Raising Taxes During a Pandemic: The Economic and Political Perils

Raising Taxes During a Pandemic: The Economic and Political Perils

In this special evening edition of tippinsights, Karen Kerrigan, the president & CEO of the Small Business & Entrepreneurship Council, discusses the results of a survey of small businesses on the impact of proposed tax increases and the concerns of small businesses.

Karen Kerrigan

For most small businesses, this pandemic is not over – far from it.

Beyond what the future may bring with regard to additional economic pain from the Delta, Lambda, or future variants, small business owners are still digging out of the mess of the last year and a half. According to a mid-July 2021 Census Bureau “Small Business Pulse Survey,” 32.5% of small businesses say it will still take them 6 months or longer to return to normal levels of operation.

Not surprisingly, more than a quarter (25.2%) still report “a large negative effect” from the Coronavirus pandemic, which is more widespread in certain sectors such as the accommodations and food services sector (54.7% are still struggling).

So why would lawmakers and elected officials want to pile on and add more uncertainty and costs with higher taxes and burdensome regulation on these small businesses?

Unfortunately, that is the threat business owners have been facing from Washington, D.C.  And the massive $3.5 trillion budget resolution currently zipping through the U.S. Senate is one doozy of a tax and spending package that could suck small businesses dry at a time they need these additional resources for higher labor costs, higher input costs, and new investments to deal with ever-changing consumer habits and trends.

Tax increases are not politically popular with small business owners, especially now as they are still grinding it out and hoping to eventually recover from the pandemic. In fact, in a new SBE Council/TechnoMetrica survey of small business owners that my group will release on August 11, 65% of respondents say that “no federal tax increases should be considered until the economy has had the time to fully recover.”

TIPP/SBE Poll Results Chart:  Most American Small Businesses think tax increases should wait

These business owners were hit hard by the pandemic, and know of other family-owned businesses and farms who suffered right alongside them.  Many of these small business owners want to keep the firm or farm in the family, and are working hard to build a resilient business that can compete and prosper into the next generation.

So, beyond their concerns about new taxes and government-imposed costs that could sink their business as they work to recover from this pandemic, small business owners are now fearful of new barriers that will prevent them from passing their business onto the next generation sometime in the future. A proposal to eliminate step-up in basis adjustment (when property such as a business or farm is passed on upon death) may be used as a  “pay for” to fund the $3.5 trillion spending bonanza.

Senator John Thune (R-S.D.) calls this proposal a new “double death tax” and for good reason. The impact for family businesses and farms would be very destructive and painful.

According to our survey:

TIPP/SBE Poll Result: American Small Business'es and the Elimination of step-up in basis
  • 50% of respondents said the proposal would hurt their ability to carry on the business
  • 51% said it would hurt their ability to make capital investments in the business
  • 42% said it would hurt their ability to secure loans or lines of credit
  • 47% said it would hurt their ability to keep existing employees
  • 49% said it would hurt their ability to support local charitable organizations
  • 48% said it would hurt their ability to pay federal or state taxes
  • 45% said it would hurt their ability to support the local economy
  • 48% said it would hurt their ability to support their own family

These outcomes are not positive ones for local economies, workers, families, charities, and governments.

The survey results will also reveal additional negatives for small businesses and the U.S. economy (visit our website www.sbecouncil.org for the results) regarding how eliminating step-up in basis and hiking capital gains taxes would impact both, but maybe that’s why Senate Democrats are moving amazingly fast to jam the massive package through the reconciliation process, and why the House will likely return in August to maintain legislative momentum.

However, this won’t go unnoticed by small business owners, and they won’t forget when the next election comes rolling around. These tax plans – especially those hurting small business and family businesses – hold political peril for elected officials supporting them. Not surprisingly, according to our survey, 83% of respondents believe that elected officials should support tax policies to make it more financially viable for families to be able to pass on their small businesses, family or privately owned enterprises, farms, and ranches from one generation to the next.

TIPP Poll Results: Elected officials should support tax policies that make it possible to pass on their small businesses

According to our survey, these small business owners will definitely keep this issue in mind for the mid-term elections.

Interestingly, the Democrats' tax and spend plan highlights a pledge to “prohibit new taxes on families making less than $400,000 per year, and on small businesses and family farms.” It would be refreshing indeed if Democrats kept that pledge, but that will not be the case if they fund their massive spending spree on the backs of small businesses by eliminating step-up in basis or hiking capital gains taxes.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.

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