The Washington Post

Payroll tax cut squabble leaves small business owners uncertain

As the Congressional battle over the extension of the payroll tax holiday has come down to a high-stakes game of chicken, some small business owners have suspended their 2012 plans amid uncertainty about their customers’ discretionary income next year.

House Speaker John Boehner called a conference committee after House Republicans rejected a Senate bill to extend the payroll tax holiday for two months. (Joshua Roberts/BLOOMBERG)

The absence of a compromise would mean a New Year’s Day tax increase for 160 million American workers, an event that many business owners and economists say would further depress already lackluster consumer spending.

“We’re talking essentially about 1 percent of disposable income...if you’re taking that out of the spending stream, it would have indirect impacts down the road,” said James Gillula, managing director of consulting services for IHS Global Insight. Together, the rise in the payroll tax and interruptions in emergency unemployment insurance benefits could shave six-tenths of a percentage point off of GDP growth, which is already expected to be under 2 percent, he said.

The International Franchise Association has already come out strongly for a payroll tax extension, saying that franchise businesses — many of which are quick-service restaurants and hotels — rely heavily on consumer spending. Tuesday, the association warned that a failure to extend the payroll tax would “jeopardize the creation of 168,000 new jobs” for franchise businesses in 2012.

Aziz Hashim, who owns several Popeye’s and Domino’s franchises throughout the country, said his businesses are being squeezed between high commodity prices, higher minimum wages in several states and the prospect of consumers eating out less.

“This tax cut would have been immensely important for us,” he said. “We’re feeling margin compression at every angle, and the customer can’t bear higher taxes right now because they also have so little relief.”

Other business owners expressed disdain that Congress attempted to package two seemingly unrelated proposals: The Senate bill had bundled the speedy review of the Keystone XL oil pipeline in with the payroll tax cut extension.

Tom Kemper, president of a Dallas office supply company called Dolphin Blue, said he’s frustrated that Congress attempted to roll an environmentally controversial issue into a fiscal one.

“I think what’s going to happen is the little guy is going to have less money to spend,” he said, “but the real issue is not the tax break, it’s the fact that House Republicans want that XL pipeline no matter what.”

The Senate compromise would have extended the tax holiday for two months in order to give lawmakers time to work out a new proposal. But some business owners said it’s difficult for them to plan for just two months at a time, so the short-term solution was, for them, hardly a solution at all.

“How do I plan for two to three years down the road when I have an economic policy that’s short term?” said Gary Desilets, president of Deckscapes of Virginia in Manassas. “I’ve had to ignore the policies and just hope for the best.”

He said that a previous proposal, which gave both employers and employees a 2-percent break on payroll, would have allowed him to hire an additional employee, but now he isn’t sure he can afford to do so.

Hashim, the franchise owner, said he’s holding off on making renovations to his restaurants, hiring more workers and determining bonuses until the payroll tax deal is solidified and he can more confidently project his sales for next year.

“If the tax holiday had gone into effect, I would have been reasonably sure about those investments,” he said. “A lot of business people were looking forward to that certainty.”

Regardless of just how severely they’ll be impacted, business owners we contacted were put off by the entire payroll tax debacle — helping to explain why this is the least popular Congress in 30 years.

“Why can’t Congress get together and finally make the decision?” said Musya Tumanyan, senior vice-president at a construction-equipment firm Hoffman International in Piscataway, N.J. Tumanyan has cut her staff from 87 to 65 since the recession began — in part because Hoffman has heavy exposure in Europe -- and she said there may be more layoffs in 2012. “As long as the government can’t make a decision and can reach a viable solution, we will be continuing to lose our best minds and continuously shrink.”

Follow Olga and OnSmallBiz on Twitter. E-mail Olga Khazan here



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