Small Business Lobby Exaggerates Impact of Tax Changes

July 2, 2009

Anyone who has read "How to Lie with Statistics" knows well that numbers can be contorted in many ways to make them tell the story you want.

Such is the case with a misleading spreadsheet released by the NFIB of Pennsylvania this week purporting to show the impact a tax increase would have on the state's small businesses.

The group is lobbying against a proposed half-percent increase in the personal income tax (PIT) and the deferral of the planned phase-out of the capital stock and franchise tax. In its spreadsheet, the NFIB claims a small business with gross sales of $784,000 and a payroll of $384,252 would pay an additional $4,797 if those tax changes were enacted (along with a 2% tax on health insurance premiums, which is not part of any budget proposal).

The primary flaw in the NFIB's calculation is that it includes additional PIT that individual employees would pay. That accounts for $1,741 - more than one-third of the $4,797 - that is not a direct cost to the small business. Adding that figure to other taxes paid by the company inflates its overall tax liability.

The NFIB spreadsheet also assumes that every employee pays the PIT, even though several could qualify for the state's special tax forgiveness program. This particular business had an average of 17 employees on payroll during 2008, including the two co-owners who were each paid salaries of $45,000 per year. Based on that information, the average wage of a non-owner employee was $17,217, or about $8.28 an hour.  If any of those workers is a single parent of one child, he would be eligible for a 50% reduction to his PIT liability under the state's special tax forgiveness program - a fact conveniently ignored by the NFIB. A married employee with one child who is the family's sole breadwinner would pay no income tax under the program.

The NFIB spreadsheet also omits some other key facts. First, the average annual combined salary and profit of the two co-owners is $149,476 - far in excess of what most families earn in Pennsylvania. The profit margin for their business is 38% - higher than most small businesses. The additional state taxes they would be may reduce company profits but is not enough to hire another person, even at $8 an hour. Moreover, the owners are pulling all their earnings out of the business each year, rather than investing them back into the business - based on the estimates of capital stock and franchise tax due each year.
 
When these business owners go to a convention in Las Vegas, they would find their taxes are lower than many of their counterparts. They might try to convince other business owners to move to Pennsylvania to take advantage of our low tax rates. After all, even with the proposed increase, these business owners will pay less in taxes than their colleagues in West Virginia, Georgia and North Carolina.

So what do the owners get for their money? Their children go to good public schools, they rent movies from their libraries, and the state police patrol their business headquarters on weekends, so they don't have to hire private security. Their employees are more productive and take fewer days off because they have state-funded health insurance for their children.

The NFIB and its allies say this spreadsheet shows that small businesses will be paying much more in additional taxes than Governor Ed Rendell claims in his public comments. It omits the fact that this business must have more than a million dollars in assets and is owned by individuals who are among the top 15% of earners in Pennsylvania.

It's easy to lie with statistics when you are selective about the data you highlight, but the truth comes out when all the pieces of the puzzle are assembled.