One of the most significant changes contained in Obama's budget is the increase in taxes on the top income brackets. Obama's budget calls for tax hikes that would restore Clinton-era rates of 36% and 39.6% on individuals earning $200,000 and couples earning $250,000, respectively. The changes would be instituted at the end of 2010 when the 2001/2003 tax cuts are set to expire and currently stand at 35% for individuals in that bracket and 36% for couples.

The Administration inaccurately claims that these tax increases would only affect 3% of small business owners, but this number does not account for the number of small business owners who report small business income on their personal income tax returns. About 35% of all business taxes are paid in this manner.

Small businesses are especially important now given the economic downturn, because they were the ones who jumpstarted the recovery in the 2001 recession, generating 100% of all new jobs in that time. Small business owners are our biggest jobs makers, responsible for creating 70% of net new jobs over the past 10 years. Additionally, they represent 99.7% of all employer firms, employ half of all private sector employees, and contribute more than half of nonfarm private gross domestic product (GDP).

Health care budget

2010 Proposal: $821.7 billion
Increase/Decrease from 2009: +7.5% increase

Main areas of spending:

• $453 billion for Medicare
• $290 billion for Medicaid
• $78.7 billion for discretionary spending, including::
• Funding to increase health care providers in certain areas
• Funding to detect, prevents and treat HIV/AIDs domestically
• $6 billion for cancer research at the National Institutes of Health (NIH)
• $211 million for research on Autism Spectrum Disorder
• $1.1 billion for the President's Zero to Five plan which provides health care to children in need
• $1 billion to expand the Head Start program
• $2 billion to expand the Child Care and Development Block Grant
• $3.2 billion to help low-income families heat and cool their homes
• $4 billion to improve healthcare for Native American and Alaskan Natives
• $73 million to improve access to and quality of health care in rural areas

The increases in health spending would be funded in three primary ways:

• Stricter limits on the itemized deductions that "wealthier" people can take on their tax returns.
• Tax increases on individuals making $200K and couples making $250K a year while increasing the capital gains and dividends tax from 15% to 20%.

The additional funds raised by these measures will comprise $318 billion of the health reform "reserve fund" of $634 billion, which Obama says will act as a down payment on his goal to provide universal health care. The rest of the reserve fund will be financed by cost-savings in Medicare and Medicaid.

Of course this government reserve fund is a first step in the direction of government-run health care, a proposal that will consolidate major health decision-making in the hands of the federal government. Instead we should improve our system of private insurance by bringing the individual back into the decision-making with individually-owned health plans, not government programs. Doing so would increase the accessibility and affordability of health care for American families without ceding control of some of our most important health decisions to the federal government.

Environment

Environmental Protection Agency (EPA)
Total spending: $10.5 billion
Increase/Decrease from 2009: +34.6 % increase

Main areas of spending:

• $3.9 billion to fund 1,700 clean-water programs
• $19 million to build a greenhouse-gas emission inventory, the first step in establishing a cap-and-trade system
• $475 million to a Great Lakes restoration program to control pollution and attack damaging invasive species in the area

The money in this budget triples (to $3.9 billion) the previous year's funding going to states, local governments and tribes to improve sewage treatment and drinking water systems, despite already having received a separate $7.2 billion to these programs in the stimulus package.

The Cap-and-Trade system, which would be implemented in 2012, sells permits to businesses allowing them to exceed caps on pollution. This system amounts to an effective tax on energy consumption, and the increased cost would be passed on to anyone who uses electricity, drives a car, or relies on energy in any way.  Obama would ideally auction off these credits but has recently acknowledged a potential need to give some away to energy companies. A system like this, in which permits are auctioned off and/or given away, lacks transparency and would require a massively bureaucratic framework that is vulnerable to political influence.

The EPA budget actually acknowledges expected increases in energy prices for American families and provides a refundable tax credit of up to $400 for working individuals and $800 for working families to offset the higher energy prices.

Department of Energy
2010 proposal: $26.3 billion
Increase/Decrease from 2009: -0.4% decrease

Main areas of spending:

• Increased funding for scientific research at the Office of Science, despite having already received $1.6 billion in the stimulus
• Loan guarantees on projects to bring solar, wind, geothermal and other renewable energy sources to market
• Additional funding to the Office of Electricity Delivery and Energy Reliability to modernize the nations' electric grid
• Increased funding for low-carbon coal technologies
• Increased funding for helping low-income families improve the energy efficiency of their homes

Labor

2010 proposal: $13.3 billion
Increase/Decrease from 2009: +4.7% increase

Main areas of spending:

• Increased funding for Unemployment Insurance (UI) benefits
• Expansion of the Saver's Tax Credit which would offer a 50% government match on the first $1,000 saved by families making up to $65K
• Require employers offering 401Ks and pension plans to automatically enroll employees
• Increased funding to government programs that enforce worker protection laws

The Administration's budget for the Labor Department includes an increase in funding to Occupational Safety and Health Administration (OSHA) to better enforce workplace health and safety conditions as well as an expansion in the government program of Unemployment Insurance. Additionally, employers would be required to automatically enroll their employees in retirement plans (assuming a plan is offered). Employees would have to opt out of these types of plans.

