By Raymond J. Keating
Small Business & Entrepreneurship Council
Thirty years after the United States’ tax code was last updated under President Reagan, there is reason to believe Washington is prepared to shoulder comprehensive tax reform. For South Carolina small businesses, that should come as welcome news—and motivation to continue to help see these efforts through to completion.
Late last year, Congress passed a tax-extender package, which South Carolina senior Sen. Lindsey Graham supported as well as House Speaker Paul Ryan, who has stated, “The only way to fix our broken tax code is to simplify, simplify, simplify.”
But it will take strong support from local businesses—and the leaders who support America’s job creators—to achieve serious reform.
For that reason, South Carolinians should be heartened they heard tax reform ideas from the Republican presidential candidates. Addressing our broken tax system would significantly strengthen small business growth across the United States, including South Carolina, where small businesses represent 97% of all employers in the state. By making tax reform a centerpiece of the presidential election-year discussion, the Republican field can help hold Washington accountable for laying the groundwork for real reform.
Comprehensive reform won’t be easy. It will require members on both sides of the political aisle to make concessions. But done right, reform that lowers tax rates, simplifies the code and provides much-needed tax relief will boost our economy by enhancing incentives for entrepreneurship and investment. It is, in fact, small businesses that created 20,465 new jobs in South Carolina alone in 2012, according to the Small Business Administration.
There are several areas lawmakers should focus on. Reform must cut the corporate income tax rate, which ranks as the highest among developed countries. Individual tax rates must be reduced as well, especially given that businesses – more than 94 percent, according to IRS data – pay the personal income tax rather than the corporate tax.
As Ryan makes clear, serious tax reform should simplify the system. At more than 14,000 pages, the U.S. tax code has become a thicket of rules and regulations. Forty percent of small business owners spend more than 80 hours a year filing taxes, according to a SCORE study last year. In 2015, Americans collectively spent more than $33 billion and 2.6 billion hours filing tax returns, according to analysis by the American Action Forum.
And given the tax increases that have been imposed in recent years, it is critical that tax reform provide much-needed tax relief. Most certainly, tax reform should not be a vehicle for increasing the tax burden on individuals or businesses. Also, particular industries should not be targeted for tax hikes. President Obama, for example, has long sought to collectively repeal legitimate tax deductions for the oil and gas industry, conflating them with subsidies. It’s also important to understand that the energy sector of our economy is not about large energy companies but instead about small business, as most firms – for example, 90.7% of employer firms among oil and gas extraction businesses – have less than 20 workers. Congress, and the presidential candidates, can do their part by making sure all industries are treated equally with tax policy.
Here in South Carolina, leaders have already begun to take action. In her State of the State Address this year, Governor Nikki Haley—who delivered the Republican response to the President’s State of the Union speech—called for a significant income tax cut for individuals, families, and businesses, including reducing the top marginal income tax rate.
On the campaign trail, Republican candidates have begun to articulate their plans for comprehensive tax reform. As they leave the debate stage, it is important they continue to articulate their vision. Serious reform may not be achievable until new leadership enters the White House, but until then, let’s keep the pressure on congressional lawmakers. Hardworking Americans and small businesses need tax reform and relief—if not this year, then certainly in 2017.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.