Capitol Hill

House Democrats have proposed employing a new surtax for "wealthy" individuals to pay for a portion of their more than $1 trillion health care reform bill—H.R. 3200, America's Affordable Health Choices Act of 2009. With this proposal, the battle regarding federal tax policy in the post-Bush era has begun, and there is quite a bit at stake for many small businesses and the U.S. economy.

H.R. 3200

As approved by the House Ways and Means Committee, H.R. 3200 would levy a surtax between 1 and 5.4 percent on the modified adjusted gross income of individuals earning more than $280,000 and families earning more than $350,000 per year. The surtax would take effect in 2011 and is estimated to bring $544 billion to the federal government during 10 years. If reforms in other parts of the bill do not produce a designated amount of savings by 2012, some of the surtax rates would increase in 2013.

President Obama endorsed the proposed surtax during his July 22 press conference, saying it "meets my principle that it is not being shouldered by families that are already having a tough time."

Whether high-earning families automatically should be excluded from "having a tough time" in current economic conditions is not the issue. The problem is the surtax would deal a crushing blow to many small and midsized businesses, which are our best hope for generating new jobs needed to pull the economy out of recession and sustain future economic growth. This is because most small businesses (93 percent, according to a 2007 U.S. Treasury Department study) are "flow-through" entities whose owners pay taxes on the business's profits as individuals, not corporations.

Small businesses have accounted for about 70 percent of new jobs created in the U.S. during the past decade. The businesses whose owners likely would face the surtax employ more than a quarter of the U.S. work force.

NRCA strongly opposes the surtax and is lobbying against the provision. In July, NRCA sent a letter to House members stating the surtax would "greatly reduce after-tax profits of small businesses at a time when entrepreneurs are struggling to find access to capital to sustain or expand their businesses." NRCA has other concerns regarding the health care reform bill, such as a new payroll tax the bill would impose on employers who cannot afford to offer their workers health care benefits.

Republicans uniformly oppose the surtax, and some Democrats have spoken out against it, as well. Rep. Jared Polis (D-Colo.) initiated a letter to House Speaker Nancy Pelosi (D-Calif.) signed by 21 other Democrats stating opposition to the surtax.

The opening act

The surtax debate may preface an even bigger tax battle. Under current law, tax rate reductions enacted by Congress in 2001 and 2003 are scheduled to expire at the end of 2010. In 2001, President Bush and Congress reduced the top two income tax rates from 39.6 to 35 percent and 36 to 33 percent, and in 2003, the capital gains and dividend rates were lowered from 20 to 15 percent for most individuals. If Congress does not pass legislation to extend these rates, they will revert to the previous higher levels Jan. 1, 2011.

If the surtax is enacted as part of health care reform and Congress allows the top existing tax rates to expire, many small businesses will face substantial tax increases in 2011. The surtax—combined with increases in other tax rates, as well as state taxes—will push the average top marginal rate in the U.S. above 52 percent, which is higher than all but three of the 30 most economically developed countries in the world.

Future implications

Given that Obama's proposed budget projects large annual national deficits during the next decade, he and his congressional allies are expected to continue seeking to raise taxes to reduce the budget gap. As such, the surtax debate likely is just the beginning of a protracted federal tax policy battle that could have huge implications for small businesses and the U.S. economy.

Duane L. Musser is NRCA's vice president of government relations.