As lawmakers work to reduce the federal budget deficit, many seek to overhaul the tax code as a way to boost economic growth and ultimately increase federal revenues. Comprehensive reform of the Internal Revenue Code has not occurred since 1986, and lawmakers have endeavored to address tax reform during the past decade without success. In policy circles in Washington, D.C., tax reform perpetually seems to be just over the horizon yet always out of reach.
However, the current budget environment has breathed new life into previously inconceivable policy initiatives, including tax re-form. Although a task as massive as rewriting the tax code is unlikely to occur as part of the immediate budget discussions, the groundwork could be set for a tax overhaul that likely will have significant implications for businesses in the roofing industry.
Tax reform consensus
There is bipartisan agreement on the need for tax reform for several reasons. There is broad agreement that the tax code is far too complex, increasingly burdensome and costly, which causes compliance problems for individuals and small businesses. Also, the temporary nature of much of the tax code renders many tax incentives ineffective. It is difficult, for example, for a business to plan capital investments when the maximum Section 179 small-business expensing amount changes almost every year.
Additionally, Republicans and Democrats acknowledge the competitive disadvantage created in the global marketplace by the current 35 percent tax rate on C corporations, the second-highest tax rate in the world behind Japan. In an effort to make the U.S. more competitive, agreement is building around a lower corporate rate between 25 and 29 percent. To offset the reduced tax revenue resulting from the rate reduction, many tax deductions and credits likely would be repealed.
Where they differ
Much of the consensus needed to pursue tax reform exists, but Republicans and Democrats differ significantly regarding some fundamental issues.
Republicans seek a comprehensive overhaul of the tax code—a re-examination of all individual, corporate and international regimes. The centerpiece of the GOP plan would be to lower corporate and top individual rates from 35 to 25 percent.
In addition to lowering rates, a broader overhaul would offer more opportunities to rationalize areas of the code in great need of repair, such as depreciation schedules.
For example, under the current depreciation schedule, a commercial roof system must be depreciated over 39 years, more than double the realistic lifespan for most roofs and an impediment to economic growth in the roofing industry.
Democrats have proposed tax reform that lowers the corporate tax rate only. Moreover, many Democrats seek to allow the current
33 and 35 percent top individual rates to expire as scheduled after 2012, raising those rates to 36 and 39.6 percent, respectively.
Whether Congress pursues corporate-only or comprehensive reform has significant implications for roofing contractors. Most small firms, including many in the construction industry, are structured as “pass-through” entities (S corporations, LLCs, partnerships and sole proprietorships). Pass-through income generally is taxed at the individual rate as it is passed through to its owner(s). This structure is preferred because it avoids double-taxation and much of the C corporation structure's complexity.
A corporate-only tax reform approach would benefit C corporations at the expense of pass-through businesses. If corporate taxes are lowered and Congress allows the top individual rates to expire, many small businesses would experience significant effective tax increases. According to recent estimates by Ernst & Young, this corporate-only approach would result in a 9 percent effective tax increase on the construction industry.
NRCA is collaborating with Rep. Reid Ribble (R-Wis.), former NRCA president and founder of the Job Creators Caucus, a group of congressional members who have owned businesses, to educate other lawmakers regarding the concerns of small businesses during the tax reform debate.
Although some progress has been made toward tax reform, a serious effort by Congress likely will not take place until after the 2012 elections. NRCA will continue working to ensure the roofing industry's voice is heard as Congress considers tax reform.
Brandon Audap is NRCA's director of federal affairs.