By SBE Council at 22 January, 2013, 1:58 pm
By Karen Kerrigan and Raymond Keating-
SBE Council has a full policy plate for 2013. The issue set is extensive and complex. There are promising opportunities for progress, but a few prominent issues – such as cascading deadlines on spending and fiscal matters – could derail other priorities for small business. Congress and President Obama have a lot of work to do to shore up U.S. competitiveness and get the economy back on a strong growth track. Hopefully, President Obama will seize and lead on bipartisan opportunities to help make his second term, and the 113th Congress, a productive session for our nation’s entrepreneurs.
Although the issues are many that SBE Council will be tracking and weighing in on for our small business members, here are ten issues we’ll be staying close to in 2013:
#1 Government Spending & Grand Bargains. Washington has dealt with out-of-control spending by creating commissions but ignoring the recommendations; producing future deadlines that delay difficult decisions but often get extended once the deadline is reached; or by advancing plans that were never meant to be implemented, but still get passed by Congress anyway in the hope that these ploys will force Congress to act (which they don’t). The sequestration measure (where $1 trillion in spending cuts will occur at the beginning of March if no action is taken) is a good example of the last approach. The debate over lifting the debt ceiling (where House Republicans will now consider a short term lift through mid May), the end of the current stop gap measure that funds the government through March 27, along with upcoming budget battles in April present Congress with a steady stream of complex issues that will drain time and energy from other critical matters. Make no mistake, these fiscal and spending issues are certainly important, but there are more rational ways to address fiscal policymaking. The budget process is one, and a more orderly process for tackling the drivers of our fiscal woes – entitlements is another. Serious spending reductions and reforms must be addressed. If not, the government sector will continue to discourage investment, add burdens onto and crowd out the private sector, and damage U.S. competitiveness.
The federal government’s high levels of spending damage our economy by siphoning resources away from the private sector – via both taxes and borrowing – while rising debt levels threaten future tax increases. Significant resources and time have been invested in efforts to reduce the deficit, reform entitlement programs, and advance tax reform (the most recent and notable include the Domenici-Rivlin Debt Reduction Task Force, President Obama’s National Commission on Fiscal Responsibility and Reform – aka Bowles-Simpson, and other private initiatives such as Fix the Debt) yet Washington appears no closer to tackling our nation’s fiscal problems even with bipartisan agreement that something needs to be done.
Federal spending stands at levels that would have been unfathomable not long ago. Compared to $2.73 trillion in 2007, outlays jumped to $2.98 trillion in 2008, and $3.52 trillion in 2009. It has remained at or around those levels ever since: $3.46 trillion in 2010, $3.60 trillion in 2011, and $3.54 trillion in 2012. As a share of GDP, federal outlays are at unprecedented levels – at 25 percent in 2009, 24 percent in both 2010 and 2011, and 23 percent in 2012. The U.S. has never had spending levels this high but for during World War II. Looking ahead, under the “current policies” scenario, in its June “2012 Long-Term Budget Outlook,” the Congressional Budget Office projected federal spending as a share of GDP to top 24 percent in 2022, and rise to 35.7 percent of GDP in 2037. Keep in mind that at the close of the Clinton budget years, federal outlays stood at 18.2 percent of GDP.
Meanwhile, the federal government hit its $16.4 trillion debt limit at the end of calendar year 2012. For the past four budget years, the federal government has run previously unimaginable deficits of more than a trillion dollars annually – $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and $1.1 trillion in 2012. Unfortunately, projections for the current fiscal year (2013) put the increase in federal outlays at 6.1 percent, pushing spending up to $3.8 trillion, with another $1 trillion deficit.
SBE Council will continue to advocate and push for entitlement and spending reforms to shore up our nation’s fiscal condition. We will closely monitor and work to participate in any “grand bargains,” with a close eye on tax changes attached to potential deficit reduction deals. Deficit reduction is certainly important, but grand bargains require pro-growth tax changes that encourage entrepreneurship and small business growth. Anti-growth tax increases, especially those that fall on the backs of small business, will weaken the struggling economy, hurt job creation and drag down entrepreneurship.
#2 Tax Reform and Tax Policy: Bipartisan support continues to build for addressing tax reform. Whether done on its own or paired with deficit reduction, reforming the tax code is critically important to U.S. businesses and the economy. The tax code is complex and costly — just about everyone in Washington agrees with that. Simplification is in order. Continuous tax changes, and last minute extensions of expiring or temporary provisions only perpetuate uncertainty and add burdens for small business owners. In her 2013 annual report to Congress, National Taxpayer Advocate Nina Olson said tax reform is the #1 priority issue for taxpayers. She called compliance burdens “unconscionable.” Reforms that encourage capital formation, small business growth, investment, and make the tax system more globally competitive (by cutting corporate and small business tax rates, for example) are long overdue. But will Congress and President Obama act? They must. SBE Council will provide relentless advocacy on this critical issue. And, similar to steps taken to provide a simplified Home Office Deduction option for small business owners, we will work with the IRS and White House on other positive changes that can be advanced through administrative action.
