The Wall Street Journal
By: Martin Vaughan and Corey Boles
August 23, 2010
Karen Port of St. Louis fears that President Barack Obama's plan to let tax rates rise for top earners will be a double whammy for her hot-tub dealership.
Not only would the company--which takes in between $1 million and $3 million annually in gross sales--pay taxes at a higher rate, but the tax increases could leave less money for customers to spend on her high-end products, said Ms. Port, co-owner of Mirage Spa & Recreation, Inc.
"It has a deep impact on us," said Ms. Port. "People are going to be stepping back and not wanting to purchase luxury items."
Port is among a dozen small-business owners around the country interviewed by Dow Jones Newswires who said the increase in personal tax rates could hurt their ability to make new investments or hire workers.
Tax cuts enacted under President George W. Bush are slated to expire at the end of this year. Obama has proposed extending the tax cuts for married couples with income of less than $250,000, or single taxpayers with income of less than $200,000. But rates on income higher than that would rise to 36% and 39.6%, respectively, from current levels of 33% and 35%.
The stage is set for a September Senate debate over whether to extend all the Bush-era tax cuts temporarily, or let rates rise for the wealthiest.
Because most small firms are structured so that they pay individual rather than corporate income taxes, some would be caught by an increase in personal tax rates.
But Democrats and Republicans are miles apart when it comes to estimating how large that impact would be.
Treasury Secretary Tim Geithner in a Washington speech this month said the notion that Obama's proposals would hurt small business was a "myth" spread by the GOP. House Minority Leader John Boehner (R., Ohio) says letting top rates rise would amount to a "job-killing tax hike" on small firms.
Both sides have data to back up their claims. Congress's Joint Committee on Taxation said in a July analysis that only 3% of taxpayers with business income in 2011 would see their tax rates increased under Obama's plan.
But Republicans point to data from the same JCT study showing that half of the $1 trillion in income projected to be earned by pass-through entities such as partnerships and S corporations in 2011 would be taxed at the higher rates.
That suggests that even though the majority of small businesses wouldn't see higher tax rates, the most successful of these businesses would. Democrats dismiss that statistic, saying it is mostly accounted for by hedge funds and law firms, not mom-and-pop storefronts.
Democrats say the tax cuts for the wealthiest must be allowed to expire in order to begin to reduce the federal budget deficit, expected to top $1 trillion next year.
But some business owners--and even some Democratic politicians like Sen. Kent Conrad of North Dakota--are questioning the wisdom of doing so when unemployment remains at a discouraging 9.5%.
"I am the guy who is supposed to be responsible for creating the jobs," said Ryan Robinson, co-owner of Irving, Texas-based Signal Metal Industries Inc., a maker of heavy machinery for the steel and mining industries.
"When the economy is teetering, and you're worried about having a double dip [recession], is it really smart to not renew those tax cuts?" said Mr. Robinson.
Mike Ferletic, owner of Irvine, Calif.-based Enterey Life Sciences Consulting, estimated his taxes could rise by as much as $15,000 as a result of the higher rates.
But like St. Louis hot-tub dealer Port, Mr. Ferletic said he worries as much about the impact of the tax increases on his customers.
"There's kind of a domino effect," said Mr. Ferletic. Enterey's eight-person staff provides business consulting services to biotech and pharmaceutical firms.
Some firm owners just want Congress to make up its mind. "It's August, and we still have so much uncertainty. How can I plan on what I want to invest next year?" said Ron Bullock, owner of St. Charles, Ill.-based Bison Gear & Engineering Corp.
The firm makes gears for machinery used by fast food restaurants and manufacturers of exercise and medical equipment.
Write to Martin Vaughan at email@example.com and Corey Boles at firstname.lastname@example.org