Cory Gardner's Small Business Savings Accounts - A poorly thought out plan to increase the deficit

Cory Gardner just introduced a bill to create Small Business Savings Accounts, which will afford businesses of up to 500 employees to set aside $10,000 per year, tax free, to pay for business expenses. As we've reported before, this isn't really Cory Gardner's idea at all, he's just introducing a House version of a bill introduced more than a month ago in the Senate. This is just another case of Gardner pretending to be a leader but really just following the lead of others.

So what are Small Business Savings Accounts? Per Gardner's press release, published in the Adams County Business Journal:

Rep. Cory Gardner (R-CO) introduced a bill today that will help entrepreneurs and small business owners by allowing them to open tax deductable (sic) savings accounts under the condition that the money is used to start or grow a small business.

Details of Rep. Gardner’s proposal:

• Businesses with 500 or fewer employees will be eligible to open a savings account.
• Contributions to the account would be capped at $10,000 per year and the total value of these accounts at any one time would be capped at $150,000.
• As long as the money is used within five years of the first distribution, account holders do not have to worry about fees or penalties.
• Account holders could use the funds for the costs of business creation or expansion, such as the purchase of equipment or facilities, marketing, training, incorporation or accounting costs.

As I mentioned before, this proposal will reduce revenues tremendously and increase the federal deficit. But, what about the potential for abusing these accounts, such as using the savings account to make expenditures that are already planned? Apparently Gardner dismisses these concerns out of hand. Does he not realize this will be a boon to tax evaders everywhere, a bailout for tax lawyers and accountants, and will explode the federal deficit with no economic gain?

The Coloradoan asked about these concerns:

Gardner dismissed a suggestion that businesses could use the savings accounts to pass through expenditures they planned to make anyway, which would create a tax deduction without stimulating additional business activity.

“I think the way we’ve defined the qualified expenses really will limit it to the purpose of job creation and economic growth,” he said.

Gardner also said he wasn’t concerned that the reduced tax revenue from the new deductions could increase the federal deficit.

“I think the fact that this is going to create economic activity will actually bring more revenue into government,” he said.

I think he greatly underestimates the cost of this proposal and he should request a CBO or JCT report on the bill. But let's look at a few ways that this plan can be used:

First, a business doesn't have to be a corporation or even an LLC. A business can be a sole proprietorship, meaning it is a business run by an individual and the business pays taxes through that individual's tax filing. Usually, you wouldn't want to pretend to operate a business, because the filings are a bit of a pain. But for $10,000 per year, tax-free, it will be worth it.

And don't be dissuaded by it being called a "savings" account. The money has to go in, but there's no limit on how soon it can come out. Need to buy a new computer? Drop $2000 in a SB savings account and then go to the store and buy the computer. The account can be used as a pass through account, where you magically get to make purchases with tax-free money.

Some may wonder about the additional costs of business filings that may be necessary when they file their taxes and also perhaps licensing. Check out his announcement about what they can be used for: accounting fees and incorporation costs. By the very nature of opening the account, you have to file additional taxes, which means that your accounting costs (Turbotax would probably count) are now business expenses and can also be paid through the account.

I think he believes the requirement that the money be spent within 5 years would make the account disbursements a one-time thing. Just make sure you close out the account at the end of the year. In the next year, open a new savings account to make those big purchases tax-free. Every individual could use this plan to reduce his taxable income by up to $10,000 each year.

What about bigger companies? Obviously a firm of 499 employees could use up the $10,000 in expenses each year. They could create the account, spend the money in it, and close the account within a month or so. The next year, they open a new account. As long as this bill is in place, every company in this country that has 500 or fewer employees can evade taxes up to $10,000. Even larger companies often have small subsidiaries. Could they use these plans? Probably. So, it even helps cut taxes for larger businesses.

I think Gardner greatly underestimates the ways to abuse this new plan and greatly underestimates the burden on the deficit that will be caused by the reduced revenue. And most of the money spent would have nothing to do with really starting business or encouraging new investment. It would be used for sham businesses for individuals to save money and it would be used by all existing businesses to reduce their taxes for expenditures they would have made anyhow.

I almost wish we could blame Cory Gardner for coming up with this woefully stupid idea. That would be great. But since we know, based on the bill already being introduced before, he didn't come up with the plan or have anything to do with writing the bill; we can't blame him for the idea itself. He's just a follower on this one. Gardner simply introduced a bill probably written by a business group because he was told it would look good.

Cory Gardner, I thought you claimed to be an idea man. Your lack of care in considering this bill shows that's not the case. We want real solutions, not deficit increasing bills that pander to business groups who contributed to your campaign.