Sen. Snowe Calls Tax Provision in Jobs Measure `Poison Pill'

Senator Olympia Snowe, a Maine Republican who Democrats view as a possible vote in favor of a jobs bill, said a provision in the measure would unfairly saddle small businesses with new payroll taxes.

In a statement released with fellow Republican Senator Mike Enzi of Wyoming that Snowe posted to her Web site, she called the tax a “poison pill” that would “cripple” so-called S corporations, the most common business structure. The proposal would force such corporations to pay as much as a 15.3 percent payroll tax on earnings reinvested in the business rather than taken in salary, she said.

“This is a job-killing tax hike that will force entrepreneurs across the nation to retrench and reconsider any plans for hiring employees or expanding their business,” Snowe said in the statement.

Democrats control 59 of the Senate’s 100 members and need 60 votes to clear a procedural hurdle that could lead to passage of the jobs bill. The measure would reinstate unemployment aid for jobless workers who’ve exhausted benefits, renew about three-dozen tax breaks and impose higher taxes on executives of buyout firms and other investment partnerships.

The provision raising Snowe’s ire is aimed at closing the so-called John Edwards loophole in tax law, a name coined by Republicans after the former North Carolina senator organized his law practice in a way that to avoided the 2.9 percent Medicare tax on about $26 million in earnings. Edwards, a Democrat later nominated to be vice president, was the sole shareholder in his S corporation.

‘Reputation and Skill’

The legislation would impose the Medicare tax and applicable Social Security taxes on such earnings when the company’s “principal asset” is the “reputation and skill” of less than four employees. Social Security taxes of 12.4 percent apply only to the first $106,800 of an individual’s earnings; Medicare taxes have no cap.

The provision is projected by the congressional Joint Committee on Taxation to generate about $11.3 billion in revenue over a decade starting next year.

Snowe and Enzi said the provision would go farther than stopping abuses by imposing levies on earnings that aren’t actually distributed to shareholders or partners in a company. “Retained earnings are the single biggest form of capital for small business and this provision would decimate that capital at a time when other sources remain difficult to access,” the senators said.

According to the Internal Revenue Service, S corporations comprise about 62 percent of all corporations and have been the most commonly used business entity since 1997. In 2003, the last year for which data was available, about 3.3 million S corporation tax returns were filed, up 5.9 percent from the year before.

Snowe and Enzi said they filed an amendment to strike the provision from the bill; under congressional budget rules, the provision would have to be replaced with another projected to raise the same amount of money.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

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