— Guest Opinion, by Andrew Wyllie
[Work Hard for the Money? will appear on Page 5 of this week’s Ace, on stands Thursday, Dec 4.]
If you ask anyone who has started their own business, they will tell you that it is a lot of work. You have to deal with three levels of government, make sure you have all the required licenses, set up business bank accounts, get insurance, and maybe even hire a lawyer and or accountant for accounting and tax advice. This is true even if you don’t plan on having a lot of business activity.
For example, someone with a full time job a may want to set up a small side business to sell their photography or art work in hopes that it may some day turn into a full fledged business. A student may need to set up a small business to help pay for school. Many people have hobbies that are considered businesses because they generate some revenue. In our current financial climate, many people may be cutting back on their business income to try to get stable employment, like construction contractors taking full time work at the local big box hardware store but keeping their business open just in case some work comes along.
Well now in Lexington, you can add another $100 of prepaid tax onto your businesses’expenses if you don’t plan on making more than a few thousand dollars.
The new annual minimum license fee “bill” from the LFUCG arrived in most small-business mailboxes just in time for Thanksgiving.
No one likes paying taxes, but most people can understand why we need them.
Currently if you own a business in Lexington, you are required to pay an Occupational License Fee. It’s not a huge amount compared to state and federal taxes, just 2.25% of your net earnings. So, if you made a net profit of $2000 selling photographs, you would have to pay the city $44.50 in business tax. That’s not a big deal although it is a bit of a pain to fill out all the paper work (which is actually pretty complicated) just to send a check in for forty or fifty dollars a year. With the new plan, you are now required to prepay $100 in tax, so if you wind up only owing $44.50, you lose the other $65.50. Or to put it another way, your tax rate goes UP if you make less money.
Here’s the reasoning for the new tax (from Mayor Newberry’s budget address on April 8th, 2008): “… there are hundreds of businesses filing for licenses, yet they generate no revenue for the community. In those instances, the fee [the $100] will serve to pay for the cost of administering the program or will serve to discourage businesses which are not active from filing for a license. In FY09, this fee will generate approximately $2.7 million, and in subsequent years, we anticipate that it will add approximately $1.4 million each year.”
Basically, what he is saying is that there are business in Lexington (actually about 12,000 of them) that are filing for licenses but then don’t have much if any net income. Well, like I described above, there are lots of small business out there that are just small side interests or hobbies which maybe just generate a small amount of money. To suggest that these businesses should pay the city so that the city can in turn afford to processes the returns of these small businesses is a bit ludicrous —it’s a ‘make work’ project funded by people who can’t really afford to pay for it.
So now, it gets even worse for these very small business in Lexington. If you are running a small side business (you or your spouse work full time), you may not be able to write off many expenses, and even though the business does not generate much revenue, you will be taxed at a higher rate as the profits are added to your regular income. So, going back to the $2000 in net profits selling photographs: You’re looking at 25% in federal income tax ($500), 15% federal self employment tax ($300), 6% state tax ($120), state business taxes (flat $165, for a LLC) and Lexington’s $100 = $1185 in taxes or a marginal rate of roughly 60%. Surely anyone in this position is doing it as a labor of love. If you just wanted to make money, you would be better off with a part time job at Target.
Other cities that we are trying to emulate, that are vibrant and foster the creative class tend not to place any taxes on these types of small businesses. In Austin Texas, they have no business license requirements. Same for Boulder Colorado although they do have a city sales tax. In Bellevue Washington, you need to pay a one time registration fee of $29.00, but then only pay taxes if your gross income is over $135,000.
It seems to me that the city could save a lot of time and money by using rules similar to those of Bellevue WA. Have a registry of businesses set up for a nominal fee, but only tax businesses that are making above a set gross income limit. This would reduce the amount of labor required to process the 12,000 tax forms with zeros all over them and remove the need to generate another $1.4 million in revenue to pay for this processing. The key though is to encourage people who want to run a small business in Lexington, not make yet another hurdle for them to jump over.