National Small Business Network

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Tax Policy Recommendations for the 119th Congress             June 2025

  

Congress can pass sustainable budgets and good tax policy to control the rapidly growing deficit, but current proposals will increase the national debt by $4 Trillion over 10 years, and are bad tax policy!   We have long supported the effort to control annual budget deficits and the growing $36 Trillion National Debt.    We agree with CBO, GAO and most economic advisory groups that our current fiscal path is “unsustainable” and will result in significant economic harm if not corrected.  Congress can start to re-establish long-term fiscal sustainability, but it must be done logically, and it needs to start now.

 

 

 Do not delude yourselves, or the public, that the current budget proposals will reduce the growing annual deficit or total national debt because the assumptions are unrealistic.

 

A.    The proposed use of “current policy” scoring, versus normal “current law” scoring is just an attempt to deceive yourselves and the public about the true long-term costs of appropriations and tax expenditures.    Use of current policy scoring means Congress was deceiving the public in the past, or deceiving them now, and in the future.  Should all new HR1  “temporary” provisions be scored as permanent?    Even normal current law scoring needs to be extended over longer periods to better reflect the true cost of most expenditures.

 

B.    Trump’s illogical “extorsion” tariffs, even if continued, will not collect enough long-term revenue from US citizens to offset the economic, and tax revenue, losses from their damage to the US and international economy.     Like any tax on consumption, tariffs will significantly impact consumer spending and increase inflation.   The economic effects of tariffs will also fall most heavily on lower income individuals.   The idea that high tariffs will bring an economic benefit by forcing more manufacturing back to the US, is not true, based on prior experience and business logic.   Any industries which require large quantities of low wage workers to perform simple manufacturing tasks such as sewing, furniture construction, and parts assembly will not find an adequate, or affordable, labor pool in the US, particularly with tightened immigration restrictions.    Manufacturers of higher value products who might think of moving to the US, will also face labor force and regulatory barriers, and high investment costs that will require them to use the maximum amount of automation and AI for whatever they produce.    This will provide the least long-term economic benefit for US workers, and the general economy.

 

C.    Tax avoidance will increase, and projected tax revenues will decline.     This Congress has allowed the President and DOGE to unilaterally change the “value” of government by eliminating services that most citizens supported.  This will also change what taxpayers will be willing pay for the reduced level of government services.   At the same time, the Congress has also crippled the IRS’s ability to effectively collect tax revenue, creating the “perfect storm” for tax avoidance.   Polls show a majority of taxpayers object to DOGE’s unconstitutional destruction of governmental programs and agencies without any involvement or logical evaluation by the Congress.  Until they have a chance to elect a more representative Congress, taxpayers will believe that they have just as much legal right to withhold their taxes as DOGE and its nongovernmental backers had to reduce the services they had paid for.  Tax avoidance through cash transactions, bartering, use of digital currency, and outright tax fraud, will further increase the tax-gap.

 

D.    The continuation and expansion of TCJA lower tax rates on businesses and high-income investors will not result in significant general economic growth.    CBO now projects that HR1, even in its current form, will increase the debt by $3,4 Trillion over 10 years.   It is also projected to actually reduce economic growth and tax collection by $356B   Extending and increasing the TCJA cuts, particularly in today’s good economic environment, will only increase the deficit primarily to benefit upper income taxpayers, not the overall economy.   

 

E.    To make the deficit even worse, HR-1 includes additional tax expenditures, which have no logical economic benefit, will be open to fraud and abuse, and will add new administrative burdens on businesses and the IRS.

 

The cause of the deficit is NOT government services –

 It Is INADEQUATE TAX REVENUE:

 

The two basic Constitutional responsibilities for the Congress are to pass a budget of necessary expenditures for the needs of the country, AND to collect the taxes needed to pay for those programs.        In FY 2023, Congress spent 22.7% of GDP, but collected only 16.5% of GDP in total tax revenue.  The problem is not expenditures for domestic service programs and agencies.  In 2023-24, only 3.3% of GDP was appropriated for non-defense discretionary services, which is below the 20-year average and well below all other G7 Nations.   The growth of the deficit is caused by defense spending, entitlement programs, and inadequate tax collections, particularly on business income and the wealthy.    Corporation income taxes which averaged about 1.8% of GDP from 1980 – 2016, fell to just 1% of GDP for 2017 - 2021 after TCJA.     

