MSCI, 190 Other Groups Tell Senators Not To Raise Small Business Taxes

According to several news outlets, Sen. Joe Manchin (D-W.Va.) has told Senate Majority Leader Charles Schumer (D-N.Y.) that he will only vote for a narrow Build Back Better plan if it does not include new spending to fight climate change, a 15 percent corporate minimum tax, or higher taxes on individuals and couples who earn more than $400,000 and $500,000 annually in pass-through income.

As a reminder, the Build Back Better plan started as the White House’s “human infrastructure” plan that would fund everything from housing to childcare. Sen. Manchin has insisted for months that Democrats contain the cost of the plan since he is worried increased federal spending could drive already-historic inflation levels even higher.

Specifically, last week Sen. Manchin said he would only support a provision to lower prescription drug prices and a two-year extension of expiring health insurance subsidies under the Affordable Care Act. President Joe Biden urged Democratic leaders to accept Sen. Manchin’s demands, which means lawmakers could cast a vote on this plan in the coming weeks.

While Sen. Manchin’s statement about tax hikes is a good sign, a corporate tax increase is not the only tax hike lawmakers are considering — and lawmakers could still consider these revenue raisers this year.

Specifically, Democrats also have discussed expanding the existing 3.8 percent Net Investment Income Tax (NIIT) to include the incomes of S corporations and partnerships where the owners actively manage the business. As the S-Corp Association has made clear, data from the U.S. Treasury Department indicates expanding the existing 3.8 percent NIIT to include the income of active business owners would affect one million small and family-owned businesses, forcing them to shoulder an 11 percent increase in their current rates.

Last week, MSCI joined with more than 190 trade associations to send a letter asking lawmakers to oppose an NIIT tax increase. The letter said the proposal amounts to a $200 billion tax hike on businesses at a time when they can least afford it. It argues that a tax hike would hurt businesses that survived the worst global pandemic in a century.

Another provision Democrats hav considered also targets small businesses. This provision would extend and expand the new loss limitation rules that apply to pass-through businesses whose losses exceed $500,000. The current rules expire in 2026. In the House-passed bill, the rules would be extended and made more stringent, hurting the ability of these businesses to survive the next downturn.

During the Great Recession, many businesses were able to survive, in part, due to policies that allowed them to offset their current losses against taxes they had previously paid. These refunds were particularly important for cyclical industries such as construction, manufacturing, and travel and tourism. Extending and expanding the excess loss limitation rules into the future would prevent pass-through businesses from having this relief in the next recession, increasing the odds that these companies would not survive.

The letter concludes that with small businesses facing a looming recession, inflation at a 40-year high, unprecedented supply chain challenges, and chronic labor challenges, Congress should not raise taxes on these companies. Click here to read the letter.