Rice County Republicans

A reporter at the StarTribune has caught the attention of one of our thoughtful, respected and respectful readers, he forwarded to us the content of his letter sent to the reporter in an effort to give her the benefit of another way of looking at things. We believe that too often our journalists only preach to the choir and never learn the whole story because the feedback from their peers and readers is self-perpetuating of the myths that inform their writing.  This excellent letter is a valiantly shows “the rest of the story”.

*From:* Bron J. Scherer [mailto:brons@charter.net]
*Sent:* Friday, April 10, 2009 2:20 PM
*To:* ‘plopez@startribune.com’
*Subject:* Your question regarding “small business” people making $200,000 plus annually to Rep. Seifert at Easter break newsconference

Ms. Lopez, You may remember the aforementioned question you asked Rep. Mary Seifert this week as to why these individuals are any different than salaried people making $200,000 and why this group is of particular concern to the GOP caucus.  As someone in this taxpayer category, I will take the time to enlighten you beyond Rep. Seifert’s remarks which were also valid. Here a few reasons why high income tax rates matter to this group (small business owners):

1.        Reported income does not always represent cash earnings.  Many businesses are accrual basis taxpayers that in essence pay income taxes on receivables from customers, inventories held for sale or manufacture and other working capital items.  Passed through earnings from an S corporation, LLC, LLP or sole proprietorship are not the same as cash earnings for a regular payroll person.  Further, often business owners may not be able to extract the necessary cash from the business to pay federal and state income taxes (not to mention payroll taxes/self employment taxes at 15.3% alone) due to business banking line of credit covenants and the like.  This obviously can result in taxable income without the related cash to pay the tax.  The higher the tax, the greater the burden on the business owner to increase prices, reduce costs (resulting in possible employee layoffs), increase borrowings or a combination to pay this bill.

2.       A business owner earning $200,000 in your question, probably had to generate millions in revenue to earn that amount.  Most businesses (large and small) would struggle and consider it a major accomplishment to achieve a 10% pre-tax earnings rate meaning the hypothetical individual referred in your question probably grossed $2,000,000 plus in annual business revenues to achieve that amount of pre-tax earnings.  When viewed in this context, $200,000 does not seem very large, particularly when that business owner needs to reinvest profits to continue to grow the business.  That $200,000 cannot be extracted from the business in cash without extreme negative, long-term consequences.  Again, this net residual income is not individual or family spending money we’re talking about.

3.       Finally, I believe there are many who believe this group of business owners automatically generates $200,000 plus in annual income year after year.  Again, this is obviously not true.  Businesses have good and bad years, some of which may result in net losses due to the thin margins referred to in item 2 above.  Contrary to the many other “beleaguered groups” in this country, the business owner funds these losses out of previously earned profits and possibly future profits and/or debt.  Those achieving “success” at this level more often than not have everything they own at risk including personal assets, residence and retirement accounts and there were probably years during the early stages of the business when the owner was unable to take any funds for personal family needs and incurred significant debt to get started.

Rep Seifert and the Republican caucus recognize that these type of business owners employ the majority of Americans with good paying jobs and benefits. We care about our employees and their ability to take care of their families and we do everything possible to assure we retain good employees.  However, the business owner is only able to do so effectively in a lower tax and regulatory environment.  The facts speak for themselves for those who choose to do the background work.

From my perspective, every day the state legislature is in session represents a significant and growing risk to the success of my businesses and my family’s well being as well as the state as a whole.  Regulation and high taxes are huge problems in this state.  Growth of federal and state government is out of control.  In reviewing pending legislation, I always hope for equality of *opportunities* for all Minnesotans, not equality of *outcomes*.

Thank you in advance for your time and fair treatment of this issue and others as you cover the Minnesota State Legislature.

Very truly yours,
Bron J. Scherer, CPA