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How Small Business Tax Expenditures Miss Women-Owned Firms

Tax Notes contributing editor Marie Sapirie talks with American University tax professor Caroline Bruckner about the lack of consideration by Congress on how the U.S. tax code affects women-owned businesses and what can be done.

This post has been edited for length and clarity. 

Marie Sapirie: Thanks, Caroline, for joining me today to talk about your recent research on women-owned businesses and the tax lawmaking process.

Caroline Bruckner: Thanks so much for having me.

Marie Sapirie: Your research documents the growth of women-owned businesses over the past 40 or so years from 1976 when the U.S. Census Bureau counted just over 400,000 women-owned firms to over 11 million firms today. I was hoping you could give us an overview of the growth of women-owned firms and what characteristics they tend to have, such as the industries and size.

Caroline Bruckner: Absolutely. One of the things that you have to keep in mind is how extraordinarily fast this growth has occurred just in the last 40 years. It was propelled in large part by an attention by Congress to discriminatory practices that were inhibiting the growth in start-ups by women of their own businesses.

For example, in 1974, for the first time Congress passes legislation that enables women to be able to get credit in their own names. Access to capital is a key feature of being able to start and sustain a start-up. Once Congress starts to recognize discriminatory lending practices, and that there are specific barriers to access to capital for women-owned firms, they start passing legislation. Women-owned firms start growing up and starting at faster rates.

What’s interesting, however, is that if you look at the data over that same period of time, we see that while women are starting firms at faster rates, they are starting firms in the same industries in which they had traditionally been concentrated. Sixty percent of women-owned firms are in services. Almost half of those services are concentrated in three primary industries with about 23 percent of those being in personal and education, 15 percent being in healthcare and social assistance, and 12 percent being in professional, scientific, and technical services.

That 12 percent, I think, reflects what a good job that we have done in educating women from the 1970s to date. You see more and more women-owned firms in the professional spaces, which likely tracks the data that we have that more and more women are pursuing higher education degrees and graduate degrees.

Marie Sapirie: You’ve highlighted how women business owners continue to encounter challenges in accessing capital to start and expand their firms. That was one of the challenges that the government identified in the 1978 interagency task force on women business owners report, as you discussed in your article.

Your research also documents how the access to capital issue is a significant challenge for women of color who are starting or growing businesses. I was hoping you could talk about the role that tax plays in the survival and growth of small businesses and women-owned businesses in particular.

Caroline Bruckner: I think there is a lot to unpack with understanding the role that tax can play. I think a little additional level setting is necessary. Keep in mind that 99 percent of women-owned firms are small businesses and 90 percent of them are non-employer firms. About 88 percent of them have revenues of less than a $100,000 and less than 2 percent have receipts over $1 million.

Women-owned firms are small businesses, non-employer firms, that are concentrated in services. Women also have well-documented challenges accessing capital and are less likely to have as high of credit scores or as extensive credit histories as their male counterparts.

They’re not as likely to apply for new loans for fear of denial. Those fears are somewhat warranted in the data that we have on the Small Business Administration 7A loan program from 2019. The SBA approved more than $28 billion in loans to small businesses, but only 23 percent went to women-owned firms. Keep in mind that these small women-owned firms comprise about 40 percent of all U.S. businesses as of December 2019.

Access to capital has been a longstanding challenge for women-owned firms. There’s a lot of debate in the academic space as to whether or not women-owned firms have not grown and been able to scale because they are concentrated in services or whether or not it’s access to capital. But one tool that Congress has in its toolbox to address access to capital challenges, in addition to programs like SBA 7A lending program, are tax expenditures.

I’m intimately familiar with Congress’s reliance and desire to look to tax expenditures, specifically in the context of trying to stimulate the economy in the wake of an economic crisis. I worked for the Small Business Committee on Capitol Hill from 2009 to 2015, when members of Congress were desperately trying to stimulate the economy and looking to various small business tax expenditures to get access to capital into the hands of small businesses. Over and over again, there was a constant echo by members of Congress as to how can we use various tax expenditures to stimulate the economy and help small businesses retain their own camp capital so that they can grow and scale.

That is just one of the underutilized tools that women business owners have not been able to take advantage of to the same degree as their male counterparts because of the way that small business tax expenditures are designed in many instances.

Marie Sapirie: That leads to the next question that I was hoping to discuss: the design of the tax benefits for small business. How should Congress take the challenges faced by women-owned businesses and businesses owned by women of color into consideration when designing those tax provisions?

