Tax Notes Talk

How Small Business Tax Expenditures Miss Women-Owned Firms

October 08, 2020 Tax Notes
Tax Notes Talk
How Small Business Tax Expenditures Miss Women-Owned Firms
Show Notes Transcript Chapter Markers

Tax Notes contributing editor Marie Sapirie talks with American University tax professor Caroline Bruckner about the lack of consideration by Congress on how the U.S. tax code affects women-owned businesses and what can be done.

For additional coverage, read Marie Sapirie's analysis in Tax Notes:

In the segment In the Pages, Tax Notes Executive Editor for Commentary Jasper Smith chats with the 2020 winner of the Christopher E. Bergin Award of Excellence in Writing, Alex Zhang of Yale Law School, about his winning paper, “The State and Local Tax Deduction and Fiscal Federalism.”

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Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Faye McCray
Showrunner: Paige Jones
Audio Engineers: Derek Squires, Jordan Parrish
Guest Relations: Nicole White

David Stewart:

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: being heard. New research shows that women-owned businesses rarely get much attention when it comes to tax policymaking, despite making up a large and growing percentage of the total number of companies in the United States. Here to talk about why their voices need to be heard in the process of developing tax policy, and what can be done, is Tax Notes contributing editor Marie Sapirie. Marie, welcome to the podcast.

Marie Sapirie:

Thank you for having me.

David Stewart:

Could you tell us a bit about who you talked to and what you discussed?

Marie Sapirie:

I was joined by Caroline Bruckner of American University Kogod School of Business. Caroline is a tax professor and the managing director of the Kogod Tax Policy Center. She also has extensive experience as a congressional staff member at the Senate Committee on Small Business and Entrepreneurship. We discussed her recently published research that examines existing tax benefits aimed at helping small businesses, particularly sections 199A, 1202, and 179, and discusses the implications of the changes made in 2017 on the ability of women business owners to access capital. Caroline also talked about the impact of the pandemic for women-owned businesses.

David Stewart:

All right. Let's go to that interview.

Marie Sapirie:

Thanks, Caroline, for joining me today to talk about your recent research on women-owned businesses and the tax lawmaking process.

Caroline Bruckner:

Thanks so much for having me.

Marie Sapirie:

Your research documents the growth of women-owned businesses over the past 40 or so years from the census data in 1976 that counted just over 400,000 women-owned firms to over 11 million firms today. I was hoping you could give us an overview of the growth of women-owned firms and what characteristics they tend to have such as the industries and size.

Caroline Bruckner:

Absolutely. One of the things that you have to keep in mind is how extraordinarily fast this growth has occurred just in the last 40 years. And it was propelled in large part by an attention by Congress to discriminatory practices that were inhibiting the growth in start up by women of their own businesses. So for example, in 1974, for the first time Congress passes legislation that enables women to be able to get credit in their own names. Access to capital is a key feature of being able to start and sustain a start-up. And once Congress starts to recognize discriminatory lending practices, and that there are specific barriers to access to capital for women-owned firms, they start passing legislation. Women-owned firms start growing up and starting at faster rates. What's interesting, however, is that if you look at the data over that same period of time, we see that women, while they are starting firms at faster rates, they are starting firms in the same industries in which they had traditionally been concentrated. So, 60 percent of women-owned firms are in services. And almost half of those services are concentrated in three primary industries with about 23 percent of those being in personal and education, 15 percent being in healthcare and social assistance, 12 percent being in professional, scientific, and technical services. And that 12 percent, I think, reflects what a good job that we have done in educating women from the 1970s to date. And so, you see more and more women-owned firms in the professional spaces, which likely tracks the data that we have that more and more women are pursuing higher education degrees and graduate degrees.

Marie Sapirie:

You've highlighted how women business owners continue to encounter challenges in accessing capital to start and expand their firms. And that was one of the challenges that the government identified in the 1978 interagency task force on women business owners report, as you discussed in your article. Your research also documents how the access to capital issue is a significant challenge for women of color who are starting or growing businesses. I was hoping you could talk about the role that tax plays in the survival and growth of small businesses and women-owned businesses in particular.

