Democrats Prepare To Crush Inflation-Battered Small Businesses With A Massive Tax Hike

With Small Businesses Struggling With Soaring Prices For Labor, Supplies, Gas, And Rent, Senate Democrats Are Incredibly Planning To Drop A $400 Billion Tax Hike On Their Heads, Potentially Affecting 60% Of All Private-Sector Workforces In Many States

SENATE REPUBLICAN LEADER MITCH McCONNELL (R-KY): “Persistent rumors… that some version of Build Back Better, or what we call reckless tax and spending, is seeking to make a comeback. … [I]t appears as if they want to target businesses they don’t really understand which are pass-throughs. The vast majority of American businesses are not incorporated. They pay as individuals pay through these companies that employ an enormous number of people. Just to give you — to pick out four kind of random states out of the blue — in Georgia, Nevada, and Arizona, just to pick a few states, 58 percent of the private sector workers are actually employed by pass-throughs. In New Hampshire, just to pick another state out of the blue, 61.7 percent of the employees in New Hampshire are employed not by corporations but by pass throughs. And in West Virginia, just to pick another state out of the blue, in West Virginia a whopping 95 percent of businesses are pass-throughs. 95 percent of the businesses in West Virginia are pass-throughs and about 58 percent of the employees. So what are they looking at doing here? First, they overstimulated the economy by dropping almost two trillion dollars on the economy last year. At the time Larry Summers and Jason Furman said this is going to create record inflation. And it did. And now they want to pour fuel on the flames by making it more likely that we go into a recession by raising taxes on all of these businesses — the vast majority of businesses in America — which will only cause them to reduce the number of employees. So that’s where they’re trying to head. And I would continue to ask those who may be negotiating this if they fully understand the consequences of what they think they’re about to do.” (Sen. McConnell, Press Conference, 7/12/2022)

SENATE REPUBLICAN WHIP JOHN THUNE (R-SD): “And so as the leader pointed out, one of the ideas on the table right now, if you can believe this, is let’s stick it to the small businesses. Pass-through businesses in my state of South Dakota represent 99 percent of businesses. And what they’re talking about doing is a tax increase on the very small businesses that create the jobs in this country and that we’re hoping will pull us out of the recession. And what do you do when you raise taxes? [F]irst off, it contributes to inflation. Because when businesses are faced with higher taxes, they can do a couple of things. They raise prices, right? That’s how they pass it on to their consumers. They also pass it on in the form of lower wages to workers. So you’re going to punish workers, you’re going to punish the American people with high inflation by going after small businesses. That’s what this reckless tax and spending spree is all about.” (Sen. Thune, Press Conference, 7/12/2022)

SEN. THUNE: “And as was alluded to, there is a study out there now by the Joint Committee on Taxation that has assessed the many ideas the Democrats are putting forward in the form of tax increases and concluded that it doesn’t just hit people who make more than $400,000 a year. In fact the Joint Committee on Taxation, bipartisan. Obviously a referee if you will, umpire of tax policies and their implications on the — on the economy — pointed out that people who make between 100,000 and $200,000 a year, 50 percent of them will see a tax increase. A quarter, 25 percent, would see a tax increase if they make between 75,000 and $100,000 a year. That’s what we’re talking about. We’re talking about higher taxes on the American people, higher taxes on businesses, higher prices, and lower wages. That’s the Democrat prescription.” (Sen. Thune, Press Conference, 7/12/2022)

SEN. MIKE CRAPO (R-ID), Senate Finance Committee Ranking Member: “Today’s consumer price inflation reading of 9.1 percent is a painful reminder that Americans’ paychecks continue to be strained by the high inflation that was fueled by Democrats’ untargeted and partisan spending spree.  As the economy faces runaway inflation and rising odds of a recession and stagflation, raising taxes, killing jobs, smothering wages and imposing price controls makes no sense.” (U.S. Senate Finance Committee Ranking Member, Press Release, 7/13/2022)

Small Businesses Are Being Hit From All Sides By Inflation

Labor Costs Are Up

“Small businesses are losing ground in the hiring game. Head counts at companies with fewer than 50 employees declined in three of the past four months, according to ADP payroll data, even as employment at larger firms continued to grow. Owners of many small companies say inflation has added to the pressures of an already tight job market, making it increasingly difficult to keep pace with the wages and benefits offered by large employers. The hiring challenges are stunting growth, small-business owners say, and further clouding their deteriorating economic outlook. … Sixty-three percent of small-business owners say that hiring challenges are affecting their ability to operate at full capacity, according to a June survey of more than 825 small businesses for The Wall Street Journal by Vistage Worldwide Inc., a business coaching and peer advisory firm.” (“Small Businesses Fall Behind On Hiring As Inflation Takes A Toll,” The Wall Street Journal, 6/20/2022)

