Startups are Waiting for What the Reconciliation Bill Has in Store for Innovation
by Jennifer Weinhart, Policy Manager, Engine Advocacy & Foundation
Congress is preparing to consider a reconciliation bill — a legislative vehicle that only requires a simple majority to pass — which could impact multiple sectors across the U.S., including possible tax increases for startups.
Earlier this month, the House and Senate passed a budget resolution with an expansive $3.5 trillion blueprint including universal pre-k, tuition-free community college, an extension of the child tax credit, and even the long-awaited pathway to citizenship for thousands of immigrants. This agreement must overcome several more obstacles in Congress, and some policy proposals may fall to the wayside, but startups should watch to see what impact this package could have on the startup ecosystem.
Many of the provisions detailed in the budget — including universal pre-k and citizenship for Dreamers — could help grow the limited pool of talent available to startups. Without affordable childcare, many innovators — particularly women — are unable to undertake the risk of launching a startup or going to work for one because of the expense and time associated with raising a family. Dr. Grin Lord, co-founder of Empathy Rocks told Engine that childcare is, “cost prohibitive, and remote schooling plus lack of consistent child care almost stopped my startup journey.” And while simply extending the child tax credit and implementing universal pre-k will not single handedly solve the childcare crisis in the U.S., these efforts may provide some parents with more opportunity to pursue entrepreneurship.
Additionally, the bill would create a pathway to citizenship for Dreamers — individuals who were brought to the U.S. as children. That would provide certainty for thousands of individuals that contribute to a diverse and robust STEM talent pool and found innovative ventures, especially in the wake of a recent federal court’s ruling that found the Deferred Action for Childhood Arrivals program unlawful.
While some of the bill would help keep the startup ecosystem on a growth trajectory, other possible provisions — including tax objectives outlined in the President’s FY2022 budget proposal — could negatively impact U.S. startup growth. Proposed policies, like raising the corporate tax rate to as high as 28%, would increase the tax liability of startups organized as C corporations. Additionally, raising the individual rate to as high as 39.6%, while directed at wealthy individuals, could increase the liability of startups organized as S corporations or partnerships.
The administration has also proposed increasing the tax rate on long term capital gains to an effective 43.4% rate (accounting for a jump from 20% to 39.6% plus the surtax on investment income) for high income earners. That change would treat long term capital gains — such as selling assets including stocks — like ordinary income, potentially resulting in a number of outcomes, including pushing people to sell their stocks prior to the new rate going into effect and disincentivizing investment, including among angel investors who invest in early-stage startups.
Ultimately, the final reconciliation bill could be a mixed bag for founders, depending on what remains and what changes as it moves through Congress. We hope policymakers on both sides of the aisle continue to keep innovation and the startups in their states and districts at the forefront of their decisions.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.