The Obama administration has unveiled its annual budget proposal, setting the stage for yet another battle over the most effective way to rein in federal spending without derailing the economic recovery.
The White House’s plan arrives several weeks after House Republicans and Senate Democrats approved their own competing budgets, which, politically speaking, are worlds apart. The president’s entry seeks to bring the two sides toward the middle.
Similar to the spending guides passed in Congress, Obama’s budget includes several features that would favor small businesses, but it also includes some that haven’t proven particularly popular on Main Street.
Here’s a look at the primary components of the budget and what it would mean for small businesses.
On entitlements: In the days leading up to the budget release, most of the discussion centered on the president’s willingness to work with some of his political opponents to trim spending on entitlement programs, particularly Social Security — and he’s taking plenty of heat for it from his own party.
Obama’s plan would basically change the way entitlement benefits are adjusted for inflation. Using the new formula, those benefits would increase at a slightly slower rate than they do under the current system.
Coupled with plans to lower payments to providers and raise premiums for some patients under Medicare, the budget would trim about $1.2 billion in spending over the next decade from a range of federal programs.
In several polls, small business owners have condemned plans to cut back on entitlements, even when pitched as an alternative to higher tax rates. Some elderly employers would be hit directly by the cuts, but the broader concern, they say, is that undercutting programs like Medicare, Medicaid and Social Security could shatter any semblance of consumer confidence, which could drive sales lower.
On taxes: Republicans may not be in a very compromising mood on this one, given their concession to raise rates on the wealthy at the start of the year — but that did not stop the president from pitching new tax revenues in his latest proposal.
His budget limits certain tax deductions for high-income earners, sets a minimum tax rate of 30 percent for households earning annually more than $1 million, and calls for closing additional loopholes exploited by the wealthiest Americans. Interestingly, House Republicans called for eliminating some of the same tax breaks in their budget; however, their plan is to use the savings to offset lower rates across the board, whereas Democrats want a large portion of the additional revenue to fund government operations.
Several small business lobbying groups have contested attempts to raise the tax burden on the wealthy, arguing that a large number of small employers pay pass-through taxes on their business income, placing them in tax brackets higher than those appropriate for their actual level of personal income. Increase their rates, they warn, and they will have less money to invest back into their firms and create new jobs.
Others have argued that only a tiny sliver of the small business population would be affected by raising the top rates or eliminating breaks for the wealthy, and of those that do feel the impact, many are hedge funds and investment groups that don’t need the breaks lawmakers are purportedly directing toward Main Street.
Meanwhile, some experts said the president’s budget does not go far enough to simplify the tax system or help level the playing field for some of the nation’s smallest firms.
“The sad reality is our tax code is unfair for the millions of small businesses that want to grow and expand their small businesses,” Katie Vlietstra, director of government relations for the National Association for the Self-Employed, said in a statement. “While job creation and closing loopholes are important, just as essential is creating the environment for new and existing small businesses to thrive without a paper trail of unnecessary and complex requirements.”
On federal spending: In total, Obama’s budget calls for $1.8 trillion in new savings and tax revenue over the next 10 years, and most of that will go toward replacing the $1.2 trillion in automatic spending cuts known as “sequestration,” which began in March. That would go a long way toward alleviating some of the concerns of government services firms of all sizes, but particularly small contractors, who are likely to be hit hard by the cuts.
The president’s budget also calls for a $50 billion investment in public works projects, including repairs to highways, bridges and transit systems, which would create a flood of new business opportunities for various sectors, particularly the construction industry.
On the SBA: The U.S. Small Business Administration would receive $810 million for the coming year under the president’s new proposal — $109 million less than the agency’s 2012 operating budget. Citing brighter economic forecasts, the administration expects fewer small business owners to default on government-backed loans under the agency’s 7(a) program; thus the president expects the program to require less money to operate.
The budget would also eliminate fees for SBA loans under $150,000. In a conversation with members of the media on Wednesday, SBA Associate Administrator Jeanne Hulit noted that borrowing demand has started to recover after slipping during the recession, but not for small-dollar loans. The administration is hoping the fee waivers will help fill that lingering gap in the loan market.
Obama’s proposal would reauthorize the widely popular 504 Loan Refinancing program, too, which expired last September, much to the chagrin of the small business community. The temporary program provided attractive terms under which employers could refinance debt for property and other tangible assets, and many proponents have called for the program to be made permanent.
On wages: Obama’s budget reaffirms his push to hike the minimum wage from $7.25 per hour to $9 per hour. While that remains lower than the proposals from some Democrats in Congress, it is still far too high for the likes of many business groups.
Dan Danner, head of the National Federation of Independent Business, called that part of the president’s budget a “major anti-jobs policy” at a time when small business hiring remains stubbornly weak. In a statement, he added, “workers of all ages that are relatively unskilled are adversely impacted by this policy because they can’t break into the job market, and small business owners can’t afford to create new positions for them.”
On innovation: Directing attention (and additional funding) to one of the country’s ailing sectors, the administration wants to spend $1 billion to launch a network of manufacturing innovation institutes across the country. The hubs will operate as public-private partnerships, building off a $45 million pilot program in Youngstown, Ohio.
The proposal continues a theme from the president’s State of the Union, when he said the government must help the country become “a magnet for new jobs and manufacturing.” The technology and start-up sectors have strongly supported the initiative, arguing that the United States must take a more active role in funding and commercializing advanced research.
The White House budget would also increase non-defense research-and-development spending by 9 percent over last year’s levels.
On education: One of the early attention-grabbers in the budget is the president’s plan to offer public pre-kindergarten education. But of more immediate importance to many in the technology community will be the president’s attempt to overhaul the federal education system for college students in science, technology, engineering and mathematics (STEM) fields and expand the number of teachers in those areas.
New, high-growth firms, which have been shown to create the bulk of new jobs in recent decades, have complained that the country’s colleges simply aren’t churning out enough qualified job candidates to meet surging demand for experts in fields like computer engineering and software development. Congress is currently crafting immigration reform legislation that many hope will help those firms attract talent from overseas, but the president’s plan could help cultivate those skills stateside.
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