It’s been a busy week for the Administration. In addition to new inversions regulations, the Treasury Department also unveiled its latest tax reform proposal. Below are a few of the highlights on how the plan might impact design firms, starting with the good news:
- This year marks the 30th anniversary of the passage of the last major tax reform bill (captured in the image above). In that time, it’s become saturated with unnecessary and wasteful provisions, and is long overdue for another overhaul. The White House plan takes important steps to “trim the excess fat” from the code, freeing up much-needed revenues.
- As quintessential small businesspeople, architects know better than anyone that the complexity of the tax code makes running a business a constant challenge. The time and money (240 hours and $2,000, on average, for small firms) spent on compliance each year is an enormous burden, and the Administration’s proposal works to address those concerns.
- There’s an interesting chart (reproduced below) that shows the effective, or “actual,” corporate tax rate paid by each industry. It’s unclear whether architecture would fall under “All Services” or “Construction,” but either way it’s encouraging that officials understand design firms are paying significantly more than the average:
There are, however, a handful of red flags:
- The biggest takeaway from the proposal is that the White House is still advocating for “corporate-only” tax reform, which would lower corporate tax rates but leave rates faced by pass-through businesses untouched. While there is general agreement that corporate rates are too high, this approach to tax reform is problematic because it ignores a vast swath of the business community, including the more than 90 percent of architecture firms, which are structured as pass-throughs. Granted, one of the biggest challenges of tax reform is how to address the high rates faced by pass-through businesses – which pay individual tax rates – without giving wealthy individuals a massive tax cut in the process. But the inherent difficulty associated with comprehensive reform shouldn’t be a reason to avoid it altogether.
- Corporate-only reform isn’t just bad tax policy, but has virtually no support among key congressional tax writers. That’s because pass-throughs already face higher statutory rates than their corporate competitors; corporate-only reform would only widen the gap and exacerbate the problem. Of course this is nothing new, and there’s been political gamesmanship on this issue from both sides of the aisle for years. But it’s important to keep in mind that tax reform along these lines is a non-starter.
- If there’s a group that clearly gets the short end of the stick in this plan, it’s small businesses; a major concern given that 80 percent of design firms employ 10 or fewer employees. The few handouts – such as increased expensing limits for qualified investments, which the vast majority of architecture firms wouldn’t even be able to take advantage of – offered to small businesses are meant to make up for not giving them a rate reduction, but fall short. Consider the example of two design firms that are identical in every way except how they’re organized under the tax code: making one pay significantly more in tax each year amounts to picking winners and losers, and is inherently unfair. That’s why tax reform should ensure rate parity for all businesses, regardless of their tax structure. It’s a message that we’ve conveyed to Congress in the past, and one that we continue to stand by.
To read the joint White House-Treasury Department proposal in full, click here.
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Alex Ford, Manager, Federal Relations