“Like companies of all sizes, small businesses are spending more to attract and retain workers. Seventy-six percent of small-business owners said they had boosted wages in response to labor-market challenges, according to the Vistage survey, while 44% reported adding employee benefits.” (“Small Businesses Fall Behind On Hiring As Inflation Takes A Toll,” The Wall Street Journal, 6/20/2022)

And Supply Costs Have Skyrocketed

“Many business owners in Bucks County [Pennsylvania] say demand is keeping up for now, but worry that it is at risk if persistent inflation forces them to implement another round of price hikes. Owen Burke, 20, the part-owner of the diner Coach’s, already raised the price of his Philly cheesesteak — called the ‘Buck’ — from $9 to $11.95 in response to the rising costs of ingredients. His supplier just increased his price tag for fries from $30 to $50 for a case of seven bags. Some customers grumbled but most kept buying, though Burke is now worried they’ll revolt if he raises prices again. The duration of the price hikes makes them particularly anxiety-inducing, because businesses can’t anticipate their impact on future sales. Up the street from Coach’s, James Lamb, 43, pointed at a row of candy bars and let out a small sigh. Already, his Evolution Candy store in downtown Doylesville had raised the price of Charms sour balls from $2 to $2.25. One of the store’s novelty items, a roughly foot-long Rice Krispy treat, once sold for $19.95 but now goes for $25.95. And the store may have to raise the price of their traditional candy bars — like Hershey’s and Twix — from $1.50 to $1.65. ‘We want to go for $1.65, but the community might not be ready for it,’ Lamb said. ‘We’re eating some things,’ he said of the higher prices being paid to suppliers, ‘because we can’t eat it all at once and hike everything.’” (“The Comedown: After Stimulus Boom, Americans Face A Darkening Economy,” The Washington Post, 6/21/2022)

“In Houston, Three Brothers Bakery has been open for 73 years, most recently surviving a fire, Hurricane Harvey and the 2021 Texas freeze. The latest test is high inflation, which has sent prices for key ingredients like honey and unsalted butter soaring. Eggs are up more than 300 percent compared to last year. President and co-owner Janice Jucker said she expects that the war in Ukraine could send prices for flour even higher by the holidays, the busiest time of the year. Even as recession fears grow elsewhere in the economy, Jucker said what matters to her is how people feel about their ability to buy goodies for their loved ones. ‘It’s when things aren’t great, that’s what we worry about,’ she said. Jucker doesn’t know if people will begin to decide they just can’t swing $4 for one of the bakery’s beloved gingerbread men. ‘It’s still something people come in and they get all the time, and I worry at some point they may say, ‘no,’’ Jucker said.” (“June Inflation Soared 9.1 Percent Amid High Gas Prices,” The Washington Post, 7/13/2022)

“The prices on Boricua Soul’s menu [in Durham, NC] are the highest they’ve ever been with inflation. Owner Toriano Fredericks and his staff have been serving up cuisine meant to celebrate his and his wife’s heritage since November 2019. ‘We use a lot of frying oil, so frying oil has more than doubled. Really, it’s tripled in less than a year. Chicken prices and all of our meat prices have fluctuated, but mostly gone up,’ said Fredericks. ‘The main way we offset costs is by raising prices.’ He posted a video to Instagram showing how expensive chicken has gotten.” (“‘Offset Costs By Raising Prices’: Durham Restaurant Among Many Small Businesses Feeling Inflation,” WTVD, 6/22/2022)

“‘My concerns are that my food costs have escalated dramatically,’ [Kevin] Mills [owner of the breakfast restaurant Omelet House in Las Vegas] said. ‘I used to gut wrench about (raising menu prices) 2 or 3 percent. Now, it’s way more than that just to keep my doors open. I can’t sell food at a loss.’” (“New Nevada Minimum Wage Starts Today, But Inflation Taking Toll,” Las Vegas Review-Journal, 6/30/2022)

“Like many other businesses across the country, DeFelice Brothers Pizza [in Belmont County, Ohio] is learning to adjust in the current challenging economy. ‘In our business, we’re seeing, company-wide, a 3 to 4 percent increase in our costs overall in the product mix that we have. So, at the end of the month, we’re losing 3 to 4 percent,’ President Dominic DeFelice said. The business has been operating in the Ohio valley for more than 40 years. ‘So, at $5 a gallon, we’re getting a surcharge on our food being delivered to us,’ Dominic DeFelice said. ‘So, our distributor is now hit with higher prices, so they’re turning around and raising our price.’ … It’s not just the gas prices and inflation that are affecting the restaurant, but a shortage of workers as well.” (“As Gas Prices Rise And Inflation Soars, Small Businesses Face Difficult Decisions,” WTOV, 6/21/2022)

‘Add Rent To The Rising Costs Bedeviling Small Businesses’