Caroline Bruckner:

I think there is a lot to unpack with understanding the role that tax can play. And I think a little additional level setting is necessary. Keep in mind that 99 percent of women-owned firms are small businesses. Ninety percent of them are non-employer firms. About 88 percent of them have revenues of less than a$100,000 and less than 2 percent have receipts over$1 million. So, women-owned firms are small businesses, non-employer firms that are concentrated in services. And women also have well-documented challenges accessing capital, and women are less likely to have as high of credit scores or as extensive credit histories as their male counterparts. They're not as likely to apply for new loans for fear of denial. And those fears are somewhat warranted in the data that we have on the SBA 7A loan program from 2019. SBA approved more than$28 billion in loans to small businesses, but only 23 percent went to women-owned firms. Keeping in mind that these small women-owned firms comprise about 40 percent of all U.S. businesses as of December of 2019. So, access to capital has been a longstanding challenge for women-owned firms. And there's a lot of debate in the academic space as to whether or not women-owned firms have not grown and been able to scale because they are concentrated in services or whether or not it's access to capital. But one tool that Congress has in its toolbox to address access to capital challenges, in addition to programs like SBA 7A lending program, are tax expenditures. And I'm intimately familiar with Congress's reliance and desire to look to tax expenditures specifically in the context of trying to stimulate the economy in the wake of an economic crisis. I worked for the Small Business Committee on the Hill from 2009 to 2015, when members of Congress were desperately trying to stimulate the economy and looking to various small business tax expenditures to get access to capital into the hands of small businesses. And over and over again, there was a constant echo by members of Congress as to how can we use various tax expenditures to stimulate the economy, help small businesses retain their own camp capital so that they can grow and scale. And that is just one of the underutilized tools that women business owners have not been able to take advantage of to the same degree as their male counterparts because of the way that small business tax expenditures are designed in many instances.

Marie Sapirie:

That leads to the next question that I was hoping to discuss was the design of the tax benefits for small business. And how should Congress take the challenges faced by women-owned businesses and businesses owned by women of color into consideration when designing those tax provisions?

Caroline Bruckner:

Again, going back to the idea of how can we use tax policy to help women business owners access capital. We have to start with a preliminary understanding that A) the tax expenditure toolbox is available, and B) that also requires that we actually have comprehensive data on what works and what doesn't work for small businesses. And we don't necessarily do appropriate or extensive enough oversight on the small business tax expenditures that we do have. And we certainly don't do that with respect to women-owned firms. So, my research has focused in prior years on looking at specific small business tax expenditures that Congress has enhanced or funded more generously in response to a need to address access to capital challenges small businesses have. And at the same time has documented that Treasury and IRS don't really collect enough data on the uptake rates of women-owned firms with respect to different small business tax expenditures. So, if you're trying to use these tools, and yet don't even have the data on uptake rates or the types of firms that are most likely to be reliant on different types of expenditures, you're really operating blindly and just throwing good money after bad at a problem that you're trying to solve, absent comprehensive data to tell you whether or not your stimulative efforts are going to be effective. So, when we look at what is in our tax toolbox that we could use, we think of the most obvious suspects. We think of section 179. We think of section 1202. We think of section 199A. We think of section 1244. Various small business expenditures that are in our tax toolbox that we could in theory use and particularly target to help all small firms. But women-owned firms in particular recover from the current economic crisis that we're in. The challenge is that we don't have any corresponding to tell us what works and what doesn't work. Because we don't regularly collect data on women-owned firms that reflects how they're organized for tax purposes on their earnings or general tax data to inform Congress to make good informed evidence based policy making decisions on these issues.

Marie Sapirie:

One of the striking findings in the research that you did was that you found only three women business owners who had used section 1202 to raise capital. And the uptake of the section 179 depreciation deduction was lower for women-owned businesses than for businesses generally. Just under half of women-owned businesses use it, but 60 to 80 percent of businesses generally do. If Congress wants to change these provisions to make them more accessible to women-owned businesses, what would you recommend that it do?