While encouraging retirement savings through individually-owned plans like 401ks and IRAs can be a good thing, the government should not dictate to employers how to go about doing so, as would happen with an auto-enrollment requirement.  The idea of auto-enrollment grew out of employers' ability to experiment to find innovative ways to get their employees to save; any attempts to restrict employers' choices could have harmful, unintended consequences down the road.

Defense

2010 proposal: $533.7 billion
Increase/Decrease from 2009: +4% increase
War spending (addition to annual budget): $130 billion for 2010, $75.5 billion for 2009

Main areas of spending:

• $130 billion in war spending for 2010; $75.5 million for the rest of 2009
• Increase in soldiers pay to keep pace with private sector
• Expansion of military retired pay and Veterans Disability Compensation to retirees receiving disability retired pay
• Expansion on integrated mental health professionals with deployed units
• Improved medical care and housing for wounded, ill and injured service-members
• Quality of life improvements for soldiers, sailors, airmen and marines include modernization of barracks

Obama's defense budget has signaled a general decline in defense spending over the next several years, placing baseline defense spending at 3.7% of GDP, down from just over 4% for 2009.

More interestingly, Obama has claimed that there will be $1.6 trillion saved in the budget over the next 10 years by reducing troops and the costs of war, but written into the budget is the assumption that war spending would continue at the same level over the next decade. Because of this, the claim to $1.6 trillion is deceptive considering that the Administration plans to withdraw most troops sometime in the next 19 months.

Housing and Urban Development

2010 proposal: $47.5 billion
Increase/Decrease from 2009: +18.5% increase

Main areas of spending:

• $4.5 billion for Community Development Block Grants to bring businesses into communities
• $1.4 billion for the HOPE for Homeowners program (up from $225 million) for mortgage refinancing
• $1 billion to start a trust fund to rehabilitate housing for the poorest families
• An unspecified increase in funding for rental-housing vouchers for poor and moderate-income families

One of the problems with programs like these is that once they are enacted, they are hard to take away, no matter how little they actually work. Take the HOPE for Homeowners program, which was signed into legislation in the summer of 2008, which provided government guarantees for refinanced mortgages. The program estimated that it would assist 400,000 individuals struggling to pay their mortgages, but as of February 2009, only 451 applications had been received and just 25 of those were eventually finalized. Instead of scrapping a clearly non-functional program, Obama is instead dropping $1.4 billion more into it.

Education

2010 proposal: $46.7 billion
Increase/Decrease from 2009: +12.8% increase

Main areas of spending:

• $2.5 billion for a fund that rewards states with innovative strategies that improve the college graduation rates for low-income students
• Increase Pell Grant loans by $500 to a total $5550 per student every year, while guaranteeing access for all applicants, turning it into an entitlement program
• Eliminate the system of private student loans guaranteed by the government and replace it with a direct student loan program run by the Education Department

Commerce

2010 proposal: $13.8 billion
Change from 2009 estimate: +48% increase

Main areas of spending:

• $7 billion to conduct the Census, which will include hiring approximately half a million people
• $1.3 billion for weather forecasting and global climate monitoring
• $50 million to create new businesses in distressed areas
• $70 million to a technology innovation program

2 Responses to “New taxes on small businesses?”

1. Ken Arlen Says:
   March 29th, 2009 at 1:02 am

   Hi Terry, I heard your interview on the Mike Gallagher show. Thank you for speaking up for small business owners. I am frustrated that at no point during the presidential campaign did anyone make the case for the small business owner. (Joe the plumber was miss represented.) President Obama has defined 98% of small business as making under $200k. He lacks a fundamental understanding of small business and flow through income. My company has 6 full time and 30 part time employees. I consider myself a very small business. If I am lucky enough to make $250K I will pay 99k in tax. With two kids in college I pay 80K + as self employed I pay my familys health. What’s left over is about 50k for my family of 4. So…If my taxes are increased how can I possibly hire new employees? How can I grow my business or grow the economy? Here are my suggestions:
   1. No tax increases
   2. A credit for business that pay all of their employees health benifit.
   3. Higher levels of deductions for equiptment and growth related expenses.

   No one is talking about Obama’s pledge to raise or illiminate the cap on Social Security. That (tax) would cause me to have to lay off at least a few employees. I cannot afford the 4% income tax +15%SS increase. Ken Arlen

2. Robert Stanley Says:
   April 3rd, 2009 at 8:05 pm

   Good Day Terry,
   Thank You for your work as an advocate for us, small BUSINESS. As i am not totally familiar with all the aspects I am subject to tax wise, I surely know I pay way too much and am constantly surprised at how I am penalized for choosing to be self-employed.Self employment tax is staggering.
   Thank You for listening,ah, reading !
   Robert

Leave a Reply