“The rent has come due for America’s small businesses and at a very inopportune time. Landlords were lenient about rent payments during the first two years of the pandemic. Now, many are asking for back rent, and some are raising the current rent as well. Meanwhile, most of the government aid programs that helped small businesses get through the pandemic have ended while inflation has sharply pushed up the cost of supplies, shipping, and labor…. Thirty-three percent of all U.S. small businesses could not pay their May rent in full and on time, up from 28% in April, according to a survey from Alignable, a small business referral network. And 52% said rent has increased over the past six months. ‘Many small businesses are still frankly recovering from whatever the last phase of COVID was,’ said Chuck Casto, head of corporate communications at Alignable. ‘Plus, they’re dealing with a years’ worth of increasing inflation on top of that. It’s made it difficult for small businesses to really make a go of it.’” (“Add Rent To The Rising Costs Bedeviling Small Businesses,” The Associated Press, 7/04/2022)

“Ris Lacoste owns a namesake restaurant, Ris, in Washington, D.C., and is staying afloat using aid she got from the Restaurant Relief Fund to pay her rent…. ‘What I have to do to stay alive after that, every single penny that I can save has to go into reserve,’ Lacoste said. To cut corners she’s refinishing tables to cut down on linen costs, not printing color copies of menus, and working with 22 staffers instead of the 50 she once had. Before the pandemic, the 7,000-square-foot restaurant was often full, but it isn’t ‘back to full occupancy at all,’ Ris said. At the same time, inflation is compounding the cost of doing business.  ‘Payroll is up labor is up, the cost of goods is up, utilities are going up,’ Lacoste said. ‘I’m wearing 20 hats instead of 10, and working six days a week, 12 hours a day.’” (“Add Rent To The Rising Costs Bedeviling Small Businesses,” The Associated Press, 7/04/2022)

“Charleen Ferguson owns the building that houses the tech business she owns with her husband, Just Call the I.T. Guy, in Wylie, Texas. She also has 13 tenants, so she sees the dilemma from both the small business and landlord points of view. During the pandemic, Ferguson agreed with her tenants, which range from a massage therapist to a church, to put a moratorium on rent. Once things began to reopen, she worked with tenants on the back rent. They all caught up within three months — except the church, whose debts she forgave. But she’s had to raise rent by about 5% as of May to keep up with her own costs of maintaining the building. Prices have gone up for utilities and cleaning supplies, as well as property taxes.” (“Add Rent To The Rising Costs Bedeviling Small Businesses,” The Associated Press, 7/04/2022)

“Martin Garcia, owner of gift and décor store Gramercy Gift Gallery in San Antonio, Texas, survived the first part of the pandemic in part by paying his landlord whatever rent he could each month…. A strong holiday season helped him pay back his loans, but so far this year sales have slipped, and he used credit card financing to pay his June rent. Garcia thinks some of his customers are cutting back on non-essentials to afford to pay the higher prices for gasoline and other must-have items.” (“Add Rent To The Rising Costs Bedeviling Small Businesses,” The Associated Press, 7/04/2022)

Unsurprisingly, Small Business Confidence In The Economy Has Reached Lows Not Seen In Nearly A Decade

“U.S. small-business confidence dropped to the lowest level in nearly 9-1/2 years in June amid concerns about inflation … The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 3.6 points last month to 89.5, the lowest level since January 2013. Thirty-four percent of owners said that inflation was their biggest single problem in running their business, an increase of six points from May and the highest level since the fourth quarter of 1980.” (“U.S. Small Business Sentiment Drops Near 9-1/2-Year Low In June, NFIB Says,” Reuters, 7/12/2022)

“The NFIB survey showed 50% of owners reported job openings they could not fill in June, down a point from May’s reading, which tied the previous record high. The vacancies were for both skilled and unskilled labor, with worker shortages most severe in the construction, manufacturing and services industries.” (“U.S. Small Business Sentiment Drops Near 9-1/2-Year Low In June, NFIB Says,” Reuters, 7/12/2022)

NFIB: “Small business owners expecting better business conditions over the next six months decreased seven points to a net negative 61%, the lowest level recorded in the 48-year survey. Expectations for better conditions have worsened every month this year.” (NFIB, Press Release, 7/12/2022)

NFIB CHIEF ECONOMIST BILL DUNKELBERG: “As inflation continues to dominate business decisions, small business owners’ expectations for better business conditions have reached a new low. On top of the immediate challenges facing small business owners including inflation and worker shortages, the outlook for economic policy is not encouraging either as policy talks have shifted to tax increases and more regulations.” (NFIB, Press Release, 7/12/2022)

Yet Senate Democrats Are Preparing To Hammer Small Businesses With A Massive Tax Hike

