Last week, we put out a report on some of the effects of Colorado’s Amendment 66, which would increase the state’s individual income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate, in addition to moving it from a single rate system to a two-bracket system. In its first year, it would raise taxes by nearly $1 billion.
In our analysis, we pointed out an interesting research piece completed by Ernst & Young LLC in 2011, which discussed various aspects of pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. taxation. Pass-through businesses pay taxes on their business income through the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , rather than the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . The report found that 57 percent of private sector employment in Colorado was at pass-through entities. Since they pay individual income taxes, Amendment 66 increases taxes on them all.
Because of this, hiking individual income taxes can have a big effect on business, even if proponents of these tax increases claim it won’t. According to the U.S. Small Business Administration (as described in our recent report), 64 percent of new domestic jobs created between 1993 and 2011 were from small firms. What’s more, “[s]mall businesses produced 46 percent of the private nonfarm gross domestic product (GDP) in 2008 (the most recent year for which the source data are available to make these estimates).”
The Small Business Administration isn’t alone in this assertion that small business job creation is an important driver of economic growth. In fact, the Colorado Governor’s Office of State Planning and Budgeting noted:
New and young firms are a leading source of new jobs for the economy. Thus, the proportion of a state’s employment in new and young firms correlates highly with a state’s overall employment growth, meaning that higher levels of entrepreneurial activity are closely associated with higher levels of employment growth.
And when small businesses across the U.S. are polled, taxes are a significant concern for them. This trend is prevalent in Colorado, too—recent polling indicates that the large majority of independent businesses within the state oppose the tax increases that are included in Amendment 66.
Taxes matter to small businesses, and small businesses matter for economic growth, despite claims that they don’t.
Be sure to check out our full report here. More on Colorado here.
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