#3 Patient Protection and Affordable Care Act (ObamaCare) Implementation and Health Coverage Costs: Small businesses and the self-employed were promised lower health coverage costs and more choices with the passage of the Patient Protection and Affordable Care Act (PPACA). But insurance costs continue to rise, the health care tax credit remains an ineffective tool for most small firms, and even the federal government says that most small businesses will not be able to keep the coverage they currently provide. Furthermore, new PPACA taxes kicked in on January 1. Following the 2012 election, the U.S. Department of Health and Human Services (HHS) picked up the pace in terms of issuing proposed regulations to implement PPACA. As expected, the proposed rule on “essential health benefits” will drive costs higher. The employer mandate (where firms covered by the mandate will be required to provide insurance for the employee and their family or pay a penalty, according to the proposed rule) and the individual mandate are slated to hit in 2014. In addition, twenty-three states to date have opted out of running a health care exchange (which means the federal government will step in and do it for them). The exchanges are supposed to be operational by January 2014, with open enrollment starting October 2013. Many hold out promise that the exchanges will offer more affordable options for small businesses. However, new models and approaches to providing health benefits and health care are emerging. Private exchanges are on the rise and experts see the growth in defined contribution approaches as a method for dealing with the higher costs, administrative headaches, penalties and restrictions associated with PPACA. President Obama has said he is open to improving PPACA, and SBE Council will continue to push for reform improvements (such as more effective tax credits, more competition, fewer mandates and lower taxes and fees) that will lead to more flexible and affordable health insurance choices for small business owners and their employees. Market forces are responding to the new law, but in a way that is creating an alternative market outside of the government-centered one created by PPACA.
#4 Capital Access and JOBS Act/Crowd Investing Implementation. The capital markets continue to heal from the financial meltdown, but regulations put in place following the crises have constrained the availability of capital and loans. Crowdfunding has filled an important niche in helping some small businesses and entrepreneurs access resources to start or grow their businesses. Other financing alternatives have also blossomed. As part of the Jumpstart our Business Startups (JOBS) Act, which was signed into law April 2012, new platforms will enable equity-based crowdfunding for entrepreneurs and small businesses.
Unfortunately, the Securities and Exchange Commission (SEC) has missed important deadlines for issuing and finalizing proposed regulations that will govern the new platforms. In fact, if the SEC managed to hit its deadlines, equity-based crowdfunding could have been operational by early 2013. Staff and leadership changes (or biases) are not acceptable excuses for being late with new rules, yet resignations and departures (such as the former Chair) on top of bureaucratic intransigence are causing long delays. SBE Council will continue to nudge this process along and urge Congress to closely monitor the SEC’s rulemaking. The purpose and idea behind the JOBS Act – to encourage capital formation through a new and transparent national marketplace…on platforms that are affordable and accessible for entrepreneurs – will fail if outmoded and unwarranted rules and regulations overwhelm small businesses, and the nascent industry in general. The concern is real that the SEC will load up on requirements and rules that make no sense for crowdfunding. SBE Council will be watching, and advocating, to ensure the SEC is implementing the JOBS Act in the same spirit that generated strong support in the Congress and with President Obama.
#5 Immigration Reform. President Obama will put significant time and political capital behind moving immigration legislation. Supporters expressed deep disappointment with his indifference on the issue during his first term, and they have made it clear they expect a different outcome for the second term. The business community and leading Republicans would also like to see movement on immigration reform. It certainly appears that the stars are aligning for progress on the issue. A plan put forward by Senator Marco Rubio (R-FL) aligns with many of the principles and elements that President Obama has advocated. For example, they both support skill-based and family-based immigration as well as an orderly and humane way for illegal immigrants to identify themselves, go through background checks, pay back taxes and fines if appropriate, learn English and participate in a lengthy process before getting in line for legalization. There is a lot at stake for small businesses and our economy in how this issue moves forward. The immigration system is broken, and it cannot accommodate the increased immigration needs within certain industries (such as high tech and agriculture), or when the economy is growing at a healthy pace. Technology can be effectively used to modernize a system that needs to adapt to the mobility of labor and changes in the global economy. SBE Council has been a long-time supporter of immigration reform, but will watch for measures that place too many burdens on small businesses. Business should not have to play the role of immigration police, nor be unduly fined or penalized for circumstances beyond their good faith efforts to comply with the law.
