Democrats poised to break their small business pledge

ANALYSIS/OPINION:

The massive $3.5 trillion tax and spend plan released by Senate Democrat leaders highlight their pledge to “prohibit new taxes on families making less than $400,000 per year, and on small businesses and family farms.”

Whether this pledge is honored or merely a public relations gimmick will be borne out shortly.  One key indicator will be if President Biden and Senate Democrats allowed Senate Finance Committee Chairman Ron Wyden to embed his unemployment insurance overhaul into the final budget framework. 

The Wyden proposal, released in April by Oregon’s senior senator and Colorado’s Michael Bennet, is a small business tax increase dressed up as safety net reform. The proposal is guaranteed to increase the federal taxes paid by millions of small business owners. Its inclusion in a partisan, trillion-dollar reconciliation bill would prove that the President and Senate Democrats are not serious about protecting the smallest small businesses from tax increases. 

Wyden-Bennet would radically change America’s unemployment system and not for the better. A key component is a “carrot and stick” tax policy designed to force 49 states to adopt California’s ABC worker classification test for unemployment eligibility. 

Those who have followed California’s ABC experiment know what a disaster the classification test has been. Laws that use the test require employers to treat most independent contractors as employees for the purposes of that law. 

In California, the ABC test was advanced to get more workers to access benefits like minimum wage and unemployment. In practice, it has resulted in tens of thousands of self-employed contractors seeing their contracts dry up, as employers have found the costs and administrative challenges of turning contractors into employees economically unfeasible. 

To make independent contractors eligible for unemployment nationwide, Wyden-Bennet would bring California’s failed and anti-entrepreneur ABC test to every state in the country. The proposal forces lawmakers in every state to confront what amounts to a Hobson’s choice: adopt California’s ABC test for unemployment eligibility, or employers in your state will lose the Federal Unemployment Tax Act (FUTA) credit. 

Wyden-Bennet would break the President and Democrats’ small business tax pledge no matter what choice a state makes. 

In states that comply with Wyden-Bennet and adopt the California test, small businesses that use independent contractors would be on the hook for higher taxes, as they would be required to pay federal unemployment taxes in the future for nearly every independent contractor they use. 

In states that decline to adopt the test, every employer - small and large - would see their federal unemployment tax bill go up 5.4 percent per employee, as employers would no longer be eligible for the federal tax credit reduction.

There is no way around it. Wyden-Bennet raises taxes on small businesses. Whether or not Democrats will admit this is another question. Supporters of the proposal have a history of skewing the facts. 

Wyden-Bennet proponents, for example, suggest that 20 states already use the ABC test for unemployment, and therefore, requiring other states to use the test is not a big deal. The truth? Only California uses the same version of the ABC test for unemployment that Wyden-Bennet requires. 

Supporters also insist California’s ABC test is the only way to ensure gig workers like rideshare drivers can access unemployment during the next pandemic or national emergency.  Once again, this claim is false. 

In perhaps the biggest whopper of them all, the bill is built on the belief that the federal government alone knows best how states should run their unemployment systems. Recent events prove how misguided this belief is.  Governors in 25 states had to step in and opt out of extended federal unemployment benefits this summer to address labor shortages they witnessed on the ground. 

In a matter of days, if not hours, we will find out if Democrats spark another myth about Wyden-Bennet by falsely claiming it does not raise taxes on small business, or if President Biden and Senate Democrats will honor their pledge by keeping this poorly conceived proposal out of their reconciliation package. 

For the sake of small businesses and those who have the dream of pursuing entrepreneurship, let’s hope they keep their work on this one issue, as there will be other tax increases to battle in the days ahead. 

• Karen Kerrigan is president and CEO of the Small Business & Entrepreneurship Council.

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