‘Pro-Business’ Congress May Consider a National Sales Tax

The new 109th Congress brings good news and bad news for small businesses, including retail jewelers, say savvy Washington veterans.

The good news: This is the most pro-business Congress in years, promising more sympathy and quicker action on issues affecting small businesses, including health care and permanent business-related tax cuts.

The bad news: The commitment of the president and the Republican leadership to major tax reform raises the possibility of a sizable national sales tax to maintain revenues.

Here’s what legislative experts say JCK readers should expect from this Congress on issues affecting them.

In the 2004 elections, the GOP kept the White House, added four seats in the House of Representatives (now 231 of 432), and four more in the Senate (now 55 to 44 Democrats and one Independent). Those margins are significant, especially in the Senate, where some business-backed bills stalled in recent years, say Washington observers.

“This is an optimistic time for the business community,” says Dan Blankenship, director of legislative affairs for the National Federation of Independent Businesses (NFIB), “because this is probably the most conservative new Congress since the 1920s, and more pro-business than any in a long time. With a pro-business White House and House, and a majority in the Senate who are small-business guardians, it’s unlikely there’ll be new government mandates that hinder small-business owners.”

In fact, says James C. Musser, government affairs representative for the American Small Business Association (ASBA), for those with 10 employees or less, “This Congress is focused on tax cuts, streamlining the Small Business Administration and its regulations, and other issues important to small business.”

Still, caution Washington insiders, GOP control isn’t a green light for all pro-business bills. “While large Republican majorities in the House and Senate provide much better opportunity to pass business-friendly legislation, the margins aren’t large enough to guarantee passage,” says J. Craig Shearman, vice president of governmental affairs for the National Retail Federation (NRF), the world’s largest retail trade association. Also, members of both parties have various other interests to promote, protect, or consider. “Many competing interests vie for time before congressional committees and on the floor,” notes Musser. “Small business still must make itself heard and identify those in Congress who’ll move our agenda forward. But we know this time our issues will get a fair hearing.”

National Sales Tax

Major tax reform is a top goal of President George Bush and the GOP, and that’s “music to ears of independent businesspeople who do a numbing amount of [tax-related] paperwork,” says Blankenburg.

Republicans in both Houses say they’ll push hard for tax reform in this Congress, though Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, favors moderate changes and says an overhaul is “difficult,” unless the president aggressively seeks public support. Rod DeArment, former deputy Secretary of Labor under President George H.W. Bush and now the American Watch Association’s Washington, D.C., counsel, suggests “the odds are 50/50 for some type of tax reform in two years, though what it finally is depends on public reaction as details come out.”

One frequently mentioned idea is to replace or reduce the federal income tax with a national retail sales tax. Bush calls it “an interesting idea,” and it’s endorsed by some Republican leaders, including House Speaker Dennis Hastert and House Majority Leader Tom Delay, who support a heavily sponsored bill to tax all goods and services at 23 percent (on top of existing state taxes).

A national sales tax is where retailers part company with the new Congress and White House. The NRF is “absolutely opposed,” says Shearman. “It would have a huge psychological impact on consumers and be devastating for the economy. When people don’t buy, retailers don’t order from suppliers, who don’t order raw materials—and jobs are lost all along the way.” Also, the 23 percent plan actually calls for a 30 percent tax, he notes, “with ’23 percent’ calculated on the retail price and tax together.”

DeArment, a former chief of staff of the Senate Finance Committee, also notes that “a national sales tax must be very high to replace revenues from income tax.” Shearman agrees. “To scrap all current sources and cover them by a national tax requires one that’s 60 percent, not 30 percent,” he contends. NRF officials have met with White House Chief of Staff Andrew Card, Majority Leader Delay, and sponsors of the “23 percent” bill to express retailers’ opposition.

