(This column originally appeared in the Inquirer)
The budget reconciliation legislation, otherwise known as the “Big Beautiful Bill,” that was signed into law by President Donald Trump contains some significant benefits.
But those positives may be outweighed by the significant risks for small businesses created by this law.
No tax on tips and other deductions
Among the benefits: tax reductions.
Several tax rules that were expired, or were scheduled to expire later this year, have now been made permanent. They include deductions for pass-through businesses, first-year “bonus” depreciation for purchasing machinery and capital equipment, and the ability to write off research and development expenses in the year they were incurred rather than amortize these costs over five years.
In the past, these provisions were regularly extended, but now they’re permanent, which could help small businesses make longer-term investments and spending decisions.
There are other benefits for small-business owners in this bill.
The federal exemption for estate taxation was made permanent at the high level of about $15 million for individuals and $30 million for joint filers, and that should make future decisions about the sale or purchase of a business easier.
Not taxing tips up to $25,000 may encourage more tipping and ease the burden of compensation for smaller retailers and food service providers. Generous deductions for building new manufacturing facilities could also spur investments.
Why a bigger deficit is bad for small business
All of this is very good for small businesses. But there are serious concerns.
The Congressional Budget Office has estimated that the effects of the bill could add as much as $3.3 trillion to the federal debt, and some organizations, like the Committee for a Responsible Federal Budget, say the amount could be as much as $5 trillion. Others dispute those claims, such as the Wall Street Journal editorial board, who wrote that “the $3.3 trillion deficit critique is phony — like Beltway accounting.”
The deficits could mean big problems not too far down the road in the form of higher inflation and interest.
“I agree with the WSJ editorial board that the reconciliation legislation, when all is said and done, will neither make the nation’s fiscal situation worse nor better,” said Philadelphia-based Mark Zandi, chief economist at Moody’s Analytics and host of the Inside Economics Podcast. “But the fiscal situation, which is bad, is set to get much worse.”
Why does this matter for small businesses?
It’s because as the debt gets bigger, so do the interest payments needed to service that debt. Interest comes out of the federal budget.
Interest payments last year were a whopping $880 billion, about 13% of federal spending. In fiscal year 2020, net outlays for interest totaled $345 billion, equal to 1.6% of GDP and 5.3% of total federal spending.
“Over the next decade, the U.S. government’s interest payments on the national debt are now projected to total $13.8 trillion — the highest dollar amount for interest in any historical 10-year period and nearly double the total spent over the past two decades after adjusting for inflation,” reports the Peter G. Peterson Foundation, a bipartisan think tank. “In fact, by pretty much any measurement, interest on the national debt will soon grow beyond its highest level since 1940, when such data were first collected.”
Zandi estimates that the deficits will be no lower than an “eye-popping” 6% of GDP; the public debt load will rise from close to 100% to 130% a decade from now; and interest payments as a percentage of GDP, which are already near record highs, will surge.
“And all of this assumes no recessions or other crises, which seems unlikely,” he adds.
As debts rise and interest payments take up a greater piece of the pie, funds will have to come from somewhere.
Could the government raise more money? The Trump administration has said tax cuts and other measures will spur growth and therefore generate more tax revenues. But many studies refute that idea. And the alternative — raising taxes — is never a popular decision.
So the money to pay interest has to come from somewhere. A government can print more money, and that’s a likely scenario. But if the Federal Reserve prints more money, that increases the supply of currency in the system and will cause inflation. And the Fed’s main tool to combat this is to raise interest rates. So is that what we’re looking at in the near future?
Quite possibly so. And business owners should be preparing for this.
That means higher costs of materials. Higher wages to keep up with higher costs. And higher costs of capital to invest and grow.
So yes, the Big Beautiful Bill does have its benefits. But, as every business owner knows, nothing in life is free. And the potential costs from this bill may outweigh any benefits we’re now realizing.
