The past year was a rollercoaster ride when it came to the economy and government policies. While entrepreneurs can claim some policy victories in 2011, Washington came up woefully short on the types of policies needed to boost business confidence and strong economic growth. Unfortunately, it looks like similar conditions will prevail in 2012.
Here are the policy developments -- the good, the bad, the ugly and the unfinished -- that in big ways and small will continue to impact business conditions and confidence in 2012. SBE Council's "Top Policy Highlights and Lowlights for Small Business in 2011" include:
Burdensome 1099 Reporting Requirement in ObamaCare Repealed. One of the many misguided provisions included within the "Patient Protection and Affordable Care Act" was a mandate requiring small business owners to file a 1099-MISC to the Internal Revenue Service (IRS) for all payments made to vendors totaling $600 or more in a tax year. This also meant that they would have to collect W-9 information from every vendor they purchase more than $600 worth of goods or services from each year. This unreasonable reporting mandate would have vastly increased costs and the paperwork burden on small business owners. On April 14, President Obama signed H.R. 4, the "Small Business Paperwork Elimination Act," which repealed the 1099 mandate.
3% Withholding Tax Mandate Repealed. Since its inclusion as a "pay for" in the "Tax Increase Prevention and Reconciliation Act of 2005," SBE Council and other business groups warned about the costly and unintended consequences of the 3% withholding mandate on government contractors. Set to kick in January 1, 2013, SBE Council argued that new government and private sector costs associated with the mandate would far exceed anticipated revenue gains. Small firms would become less able to compete for government contracts due to new cash flow constraints and costs spawned by the mandate, and taxpayer costs would also increase. Repeal legislation (H.R. 674) passed the House and Senate unanimously, and the President signed the bill into law on November 21.
U.S. Supreme Court to Consider Constitutionality of Individual Mandate in ObamaCare. On November 14, the U.S. Supreme Court granted certiorari to hear arguments regarding the constitutionality of several aspects of the "Patient Protection and Affordable Care Act" (PPACA). America's largest bloc of small business owners - the 14.5 million self-employed - has an immense stake in the outcome of the Court's decision regarding the constitutionality of the individual mandate in PPACA. The mandate requires that individuals purchase a government-approved health insurance plan, or pay a tax if they refuse to buy coverage or cannot afford it. The court will hear five hours of arguments on several partitions: whether Congress exceeded its authority under Article I of the Constitution in passing the individual mandate; whether the suits challenging the new law should be barred by the Anti-Injunction Act; whether the individual mandate can be severed from the rest of the law; and the federalism issue as it pertains to Medicaid expansion in PPACA. Already, the number of self-employed Americans is dramatically decreasing due to policy uncertainties on tax, health care and other issues, as well as a general lack of confidence in the future of the U.S. economy. SBE Council agrees that individuals should not be forced by the federal government to buy a product or service. Oral arguments are expected to begin this March.
Small Business Health Care Tax Credit is a Flop. ObamaCare supporters touted the inclusion of the small business health care tax credit in PPACA as an argument for advancing the legislation. They continued to hype the tax credit well after passage even though SBE Council communicated it would not work. The tax credit is not robust enough, is too restrictive in its eligibility criteria, and it is temporary. It has little practical utility for most small businesses, and this was confirmed by the June 2011 results of an "Economy and Entrepreneurs Outlook Survey" released by SBE Council. Overall, only 7 percent of small businesses said they used the new small business health care tax credit. A November 15 House Ways and Means hearing uncovered similar findings. A U.S. Treasury Department Inspector General report found that of mid-October 2011, only 309,000 small business taxpayers had claimed the credit. The IRS had earlier communicated that 4.4 million taxpayers would be eligible. The good news is that the total payout for the credit was $416 million, while the CBO estimated that $2 billion would be paid out in 2010 alone - so PPACA is under budget! The bad news is that many small business owners have no effective tool to help them deal with ever-increasing health coverage costs, and many owners and their employees remain uninsured due to the high costs of insurance. With the passage of PPACA nothing much has changed for small business, except for higher costs and more uncertainty, which means "affordable health coverage" and ObamaCare is set to be a major campaign issue in 2012.
