Middle Market Tax Burden Rising, Threatening Job Growth

More than half of the 79 percent of middle market firms that had to cut their workforce in 2013 reported the "fiscal cliff" law contributed to that decision.

Id 5331 Mc Gladrey

CHICAGO — The vast majority of middle market companies have experienced tax hikes since the beginning of 2013 as a result of the “fiscal cliff” tax deal that became law last year and subsequent tax changes, reports McGladrey LLP, the leading U.S. provider of assurance, tax and consulting services focused on the middle market. According to McGladrey’s survey of 525 middle market executives, 79 percent of middle market firms saw their tax bills increase at least somewhat last year. More than half of those that had to cut their workforces in 2013 reported the law contributed to that decision.

The “fiscal cliff” deal, also known as the American Taxpayer Relief Act of 2012, became law at the beginning of 2013 after months of intense debate that focused on the bill’s increase in the individual tax rate for top earners and its potential impact on the growth of smaller businesses that are taxed through the individual tax code.  Congress sought to address this concern by setting a new $450,000 threshold for the highest tax bracket, a line that middle market owners and partners are far more likely to exceed than their small business counterparts.  

The results of McGladrey’s survey confirm that these tax code changes not only failed to protect mid-sized companies, but also created new burdens that are holding back the most prolific job creators of the past five years. According to the survey, two-thirds (66 percent) of middle market executives report that current federal tax policy is limiting their growth. What’s more, a majority of middle market companies that reported having reduced their workforce and cut expansion plans since the beginning of 2013 said that the 2013 tax reform law contributed to their decisions to do so.  

“Congress spent months locked in a fierce debate over how this legislation was going to affect small companies. However, middle market companies, which represent one-third of our economy and our national workforce, were not part of the conversation,” said Jeff Johannesen, national tax leader at McGladrey. “This survey makes clear that Washington’s ‘big or small’ approach to tax policy has not only failed to help middle market businesses, but that it actually appears to be causing harm.”

Additional Findings from the Survey Include:

  • Workforce reductions: While middle market companies are adding jobs, and have been for several years, some have had to reduce their workforces over the past year. More than 50 percent of the middle market companies that reported having cut jobs (56 percent) said the 2013 tax reform bill was a factor in their decision to take these actions.
  • Widespread increase in compliance burden: More than three-quarters (77 percent) of middle market companies reported their compliance burdens increased from 2013-2014. These types of additional demands can act as an additional “tax” on middle market companies, which tend to lack the in-house resources that larger companies often have to handle compliance matters.
  • International expansion stunted: Fifty-two percent of middle market companies that reported having international operations said that U.S. tax policy has limited their business growth abroad, while only 15 percent said that domestic tax policies had helped.  
  • Expiration of R&D credit leads to research and development cuts: Half of all companies that reported cutting back on research and development (R&D) said that the reform law had influenced their decision to do so. Not surprisingly, the manufacturing industry – a key component of the middle market – reported the most severe impacts. More than three-quarters (78 percent) of middle market manufacturers said that the R&D tax credit’s expiration had led to an increase in their tax bills, and 63 percent of manufacturers that reported having cut R&D over the past year said  the tax credit’s expiration contributed to their decisions to do so.

“The middle market weathered the storm of the recession by creating millions of jobs when their larger counterparts were cutting them,” said Johannesen. “However, lack of focus on this important segment of our economy has the potential to negatively impact the entire economy moving forward. Given the middle market’s proven track record as an engine of economic growth, it is time for our leaders on Capitol Hill and in the White House to recognize the importance of the middle market and bring them to the table for major policy debates.”

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