New analysis from the U.S. Department of the Treasury shows that the construction industry pays the highest effective tax rate—the percentage of income businesses actually pay in taxes—of any sector of the economy. According to the report, the typical construction company faces an average effective federal tax burden of 30.3%, well above the 23.3% average for all U.S. businesses.
The analysis was offered in the context of a renewed effort by the Obama administration to push a corporate tax overhaul. The President’s Framework for Business Tax Reform, originally offered in 2012, has been updated by the Treasury Department, including a proposal to stop corporate inversions while cutting the domestic corporate rate from 35% to 28%.
The overwhelming majority of construction businesses and ABC member companies, however, are organized as pass-through entities whose income is taxed at the individual level, and would be left behind under such a plan. The Associated Builders & Contractors and its Tax Advisory Group have long supported efforts to lower effective tax rates for construction businesses and bring greater parity to effective tax rates by fighting to ensure that pass-through entities are included in tax reform discussions. In an April 15, 2015 op-ed in The Hill newspaper, ABC Immediate Past Chair Pamela Volm called on stakeholders to create a tax environment that would encourage growth for both big and small businesses:
“While there seems to be a general consensus in Washington that our tax system needs fundamental reform, some in Washington, including President Obama, have proposed reforms chiefly concerned with lowering the corporate rate—despite the fact that so-called C-corps make up just five percent of all business entities and account for less than half of the private sector workforce. Slashing the corporate rate does nothing to provide relief for the millions of small businesses that file their taxes individually; the same small businesses that create two out of every three jobs in the United States, according to the Small Business Administration.”
In addition to high effective rates, many ABC members, and small businesses in general, struggle with the ambiguity created by constantly changing tax policies. In testimony before a U.S. House of Representatives subcommittee in December, ABC tax-advisory-group member Rich Shavell told Congress, “The single biggest challenge facing small business today is widespread uncertainty—uncertain economic prospects, an uncertain regulatory environment and uncertain tax policy.”
In December 2015 Congress did make permanent several of ABC’s high priority tax extenders with the Omnibus spending package, bringing some long-term certainty to construction contractors. These provisions include:
- Increased expensing of new property and equipment under Section 179
- The research and development tax credit
- 15-year straight-line cost recovery for qualified leasehold, restaurant and retail improvements
- Five-year recognition period for S corporation built-in-gains
In addition, the following construction-related tax provisions were extended temporarily last December:
- Bonus depreciation (five years)
- Work opportunity tax credits (five years)
- Empowerment/Enterprise Zone tax credits (two years)
- 179D deduction for energy efficient commercial buildings (two years)
Ms. Volm’s op-ed is available on The Hill’s website.
Mr. Shavell’s full testimony from the December 3, 2015 Subcommittee on Economic Growth, Tax and Capital Access hearing titled “Tax Extenders and Small Businesses as Employers of Choice.”
Full video of the hearing is available on the House Small Business Committee’s website.