Daily Debunk: Small-biz owners are no different from anyone else

If they clear $250K, they’ll pay a slightly higher rate under Fair Tax

Jeff Friedman has become the TV poster child for owners of small businesses opposed to the Fair Tax. (Facebook/Stop the Illinois Tax Hike Amendment)

By Ted Cox

If you’ve watched TV lately in Illinois, you’ve probably seen an ad in which the owner of a small business complains that the proposed graduated income tax on the ballot Nov. 3 threatens his livelihood.

It’s being scheduled on TV by the Coalition to Stop the Proposed Tax Hike Amendment, which over the last month or so has enjoyed a $47 million windfall in contributions from billionaire Kenneth Griffin. So you can thank him for gumming up the commercial breaks between now and Election Day.

The apparent owner, Jeff Friedman, runs the Home Plate Bar and Grill in Springfield, and he says the Fair Tax proposed by Gov. Pritzker and passed by the General Assembly would raise taxes on more than 100,000 small businesses by almost 50 percent.

And, here’s a shocker, he’s actually right about that. Although he also blurs some fairly important details.

As the Better Government Association reported earlier this week in picking apart another coalition ad attacking the proposed progressive income tax, Illinois corporations pay a flat tax rate of 7 percent on profits, and that’s slated to go up to 7.99 percent with passage of the Fair Tax Amendment. Not coincidentally, that’s the exact same tax rate as the top income bracket under the Fair Tax, for those making more than $1 million a year.

As the BGA quickly pointed out, however, most small businesses don’t pay that corporate rate. Instead, they’re taxed as a “pass-through entity,” which basically means that any profits that pass through the business and get pocketed by the owner are what constitute taxable income.

That’s consistent with a recent posting by AARP Illinois, which debunked the notion that the Fair Tax will also draw on retirement income — again, emphatically, it won’t — but felt compelled to lash out at “fearmongers” spreading “misinformation” on the Fair Tax Amendment. The post repeated the basic facts that the progressive income tax will cut rates or leave them the same for 97 percent of Illinois taxpayers, with only those making more than $250,000 paying more, and it went on to clarify: “A small business does not pay income tax in Illinois. Instead, the income tax is paid by the small-business owner who will be paying the same new graduated tax rates as all other Illinois taxpayers. Under the graduated income tax, tax rates would only be higher for those with incomes over $250,000. Those making less than $250,000 will see no increase in their state income taxes, and some will see a small decrease.”

In other words, owners of small businesses are no different from anyone else. If they’re fortunate enough to make more than $250,000, they’ll pay a slightly higher tax rate.

But here’s the rub. That’s a small percentage of small-business owners. The U.S. Small Business Administration estimated there were 1.2 million small businesses in Illinois, making up a whopping 99.6 percent of Illinois businesses overall. The Center for Tax and Budget Accountability estimated that about 190,000 of those small businesses produce earnings of more than $250,000 for their owners.

That’s a little more than 15 percent, so let’s round it off and say 1-in-6. That still means that the vast majority of small-business owners — like the slightly more vast majority of all Illinois taxpayers — will pay less or the same in taxes as they do now.

Now, Gov. Pritzker, as a businessman himself, has expressed nothing but admiration for small-business owners, and he knows that they’re key to putting people to work. He’s done all he can to bolster them in the midst of the COVID economic crisis.

But if a small-business owner is doing well enough to make more than $250,000, he or she should be willing to pay a little bit more. That’s exactly what Ralph Martire, executive director of of the aforementioned Center for Tax and Budget Accountability, said last year in advocating a progressive income tax: that it’s about taxing the economy where it’s vital and growing, not where it’s stagnant or in decline.

As we’ve said before, and we’ll no doubt say again in many another Daily Debunk before Nov. 3: anyone fortunate enough to make more than $250,000 next year as the economy slowly recovers from the COVID-19 collapse deserves to pay a little bit more than those struggling to keep their heads above water.

The Fair Tax Amendment and the accompanying progressive tax rates don’t penalize small businesses. They don’t place any additional bureaucratic burdens on them. They just tax their owners a bit more when they’re unusually successful, same as with everyone else in the state.

And there’s no exemption in the Fair Tax Amendment for owners of small businesses. The BGA quoted University of Illinois economist J. Fred Giertz as saying, “There's no particular reason why you should say, ‘I really feel sorry for the small-business owner who's making a million dollars but I don't feel sorry for the opthamologist or the corporate lawyer who's making the same amount of money.’ If you think the tax is good, then they should be paying the tax. If you don't think that people above $250,000 should be paying the higher tax, it should not apply to anyone.”

So let’s put it another way. Let’s say that the Home Plate Bar and Grill develops a takeout horseshoe sandwich that can be warmed up at home in a microwave and becomes a Springfield taste sensation. Jeff Friedman is making money hands over fist, even as the pandemic persists, and rakes in $275,000 for the year. Should he be paying the same tax rate as the dry cleaner down the street who’s seen business drop off dramatically because so few people are going into the office anymore?

Advocates of the Fair Tax Amendment say very simply: no. He should be paying a slightly higher rate.

And about that tax hike of “almost 50 percent.” That’s the same sort of math anti-taxers used when arguing against the tax hike imposed under Gov. Quinn a decade ago raising the flat tax rate from 3 to 5 percent. Anti-taxers howled that it was a 67 percent take hike, and indeed the 2 percentage points’ increase is 67 percent of 3. But it’s still just an increase of 2 percentage points.

So it turns out that the graduated income tax actually raises the tax rate more than 50 percent in the bracket making more than $250,000. But it’s still just an increase in the tax rate from the 4.95 percent flat tax to 7.75 percent. Someone making more than $250,000 should be able to afford that.

In pointing out all these ancillary details, the BGA rated the anti-tax TV ads “half true.” We think that’s charitable, but we can live with that — as long as everyone voting on the Fair Tax Amendment knows the whole truth as laid out here.