WASHINGTON (AP) – Few small businesses would see a tax increase under President Barack Obama’s budget plan. But those companies in line for higher taxes employ the most workers and could be hit hard.

A debate that started with last fall’s campaign on whether those taxes might hurt an important engine of economic growth continues to rage, partly because arguments on both sides have merit.

Republicans have accuse Obama of trying to raise taxes on small-business owners since he proposed a tax increase on the wealthiest Americans during the campaign. Not true, Obama replies. Only a few of the most successful small-business owners would pay more, he says.

Back and forth they go. Now that Obama has included the tax increases in his spending blueprint, the debate is unlikely to end soon. Both the House and Senate budget outlines that were debated this past week assume Obama’s tax increase will pass.

It is true that relatively few small-business owners would face tax increases. But those businesses – the ones that make the most money – are the most likely to employ 20 or more workers, according to data from the National Federation of Independent Business.

“They are trying to say we’re only raising taxes on the few,” said Rep. Dave Camp of Michigan, the senior Republican on the tax-writing House Ways and Means Committee. “But the taxes on those few have huge ramifications on everyone else.”

At the heart of the debate is Obama’s plan to raise the top two income tax brackets by allowing tax cuts enacted under former President George W. Bush to expire in 2011.

The top income tax rate – which for a couple filing jointly kicks in on income above $373,000 a year – would increase from 35 percent to 39.6 percent, the rate in place when Bill Clinton was president.

The second highest rate – on marginal income between $209,000 and $373,000 – would increase from 33 percent to 36 percent.

The Small Business Administration defines small businesses for many industries as those having 500 or fewer employees. But millions of business owners, including many one-person operations, report business income on their individual tax returns. Obama says his plan would limit tax increases to individuals making more then $200,000 a year and couples making more than $250,000.

Those taxpayers would face new limits on itemized deductions, including those for home mortgage interest and charitable donations.

Obama’s proposal calls for eliminating capital gains taxes on certain small business stock held for at least five years. He would, however, increase the top capital gains rate paid on other securities from 15 percent to 20 percent.

Eileen Kessler, president of OmniStudio, a small communications and marketing firm in Washington, said she would gladly pay a little more in taxes if the government would use the money to help reduce the cost of providing health benefits to her 22 workers.

Kessler said the tax increase could have affected her when the economy was strong, “but not right now.”

Kessler was at the White House two weeks ago with a group of small-business owners and community bankers for an event where Obama announced several measures designed to free up credit for small businesses.

Keith Ashmus, who joined with 12 other lawyers to start a law firm in Cleveland in 2000, also attended. He supports Obama’s efforts to free up credit, but worries that higher taxes could stifle job creation.

“Are you going to discourage the people who would create jobs, or who are trying to create jobs?” asked Ashmus, whose firm, Frantz Ward, has grown to about 65 lawyers.

About 97 percent of small-business owners would see their taxes go down or stay the same under Obama’s plan, according to Treasury Secretary Timothy Geithner. The plan counts on Congress extending Bush’s middle-income taxes beyond 2010, as well as a new tax credit enacted in February that pays workers up to $400 a year and couples up to $800.

His numbers are consistent with a widely cited analysis by the Tax Policy Center, a collaboration of two liberal-leaning think tanks, the Brookings Institution and the Urban Institute. According to the analysis, only 1.9 percent of taxpayers who report business income on their individual returns fall into the top two income tax brackets.

Republicans cite a different analysis, by the Treasury Department in 2007, before the new administration took over. This analysis showed that 8 percent of taxpayers with small-business income fell into the top two tax brackets in 2006 – about 2.1 million taxpayers. About 1.1 million of those taxpayers received more than half their income from a small business.

Benjamin Harris, a senior research associate at Brookings, said the two studies use slightly different definitions for business income and different methods to estimate the percentage of taxpayers in each bracket.

Regardless of which analyses is used, Republicans say businesses that fall into the top two tax brackets tend to employ the most workers.

About half of small-business owners with 20 to 249 employees made more than $200,000 in 2007, according to an annual survey by the National Federation of Independent Businesses. About 40 percent made more than $250,000.

That is a select group of companies – only 3 percent of all U.S. businesses employ 20 or more workers, according to the Census Bureau. But Republicans argue those companies have a big impact on the economy.

“Hitting these businesses with a massive tax increase would result in fewer jobs,” said Sen. Charles Grassley of Iowa, the senior Republican on the Senate Finance Committee.

On the Net:

White House budget background: http://www.whitehouse.gov/omb/

Small Business Administration: http://www.sba.gov/

Tax Policy Center: http://www.taxpolicycenter.org/

National Federation of Independent Businesses: http://www.nfib.com/page/home

AP-ES-03-27-09 1213EDT

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