As Washington adjusts its focus towards the new Joint Committee on Deficit Reduction, many observers expect the same sort of partisan ideological gridlock that has seized much of the process to this point, but there are those that see a realistic path to a successful compromise by the “super” committee, and they see this scenario reached through some sort of revenue-neutral reform of the tax code. The top tax writers in Congress intend to move forward the tax reform debate this year, through the deficit reduction effort or separately, and have already begun calling corporate CEOs to the table to discuss their ideas for reform. Karen Hube of The Fiscal Times laments in The Washington Post this weekend that the pass-through community has been largely left out of the discussion:

Non-publicly traded companies that are structured as so-called pass-through entities - which are S corporations, partnerships and sole proprietors - have been notably quiet. This is no small omission. While most people probably have never heard of them, pass-throughs make up more than 90 percent of all U.S. businesses, and they collectively account for about 40 percent of business revenue.

On one hand, Hube is correct – the pass-through community does represent a huge segment of the economy. In fact, the Ernst & Young study commissioned by the S Corporation Association earlier this Spring found that pass-throughs are the majority job creators and employ 54% of the private sector workforce. Furthermore, the study finds, one in four private sector jobs are attributable to S corporations.

On the other hand, Hube stands to be corrected: S-CORP and its growing ally base has been far from “quiet” with the release of these statistics, as several members of Congress - including the House Ways and Means Committee Chairman Dave Camp and House Budget Committee Chairman Paul Ryan - have helped us bring these figures into the public consciousness. In many of the congressional tax reform hearings held so far this year, members have engaged witnesses on the importance of protecting the pass-through community and highlighted the harmful inefficiencies of the double tax business model.

A growing coalition of more than 30 business trade associations led by S-CORP are now working together to educate Congress about the significance of the pass-through community. As we wrote this Spring to tax policy leaders in a letter raising broad business opposition to tax reform that would only benefit C corporations and force more pass-throughs into the double tax model:

It is hard to see how a significant tax hike on a large segment of this country’s employers will improve the job market or make U.S. businesses more competitive. As Congress debates the future of the tax code, we strongly encourage the tax-writing committees to pursue reforms that recognize the economic value of all employers, regardless of how they are organized.

But let’s give Hube credit for recognizing that Washington policymakers may not all get the big picture. In her assessment, she highlights the challenges to pass-throughs in the Administration’s once-favored corporate-only approach to tax reform:

If changes are made to the corporate tax code without addressing pass-throughs, “these kinds of businesses may see their taxes go up,” says Robert McIntyre, director of the Institute on Taxation and Economic Policy.

And on the potential hit to pass-throughs:

The top rate is 35 percent in both the corporate and individual income tax systems. So if the corporate rate is lowered from 35 percent and major corporate tax deductions are eliminated, pass-throughs would be at a major disadvantage. For many, deductions would disappear or shrink, yet their top tax rate would remain at 35 percent.

The E&Y study quantifies this potential hit to the pass-through community at $27 billion annually. And, that’s not counting the potential increase in individual tax rates that is currently scheduled to hit these small and medium-sized business owners come 2013.

Hube then suggests that tax reform is a potential vehicle to correct “flaws” within the pass-through rules:

Many tax experts say that as lawmakers address the corporate tax code, they must also address the flaws in rules on pass-throughs.

For example, it used to be these were only small businesses with no more than 10 shareholders. But rules were relaxed through the 1990s and now the structure is possible for companies with up to 100 shareholders.

This is not only a departure from its original purpose - to help small businesses compete – it upends the level playing field for larger pass-throughs and their public competitors.

We believe it has been the deliberate, consistent, and recurring intention of congressional action over the past 50 years to modernize the S corporation rules and encourage S corporation entrepreneurs to grow their private businesses into successful contributors to the American economy, not a legislative accident, or a “flaw.” The “flaws” we see in the system that we hope can be addressed are those outdated rules limiting these S corporations’ ownership, operating flexibility, and access to their own capital. Modernizing the rules in this way would enable privately-held businesses to better navigate changing economic conditions, and provide greater opportunities for job creation and capital investment.

Regardless of what happens or doesn’t happen with the “super” committee, the tax reform conversation has begun. As you all heard yesterday, President Obama has suggested that he will be submitting deficit reduction proposals for the super committee to consider. Then, today, the Treasury Office of Tax Analysis released a new methodology for identifying “small businesses.” Your S-CORP team will be taking a closer look at this analysis in the coming days, but the broader point remains– the challenges to the pass-through community are growing.

The pass-through community should heed Karen Hube’s words and make sure we are loud enough to not be considered “notably quiet” by anyone. We have made some significant strides with the E&Y study and our education efforts on Capitol Hill, but the challenges ahead demand that we build on these efforts to expand our reach with more tools and more voices to help us deliver the strongest possible case for the majority of job creators.

If you’re interested in getting involved, please let your S-CORP team know.