Surtax Unlikely to Have Big Impact on Small Biz

House Democrats’ proposal for a surtax on upper-income taxpayers to help pay for health insurance reform would not have a noticeable impact on small businesses, according to a new report from the advocacy group Citizens for Tax Justice.

The legislation being discussed in the House, H.R. 3200, includes a surcharge on joint filers with adjusted gross income over $350,000, or $280,000 for single taxpayers. The Congressional Joint Committee on Taxation found that only the wealthiest 1.2 percent of taxpayers would pay the surcharge. CTJ projected an almost identical 1.3 percent paying the surcharge. In his primetime news conference Wednesday evening, President Obama noted that Congress is probably going to raise the threshold for the surcharge to those earning $1 million or more.

Using the $350,000/$280,000 level, CTJ estimated the $544 billion that the surcharge would raise over 10 years would be almost entirely paid by the wealthiest 1 percent of taxpayers and would be less than the $700 billion this group would have received from the Bush tax cuts by the end of 2010.

There are different ways to define a “small business owner” and different ways to estimate the impact of the surcharge, but very few would have to pay the surcharge no matter how the impact is estimated. The JCT finds that only 4.1 percent of taxpayers with any small business income at all would have enough income to be subject to the surcharge.

CTJ has found that only 4 to 5 percent of taxpayers who get more than half their AGI from the small businesses that they are involved in operating would pay the surcharge in 2011.

The CTJ study also disputed the notion that the surtax would affect hiring decisions. Money that a small business owner pays to an employee as wages or salary is rarely included in the business owner’s AGI or taxable income. Small business owners only need to pay taxes on business profits.

The report contends that health care reform will make it cheaper to hire workers. The House bill would provide small businesses with tax credits of up to 50 percent of the cost of providing health insurance to employees. It would also stop insurance companies from discriminating against small companies based on the health status of their employees and from denying services because of pre-existing conditions. These measures would make health care costs far more predictable and manageable for small businesses.

For state-by-state estimates of the effect of the surtax, see the full report.

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