Senate Republican voice concerns over net investment income tax expansion

Republican members on the U.S. Senate Finance Committee expressed concerns to their senate colleagues over a proposal to expand the net investment income tax (NIIT).

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The NIIT is a 3.8 percent tax imposed on the proposal would impose an additional 3.8 percent tax on investment income over a certain threshold. It went into effect in 2013 as part of the Affordable Care Act. This new proposal would expand the NIIT to income earned from pass-through businesses, which are businesses where the taxes pass through to the owner as an individual, not the company. This tax would only be imposed on those making more than $400,000 annually.

Democrats say the proposal would raise $203 billion over the next decade to help improve the solvency of Medicare, according to the New York Times.

However, Republican committee members, led by Ranking Member Mike Crapo (R-ID), said the proposal would put many small businesses at risk of paying a higher tax rate. They said it would put 75 percent of businesses organized as S corporations, partnerships, or limited liabilities companies (LLCs) at risk of tax hikes. The Republicans say it would create $252 billion in new taxes, citing the nonpartisan Joint Committee on Taxation.

“This small business tax surcharge would be in addition to the income taxes of up to 37 percent that owners already pay on their net earnings—a tax they pay regardless of whether they distribute the money to themselves or leave it in the business for future needs,” the Republican members wrote to their Democratic colleagues on the committee. “An expanded NIIT would mean an up to 40.8 percent marginal tax rate for some, even before state income taxes are considered. Regarding state income taxes, 43 states have an individual income tax, with an average top marginal rate of 6.4 percent. Adding federal and state income tax liabilities together would result in a 47.2 percent top marginal tax rate for many pass-through owners.”