 

The GAO and CBO have both concluded that “The federal government is on an unsustainable fiscal path”. The latest CBO projections show deficits will average $2.1 Trillion or 5.7% of GDP over the next 10 years, even under current law.    In effect, this means essentially all of our expected GDP growth, is just borrowed ahead from future years, and future generations.        The total “Publicly Held” national debt is now projected to equal our total annual GDP in less than 5 years.   Most economists believe that continuing deficits, added to our $36 Trillion national debt, will reduce long-term economic growth, and are a very real threat to the future sustainability of our economy and the value of the dollar. The recent Moody’s downgrade of US debt is a clear warning, and will result in higher future interest costs. Annual interest on the debt already exceeds 16% of the budget, and will grow significantly with higher interest rates.     We agree with the CBO and GAO warnings, and those of other research organizations.  And, the real situation is even worse.    The official budget deficit excludes the pending bankruptcy of our key social support programs, Social Security and Medicare, as well as growing, and unaccounted for, deficits in infrastructure replacement and climate related damage prevention and recovery.  

 

The bottom line is that we must increase overall tax revenue to at least equal average federal expenditures.

 

 

  

 

 What Needs to Be Done Instead:

 

1)    Pass a $2M extension of the Federal borrowing authorization until Sept 30 2027 to allow Congress time to develop a more sustainable fiscal plan.

 

2)  Allow the 2017 TCJA tax changes to expire as scheduled and increase the corporation tax rate to a 28% maximum, along with the other tax policy corrections outlined below.

 

3)    Pass flat FY 2026 agency appropriations at the 2024/25 service levels which were set by bipartisan agreement of the last Congress.   Require any proposed spending increases to have clear bipartisan agreement on the justification of additional need, as well as provision for tax revenue offsets.

 

4)    Adopt legislation requiring appointment of a bi-cameral - bi-partisan “Congressional Fiscal Sustainability Task Force.  Require recommendations to the full Congress by 01/01/26, and an automatic floor vote in the House and Senate on their recommendations.

 

5)    Reform the current ineffective Federal Budgeting and Appropriations process to better focus on long-term bi-partisan national priorities, and greater efficiency of expenditures and agency programs.   The current process is neither timely enough, nor complete enough, to provide good long-term program and expenditure control.  As a start, we have outlined below a series of more detailed fiscal process reform suggestions to get the greatest value out of necessary expenditures, and provide better Congressional information and management for all Federal programs.

 

 

 

 Specific Tax Policy Corrections:

 

We support these Basic Taxation Principles for Sustainable Economic Growth.

 

·       Tax policy should incentivize direct long-term investment in businesses, buildings, and equipment that create new jobs, rather than short-term speculative transactions which create no new economic activity or jobs.

 

·       Tax policy should promote domestic investment and job creation to the greatest extent possible within the limitations of international agreements by focusing tax incentives on domestic investment.

 

·       Tax policy should maintain U.S. international business competitiveness, while also reducing the ability of multi-national corporations to avoid taxes by shifting profits to low tax countries.

 

·       Tax policy should provide equitable tax incentives for the growth of small businesses which provide over half of all new jobs and are the greatest contributor to economic growth.  These are predominantly pass-through entities which require separate and equitable treatment of business income in the personal tax code.

 

·       Tax policy should stop trying to influence taxpayer behavior using only tax credits and other deficit increasing revenue giveaways.    Instead put revenue raising taxes on behavior which conflicts with broader governmental policy objectives.

 

·       Tax policy should be progressive in rate and application, because the impact of any specific tax rate has a much greater impact on the sustainability of small businesses, or on the personal security and financial stability of lower income individuals.

 

·       Tax policy should assure that any tax reductions are at least truly revenue neutral, and provide adequate off-setting revenue to gradually reduce our national debt and restore long-term fiscal stability.

