March 23, 2021
Total Spectrum Strategic Consultant Congressman Erik Paulsen shines a light on some of the programs that have given America’s small businesses some respite during and after the pandemic, and a few policy proposals that may hurt them exactly when they can stand it least.
There are over 30 million small businesses in the United States, and they account for over 60 percent of the net new jobs in the United States. But nearly 164,000 small businesses have closed since the beginning of the pandemic, and about 98,000 of these small businesses say they have shut their doors for good.
Thankfully, many other small businesses have shown amazing resilience. They weathered the pandemic because of skill, ingenuity, and help from Congressional legislation that was targeted at keeping small businesses operating.
The Paycheck Protection Program provides loans to small businesses so that they can keep their employees on the payroll as well as hire additional people. These loans can be forgiven if 60 percent of the loan is attributable to payroll costs. In addition, the Employee Retention Tax Credit can be used by borrowers who use the Paycheck Protection Program. These programs have provided a significant source of financial relief for many small businesses coping with the financial impact of the pandemic.
The legislation that created and then expanded both programs passed overwhelmingly in 2020 with bipartisan support. President Biden recently unveiled a new set of initiatives aimed at enhancing the Paycheck Protection Program, such as a two-week period where only small businesses with fewer than 20 employees can apply and modified rules for sole proprietors, independent contractors, and self-employed individuals. These steps were also widely applauded.
America’s small business community certainly has suffered over the past year, but optimism is starting to return. The National Federation of Independent Small Business’s Optimism Index rose to 95.8 in February, a slight bump up from January but still below the 47-year average of 98. The NFIB’s recent monthly jobs report showed that there is a slight increase in those small business owners who expect to hire more employees over the next three months.
There is little question that talk about a minimum wage boost to $15 per hour dampened the optimism of many small business owners. The recent $1.9 trillion American Rescue Plan did not include a minimum wage increase, but Congress indirectly saddled many businesses with a new challenge when it increased unemployment benefits.
Employers who want to hire more people at a starting rate are often competing with the combination of state and federal unemployment benefits. Some small businesses simply will not be able to hire employees at that level even if they need more employees to meet growing demand. As a result, it will likely take longer than usual for the unemployment rate across the nation to drop.
Another factor weighing against increased optimism among small business owners is the talk in Washington D.C., about tax increases. The centerpiece of the pro-small business tax changes that were in the 2017 Tax Cuts and Jobs Act is the Small Business Deduction. It was designed to reduce the difference between the top corporate tax rate of 21 percent and the top individual tax rate of 37 percent at which small businesses otherwise would be taxed. It is important because more than 90 percent of small businesses are organized as pass-throughs. Qualifying pass-through businesses can claim up to a 20 percent tax deduction on their share of the business’s income up to $164,900 in tax year 2021, or $329,800 for those filing jointly. That provision reduces the tax rate for a small business owner or partner from 37 percent to around 29.6 percent. According to the National Federation of Independent Business, 81 percent of business owners believe the Small Business Deduction is important to the health of their businesses.
President Biden and some in Congress want to repeal the Tax Cuts and Jobs Act, including the 20 percent small tax deduction, while increasing taxes on higher income individuals — many of the owners of small businesses — to just below 40 percent. This would drive up taxes on small businesses and would strongly discourage companies from organizing as a pass-through entity.
President Biden recently said that “Small businesses are the engines of our economic progress. They are the glue and the heart and soul of our communities, but they are getting crushed.” He is correct—but getting rid of the small business tax deduction and adding new tax burdens will not create more optimism among many small business owners, which may slow down the hiring of new employees and discourage other investments in their companies.