Measuring impact of administration’s proposed tax changes

April 1, 2009 By    

Our industry employs thousands and pays a great deal in taxes at all levels. At the same time, we endeavor to create profits and to build, preserve and transfer to future generations the wealth we create.

With that in mind, and since the retail propane industry is composed of mostly small businesses, it is a great testing ground for measuring the impact of the Obama administration’s proposed tax changes.

The scope and subsequent costs of initiatives by the new administration are unprecedented. The administration targets two major fund-raising areas to help pay for the initiatives, with the plan to increase taxes for only the most wealthy in the country. The Bush tax cuts of 2002 expire in 2010, and – if not acted upon – will automatically become tax increases. Next, Obama has proposed to raise tax revenues by changing the deductions available to top-earning individuals.

The administration has promised that the changes will negatively impact only 3 percent of all taxpayers and will have a similarly minimal impact on small businesses. Simple math, therefore, calculates that only 100 companies of the roughly 3,500 retail propane businesses will be negatively affected with higher taxes. Presumably, the remaining 3,400 businesses would be tax neutral or stand to benefit. I will leave the handicapping of what will happen to others more qualified. However, keeping tabs on the impact to our industry is worthwhile.

Many in the propane industry are structured for tax purposes as pass-through entities (partnerships, LLCs and S corporations), which means that the tax implications of the businesses are treated at the owners’ tax level. A company’s profits and losses become part of the owner’s personal income tax obligations through the company’s K-1 filing. For this reason, we view it as important to understand the changes that affect the individual rates.

Tax roll back – sunset in 2010
Today, a significant portion of the tax structure is operating under a non-permanent set of tax changes made by President Bush in 2002. These tax cuts are due to “sunset” or revert back to prior levels in 2010.

The proposed levels represent the administration’s desired tax rates. Taxes on qualified dividends will increase from 15 to 20 percent, representing a 33 percent tax increase to all shareholders of “c” corporations who make distributions in the form of dividends.

The capital gains tax increase from 15 to 20 percent applies on the sale of any asset, and includes the sale of stock or asset sale of a company. This 33 percent increase is more meaningful when a large transaction is considered.

Reductions in deductions
The Obama proposal intends to raise taxes by reducing itemized deductions for mortgage interest paid and for contributions to charitable organizations. The administration’s target groups are individuals making more than $200,000 in taxable income and married couples making more than $250,000 in taxable income. The initial proposal would reduce the deduction taken by some 20 percent. With significant implications for the housing industry and private charities, these proposals have come under strong opposition. Worth watching are the clear and consistent target groups and the targeted areas of the tax code.

Another area of concern is that of payroll taxes. Some of the proposed concepts would call for an increase on earnings above the current payroll tax cap of $106,800. This is a direct and immediate impact area in which most all propane companies will participate.

Longer-term watch
These changes are modest when stacked up against historical comparisons, so a bit of history is worth noting. To help pay for the cost of World War II, the federal government in 1945 increased the top individual rate on taxable income more than $200,000, to more than 90 percent, according to the National Tax Payers’ Union.

As we contemplate the expanding role of the federal government, we can expect increasing pressure for tax increases significantly above the current proposals. These costs will negatively and directly affect all of us in the retail propane business.

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