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How to avert the fiscal cliff without threatening small businesses

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President Obama and Republican lawmakers aren’t the only ones struggling to find common ground on the right way to avoid tumbling off the “fiscal cliff.”

Small-business advocates have their differences, too.

John Arensmeyer, chief executive of Small Business Majority, an advocacy group based in the District and California, favors raising taxes on the wealthy over eliminating tax breaks and reducing spending in areas that have benefited small firms, like allowing breaks for businesses that hire new workers or purchase new equipment to expire as scheduled in 2013.

“There’s no reason to not just let the tax cuts on the top two brackets expire,” Arensmeyer said, citing his group’s poll showing that 52 percent of small-business owners support increasing taxes on high-income earners, and government data showing that only 3 percent of small firms would be hit by lifting the top rates. “We’re sucking up money that is not targeted at small businesses. This is something we can do immediately, and it should be part of a down payment on a bigger plan later with broader spending cuts.”

The Seattle-based Main Street Alliance sent a letter to party leaders in both chambers of Congress echoing the same sentiment, asking lawmakers to eliminate tax cuts for the wealthy that it says “never seem to ‘trickle down.’”

“These tax cuts have never helped the overwhelming majority of small businesses,” the group’s executive committee members wrote in the letter. “All they’ve done is blow a hole in the deficit and prevent us from making the investments in our local economies that we so critically need.”

Christopher Whitcomb, tax counsel for the National Federation of Independent Business in Washington, strongly disagreed, noting that while the tax hikes on the wealthy may impact a relatively small percentage of small businesses whose owners report their profits as personal income, those firms tend to be the ones with the necessary capital available to hire new workers.

Increases to capital gains taxes should not be part of even a temporary agreement, Whitcomb added, warning that the move could deter investors from pouring capital into growing companies. However, Arensmeyer said there may be ways to squeeze more revenue out of capital gains without threatening small businesses.

“We have supported proposals to reduce the capital gains rates for investments made specifically in new and small businesses,” Arensmeyer said. “But such a large amount of capital gains is earned in a way that doesn’t benefit small businesses, so to the extent that those benefiting from lower capital gains are the same ones benefiting from tax cuts for the wealthy, there could be changes that don’t have a major impact on Main Street businesses.”

Whitcomb did agree that policymakers should keep their hands off tax breaks for entrepreneurs that hire and invest in their businesses, urging lawmakers not to allow the current level of tax deduction for equipment purchases to fall as scheduled from $139,000 to $25,000 in 2013.

“That’s really not enough to encourage small businesses to make investments,” he said. “Maybe it could be lowered, something in between might work, but not to $25,000.”

On one point Whitcomb and Arensmeyer agreed: There is little chance a long-term deal will be struck before year’s end. But they both hope a temporary stop-gap agreement can be reached to buy lawmakers time to negotiate a longterm deal that will support the interests of small employers.

“To the extent we are looking for fiscal policies that lower the deficit, we need to be looking for ones with targeted and lasting benefits for small businesses,” Arensmeyer said.

Follow J.D. Harrison and On Small Business on Twitter.

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