The Small Biz Issues

Small business is big business. In the U.S., approximately 70 million people–one quarter of the entire U.S. population—work for or run a small business. Yet, given all the economic growth and jobs created, small business continually is an afterthought in the realm of public policy.

It is clear that America is at a crossroads and leaders in Washington must seriously consider new and innovative policies that promote a better, more confident, prosperous, and secure America in the 21st century.  The only question is how do elected officials accomplish such a broad reaching mission?

The answer is simple: provide small business with favorable policies that allow them to worry less about politicking and more about doing what they are good at – running their businesses, creating jobs and fueling the economy.

So where should Washington’s leadership start in crafting a pro-small business agenda?  In February small-business leaders gathered from across the nation to attend the Small Business Congress hosted by the National Small Business Association (NSBA).  During their time together, small-business owners talked with one another, received briefings on crucial small-business issues, and drafted and voted on the top ten issues facing small business that require immediate attention of lawmakers and the administration.  The issues are as follows:

Broad Health Care Reform
The small-business community needs substantial relief from escalating health insurance premiums.  This level of relief can only be achieved through a broad reform of the health care system with a goal of universal coverage, focus on individual responsibility and empowerment, the creation of the right market-based incentives, and a relentless focus on improving quality while driving out unnecessary, wasteful and harmful care.

NSBA’s plan to accomplish universal coverage can be simply summarized:  1) require everyone to have a basic level of coverage; 2) reform the insurance system so no one can be denied coverage and so costs are fairly spread; and 3) institute a system of subsidies, based upon family income, so that everyone can afford coverage. NSBA’s plan calls for a basic benefit package that includes only truly necessary benefits and recognizes the need for higher deductibles for those able to afford them. The basic benefit package would be subject to federally-established rating rules based on modified community rating, adjusted for geography, with defined rate bands within which all federally-defined packages must be priced. Insurers would operate on a guaranteed-issue basis and would be allowed to give limited discounts or benefit enhancements for wellness programs.
Tax incentives would be capped at the premium level for the required package, and additional coverage could be purchased using after-tax dollars. This will curtail over-insurance and ease demand for health benefits in-lieu of other compensation. These reforms would help return a greater share of health insurance to its role as a financial backstop, rather than a reimbursement mechanism for all expenses, and provide a greater focus on individual responsibility and empowerment to drive more robust consumer behavior.

NSBA also believes more must be done to improve quality and keep costs in check. Delivery system reforms that shift reimbursement from a volume-based purchasing model to a value-based purchasing model would appropriately reimburse providers on actual health outcomes and standards, rather than procedures.

Health care infrastructure investment will provide the framework for the implementation of electronic records and procedures including digital prescription writing, individual electronic medical records, and universal physician IDs. Greater transparency of medical procedure costs and outcomes would incite competition and motivate consumerism.
Greater access to primary care through medical homes and other alternatives to traditional doctor’s offices should provide near-term relief. In addition to limits on medical malpractice awards, NSBA supports the implementation of Health Courts to handle medical injury disputes. These reforms can reduce unnecessary procedures, increase efficiency, and improve the quality of health care.

It has become clear to NSBA that, to bring meaningful affordability, access, and equity in health care to small businesses and their employees, a broad reform of the health care and health insurance systems is called for.

Fair Labor Practices in the Workplace
One of the biggest threats to small business is potential changes to labor practices in the workplace. The top priority for organized labor in the 111th Congress is legislation that would change long-standing labor laws that have been on the books for over 60 years to allow for increased union membership. Organized labor’s agenda includes legislation that could have significant impact on the employer-employee relationships in small businesses, including the deceptively named Employee Free Choice Act and the RESPECT Act.

Employee Free Choice Act or ‘Card check’
The Employee Free Choice Act would take away a worker’s right to a federally supervised private ballot when deciding whether or not to join a union. Instead, the proposed bill would require the National Labor Relations Board (NLRB) to certify a union that brings in signed authorization cards from a majority of employees in the company bargaining unit. The card check system makes it easier and less expensive for unions to target and organize small businesses of any size, using any means available—false or misleading promises, threats or coercion. Employees who sign just to get persistent organizers out of their living rooms will now be stuck with the union in their workplaces indefinitely. As if this weren’t bad enough, the Act could then impose a contract on the employer, based on what a government-selected arbitrator decides. Even if a wage increase can’t get passed along, or a union pension plan is underfunded, the arbitrator could force it on an unwilling small business.
Furthermore, NLRB jurisdictional standards used to identify organizing-eligible businesses are outdated and not indexed for inflation. Some of these jurisdictional standards are shockingly low, including any non-retail company with more than $50,000 annually in direct or indirect inflow or outflow of goods or services across state lines. To be considered a small business for nearly every government program according to the U.S. Small Business Administration’s Size Standards, however, the range in total annual sales starts at $750,000 and goes up to $34 million—far above NLRB’s threshold.

