S-CORP Testifies

S corporation tax policy took center stage on the Hill earlier this month.

Carrying the S-CORP flag before the House Ways and Means Select Revenue Subcommittee was Tom Nichols, the Chairman of S-CORP’s Board of Advisors. The hearing focused on pass through business taxation issues and, in particular, the merits and shortcomings of the “Pass Through Draft” that Chairman Camp released earlier this year.

From the beginning, Tom’s testimony hit the high notes of the advocacy we’ve been conducting for the past two years:

“Tax Reform needs to be comprehensive and address the individual, pass through, and corporate tax codes at the same time. Congress should continue to foster progress toward a single level tax system for all businesses, and continue to strive to keep the tax rates paid by businesses and individuals as low as possible.

In this regard, the bipartisan Tax Reform Act of 1986 stands out as an excellent template for Tax Reform. It expanded the tax base by eliminating numerous preferences and privileges for specific taxpayer groups, thereby creating room to dramatically decrease the tax rates for C corporations, pass through businesses and individuals alike.

This approach allowed many, if not most, owners and managers to get out of the tax planning business and immerse themselves in the operations of their real businesses instead. It is my hope that the current Tax Reform effort will build on the policies and lessons learned in 1986.”

Tom went on to highlight provisions in the discussion draft that would help S corporations, including those provisions taken from H.R. 892, the S Corp Modernization Act of 2013. This legislation has been an S-CORP priority for years and forms the core of “Option 1″ in the draft.

While the panel expressed some reservations regarding the more aggressive “Option 2,” Tom did highlight several positive ideas incorporated in the reform, including making public-private ownership the new, improved line of demarcation between pass-through and C corporation tax treatment. That’s a reform that can and should be included in any tax reform package.

This hearing is one of several we expect over the course of the summer, all leading up to the possible House consideration of tax reform sometime this fall. As we’ve observed previously, others have argued that enacting tax reform is just too big a lift this year, and that little will happen. We’re not so sure about that. Congress needs to raise the debt limit, and it needs to address the long-term deficit picture. How that happens is anyone’s guess, but there’s a confluence of fiscal policies all coming to a head this fall together with two very determined chairs of the tax-writing committees which suggests consideration of a big package that includes tax reform should not be discounted. We’re certainly not.

New York Times on Tax Reform

The New York Times has weighed in with a couple of tax reform stories in recent days.

The first, entitled “In Tax Overhaul Debate, Large vs. Small Companies,” focuses on the possible rift between US-based multinational corporations and privately-held businesses over the goals of tax reform.

As we have noted before, we believe this rift is overstated. Yes, there are a couple large corporations that argue Congress should cut their taxes while making private companies pay more, but these businesses are a distinct minority and their voice is falling on deaf ears among tax-writers. The vast majority of the business community is united behind a tax reform effort that would lower rates on all forms of business while broadening the tax base.

The NY Times piece featured a couple of S-CORP Board members making this case, as well as the need to reduce high effective tax rates as the best means of encouraging increased investment and job growth. As the story notes:

Companies that switched said the simpler, generally lower single-tax rules gave them a leg up and helped them grow.

McGregor Metalworking Companies, a family-owned business in Ohio and South Carolina, had 80 employees when it converted in 1986 and now has a work force of 370.

“It has been a real force for reinvestment,” said Dan McGregor, 69, chairman of the company, which has seven shareholders.

This impact is not for metalworking companies alone. As our first Ernst & Young study made clear, the existence of pass-through businesses in the US means more investment, higher wages, and more jobs than if every business was subject to the double tax. That’s the reason why Principle Three in the Main Street Coalition’s Principles for tax reform calls for tax reform to reduce the existing double tax.

The second story appeared over the weekend and gets right to the heart of the challenge over tax reform,  i.e. the looming battle between those firms and industries that pay a high effective tax and those that do not:

Corporate taxes burst into the spotlight last week, with the release of a Senate committee report on Apple’s tactics to reduce its tax payments. More quietly, but perhaps more significantly, the House Ways and Means Committee has begun work on a potential overhaul of the tax code. Edward D. Kleinbard, a tax expert and former Democratic Congressional aide, said he had been impressed so far by the seriousness of the committee’s work.

The effort has a long way to go, but if it succeeds, both liberal and conservative tax experts hope it will reduce the statutory rate while also eliminating tax breaks. The net effect could be to close the gap between companies that pay relatively little in taxes and those that pay much more. The market, rather than the tax code, would then play a bigger role in determining companies’ success and failure.

As the Times notes, done correctly, tax reform will help level the playing field between those companies and industries currently paying little or no tax, and those that are currently shouldering a much higher tax burden.

Lastly, we should point out that a reader of these Times articles might come away thinking that pass-through businesses, including S corporations, pay a lower effective tax rate than their larger competitors. We’re confident that’s not the case. Previous work has shown that S corporations pay the highest effective tax of any business structure, and their marginal tax rates just went up, not down. Meanwhile, as the second Times story made clear, the news is full of stories about how our largest corporations pay little or no tax.

More on this to come.

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