#6 Regulation and Regulatory Reform. On December 21, the Obama Administration released its “regulatory agenda” – required by law, but two months late. Federal agencies failed to publish their spring agenda, as required by law. The report shows there are now 224 “economically significant” regulations in the pipeline — each of these regulations will cost the economy $100 million or more. In total, there are 4,062 regulations at various stages in the rulemaking process. The Competitive Enterprise Institute estimates that federal regulations will cost the economy $1.8 trillion annually once the new health care law is fully implemented. Already, without including the costs of PPACA and Dodd-Frank, federal regulations impose a $10,000 per-employee burden on small businesses.
A review of several of the individual departments’ “statement of regulatory priorities” for 2013 is downright alarming. The Department of Labor’s priorities include its Plan/Prevent/Protect broadside of the American workplace — a regulatory nightmare for any small business. The agendas of DOL, National Labor Relations Board (NLRB), and Equal Employment Opportunity Commission (EEOC) all point to heightened enforcement and activism. In addition, there appears to be no end to the regulatory onslaught from most federal agencies including the Environmental Protection Agency (EPA), HHS and others. As noted above, the SEC is late in implementing regulations governing the JOBS Act. Dodd-Frank is only half way through its regulatory implementation, and the health care law is woefully behind schedule in issuing new rules. Still, the federal government continues to crank out new rules at a frenetic pace. SBE Council has called for a timeout to this regulatory madness. The sheer overkill in the volume and depth of new rules, combined with the lack of accountability exhibited by regulators is outrageous. Regulations disproportionately impact small business. The quantity and impact of many of these rules will have a serious impact on the survivability and growth of many small firms, and in turn the nation’s economy and job creation.
#7 Technology Policy & IP. During the past decade or more, SBE Council has tracked and measured the growing importance of technology, broadband Internet and now mobile technologies for small business owners and entrepreneurs. Small businesses are embracing these technologies, and learning to follow dynamic changes in the marketplace that affect sales, marketing and customer service. For example, data continue to point to the acceleration of mobile commerce, which means small businesses must adapt to the trend. Consumers spent $25 billion on phones and tablets in 2012 (an increase of 81 percent over 2011) and are expected to spend one-quarter of all ecommerce by 2016 – a whopping $87 billion. It’s not news that the use of mobile devices and broadband continue to explode, but the pipeline through which all this traffic moves is getting busier and more congested. Businesses are embedding mobile technologies across operations, and employing devices and apps to more effectively run their firms. As more businesses and consumers turn to mobile tools, will our infrastructure have the capacity to carry the traffic at the speed, quality and reliability we all need and demand? The pressure is growing for the Federal Communication Commission (FCC) to be more proactive in freeing up our nation’s spectrum for mobile broadband. This is a competitiveness issue, as well as a critical infrastructure issue for our nation. SBE Council is hoping to see aggressive movement on spectrum in 2013.
Another key issue falling within our technology basket is the effort to strengthen intellectual property (IP) rights and fight IP theft, the latter of which disproportionately hurts innovators and small firms. The cost of counterfeiting and piracy is projected to double to $1.7 trillion annually within just three years. That being the case, it is critical that both within the U.S. and through efforts abroad our government lead on initiatives that foster a culture of respect for IP and rules supporting IP rights. For example, robust IP rights need to be included in international accords and negotiations such as the Trans-Pacific Partnership (TPP) agreement (see “Global Market Access” item below). IP is central to our economy and the small businesses that add value through their innovations.
#8 Global Market Access. President Obama and the Congress have an opportunity to reinvigorate U.S. trade policy. By doing so, more opportunities for all U.S. firms will be created, which means business growth, investment and job creation. A November 2011 survey released by SBE Council and the Financial Services Forum found that 21 percent of small firms plan to expand overseas in the next several years. This is extraordinary progress in terms of small businesses thinking globally regarding business development. U.S. trade policy needs to support these plans to help make them a reality for America’s entrepreneurs. International trade is critical to U.S. small businesses and workers. U.S. exports as a share of GDP are more than two-and-a-half times larger today than 50 years ago, with total trade (exports plus imports) more than three times larger. As for small businesses and trade, the International Trade Administration has reported that 97.8 percent of U.S. exporters have less than 500 employees, and 97.2 percent of firms involved in importing also have less than 500 workers. In January 2010, President Obama set a goal of doubling U.S. exports by 2015.
