Study: Corporate-only tax reform could hurt small businesses

Also on Tuesday, Reps. Dave Reichert (R-Wash.) and Ron Kind (D-Wisc.), both members of the tax-writing House Ways and Means Committee, are introducing a measure aimed at helping S corporations, a kind of pass-through. 

The bill, which is similar to legislation introduced in previous Congresses, would, among other things, allow electing small business trusts to claim an expanded deduction for charitable contributions and S corporations to boost their passive investment income without owing more taxes. 

In a statement, Kind said the measure would allow S-corporations to better “access credit, invest in their business, and create the good paying jobs that we need.”

According to the Ernst & Young study, changes to the tax code in recent decades have led to a steady increase in flow-through businesses. In 2008, those sorts of small businesses accounted for more than a third of business receipts and employed more than half of those working in the private sector. 

The accounting firm’s estimate that flow-through owners would owe an average of 8 percent more in income taxes – around $27 billion per year from 2010 to 2014 – is based on the premise that all business tax expenditures would be scrapped in a corporate tax reform package. 

With the tax reform discussion still in relatively early stages, it is unclear which credits and deductions might be targeted in a tax code overhaul. But Ernst & Young said that agriculture and mining, manufacturing, and construction would be among the industries most affected by an elimination of tax expenditures used by businesses, which include a deduction for domestic production activities and a health care credit for small businesses. 

Rep. Pat Tiberi (R-Ohio), the chairman of the House Ways and Means subcommittee on Select Revenue Measures and a backer of more comprehensive reform, said the study had made “a strong case about why Congress must go beyond corporate tax reform and also include the business structures most commonly used by small businesses.”

For his part, Geithner has indicated in recent months that a corporate tax reform push might have to also examine the broader scope of business income, while also expressing some skepticism about the growth of pass-through entities. 

“I think, fundamentally, Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they're treated as corporations for tax purposes or not,” the secretary told the Senate Finance Committee in February. 

Sen. Max Baucus (D-Mont.), the chairman of that tax-writing panel and another proponent of tax reform, has also communicated some doubts about the flow-through set-up.

The new study and legislation come as policymakers in Washington are debating both a tax code overhaul and taxes in general.

President Obama is expected on Wednesday to lay out a deficit-reduction vision that includes allowing taxes to rise for households making more than $250,000 a year, a proposal that was also included in his fiscal 2012 budget. 

Meanwhile, Rep. Dave Camp (R-Mich), the chairman of House Ways and Means, has called for reducing both the top corporate and individual tax rates to 25 percent – a framework that was also included in the House Republicans’ 2012 budget, which was released last week.