‘Patriot Tax’ Surcharge Would Slap Small Businesses

Published July 1, 2008

Over much stronger opposition than usually accompanies such measures, the U.S. House of Representatives has passed a bill to increase funding for veterans’ education.

Such rewards for service to country are generally so uncontroversial they pass by voice vote or under expedited rules. But this one met stiff opposition, as it would pay for the benefits with revenues generated by a new surtax on high-income taxpayers. The bill passed the House on a 256-166 vote shortly before the Memorial Day break.

The new measure, dubbed the “Patriot Tax” by House Democrats, would impose a 0.47 percent surtax on taxpayers with adjusted gross income (AGI) of $500,000 or more ($1,000,000 or more for married couples filing taxes jointly).

According to the IRS Statistics of Income Division, the surtax would affect about 400,000 households. Congress’s Joint Tax Committee estimated it would raise some $52 billion over 10 years.

‘PAYGO’ Rules Enforcement

Some observers took to calling the surtax the “Blue Dog Tax Hike,” because it was only at the request of Democrats that the veterans’ education bill was funded at all. Under Congress’s “PAYGO” rules, any new mandatory (that is, entitlement) spending must be offset by spending cuts, tax increases, or both.

To date, the Congressional majority has chosen to enforce PAYGO by paying for higher spending with tax increases alone.

House Appropriations Chairman David Obey (D-WI) said in National Journal‘s “Congress Daily” on May 16 he wanted an even broader tax because the American public has not been asked to sacrifice for the war, leaving the nation’s soldiers and their families to shoulder the load. But he said he lost that battle and taxing those earning more than $500,000 was the next-best idea.

Republican Reaction

The surtax set off a flurry of reaction from Republicans. All but 32 of the 199 House Republicans voted against the measure, mostly because of the tax increase. President George W. Bush threatened a veto.

Americans for Tax Reform (ATR) took the unusual step of double-rating a vote against the surtax in its annual “Hero of the Taxpayer” Congressional scorecard. ATR also declared the income tax increase a violation of the “Taxpayer Protection Pledge,” which has been signed by all but a handful of House Republicans. In addition, a vote for the surtax was an automatic disqualification from receiving ATR’s “Hero” award for 2008–no matter what the member’s overall score happened to be.

Using IRS data, ATR calculated the surtax would affect approximately 325,000 small business owners. That’s because 87 percent of tax returns with the surtax’s level of AGI have business income from sole proprietorships, partnerships, or Subchapter S corporations–all of which pay tax on the individual 1040 form.

‘Plenty of Wasteful Spending’

“It’s pretty cynical to pass a tax increase on small business owners and tell them to simply take it because it’s the patriotic thing to do,” said ATR President Grover Norquist.

“If Blue Dog Democrats were so hell-bent on paying for veterans’ education benefits, there are plenty of wasteful spending programs out there they could have offset it with. This tax increase shows that Blue Dog Democrats are neither ‘conservative’ nor at all committed to reigning in the size of government,” Norquist continued.

The fate of the surtax, now on its way to the U.S. Senate, is unclear. Compared to the House, that body has shown little appetite for tax increases.

Ryan Ellis ([email protected]) is tax policy director at Americans for Tax Reform in Washington, DC.