The Obama Stimulus Plan and Small Business

By Marc Tracy

Everyone's focus is squarely on President-elect Barack Obama, who has entered office with the type of mandate for change not seen in nearly three decades and who is taking the helm as the U.S. faces its greatest economic crisis in at least that long, if not much longer. The stimulus plan he is proposing--which contains a mixture of new spending and tax cuts and whose total pricetag is in the neighborhood of $775 billion--is receiving much examination and scrutiny: by Republicans (who may think it's too much but may not want to get clobbered by the Obama juggernaut); by Democrats (the more liberal of whom may be somewhat dismayed by the prominence of tax cuts in the plan); and by a nervous and struggling public. That last, of course, includes small business owners, whose traditional role as engines of economic and job growth make them essential to any long-term strategy for economic recovery.

There are three components to the plan that will provide particular boons to small businesses, according to The New Entrepreneur. These are an extension of the so-called "carry back" tax rules, which allow businesses to deduct losses against gains from past years, from two to five years; a near-doubling of the amount you are allowed to deduct from your taxes for investing in new machinery for your business; and a one-year job creation tax credit.

Only the first of these three truly appears to be specifically designed to aid businesses exclusively: they really do benefit to few other constituencies, beyond the general appeal of putting more money in people's hands for stimulus purposes. The increased investment deduction encourages just that, which will help everyone from businesses to suppliers to others in the business food chain; and the job creation tax credit is most obviously targeted not at helping businesses per se as much as encouraging businesses to hire and get that rising unemployment rate back down.

The first is also the one that will probably give businesses the most money, in the form of a cash refund. Basically, you're ordinarily allowed to carry back losses over two years, which can enable you to get a refund this year on taxes you paid in past years of growth. Essentially, you get the benefit of all that money you made two years ago and the benefit of paying lower taxes on "less" income. Now, however, it will go back five years. And given the way the economics of the past years have worked--with 2008 being a poor year, generally, but the years previous being very good ones--this seems likely to set businesses up for extra-big tax refunds.

Independent Street, however, has what strikes us as a very legitimate objection to the carry-back extension, which seems so unambiguously pro-business on its face: what, it asks, about those firms that turned a profit in 2008? After all, such firms have no losses to carry back two or five years. And Independent Street is not referring here to an Exxon or someone who made gigantic profits last year at least in part due to good fortune; it's talking about businesses--and in particular small businesses--that were able to come out a bit in the black by making hard choices, such as cutting jobs and investment, that are likely to slow long-term growth but were necessary to make 2008 a halfway-decent year. “This stimulus package seems to reward the ones who have kept spending, and ignores the diligent business owners cutting off their limbs to save the core of their business,” one small businesswoman wrote Independent Street.

On a more political note, many progressives hate the extension for this reason. Blogger Matthew Yglesias, for example, argues that businesses who benefit from the change will know exactly why they got this money--which is to say, not because business has been booming--and are therefore more likely simply to pocket the money or store it away for future rainy days rather than to invest it on growing their business, which is the clear justification for the extension from a stimulus perspective. He also notes that "the distributional impact is regressive"--that is, the more you lost (which tends to mean, the bigger you are), the more money, at least in absolute dollars, you will be refunded.

This talk of regressive taxation, though, brings us to the National Federation of Independent Business's main advice for Obama: include a six-month payroll tax holiday as a part of the stimulus. This is very interesting, because, while many--including BizBox--have accused the NFIB of offering, at its worst, little more than standard Republican talking points and policies, the payroll tax is actually the most prominent regressive tax (which is to say, as a percentage of income it takes more from you the poorer you are), and so to cut it as it currently exists is actually a rather "progressive" thing to suggest.

The argument is that cutting the payroll tax will save employers money on payroll expenses, which might additionally encourage more hiring; the NFIB goes a step further and crunches the numbers in its release. Check it out.

And stay tuned as the stimulus plan develops and, post-Jan. 20 especially, makes its way (or not) through the House and the Senate. This will affect everyone--you should be paying attention.

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January 6, 2009 4:17 PM