Small businesses played a prominent role in President Barack Obama’s State of the Union speech, but some business groups doubt his proposals would lead many small firms to hire more workers. Obama said jobs “must be our No. 1 focus in 2010.”
“We should start where most new jobs do -- in small businesses, companies that begin when an entrepreneur takes a chance on a dream, or a worker decides it’s time to become her own boss,” the president said.
To help small businesses grow, the president proposed:
• Using $30 billion in Troubled Asset Relief Program funds to provide cheap capital to community banks for use in making loans to small businesses;
• Eliminating capital gains taxes on investments in small businesses, an idea Obama proposed during the presidential campaign;
• Continuing tax incentives that allow small businesses to immediately write off much of the cost of investments in new equipment instead of having to depreciate it over time; and
• Creating a tax credit for small businesses that hire new workers or raise the wages of existing workers.
John Arensmeyer, CEO of Small Business Majority, said the proposals address a broad range of needs facing small firms.
“Collectively they start to attack different aspects of the problem,” he said.
Leaders of other small business organizations, however, question how effective the proposals would be.
Obama’s plan to use TARP funds to spur community banks to make loans to small businesses was first unveiled in October, for example. The Treasury Department has not been able to get the program off the ground, however, because community banks are leery of the strings and stigma attached to taking TARP funds.
A recent survey by the National Small Business Association found that one-third of small businesses can’t get adequate financing. To be effective, the president’s lending initiative “must start now,” said NSBA President Todd McCracken.
Other small business groups would rather see TARP ended than have the funds applied to another program, even one designed to help small businesses.
“Given the mood of the country on spending and the bailout money, I don’t see this program going anywhere,” said Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council.
The president also supports legislation that would extend provisions in the economic stimulus bill that increased the government guarantee on the Small Business Administration’s flagship 7(a) loans and reduced or eliminated fees on 7(a) loans and 504 loans, which primarily are used for real estate. Most small business groups support this proposal, even though Bill Rys, tax counsel for the National Federation of Independent Business, points out that SBA loans represent only a small percentage of lending to small businesses.
Small businesses also support Obama’s proposal to extend incentives for business investment, such as bonus depreciation and higher Section 179 expensing limits. These incentives make buying new equipment easier because businesses can write off more of the cost now instead of later.
“They incentivize businesses to make their businesses more profitable,” said Giovanni Coratolo, vice president of small business policy at the U.S. Chamber of Commerce.
These investment breaks also “have a leveraging effect,” Coratolo said, because they also create customers for the businesses that make equipment.
“Businesses planning for an upturn in the economy would be encouraged to start making the investments in equipment that will be part of getting going again and hiring workers back,” said Clint Stretch, managing principal for tax policy at Deloitte Tax.
Rys said extending these breaks is a good idea, but it’s “not a game changer” because the weak economy has kept many small businesses from taking advantage of them. Capital expenditures by small businesses are at the lowest level they’ve been in the 35-year history of NFIB’s monthly survey of business owners, Rys said.
“Really, until business conditions improve, I think a lot of these businesses are going to hold off making new investments,” he said.
Obama’s proposal to give small businesses a tax credit for hiring new workers also may not have much an effect, Rys said.
“You’ve got to have work for the worker to do,” he said.
“It’s nice to be able to get a tax break” if you are a small business that is planning to hire workers anyway, Coratolo said, but a tax credit alone wouldn’t be enough to persuade a business owner to hire more workers. The tax credit likely would be temporary, whereas most employers see workers as a long-term investment, he said.
NSBA’s survey found that few small businesses would take advantage of such a credit.
“Most small businesses are not going to add workers when they don’t have the work to justify hiring, or the cash on hand to pay a new employee,” Kerrigan said.
Washington Business Journal - by Kent Hoover Washington Bureau Chief