CNBC | Momentive Small Business Survey

Small-business owners running out of patience with Trump, GOP on tax reform

President Donald Trump meets with Speaker of the House Paul Ryan (R-WI) and Senate Majority Leader Mitch McConnell (R-KY) and other Republican congressional leaders about tax reform at the White House in Washington, DC, September 5, 2017.
Joshua Roberts | Reuters

The public will get its first glimpse of a tax-reform plan from Republican Party leadership on Capitol Hill this week, and it couldn't come too soon for small-business owners. Their patience with President Donald Trump and the GOP on this critical economic issue — a driver of entrepreneurial investment and growth — is wearing thin.

Entrepreneurs consistently cite taxes as the No. 1 issue for their business. In the just-released third-quarter CNBC/SurveyMonkey Small Business Survey, taxes once again topped the list of "critical issues," beating out other government-related factors — health care and regulation — as well as customer demand. But business owners' faith that Trump's campaign promises on tax reform will become legislative reality has dipped.

The percentage of business owners who expect changes in tax policy to have a positive effect on their business in the next 12 months declined from 42 percent to 31 percent quarter-over-quarter, according to the CNBC/SurveyMonkey survey, conducted in August with more than 2,200 small-business owners using SurveyMonkey's online platform and based on its survey methodology. Small-business owners who said tax policy would have "no effect" went up from 33 percent to 40 percent. Another 27 percent expect a "negative effect."

What is the most critical issue currently facing your business?

Critical issues Small business owner totals
Cost of employee health care18%
Customer demand13%
Cost of capital/debt10%
Cost of labor7%
Threat of other crime/vandalism3%
Threat of cyber attack3%

Source: CNBC | SurveyMonkey Small Business Survey, Q3

"I am a leader in my community, and I understand how difficult it can be," said Jason Duff, founder of Bellefontaine Ohio Properties, which operates stores, restaurants and real estate in small-town and rural Ohio. "But the quality of a good leader is empowering people around you to lay out plans and agendas, and we are not seeing it. I'm holding out hope we will get clarity, but every time we sense we're getting on track, we're not. I and my peers are frustrated with that. We need better leadership," Duff said. "The lack of leadership seems like a vacuum when it comes to getting any substance passed."

More from the CNBC/SurveyMonkey Small Business Survey:
Small-business owners across US describe Trump's style using one word

In the second-quarter CNBC/SurveyMonkey Small Business Survey, 58 percent of business owners approved of the job Trump was doing as president, while 41 percent expressed disapproval. That gap narrowed in Q3, with 51 percent of business owners approving of the president's performance, while 47 percent disapproved. The more significant moves came among business owners who "strongly" approved or disapproved of Trump.

Small-business confidence overall declined in the third quarter, according to the survey, most notably among conservatives.

What small businesses are looking for in tax-reform plan

Kristie Arslan, owner of a five-year-old gourmet popcorn company — Popped! Republic, based in Alexandria, Virginia — is in expansion mode. She has a factory store in Alexandria, a mobile food truck in D.C., just-opened a kiosk at the Fort Belvoir Military Base and is in negotiations for an additional retail location in northern Virginia. But she said tax reform can significantly influence the company's ability to fund the growth with revenue from existing business operations.

"After seeing how the Trump administration and Congress handled Obamacare repeal/replace efforts, we are less confident they are going to be able to push through expansive reform to simplify and modernize the tax code, which is badly needed," Arslan said. "We are a bit anxious that they are only going to focus on big business, and the little guys like us will get left behind when it comes to tax reform or tax cuts."

Arslan said of particular importance to her is the issue of taxes on pass-through business income. The tax reform framework being discussed by GOP leaders would tax pass-through business income at the rate of 25 percent, still slightly higher than a corporate tax rate reduction to 20 percent.

While the majority of pass-through taxes may be paid by large companies, the majority of small businesses are subject to pass-through tax treatment — 95 percent of businesses in the U.S. pay pass-through income taxes, including sole proprietorships, partnerships, and S-corporations.

"Congress and the administration have been discussing tax reform/tax cuts for pass-through entities like ours, which would allow us to keep more of our money that we could then use for expansion. If they get nothing done on tax reform or only focus on corporate tax reform, then we end up with no benefit at all and would impact our decisions on growth," she said.

Raymond Keating, chief economist at the Small Business & Entrepreneurship Council, said the hope is that the GOP can accomplish tax relief and tax reform simultaneously — Reagan provided tax relief in 1981 but had to wait until 1986 for a more comprehensive tax-reform package.

Compromise shouldn't be a dirty word. As a business owner, we are required to ... make tough choices every day, at great risk. I'd like to see the same courage out of our lawmakers.
Kristie Arslan
owner of popcorn company Popped! Republic 

Keating said what the small-business community needs to see on the relief side is business rates coming down in a significant way, even if not to the "ideal" 15 percent — he said if it is reduced to around 25 percent, give or take a few points, "it is still a substantial change in right direction." Also, a reduction in the capital gains tax. And a major reform priority is new rules related to business expensing that allow a full write-off in a single year rather than multiyear and capping depreciation schedules. That change would incentivize capital expenditures on new facilities, machinery and technology.

