Main Street businesses need permanent tax relief to grow

Tax reform is just over a year old, yet already there are calls to discard it and raise taxes on incomes, estates, capital gains, accumulated wealth, and even financial transactions. It is a veritable tax hike bidding war that overlooks the harm these policies would impose on jobs and wages. The tax code should encourage hard work and success rather than punish it.

That is why more than a hundred business groups are joining together this week in support of the Main Street Tax Certainty Act of 2019. Sponsored by Representatives Jason Smith and Henry Cuellar, along with Senator Steve Daines, this critical bipartisan legislation would make permanent the 20 percent pass through deduction enacted as part of tax reform.

{mosads}Main Street employers have long been the backbone of the American economy. Companies organized as S corporations, partnerships, and sole proprietorships comprise 95 percent of all the businesses in the United States, earn the majority of income from businesses, and employ the majority of American workers. While they are often referred to under the umbrella of small businesses, not all Main Street employers stay small, and neither does their contribution to the economy. In fact, the increased investment and higher wages we have seen since tax reform has occurred in substantial part due to the increased efforts of these many businesses.

A thriving Main Street industry helps spread the benefits of a growing economy more widely. Main Street employers are just that. They are the businesses that provide the critical economic security and employment opportunities to people in thousands of communities of all sizes across the country. They form the social fabric of these communities. They get involved by sponsoring little league teams and scout troops, financing local charities and foundations, and partnering with local educational institutions to provide workers with much needed job skills training.

It is critical to the future of our nation that these Main Street employers succeed. Under tax reform, they have received the new 20 percent pass through deduction under Section 199A, which was specifically designed to ensure that Main Street employers remain competitive with larger public companies, along with the new lower 21 percent corporate rate.

The accounting firm Ernst and Young reports that Section 199A works. Ernst and Young found that effective tax rates for Main Street businesses are on par with those of the typical large C corporation, but only if they get the full Section 199A deduction. For those businesses that do not get the deduction, their tax rates can be significantly higher. The problem is that some businesses are excluded from the 199A deduction now, while all Main Street businesses will lose the deduction when it is set to expire in 2026. When it does, taxes on these businesses would go up, not just relative to tax reform, but relative to what they paid prior to tax reform.

Raising taxes on Main Street was not the intent of Congress when it had enacted tax reform, and it should not be the policy now. To avoid that bad outcome, Congress needs to make Section 199A permanent. As the wide support expressed by such a broad cross section of businesses attests, the economic benefits of providing certainty to Main Street employers would also be widespread. A bipartisan analysis at Stanford University found that making the pass through deduction permanent would be a big economic winner by raising growth significantly over the long run. The American Action Forum found similar results. The sooner Congress can make Section 199A permanent, the sooner the economy will benefit.

Main Street deserves a tax cut instead of a tax hike. The 20 percent pass through deduction is essential to provide tax parity for these employers. By making the deduction permanent, tax reform can fulfill its promise to encourage all employers to succeed in the long term. That is good for all businesses, and it is good for the people in the communities they serve.

Chris Smith is the executive director of Parity for Main Street Employers, a coalition of national trade groups representing American small businesses.