A Seat at the Tax Hearing Table for Women-Owned Businesses
You can’t grab a hefty wedge of Sicilian pizza from Pizza Girls and stroll down to the public dock in West Palm Beach, Florida, to look at the yachts anymore. The Girls — whose hip hole in the wall had sold pies at that spot since 1999 — are gone as of August 20, an economic victim of the coronavirus pandemic.
Pizza Girls is in a better position than many other women-owned businesses. Its owners have another storefront that will continue. Because of their long run in downtown West Palm, people noticed the closing. Women-owned businesses rarely get much attention when it comes to tax policymaking, despite making up an ever larger percentage of the total number of companies in the United States, according to new research by Caroline Bruckner of American University.
Bruckner’s work shows that women business owners rarely get a seat at the hearing table in front of the Senate Finance and House Ways and Means committees. Only 17.5 percent of the 462 witnesses called to testify at 91 hearings on tax reform held between 2007 and 2017 by the two taxwriting committees were women. Forty-four percent of Finance Committee hearings and 46 percent of Ways and Means hearings had no women at all. As of 2019, businesses that were at least 51 percent owned by women accounted for 42 percent of all companies in the United States.
The U.S. Census Bureau’s Survey of Business Owners showed that business receipts for women-owned companies outpaced the growth rate of all companies between 2007 and 2012. A 2019 analysis by American Express shows that companies owned by women of color grew at double the rate of women-owned businesses generally over the past five years. But despite the economic impact of women-owned businesses, at no time before or during debate over the Tax Cuts and Jobs Act did the congressional taxwriting committees publicly consider whether the changes to the tax laws would be money well spent for them, Bruckner said.
The consistent underrepresentation of women at legislative hearings is a problem for tax bills designed to target small businesses because data show that 99 percent of women-owned businesses are small businesses, Bruckner said. Although there are other ways for taxpayers to make their case to lawmakers, witnesses play a critical role in the legislative process. House and Senate members don’t always have time to read submissions, Bruckner said. “It makes a difference who [lawmakers] see and hear from at the witness table,” she wrote.
Identifying the types of taxpayers that use existing credits and deductions is necessary to ensure that future tax incentives have the greatest effect. “We should be requiring the IRS and Treasury research teams to put out demographic data on the uptake of tax expenditures and doing audits to see how women-owned and minority-owned firms claim them,” Bruckner said. She noted that these data are particularly important to have as the population ages because the earnings gap between men and women translates into a retirement wealth gap and results in more women eventually turning to gig work.
Rectifying the Omission
There are several ways that women business owners could be better represented in the legislative process. Bruckner said the IRS has expressed interest in developing research on the issues affecting women-owned companies and the gender and racial tax data deficit, and that she had been asked to present her study to it earlier this year. “We’re seeing trends moving in the right direction,” she said.
But work remains. On February 27, 2019, Bruckner pointed out to Congress that there is “no formal government or congressional oversight strategy on how the U.S. tax code’s more than $333.5 billion of tax expenditures targeted to help small businesses grow and access capital impact women-owned firms.” That’s also true for companies owned by people of color. “The question of representation in tax policy is one that has been swept under the rug with respect to tax expenditures,” Bruckner said. Although demographic information is collected for other types of credits, such as anti-poverty credits like the earned income tax credit and child tax credit, the same level of information about the taxpayers that claim business credits doesn’t exist.
Part of Congress’s oversight responsibility is to understand whether it’s making good investments through its business tax expenditures. Having no data to determine how women-owned companies benefit from tax policy changes is problematic because Congress often designs tax provisions as a means of providing access to capital for small businesses, Bruckner said. Women-owned companies continue to have greater difficulties than male-owned businesses in accessing capital, according to several studies, including a 2018 report by the National Women’s Business Council.
