By KENT HOOVER
khoover@bizjournals.com

Senate Democrats have made a million dollars the new dividing line for whom should face higher taxes.

They proposed paying for President Barack Obama's $447 billion jobs plan by imposing a 5.6 percent surtax on incomes above $1 million. This is a better alternative than the president's proposal to limit itemized deductions for households with $250,000 or more in income, Senate Democrats said, because many families with $250,000 to $300,000 in income are not wealthy.

"In large parts of the country, that kind of income does not get you a big home or lots of vacations or anything else that's associated with wealth in America," said Sen. Charles Schumer, D-N.Y.

Plus, he said, many small-business owners would be affected if taxes were raised on households making more than $250,000 ($200,000 for individuals).

"We believe a million dollars is the right line," Schumer said.

It definitely has populist appeal: A Washington Post-ABC News Poll this month found that 75 percent of Americans support raising taxes on Americans with incomes over $1 million.

This so-called millionaire surtax probably won't be enacted as part of Obama's jobs bill, which failed to get enough votes to clear a procedural hurdle in the Senate Oct. 11. But it could influence the debate on whether taxes should be raised to reduce future federal deficits, and who should bear the burden of these tax hikes.

Under current law, the lower individual income tax rates enacted during President George W. Bush's administration will expire at the end of 2012. Obama wants to allow the tax rates on wealthier Americans -  which he defined as individuals making more than $200,000 - to revert to their previously higher rates in 2013.

Few small firms would face surtax

Most Republicans and many small-business groups oppose any increase in income taxes, regardless of the threshold used. But about 2 million fewer filers with small-business income would be hit by a millionaire surtax than would be hit by a tax hike for individuals making more than $200,000.

That's according to a Treasury Department analysis conducted earlier this year. This analysis found that 273,000 income tax returns were filed for 2007 by individuals who reported $1 million or more in adjusted gross income and had income from any business that met its definition of a small business. That number jumped to 2.28 million for individuals with AGI of more than $200,000.

The Treasury Department also tried to refine its definition of a small-business owner by looking only at individuals who made at least 25 percent of their income from small businesses. By that definition, only 51,000 small-business owners would be hit by a millionaire's surtax, compared with 707,000 who would face higher taxes if rates are increased for people making more than $200,000.

Top 1 percent pay 38 percent of all income taxes

Despite the fact that a millionaire surtax would hit relatively few small businesses, most business groups are opposed to it. The Tax Relief Coalition, which represents hundreds of business associations, including the U.S. Chamber of Commerce and the National Federation of Independent Business, sent a letter to senators Oct. 7 opposing the millionaire surtax. They contend higher-income Americans already are paying their fair share of taxes - the top 1 percent of income tax filers pay 38 percent of all federal income taxes, they noted.

Plus, they noted the Treasury Department also found that 331,000 of the 392,000 tax returns with more than $1 million in adjusted gross income in 2007 reported at least some business income.

"Increasing the tax burden on these business owners will reduce the amount of capital that they would otherwise have available to invest in their company or hire additional workers," the letter contends.

Plus, they fear the millionaire surtax wouldn't replace higher tax rates for people with incomes of more than $200,000 - it would just add to their tax burden. The surtax would add 5.6 percent to whatever top tax rate is in effect in 2013 - and that rate currently is scheduled to go up to 39.6 percent. Wealthy individuals also face additional taxes from health-care reform in 2013: a 3.8 percent Medicare surtax on investment income over $200,000 and an 0.9 percent payroll tax on wage income of more than $200,000.

Together, these tax hikes would bring the effective tax rate on high earners to nearly 50 percent, "a punitive rate we have not seen in decades," the Tax Relief Coalition argues.