Caroline Bruckner:

Well, the first thing I would recommend that they do is make developing inclusive data a priority for Treasury and IRS researchers. We don't have the data to know how we can manipulate these provisions to make them more accessible for women-owned firms. Because we just simply do not collect that data. So, the data that you're referring to with respect to the uptake rates of section 1202 and 179 was a survey I did of women-owned firms who were members or affiliated with women business owner associations in D.C. So, this is a biased population of the most experienced women business owners, as evidenced by their participation and membership in these various groups representing their interests on Capitol Hill. And I just did an informal survey because my thinking was,"Well surely these experienced women business owners would be able to tell us who benefits from these various tax provisions that Congress always looks to fund and enhance in response to an economic crisis." And the data that I got back was jaw dropping. And then, when I tried to compare my data on uptake rates to IRS or Treasury publicly available data, I was left with the reality that we don't have anything to compare my data to because we don't collect that data. Inclusive data gathering on these issues is not something that is prioritized under current research agendas. And that's a mistake because it just means that Congress continues to fund expenditures, which, keep in mind, tax expenditures function as entitlements to those who meet established criteria. They are business spending programs that we run through the tax code for specific taxpayers that meet that criteria. And yet, there's little to no oversight and virtually no understanding other than the limited research I've done on women business owners and small business expenditures specifically on whether or not they actually help these firms have access to capital.

Marie Sapirie:

Turning to the code sections that you considered in your recent article in the American University Business Law Review, specifically sections 199A and 179. Would you give us an overview of the consequences of the absence of women business owners at congressional hearings?

Caroline Bruckner:

In addition to focusing my research on IRS and Treasury absence of collection and publication of inclusive data, another way I decided to kind of attack this problem and really shine a light on how we don't collect data with respect to how women business owners may or may not be served by tax expenditures designed to help small businesses access capital was to document and try to analyze the number of women that participated in the tax reform legislative hearing process. And to do that, I looked at legislative hearings, specifically tax reform hearings in 2017— and that was a year in which there were the fewest number of tax reform hearings— and counted. I simply went through the end of the year congressional reports that are published by the tax writing committees. And I simply identified every single tax reform hearing and I counted the number of witnesses that participated, and I counted how many of them were women. And unfortunately, the data was not consistent with women business owners as reflected by their numbers as a percentage of all U.S. businesses. So, for example, in 2017, and that was a year that tax reform really took center stage and there were the fewest number of hearings. There were only 12. And 19 percent of the total number of witnesses that participated those hearings were women. So, realizing that tax reform was a yearslong process, I looked at tax reform hearings from 2007 to 2017, an entire 10-year period, and noted that 44 percent of the hearings held by the Senate Finance Committee had no women as witnesses. Forty-six percent of the hearings of Ways and Means Committee had no women as witnesses. These are full committee hearings, not subcommittee hearings. And those numbers were stunning to me given how broad the jurisdiction of both Ways and Means and the Senate Finance Committee is. And given that during that same period from 2007 to 2017, women business owners had grown so extraordinarily, by 2017 comprised almost 38 percent of all U.S. businesses. But yet, they were virtually absent at almost half of the tax reform hearings these committees held. Overall, women were only 18 percent of the total 462 witnesses called by these two committees during the tax reform process. So, what we find is that women weren't fully represented in the hearings as witnesses. And yet when we look at some of the major provisions that were adopted by Congress to target small businesses as a result of tax reform, we look at section 199A and section 179, which are two provisions that tend to overlook and underserve women business owners. And that data has certainly been born out in recent weeks by the release of the IRS SOI data on section 199A, which showed that in 2018 taxpayers spent about$150 billion on section 199A, almost 70 percent of which went to taxpayers with revenues of$200,000 or more. Now I already told you that women business owners, almost 90 percent of them, have revenues below a$100,00 or more. So, the bulk of that funding is going to firms that are not women business owners, which are not 40 percent of all U.S. firms. And that might very well be what Congress intended. But we don't know that because women weren't represented at these hearings in terms of their participation as business owners in the overall composition of U.S. businesses. And that raises a lot of questions as to whether or not this is an effective use of taxpayer dollars, particularly when we know that women are starting firms at rates faster than their male counterparts. And this has been consistently documented since at least 1972.

Marie Sapirie:

Finally, I wanted to discuss the impact of the pandemic on small and women-owned businesses and businesses owned by women of color. It was recently reported that new businesses are being started at the fastest rate in over a decade. But we've also just had a large number of small business closures due to the pandemic. What are the tax policy implications of this period of what seems to be rapid contraction and then rapid expansion in the number of small firms, especially for women-owned businesses?

