GOP tax plan risks alienating critical voting bloc — small business

Small business owners, with a do-it-yourself, boots-to-bootstraps attitude generally skew right on the political spectrum. While younger, millennial entrepreneurs are shifting this dynamic, the 30-million-strong small business base typically aligns with a “keep-government-out-of-my-business” approach, and for good reason.

Direct regulatory burdens are a crushing cost to entrepreneurs. Indirect costs, like the restriction of capital, are just as harmful — and disproportionately so to low- and moderate-income Americans. Small business owners, and many of their employees, respond by favoring the small-government approach traditionally espoused by conservatives.

{mosads}But with tax reform on the horizon, the GOP should be wary with regards to this constituency. If any final deal prioritizes corporate rate-cutting without substantial benefits to smaller companies, this long-time alliance may fracture.

Conversely, if Democrats want to make inroads with this demographic, they will similarly have to offer alternatives that clearly spell out improvements for entrepreneurs’ bottom lines, something they have failed to do in the past.

Creating small-business-friendly tax policy has always been difficult. A key reason is that many businesses — 94 percent, according to the Tax Foundation — operate as “pass-through” companies where business owners could allow income to “pass through” the business and be treated as individual income.

In so doing, they avoid incorporation to receive liability protections. Thus, the latest proposals to cut the corporate rate to 20 percent would do little for small business.

It is important to remember that small businesses are already the losers of the tax code, sometimes paying double the tax rate of larger corporations. Small businesses often do not get their lowest possible rate, failing to navigate complex loopholes and depreciation schedules.

Or, as in the case for the self-employed, small businesses are not able to deduct health-care costs like corporations. Already, they spend a disproportionate amount on filing their taxes, only to discover that bigger companies pay a much lower effective rate (on average 13 percent). This leaves small business owners feeling like the tax code is unfair.

Equally frustrating, the few deductions that do matter expire annually and often get passed by Congress retroactively. While this can help the occasional bottom line, the practice distorts financial planning for these businesses. Who would want to invest in new hires or expand locations when their tax liability is always in flux? 

This is why small business owners feel like the deck is stacked against them. The GOP hopes to capture much of the “my-taxes-are-too-high” sentiment in support of a plan to lower the corporate tax rate by closing certain loopholes in the tax code and removing long-standing deductions. But this change alone will do little to benefit entrepreneurs.

Small business owners take advantage of common deductions, like mortgage interest and state and local tax deductions. Gutting those to afford a corporate tax reform could ultimately hurt their incomes and family’s economic security. In such a proposal, there is no real carrot for entrepreneurs.

Proposals to lower the “pass-through” rate, would generally benefit only the largest entities. Ideas around allowing full expensing of equipment, while helpful to capital-intensive industries, may not greatly help those in the professional services sector.

Ultimately, tax reform has to have something for everyone, and current plans may just not have enough for small businesses.

That risk carries electoral consequences. Small business owners vote. According to the National Small Business Association, small business owners had a 97-percent voting participation rate in 2012, far above the 58-percent rate that year for all Americans. Owners are also large contributors with nearly two-thirds giving to a political candidate last election cycle.

Entrepreneurs will not be alone in their ire of corporate giveaways masquerading as tax reform. Recent polling reveals cutting the corporate rate is far less important than a low rate for small businesses. More than half of registered voters said small businesses pay too much in taxes, and 66 percent believe cutting their rate should be a priority.

Given the diversity among small businesses, it is certainly one of the trickiest elements to tackle — as opposed to simply cutting the corporate rate. Nonetheless, Republicans should move this issue to the fore if they are to maintain the support of their traditional allies.

For Democrats, tax reform is an opportunity to pivot the party to support entrepreneurs. If Democrats make small business their sticking point in tax conversation, they could expand their desirability to a new base. The best way to do that is demonstrate how reforms would truly benefit entrepreneurs.

For both parties, the key to earning small business owners support will be fair reforms that offer simplicity and certainty. Decreasing the filing burden is a good place to start. Mostly, though, entrepreneurs don’t want to feel like they are losing out to corporations with pockets deep enough to afford the best tax gurus. Whichever party can achieve, or at least message, this first, will win votes. 

John Stanford is managing director at Prism Group, where he advocates on behalf of the small business community to the White House and Congress.