WASHINGTON — House GOP leaders have hailed their new tax proposals as helping the small-business owner, but small-business associations say they help big enterprises, not small ones, and vowed Tuesday to sink the bill in its current form.
The National Football League, Fiat Chrysler, the Koch brothers’ Georgia-Pacific subsidiary, The Washington Post’s owner and more than 500 Trump entities would qualify for a substantial tax break under the proposal.
But the neighborhood dry cleaner or dentist would be out of luck.
“Like everything else in America today, the vast majority of the money is made by a very small fraction of these business owners,” said Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute.
At the center of the dispute is the House plan to lower the tax rate for some firms that take advantage of a provision known as the pass-through rate.
That allows businesses to pass through untaxed profits to individuals who include them in their own tax returns, paying rates that vary from as low as 10 percent to as high as 39.6 percent.
The House plan would lower the maximum pass-through rate to 25 percent, but a host of small and medium businesses — including service providers such as doctors, lawyers, dentists, architects and accountants — would be blocked from obtaining any benefit.
Even with those limits, the Treasury would lose $448 billion in tax revenue over 10 years, according to the Joint Committee on Taxation.
The bill has taken small-business associations by surprise. The National Federation of Independent Businesses, which in 2016 gave 22 times as much money to Republicans as Democrats, has vowed to oppose the House package. The NFIB claims to represent 325,000 business owners, from shop owners to big family-owned liquor distributors.
“It’s our view that if the point of tax reform is to ignite the economy and make America’s businesses more competitive, it should do that,” said Jack Mozloom, national media director for the National Federation of Independent Businesses, which opposes the bill. “And that includes the half of the economy that is represented by small businesses.”
The changes in the tax code mark a departure for Republicans, who have traditionally praised the virtue of small businesses and the importance of reducing the deficit.
“Whether you’re starting a humble sandwich shop or you’re working on the next tech company in your garage, the American people — workers and owners alike — need this small business tax cut,” House Majority Leader Kevin McCarthy, R-Calif., says on his website.
Now the GOP rhetoric is changing. House Speaker Paul Ryan, R-Wis., issued a news release Tuesday urging people to “check out what job creators are saying.” Then instead of highlighting small businesses, he listed endorsements for the bill from groups such as 21st Century Fox, the American Bankers Association, the Aerospace Industries Association, AT&T and the Business Roundtable.
The winners under the tax bill? The Trump Organization, like most real estate firms, is a pass-through firm. Virtually all of the NFL’s teams are pass-through vehicles. When Amazon chief executive Jeff Bezos bought The Washington Post, he placed it in a pass-through entity called Nash Holdings. The Koch brothers’ Georgia-Pacific subsidiary, maker of Dixie cups, Angel Soft toilet paper, lumber and cardboard packaging, is a limited liability corporation that would be allowed to use the lower rate.
But the House plan doesn’t help the low- to middle-income earners. Eighty-six percent of people who report pass-through income already fall in the 25 percent tax bracket, according to the Tax Policy Center.
Frederick Graefe, a lawyer and lobbyist for hospitals, said the provision was “galling.”
“Small sole proprietorships like mine created under D.C. bar rules are precisely the kinds of small businesses that this bill was supposed to help,” he said.
He said “the NFL and its 32 owners … are the last people on Earth who need a tax break of any kind, especially one of this magnitude.”
“We understand that they want guardrails to prevent movie stars and rap stars from gaming the system,” Mozloom said. “But the way of doing that is not excluding legitimate small businesses — the auto mechanic, the house painter, accountants, architects — anyone whose skill is their business.”
The House plan would also limit the 25 percent rate to 30 percent of a company’s income. The remaining 70 percent of income would continue to be taxed at the individual rates. The blended effective rate for a high-income earner would be 38 percent, according to Adam Looney, a tax expert at the Brookings Institution.
The House bill also rewards the idle or “passive” owner, not the people “actively” working for the company. The passive owner can apply the 25 percent rate to all of his or her income.