S-Corp joined with over 100 trade associations today in urging Congress to reject the White House’s Build Back Better framework, the latest version of Democrats’ multi-trillion-dollar tax and spend plan.

This latest iteration replaces the many problematic tax hikes in previous drafts with new – but equally problematic – tax hikes, the sum of which would disproportionately hit Main Street businesses. Under this framework, the 21-percent tax rate on large multinational corporations remains unchanged while the top rate on Main Street businesses rises to over 50 percent!

Since the bill changes every day or two, it’s been difficult to highlight this top line challenge, or to focus on the individual policies that produce it.  As Politico notes:

Case in point: Democrats are hoping to raise around a quarter-trillion dollars by extending the reach of Obamacare’s 3.8 percent net investment income tax. House Ways and Means Chair Richard Neal (D-Mass.) included that idea in his tax increase proposals, and it was in President Joe Biden’s framework from last week, too.

And now, business groups are increasing their lobbying against that and other proposals — like the proposed surtax, which would hit certain pass-throughs at a far lower income threshold than $10 million, and changes to loss limit rules.

“These businesses just survived a global pandemic and for Congress to impose massive tax hikes on them, with rates exceeding 50 percent in some cases, would be incredibly damaging,” more than 100 business groups, including the National Federation of Independent Business and the S Corporation Association, are writing to congressional leaders today.

One key aspect that has not sunk in with policy makers is how the framework targets family businesses with modest incomes through the discriminatory treatment of taxable trusts.  As the letter notes:

Moreover, the tax rate hikes in the Framework would apply to businesses making significantly less than the advertised levels.  The White House fact sheet suggests the new surtax would impose a 5 percent tax on a taxpayer’s modified adjusted gross income over $10 million, and 8 percent in excess of $25 million.  For pass-through businesses held in trust, however, these thresholds are fifty times lower — $200,000 and $500,000, respectively.  You don’t have to be a very big business to earn $200,000. 

The same is true for the expansion of the 3.8 percent NIIT.  The expanded NIIT’s threshold for joint filers with S corporation or partnership income is $500,000, but it is just $13,000 for a family business with ownership shares held in taxable trusts. 

Trusts are a common feature of succession planning for family businesses.  While they may have tax implications, in most cases families use trusts for non-tax purposes, as they ease the transition of the business from one generation to the next by clarifying ownership and management roles and avoiding probate court.  As such, trusts are a common feature of estate planning for family businesses both large and small. 

Due to the prevalence of trusts, the higher tax rates included in the Framework would harm tens of thousands of modestly sized family businesses located across the country.  The rate increases contemplated by the Framework are significant.  The Tax Foundation estimates they will push the marginal rates of family businesses making more than $500,000 to over 50 percent.  When coupled with state and local levies, these rates hikes will result in the family businesses facing the highest marginal rates in the OECD, exceeding 57 percent. 

Proponents of the new framework claim the bill represents a “compromise” that spreads the pain evenly between public corporations and Main Street businesses. That is simply not the case.  As Lynn Mucenski-Keck observed in Forbes this week:

While both pass-through entity owners and C corporations are seeing tax increases, keep in mind the type of businesses that are being impacted. In order for the corporate minimum tax to apply, book earnings must exceed $1 billion for a three-year period and the GILTI provisions generally apply to large multinational corporations. On the other hand, the proposal to extend the net investment income tax will impact S Corporations shareholders and select partners with an adjusted gross income over $500,000 and the permanence of the excess business loss limitation rule can apply to individuals operating trades or businesses, no matter their AGI. Even though the C Corporation and pass-through entity proposals will create similar revenue streams, the burden of the pass-through entity proposals will impact a much broader base of small businesses with AGI as little as $500,000 while the C Corporation impact primarily targets large multinational companies with more than $ 1 billion in book earnings, estimated to be less than 12o companies.

The House is trying to rush some modified version of the framework through today or tomorrow in an attempt to regain momentum after yesterday’s elections.  Representatives should hit the pause button instead.  The tax provisions in the current framework are not well thought out.  They largely exempt billionaires and multinational corporations from significant tax increases, while subjecting family businesses to their highest rates since Reagan was first elected.  It’s not a good plan, and it won’t be popular outside the beltway.