States Cut Taxes More than They Increased Them. According to the National Council of State Legislatures (NCSL), for the first time in ten years states experienced a net state tax reduction. While the NCSL reports that we should not draw "hasty conclusions" from this data being the aggregate cut came from a handful of larger states cutting and raising taxes, SBE Council believes the overall trend is generally a good one. Most state officials have come to understand that a low tax environment is critical to attracting businesses and investment, which is a great trend for entrepreneurs.
Tax Uncertainty Embedded for 2012. Small business owners and entrepreneurs hoping for clarity on federal taxes in 2012 will be disappointed. The year ended with a minor skirmish over extending the payroll tax holiday and unemployment benefits for two months. Businesses preferred some certainty with a one-year extension of the payroll tax cut. But now Congress will be back fighting over how to pay for (read: proposed tax increases on small business owners and investors) a full-year extension as soon as they return in January. Moreover, Congress left town without extending the R&D tax credit, the AMT patch, the state and local sales tax deduction and a host of other provisions expiring on December 31, 2011. Meanwhile, Section 179 expensing drops to $125,000 from $500,000 in 2012, and falls to $25,000 in 2013. Adding more uncertainty in the mix is the December 31, 2012 expiration of lower individual tax rates, capital gains and dividend taxes and the whole host of tax cuts and credits that were included in the 2001,2003 and 2006 tax cut packages. Looks like 2012 will be a rewrite of 2011 - that is, along with the weak economy, tax policy uncertainties will continue to drag small business confidence down.
Access to Capital Bills Reforming Outdated SEC Rules Sweep Through the U.S. House. Access to capital remains a key challenge for entrepreneurs. Costly regulations from Dodd-Frank and economic uncertainty are making it increasingly difficult to secure capital or raise funds to support business growth and investment. By a vote of 407-17 on November 3, legislation passed the House (H.R. 2930, the "Entrepreneurs Access to Capital Act") that would modernize outdated Securities and Exchange Commission (SEC) rules to allow for crowd fund investing. President Obama supported the legislation. This approach is being used with great success in other parts of the world, and the gift-based platforms in the U.S. (Kick Starter, Kiva and many other sites) prove their workability. Crowdfund investing would provide entrepreneurs access to sources of capital they currently cannot tap into without triggering complex SEC rules. The U.S. Senate is considering two bills (S.1791 and S. 1970), but with distinct approaches to allow for crowdfund investing. The former is more workable than the latter. Also on November 3, H.R. 2940, the "Access to Capital for Job Creators Act" passed by a vote of 263-112, which would also widen the universe of potential investors for small businesses allowed under the Securities Act of 1933 without subjecting these businesses to the onerous costs of registration with the SEC. This bill has been introduced in the Senate (S.1831). Strong bipartisan support for these bills in 2011 sets the stage for action in 2012.
New Trade Agreements Penned with Panama, Columbia and South Korea. Small and mid-size U.S. businesses overwhelmingly dominate the trade landscape, but the U.S. has dramatically slowed its work in cutting new trade agreements. Our major international competitors have outpaced the U.S. with regard to signing new trade accords, putting U.S. businesses at a competitive disadvantage across the globe. On October 21, President Obama finally signed trade agreements with Panama, Columbia and South Korea, which have been in the works for many years. The accords will eliminate tariffs on most U.S. exports to these countries and open service markets to American businesses. It is expected that U.S. exports will increase by $11 billion as a result of the South Korea pact alone. These agreements also include strong IP protections for American businesses. Increasingly, U.S. entrepreneurs are looking overseas for growth opportunities. A survey released by the Financial Services Forum and SBE Council in November 2011 found that 21 percent of small businesses will pursue overseas expansion as part of their growth strategy for the next five years. The signing of these three trade accords should fuel momentum for finalizing other important agreements that will open new markets for U.S. good and services, benefitting small businesses and their workers alike.