RESPECT Act
Under current federal law, unions cannot organize supervisors. However, a top priority of organized labor is to dramatically limit which workers the National Labor Relations Act (NLRA) classifies as “supervisors.”

The NLRA, the nation’s primary law determining the rights of employees to join unions and bargain collectively, excludes supervisors from the definition of employee. Currently, a supervisor is defined by the NLRA as an employee with the authority to “hire, transfer, suspend, lay-off, recall, promote, discharge, assign, reward, or discipline other employees or to responsibly direct them, or to adjust their grievances, or to effectively recommend such action” so long as this authority requires the use of “independent judgment.”

The Re-Empowerment of Skilled and Professional Employees and Construction Tradeworkers (RESPECT) Act would remove from the definition of “supervisor” the duties of assigning and responsibly directing other employees. The legislation also specifies that supervisors must “hire, transfer, suspend, lay-off, recall, promote, discharge, reward, or discipline other employees” for a MAJORITY of their work time. This proposes a significant change in the NLRA resulting in a disproportionate impact on small businesses where almost no supervisor spends their time conducting any activity a majority of the time. The RESPECT Act would make virtually all employees non-supervisors for NLRA purposes.

SBIR Reauthorization, Expansion, and Strengthening
By using the proven innovative power of small, technology-based companies to meet America’s technology needs, the Small Business Innovation Research (SBIR) program is a key means of access to capital for small R&D companies and the nation’s largest source of early-stage research and development (R&D) funding.

SBIR has delivered thousands of innovations in its 25-year history through a competitive and transparent contracting process. It has provided more than 60,000 patents and now generates new patents at the astonishing pace of seven per day, on average—far more than all U.S. universities combined, at less than one-twelfth their level of federal R&D funding.

Despite the remarkable achievements of SBIR, federal R&D funding is still skewed against small businesses. Today, small R&D companies employ 38 percent of all scientists and engineers in America. This is more than all U.S. universities and more than all large businesses. Furthermore, these small companies produce 20-25 percent of the nation’s most important technological innovations and five times as many patents per dollar as large companies and 20 times as many as universities. Yet small companies receive only 4.3 percent of the federal government’s R&D dollars. The SBIR program provides more than half of this amount.

SBIR has been successful because it is based on a rigorous three-phase process that allocates contracts according to promise. Phase I funds the critical early development stages of technological innovations that have scored the most highly in responding to public “requests for proposals” by federal agencies. Phase II contracts, limited to the most effective Phase I awardees, bring innovations to the full prototype or market-ready stage. And Phase III (which utilizes non-SBIR funding, generally from the private sector) commercializes the technology. NSBA believes that SBIR Phase III should be further strengthened by Congress, utilizing best practices from the most successful SBIR commercialization efforts in the past.

To participate in the SBIR program, a small business must employ the principal researcher and not more than 500 employees in total. It also must be American-owned, independently operated, and for-profit. Despite calls from some quarters for a relaxation of these criteria, NSBA remains a staunch advocate of their continued application—believing that SBIR was intended as a means to advance the R&D efforts of actual small businesses and not larger or nonprofit entities, which already have access to far greater sources of federal R&D funds.

SBIR is a fully competitive program, imitated by countries around the world and praised by every independent third-party evaluation it has received—including the U.S. Government Accountability Office, the National Academy of Engineering, and the National Academy of Sciences.
NSBA urges Congress to build upon the tremendous success of the SBIR program by reauthorizing and strengthening the program.

Mandatory Employee Leave
NSBA urges Congress to oppose any move that would hinder an entrepreneur’s ability to create jobs—something an expansion of the Family Medical Leave Act (FMLA) of 1993 surely would do. A number of proposals to add to leave, both paid and unpaid, have surfaced in the 111th Congress. All of these would slow or stop job-creation and growth of small businesses at precisely the time when we need it the most.

