President Barack Obama has a funny way of asking for help. He desperately needs small businesses to create jobs and bring down our staggering unemployment numbers, yet he is about to hit those same businesses with a huge tax increase. The president claims the growing federal deficit requires that he raise taxes on those he calls the “wealthiest Americans,” but in his effort to soak the rich, he would also drown most of the nation’s small businesses under a wave of higher taxes.
At the end of this year, the Bush-era tax cuts will expire, resulting in a massive tax increase for all Americans. If this is allowed to happen, Mainers will owe $550 million more in taxes in 2011. While there appears to be a growing consensus in Washington that the tax cuts should be extended, the president and his congressional allies would exclude everyone making more than $250,000 a year.
While it might sound like a lot of money for an individual, it isn’t much when it comes to running a small business. About two-thirds of America’s small businesses are S-corps, which means the owner files a personal income tax return to pay taxes on business profits. What the government taxes as profit does not typically go to the owner for personal use, it is an operating surplus needed to keep the business viable. If a business owner takes home a salary of $50,000 and the business earned a $200,000 profit that year, they have joined the ranks of the wealthy.
Small businesses rely on these funds not only to grow but also to survive. Repayment of loan principal for equipment and working capital come out of a company’s earnings. If a business wants to expand or hire employees, it must have capital to reinvest. In today’s tight credit market, borrowing is much more difficult than it used to be and a business’s earnings are often its only source of capital.
Higher taxes deprive a business of vital working capital. The cash flow demands of most businesses simply do not allow for large sums of cash to be pulled out to pay taxes, regardless of how much profit your accountant says you’ve made. Depleting a business of cash in the middle of a recession is not a recipe for success.
Most small businesses are already in a tough fight for survival. Sales are down significantly, overhead has been cut to the bone, and profits are being squeezed. Companies are dealing with big increases in unemployment insurance premiums and, thanks largely to health care reform legislation, health insurance premiums are up as much as 20 percent or more. For business owners who find themselves on the brink of survival now, a tax increase could push them over the edge.
Even those businesses that are doing OK are less likely to create jobs if taxes go up. Expanding in a tough economy is a risky undertaking. Few will take the chance if the government is going to take a bigger and bigger chunk of any return they are able to earn on their investment.
The president defends his tax increase as being necessary to control the exploding federal deficit. What he fails to acknowledge is that he and his congressional allies are the ones who have continued to blow it up by increasing spending to unprecedented levels and posting record budget deficits.
Federal budget deficits are a huge problem, but you cannot solve it by driving people out of business. A more responsible approach to controlling the deficit would be to rein in spending and free up small businesses to grow and create jobs. The revenue that will be generated by a strong economic recovery will do more to reduce the deficit than a tax increase that hurts the people who create jobs.
So far it appears that Maine’s congressional delegation is split on the issue of raising taxes on small businesses. Reps. Mike Michaud and Chellie Pingree are siding with President Obama. To their credit, Sens. Susan Collins and Olympia Snowe have said they will not support a tax increase on Maine companies.
One hopes, the president and his allies will join Sens. Snowe and Collins and keep the tax rates where they are — not raise them. America is depending on its small businesses to pull us out of this recession. Now is not the time to single them out for a tax increase. If small businesses are the engine of economic recovery, the president would be wise to leave some fuel in their tanks.
Doug Newman is the chairman of Associated Builders and Contractors of Maine and the owner of Newman Concrete Services in Richmond.