“Senate Democrats also have a deal to raise taxes on ‘pass through’ income for small business owners who make more than $400,000 annually ($500,000 for couples) …” (Punchbowl AM, 7/11/2022)

“There’s relatively broad agreement [among Democrats] on using any party-line bill to increase taxes on some high earning Americans who run so-called pass through businesses …” (“Dems Agonize Over Election-Year Tax Increases,” Politico, 7/14/2022)

“Democrats [are] near the climax of their months long push to unilaterally raise … taxes …” (“Dems Agonize Over Election-Year Tax Increases,” Politico, 7/14/2022)

Business Associations Across The Country Warn Democrats Are Proposing A $400 Billion Tax Hike, ‘Shouldered Entirely On The Backs Of Small, Individually, And Family-Owned Businesses’

192 NATIONAL AND STATE BUSINESS ASSOCIATIONS: “We, the undersigned organizations representing millions of Main Street businesses and employing tens of millions of American workers, urge you not to raise taxes on small, individually, and family-owned businesses as part of any effort to enact a reconciliation bill this year. In the face of a possible recession, 40-year high inflation, unprecedented supply-chain challenges, and chronic labor shortages, raising taxes on small, individually, and family-owned businesses is the wrong approach and should be rejected. According to recent media reports, two tax increases under consideration would fall entirely on small, individually, and family-owned, closely-held businesses: 1) expanding the 3.8 percent Net Investment Income Tax (NIIT) to individuals and families who actively participate in their business, and 2) limiting the ability of small, individually, and family-owned businesses to fully deduct their losses during an economic downturn by expanding and extending the so-called ‘excess business loss limitation’ for ‘noncorporate taxpayers.’ Combined, these would increase revenues by more than $400 billion over ten years, shouldered entirely on the backs of small, individually, and family-owned businesses.” (192 Business Associations, Letter to Speaker Pelosi, Rep. McCarthy, and Sens. Schumer and McConnell, 7/11/2022)

“Expanding the 3.8 percent NIIT represents nothing more than an eleven percent increase in the rates imposed on family-owned businesses. Based on Treasury data, we estimate up to 1 million small and family-owned businesses, representing over half of all pass-through business activity, would be at risk of having their rates increased under this policy. This small business tax hike would hurt the ability of businesses that survived the worst global pandemic in a century to remain viable in the coming months.” (192 Business Associations, Letter to Speaker Pelosi, Rep. McCarthy, and Sens. Schumer and McConnell, 7/11/2022)

“This is ill-advised tax policy and it is being considered at a moment when the economy is no longer growing. First quarter gross domestic product (GDP) fell by 1.6 percent and many economists and forecasters predict that the second quarter GDP will also be negative. Meanwhile, the small business sector may already be in recession, as those businesses have lost employment in three out of the last four months.” (192 Business Associations, Letter to Speaker Pelosi, Rep. McCarthy, and Sens. Schumer and McConnell, 7/11/2022)

“Raising taxes on small and family-owned businesses with the economy on the brink of a recession, a situation which is compounded by the other post-pandemic challenges they face, harms not only the businesses but the families and communities who rely on them. We ask you to reject these or any tax hikes on America’s small and family-owned businesses in any legislation considered this year.” (192 Business Associations, Letter to Speaker Pelosi, Rep. McCarthy, and Sens. Schumer and McConnell, 7/11/2022)

Pass-Through Businesses Account For Around 60% Of All Private Sector Employment In Many States

Pass-through businesses account for 57.6% of all private sector employment in West Virginia. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

“S Corporations, partnerships, limited liability corporations (LLCs), farms, and sole proprietorships are all pass-through businesses, and together they employ nearly half of the West Virginia workforce.” (“Evaluating West Virginia Income Tax Repeal Plans,” Tax Foundation, 3/30/2021)

“Over 95 percent of all West Virginia businesses are what is known as pass-through businesses, meaning that business income is taxed on (‘passes through to’) the individual income tax returns of the owner or owners, rather than being taxed at the entity level like a traditional C corporation.” (“Evaluating West Virginia Income Tax Repeal Plans,” Tax Foundation, 3/30/2021)

Pass-through businesses account for 58.3% of all private sector employment in Arizona. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 58.7% of all private sector employment in Nevada. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 61.6% of all private sector employment in New Hampshire. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 58.4% of all private sector employment in Georgia. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 59.6% of all private sector employment in Wisconsin. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 59.0% of all private sector employment in Pennsylvania. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 57.8% of all private sector employment in North Carolina. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 57.3% of all private sector employment in Ohio. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 59.0% of all private sector employment in Washington State. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 62.2% of all private sector employment in Colorado. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)

Pass-through businesses account for 72.5% of all private sector employment in Montana. (“Marginal Tax Rates for Pass-through Businesses by State,” Tax Foundation, 7/15/2020)