There are several opportunities for President Obama to step forward on trade in 2013. For example, he has pledged to finish negotiating the Trans-Pacific Partnership, which is a proposed regional trade agreement that would include the United States, Australia, New Zealand, Vietnam, Malaysia, Singapore, Chile, Peru, Brunei, Canada and Mexico. In addition, the Obama administration has spoken (but only vaguely so) about asking Congress to grant the President trade promotion authority (TPA) at some point. TPA – which allows a president and our trading partners to negotiate agreements with the confidence that when the accord goes to Congress, it will go to an up-or-down vote without special interest amendments changing and undermining the agreement – is vital to getting our trade policy reinvigorated.
#9 Monetary Policy. The Federal Reserve has been running loose monetary policy since late summer of 2008. In fact, monetary policy has been so expansive that this ranks as a period without precedent in U.S. monetary history. The Fed has moved in this policy direction hoping to spur economic growth and job creation. Yet the economy continues to underperform. The recovery from one of the worst recessions since the Great Depression is one of the most anemic on record. Rather than aiding the economy, the Fed’s loose money only serves to add to the costs and uncertainties hampering entrepreneurship, business and investment. The consequences of the Fed’s policy include undermining confidence in the dollar, boosting energy costs (namely, oil priced in dollars), and raising serious concerns about future inflation. All signals from the Federal Reserve point to loose money policy for the foreseeable future. Interest in the Congress is growing for increased Fed accountability, audits and more transparency. The fact remains that when and if excess bank reserves begin to move into the economy, inflation will rise. Consider that excess reserves stood at $1.9 billion in August 2008, and registered more than $1.5 trillion in December 2012. Over the same period, the monetary base expanded by about $1.8 trillion. Small business interest in monetary policy has increased over the past several years, and for good reason. A period of increasing or high inflation could be the death knell for many businesses that operate on thin margins.
#10 Energy. Energy production in the U.S. in recent years has been one of the very few positives for our economy. For example, as noted in an October 2012 study from IHS-CERA and the Chamber of Commerce’s Institute for 21st Century Energy, “Shale oil has been the primary driver behind the nearly 25 percent increase in domestic oil production over the last 4 years, a trend expected to continue resulting in a 46 percent increase by 2015 and a 68 percent increase by 2020… Shale gas has led to a 26 percent increase in domestic gas production since 2007 and is expected to lead to domestic production nearly doubling by 2035.” This recent expanded domestic production has produced 1.75 million jobs, and is projected to generate 2.5 million jobs in 2015, 3 million jobs in 2020, and 3.5 million jobs in 2035. The increased access to and production of natural gas in the U.S. also presents a tremendous opportunity to increase exports of liquefied natural gas, and thereby, further boost economic growth and job creation.
It is worth noting that the energy industry is populated overwhelmingly by small and mid-size businesses. Among employer firms, for example, in the oil and gas extraction industry, 91 percent of firms have fewer than 20 employees, and 98.6 percent less than 500 workers; 80.3 percent of firms involved in suppor work for drilling oil and gas wells have fewer than 20 employees, and 97.8 percent less than 500 workers; 83.4 percent of firms engaged in support work for drilling oil and gas operations have fewer than 20 employees, and 98.7 percent less than 500 workers; and in the oil and gas pipeline and related construction business, 61.1 percent of firms have fewer than 20 employees, and 94.9 percent less than 500 workers.
Stronger economic growth, job creation and energy security can be achieved if the Obama administration finally approves the Keystone XL pipeline (it was rejected in January 2012 by the President), which would bring oil from Canada, North Dakota and Montana to U.S. refineries on the Gulf of Mexico. The southern portion of the pipeline, running from Cushing, Oklahoma, to the Gulf of Mexico, already was approved, and now is moving ahead. The company building the pipeline, TransCanada, has reapplied on the northern segment, which crosses an international border, and it requires approval from Obama’s State Department.
Boosting energy affordability and supply can also be achieved by reining in misguided and costly EPA regulations (like the pushing ahead on caps on emissions), saying “no” to those seeking to limit U.S. energy exports, and expanding domestic offshore and onshore energy production. High energy costs continue to hamper small businesses. In fact, SBE Council surveys have consistently found that small businesses are less competitive when higher gas prices cause them to raise prices or cut employee hours. During periods when gas prices spike, many entrepreneurs say that the survivability of their business is at stake if prices remain high or increase further. With more supply and certainty, lower costs will result in a healthy and growing small business sector.
Karen Kerrigan is President & CEO, and Raymond Keating is Chief Economist of the Small Business & Entrepreneurship Council.