Washington insiders, though, don’t expect a national sales tax, specifically, anytime soon. A bipartisan White House tax review panel wasn’t expected to offer its proposals before early 2005, and then those—and later the president’s—will be reviewed by Congress, the public, and various interest and business groups. “Right now, a national sales tax is only part of the debate on tax reform, which is going to be a huge ongoing national conversation,” says Musser. “So, the likelihood of anything [like a sales tax] being enacted soon is remote. I’d say you won’t see it in this Congress.”

Even so, warns Blankenburg, “the tax policy debate has heavy implications for retailers like jewelers. Even though the president, House, and Senate are pro-business, they’re studying ways to reform the tax code without losing money, and a national sales tax is part of that. This is no time for jewelers to ignore what’s important to them in Congress. They must make their position known.”

Business issues

Tax reform isn’t the only business-related matter facing Congress. Here are some other top issues.

  • Health care. Soaring health-care costs worry small businesses, including jewelers who say (in a new JCK national poll) it’s the top business issue they want Congress to address. One way is with “association health plans” (AHPs), in which small-business owners join together—on their own or in trade groups, nationally or across state lines—to buy health insurance at group rates. Jewelers of America estimates AHPs could trim insurance costs up to 30 percent.
    Although most states already allow small businesses to join together to buy insurance, those states also regulate group insurance to prevent discrimination against the less healthy, ensure that benefits are adequate, and make certain that providers are legitimate. The AHP concept, which would eliminate those regulations (and is opposed by most states), is backed by 120 organizations representing 12 million employers. It’s had bipartisan support in Congress for years, passing the House twice but stalling in the Senate, where supporters couldn’t muster the 60 votes for passage. This year, AHP backers see a chance for enactment. The ASBA, for one, is making “an absolute push for it,” says Musser. “We expect success again in the House and possibly now in the Senate, with the enhanced Republican majority.” Shearman notes a Senate health-care task force last year recommended AHPs, “so the odds of getting it in this Congress are very good.” The NFIB also will “press the Senate and House” says Blankenburg. “Many winning candidates we backed support AHPs, so I’m more optimistic about passage—especially if grassroots business owners contact their representatives.”

  • Estate tax. The GOP-controlled Congress wants to ensure tax cuts made or extended in the last session become permanent. An important one, say small-business groups, is the federal estate tax. Its phase-out by 2010 passed the 107th Congress, but it’s due to return in full force Jan. 1, 2011. Business associations pushed hard to make repeal permanent. The 108th Congress didn’t act; the 109th might.
    “It’s a forgone conclusion it’ll pass the House, and now with the enhanced majority, odds on the same in the Senate have greatly lengthened,” says Musser. “After all, not only Republican senators but also Democratic ones from ‘Red States’ [i.e., pro-GOP] support family-owned businesses, and that should get us past any filibuster attempt.”

  • Leasehold improvements. For a long time, the depreciation period on building improvements was 39.5 years. Last year, Congress cut it to 15—but only for leased buildings and only for this year. The NRF is pushing to reduce it to 10 years, make it permanent, and add coverage for owned buildings.

  • Expensing. The last Congress raised the amount small businesses can deduct on new equipment (including furniture and computer software) in a single year from $25,000 to $100,000, and last fall extended it through 2007. “There’s a fair chance that it will be made permanent,” says Musser, “because of the larger GOP majority and because President Bush wants it.”

  • Consumer bankruptcy. Needed bankruptcy reforms—including personal bankruptcies, which topped 1.5 million in 2003—twice passed the House in recent years, but not the Senate. Despite bipartisan backing and support of many business groups, “it’s become a pawn in political disputes,” with amendments for other issues tacked on, says Shearman. Still, while “it’s been fought tooth and nail by trial lawyers, the enhanced Republican majority in the Senate makes it more likely [to pass],” says Musser.

  • Retirement. Several business groups, including ASBA, will push Congress to let larger amounts be deposited in IRAs and to ease the rules on contributions to Simplified Employee Pensions, used by the self-employed and many small companies for employees.