The Deficit, Small Businesses and Bay Country Rentals

Let’s start with TAXES & THE DEFICIT

There’s a lot of hype over reducing the deficit right now as we’ve reach our nations debt limit and ratings agencies have already warned that US Bonds are likely to lose value due the stalemate we currently have in Congress on the matter of deficit reduction. A lot of pundits and politicians speaking in broad sweeping terms are telling us about what should be done about it. But the federal deficit, taxes, and jobs are so deeply connected that anyone seeking to dismantle the current system is playing with more than just numbers, they are playing with people’s livelihoods.

“Last December's report from President Barack Obama’s fiscal commission called for a drastic cut in the number of tax breaks: "These tax earmarks — amounting to $1.1 trillion a year of spending in the tax code — not only increase the deficit, but cause tax rates to be too high."

And both Obama and House Budget Committee chairman Paul Ryan have voiced support for tax simplification. Obama specifically cites it as one path to deficit reduction: “It’s important that we look at our tax code and find a way to work together to not only simplify and make the tax system fairer, but also that we use it as a tool to help us achieve our deficit targets.”

Excerpt from an MSNBC article by Tom Curry titled, “Scrapping tax breaks, but probably not yours”

These are good ideas but, I suggest that we (the public) carefully consider the implications of supporting broad, vague promises by any leaders on either side of the debate. Supporting ideology alone will not get us out of this mess and very well could lead us to bigger problems in the future.

In the last several years we have seen tax policies that have both hurt and helped the relationship between small businesses and their employees.

SMALL BUSINESS EMPLOYERS

According to the U.S. Small Business Administration, small firms represent 99.7% of all employer firms and employ just over half of all private sector employees. They pay 44% of total U.S. private payroll and have generated 64% of net new jobs over the past 15 years. They also create more than half of the nonfarm private GDP.

While large corporations were able to retain huge profits and CEO packages, the recession hurt small businesses and their employees more than the rest.

Remember the unemployment insurance provisions last year? They extended jobless benefits to the unemployed whose unemployment insurance was running out. The federally mandated bill itself (the one that extended jobless benefits through the end of November 2010) says nothing about increasing the cost to employers who must pay into the state unemployment insurance fund, but the experience of some local employers suggests otherwise.

JOBS & BAY COUNTRY RENTALS

Bay Country Rentals is a Reisterstown small business employer who has had their fair share of trouble dealing with the ever changing landscape of fiscal reform. In 2008, when the economies sharp downward turn really started to make itself apparent, Bay Country Rentals had to lay off 4 employees (of the 4, they have since been able to rehire 2 of them). That doesn’t seem like a lot, but those are 4 people whose lives were affected, and 1 small business that takes that very seriously. And according to the brothers that run it, their unemployment insurance went up “500%” as a direct result of those lay-offs. That is a lot.

Similar complaints from small businesses around the country that had no choice but to lay off workers, and pay the associated costs, were heard on the Hill.

In sweeps the 2010 HIRE Act, signed into law by Obama on March 18, 2010. The IRS specifies:

…two new tax benefits [were] available to employers who hire certain previously unemployed workers (“qualified employees”).

The first, referred to as the payroll tax exemption, provides employers with an exemption from the employer’s 6.2 percent share of social security tax on wages paid to qualifying employees, effective for wages paid from March 19, 2010 through December 31, 2010.

In addition, for each qualified employee retained for at least 52 consecutive weeks, businesses will also be eligible for a general business tax credit… of 6.2 percent of wages paid to the qualified employee over the 52 week period, up to a maximum credit of $1,000.

While the unemployment insurance provisions didn’t actually directly affect small businesses, they didn’t do anything to help either. The HIRE Act however, provided direct incentives to employers to hire. Did it work?

 According to the US Treasury Department:

“From February to July of 2010, an estimated 6.9 million workers who had been
unemployed for eight weeks or longer were hired by employers who are eligible for the HIRE Act payroll tax exemption. This estimate includes 1.3 million workers who were hired between June and July 2010.

Newly hired workers whose employers are eligible for the HIRE Act payroll tax
exemption constitute 11.8 percent of all workers who were unemployed for eight weeks or longer since the law took effect in February 2010. In other words, about one in eight workers who have been unemployed for eight weeks or longer are hired in the subsequent month.”

This is pretty much how business is done on the Hill, and an indicator on how it works well, when it does. With so many business incentives and tax breaks that are meant to help our economy, a complete overhaul of the tax code could have drastic affects on how business is done on Main Street. Let’s be careful with it and careful about what we say about it.

Note of disclosure: Most opposition to the HIRE Act has been regarding the effect it has had on disclosure requirements for Hedge Fund managers dealing with foreign investments and people with offshore accounts. Some opposition has argued that it did not go far enough to encourage employment.