State Efforts: Small Business
Duncan, Harley T., Smith, Verenda C., The National Public Accountant
We at the state level of taxation are just beginning to recognize the great need that small businesses have for special help. We have recognized that helping a business comply is cheaper, and brings in more revenue, than waiting until a mistake is made. But we face some special challenges in implementing these changes. For one, we need more research into small business' special needs in order to help us better target our resources. And we're still struggling with how to manipulate our own budgets to pay for these new ideas. Alternatives to Enforcement may bring in more revenue in the long run. But the sad truth is, most states today still need every penny they can scrape together just to get returns processed and money deposited in the bank. Essentially, we're trying to save money for a new roof when we can hardly afford to buy a pan to put under the leak in the old roof.
As you will see later, these challenges haven't stopped state efforts to help small business. We have a problem with small businesses, and we have to help them. They are a special kind of taxpayer, one that needs special care and handling. The tax profile of a mom-and-pop bookstore in Bangor, Maine, can't be compared to the tax profile the Trump's Taj Mahal in Atlantic City.
The Small Business Problem Has Many Layers
Small businesses are special taxpayers because there are so many of them. They generate small liabilities. The time and effort they put into paying taxes is disproportionate to the return it generates to the business, so their incentive to comply is reduced. Our routine enforcement mechanisms are not realistic. Let me explain a little about each of these unique problems.
States must deal with large numbers of small businesses. Generally, the federal government has developed a dependence on income and employment taxes. States have a heavy reliance on sales and excise taxes -- about two-thirds of state revenue is from sales and excise taxes such as lodging, alcohol and automobile rentals. So states must deal with individual retailers and business entrepreneurs, rather than working farther up the revenue stream with the manufacturers and wholesalers. They're also dealing with cash businesses, with no third-party reporting. And when you factor in the employment taxes paid to states by sole proprietors and the service sector -- ophthalmologists, tree surgeons, day care centers, car mechanics, franchise owners -- you can see that states are dealing with very large numbers of fairly small-dollar taxpayers.
Small-dollar taxpayers generate small liabilities. In Illinois, 60% of the Accounts Receivable is due from sales tax. Two of the largest categories in that 60% are gas stations and restaurants -- again, small cash businesses. Consider that under most sales taxes, each PTA, Girl Scout troop, Boy Scout pack and other charitable organizations which sell anything for charitable purposes from cookies to bake sales have to collect sales tax. It is not uncommon for the largest 5% of taxpayers to account for 50% of total liabilities, and for the smallest 50% to account for 10% of total liabilities.
Small businesses don't have enough resources to deal with their tax responsibilities. The incredible demands of a small business, both in terms of capital and time, usually outstrip the business person's resources. It's been a slow month. Do you pay your employees? Your suppliers? Your utility companies? Your taxes? Time itself is a problem, too. A retailer has reporting responsibilities for federal and state income taxes, employment information, excise taxes, sales taxes, licensing, retirement plans and more. This information goes to tax agencies, to commerce departments, to the Social Security Administration, to licensing and registration agencies. Each marches to its own drummer, and we expect the businessperson to somehow keep time with them all. But the small business persons are not even in the parade. …