Dave Camp’s Tax Plan Hurts Small Business

As written for the Baltimore Business Journal

U.S. Rep. Dave Camp’s tax plan was promised as a comprehensive, revenue-neutral plan to simplify the tax code for both individuals and businesses.

Approaching 1,000 pages, the proposal from the Michigan Republican legislator would definitively overhaul the tax code by flattening the rate structure (including the elimination of the alternative minimum tax), eliminating deductions and credits, significantly changing provisions affecting large and small businesses, reforming the corporate tax code and revamping the foreign tax system.

The Camp plan appears designed to please Republicans, appease Democrats and avoid drawing the ire of every special interest group in the country, even while attacking numerous sacred cows (e.g., eliminating tax-deductible IRAs, reducing the allowable home mortgage deduction and eliminating state income tax deductions). It is safe to say, after two weeks of commentary and criticism, that the overhaul is both well-received by all sides, and soundly rejected by them as well.

Camp, chairman of the House Ways and Means Committee, has achieved the unthinkable, created a working model that all sides could agree is an adequate foundation for tax reform, and in the process angered every constituency in the country.

Indeed, Stephen Moore of the Heritage Foundation, a conservative think tank, argued that Republicans must push to “make it bolder”.

From the opposite end of the spectrum, Howard Gleckman writing for the left-leaning Tax Policy Center of the Brookings Institute reaches a similar conclusion, calling the plan a “brave start”. Special interest groups, on the other hand, are less enthusiastic, with both the National Association of Realtors and the Private Equity Growth Capital Council dismissing the plan as “disappointing”.

Some of the plan’s key features will have significant impact on Maryland businesses and their owners.
Although the proposal is being touted as a road to simplification and the basis of comprehensive tax reform, the Camp plan still maintains the same (complex) structure of the existing system, with fewer deductions and credits, fewer modifications and fewer brackets. It certainly remains a stretch to frame the 1,000 page plan as “simple.” Given Congress’ history, if a bill begins life at 1,000 pages, the end result may be more complicated than where we are today.

For small business owners, the Camp plan inadvertently picks winners and losers as it strives for fairness. Most small businesses use pass-through entities such as LLCs and S corporations, which impose tax only at the individual tax rate. The Camp plan includes only a 10 percent, 25 percent and 35 percent bracket which, even after lost deductions, may reduce the aggregate tax rate imposed on a small business owner.

The most significant changes affect specific sectors of the economy. Accelerated depreciation (commonly known as MACRS) is eliminated and replaced with longer depreciation of capital assets, while at the same time the domestic production deduction (DPAD) is also dropped. Although the Section 179 expensing of $250,000 is made permanent, the combined effect of these provisions on capital intensive small businesses is to implicitly increase the effective tax rate dramatically. Manufacturers and similar businesses are hit very hard by these new proposals.

Similarly, last-in, first-out (LIFO) accounting would no longer be allowed, which could dramatically affect auto dealers, retailers, wholesalers and distributors. Wholesale changes are also in store for the energy sector, with the elimination of key deductions and credits. Even the technology sector will be affected, with research and development deductions spread over five years rather than allowing for immediate expensing.

The corporate tax reform component lowers the rate applicable to C corporations. The overall effect of this change immediately helps large businesses and public companies, and probably will force many small businesses to convert to C corporations, subjecting them to double taxation and greater aggregate taxes in the long run, in order to mitigate short-term tax liability. Although corporate tax reform is positive for the economy, the net effect of the business tax reforms appears to inhibit small business growth in many industries, even after taking into account the rate reductions.

The effect on Maryland business owners is even more significant. The Camp plan eliminates the state income tax deduction. Thus, the effective Maryland tax rate on business owners will increase from about 5 percent to about 8 percent — basically negating the decrease in federal marginal rates.

I would agree that the Camp plan is both “a good start” and at the same time, quite “disappointing.” Not only does the Camp plan not succeed in its goal for true simplification, but it fails to spur growth of small businesses (and may in fact inhibit the ability of small businesses to prosper in many industries). We need a plan that incentivizes Maryland businesses and their owners to reinvest and grow their businesses, not one that continues to pick winners and losers.

David Rosen, a CPA and director of tax services for RS&F (Rosen, Sapperstein & Friedlander) in Owings Mills, can be reached at davidr@rsfchart.com.

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