Caroline Bruckner: We have to start with a preliminary understanding that A) the tax expenditure toolbox is available, and B) that also requires that we actually have comprehensive data on what works and what doesn’t work for small businesses. We don’t necessarily do appropriate or extensive enough oversight on the small business tax expenditures that we do have. We certainly don’t do that with respect to women-owned firms.

My research has focused in prior years on looking at specific small business tax expenditures that Congress has enhanced or funded more generously in response to a need to address access to capital challenges small businesses have. At the same time, I have documented that Treasury and IRS don’t really collect enough data on the uptake rates of women-owned firms with respect to different small business tax expenditures.

If you’re trying to use these tools, and yet don’t even have the data on uptake rates or the types of firms that are most likely to be reliant on different types of expenditures, you’re really operating blindly. You’re just throwing good money at a problem that you’re trying to solve, absent comprehensive data to tell you whether or not your stimulative efforts are going to be effective.

When we look at what is in our tax toolbox that we could use, we think of the most obvious suspects. We think of section 179. We think of section 1202. We think of section 199A. We think of section 1244.

Various small business expenditures that are in our tax toolbox that we could in theory use and particularly target to help all small firms — women-owned firms in particular — recover from the current economic crisis that we’re in. The challenge is that we don’t have any corresponding data to tell us what works and what doesn’t work.

We don’t regularly collect data on women-owned firms that reflects how they’re organized for tax purposes on their earnings or general tax data to inform Congress to make good informed evidence-based policymaking decisions on these issues.

Marie Sapirie: One of the striking findings in the research that you did was that you found only three women business owners who had used section 1202 to raise capital. The uptake of the section 179 depreciation deduction was lower for women-owned businesses than for businesses generally. Just under half of women-owned businesses use it, but 60 to 80 percent of businesses generally do.

If Congress wants to change these provisions to make them more accessible to women-owned businesses, what would you recommend that it do?

Caroline Bruckner: The first thing I would recommend that they do is make developing inclusive data a priority for Treasury and IRS researchers. We don’t have the data to know how we can manipulate these provisions to make them more accessible for women-owned firms because we just simply do not collect that data.

The data that you’re referring to with respect to the uptake rates of sections 1202 and 179 was a survey I did of women-owned firms who were members or affiliated with women business owner associations in Washington, D.C. This is a biased population of the most experienced women business owners, as evidenced by their participation and membership in these various groups representing their interests on Capitol Hill. I did an informal survey because my thinking was, “Well surely these experienced women business owners would be able to tell us who benefits from these various tax provisions that Congress always looks to fund and enhance in response to an economic crisis.”

The data that I got back was jaw dropping. Then, when I tried to compare my data on uptake rates to IRS or Treasury publicly available data, I was left with the reality that we don’t have anything to compare my data to because we don’t collect that data.

Inclusive data gathering on these issues is not something that is prioritized under current research agendas. That’s a mistake because it means that Congress continues to fund expenditures, which, keep in mind, tax expenditures function as entitlements to those who meet established criteria. They are business spending programs that we run through the tax code for specific taxpayers that meet that criteria. Yet, there’s little to no oversight and virtually no understanding other than the limited research I’ve done on women business owners and small business expenditures specifically on whether or not they actually help these firms have access to capital.

Marie Sapirie: Turning to the code sections that you considered in your recent article in the American University Business Law Review, specifically sections 199A and 179. Would you give us an overview of the consequences of the absence of women business owners at congressional hearings?

Caroline Bruckner: Another way I decided to attack this problem and really shine a light on how we don’t collect data with respect to how women business owners may or may not be served by tax expenditures designed to help small businesses access capital was to document and try to analyze the number of women that participated in the tax reform legislative hearing process. To do that, I looked at legislative hearings, specifically tax reform hearings in 2017 and counted. I simply went through the end of the year congressional reports that are published by the tax writing committees. I identified every single tax reform hearing, counted the number of witnesses that participated, and counted how many of them were women.

Unfortunately, the data was not consistent with women business owners as reflected by their numbers as a percentage of all U.S. businesses. For example, 2017 was a year that tax reform really took center stage and there were the fewest number of hearings. There were only 12. Nineteen percent of the total number of witnesses that participated those hearings were women.