America Invents Act Signed into Law: Long Overdue Patent Reform Helps U.S. Entrepreneurs. President Obama signed the Leahy-Smith "America Invents Act" (H.R. 1249) into law on September 16. This important legislation updates the U.S. patent system, bringing certainty, simplicity and savings to U.S. entrepreneurs. Strong IP protection is critical for small business looking to effectively expand and attract investment. The new law effectively enables such protection by modernizing key aspects of the patent process, aligning the U.S. system to the rest of the world. The first-inventor-to-file approach will reduce legal costs and improve transparency. The fast-track examination cuts costs in half for small businesses, and other fee reductions are available for qualifying small firms. Implementation of the law's provisions will bring the U.S. patent system into the 21st century, help spur American innovation and improve U.S. competitiveness. As a side note, the U.S. Patent and Trademark Office awarded patent number 8 million to a California-based small business on September 8. Second Sight Medical Products, a firm with 85 employees, received the patent for a "visual prosthesis apparatus."
The Debt Ceiling and Failure of the "Super Committee." For the first time in history, Congress tied conditions for allowing an increase in the debt ceiling. SBE Council agreed that it was a good thing to tie spending reductions to a rise in the debt ceiling, and Congress assigned a "super committee" to address the challenge. But the committee could not reach an agreement, which means automatic spending cuts will occur with the 2013 budget. Small business owners have a major stake in getting the nation's fiscal mess in order. The future of entrepreneurship, robust economic growth, tax rates and access to affordable capital all rest on getting spending and debt under control. Out-of-control spending will continue to consume more and more private sector resources suffocating growth, pushing capital abroad and killing U.S. competitiveness. According to the Financial Services Forum and SBE Council survey noted above, small business owners said the number one thing Washington could do to help the economy was to develop a credible plan to get the nation's fiscal situation under control. The failure of the super committee, the lack of leadership from the White House in supporting even certain elements of the Bowles-Simpson plan, and the fact that the Senate has not passed a budget in over 900 days will continue to drive uncertainty casting a long shadow over the economy. Such conditions will continue to hurt small business in 2012 and in the mid-term.
Decision Time for President Obama on Keystone XL. The rise in fuel prices has had a significant impact on small businesses. In a June 2011 "Entrepreneurs and Economy Survey" released by SBE Council 74 percent of small business owners reported that higher prices were having an impact on their firms -- 41 percent raised their prices because of high prices, 26 percent had to cut employees or their hours worked, and 47 percent said higher prices were affecting their plans to hire. A staggering 38 percent of small business owners said if gas prices remain high or increase further their business will not survive. Fuel prices are on the rise again, and with instability mounting in the Mideast along with Iran threatening to close off the Strait of Hormuz, the U.S. needs to get serious about domestic production. The payroll tax extension bill agreed to by Congress includes a provision allowing the Keystone XL project to move forward (except in Nebraska) unless the president determines within 60 days of enactment that the project is not in the national interest. Even without threatening rhetoric from Iran - or if fuel prices were lower - this project should have been approved. More than three years worth of risk assessment has already been conducted, and numerous government agencies have affirmed that the pipeline poses no significant environmental risk. The $13 billion project would create more than 13,000 construction jobs, 7,000 manufacturing jobs, and more importantly a stable and secure supply of oil for the U.S. That means more affordable energy for small businesses.
What happened to Broadband for Everyone? Unfortunately, many small business owners and individuals are still without broadband access. That means their economic opportunities are limited. The Federal Communications Commission (FCC) issued a National Broadband Plan in March of 2010, and as recently as April 2011 said that increasing broadband deployment "is one of the great infrastructure challenges of our time." Unfortunately, the federal government and FCC continue to stymie private sector initiatives that would accelerate broadband deployment and keep investment flowing into wireless technologies. For one, the FCC's unprecedented bias and backward view of competition in reviewing the AT&T/T-Mobile merger (and the DoJ's decision to sue to stop the deal) killed an important development that would have brought high speed wireless access to many areas of the country. Despite overwhelming support from unions, entrepreneurs, politicians from all levels of government and the technology sector, the FCC listened to hard leftists, proving it does not grasp how markets and business work. On September 23, the FCC also moved forward with "net neutrality" regulations, even though it lacks the authority to regulate broadband markets. This regulatory overreach and the uncertainty that comes with it serve as real disincentives for investing in broadband innovations and service. That is bad news for small businesses that have benefited so much from the expansion of and innovations in broadband networks as consumers, content providers and telecommunications players.
Karen Kerrigan, President & CEO