Caroline Bruckner:

So, women-owned businesses are going to be disproportionately harmed by the economic fallout of the pandemic. There's no question about that. They are in industries which have been disproportionately impacted by the need for social distancing and quarantining. Women-owned firms are in hospitality. They're in retail. They're in social and education assistance programs. And then they tend to be in the types of industries which tend to have more personal interaction than other types of firms. So, they're going to get hit the hardest. And there's also related concerns with the disproportionate responsibilities for caregiving that are going to fall on women. That are going to hamper their ability to shore up their businesses during this period. And what we're seeing— the tax data is actually going to provide for the first time— critical new insight as to these firms if they're able to hang on. And that is because for the first time Congress has authorized new paid family and sick leave for sole proprietors and gig workers that could give us a whole new avenue for research, for considering how these firms have been impacted by the pandemic. But getting our hands on that data is a ways away. Those returns haven't even been filed yet. So, more immediately we're left with the data that we're seeing coming out of uptake rates from the voluntary disclosures from PPP. And those numbers are nothing short of abysmal. For example, I was looking at the number of voluntary disclosed demographic data applicants to PPP showed that 159,000 male-owned firms voluntarily disclosed that they were male-owned and applied for PPP. Whereas only 31,000 women business owners voluntarily disclosed that they had applied for PPP. And that of course raises questions as to the total number because those are only voluntary disclosures. But when you dig down even deeper, I saw one analysis that showed that just one woman-owned firm by a black woman received a PPP loan over$5 million as compared to 332 male-owned firms. And that 35 black women had received PPP over$1 million as compared to 6,636 other businesses. So, we can already see some challenges in the existing data. Of course, there's a lot that you have to sort through because that's just a snapshot of limited data that was voluntarily provided. But there is an opportunity with forthcoming tax data from the various tax credits that were authorized in the CARES Act that could provide an avenue for new research and new insight as to women-owned firms. As to whether or not they were able to take advantage of some of the tax credits that Congress designated specifically in response to the pandemic. There's also the outstanding data that we have that we're getting monthly on the pandemic unemployment assistance program, which is the unemployment insurance for sole proprietors gig workers. That data is— I've been watching it very closely to see what we can learn from the total number of women business owners that are taking pandemic unemployment assistance benefits. And that data, at this point, is something to keep an eye on and watch very closely. When Congress authorized that program back in March, CBO put out a letter saying that they anticipated about 5 million people would claim those benefits. And these are the unemployment insurance benefits that were specific for individuals who could not otherwise qualify for regular unemployment insurance. So, these are gig workers. These are sole proprietors. And the thinking was based on data from other disasters that there would be about 5 million people that would qualify and claim these benefits. We are more than six months into this program and more than 15 million people have claimed those benefits. There's no question there's some fraud in there. But that number is reflective of the reality overall that we just do not have a good handle on these kinds of workers. And we don't have a good handle for tax policy purposes and for emergency response purposes on these workers and women business owners overall.

Marie Sapirie:

Well, we will look forward to your continued work on the data as it comes out. And I wanted to thank you, Caroline, for joining us on the podcast today.

Caroline Bruckner:

Sure. Thank you so much for having me.

David Stewart:

And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what will you have for us?

Faye McCray:

Thank you, Dave. In Tax Notes Federal, Corey Goodman and Lorenz Haselberger explore how BEAT can or should be allocated among members of a consolidated group. Walter Schwidetzky examines the tax consequences of partnership debt workouts. In Tax Notes State, Tax Notes State advisory board members honor the late Supreme Court Justice Ruth Bader Ginsburg. Four practitioners counter a recent critique of their views on state and local taxation in a COVID-19 world. And on the Opinions page, Martin Sullivan uses recently released IRS data to show the distribution of tax cut benefits from the TCJA. Carrie Brandon Elliot shares insights on her tax career and writing tax. And now for a closer look at what's new and noteworthy in our magazines, h ere i s Tax Notes Executive Editor for Commentary Jasper Smith.

