"Rep. Nancy Pelosi and Senator Chuck Schumer" by Lorie Shaull is licensed under CC BY 2.0. https://flic.kr/p/QsKybk

Senate Democrats are set to introduce legislation that contains a $252 billion tax increase on small businesses, according to news reports. With the economy struggling and inflation out of control, now is the worst time to increase taxes on businesses.

This tax increase would be included in the Democrat’s trillion-dollar tax and spend proposal that is being negotiated by Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-W.Va.).

Democrats are proposing to expand the 3.8 percent net investment income tax (NIIT) which was created under Obamacare. Currently, the tax is imposed on individuals’ passive business income, including interest, dividends, annuities, and royalties. It is not imposed on wage income or nonpassive business income. It applies to taxpayers with modified adjusted gross income (MAGI) of $250,000 for married filers or $200,000 for single households.

Democrats want to expand the 3.8 percent NIIT so that it also applies to nonpassive business income. This would apply to taxpayers filing as individuals making more than $400,000 and joint filers making more than $500,000.

While the Left argues this would close a “loophole,” it would actually be a substantive policy change that would increase taxes on small businesses across the country. When Congressional Democrats created this tax in 2010, they deliberately had it apply to passive income, not active business income because of the concern that it would raise taxes on small businesses.

While running for President in 2020, Joe Biden promised that small businesses would not see their taxes go up. Biden made this promise on February 20,2020 during a Democratic debate hosted by MSNBC. He unequivocally stated, “No. Taxes on small businesses won’t go up.”The proposal to expand the NIIT would violate Biden’s pledge by raising taxes on organized as pass-through entities like sole proprietorships, LLCs, partnerships and S-corporations.

According to the Joint Committee on Taxation, the proposal would raise taxes by $252 billion over the next decade.

It would impact businesses across the country. According to IRS Statistics of Income data, 992,000 filers with AGI of over $500,000 reported net income from a partnership or S-corporation. This includes 1,870 filers in West Virginia, 17,000 filers in Arizona, and 85,870 filers in New York.

Raising taxes on passthrough businesses could also significantly harm workers and the economy. 51.6 million Americans, or 41.6 percent of the labor force was employed by passthrough businesses in 2015. S-corporations employed 32.6 million Americans (26.2 percent of the labor force), partnerships employed 14.3 million Americans (11.6 percent of the labor force), and sole proprietorships employed 4.7 million Americans (3.8 percent of the labor force).

75.2 percent of small employers, defined as fewer than 500 employees, are passthroughs entities (12.9% are sole proprietorships, 11.8% are partnerships, and 50.5% are S-corporations).

The existing tax thresholds are not indexed to inflation, so the tax will grow to hit more and more taxpayers over time. The NIIT went into effect on January 1, 2013 with a threshold of $250,000. However, because of inflation, $197,000 in 2013 has the same purchasing power as $250,000 in May 2022 according to the U.S. Bureau of Labor Statistics inflation calculator.

The economy is struggling, and tax increases will only make this problem worse. First quarter GDP declined by 1.6 percent and the Atlanta Federal Reserve is projecting that the U.S. economy will contract by 1.2 percent in the second quarter of 2022, as of July 8.

Small businesses and families are being hit by out-of-control inflation. The consumer price index increased by 8.6 percent in May on an annualized basis, the sixth month that inflation hit a 40-year high. Similarly, the producer price index rose 10.8 percent, some of the highest rates ever.

In January 2021, before Joe Biden took over the presidency, annual inflation was at a stable 1.4 percent. Just one year into Biden’s presidency, inflation has increased by more than six times.

The Democrat proposal to expand the Obamacare net investment income tax will significantly raise taxes on small businesses across the country. This is a terrible idea that would hit businesses that hire millions of Americans at a time that the economy is weak and inflation is out of control.