As taxpayers across the country once again settle up with Uncle Sam, small business owners are reminded of the increasingly slanted playing field they face. Over the past two years, many Associated Builders and Contractors members, and construction firms in general, have faced the grim reality of higher taxes. These taxes have come in the form of rising marginal rates, additional limits on deductions and new surtaxes from Obamacare.
Construction was hit hard by the Great Recession and our industry’s recovery continues to lag the recovery of the overall economy. As in most industries, the vast majority of construction firms are small businesses that aren’t publicly traded and that don’t have a team of accountants. Most of them, including my business, Annapolis Contracting, are known as pass-through businesses because they pay their taxes through the company owners’ individual returns. That means that when individual tax rates go up and deductions on investments are cut, as occurred during the deal to avert the fiscal cliff two years ago, the taxes on my small business increase.
While there seems to be a general consensus in Washington that our tax system needs fundamental reform, some in Washington, including President Obama, have proposed reforms chiefly concerned with lowering the corporate rate—despite the fact that so-called C-corps make up just 5 percent of all business entities and account for less than half of the private sector workforce. Slashing the corporate rate does nothing to provide relief for the millions of small businesses that file their taxes individually; the same small businesses that create two out of every three jobs in the United States, according to the Small Business Administration.
To the contrary, absent additional reform, a corporate rate cut would actually mean a substantial tax hike on small businesses. A 2012 Ernst & Young study projected that revenue-neutral corporate-only reform would amount to a $27 billion (8 percent) annual tax increase on the broader pass-through community, with construction among the industries hardest hit. While the numbers have changed since that time, it’s only because the pass-through rate has jumped more than 9 percentage points. Simply put, if Congress eliminates broadly used credits and deductions to lower taxes for big business, Main Street businesses will be left paying more. Corporate tax rates must surely be addressed, but only as part of a bigger picture and certainly not at the expense of small businesses.
Everyone can agree that the corporate tax rate is too high. At 35 percent, the U.S. has among the highest corporate levies in the world; one that leaps to first when state and local rates are considered. But if we acknowledge that a 35 percent rate is enough to render American businesses uncompetitive, what does that say about the 43.4 percent top marginal rate assessed on pass-through businesses? Indeed, many Main Street entities currently face tax rates more than 25 percent higher than those of their Wall Street and Fortune 500 counterparts.
While the disparity is alarming, the gap in effective rates, which is the percent of income businesses actually pay in taxes, is equally disturbing. While large international corporations have the ability to use complicated tax dodges to lower what they actually pay below 35 percent, infamously bringing their liability to zero in some cases, small firms in construction and other industries have nowhere else to go. The result is that construction contractors pay the highest effective rate of any sector in the country, according to Department of Treasury analysis. Other pass-through heavy industries share a similar burden. Thus, while business rate parity is important, it is equally crucial that any reforms be viewed through the lens of fair effective rates.
Construction is reliant on an overall healthy economy and the economic drag of a tax code that continues to pick winners and losers has a compound effect on our industry. Less economic growth means fewer companies starting and expanding and also means lower overall tax revenue, which translates into fewer offices, plants, hospitals and schools that need to be built.
Instead of a corporate-only approach to our tax code problems, we need reform that will level the playing field and help relieve the tax burden felt by Main Street business owners and Fortune 500 companies alike, regardless of size or structure. Broader rate relief and certainty in the tax code will lead to more opportunities for me, and small businesses like mine, to invest in and grow our businesses. Growing my business means more money in the local economy, more opportunities for me to hire more employees and more money throughout the construction supply chain, which includes other mostly small businesses such as subcontractors and suppliers.
The construction industry is a great one. It has offered me the opportunity to learn, grow and ultimately create my own business and hire my own employees. However, for the industry to reach its full potential it needs a tax code that works for both big business and small business across the entire economy.
Volm is national chair of Associated Builders and Contractors.