Currently, expensing is limited to $500,000 per year (with that indexed for inflation in future years) in capital spending. Full expensing would allow all capital expenditures to be written off or deducted as a business cost in the year the investments were made.

What was your business's effective tax rate paid in 2016?

Effective tax rate in 2016 Small business total
More than 35%7%
Don't know22%

Source: CNBC | SurveyMonkey Small Business Survey, Q3

Ray Haller, tax partner and CPA at the Jericho, New York-based accounting firm Grassi & Co., said he has a client currently building a manufacturing plant and putting in as much machinery as possible, and that's an investment that would be easier to make if he could write off the entire investment in a single year. "You would say, 'Let's wait,' but they aren't. They can't hope people in Washington will do what they say."

The Tax Foundation, which recently laid out its tax-reform recommendations on Capitol Hill, has four priorities for reforming the corporate tax system: 1) providing full expensing for capital investments; 2) cutting the corporate tax rate to a globally competitive level, such as 20 percent; 3) moving to a competitive territorial tax system; and 4) making all three of these policies permanent.

"If you ask me, the biggest roadblock isn't outside groups or special interests; it's just having a Republican coalition coming to agreement on a bill," said Scott Greenberg, a senior analyst on the federal policy team at Tax Foundation. "I think that might be clearer by [the end of] this week," Greenberg said, but he added, "Some of us at the office have been pessimists for a long time on the chances for a complicated endeavor like this to pass this Congress."

Tax hopes come amid broad decline in business formation

Beyond the specific tax policies that could benefit small-business operations, experts point to a broader goal of tax reform: reversing what has been a decline in new business formation in the United States.

"We've had lackluster levels of entrepreneurship," Keating said. "New business formation, self-employment numbers, IRS tax returns ... whatever number you want to look at, levels of entrepreneurship are down notably," he said. "Any effort through tax reform to incentivize entrepreneurs is a good thing for the economy, not just now but in the future."

Is your business a ...

Business types Small business totals
Sole proprietorship38%
Limited Liability Company (LLC)30%
C Corporation6%
S Corporation16%

Source: CNBC | SurveyMonkey Small Business Survey, Q3

"I'm committed to growth," Duff said. "I want to take on more risk. But there's a risk-tolerance meter that I think all entrepreneurs have and things that factor into it. ... Taxes factor into that. ... I want to invest, I want to hire more employees, but I also recognize this needs to be cautious optimism as more caution flags pop up. My ability and desire to take those risks decreases. Part of me dies inside just saying that. That's not how I'm wired. That's not how most entrepreneurs are wired. But if all we get is more roadblocks and red tape, it's not worth doing."

"If I'm going to expand my business and I'm banking on long-term tax reform, I would be a little bit nervous," Haller said.

In recent months it's been the lack of tax-reform details that have served as an indicator, and not a positive one, Greenberg said. "It's not necessarily new information on lawmakers' intentions on tax policy that's made small businesses more circumspect. It's declining confidence in ability of lawmakers to get anything done."

Small-business owners should wait to see what is revealed this week and then make a determination as to whether the details seem substantive, long-term in nature rather than a short-term fix, and show the GOP has reached consensus on the major structural elements of reform, as well as the hard choices that will be required to pass it. "The true test of a tax bill is whether lawmakers make hard choices and trade-offs, and we haven't seen these hard choices yet. ... If I were a business owner, I would wait until the end of next week, when the Big Six [GOP leaders] put out whatever document they are going to put out and judge whether it's a serious proposal or one that seems likely to flounder," Greenberg said. "And if it looks like tax reform were to meet the same fate as health care, just go on with business as usual."

Concept of tax reform is popular, but details not as much: Republican strategist

Small-business owners may ultimately take matters into their own hands.

"I will vote differently in the next election if I see my elected officials supporting tax reform for the big guys, like corporations or special interests, and only give lip service to small-business tax concerns," Arslan said. "No one seems to want to make the tough decisions anymore. ... Compromise shouldn't be a dirty word. As a business owner, we are required to problem solve and make tough choices every day, at great risk. I'd like to see the same courage out of our lawmakers."

Rural Ohio entrepreneur Duff said it's time to have a debate and put forth legislation instead of "hiding things behind closed doors or passing last-minute initiatives" that entrepreneurs and the public haven't had the chance to vet.

"For many years we trusted they would get it done, but obviously they aren't. We want to believe government can work, especially now that the president and Congress have control," Duff said, but he added that he is willing to not only vote against them in future elections, but go one step further: "It may require getting more small-business owners to step up and serve in the public sector," he said.