International Franchise Association (IFA) president Robert Cresanti has spent recent weeks traveling the country to talk with employers about the current tax reform push and how it could impact their businesses.
Cresanti says he made it a point to travel so that he could truly understand what employers thought. They discussed a range of issues with tax reform becoming a prominent part of those conversations.
Republican leaders have turned their full attention toward passing tax reform in recent months. They are hoping to do something comprehensive that will help employers and workers by boosting economic growth. They have looked at rate reductions and simplification as pathways to accomplishing those goals. Cresanti believes that lawmakers are on the right track.
“I’ve been out with my members in the field at various locations, meeting with small businessmen and women,” Cresanti told InsideSources. “We’re talking to them about what are the issues that are at the top of their agenda. It’s abundantly clear that we have to have a comprehensive tax reform bill.”
Republicans have long been advocates for tax reform as a means of spurring economic growth. Their tax reform framework provided a glimpse into how the eventual bill might look when it was released Sept. 27. Republicans hope to significantly reform the tax code in a way that hasn’t been done since 1986.
“Franchises, the small business community, in particular, need it now more than ever,” Cresanti said. “We have massive costs that have been lifted onto these small businesses over the last many decades, be it from local governments or regional issues, in some cases counties. We have had increased minimum wages and other expenses.”
The IFA is the oldest and largest organization representing franchise establishments worldwide. It has 733,000 members. Small businesses encompass a sizable portion of their membership. Franchising is a popular business model in which large companies license their brands out to smaller, independently-owned businesses. McDonald’s, for instance, is comprised of many different companies operating under the same brand name.
“Hardworking Americans who have risked their homes and their mortgages, borrowed against their 401(k) to open a business are the people who are struggling and looking towards some kind of relief,” Cresanti said. “The burden for them is not just the raw number of taxes they pay, but the complexity of that tax code.”
Cresanti adds that pass-through businesses constitute about 80 percent of IFA’s small business members. The owners of pass-through entities are directly taxed on their income instead of having the corporate rate applied to their business. The framework promises to limit the maximum tax rate for these businesses to 25 percent.
Businesses that are structured as pass-through entities are often small and family-owned. Some have warned that pass-through businesses are not always small, and wealthy individuals might abuse the new system. The Institute on Taxation and Economic Policy (ITEP) found that wealthy individuals could use the pass-through structure to avoid paying higher taxes.
“While we’re seeing a good amount of economic growth, I can definitely sense talking with these entrepreneurs that there is a lot of headroom for a lot more growth,” Cresanti said. “This is one of the steps, and maybe the key step, that Congress can accomplish in the short term.”
Republicans have also made simplification a primary focus throughout their push for tax reform. They have argued that many businesses and individuals face an unnecessary burden in just complying with the tax code. The National Taxpayers Union found in a 2015 study that the economy loses $233.8 billion in productivity annually because of the complex tax code.
“When we’re talking about tax-related things, certainty is always preferable to uncertainty,” Cresanti said. “We’ve been going back and forth on this for quite some time, and I think it hinders people from making investments because the following year the government tries to use the tax code to incentivize another industry or create another wrinkle in it somewhere.”
The Government Accountability Office found in a 2014 study that the tax code is so complex that very few professional tax preparers are able to calculate the correct tax refund. Republicans hope to make the tax code less complicated primarily through reducing the income brackets and eliminating certain deductions.
“Our country really needs a simpler, and a fairer, and more transparent tax system than the one that we have,” Cresanti said. “We’ll leave millions of dollars in the pockets of working families if we accomplish this particular feat. So we’re pushing very hard. I think this is eminently doable.”
The tax framework merely showed where lawmakers are in the process of eventually drafting a bill. But there are still some critical details that must be worked out. Cresanti is hoping for an overarching tax plan that leaves out complexities like special classes of taxpayers.
“We don’t know exactly where the merry-go-round is going to stop,” Cresanti said. “We have our preferences. But we’re going to have to do a bit of studying on behalf of the industry and get more information out. One of the key questions I keep getting is deductibility of businesses in high taxed states like New York and California.”
The framework includes a provision which eliminates what are known as state and local (SALT) tax deductions. SALT deductions allow taxpayers who itemize to deduct some of their local taxes on their federal taxes. Cresanti notes that some small business owners are concerned with how the change will impact their bottom line.
Those opposed to the plan have also expressed concern that low-income individuals will see their taxes increase. The framework reduces the seven current income brackets down to three. The top and middle-income brackets are written to include overall rate reductions. But the lowest bracket increases from 10 percent to 12 percent.
Cresanti countered the concerns by pointing to the zero percent rate included in the framework. Republican leaders hope to essentially provide a fourth bracket for low-income Americans. They plan to accomplish this by consolidating standard deductions and personal exemptions at an increased amount.
“How this could be hurtful to low-income earners is beyond me because even more people move into the category where they pay a rate of almost zero percent under this bill,” Cresanti said. “I don’t think the class warfare argument holds a lot of water with the people who are out there pulling on this economy.”
Republicans still need to work out the details on how they will consolidate those deductions and exemptions. But the end goal is to create a zero tax bracket by eliminating taxes on the first $24,000 of income earned by a married couple, and $12,000 earned by individuals.
Small businesses aren’t the only focus of the plan which promises to lower rates and simplify the tax code. The framework is also looking to lower rates for upper and middle-income earners. It reduces the top individual tax rate from 39.6 percent down to 35 percent. It also lowers the corporate rate to 20 percent.