Over the past week, starting with the State of the Union Address last Wednesday, President Obama has been speaking a lot about doing more to help the nation’s small business owners. The question is whether or not the President is proposing real relief or more of the same lip service that small business owners have been getting over the past year.
Small Business Tax Credit. One of the big highlights of the Presidents speech was where he proposed a new small business tax credit that would go to small businesses who hire new workers or raise wages. Generally speaking, small business owners would get a portion of the new worker’s salary or existing worker’s raise back as a tax credit – effectively allowing the government to subsidize a portion of this person’s salary. As general policy goes, I hate the idea of the government subsidizing anything. However, if they are going to help someone with subsidies to help create jobs, small businesses are where it should be. After all, its better than spending $533,000 to create each temporary job, as we did with the Stimulus Bill.
Elimination of All Capital Gains Taxes on Small Business Investment. Wow! This sounds great! Except for one thing. When someone invests in a small business, they typically invest for the long-term. While this policy would mean well, will it really create a flood of investment into the small business market? After all, these investments could indeed be subject to capital gains taxes again when they are sold 5, 10, or 20 years down the road. Don’t get me wrong – I like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.
Therein is the underlying problem that I have seen with using Capital Gains rates to encourage investment all along. Altering the tax rate in the short-term does little to spur on long-term investment. The problem is that the tax rate is determine based on when an investment is sold – not when the investment is made. If I invest $100,000 into a new business venture today, what will the tax policy be 15 years from now when I sale the small business? If the President and Congress want to spur investment, they need to allow taxpayers to “lock-in” a zero-percent capital gains rate at the time they make the investment – not years later when it is sold. Investors like certainty. Little certainty equals little investment. Greater certainty equals greater investment.
I do like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place. I applaud the President for this proposal. I just happen to like it for slightly different reasons than he does.
Small Business Lending Fund. President Obama is now promoting a $30 billion fund that will be specifically designed for the nearly 8,000 small community banks (those with assets of $10 billion or less) to loan money to small businesses in hopes that it will spur job growth. Interestingly, many in the banking industry say that the extra funds will not help lending. They say that banks with plenty of money to lend are having trouble finding credit worthy borrowers and that small business owners are holding off on expansion and improvements due to the sluggish economy.
If a business participates in the loan program, does it subject that business to more regulation and government control? If so, the loan may not be worth it.
Much of the success of the program will revolve around how much control the federal government wants to exercise over the program participants (the banks) and what kind of regulations the government places on the banks. An easy example of this are the underwriting guidelines for these loans.
The federal government will have to change drastically from the ARC Loan program for small businesses if they want it to succeed. (See prior posts, ARC Loans are Ready to Go – If You Can Find A Lender and What Ever Happened to ARC Loans?) The ARC Loan program was a complete failure by any measure. It was amazing to me how many SBA Lenders had never even heard of it. A big reason for its failure was the stringent underwriting guidelines placed on the banks for a very low-profit loan for them. They had no interest in underwriting a loan that was simply not profitable for them – even with little or no risk.
While the above three proposals are a step in the right direction, they ultimately do not solve the underlying issue. Small business owners rarely make decisions based solely on tax results. Regardless of whether there is a credit available, most small business owners are gong to be reluctant to hire or borrow money until they see their business moving in the right direction.
In excerpts of a speech from today that were released by the White House early, President Obama states that “Jobs will be our No. 1 focus in 2010. “ Well, that sounds spectacular, Mr. President. I am not sure why it was such a back burner item in 2009, but at least we can look forward to 2010. Or, are you just paying us lip service again? Only time will tell. In the meantime, kudos to the President for at least proposing some small business relief.