 

 

                                          Business Tax Recommendations:

 

1.  Increase the base tax rate on large C corporations to 28%.

 

Even before the 2017 TCJA rate reductions, the percentage of total US tax revenue coming from corporations had declined significantly over the last 25 years.  A recent GAO report found that the TCJA rate reduction cut the effective corporation average tax rate by 22% to only a 12.8% tax rate on average in 2018.  The GAO also reported that 33.9% of corporations with $10M or more in assets paid no corporate income tax.  A 25% increase to a 28% base rate for large corporations with over $5M in taxable income, and a proportional increase in tax rates for pass-throughs, would restore some balance in business tax levels versus individual tax collections.

 

2. Correct the impact of a higher flat tax rate on small C corporation start-ups by re-instating graduated small C corporation tax rates.

 

Congress has always said that they understand the critical importance of small innovative businesses to the economy.   The TCJA change to a single tax rate, even at 21%, actually increased the tax rate on small startups by 40% by deleting the lower 15% tax bracket on the first $50,000 of income.  Most high growth potential start-ups, who may become the base of future economic growth, have to be organized as C corporations because of the need to attract equity capital.    Based on the most current IRS numbers available, over 560,000 small business are in this category and had their taxes increased by the TCJA.  We recommend legislation to reinstate the 15% tax rate on C corporation income below $100,000 and provide graduated base rates between $100,000 and $5M of corporation taxable income.

 

3. Continue to Reduce Multi-National Corporation Tax Avoidance.

 

We believe that Congress erred in 2017 by adopting a territorial tax system for multinational corporations combined with lower tax rates.  The reduction of corporation tax rates by other nations has been a race to the bottom, with a significant loss of tax revenue from businesses for all countries.   We support Treasury’s work on international agreements to reduce base erosion, and support the “Pillar 2” agreement, but believe more changes are needed.   We recommend continued work with other nations to change the taxation of multi-national businesses (MNB) to a formulary allocation system based on a percentage of sales of goods, services, and assets in each country. 

  

The current corporate income tax system allows multinational corporations, particularly those with high intellectual property values, to use inter-division accounting manipulations to shift taxable profits to divisions in lower tax countries where the earnings can multiply.  This not only reduces US tax income, but also creates a tax incentive barrier to recognizing and re-investing those earnings in the US for domestic business growth.  Adoption of a standard Value-Added Tax may also be a logical way to tax international transactions. 

 

4. Do not reauthorize Bonus Depreciation, or expensing, of long-term capital investments.

 

Although accelerated expensing can be a useful tax tool during a recession, its use during good economic periods, such as this is not needed and significantly increases the deficit.    This also contributes to inflation which the Federal Reserve has to control with higher interest rates.    If extended or made permanent, the Congress would also have few practical tax incentives left for stimulating the economy when we need it for the next recession or pandemic.   The CBO estimated cost to extend Bonus Depreciation is $3B.   Section 179 small business expensing should also be capped at $ 5M per year.

 

Small Business Pass-Through Entity Tax Corrections:

 

5. Increase the general State and Local Tax deduction limitation to $40,000, on joint returns and allow deduction of up to $100,000 of state income tax specifically paid on QBI small business pass-through income.

 

The TCJA $10,000 state and local tax deduction limitation was particularly harmful to small business owners.     Most small businesses are pass-through entities and have to pay the state income tax on their business income, at personal rates.  These rates can be as high as 10% in some states, in addition to the taxes on their personal income and property.   This often makes all of the state tax on their small business income non-deductible.   State taxes have always been deductible federally for larger “C” corporations and should also be for pass-through entities.  In addition to any general SALT cap increase, small pass-through entity business owners should be allowed to deduct up to $100,000 of state income tax paid on their net active business QBI income.    The “work-around” business entity tax alternatives that have been adopted by some states have just added more confusion and complexing to the tax system.

 

6. Maintain tax equity and predictability for small pass-through businesses by enacting a reduced Qualified Business Income deduction for pass-through business of 15% to balance a higher 28% corporation tax rate.

 

We believe that tax rates and tax incentives should be as equitable as practical for all types of businesses.     To provide equitability, the 2017 Tax Cuts and Jobs Act (TCJA) reduced taxes on both corporations and on pass-through entities, which is how most small businesses are taxed.   For bill scoring reasons, the matching pass-through rate reduction and other provisions were only done through 2025.   To make business planning and investment decisions, pass-through businesses need certainty of the tax structure, but also should be contributing more tax revenue.

