Small businesses feel squeezed by Obama policies

By V. Dion Haynes
Washington Post Staff Writer
Monday, September 6, 2010; 12

Last year, even as he struggled through the worst of the recession, Chris Upham said revenue at his District-based real estate and construction businesses doubled -- allowing him to hire two agents.

But Upham said he hasn't increased his staff thus far in 2010 and he doesn't expect to for the remainder of the year.

That's because his taxes rose sevenfold. And he said he anticipates they'll increase again if the Bush tax cuts for people earning $250,000 and above expire at the end of the year.

As small businesses try to plot their recovery, attention is turning to what many owners consider burdensome policies -- higher taxes, new accounting procedures and health-care mandates. Even as the government tries to help with an array of small-business initiatives, many owners say the intervention is as much a hindrance to hiring as the faltering economy.

Their perceptions are important because the Obama administration is counting on small-business owners like Upham, whose ranks represent more than half the U.S. workforce, to jump-start the economy, much like they did after downturns in the early 1990s and 2001.

"We did well last year, hired two people, but the taxes ate through the income we had," Upham said.

Upham said business picked up substantially with the Obama tax credit for first-time home buyers before dropping off when it ended. With the administration efforts, he said, he feels like he's taking one step forward and two backward.

"It seemed like we were moving up, [and now] consumer confidence is down," he added. "What I want government to do is not raise taxes -- decrease them to allow us extra money for hiring."

The White House appears poised to respond to a growing backlash from businesspeople about the crush of higher taxes. Among the ideas being explored were a temporary payroll-tax holiday and permanent extension of the expired research-and-development tax credit, ways to offset the impending elapse of tax cuts for the top 2 percent of households.

"I will be addressing a broader package of new ideas next week," President Obama said Friday at a news conference held to comment on the Labor Department's August unemployment data. The report showed weak economic growth -- 67,000 private sector jobs added in August, down from 107,000 in July -- and that the jobless rate ticked up to 9.6 percent from 9.5 percent.

The conventional wisdom is that small businesses would be willing to expand their payroll if capital were more readily available to them. Small businesses suffered more in the credit crunch than their larger counterparts because they rely almost solely on banks for their financing.

Last year, the Obama administration allocated hundreds of millions of dollars to increase loan guarantees and to reduce borrower fees for small businesses, classified by the government as firms with 500 employees or fewer. The program proved to be wildly popular: Before the money ran out last spring, the number of loans approved soared 90 percent.

"There's a direct correlation between access to capital and job growth," said Molly Brogan, spokeswoman for the National Small Business Association. "If people are able to get loans and financing, they're able to grow their business and that includes creating new jobs."

Obama, who wants to revive the program, last week urged Senate Republicans to support a Democratic proposal to cut taxes for small businesses and establish a $30 billion loan fund providing them easier access to credit.

"There's one thing we know we should do -- something that should be Congress's first order of business when it gets back -- and that is making it easier for our small businesses to grow and hire," Obama said in a Rose Garden speech. "We know that in the final few months of last year, small businesses accounted for more than 60 percent of the job losses in America."

Yet to date, existing loan programs haven't yet spurred much hiring. Surveys conducted by the National Federation of Independent Business and the National Small Business Association show owners much less optimistic in recent months about their prospects of hiring and growing than they were late last year and earlier this year.

Even supporters of loans say the government investment likely won't pay off until consumers start spending and business owners start feeling more confident. "If everyone is saving and not spending and their clients are hurting economically, small businesses have to be a bit more cautious" about hiring, Brogan said.

In the Washington region, hiring is picking up at small businesses experiencing an increase in demand for their goods and services. For Luc Brami, principal of Gelberg Signs in Northwest Washington, and Craig Savarick, director of executive recruiting firm Capital Search Group in Vienna, an incentive came in the form of an Obama initiative: a temporary exemption from payroll taxes on every unemployed person they hired.

"For four people we hired, it will be a $9,000 savings," Brami said.

"We got a [tax] break and put it back into the company," he added. "We can buy equipment and get a credit, too."

In all, the administration has implemented about a dozen small-business programs, including a health-care tax credit; more opportunities for women business owners to receive government contracts; and cuts in capital gains taxes.

"Our view is that the financial crisis put multiple barriers in the way of small businesses and the appropriate policy response has to be aggressive and multifaceted instead of looking for one silver bullet," said Gene Sperling, counselor to Treasury Secretary Timothy F. Geithner on small-business issues.

But Brian Bethune, chief U.S. financial economist at IHS Global Insight, asserts that the initiatives coupled with numerous other new regulations are making owners feel overburdened, overregulated and less secure about the economy.

"They may see it as more interference," Bethune said, "they see it as bureaucratic intrusion."

Some business owners and advocates complain that some of the programs contradict one another. Stephanie Cathcart, spokeswoman for the National Federation of Independent Business, said benefits from the payroll tax exemption business owners use when they hire unemployed people are mitigated by provisions in the health-care overhaul law that reduce a tax credit when businesses hire.

"It's counterintuitive," she said. "Frankly, a lot of these initiatives fall short."

Brogan of the National Small Business Administration said a new accounting regulation dramatically increases the requirements associated with providing documentation to the government on businesses' vendors, a rule that on average will multiply the average number of 1099 tax forms an owner files every year to 86 from 10.

"This will take the money they'd spend to hire a part- or full-time employee and give it to accountants," she said.

Dinesh Sharma, president of government contracting firm Washington Business Group in Chantilly, said he ruled out using the payroll tax exemption, believing the savings couldn't justify the tens of thousands of dollars he'd spend in salary and health insurance for a new employee.

"We're not large enough to hire someone just to take the benefit of a small tax break," he added. "The burden is more than the benefit."

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