When it comes to businesses’ recovery in the wake of the Great Recession, bigger is better.
As the economic floodwaters of the recession recede, NFIB data shows that recovery for small businesses has been sluggish compared with their larger counterparts.
“Sales are depressed. Earnings are depressed. But then you look at the stock market and corporate profit earnings, and they are at record highs,” says Holly Wade, senior policy analyst for NFIB’s Research Foundation. “There seems to be an increasingly pronounced difference between how large and small companies are faring in this economy.”
In July, for example, small business optimism hovered at 94.1, just slightly above the post-recession average of 90.7, according to the most recent NFIB Small Business Economic Trends data available at press time. That might not seem terrible, but historically, the average is 100, Wade says. At its lowest point during the recession, March 2009, optimism sank to 81.
There seems to be a gap between what big business and small business want from Beltway policymakers, especially when it comes to policy areas like taxes, healthcare and regulations.
Of course, big and small firms have always operated differently. But their policy interests were usually one and the same, rooted in support of a free enterprise system—a system NFIB supports, regardless of a business’ size.
Opinions vary on when the divide first appeared. But many experts point to the massive corporate bailouts of 2008, with the gap further widening during fiscal cliff negotiations late last year, when big business showed a willingness to accept higher taxes in exchange for corporate tax reform.
Since the corporate bailouts, the Obama administration has become even cozier with big business. And because big business often has more power when it comes to influencing federal policy, the concerns of small business are often neglected.
“Administrations too often listen only to the big corporate CEOs who elect them and too often forget about small businesses, which create two-thirds of the net new jobs,” says Susan Eckerly, senior vice president of federal public policy for NFIB.
Why is big business cruising toward record-breaking years while small businesses are sputtering along? The answer is complicated and spans the federal policy gamut. But much of it goes back to small business owners’ intrinsic ties to the American consumer, Wade says.
“Small businesses rely more heavily on local consumers, and consumer confidence is still low. They are less able to absorb higher costs—taxes and regulations, for example—than larger companies,” Wade says.
Big businesses aren’t immune to the negative effects of anti-growth policies, but they have the resources to weather them—both in terms of hundreds of millions of dollars in overseas cash reserves and powerful lobbyists on Capitol Hill.
Armed with such resources, big businesses are often willing to push for policies that aren’t good for the business community as a whole to put themselves at a competitive advantage.
U.S. Sen. Ted Cruz of Texas, whom NFIB’s Save America’s Free Enterprise Trust supported in last year’s election, described the crux of the divide: “Often you see big companies … eager to embrace crushing regulatory burdens because they drive up everyone’s costs,” Cruz told The Wall Street Journal in May 2012. “The big business can hire armies of lawyers and accountants, and they can deal with the cost, whereas the smaller competitors are driven out of business.”
But why, then, would the government support policies that are harmful to small businesses? It’s complicated, but in addition to powerful lobbyists, many small business owners and advocates point to a president who has never run a business himself, and sees the business community as a monolithic bloc rather than as a diverse coalition of small and large firms with unique policy concerns.
Large corporations have made inroads with the Obama administration in recent years. Take the creation of Pres. Obama’s Jobs Council. Before it disbanded on Jan. 31, the 25-member panel included heads of massive corporations such as General Electric and Xerox. But out of 25 members, the council included just one small business, Permac Industries, a Burnsville, Minn., precision manufacturer. That means 4 percent of the council’s membership represented small firms’ concerns.
“That decision communicated to me that the council was a joke,” says NFIB member Alan Sayler, owner of Sayler’s Suncoast Water, a Pinellas Park, Fla.-based water treatment company.
During the negotiations to avert the fiscal cliff late last year, the divide between small and big business’ policy interests further widened. In November, after winning re-election, the president met at the White House with top CEOs from companies such as Goldman Sachs to discuss the fiscal cliff. At the meeting, CEOs pushed for a more globally competitive corporate tax code.
But again, the interests of small businesses were mostly ignored. The final fiscal cliff package—though it gave a reprieve to the majority of small business owners from a tax increase on their incomes and estates—included $100 billion in tax credits for big business.
“Government needs to just get out of the way,” Sayler says. It’s not that small business owners want those tax credits for themselves, he says. What he and many other small business owners do want is tax reform. Tax policy is one of the most pronounced policy differences between small and big business, and one of the most frustrating for small firms.
