A proposal to increase federal taxes on businesses could be coming from President Joe Biden sooner than some analysts anticipated. That has potential implications for the promotional products industry.

In the run up to Biden taking office in January 2021, certain economists and business leaders, both within promo and beyond, felt the United States 46th president wouldn’t aggressively pursue tax changes out of the gates, given other pressing concerns related to COVID-19, such as vaccination rollout and economic recovery.

Biden administration could move quicker than some analysts thought to implement tax increases on business. This 97-second vid gives you the basics. Full article on potential impact on the #promproducts industry here https://t.co/umOn1tK28e @ASI_MBell @asicentral @Tim_Andrews_ASI pic.twitter.com/TyHW9kfXe8

— Chris Ruvo (@ChrisR_ASI) March 19, 2021

However, fresh off the victory of passing his $1.9 trillion American Rescue Plan, the president appears to be turning more attention toward a legislative agenda that’s broader than just the immediate crisis. And increasing taxes could be part of that.

More #PPP, loans/grants, tax credits & indications of where to find new sales opportunity - that's some of what's in the Congress-approved stimulus package that #promoproducts firms should know about: https://t.co/O8znS8ruve @asicentral @ASI_MBell @Melissa_ASI @TheresaHegel

— Chris Ruvo (@ChrisR_ASI) March 11, 2021

On Sunday, March 14, Treasury Secretary Janet Yellen indicated that the White House could soon be proposing federal tax increases, in part to help bring the deficit under control. The nation’s deficit totaled a record $3.1 trillion for the 2020 fiscal year, with national debt more than $28 trillion.

Biden feels “that corporations and wealthy individuals should pay more in order to meet the needs of the economy, the spending we need to do, and over time I expect that we will be putting forth proposals to get deficits under control,” Yellen said.

Since becoming president, Biden hasn’t yet produced a formal tax plan, “but it’s expected he will unveil measures soon to help fund his plans for infrastructure, clean energy and other recovery efforts,” CNN reported.

A Tax Hike for Corporations?

As a candidate for president, Biden said his tax plan would include increasing the corporate tax rate from 21% to 28%. President Donald Trump had lowered the rate from 35% to 21%. Biden’s also interested in reinstating the Alternative Minimum Tax, which requires corporations with $100 million or more in income to pay the standard rate or a 15% minimum tax, whichever is higher.

It’s estimated that Biden’s potential corporate tax hikes would generate about $1.3 trillion in revenue over a decade. Biden and proponents of the plan say the increases are necessary to get corporations to “pay their fair share.” White House press secretary Jen Psaki has said this week that Biden believes that “obviously…corporations could be paying higher taxes.”

Some taxation experts view the plan favorably. “Raising the corporate income tax can be a relatively efficient and progressive way to generate revenue,” the Tax Policy Center determined in an analysis.

Still, the proposal has professionals in promo and beyond concerned. Some owners and executives fear their companies’ bottom lines will suffer, dragged down by a greater tax burden. Perhaps even more concerning, promo executives across the board worry that heavier taxation will compel end-clients to spend less on promotional products, not to mention potentially cause other consequences like reduced hiring, which could hurt promo sales and the economy as a whole.

Analysts like the Tax Foundation, a Washington, D.C.-based nonprofit think tank that tends to be critical of high taxes and tax increases, have said the burden of the increased corporate tax rate would likely be shouldered by workers. The nonprofit said an analysis indicates that labor bears 50% to 100% of the corporate income tax, “so when the corporate tax rate increases and investment flows elsewhere, workers are left holding the bag.”

“For example,” the Tax Foundation said in a study, “the bottom 20% of earners would on average see a 1.45% drop in after-tax income in the long run.”

Estimates vary, but most studies indicate labor bears 50 to 100% of the corporate tax. This is because labor is less mobile than capital in response to a corporate tax change, so when the corporate rate increases and investment flows elsewhere, workers are left holding the bag.

— Tax Foundation (@TaxFoundation) March 18, 2021

The nonprofit noted that an increase in the federal corporate tax rate to 28% would raise the U.S. federal-state combined tax rate to 32.34%, which it said would be highest among the 37 OECD nations and Group of Seven nations. The Tax Foundation estimates that would reduce long-term economic output by 0.8%, eliminate 159,000 jobs and reduce wages by 0.7%.

QBI Concerns & Other Possible Tax Hikes

As Bloomberg and others have reported, Biden has discussed making changes to qualified business income (QBI) deductions. Current law, set to expire at the end of 2025, allows non-C-corporation taxpayers to deduct 20% of QBI from either pass-through entities or certain real estate investment trusts. Biden has indicated he would phase out these deductions for those earning $400,000 and above.

Some promotional products distributors that file as S-Corps or LLCs (so-called pass-through companies) are worried that they will no longer be able to deduct 20% of the profits off the top as they have been, even if their household income is less than $400,000. John Resnick, partner at Proforma Printing & Promotion (asi/300094), said that his distributorship and others that are classified as S-Corps are quite concerned.

“As an S-Corp,” he said, “any business profit is pass through to my personal income for tax reporting. If that is eliminated, my taxes will increase 100% -- no doubt. My household makes way less than $400,000. So do many in the promo space who file the same way. There is no way to spin this. Taxes will go up.”

As one possible consequence, "companies may decide not to hire additional staff or upgrade equipment," said Resnick.

Relatedly, Biden has also advocated for increases to social security and Medicare taxes that, along with the possible deduction changes, could have some small businesses paying more in taxes, according to analysts like Tom Wheelwright, CEO of WealthAbility, which helps business owners and investors reduce their taxes.

Wheelwright, for instance, performed a hypothetical analysis for Entrepreneur magazine in which he demonstrated how the owner of a business with $1.5 million in gross revenue would pay $112,150 more in taxes if the tax agenda Biden discussed during his campaign were implemented.

In a March 17 interview with ABC, Biden addressed potential tax hikes on households too, saying that people who earn more than $400,000 a year could see a “small to significant tax increase” under his proposals. The White House later clarified that the $400,000 threshold applies to households, so individuals earning less than that on their own but who are part of households that collectively earn more than $400,000 could experience the increase too.

Biden wants to return the top marginal federal income tax rate to 39.6%. It was reduced to 37% under Trump. The envisioned increase, combined with limiting the value of itemized deductions for households earning above $400,000, could raise an additional $505 billion in tax revenue, estimates indicate. The top 1% of earners could bring in 15.6% less in income under such proposals, the Tax Policy Center has found.

According to tax initiatives discussed during his campaign, Biden could also look to increase taxes on capital gains for those earning more than $1 million annually. For more on that and other potential increases, head here.