Business Community Rallies Behind 3.8% NIIT Repeal

The Business Committee came out in force today in opposition to the Obamacare 3.8 percent Net Investment Income Tax (NIIT) and, more to the point, in support of repealing this harmful tax as part of the on-going health care reform effort.

More than forty national trade groups joined the S Corporation Association in writing to Senate Majority Leader McConnell supporting NIIT repeal as a priority in health care reform. Since the beginning of the year, repeal of this tax had been a core part of Republican efforts to roll back the Affordable Care Act (ACA).  But in recent weeks a number of senators have argued to keep the tax in place even as health care reform moves forward.  As the Associated Press reported prior to the July 4th break:

Top Senate Republicans may try preserving a tax boost on high earners enacted by President Barack Obama in a bid to woo party moderates and rescue their sputtering push to repeal his health care overhaul.  The break from dogma by a party that has long reviled tax boosts — and most things achieved by Obama — underscores Senate Majority Leader Mitch McConnell’s feverish effort to yank one of his and President Donald Trump’s foremost priorities from the brink of defeat.  The money from the tax boost would instead be used to bolster proposed health care subsidies for lower-income people.

That’s a really bad idea – not only would it keep the harmful NIIT in place, it would also bake the NIIT’s revenues into the budget baseline for tax reform, making it even more difficult to reduce rates on pass through businesses to competitive levels.  The entire business community has rallied around the idea of treating Main Street businesses fairly in tax reform.  Failing to repeal the NIIT as part of health care reform threatens that goal.  As the letter states:

The NII tax was enacted as part of the ACA and sold as both a “tax on the rich” and as a means of shoring up the Medicare trust fund.  The tax has no connection to Medicare, however, and its burden falls on many middle class families and Main Street businesses.  The surtax imposes an additional 3.8 percentage points of tax on investment income, including capital gains, dividends, interest, as well as certain S corporation and partnership income, for families making as little as $200,000 a year.  Furthermore, because the ACA failed to index the NII tax to inflation, millions of additional taxpayers will be subjected to this tax in the future due to “bracket creep.” 

S corporations in particular are affected by the NIIT.  The tax targets passive ownership – read “savers” — so S corporation shareholders who don’t work at the business would have to pay the tax.  But S corporations are only allowed a single class of stock, which in practice means that all distributions have to be pro rata to the ownership interest.  The result is that S corporations with passive shareholders must increase their tax distributions for all their ownership, increasing the distributions and draining capital from the company.

The bottom line for the NIIT is that it’s a tax on the majority of taxable savings in the United States – savings we need to provide the capital for the future.  As S-Corp wrote when the tax was first announced:

Finally, while the tax has been described as applying to the “unearned” income of only a few taxpayers, it is actually a direct tax on the majority of taxable savings in this country.  In 2007, households with incomes exceeding $200,000 accounted for 47 percent of all interest income, 60 percent of all dividends, and 84 percent of all capital gains reported on tax returns.     

The $200,000 threshold is not indexed for inflation, so these numbers have only gotten worse since 2010.  The result is the tax is a significant drag on employment and wages.  According to the Tax Foundation:

Repeal would raise employment by 133,000. The economy would be 0.7 percent larger, and wages about 0.6 percent larger. The income gains would be spread over all income levels. After-tax incomes in the bottom 80% of the income distribution would be about 0.65% higher than with the tax in place. They would share in the gains.

So the NIIT was enacted without debate or any public review, it raises the cost of capital throughout the U.S., it taxes middle class families and Main Street businesses, and it reduces jobs and wages.  It needs to go, and it needs to go as part of health care reform.

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