 

7. Provide a better definition of Qualified Business Income that more clearly separates personal service income, which should be taxed at regular individual rates, from true return on business investment.

 

Remove the illogical Specified Service Industry exclusions from the section 199A Qualified Business Income adjustment on pass-through entities.   Section 199A of the TCJA, though well intentioned, created a large amount of complexity, uncertainty, and inequity for many pass-through businesses who pay their business taxes on their personal tax return.    One of the most inequitable provisions was the exclusion or phaseout of income of certain designated business sectors from the rate reduction on Qualified Business Income.      The designated business sector exclusions selected by the bill drafters were a carry-over from prior code provisions for special tax incentives, including Sec. 1202 small business investment incentives, and the old Section 199 domestic manufacturing – exporting incentives.      However, Section 199A was not intended as a special incentive, but was simply intended as a way to provide some equitable rate reduction for pass-through businesses to balance the rate reduction the bill made in corporation taxes, and it should apply to all true pass-through businesses.

 

Add Guaranteed Payments made to partners to the definition of wages for the Sec. 199A wage-asset test.  The use of the term “W2 wages” for the wage-asset test of QBI was an error and discriminates against partnership entity partners who receive their compensation as “guaranteed payments” which are subject to self-employment taxes, but are not “W2” wages.

 

 A better set of criteria for “reasonable compensation” for personal services by owners of an S Corporation business should also be developed to assure that personal service income is taxed as wages for employment and income taxes.

 

8. Restore annual deductibility of business Research and Experimentation costs, at least for small Businesses.

 

Research and innovation are vital to US economic growth, and should be incentivized.  Annual expensing is particularly important for small innovative businesses who do not have the cash assets, or borrowing capability, to withstand having to amortize a significant part of their R&E costs over 5 years.    SBA research found small businesses did over $70B of R&D in 2019 employing over 500,000 workers.   For small technology-based businesses, R&D expenses are often the majority of their total expenses and cash flow.   If the cost of full repeal of the amortization requirement cannot be justified, at least restore same year expensing for small businesses with under $5M in total assets.

 

9. Correct the excessive TCJA reduction in the 1099K “payment processor” reporting threshold and correct the original error in basing the reporting on gross payments, rather than net payment income.

 

We strongly support logical and efficient digital reporting of payments to both businesses and individual service contractors because of the positive impact on tax compliance.   However, the reduction of reporting threshold from $20,000 to $600 annually was too much for existing reporting technology and has not been properly enforced.     Such a low reporting threshold, without clearer ways to separate out non-taxable payment transactions, results in an excessive number of false income reports.    These are costly for both businesses and the IRS to resolve.   We suggest correcting the reporting threshold to $10,000 or 100 transactions per year, and developing better, clearer electronic 1099 reporting processes.   At the same time, it is also important to correct the error in the original TCJA reporting requirements which specified gross payments, rather than net payments, after return credits, fees, and non-sale cash advances.  

 

 

 

10. Permanently equalize the deductibility of worker health insurance at the entity level for all forms of businesses including the self-employed.

Changes in the economy accelerated by the pandemic have caused many people who were formerly employees to become self-employed contractors out of necessity.    As employees, they usually received group health care that was tax deductible for their employer.  As a self-employed person, however, they cannot deduct the cost of their health insurance from their business income, and they have to pay the 15.3% self-employment tax on the income they use to purchase insurance.   This often means they can’t afford the cost of insurance for themselves and their family.     The self-employed should be allowed to deduct insurance premiums up to the average ACA coverage cost at the business tax entity level.

                                                                                                                                                                                                                                                                                                                                                    

Individual Income Taxation Recommendations:

 

11. DO NOT adopt new illogical, and difficult to administer, tax ideas.

 

The elimination of income tax on tips and overtime pay are bad tax policies, and provide no positive economic benefits. Both sources of income already have other benefits, and making them tax-free will encourage abusive gaming and add extra accounting costs for employers.   Reducing existing tax rates on Social Security Benefits would primarily benefit high income recipients and further bankrupt the SS system.   Creating a new “US Remittance Tax” on foreign financial transfers would add a major administrative burden on individuals, the financial system, and the government.

