Two days hence, the Federal Communications Commission plans to vote on a proposal by its chairman, Ajit Pai, to repeal net neutrality and stop regulating Internet Service Providers (ISPs) like landline phone companies. The proposal is likely a done deal since the FCC has a Republican majority among its five members.

The net neutrality rules, which were adopted in 2015 under the Obama administration, barred paid prioritization by high-speed ISPs, which would have given faster internet lanes to companies that pay for it.  Pai’s  proposal allows paid prioritization and also punts the policing of any ISP blocking or discriminatory behavior back to the Federal Trade Commission to be investigated on a case-by-case basis. (The proposed order would also require ISPs to disclose information about their practices to the FCC and the public.)

ISPs say Pai’s proposal would lead to a better array of services for online customers and more innovation in the industry.  And one of the largest ISPs, Philadelphia-based Comcast, says it “will not block, throttle or discriminate against lawful content.”

However, small businesses fear a rollback of net neutrality rules could fundamentally change how and whether they do business.  Many started online and turned to e-commerce to become profitable or at least break even. Many entrepreneurs worry that without net neutrality provisions, ISPs would wield their increased power to control how businesses reach consumers.

Last month, the American Sustainable Business Council (ASBC), which represents more than 250,000 business owners, executives and investors, said net neutrality fuels business competition and that without it businesses would lose the free-market aspects of the internet.

“The FCC’s action–which will disregard millions of public comments in favor of net neutrality–masquerades as deregulation, but will actually make winners out of the largest [ISPs], and make losers out of every startup and small business,” said David Levine, president, CEO and co-founder of ASBC.

The new rules are almost certain to increase the costs of transacting business on the internet. And some small businesses may not be able to compete. In the new landscape,  he who has the deepest pockets can pay to get an edge online.

If paid prioritization is legalized, why wouldn’t ISPs take advantage of it, the same way they have dominated the cable television industry? “The communications giants want to turn the internet into the cable system,” Levine said, “where they control who has access and can limit that access to the highest bidder.”

A pay-for-play Internet system could also be problematic for startups or small businesses who often don’t become profitable right away but who conduct their business mostly online, such as website designers or data analysis firms.

It is also worth noting that unwinding net neutrality could also affect freelancers, franchisees and temporary workers who earn a living doing one-off jobs in the so-called gig economy.  According to the Pew Research Center, nearly a quarter of American adults made money in 2016 using online platforms to take on a job or a task, selling something online or renting out their properties using a home-sharing site like Airbnb.

 

 

 

 

Now that both the House and Senate have each pass their own versions of a tax bill, it will be the job of a conference committee composed of three members from each chamber to fashion a compromise incorporating elements of both bills.  Both a majority of members in both chambers would then have to approve the compromise.

Both chambers voted to drop the corporate income tax rate from the current 35 percent to 20 percent, and make the change permanent. (The Senate version would delay the change until 2019; the House bill makes the change effective in 2018.)

However, the House and Senate bills take a much different approach on how to treat “pass-through” businesses, which under the current tax code, pay taxes on business income via the owner’s individual income tax rate.  Many small businesses are pass-through businesses.

The Senate offers higher tax rates on pass-through income, in general, than the House bill.  The House bill cuts the top rate down as low as 25 percent; the lowest rate in the Senate bill is 29.6 percent. (The Senate adopted a 23 percent deduction for pass-through income–limited to 50 percent of wage income–for qualifying businesses.) And, unlike the House bill, the Senate bill pass-through provisions sunset in 2025.

For people like lawyers or accountants whose pass-through earnings are more like wages, the House bill has a slightly higher top rate than the Senate bill.  That’s because the House bill presumes that 70 percent of pass-through is wage income (subject to the regular individual income tax rate and 30 percent is business income subject to the lower pass-through rate cap).  This is the House’s so-called 70-30 rule, but does it fully close the loophole?

Politico reported today that some tax lawyers see the plans  to cut taxes on pass-throughs as opening up a new loophole for the very wealthy–hedge fund guys, real-estate tycoons and the like–to recharacterize portions of their income as profit in order to receive a huge tax cut.  For somebody making $500,000, that would save them $30,000.

Wealthy “passive” owners–who don’t work directly for the company they own and more often than not are owners in name only, fronting the cash for their stake in the company but not running day-to-day operations–would still qualify for the special 25 percent pass-through rate on 100 percent of their “passive” net business income under the House bill.

President Trump, for example, in addition to many of his Cabinet members, as well as his son-in-law and senior adviser Jared Kushner, are the owners of passive pass-through businesses. The Trump Organization reportedly has at least 500 of them.

So, I think there will be lots of negotiation in the conference committee over how to treat pass-throughs.  There are clear differences between the House and Senate bills.  For sure, there is not the unanimity on how to tax small businesses as there is on corporations.