Currently, FMLA requires employers to provide employees with up to 12 weeks of unpaid leave in a 12-month period. FMLA leave provides employees extended time off for the birth or adoption of a child; care for a spouse, parent or child with a serious health condition; or when the employee is unable to work due to a serious health condition. FMLA applies to employers who have at least 50 employees.

Senate Health, Education, Labor and Pensions Committee Chair Edward Kennedy (D-Mass.) and Rep. Rosa DeLauro (D-Conn.) introduced legislation, the Healthy Families Act, in the 110th Congress which would require employers with 15 or more employees to provide seven paid sick days to all employees working 20 hours or more per week. An employee’s sick time would be accrued as of the date of hire, and awarded on a pro-rated basis just three months after the date of hire. Under the Healthy Families Act, 28 percent of business owners fear that productivity would decrease. Furthermore, 25 percent of respondents expect the per-employee cost of complying with the Healthy Families Act to exceed $1,000—for a business with just 15 employees, that would mean at least $15,000, not counting lost productivity. That is at least one full time job that can’t be added.

Rep. Pete Stark (D-Calif.) has introduced legislation, the Family Leave Insurance Act (H.R. 1723), which would expand the FMLA threshold to 20 or more employee, and provide up to 12 weeks of paid leave. The legislation establishes an FMLA fund financed by employers and employees through a new fee/tax equivalent to 0.2 percent of each employee’s earnings, tiered progressively according to income level. That fund would then pay for individuals’ paid FMLA leave. This legislation could prove to be an added expense to employers and employees at absolutely the wrong time.

Paperwork and legal requirements have overwhelmed small-business owners, who, prior to FMLA, often allowed employees time off without the government telling them how to do it. Perhaps the most troublesome outcome of FMLA expansion is stifling job growth, or the potential that small-business owners would hesitate to grow, especially if it means having to give paid leave to all employees.

Access to Capital
The U.S. finds itself in the midst of the worst financial crisis since the Great Depression and America’s entrepreneurs—existent and aspiring—are suffering through a crippling credit crunch. Given that accessing capital is one of the largest and most persistent obstacles facing America’s small-business owners, this is especially worrisome.
According to a nationwide NSBA survey of small- and mid- sized business owners, 55 percent of small- and mid- sized business owners had difficulty securing credit in the previous six months—and this finding was consistent across firm size and revenue.

One of the biggest barriers to small-business financing is the requirement that debt be secured by equity in fixed assets. Many small and startup businesses lack the kind of equity necessary for traditional bank loans. This gap in debt-equity financing especially hinders startup and growing businesses, as these entrepreneurs typically do not have the assets necessary to acquire sizeable loans.

Another barrier to capital for small businesses is that banks too often shy away from the small-business community. Smaller loans generally are less-profitable for banks and typically have higher default rates. Additionally, the proper valuation and credit worthiness of small businesses are notoriously difficult to determine. Ongoing bank consolidation has lead to fewer community banks and fewer character-based loans as well.

Aggravating this state of affairs is the recent tightening of lending standards by banks. The Federal Reserve recently reported that the number of banks reporting having tightened their lending policies in the past three months remained “very elevated.” Nearly 70 percent of domestic banks reported that they had tightened their standards for commercial and industrial loans to small businesses. It should not be surprising then that the number of small-business owners who reported using traditional bank loans, was at a 15-year low in NSBA’s 2008 annual survey.

In addition to tightening their lending standards, hundreds of banks have dropped out of the lending programs offered by the U.S. Small Business Administration (SBA) or have simply stopped making—or drastically reduced the number of—SBA loans. Between 2001 and 2007, there was a 47-percent decrease in the number of banks making at least one 7(a) loan.

Meanwhile, there has been a massive decline in the amount of SBA lending. There were 57 percent fewer 7(a) loans in the first quarter of 2009 than during the same period in 2008. Additionally, total dollars loaned fell by 40 percent, to almost $2 billion. The number of loans made through the 504 program was down 46 percent from 2008.
It is vital that Congress and the administration recognize the economic benefits of fully-funded SBA programs. For every $33,000 lent through the 7(a) program, one job is created or retained. In 2002, 7(a) loans created or retained 370,000 jobs.

