Weekly Column: Tax-Cut Expiration Would Hurt Small Businesses

About 15 years ago, Stephanie Camarillo took a chance and purchased Molly Maid, a residential-cleaning franchise in Boise, Idaho.  Stephanie now is responsible for 33 employees, and her franchise has been voted the city’s best cleaning service.  As a small business owner, Stephanie has invested in her employees, providing them with the resources to pay off debt, save for college and retirement, and take on additional responsibility.  When she was able to claim a small business tax deduction a few years ago, Stephanie used the tax savings to give a promotion and raise to Jasmine, one of her top employees, a single mom working as a housekeeper while finishing up her GED at night.  Thanks to the additional savings, Molly Maid now also offers paid holidays to employees, along with expanded health-care benefits for employees and their family members, including children. 

Small business owners across the country have similar stories about the benefits from the TCJA small business tax deduction.  However, many were unaware that the small business deduction they received was enacted by Republicans in the 2017 Tax Cuts and Jobs Act (TCJA), which provided a 20 percent deduction for the income that is “passed through” from the business to the owners, who then report and pay the tax on that business income.  Over 60 percent of Americans are employed by pass-through businesses, and owners pay tax on those business profits personally.  According to Tax Foundation data, Idaho has 44,808 pass-through entities employing 376,546 Idahoans.

The law enabled small businesses across the country to keep up with their larger competitors.  The 2017 tax overhaul paired a lower corporate tax rate with two key elements to help small business owners—lower individual rates across the board and the 20 percent pass-through deduction.

But the changes to the rates and pass-through deduction did not just benefit the businesses’ owners.  In one survey of business owners who took the small business tax deduction, 25 percent reported that they spent the money they saved in taxes to raise employee pay.  The next-most-popular uses for the savings were company growth and expansion and hiring additional employees. 

While critics of the small business tax deduction claim that the TCJA was a tax cut exclusively for “millionaires and billionaires,” the facts tell a different story.  A recent Ernst & Young (E&Y) analysis found that in 2021, 93 percent of the businesses that claimed the small business tax deduction had an income level under $500,000.

In recent surveys, small business owners cite the expiration of TCJA’s individual rates and small business deduction as a top concern.  If these provisions expire, Americans face a multitrillion-dollar tax increase, and small business owners will be hit with a double tax hike: the elimination of the pass-through deduction coupled with a higher individual tax rate. 

Although entrepreneurs will pay the tax bill directly, others will be hit indirectly with increased prices, higher unemployment and reduced wages.  This double hit would have a chilling effect on the economy.  In contrast, the E&Y report estimates that a permanent extension of the small business tax deduction would create 1.2 million jobs annually over the first ten years, growing to 2.4 million in the long run.  This includes 17,000 jobs in Idaho, adding $820 million to Idaho’s economy.

As Congress deliberates the upcoming expiration of certain tax provisions, it would do well to remember the stories of small businesses that, unencumbered by a larger tax bill, bought a new warehouse, hired an additional employee, or funded an employee’s health-savings account.  They represent the innovative American spirit that our tax code must protect.

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A version of this guest column ran in the National Review.