Washington Examiner: Democrats' small business surtax would crush Main Street’s recovery

People are reeling from pain at the pump, shock in the grocery aisles, and the continued erosion of their paychecks. Buying a house is becoming increasingly out of reach for many families. Many are struggling just to pay their monthly energy bills.

As the economy continues to be hammered by runaway inflation, declining real wages, and the rising odds of a recession, the government’s priority should be to help ease the financial burden many are facing. Instead, Democrats are trying to raise taxes, kill jobs, smother wages, and impose price controls.

One of the job-killing tax increases under consideration is an expanded Net Investment Income Tax on so-called “pass-through businesses” — or businesses whose income is taxed on the owner’s individual tax return. The NIIT is a 3.8% tax that primarily taxes passive income, but Democrats have proposed expanding the tax to apply to active pass-through income (or what is left over after a business pays its expenses). This proposal is essentially a small business surcharge and would punish the job creators who can least afford it.

Democrats want to pass this business tax surcharge in addition to the federal income taxes that business owners already owe. Currently, business owners have to pay up to 37% on their share of the business’s net earnings — even when they decide to reinvest all those earnings back into their businesses and take nothing out for themselves. An expanded NIIT would mean that business owners might face a marginal tax rate of up to 40.8% — and that’s before state income taxes are taken into account. Forty-three states have an individual income tax, with an average top marginal rate of 6.4%, which means that when all is said and done, pass-through business owners could be slapped with a combined 47.2% marginal tax rate, with some owing even more.

This small business surcharge punishes hard work, investment, growth, and successful small- and medium-sized businesses by stripping away close to half (or more) of what an owner makes. It’s a success tax that would penalize small businesses for achieving even a moderate level of success. Hitting these businesses with a massive new tax hike, which the nonpartisan Joint Committee on Taxation estimates would total $252 billion, will hurt the very people Democrats say they champion: workers and entrepreneurs.

It is also a marriage tax that would penalize marriage by treating business owners with joint filing spouses, who each contribute income, more harshly than those who are not married.

Further, higher taxes on producers affect everyone: workers and consumers, business owners and non-business owners alike. If Democrats have their way, businesses will have no choice but to raise their prices. That’s bad news for an economy that’s already staring down a recession.

Why would we make it harder for small businesses and workers to compete, remain successful, and help drive us out of the current economic quagmire? This crippling tax-and-overspend strategy defies logic.

There are more than 32 million small businesses in the United States. Together, they support more than 61,000,000 jobs. They’re integral to rebuilding and strengthening our economy. Yet with labor shortages, rising inflation, and crushing new regulations and supply chain disruptions, many small businesses are struggling to stay afloat. Indeed, the National Federation of Independent Businesses found that small business optimism is at a historic low, and expectations for better conditions have worsened every month this year.

The Democrats’ small business surcharge would further bury Main Street. It’s not in the best interest of business owners, America's families, or the economy.

With consumer price inflation at 9.1% and wholesale price inflation at 11.3%, it is clear we need to pump the brakes on the Democrats’ irresponsible spending and proposed tax hikes permanently. Otherwise, we risk accelerating in the wrong direction down the road of soaring inflation and recession.

Mike Crapo is a U.S. senator for Idaho and is the ranking member of the Senate Finance Committee. He is also a member and former chairman of the Senate Banking Committee, a senior member of the Senate Budget Committee, and a member of the Senate Joint Committee on Taxation.