Alternative Minimum Tax
Although it is typically thought of as a tax on individuals, the Alternative Minimum Tax (AMT) strikes harder at small-business owners than at wage earners. Why? For starters, successful entrepreneurs tend to earn more, and 90 percent of small businesses have their profits taxed as personal income, regardless of whether the firm is organized as an S Corp., LLC, or unincorporated business. In addition, when an entrepreneur’s income carries him or her into AMT land, some business deductions are not allowed.

The AMT, which was created 40 years ago to ensure that high-income taxpayers would pay at least some tax, has failed at its original mission and now snags growing millions of middle- and upper-middle-income Americans. The income threshold that qualifies one as wealthy was never pegged to inflation, so today taxpayers earning as little as $75,000 can run afoul of the AMT. Congress has approved patches, but has yet to tackle a long-term solution.

NSBA supports full repeal of the AMT, or alternatively, supports changes to lessen the impact on middle-income taxpayers. Because many small businesses are pass-through entities, their business income is reported as personal income, subjecting increasing numbers of small-business owners to this complex tax.

Credit-Card Reform
According to a recent NSBA member survey, 59 percent of small-business owners identified credit cards as a source of financing they had used in the previous 12 months—up from 49 percent just four months earlier. Small-business owners use credit cards to finance their business more than any other source, including business earnings. In 1993, this number was only 16 percent.

NSBA data also shows that nearly three-quarters (71 percent) of the small-business owners who use credit cards as a source of funding are carrying a balance month-to-month. Twelve percent of small-business owners are carrying a balance of more than $25,000, and 38 percent are carrying a balance of more than $10,000.
Although they are increasingly turning to credit cards to finance their business ventures, 79 percent of small businesses surveyed report that the terms of their cards are worsening.

America’s small-business owners are not in the habit of advocating the passage of increased federal regulations, preferring free enterprise and market solutions, but the current practices of the credit-card industry defy the principles of a free market.

One of the basic tenets of free-market capitalism is the sanctity and insolubility of contracts, but somehow the credit-card industry has managed to insulate itself from adherence to this principle, retaining the right to unilaterally change the conditions of their contracts at any time. A free-market system also relies on actual competition, but there is no longer real competition in the credit-card industry. In 2004, the top 10 issuers controlled 88.1 percent of the market (understood as their proportion of outstanding credit-card debt).

Free market competition also is based on informed consumers, but the business practices of the credit-card industry appear geared more toward obfuscation than illumination.  Although improved disclosure—which must not be construed as simply more disclosure—is of paramount importance to the small-business community, it is not enough.

NSBA supports the following credit-card reforms:

• Prohibit the practice of universal default,
• Prohibit the practice of double-cycle billing,
• Prohibit the retroactive application of interest rate hikes—interest rate increases only should be applied to future card usage,
• Limit the interest rate percentage increases that card issuers can impose on holders,
• Require card issuers to apply a customer’s payments to the card balance with the highest interest rate first,
• Prohibit extra interest charges on card debt that the cardholder already paid in full,
• Prohibit interest charges on transaction fees,
• Prohibit late fees if an issuer’s action caused a delay in crediting a payment, and
• Establish an industry-wide practice regarding the time on which a payment must be received or sent to be considered on time.

Despite NSBA’s best efforts, language to specifically include small businesses in credit-card reform legislation debated early in the 111th Congress failed to make its way into the final legislation. NSBA will continue working with lawmakers to ensure that the protections extended to credit-card consumers also protect America’s small businesses. Small businesses are not opposed to the credit-card industry. In fact, they are increasing reliant on it. Small business simply asks it play by the same rules.

Energy Policy
The time has come to actively address America’s oil dependence and the shortcomings of its national energy policy. As small businesses produce more than half of the private sector output and consume nearly half of all of the electricity and natural gas used for commercial and industrial purposes in the U.S., it is imperative that America’s small businesses be comprehensively involved in this effort.

This national endeavor must not only protect small businesses, it must make full use of them. At the forefront of the effort to provide energy solutions, drive economic growth, create jobs, and protect the environment are innovative, entrepreneurial, and growing small businesses known as “green gazelles”. NSBA supports increased federal incentives and funding to advance the research and development efforts of these small-business innovators.
NSBA urges Congress and the administration to increase domestic energy production, construct a predictable and long-term framework of rules and incentives for the development and use of renewable and alternative energy—with a focus on technological innovation—and implement a national program to drastically enhance the nation’s energy efficiency, especially as it relates to the transportation sector.

