Small business owners are most concerned about taxes, health insurance costs, and getting banks to lend again
After an historic election, entrepreneurs, along with the rest of the country, await the inauguration of a new President with an ambitious agenda. Given the nearly unprecedented financial situation and two ongoing wars, entrepreneurs are understandably anxious that their concerns will get short shrift. In conversations with SmallBiz, business owners spoke of the need to restore confidence in a badly wounded economy. And they repeatedly raised the same three issues: soaring health-care costs, reduced access to credit, and fear of higher taxes. "There is a lot of anxiety out there among my clients," says Angie Strunk, managing director and founder of Triserve, a 22-person Cinncinati-based payroll and accounting company with $2 million in annual sales. She says her small business clients "are worried about the next Administration raising taxes, they are worried about the economy, and about these bailouts, which are scary." Here's what business owners can realistically expect from the new President, and when it might happen.
Andy Vabulas is chief executive of I.B.I.S. in Norcross, Ga., a $15 million, 58-person company that helps businesses install and use Microsoft applications. He says job one for the Obama Administration must be restoring confidence in the economy. Vabulas says business from his small and midsize clients is down 25% this year—and that the first two weeks of November saw an even more dramatic pullback. "They are not spending money right now," he says.
Restoring confidence in the economy is a tall order, but two important elements will undoubtedly be job and economic growth. President-elect Barack Obama and the new Congress are likely to view an economic stimulus package as a critical tool for addressing both.
The betting is that the stimulus package will pass, and is likely to hit $300 billion, whether or not a piece of it is passed before President George W. Bush leaves office. Expect to see aid to states and cities facing budget shortfalls, extended unemployment benefits and food stamps, and big infrastructure spending. According to Gus Faucher, director of macroeconomics at Moody's Economy.com, every dollar spent on infrastructure projects or extended unemployment benefits will add $1.59 and $1.64, respectively, to gross domestic product. And Ross Eisenbrey, a vice-president at the Economic Policy Institute, points out that small businesses, especially construction-related companies, would be helped greatly by a boost in infrastructure spending.
But vanquishing the pessimism that currently pervades the markets and economic decision-making will also require some symbolic moves. Faucher says people want to see that "the President understands what is going on in the economy and is acting not reactively, but proactively." Thus, the right economic team is critical. National Federation of Independent Business Executive Vice-President Dan Danner is encouraged that so far, the President-elect seems to be surrounding himself with experienced advisers, including likely Treasury Secretary Timothy Geithner. Many are from the Clinton Administration, "seasoned pros who have been there and who understand the importance of business."
While calming the economic waters clearly comes first, entrepreneurs are hoping for relief on a longer-term threat: soaring health-care costs. Wendy S. White, founder and president of $2.5 million online marketing firm Siren Interactive in Oak Park, Ill., expanded coverage for her 20 employees this year. She says she had to do it to stay competitive, but her premiums went up almost 50%. "It's killing me," she says. White wants to see health care addressed quickly, but she isn't expecting a freebie. "I think I'm going to end up paying higher taxes," she says. "But if [Obama] can help with health care, I'm O.K. with that."
Obama's proposed fix for health care is still short on specifics—one of the most important being which companies qualify as "small." Still, this much is clear: Large companies would have to provide coverage for employees or help pay for a new insurance exchange where individuals could buy their own insurance, mostly from private insurers. The government would protect insurers against catastrophic losses in return for lower premiums. Those who still couldn't afford insurance would likely get some sort of subsidy. Small businesses would get a 50% tax credit on their health insurance costs.
Chances are you'll be hearing serious discussions about this sooner than you might expect, although budget troubles could result in a less dramatic overhaul or a slower phase-in. The President-elect has announced health-care reform as one of his priorities and his solution is largely a private-sector one, which could be relatively palatable to business. Obama has a strong position with Congress right now, which creates urgency. Already, Senator Max Baucus (D-Mont.), chairman of the Senate Finance Committee, has put out a blueprint for reform that is similar in many ways to Obama's. All in all, John Arensmeyer, founder and chief executive of the trade group Small Business Majority, puts the odds of comprehensive health insurance reform getting done in 2009 at "better than 50%."
While the government's $700 billion may stabilize some big Wall Street firms, the banks have yet to open the credit coffers. According to the Federal Reserve Board's October Senior Loan Officer Opinion Survey on Bank Lending Practices, 75% of large banks operating in the U.S. had tightened standards on loans to small business, up from 65% in July. "Banks need to open up their doors and start giving small businesses access to capital," says Mark Deion, an independent consultant in Warwick, R.I.
The central question is how to free up credit without encouraging banks to make loans that will become problems down the road. One way to do this would be to revitalize SBA lending, perhaps by reducing or eliminating fees and allowing the agency to make emergency loans to small businesses. Next year's stimulus package is expected to include some combination of these elements.
Using the government bailout, or TARP (Troubled Asset Relief Program), to get banks lending may be more problematic. There's no requirement that banks increase lending after receiving TARP funds, but Congress reserves the right to make that demand retroactively. For now, federal officials are wary of trying to micromanage the lending process, for fear of ending up with more bad loans. The remaining $92 billion in capital infusions expected to come from TARP are likely to go in part to small banks, which are major lenders to small business.
Business owners' greatest concern about the next Administration can be summed up in one word: taxes. "Small businesses are very fearful of being overtaxed and overburdened. What incentive is there to work very hard if you hardly get any gains for it?" asks Ann Blackburn, a leadership consultant in Lafayette, Calif. The first tax break for small businesses will probably come in the stimulus bill, which is expected to include an extension of the $250,000 limit on the first-year depreciation of equipment (otherwise, the deduction will fall to about $125,000 in 2009) and possibly Obama's promised cut in the capital gains tax to zero for investments in small businesses and startups.
Daniel Clifton, head of policy research at Washington's Strategas Research Partners, suspects income taxes will go up even for some making less than $200,000. Obama, he says, "just doesn't get the revenue he needs by raising taxes only on those making over $200,000." But most experts say those tax hikes will have to wait at least until the end of 2009, given the weak economy. "You don't want to raise taxes in the middle of a recession," says Economy.com's Faucher. The end of 2009 will probably also see Obama attempt to hike the rate on other capital gains to about 20% from 15%.
As for hikes in FICA taxes—a worrisome issue during the campaign—proceeds from FICA taxes could only go toward funding Social Security or Medicare. So FICA tax rates are unlikely to change until Congress or the Administration attempts to reform those two programs, says Anne N. Mathias, research director at investment firm Stanford Group. With all the Obama team has on its plate, that may not be for quite some time.
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