(CNSNews.com) – More than a million small business owners and about two-thirds of the profits earned by U.S. small businesses would be hit by the income tax increase on the "rich" that House Democratic leaders want to enact to pay for the health-care reform plan President Obama wants passed this summer, a taxpayer watchdog says.
Ryan Ellis, director of tax policy for Americans for Tax Reform, told CNSNews.com he calculated that 1.09 million of 21.5 million small business owners would see a one- to three-percent surtax on their profits in order to fund the House of Representatives’ trillion-dollar health care reform bill.
While only about five percent of small business owners would be exposed to the extra charge, Ellis says two in every three dollars of profit made by small businesses would be subject to it.
Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, announced late Friday that Democrats want to enact this tax increase.
The plan reportedly would include a one percent increase in the income tax rate paid by individuals earning $280,000 or more and by households earning at least $350,000. Steeper rate increases of up to three percent would be imposed on those earning $500,000 and $1 million or more. The committee hopes these income-tax rate increases will raise about $540 billion for the federal government over a decade.
Small business owners would be subject to the income-tax rate increases because many of them report the profits of their small businesses on individual tax returns. As a result, the roughly five percent who make more than $200,000 a year would be hit with the extra tax.
Ellis said the Obama administration’s claims that only a few small businesses will be affected misses the point. “(T)hat’s what the Obama guys will always tell you. It’s a small, single-digit percentage of small businesses that would be affected by this, and that’s absolutely true. It’s probably somewhere between five and 10 percent … of all small businesses.
“But if you actually look at the small business profits being reported, two-thirds of all small business profits are reported in these households.”
Indeed, IRS figures from 2006, the most recent year reported, show that $479 billion of the $707 billion in small business profits was reported by households in the top two percent of earners, those earning more than $200,000.
Republicans went on the offensive after Rangel's Friday announcement. A spokesman for House Minority Leader John Boehner (R-Ohio) said, “In the middle of a serious recession, with unemployment nearing double digits nationwide, the last thing we need is a tax increase on small businesses, which will cost the American economy even more jobs.”
Blue Dog Democrats in the House also voiced some concern. Rep. Jason Altmire (D-Pa.) told CQ Today, “I have a concern with going outside the health care system” when discussing funding options.
“I feel like the House has moved this issue so far to the left we've taken ourselves out of the discussion entirely.”
But Ways and Means Committee member Rep. Allyson Schwartz (D-Pa.) told The Washington Post that “if (the bill) works right,” the high earners who pay extra taxes will also see lowered health insurance premiums.
Ellis, however, is skeptical. “If you’re a very successful company and you’re making more than a million dollars a year,” he said, then at “a three percentage point surtax, you basically have to assume that their healthcare costs will go down by 3 percent of their profits in order to even themselves out.”
“That’s just not reasonable to expect,” he told CNSNews.com. “(T)here’s not one example of where the government is going to go in and take over something and start spending money on something and then it saves money.”
Rea Hederman, assistant director of the Center for Data Analysis at the conservative Heritage Foundation, also said small business owners will not see their money back unless they force their employees to take the proposed public health care option.
“The only way they would see reductions in health care,” he said, “is if small businesses just say we’re not going to offer health care to our employees all together, and I don’t think that’s a direction that people want to go,” Hederman said.
While the surtax for small businesses may top out at three percent, Hederman said, “in percentage terms, the tax burden is jumping somewhere between four and a half to five percent, and this is going to be combined with the expiration of some of President Bush’s tax cuts.”
The health care surtax would come in addition to the scheduled expiration of the Bush tax cuts at the end of 2010, which will move the federal top rate from 35 percent to 39.6 percent.
In a statement, Thomas Hodge, president of the nonpartisan Tax Foundation, said total top rates, including federal taxes, could push past the 50 percent mark in some states.
“Combining top federal and state rates, and factoring in all deductions, the government would be taking over half of every additional dollar from high-income taxpayers in two-thirds of the states under this latest funding scheme.”
According to Hederman, “Unfortunately, right now, businesses are going to have trouble pricing in (these) cost increases.
“(So) businesses will continue to try to wring out as much efficiency as they can in the labor force, and that means cutting back hours and cutting back jobs,” he said.
A May 2009 survey performed by the National Federation of Independent Businesses, small business owners identified high taxes as the second biggest problem facing them, trailing only poor sales.
The tax increase, if enacted, would take effect in 2011.