Washington Is Poised to Suck More Out of Taxpayers
If you thought preparing your tax return for 2011 was a painful exercise, just wait. Individuals and small businesses are staring down the barrel of a bevy of tax increases, new taxes, and expiring deductions scheduled to take effect at the beginning of next year. The additional tax burden is potentially so great that some are calling it “Taxmaggedon.”
Without action from Congress in 2012, small businesses will face one of the largest tax increases in American history. On December 31, 2012, the Bush tax cuts are scheduled to expire. Overnight, the maximum tax rate for individuals earning $200,000 or more, and couples filing jointly who earn $250,000 or more per year, will jump from 35% to 39.6%.
An increase in marginal income tax rates will hurt job creators like Gene Marks, owner of The Marks Group PC, a highly successful 10-person technology consulting firm outside of Philadelphia, and a small business columnist. Marks’company is a pass-through entity, which means that he pays taxes on his company’s profits at the individual rate, putting him above the $200,000 income group. An increase in the marginal rates amounts to piling on, he says. “Nowadays, it’s not just the federal tax rate you have to deal with. My federal [effective] tax rate is in the 30% range. But then I’ve got state taxes, city taxes, property taxes, school taxes, and tolls I pay on the turnpike.”
On January 1, individuals in Marks’ income group will have to shell out to pay for the costly 2010 health care law. The 2.9% Medicare tax deducted from their earnings will increase 0.9%, and a new 3.8% surcharge will be assessed on their investment income.
In addition, all itemized deductions and exemptions will be limited for high-income earners. Capital gains taxes will rise from 15% to 20%, and dividend taxes will increase from the current 15% to the pre-Bush era of 39.6%, greatly impacting seniors who rely heavily on dividend income for their daily living expenses.
Estate taxes, which are particularly burdensome for family-owned businesses, will also go up in 2013. Currently, the maximum estate tax rate is 35%, and estates valued at up to $5 million per person are exempt from the tax. Beginning January 1, 2013, the maximum rate will climb to 55%, and the exemption value will drop to $1 million per spouse.
That’s not all. A number of tax incentives and deductions will expire at year’s end, joining several that expired at the end of 2011. Expired or expiring provisions include the deductions for state and local general sales taxes, the research and experimentation (R&E) tax credit, and the 15-year depreciation for qualified restaurant and leasehold improvements.
Many of these deductions and credits have existed for decades, are long-accepted provisions of the code, and are routinely renewed by Congress. The active financing exception, for example, has been in the code for 91 years; the research and development (R&D) tax credit, 30 years.
Finally, nearly 30 million families are at risk of being ensnared by the alternative minimum tax (AMT), a parallel tax system to ensure that taxpayers pay a minimum amount in taxes. The most recent AMT patch, legislation designed to ensure that the tax doesn’t capture growing numbers of taxpayers, expired in December 2011.
President Obama’s Budget—No Relief for Businesses
The business community won’t be able to turn to President Obama for relief from the coming tax hikes. In fact, his budget proposal for the fiscal year beginning October 1, 2012, and his framework for corporate tax reform would make things worse.
The president’s FY 2013 budget calls for a $2 trillion tax hike, much of it on the backs of successful small businesses. It would allow the Bush tax cuts to expire for high-income earners, reduce or eliminate itemized deductions, and limit the rate at which the remaining deductions can be taken. The president’s budget also raises taxes on the oil and gas and financial industries.
Noticeably absent in the president’s budget are tax incentives to help businesses grow. In contrast to $2 trillion in tax hikes, Obama’s plan budgets only $146 billion for business tax cuts and incentives, $108 billion of which is attributed to making permanent the R&D tax credit.
“What’s the administration’s budget strategy? Spend like there’s no tomorrow, drive deficits to record levels, heap huge tax increases on America’s most productive citizens, and ignore the most urgent challenges facing the economy, including tax reform and entitlement programs.” says U.S. Chamber President and CEO Tom Donohue.
Says Gene Marks, “My biggest issue with the president is that he doesn’t promote revenue growth and demand growth. He goes after those rich people making more than $200,000 a year, when those are the people with the money to invest and create jobs.”
Marks is also not impressed with what he calls “gimmicks” in Obama’s budget plan to give a 10% credit to small businesses that add jobs or increase wages in 2012. “I don’t need any credits for hiring people. If I need somebody, I’ll hire them.” He adds, “I don’t need the government giving me treats to hire people. The treat is if the demand is there and the work is there. It’s kind of insulting that the government thinks it’s going to spur hiring with a goodie.”
The U.S. Chamber’s Plan of Action
The Chamber is lobbying Congress and building public support for a leaner, simpler, and fairer tax code. One of its top priorities is to preserve current individual marginal tax rates and capital gains and dividends rates for all taxpayers. Raising these rates would undermine economic growth, choke off job creation, and take money out of the hands of the individuals and businesses that create jobs, spur investment, boost consumption, and promote economic growth.
In addition, the Chamber is working to repeal the estate tax. Absent full repeal, Congress should make the 35% rate and $5 million ($10 million per couple) exemption permanent.
The Chamber also supports an immediate extension of all expired and expiring provisions, including deductions for state and local general sales taxes; the R&E tax credit; the 15-year depreciation for qualified restaurant and leasehold improvements; and the railroad track maintenance tax credit.
Click here for a complete list of all recently expired and soon-to-expire tax provisions.
Click here for U.S. Chamber congressional testimony on expired and soon-to-expire tax provisions.