06/03/2008
Testimony of NFIB/Massachusetts State Director Bill Vernon on the Impact of the Increase in Energy and Fuel Costs on Small Businesses
Located in the Commonwealth of Massachusetts
Before the Senate Post Audit and Oversight Committee
Chairman Pacheco and members of the Post Audit and Oversight Committee:
My name is Bill Vernon. I am the Massachusetts director of the National Federation of Independent Business. A non-profit, non-partisan organization, NFIB is the nation's and our state's largest small business advocacy group. In Massachusetts, NFIB represents thousands of small and independent business owners involved in all types of industries, including manufacturing, retail trade, wholesale trade, transportation, other services and agriculture. The average NFIB member has five to nine employees and annual gross revenues of $450,000-$650,000. In short, NFIB represents the small Main Street business owners from across our state. While individually they are small, collectively independent businesses with less than 50 workers employ about one million workers in Massachusetts -- about one-third of the state's total workforce -- and create more than two-thirds of the new jobs every year. On behalf of those small and independent business employers in the Commonwealth, I report to you that the increase in fuel and energy costs is hurting them.
NFIB represents thousands of companies statewide involved in a wide range of economic activities. The impact of increasing fuel prices on a particular industry or company therefore varies greatly among NFIB member companies depending on the level of fuel used in the production or distribution process. But the cost of energy (except electricity) is now ranked as the second most critical problem for small businesses behind the cost of health insurance. The cost of energy (except electricity) is a critical issue for 42.3 percent of small business owners in our most recent national survey.
The impact of increasing energy costs on small business is immediate, although the impact of energy costs on individual businesses varies greatly. A tenth of all small businesses say that energy is their greatest cost and another 25 percent say it is among the three largest business costs. Adjusting to high fuel costs is a gradual process with massive losses in the short run when it is very difficult for smaller businesses to mitigate the impact. Unlike their larger competitors, smaller businesses cannot quickly shift emphasis of the product line to a less energy dependent activity or enter a new product line that is more energy efficient. Smaller businesses that already have tight profit margins cannot easily absorb increased costs; and most importantly, smaller businesses cannot increase prices and continue to compete.
As a result, in the short run, increased costs for small businesses mean smaller profits, business contraction, or where the impact is large, suspension or closure of the business. The typical small business response to the question "What are you doing to cope with higher fuel prices?" is "Nothing extraordinary except losing money." When asked whether they are increasing their prices, the typical one-word response is "Can't."
Nationwide, small business energy costs are primarily linked to vehicles (38 percent), heating and cooling (33 percent), operating equipment (21 percent), and lighting (6 percent). For small businesses that use vehicles in their business, the most frequent remedies to high prices are rescheduled or altered routing, fewer vehicles or less frequent use, and purchase or lease of more fuel efficient vehicles. About one-fifth of small businesses that directly pay for heating and cooling costs have already remodeled at least substantial parts of their building to achieve energy cost savings in the past three years. Florescent lighting is used in nearly three-fourths of business locations.
Overall, during the past three years, more than two-fifths of all small businesses have taken steps to reduce energy consumption including more efficient lighting, changing the thermostat, rearranging processes, new more energy-efficient equipment, and adding insulation or new windows and doors. Small businesses will continue to act to reduce costs and increase energy efficiency as changes are affordable and economically prudent. But these changes are long-term in nature.
In the short term, there are few affordable public policy options at the state level that would significantly mitigate higher energy costs unless the remedies were focused on industries that are significant users of energy. Nationally, NFIB supports suspension of oil shipments to the Strategic Petroleum Reserve to the end of the year as long as the price of crude oil remains above $75 per barrel, suspension of the federal gas tax for the summer (saving consumers $3.66 per 20-gallon fill up), parity of the federal tax on diesel fuel with the federal gas tax (six cents per gallon reduction to ensure equal treatment for small businesses with diesel vehicles), and further exploration of domestic energy supplies in an environmentally friendly way.
In closing, the recent spike in energy costs depresses the small business economy similarly to a significant and immediate tax increase on small businesses. Unlike an economically damaging tax measure, the state's ability to provide significant and immediate across-the-board relief from an energy price spike is severely limited. But policymakers should remain aware of energy prices and their economic impact when considering other policies that affect the costs of operating a small business in Massachusetts.
Thank you for your attention.
