Republicans Falsely Argue That Surtax Would Disproportionally Affect Small Businesses

Responding to reports that the House Ways and Means Committee has decided to raise $550 billion to pay for health care reform by applying a surtax to the richest Americans, Republican lawmakers took to the airwaves yesterday to argue that the tax would disproportionately burden small businesses:

Sen. Jon Kyl (R-AZ): At least 55 percent of the income that would be generated by this surtax directly hits the entrepreneurs that run these small businesses. It would be a job killer.

Rep. Eric Cantor (R-VA): Half of those people [who would have to pay the tax] derive their income from small businesses, half of those people are making the decision about whether to hire Americans or not.

Watch it:

Indeed, “beginning in 2011, the plan would target all income over $350,000 a year for families and $280,000 a year for individuals.” The surtax would start at 1 percent, “rise to around 1.5 percent for families earning more than $500,000, then step up again, to around 3 percent, for families earning more than $1 million.” The proposed surtax would target adjusted gross incomes (AGI) — or all earnings before subtracting for itemized deductions and exemptions.

Since the overwhelming majority of small business owners earn far less than $280,000, few “entrepreneurs that run these small businesses” will be affected by the tax. As the Center on Budget and Policy Priorities pointed out, “only 1.9 percent of filers with any small-business income are projected to face either of the top two income tax rates in 2009.” In fact, of people who file most of their income from their own business, “more than half have income below $30,000 and 80 percent make less than $100,000.” The few business owners who do qualify for the new tax should be able to afford it. Pat Garofalo explains that “no one likes paying higher taxes” but a household earning more than $350,000 “is not a household that is barely scraping by.”

Still, if only a small percentage of small businesses will face a tax increase, all small businesses are currently grappling with skyrocketing health care costs, the difficulties of a small risk pool, higher administrative costs and unpredictable premium spikes. In fact, rising prices have led many businesses to drop coverage entirely, increase cost sharing or switch to coverage with higher out of pocket costs and skimpier benefits.

Fifty eight percent of all small-business owners say they’re having a hard time keeping up with the cost of health care and the percentage of businesses with fewer than 200 employees that offer insurance fell to 59 percent last year, “down from 66 percent as recently as 2002, according to the Henry J. Kaiser Family Foundation.”

The reality is small businesses will benefit from comprehensive health care reform, not inflated earnings projections. The health reform legislation before Congress exempts small businesses from the requirement to provide coverage and offers a new Small Business Health Tax Credit to businesses that still provide insurance. Small business owners and their workers would also be able to purchase coverage through a new Health Insurance Exchange, where employees who currently lack coverage would have a choice of private or public coverage.