The Biden administration has demanded trillions in tax hikes on the American people despite President Joe Biden’s campaign pledge not to raise taxes on anyone making less than $400,000.
New research shows that the “Protecting the Right to Organize” (PRO) Act violates Biden’s tax pledge by raising taxes on 7.7 million Americans, 96 percent of whom make less than $400,000.
There are plenty of reasons to oppose the PRO Act, which rewrites American labor law in favor of union bosses and at the expense of workers. It nullifies right-to-work laws in 27 states nationwide, forcing workers across the country to choose between putting food on the table or kicking up dues to a union boss. It forces employers to disclose sensitive employee contact information to organizers during union drives, opening workers up to harassment at all hours of the day and night.
Thanks to a new study from Americans for Tax Reform, the Tholos Foundation and Beacon Hill Institute, we now know that the PRO Act is a massive tax hike on millions of Americans. How is the PRO Act a violation of Biden’s $400,000 tax pledge?
The PRO Act contains a stringent three-part “ABC” test to determine if a worker is an independent contractor or a W-2 employee. Under the PRO Act, businesses must prove that a contractor is [A] “free from control or direction,” [B] doing duties “outside the usual course of work of the hiring entity,” and [C] “customarily engaged in an independently established…business of the same nature of the work performed.”
Under part C, an individual must be providing services to more than one client in order to be considered an independent contractor. The practical effect of the ABC test is to force the mass reclassification of millions of independent contractors into W-2 employees. This would damage every Uber driver in the country.
Workers have seen this movie before. California enacted an ABC test as part of Assembly Bill 5, which Governor Gavin Newsom signed into law in January 2019. The test was so reviled that nearly 59 percent of Californians voted to implement an exemption for rideshare drivers in November 2020.
Rideshare drivers aren’t the only Americans that work as independent contractors. Court stenographers, florists, ballroom dancers, auctioneers, doctors, dentists, financial professionals and veterinarians all work as independent contractors.
The study uses IRS data from a Treasury study to calculate taxes on a sample of independent contractors. The sample comprises the four different types of independent contractors most likely to be reclassified if the PRO Act became law. The population size is 13.81 million independent contractors with 1099 income, with a sample size of 1 percent. The study assumes that both the independent contractor and the employee take the standard deduction and computes the tax differences from there.
The results are striking. Based on the sample, a nationwide ABC test would lead to 7,749,443 workers paying more in tax as W-2 employees than independent contractors. It is important to note that independent contractors already pay taxes — the reclassification would lead to them paying a different mix of taxes resulting in a higher overall tax burden.
As the study notes: “BHI found that 56 percent of the independent contractors most likely to be reclassified would pay more tax as employees, which we estimate to be about 7.7 million taxpayers. We estimate that 96 percent, or 7.5 million, of those reclassified taxpayers who would pay more tax, make less than $400,000.”
The study uses the best available data from 2016 to reach these conclusions. Due to the rising popularity of the gig economy and workers turning to side hustles to make ends meet during the COVID-19 pandemic, the real number is likely much higher. According to Upwork’s “Freelance Forward: 2021” study, an estimated 59 million Americans engage in some form of freelancing. Using that number, the study assumes that 33 million Americans would pay more in tax if reclassified as W-2 employees.
The PRO Act has been one of Biden’s top priorities despite the fact that it has yet to move in the Senate. The PRO Act’s ABC test is a clear tax hike on millions of Americans, 96 percent of whom make less than $400,000 per year. If Biden is serious about upholding his tax pledge, a central part of his presidential campaign, he should kick the PRO Act and the ABC test to the curb.
Grover Norquist is president of Americans for Tax Reform.