Realizing that tax reform was a yearslong process, I looked at tax reform hearings from 2007 to 2017, an entire 10-year period, and noted that 44 percent of the hearings held by the Senate Finance Committee had no women as witnesses. Forty-six percent of the hearings of House Ways and Means Committee had no women as witnesses. These are full committee hearings, not subcommittee hearings.

Those numbers were stunning to me given how broad the jurisdiction of both House Ways and Means Committee and the Senate Finance Committee is. Plus, given that during that same period from 2007 to 2017, women business owners had grown so extraordinarily, by 2017 comprised almost 38 percent of all U.S. businesses. But yet, they were virtually absent at almost half of the tax reform hearings these committees held. Overall, women were only 18 percent of the total 462 witnesses called by these two committees during the tax reform process.

What we find is that women weren’t fully represented in the hearings as witnesses. Yet, when we look at some of the major provisions that were adopted by Congress to target small businesses as a result of tax reform, we look at section 199A and section 179, two provisions that tend to overlook and underserve women business owners. That data has certainly been born out in recent weeks by the release of the IRS SOI data on section 199A, which showed that in 2018 taxpayers spent about $150 billion on section 199A, almost 70 percent of which went to taxpayers with revenues of $200,000 or more.

Now, I already told you that women business owners, almost 90 percent of them, have revenues below a $100,00 or more. So, the bulk of that funding is going to firms that are not women business owners, which are not 40 percent of all U.S. firms. That might very well be what Congress intended. We don’t know that because women weren’t represented at these hearings in terms of their participation as business owners in the overall composition of U.S. businesses.

That raises a lot of questions as to whether or not this is an effective use of taxpayer dollars, particularly when we know that women are starting firms at rates faster than their male counterparts. This has been consistently documented since at least 1972.

Marie Sapirie: Finally, I wanted to discuss the impact of the pandemic on small and women-owned businesses and businesses owned by women of color. It was recently reported that new businesses are being started at the fastest rate in over a decade. But we’ve also just had a large number of small business closures due to the pandemic. What are the tax policy implications of this period of what seems to be rapid contraction and then rapid expansion in the number of small firms, especially for women-owned businesses?

Caroline Bruckner: Women-owned businesses are going to be disproportionately harmed by the economic fallout of the pandemic. There’s no question about that. They are in industries which have been disproportionately impacted by the need for social distancing and quarantining.

Women-owned firms are in hospitality. They’re in retail. They’re in social and education assistance programs. They tend to be in the types of industries which tend to have more personal interaction than other types of firms. They’re going to get hit the hardest.

There’s also related concerns with the disproportionate responsibilities for caregiving that are going to fall on women. That’s going to hamper their ability to shore up their businesses during this period.

What we’re seeing — the tax data is actually going to provide for the first time — is critical new insight as to these firms if they’re able to hang on. That is because for the first time Congress has authorized new paid family and sick leave for sole proprietors and gig workers that could give us a whole new avenue for research, for considering how these firms have been impacted by the pandemic. But getting our hands on that data is a ways away. Those returns haven’t even been filed yet.

More immediately, we’re left with the data that we’re seeing coming out of uptake rates from the voluntary disclosures from the Paycheck Protection Program. Those numbers are nothing short of abysmal.

For example, I was looking at the number of voluntary disclosed demographic data applicants to PPP showed that 159,000 male-owned firms voluntarily disclosed that they were male-owned and applied for PPP. Whereas only 31,000 women business owners voluntarily disclosed that they had applied for PPP. That, of course, raises questions as to the total number because those are only voluntary disclosures.

But when you dig down even deeper, I saw one analysis that showed that just one woman-owned firm by a Black woman received a PPP loan over $5 million as compared to 332 male-owned firms. 35 Black women had received PPP over $1 million as compared to 6,636 other businesses.

We can already see some challenges in the existing data. Of course, there’s a lot that you have to sort through because that’s just a snapshot of limited data that was voluntarily provided. But there is an opportunity with forthcoming tax data from the various tax credits that were authorized in the Coronavirus Aid, Relief, and Economic Security Act [P.L. 116-136] that could provide an avenue for new research and new insight as to whether or not women-owned firms were able to take advantage of some of the tax credits that Congress designated specifically in response to the pandemic.

Marie Sapirie: Well, we will look forward to your continued work on the data as it comes out. I wanted to thank you, Caroline, for joining us on the podcast today.

Caroline Bruckner: Sure. Thank you so much for having me.

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