The Trump administration’s plan to rewrite federal tax policy has faced widespread criticism in New Jersey, due to the proposed elimination of a key tax deduction that helps offset local property taxes. But now advocates for small-business owners are also questioning Trump’s proposals, saying they could end up hurting many of the state’s mom-and-pop stores.
Trump has been pitching his plan to overhaul the federal tax code as a boost for the middle class and small businesses. A key change relating to small-business owners is a proposal to create a new tax rate for so-called pass-through businesses, which is a category that many small businesses fall under.
The owners of a pass-through business don’t pay corporate taxes, but instead are taxed under the individual or personal-income tax rates. Right now, small-business owners can face federal personal-income tax rates as high as 39.6 percent, but Trump is seeking to create a pass-through rate that would be set at 25 percent.
Small win for business owners
The proposal would seem to be a big win for the small-business owners, but the problem is most of them don’t earn enough in income to take advantage of the new pass-through rate that’s being proposed, said Sapna Mehta, legislative policy director for the Main Street Alliance, during a conference call yesterday.
“Real mom and pop shops, family businesses — what we call Main Street businesses — would see very little to no benefit,” Mehta said.
Trump’s tax cuts could also end up leading to federal spending cutbacks that would ultimately impact the customer base of small-business owners, she said. And the proposal to eliminate the federal SALT deduction, which is currently provided for state and local taxes, would mean New Jersey’s small-business owners could no longer write off their stores’ high property-tax bills.
“If this tax plan were in place, our taxes would have gone up,” said Kelly Conklin, the owner of a small architectural woodworking firm based in Bloomfield. “They would have gone up substantially.”
After focusing for much of this year on unsuccessful efforts to roll back the Affordable Care Act, also known as Obamacare, Trump is now prioritizing the large-scale overhaul of the tax code that administration officials first outlined in April. Trump’s latest version of the tax overhaul calls for a reduction of the top-end income-tax rate and of corporate tax rates, and an elimination of the federal estate tax. Trump, meanwhile, has also promised to deliver middle-class property-tax relief by streamlining tax brackets, and by doubling the standard deduction. But many of the finer details have yet to be released, making it difficult to fully analyze those elements of his plan, even as administration officials are trying to sell it to Congress.
Trump’s specific plan to establish a 25 percent tax rate for pass-through businesses has been praised by many lobbying groups for businesses, including small businesses. In fact, a statement released by the National Federation of Independent Business after some new details of the plan were first released last month heaped praise on the administration, saying small businesses need lower tax bills so they can do more investing and hiring.
But Mehta said most small businesses — roughly 86 percent — are not earning enough money right now to be in the tax brackets that would see any real help from the establishment of a 25 percent pass-through rate.
Small-business owners worried
Another concern for small-business owners, according to Mehta, is what will happen to the broader economy if Trump’s proposals ultimately become law. Administration officials are arguing the tax revisions will stimulate widespread economic growth and investment, providing an estimated $500 benefit to the average middle-class family. But some fear they could also result in large-scale federal spending cuts if the projected economic growth comes up short.
Under that scenario, families would have to pay more out of their own pockets for things like healthcare, education, housing, and food, creating a “ripple effect” for small businesses that “depend on strong local economies with plenty of consumer demand and customers,” Mehta said.
“As families are forced to pay more for vital services, they will have less disposable income, meaning small business owners will see a decline in customers,” she said.
Conklin, the Bloomfield-based small-business owner, said his company just had a record-setting year for income last year. But he still couldn’t get above the 25 percent personal-income tax bracket, meaning he wouldn’t be helped at all by Trump’s proposed pass-through rate. Conklin also said that getting rid of the SALT deduction would mean he no longer has the ability to write off the property taxes paid on his business property, or on his home. That would make him a net loser, he said.
Benefits for a few
And while Trump has tried to sell the proposed estate-tax repeal as a benefit for small-business owners, according to tax data analyzed (http://www.taxpolicycenter.org/briefing-book/who-pays-estate-tax) by the Washington, D.C.-based Tax Policy Center, the repeal would benefit a little more than 5,000 tax filers with estates worth more than $5.49 million, which is the size of the current federal exemption.
Conklin said he takes umbrage with people labeling Trump’s proposals as “tax reform.”
“It’s not tax reform. It’s a tax giveaway to big corporations and rich people,” he said.
It’s unclear what will ultimately happen to Trump’s tax proposals in the Congress, where Republicans were unable to find common ground on the healthcare issue even though they control both the Senate and the House of Representatives. Democratic Congressman Bill Pascrell, who also participated in yesterday’s conference call, urged his Republican colleagues to focus more on closing existing tax loopholes that he said are exploited by the wealthy and big corporations at the expense of the middle class and small businesses.
“This is a very critical issue,” said Pascrell (D-9).