Obama's Proposed Hiring Tax Credit is the Wrong Answer for Small Business.

Why Obama’s Proposed Hiring Tax Credit is the Wrong Answer for Small Business.

The administration has recently proposed several measures to “stimulate” small business and encourage hiring. There are four components of the proposed plan: 1) a $5000 per worker tax credit for each net new hire, 2) a reimbursement of the increase in social security taxes incurred as a result of the net new hires, 3) elimination of capital gains taxes on investment in small business, and 4) additional SBA funding and loan guarantees.

As a small business owner, I can certainly appreciate the good intentions of the administration in attempting to help business succeed and grow. But, as a small business owner, I also understand the barriers to growth and new hiring, and I can see how the aforementioned proposed measures are unlikely to help.

In the current environment, there are a few reasons why a small business may be reluctant or unable to hire. First, the business may simple not have the capital or revenue stream to support an additional employee, or enough to reinvest in growth. Second, a small business who might have the capital or revenue stream may be reluctant to hire or grow because of uncertainty about the ongoing costs. Is revenue sustainable? Are there unforeseen new costs down the road that would make a new hire unsustainable? Are there foreseeable costs that appear to exceed any potential increase in revenue?

These issues boil down to one thing: uncertainty. The future for small business is more uncertain now than it has been in years. Are there new taxes coming? Will a cap-and-trade bill, or health care reform increase costs? As a physician, I ask, What will Congress do with the SGR formula this year? Will the Bush tax cuts expire, causing a new decrease in income to the business owners, that makes a new hire unaffordable?

Unfortunately, the Obama proposals do nothing to address these concerns. What they do is exacerbate them. Will a new hire, that a small business owner can now just barely afford, thanks to federal largesse, result in a sufficient increase in revenue so that the new hire is sustainable when the credit expires next year? Is the small business willing to take the risk that they will improve revenue sufficiently to avoid the cost of laying off the new hire, one year from now? What is the potential effect on the business’s unemployment rating?

Try this thought experiment: You run a small business. You would like to hire a new employee, and grow your business, but you have not been able to do so. For the sake of argument, your cost of a new hire is $40,000. Now, thanks to the Obama proposal (should it pass) you can get the same hire for about $33,000. (You get a $5000 credit and save your share of social security tax on this employee’s income.) You couldn’t afford the employee for $40K (else you would have hired them already), but perhaps you can at $33K. Will you be able to afford the employee a year from now? Will the expiration of the Bush Tax cuts make this $33K too expensive next year? Will the long term effect of laying off this employee next January offset any potential gains? What about Cap-and-Trade, health care mandates, and the SGR fix?

No – this small business is not likely to hire. (I am in this sort of position, and the 5K+ is not enough to induce me to hire). A larger “small business”, across town, that has more revenue and capital, was thinking about hiring five or six new employees already. Now, thanks to the tax credit, maybe they can afford to hire seven. The risk to this business is much less than the risk to the smaller business. But, being smart business people, they hire the six they were going to hire anyway, and apply the tax credit for the six to the bottom line. If they grow, maybe they’ll need the seventh hire next year, maybe not.

So you see, the proposed plan does very little to increase jobs. It rewards businesses that are ready to hire anyway with some additional cash. After all, even those businesses can recognize that the credit will expire next year – better to apply the credit to the bottom line.

So what, then, can be done to stimulate businesses that are not ready to hire, to hire? The administration could take actions which increase confidence among business owners that the environment they operate in today will exist tomorrow. Tax credits don’t help. Lower overall tax rates, which stimulate business even in the absence of hiring, will improve cash flow and improve the health of businesses so that they can grow and hire. Making the Bush tax cuts permanent, for example, would provide at least some certainty that there will not be a new, increased federal income tax bill next year. For medical businesses, Congress could fix, once and for all, the broken SGR formula. The administration could take a more measured approach to “reforms” such as health care and clean energy.

Otherwise, we will spend 30 billion rewarding businesses for doing what they would have done anyway, with no real net gain in jobs. Except of course the new IRS hires that will be required to administer the new credits.