Small Businesses Still Suffer

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The only thing that Americans seem to agree on is the importance of small businesses

About the only thing that Americans seem to agree on these days is that the health of small businesses is important to our future. It is therefore noteworthy that a new government study from economist Mark Crain of Lafayette College shows that the cost of federal regulations is stifling our smaller companies. Crain reports that compliance with the gazillion rules and regulations handed down by our nation’s bureaucrats are much more burdensome for companies with fewer than 20 employees than for their larger counterparts. Specifically, Crain says that little firms spend $10,585 per employee to meet federal regulations, compared to $7,755 per employee for the largest businesses.

That’s a pretty heavy load to lift. The breakdown includes more than $4,000 in environmental costs, $781 to comply with OSHA charges and in excess of $4,000 per employee to comply with economic costs. Crain, who updated a report first issued in 2005, estimates the total cost of the nation’s compliance with federal regulation at $1.75 trillion. By the way, that is up nearly 50% from (a recalculated) $1.172 trillion in 2005. The perception that government regulators have been slacking off over the past decade is pure fiction. At a time when many small businesses are struggling, having the government continue to ladle on regulatory costs seems nuts.

Here’s why. It has been widely publicized that 65% of net new jobs created between 1993 and 2009 were added by small firms. Moreover, these companies employ half of all private sector employees. Here’s the stat you may not know: Only about half of new start-ups survive for five years. It’s tough founding a new business. It’s estimated that 552,600 new companies opened their doors in 2009, but 660,900 closed for good. Though 2009 was a miserable year for any business adventure, the death rate for small firms is always high; only one third makes it to their ten-year anniversary.

Given the importance and fragility of small enterprises, Republicans and Democrats are tumbling all over each other to appear especially supportive. They are like divorced parents fighting over an only child, each offering more and more goodies to win their affection. Consequently, there are some good ideas on the table. Republicans in the House this week unveiled their Pledge to America, which among other things promised to “Rein in the Red Tape Factory in Washington, D.C.” It describes “excessive federal regulation” as a “de facto tax on employers and consumers that stifles job creation, hampers innovation and postpones investment in the economy.” They propose that any new federal regulation that is deemed to cost the country more than $100 million annually require Congressional approval.

Why not? I have no idea whether the number should be $100 million (which the government apparently classifies as economically significant – don’t we just know that number is headed north!) or $250 million or even higher to keep the wheels of government rolling. I do know that the ability of agency personnel to dream up significant and costly rules – such as the EPA has done in the past year – is incredibly damaging.

The Obama administration meanwhile pushed through its own bill to help small companies. It contained a variety of provisions, but the main thrust was to help make credit available to small firms. While at various times in the past two years this might have been useful, a recent survey conducted of its members by the National Federation of Independent Businesses (NFIB) concludes that acquiring credit is not an issue for most firms. “Overall, 91 percent of the owners reported all their credit needs met.” This is why many are hoping that the Obama team will, after the midterm elections, hire some members of the business community – so that they will be more informed of the issues. Assuming they are open to suggestion, which is not at all a given.

After all, small companies have made it clear that they are not in favor of Obamacare, despite ranking spiraling health-care premiums as a top challenge for many years. Most entrepreneurs are convinced that their insurance costs will ratchet up even more rapidly under the new bill, and of late their fears appear justified. Because of the mandates included in the legislation, and despite threatening warnings by the Obama administration, insurance companies are hiking rates substantially. Anthem Blue Cross and Blue Shield, the largest insurer in Connecticut, is raising premium prices as much as 20%, Aetna is hiking its prices up to 7.4% in California, and so on.

Meanwhile, the debate over extending the Bush tax cuts rages on. Though the Democrats contend that only 3% of small firms will be affected by their plan to extend lower rates on all but those earning over $250,000 (per couple), IRS data indicates that some 48% of the income earned by small companies will be impacted. The NFIB is urging its members to write to Congress in favor of repealing all tax cuts. According to an NFIB survey, “Seventy-five percent of small businesses are organized as pass-through entities, meaning they pay taxes on their business income at the individual rate.” They view the proposed hike in the top rate as “a tax increase on small business.”

Founding a new company takes guts and optimism. The latter is in short supply today; the former is part of America’s DNA. The Obama team is going to have to make some midterm corrections to stay in the game. Hopefully, they will push measures that will bring back business optimism, and along with it, the hopes of the country.

Editor’s Note: Liz Peek is a financial columnist.

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