 

 12. Increase the top marginal Individual Income tax rates progressively on income over $1Million.

 

Many of those who have become ultra-wealthy owe much of their success to the structure and systems of the US economy and government including its patent, copyright, and general legal protections.   It is appropriate that they share a greater percentage of their business income to help pay for those protections.    We support higher graduated tax rates on taxable income over $500,000, over $3 Million, over $10Million and over $100Million.  We do not, however, recommend the concept of a “wealth tax” on existing personal assets because of the complexity of calculation and the variability of valuing many asset types.    Excessively high existing wealth is best taxed through the estate tax system.

 

13. Refocus Capital Gains taxation incentives to encourage longer-term, direct, economic investment and improve the incentive for long-term capital investment by increasing the long-term capital gains period to 5 years.     But, also reduce taxation of the phantom gain from monetary inflation on business assets held more than 10 years, to better reflect the true constant dollar value of any gain.

The current personal income tax code provides a lower tax rate for a “long-term capital gain” on an asset held for more than 365 days.   This actually progressively penalizes longer-term investments that are held more than one year because of the failure to adjust for monetary inflation, over the investment life.    The investments that America needs to build for a sustainable economy such as starting or growing businesses, and building business infrastructure, are not 366-day investments.    True long-term business investments may not provide a capital return for 10, 20, 30, or 40 years or longer.  Based on the last 40 years of inflation rates, which are increasing again, Federal Capital Gains taxes would actually exceed the total real economic gain on the sale of an asset after about 40 years at the 23.8% tax rate.   Owners of even relatively small businesses will generally be in the maximum tax rate bracket in the year they sell their business or business property resulting in capital gains taxation of the inflationary gain at the maximum rate.   

The current law also provides the same tax treatment for individuals who invest in speculative secondary market investments such as traded stocks.  Less than 1% of total traded stock purchases are for new or IPO stock that actually provides business capital for economic growth.  Most traded stock purchases contribute no more to economic growth than gambling.    Ironically, secondary economic investments like stocks currently have a greater tax benefit because they can be easily sold after 1 year when the tax benefit is greatest.    Where the asset is a business or investment property, this short tax incentive peak also encourages the owners to focus on short-term profitability and the potential for resale, rather than long-term growth and sustainability.   The 366-day incentive peak also encourages financial speculators to purchase and sell off asset rich businesses, rather than operating and growing them.

        

14. Maintain a Federal Estate Tax exemption of at least $12M to simplify estate planning, and protect mid-size family businesses and farms from forced sales.

 

The current estate tax exemption of about $13 Million per person, adjusted for inflation, which would currently end in 2025, is probably adequate to protect 95% of small family businesses and farms from a federal estate tax impact.      However, the estate tax is still an important business continuity issue for faster growing mid-size businesses and larger farms because of rising land values and should not be allowed to revert to previous low exemption levels.    However, the Estate tax should also not be repealed.    Without the re-valuation of assets at death, family members who inherit small businesses and farms would be hurt by high capital gains taxes if they later have to sell.  We also suggest adding progressive graduated rates above the exemption amount starting at 20% and going to 70% for very large estates, rather than the current flat rate which is inequitable for smaller estates.          

 

15. Re-authorize the personal deduction for employee business expenses, which was eliminated by the TCJA.

 

With the pandemic and changes in technology and the workforce, more employees are working outside of a conventional business location.   They are being required by employers to fund more of their own expenses for equipment, technology, transportation and home-office work space.  Since these job-related costs reduce their effective income, they should be deductible against their wage income, with a reasonable cap, as would be allowed if they were an independent contractor.  To enable deduction of home office expenses, Congress also needs to change the outdated requirement for “exclusive” business of a “home office” to primary business use with cost limitations, and allow for electronic based business transactions as well as in person transactions.

 

16. Immediately act to remove the wage cap on Social Security payroll and self-employment taxes to extend the default date for the program.

 

More complex changes will be needed to provide long-term sustainability to the Social Security program, but Congress needs to move quickly to adopt the easiest and most logical correction.

 

Prepared for the National Small Business Network by Eric Blackledge and Thala Taperman Rolnick CPA

NSBN is a nonprofit group that evolved from the 1995 White House Conference on Small Business Regional Tax Chairs,

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