Jasper Smith:

I'm here with Alex Zhang, the winner of the 2020 Tax Analysts Christopher E. Bergin Award for Excellence in Writing. Alex's paper, titled,"The State and Local Tax Deduction and Fiscal Federalism," argued that the Tax Cuts and Jobs Act's limit on the SALT deduction undermine the deduction's effectiveness, thus underscoring the inherent defects and obstacles in advancing federalism with the tax measure. As far as Alex, he's currently pursuing his JD at Yale Law School and will graduate next year. He's graciously agreed to join us from his home in Connecticut. So, welcome Alex.

Alex Zhang:

Hi, Jasper. Thanks so much for the invitation and for having me. I'm excited to answer your questions.

Jasper Smith:

Excellent. Thanks so much for taking the time out of what I'm sure is a busy schedule. So, to get us started, first off, can you give us a brief overview of your paper?

Alex Zhang:

Of course. My paper is on the state and local tax deduction. There's been a lot of academic commentary and also policy debate about whether state and local taxes should be deductible and that commentary has primarily focused on the revenue side of things. For example, whether taxes fund benefits and services that would count as consumption, whether an uncapped deduction would be regressive, also issues of horizontal equity and the lost revenues from the deduction. And my paper really looks at this deduction from more of an expenditure perspective. Basically it asks given these various arguments for and against deductability from the revenue side, is there a reason to keep the state and local tax deduction? Because federal expenditures are distributed so unevenly across the states. And my answer there is really a qualified, yes. The paper estimates the SALT tax expenditure for each state. And then compares that with the distribution of federal spending in each state. Then it concludes that the SALT deduction was somewhat effective but imperfect mechanism of mitigating the uneven distribution of federal spending, and also that the TCJA's cap on the SALT deduction really undermined this effectiveness. My paper also underscores this difficulty of effectuating fiscal federalism through a tax measure. So, it ends by calling for a more balanced distribution of federal spending across the states.

Jasper Smith:

Excellent. What led you to submit this paper to our student writing competition?

Alex Zhang:

Yeah, so I've been very lucky to have two really fantastic mentors in tax law at Yale Law School— professors Michael Graf and Anne Alstott. Both of them encouraged me to submit to Tax Notes. And I think both of them were authors at Tax Notes. So, that's how I found out about the student writing competition and submitted.

Jasper Smith:

So, taking a step back, you talked about what you covered in the article and it was what many might say is a very deep dive into SALT tax, especially for, I guess at the time, maybe a second year law student. Right? So how did you select your topic for that paper?

Alex Zhang:

Yeah, I was really fascinated by the political debate that was happening around the 2017 tax legislation about either getting rid of or capping the SALT deduction. And then, there was also the subsequent litigation filed by several states, including New York and Connecticut as well, against the Treasury for violating the federalism provisions of the constitution and capping the SALT deduction. So, it was really an interesting mix of taxes, politics, fairness, and also constitutional federalism issues that I found just super interesting. I think at the time, a lot of people thought that the limit on the SALT deduction was politically aimed at Democratic leaning states, which had high state and local taxes and were the primary beneficiaries of that deduction. And then some scholars and policymakers were also sort of making a fairness argument that we should get rid of the deduction. But then I thought, you know, how can we think about fairness in taxation if we don't look at the spending that taxes are funding? So, there was this pattern that the beneficiaries of the SALT deduction also received lower federal spending. So, I wanted to sort of like see if empirically the SALT deduction was an effective way to mitigate the imbalance or the unfairness, if you will, in spending. So, that was really the genesis of that paper.

Jasper Smith:

Excellent. And we certainly commend you for picking a topic like that. The Tax Cuts and Jobs Act was historical in many ways and you honed right in on some of the major issues. Again, very commendable for a law student in particular, and to write so thoroughly on it. We certainly appreciate that. So, Alex, again, thanks so much for joining us. It's been a pleasure.

Alex Zhang:

Well, thank you so much for having me. It's been an absolute pleasure to talk to you and also work with the Tax Notes team on the article.

Jasper Smith:

And for all of our listeners, you can find and read Alex's full article online at taxnotes.com.

David Stewart:

You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online@TaxStew, that's S-T-E-W. And be sure to follow@TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalyst.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

Coming Attractions with Faye McCray
In the Pages Sneak Peek