Expand Domestic Production
Although expanding U.S. domestic oil production will do little to reduce the long-term strategic vulnerability caused by its oil dependence, it is an important, short-term action that may help stabilize volatile energy costs and assist American consumers and small businesses with their immediate energy needs.

Diversify Domestic Production
It is imperative that the U.S. establish clear, long-term goals for small businesses and consumers to use alternative and renewable energy. It is equally if not more important that the federal government fund research and create incentives, such as investment tax credits, for renewable and alternative energy innovation—including the cutting-edge work of the nation’s Green Gazelles.

Revolutionize U.S. Transportation and Automotive Industries
Transportation is the crux of America’s oil dependence: 97 percent of the oil used in the U.S. is consumed for transportation. NSBA supports incentives for the use of more fuel-efficient vehicles and the continued exploration of alternative-fuel vehicles. NSBA views hybrid vehicle technology, especially the plug-in hybrid variety, as exceptionally promising, and believes that this potential merits further exploration.

Improve Energy Efficiency
Improving America’s energy efficiency must be a central component of any national effort to confront its energy dependence. NSBA also supports efforts to expand current On-Bill Financing regulations—a proven method of providing improved capital access to small firms seeking improved energy efficiency—and other access-to-capital innovations. NSBA also supports the enactment of measures to increase the reach and visibility of the ENERGY STAR Small Business program, including the reallocation of existing EPA and DOE agency funds to increase its budget.

Estate Tax Reform
One-third of small-business owners today will have to sell or liquidate part of their business to pay estate taxes, and half of those who liquidate to pay estate taxes will have to eliminate 30 or more jobs.

A study by Greenberg Quinlan Rosner finds that a broad majority of Americans support reforming the estate tax to protect small business owners and family farms.
While the much-maligned estate tax rate has gradually decreased since 2002 and the exemption level has increased—giving small and family-owned businesses some temporary relief—more needs to be done to protect small business. Although Congress recently extended the current estate tax levels for 2009, unless futher action is taken, the estate tax is set to increase significantly, back to its 2001 levels, stripping from small businesses any sense of confidence in their ability to hand-down the family business.
While NSBA continues to support full repeal of the estate tax, NSBA members have agreed to a five-point compromise plan that would permanently repeal the estate tax on small and family-owned businesses—including farms. It would exempt estates of $7.5 million with a tax rate set at 15 percent tied to the capital gains tax rate to ensure a more fair method of passing-down a business—regardless of what event triggered the transfer. The estate tax exemption would be fully indexed for inflation and calculation of estate tax owed would include a step-up in basis, allowing heirs to use the higher basis to figure their gain when the property is ultimately sold. This compromise is necessary to make sure that small businesses can invest in the future and not in estate planning.

Self-Employment Tax on Health Care
NSBA supports measures to allow the self-employed to fully deduct their health insurance premiums on their income tax and their self-employment tax (FICA tax). Under current law, corporations are able to deduct the cost of health insurance premiums as a business expense and forego payroll (FICA) taxes on these costs. The self-employed, however, are unable to take the same deduction. As a result, they pay an additional 15.3 percent tax on their health insurance premiums.

This is a heavy burden for this group of small businesses, who already pay on average over $12,680 annually on health insurance premiums for family coverage. Eliminating this tax would reduce the average cost of health care for the self-employed by more than $1,940 annually.

This is why, Representatives Ron Kind (D-Wis.) and Wally Herger (R-Calif.) along with Reps. Suzanne Kosmas (D-Fl.) and Dave Reichert (R-Was.) have introduced the Equity for Our Nation’s Self-Employed Act (H.R. 1470) a measure that would allow the self-employed to fully deduct their health insurance premiums for the purposes of their income tax and self-employment tax (FICA tax). Senators Jeff Bingaman (D-N.M.) and Orrin Hatch (R-Utah) have introduced companion bill S. 725.

NSBA is actively working toward passage of this legislation in order to remove a significant inequity within the tax code that penalizes self-employed Americans and makes it increasingly difficult for them to afford quality health care coverage.

More on the Issues
While these are the top priorities, as identified by small-business owners, it is crucial that the 111th Congress and the Obama Administration begin to take a 360-degree view of everything that impacts small businesses in addition to these issues. As a staunchly nonpartisan organization, and America’s oldest advocacy organization for small business, NSBA looks forward to the opportunity to work with lawmakers to help craft a more friendly small-business agenda.  For a comprehensive view of NSBA’s Priority issues please click here.