It’s not only access to capital that poses a challenge for women-owned businesses. Bruckner’s research shows that because women-owned businesses are often service companies or are unincorporated, they are excluded from using three of the four most expensive business tax expenditures. Section 1202’s exclusion for qualified small business stock applies only to C corporations, but it excludes service trades or businesses in specified fields and any trade or business in which the principal asset is the reputation or skill of one or more employees. The change from capital to ordinary treatment of losses on small business stock under section 1244 applies only to incorporated entities. And because service firms typically don’t need to make large investments in capital equipment, they are often unable to use expensing under section 179. In contrast, companies of all types use the start-up deduction in section 195. Bruckner said that in her survey research, she found that the uptake rate for section 195 was high when compared with other tax provisions because it has no limitations based on whether a company is providing services or is incorporated. Section 195 is also relatively easy to understand and to claim, both of which help make it widely used.
To better address the needs of women-owned businesses, Bruckner recommends that Congress improve representation on congressional witness panels connected with the tax code. Asking witnesses to disclose demographic and other information, such as gender, race, and veteran status, when they testify is a good starting place. Developing that data and reporting it in year-end reports would be a relatively small administrative burden, she said.
Also important are better sources of information, Bruckner said. She recommended the Government Accountability Office report how to develop data on the distribution of business tax expenditures regarding women- and minority-owned businesses to Congress. Bruckner said that sources of these types of data already exist, but that a consistent and comprehensive approach is needed across the IRS, Small Business Administration, and Census Bureau to develop data to inform policymakers. Further, the Joint Committee on Taxation should include demographic data for tax estimates on business tax expenditures when possible, Bruckner said.
Section 199A Case Study
While women business owners often received rate cuts from the TCJA, Congress maintains a blind spot when it comes to them, Bruckner wrote. Section 199A provides insight: Although Congress intended for the passthrough deduction to reach small businesses, research shows that it misses the mark, particularly when it comes to women-owned businesses.
One reason for that is that the qualified business income deduction for passthrough businesses, through cross-reference to section 1202, excludes specified service trades or businesses from claiming it. Bruckner’s research shows that this exclusion disproportionately affects women-owned businesses because at least half of them are in three industries — health services; professional, scientific, or technical services; and other services — that would render them ineligible for the section 199A deduction if they have revenue over the threshold and phaseout amounts.
By overlaying the data on women business owners on the JCT’s distributional analysis of section 199A (JCX-32R-18), Bruckner showed that most of the revenue lost can be attributed to companies other than those owned by women. The JCT estimates suggest that more than 90 percent of the revenue lost from section 199A comes from companies that have income exceeding $100,000; companies with income greater than $1 million reap the largest benefits. Bruckner points out that only 1.7 percent of women business owners have receipts of $1 million or more. “While most [women business owners] will no doubt see some limited benefit from IRC section 199A, JCT’s distributional analysis raises serious questions as to whether the provision as designed adequately reflects congressional intent with respect to women-owned firms, 99 percent of which are small businesses,” she wrote.
On September 4 the IRS Statistics of Income division published the 2018 data on section 199A that confirm the JCT estimates that 68 percent of the $150 billion went to 3.5 million companies with AGI of $200,000 or greater. (Prior analysis: Tax Notes Federal, Sept. 14, 2020, p. 1949.) Bruckner’s research shows that 90 percent of women business owners have gross receipts of $100,000 or less.
Policymakers’ knowing the percentage of women- and minority-owned companies that claimed the deduction is critical to their assessment of how the tax expenditure was used to stimulate economic growth, Bruckner said. Particularly now when many companies are struggling to survive, Congress should consider demographic data to help determine whether the tax expenditures in section 199A are going primarily to companies that need access to capital and are creating new job opportunities, she added.
Congress may reassess the tax code in a way that would provide a boost to women-owned small businesses. In October 2019 Finance Committee ranking member Ron Wyden, D-Ore., introduced the Providing Real Opportunities for Growth to Rising Entrepreneurs for Sustained Success Act, which would have added two credits for job creation by small businesses and an investment credit for investors in small businesses.
Moving Toward Representation
Including more women business owners on legislative witness panels is unlikely to be difficult given the growing number of women-owned companies in the United States. Internally, the Finance Committee “has done an outstanding job of hiring and promoting women, but it’s not enough to ensure that there’s representative testimony at congressional hearings,” Bruckner said. Her research details how to fix that omission.