Many large corporations avoid a 35 percent corporate tax rate by keeping their reserves overseas. “Any time you have big U.S. companies who don’t pay very much in taxes, most small businesses end up picking up the slack by paying higher tax rates,” says Chris Whitcomb, NFIB’s tax counsel.
But it’s only a symptom of a larger problem, he says: a sprawling, complicated tax code that’s in dire need of reform.
Seventy-five percent of small business owners are organized as pass-through entities, meaning they file as individuals. Ninety-one percent must use a tax preparer to fill out the complicated forms, which is a reason they spend 67 percent more in tax compliance costs than big business, according to NFIB Research Foundation data.
For small business owners like David Hurley, owner of Landmark Engineering and Surveying, a civil engineering and surveying company in Tampa, Fla., tax season is a headache.
“I’d like to be able to do my own taxes,” says Hurley, an NFIB member whose filing this year was between 80 and 100 pages long. “It would be a lot simpler.”
Hurley says comprehensive tax reform would also make filing a lot cheaper. Tax code compliance costs small business owners like Hurley $18 billion to $19 billion per year across the nation. And paperwork costs? They total $74.24 per hour.
It is a problem when large corporations press for corporate reform at the expense of comprehensive reform, Whitcomb says. “If you focus on just the corporate side of the tax code, it results in an increase of the rates of pass-through businesses,” Whitcomb says. “That’s a concern for NFIB.”
A 2011 study by Ernst & Young found that reforming only corporate tax rates would raise the rates on pass-through entities by 8 percent—amounting to a $27 billion tax hike on the majority of small businesses. While current political divisions in Washington complicate the prospects of comprehensive tax reform, he says NFIB remains engaged.
“The reason why we stay engaged on it is that it’s never going to happen until it does,” Whitcomb says. “But even if tax reform doesn’t happen, a lot of tax provisions that will affect small businesses are being discussed and can be certainly used in the future for other legislative action.”
Big Health Issues
Another rift between small and big businesses came with the adoption of the Patient Protection and Affordable Care Act. Blake Woodard, managing partner of Woodard Insurance in Fort Worth, Texas, understands this more than most: He spends most days counseling small and big businesses on their best options for health insurance ahead of the changes the healthcare law will bring in 2014.
“Large employers didn’t come off well under PPACA, but they’re vastly better off than small employers—it’s night and day,” Woodard says. “The small group market has been destroyed by [the law], but large businesses will be fundamentally unchanged.”
Obamacare contains billions of dollars in subsidies for Big Pharma, which spent an estimated $150 million in an advertising push to sell healthcare reform. “Meanwhile, the small businesses who offer healthcare will see their insurance rates skyrocket due to increased mandates and taxes that only hit small businesses,” Eckerly says.
That’s because the law creates two classes of small employers: businesses with fewer than 50 employees, and businesses with 100 and fewer. Companies with more than 100 employees still have substantial control over their plan design, and they avoid the law’s community rating rule (which assigns employees premiums regardless of how healthy they are) and a maximum $2,000 deductible (which raises premiums for workers).
“Small employers who care about their employees are in a real bind: ‘Do we dump ’em [employees] on the healthcare exchanges, because there are no penalties?’” Woodard says. “Or do we maintain a health plan, knowing our rates might double?’”
Large companies’ rates will still be determined by their own claims, and they can charge their employees up to 30 percent of their premium if they don’t meet wellness objectives.
Then there’s the so-called Health Insurance Tax. The HIT is a $100 billion tax increase on insurance companies that begins in 2014. Small business owners will likely shoulder the tax in the form of higher premiums, costing them
$8 billion in its first year alone.
To repeal the provision, NFIB formed the Stop the HIT Coalition. A bill that U.S. Rep. Charles Boustany of Louisiana filed in April 2011 would repeal the provision, but it remains stalled in the House Subcommittee on Health.
If lawmakers continue to cater to big business interests at the expense of small business, we’ll continue to see slow recoveries, timid hiring practices and a mixed-bag economy.
Sayler, the Pinellas Park, Fla., NFIB member, wants to see the divide bridged sooner rather than later. But he recognizes it will require a lot of work on the part of pro-small business organizations such as NFIB.
“We need to rely on groups like NFIB to position [our interests in Washington, D.C.]. Small businesses, on our own, don’t have the influence big business has, unless we band together.”