A Millionaires’ Tax Cut In Sheep’s Clothes

John Calhoun

This legislative session has seen more twists and turns than most of us were expecting. With just a couple of weeks left before its expiration date, here comes another one: A group of Republican Senators has introduced a proposal that would cut taxes for the wealthy—and it’s actually getting serious consideration.

Senator Larry George has put a $150 million “small business” tax cut on the table as part of a package deal combined with additional revenue and additional PERS cuts. Both the press and various legislators see this as a way out of the current budget stalemate in Salem.

The proposal is to cut the tax on income from partnerships (S-Corps, LLCs, LLPs, etc.) to 7% on income up to $10 million per business partner. The basic case for the cut is the fact that large corporations (C corps) have a tax rate of 6.6% up to $10 million in income and 7.6% above $10 million. Small businesses are more frequently incorporated as partnerships which are then taxed at personal tax rates that quickly go to 9% and then 9.9% for income above $250,000. I and the Equity Alliance of Oregon have advocated for the legislature to do away with this benefit that large corporations get.

I sympathize with the goal of reducing the gap between the tax rates that small businesses pay and the lower rates paid by larger corporations. However, this tax cut is counterproductive for a host of reasons. Aside from the fiscal problems of this proposal, there’s a consideration of fairness here. This bill would mean that wealthy business owners would pay a lower tax rate than their employees. That is fundamentally unfair, and this bill should be rejected on that basis alone.

Additionally, this proposal creates the potential for abuse that could dramatically drive up the cost because it will create a big incentive for people to change their behavior in order to take advantage of it. Under this proposal, you will see more people in partnerships shift their compensation from salaries to partnership payments to pay the lower tax rate. Others could create new entities in order to take advantage of the lower taxes. In short, more income will be shifted into new entities than is accounted for in the cost estimates of this proposal.

At the same time, we have to ask: What benefit is this bill really intended to provide? If it’s to “create jobs,” this bill has some glaring problems. Let’s look at an example: Under this proposal, a “small business” owner bringing in $250,000 would get a tax cut of around $5,000. That is far too little money to hire even a single employee. Even at four times that income level—someone making $1 million per year—the tax cut would be around $25,000. That’s maybe enough to hire a clerk, but that’s about it. This is hardly a job-creating stimulus.

We also have to ask: If someone is bringing in more than $1 million, or even a quarter of a million dollars, how can we justify giving them a tax break that a carpenter, police officer, or secretary can’t qualify for? As for a cap of $10 million? That is nothing more than a tax cut for the wealthy. It has nothing to do with small business or creating jobs. Anyone earning millions of dollars in income has all the capital needed to create jobs. If the demand for their product or service exists they are going to invest. If it isn’t, a 2% cut in income taxes will not convince them to invest more in that business.

When the proponents of this tax cut promote this proposal they always use the small family business that is just scrapping by to justify it. They claim that an additional $5,000 or $10,000 will help them get a bank loan or help them buy another piece of equipment. If that is who they want to help then the appropriate response is to write legislation to help them, not the hedge fund millionaire, the heart surgeon, the trial lawyer who wins a large law suit or our good friend Loren Parks. If they were sincere about their desire to help small farms and businesses then a limit not higher than $500,000 would be plenty. Excluding professional service firms (lawyers, doctors, consultants) and financial firms (hedge fund principles) would also limit the potential for abuse.

The tax cuts under this proposal are too small to have any impact on hiring decisions by the normal understanding of what is a small business, will only amount to new giveaways to wealthy people who don’t need the help, and will take millions away from Oregon’s basic priorities.

Companies don’t hire new employees just because they get handed some additional funds. They hire new employees when demand increases. This bill would do nothing to boost demand for anyone’s business. Only an improving, thriving middle-class economy can create such a boost, and that can only be accomplished by funding basic services that families and small businesses depend on.

If we truly want to create a state where small businesses can thrive, we need to focus on investing in what matters—funding K-12 classrooms, higher education, and basic infrastructure—not handing out more tax cuts to the already wealthy.

By John Calhoun June 21, 2013