Yesterday, the Parity for Main Street Employers coalition sent a letter to House tax writers raising serious concerns with their plan to provide temporary relief from the SALT deduction cap by permanently raising the top tax rate applied to pass-through business income.
The bill, titled the “Restoring Tax Fairness for States and Localities Act”, is scheduled to be considered by the House Ways & Means Committee today and voted on by the full House next week. The bill includes one year of marriage penalty relief and then repeals the SALT cap for two years, all paid for by increasing the top individual income tax rate of 37 percent to 39.6 percent and reducing the dollar amounts at which the 39.6 percent bracket begins.
The PMSE coalition raised serious concerns with the bill, particularly the restoration of the higher top tax rate that applies to pass-through businesses and individuals alike. As the letter states:
Individually and family owned businesses organized as S corporations, partnerships and sole proprietorships are the heart of the American economy. They employ the majority of workers, and they contribute the most to our national income. They also pay the majority of business taxes. A recent study by EY found that pass-through businesses pay 51 percent of all business income taxes.
The legislation introduced today would raise these taxes by 1) increasing the top rate pass-through businesses pay from the current 37 percent to 39.6 percent and 2) lowering the income threshold of the top rate from $622,050 to $496,600 (Joint) for the years 2020 through 2025, after which the 37 percent rate is scheduled to expire under current law.
You can read the whole letter here.
The Parity for Main Street Employers coalition and the S Corporation Association will host a Hill lunch briefing at noon on October 24th in the Kennedy Caucus Room (SR-325).
The briefing is open to Hill staff and tax professionals, and will focus on the pass-through sector and how it has fared under tax reform. Speakers include Senator Steve Daines (MT), Marty Sullivan with Tax Analysts, Bob Carroll with EY, and David Winston with the Winston Group. Box lunches will be provided.
For Tax Day, Parity for Main Street Employers Executive Director Chris Smith’s has an opinion piece in The Hill addressing recent calls for tax increases and highlighting the introduction of The Main Street Tax Certainty Act of 2019 to make the 20 percent pass through deduction permanent. As the piece argues:
“Tax reform is just over a year old, yet already there are calls to discard it and raise taxes on incomes, estates, capital gains, accumulated wealth, and even financial transactions. It is a veritable tax hike bidding war that overlooks the harm these policies would impose on jobs and wages. The tax code should encourage hard work and success rather than punish it.
“That is why more than a hundred business groups are joining together this week in support of the Main Street Tax Certainty Act of 2019. Sponsored by Representatives Jason Smith and Henry Cuellar, along with Senator Steve Daines, this critical bipartisan legislation would make permanent the 20 percent pass through deduction enacted as part of tax reform…
“Main Street deserves a tax cut instead of a tax hike. The 20 percent pass through deduction is essential to provide tax parity for these employers. By making the deduction permanent, tax reform can fulfill its promise to encourage all employers to succeed in the long term. That is good for all businesses, and it is good for the people in the communities they serve.”
You can read the full piece here.
Today over a hundred business groups released a joint letter in support of the Main Street Tax Certainty Act of 2019. Sponsored by Representatives Jason Smith (MO), Henry Cuellar (TX) and Senator Steve Daines (MT), this bipartisan legislation would make permanent the 20-percent pass-through deduction enacted as part of tax reform. All Main Street businesses are at risk of losing the deduction when it is scheduled to expire in 2026.
In addition to Parity for Main Street coalition members, the groups include the U.S. Chamber of Commerce, the National Federation of Independent Businesses, and the American Farm Bureau.
Raising taxes on Main Street was not the intent of Congress when they enacted tax reform, and it shouldn’t be our policy now. To avoid that bad outcome, Congress needs to make Section 199A permanent. As the support expressed by such a broad cross section of the American business community attests, the economic benefits of providing certainty to Main Street businesses would also be widespread.
Also posted today was a new “whiteboard” video designed by the Parity for Main Street Employer coalition to illustrate the impact and challenges from tax reform for pass-through businesses.
Analysis Paves Way for Other States to Act
The Parity for Main Street Employers coalition of national trade groups today released a new analysis by the Wisconsin-based law firm Meissner Tierney Fisher & Nichols highlighting the legal basis for state efforts to preserve the federal deduction for state and local taxes (SALT) for employers organized as pass-throughs.
To date, two states (Wisconsin and Connecticut) have adopted new laws that would effectively restore the federal deduction for SALT paid by businesses organized as S corporations and partnerships, while two other states (Arkansas and Oklahoma) are actively considering similar bills.
Recent news stories have cast doubt on these efforts by raising the specter of possible action by the IRS to invalidate the new laws. At issue is whether taxes paid by pass-through entities are subject to the new $10,000 deduction cap that applies to individual taxpayers.
The analysis released today addresses these concerns by making a strong legal case for the deductibility of the new entity-level tax enacted in Wisconsin. It summarizes:
State income taxes paid by S corporations and partnerships, limited liability companies and other entities… should not be subject to the new $10,000 state tax deduction limitation under section 164(b)(6) of the Internal Revenue Code…. The Internal Revenue Service (the “Service”) has consistently held that income and other taxes imposed upon and paid by pass-through entities are simply subtracted in calculating nonseparately computed income at the entity level, and are not separately passed through or incorporated into the various provisions and calculations applicable to itemized deductions at the individual level, such as the standard deduction, alternative minimum tax and the Pease reduction. In discussing the final provisions of the Tax Cuts and Jobs Act, the Conference Committee Report explicitly reiterated and relied upon this principle in describing the scope of new section 164(b)(6) of the Code.
While the analysis focuses on the new Wisconsin law, its findings are relevant to Connecticut and other states considering similar legislation.
Chris Smith, PMSE Executive Director
“A Section 199A deduction that applies broadly to Main Street Employers organized as passthroughs is essential to maintain parity with C corporations and the new 21-percent rate. While the final rules provide some additional clarity, the Treasury chose not to adopt recommendations of the Main Street community on important issues, including aggregation and de minimis rules.”
“The economic response to tax reform has been relatively muted in part because the tax relief targeted at pass-through businesses – who employ the majority of private sector workers — is complicated, limited, and temporary. This was a missed opportunity to simplify and broaden that relief.”
“To maximize tax reform’s impact, 199A should be amended to be broader, simpler, and permanent. We stand ready to work with Congress to provide the tax relief that Main Street employers and workers deserve.”