Minnesota small businesses, others should be wary of this tax reform

Mark and Cathy Welna are longtime owners of Welna Hardware on Bloomington Avenue in south Minneapolis. They have doubled sales over the last decade, since building a store and warehouse in a frayed-edge, working-class neighborhood.

"We put everything on the line," said Mark Welna, 57, who used their savings, sold a building, and mortgaged their house and the hardware business to handle their $1 million equity-and-debt investment.

Mark works six days a week and Cathy for years worked as a nurse and in the store.

The Welnas are wary of the $1.4 trillion "tax-reform" legislation, which passed the Congress by slim Republican majorities last week. A reconciled bill should hit President Donald Trump's desk this week.

The Welnas, in an opinion that polls suggest is shared by a majority of Americans, believe the benefits are tilted toward big corporations and the richest Americans.

"We're going up against giants, such as Home Depot and Amazon … and lobbyists," Mark Welna said. "We don't have the ear of the politicians. The people who run big corporations and make millions don't put in their own money. They get it from Wall Street banks and stock sales.

"We would have made more money putting our money in the stock market. But we love this business and serving this community."

The Welnas measure profit from their business in tens of thousands. Not millions.

Mark Welna, a fiscal conservative, knows many economists estimate the plan will add $1 trillion or more to the federal debt. He's perturbed that it's billed as tax reform.

The plan generally is favored by business owners, but it gets less popular as the size of the businesses decreases.

Welna Hardware, like a majority of Minnesota small businesses, is an S-Corp. The profits flow to the owners and are taxed as personal income, which can be a much higher rate than the proposed 21 percent rate for corporations.

Sen. Ron Johnson, a Republican and former CEO of a Wisconsin plastics manufacturer, helped the small-biz cause by demanding a bigger percentage deduction of earnings from taxation for S-Corps, as the price of his vote.

Still, there's a lot in this legislation that should concern Minnesota business owners and others. And there's no guarantee Congress will pass it. Here are a few concerns:

• The bill does nothing to reform the "carried interest" loophole, which Trump once decried. It's a Wall Street favorite that taxes the profits that go to managers of private equity funds, venture capital funds and hedge funds at far less than the 39 percent paid on personal income at the highest marginal rate. The standard rate is about 23.8 percent of a fund's profits, although there's wide variation, both up and down.

The loophole: Managers' profit from owning a piece of the partnership, rather than getting a fee from the partnership. When an investment has been held for more than a year before being sold, the manager's piece of profit is taxed at that lower long-term capital-gains rate rather than as ordinary income.

"People, even including many Wall Street types whom I know, have been offended by the carried-interest loophole for years," veteran Wall Street commentator Allan Sloan wrote this month. "If you run a mutual fund and get a bonus based on your investment performance, that bonus is treated as earned income, not capital gains. So why should things be different for managers of a private equity or venture capital or hedge fund?"

• An obscure provision of the tax bill accelerates the phaseout of subsidies for the fast-growing clean-energy sector, particularly wind and solar energy, while bolstering tax breaks for coal and oil, according to Bloomberg, the New York Times and the American Council on Renewable Energy.

Minnesota, with Xcel Energy, the No. 1 generator of wind power in the utility industry, is adding jobs in wind, solar and conservation industries at a rate at least double overall job growth.

These are clean industries that also don't pose the environmental and health risks of the coal industry. Coal is now more expensive than natural gas and wind, and has been declining for 30 years amid health, workplace safety, pollution and bankruptcies.

• Citizens of higher-tax states, including Minnesota, California and New York, would lose the deductibility of most state and local taxes claimed by hundreds of thousands of Minnesotans.

We already pay far more and get back less from Washington, D.C. According to the independent Tax Foundation, Minnesota ranks among the top 10 states in terms of state-and-local taxes per capita, but only 44th in federal aid as a percentage of state general revenue.

We shouldn't get taxed by the feds for covering our own costs. That further subsidizes low-tax states such as Mississippi, Florida and Texas that get back a lot more from Washington than they pay in.

We need smart tax reform that won't further bloat the $20 trillion federal debt and that cleans up the tax code in a way that benefits working- and middle-class families and small businesses. The top earners who feasted over the last 30 years have done fine.

That will take time and a bipartisan approach that puts the Welnas and their dozen employees at the bargaining table.

Neal St. Anthony has been a Star Tribune business columnist and reporter since 1984. He can be contacted at nstanthony@startribune.com.