Imagine you’re climbing a mountain with a backpack full of heavy stones. You’re strong and have the will to manage, but the weight is significant. It is always a pain, and it always slows you down. This is, more or less, what taxes are for small business owners.
For more than 50 years, the National Federation of Independent Business has tracked the top issues facing small business owners (alongside other metrics like revenue and employment growth). This extensive research history shows that taxes have been the most consistent issue faced by Main Street.
To stretch the metaphor a little further, a backpack full of stones is not the greatest possible barrier to climbing a mountain. A sprained ankle or a driving snowstorm could easily outstrip even an extremely heavy backpack. Over the past few years, the small business sector has had its share of sprained ankles and snowstorms: Lack of skilled labor and high inflation rates have consistently, and occasionally dramatically, outstripped taxes as the top issues harming small business owners’ chance at success.
But times are changing: This May, for the first time since 2017, taxes were the single top issue for small businesses. Inflation has cooled substantially from its 2022 peak, and the tight labor market has let off some steam. While those issues calm, taxes remain the same as ever, and are once again the top issue for Main Street.
Actually, the tax situation is not the same as ever. December 2017 was the last time taxes stood alone atop the list of most important challenges for small businesses. In January 2018, labor quality moved in front, and it stayed in front (or tied) until this May. Labor quality surpassing taxes in that timeframe was no surprise, as the tightening labor market in the late 2010s was creating strong headwinds for small businesses looking to expand. But why did taxes fall from the top spot to the second spot on exactly the turn of the new year? Was there anything specific that changed at the time?
Absolutely: 2018 is when the 20% Small Business Deduction created in the Tax Cuts and Jobs Act went into effect. Deducting 20% of qualified business income is far from total relief—especially given the many layers of business taxes—but it is a meaningful reduction in the weight on small business owners’ backs. It is no surprise, then, that the month it went into effect is the month taxes descended a step on small businesses’ top challenges list.
Back to today, let’s ask why taxes are once again at the top of the list of problems for small businesses. The waning impact of labor shortages and inflation is the main reason, but is there any looming threat that might be contributing to small business owners’ tax concerns right now?
Absolutely: The 20% Small Business Deduction is set to expire at the end of the year—less than 200 days away. In the absence of congressional action, small businesses are facing a massive tax hike. But this May, small business owners were given a tangible promise of relief: The One Big Beautiful Bill Act not only preserves the 20% deduction but expands it to 23% and makes it permanent.
Expanding the deduction and making these tax cuts permanent is a profound step forward for Main Street. Owning a small business has become increasingly difficult over time, a fact you can see in long-term declines in entrepreneurial dynamism and the slow reduction in the percentage of the economy generated by small businesses. That context underscores how the 20% deduction is such a vital leveler for small businesses.
Broader economic trends in labor and inflation are the biggest reason why taxes spent seven years off the top step of small businesses’ most important challenges list. But it does not seem entirely coincidental that taxes fell from the top spot the moment the 20% Small Business Deduction went into place and retook it the same month a bill came out that would determine the deduction’s long-term fate. Small businesses are fighting an uphill battle with a weighted backpack, and the survey data tells us taxes are a significant burden. Congress must act to avoid a massive tax hike and make the Small Business Deduction permanent.
