Coping with Tax Changes Now and Waiting for the Tax Reform Debate
Chairman's Column - May 2013
Patrick L. Larmon, Bunzl Distribution USA, Inc.
NAW 2013 Chairman of the Board
As we all know, in 2001 and 2003 Congress passed and President Bush signed into law major tax legislation that reduced tax rates on individual income, capital gains, dividends, and estates, and provided a significant increase in the amount of first-year expensing small businesses were allowed to take. Unfortunately, because of the arcane rules under which Congress works, those major tax changes were only temporary and were scheduled to expire at the end of 2011 and 2013.
Because of the temporary nature of those tax provisions, American taxpayers have lived with the uncertainty that results from not knowing what their tax liabilities would be from one year to the next. That uncertainty was certainly pervasive in the business community, with decisions on expansion, investment, and hiring—all the decisions a successful business has to make—overshadowed by simply not knowing the bottom line from one year to the next.
The temporary nature of most of those tax provisions finally ended on New Year’s Day this year when Congress passed the so-called “fiscal cliff” bill—legislation that made permanent most of the provisions of the 2001 and 2003 tax bills, but raised income tax rates on upper-income business owners and others earning more than $400,000 per year. (And, that doesn’t quite tell the story—earners with incomes as low as $200,000 will see their taxes go up, because their itemized deductions and personal exemption will begin to phase out, and the new Obama Care Medicare tax hike will begin to phase in.) One would think that Congress finally enacting permanent tax law would have at long last provided certainty—for good or ill—about tax liabilities businesses would face.
But uncertainty remains part of the business decision-making process, and is now compounded by the inevitable calculation that our costs of doing business are going up because of federal tax policies. The uncertainty remains because, while no automatic tax hikes are now scheduled to take effect, neither the President nor many in Congress appear content with the tax hike of more than half a trillion dollars just enacted in January. The President and Congressional Democrats are consistently demanding still more new taxes as part of any further legislation to address our out-of-control debt and deficit.
Moreover, the Senate, after failing to pass its statutorily required budget for four years, finally got around to passing one this year. We were far better off when they shirked their responsibility. The budget proposed by the Senate Budget Committee Chair, Washington state Democrat Senator Patty Murray, calls for ever-increasing federal spending—paid for by new tax increases of more than a trillion dollars!
Fortunately, the House Republican majority and the Senate GOP minority have been resolute in their opposition to yet more tax increases, but it does not help this business CEO to sleep well at night knowing that some of the leadership in Congress and the President of the United States are intent on taking yet more huge sums of dollars from American taxpayers, and particularly from America’s job creators, to feed an insatiable government appetite for more and more money to spend.
Even assuming tax-hike opponents in Congress prevail and that no new taxes are enacted, we are facing a slew of new laws to deal with this year. Some of the new taxes come from the “fiscal cliff” legislation, many others from Obama Care, and all of them impact our bottom lines. Upper-income earners, including successful pass-through companies, will see their income tax rate rise and their itemized deductions and personal exemptions phased out. Those same upper-income earners will pay a new Obama Care tax on their unearned income and a Medicare surcharge on their regular income.
Additional Obama Care costs on business will include a penalty for companies that fail to comply with the new law’s requirement that they provide health insurance which meets a federal minimum benefit package, and yet more from the so-called “health insurance tax” that everyone knows will be passed from insurance providers onto the companies that provide health insurance to their employees.
If there’s any kind of bright light at the end of this tunnel, it could come from the leaders of the tax-writing committees in Congress who have announced their intention to pursue comprehensive tax reform this year. Their plans for reform are solid—they want to get rid of the myriad deductions, expenditures, and special provisions that clutter the tax code, reduce both corporate and individual income tax rates, and level the playing field.
For the wholesale distribution industry, tax reform that reduces effective rates and levels the playing field would be more than welcome and would stop the cost shifting that now takes place when some companies pay effective rates in single digits and our industry pays closer to 30%.
But as with all such proposals, the devil is in the details. For right now, we all will be figuring out how to cope with the tax changes that have already taken effect; but business should keep a close eye on the tax reform debate in Congress in the coming months. It could impact us all.