Testimony of David R. Clough

Senate Committee on Small Business and Entrepreneurship

November 29, 2012

Creating Jobs and Growing the Economy: Legislative Proposals to Strengthen the Entrepreneurial Ecosystem

Good morning, Chairman Landrieu, Ranking Member Snowe, and members of the Committee. I am pleased to be here on behalf of the National Federation of Independent Business (NFIB) as the Committee’s hearing today focuses on creating jobs, growing the economy, and legislative proposals to strengthen entrepreneurship.

The NFIB is the nation’s leading small business advocacy organization representing over 350,000 small business owners across the country. The typical NFIB member employs about 8 to 10 employees with annual gross receipts of about $500,000. All of NFIB’s members are independently owned, which is to say that none are publicly traded corporations.

I have been NFIB’s State Director in Maine for 28 years, and during that time I have worked closely with Senator Snowe, who has been a strong advocate and champion for small businesses during her tenure in the United States Senate and before that in the House of Representatives. The small business community greatly appreciates her leadership on issues such as regulatory reform, healthcare reform, and ensuring that small businesses have a seat at the table when regulations are being promulgated. For example, NFIB key voted Senator Snowe’s amendment (S.Amdt. 390) to the Economic Development Revitalization Act of 2011 (S. 782) that would have reformed the regulatory process and created stronger protections for small businesses in the federal regulatory process. Additionally, Senator Snowe’s amendment would have expanded the scope of the Regulatory Flexibility Act by requiring federal regulators to include an analysis of the indirect impact of federal regulations on the small business sector.

This year, for the 112th Congress, Senator Snowe received the Guardian of Small Business award, as she has eight times previously while in the Senate. She also received this award while in the House. Speaking for NFIB and small business owners in Maine, I can say that Senator Snowe will be missed but not forgotten. Her legacy of accomplishments – the positive effects she has had for small business nationally and in Maine – are greatly appreciated and will be felt for many years to come.

I would also like to take this opportunity to thank Chairwoman Landrieu and Ranking Member Snowe for their leadership on small business issues, specifically their work to introduce the Small Business Tax Extenders Act of 2012 (S. 2050), which provides incentives for small businesses to invest in and expand their businesses and helps reduce tax complexity.

Small Business Outlook: State and National

NFIB frequently conducts surveys of both its members and small business owners generally. The monthly Small Business Economic Trends survey for October 2012 found that the percentage of owners uncertain about whether business conditions will be better or worse in the next six months was at a record high of 23 percent.1 Additionally, in the most recent publication of the NFIB Research Foundation’s Small Business Problems and Priorities, uncertainty over economic conditions ranked second out of 75 problems. Four of the top small business concerns are tax related.2

1 Small Business Economic Trends, NFIB Research Foundation, Washington, DC, October 2012.

2 Holly Wade, Small Business Problems and Priorities, NFIB Research Foundation. Washington, DC, series.

While there is no single definition of a small business, the problems our members confront relative to the tax code and the uncertainty surrounding future tax rates and regulations are representative of most small businesses.

This is consistent with what I am hearing from small business owners in the state of Maine.

Maine, like many states, is struggling to recover jobs that were lost in the Great Recession and build a strong economy for the future. The November 2012 report from the state’s Consensus Economic Forecasting Commission indicates it will take until 2017 to get back to the employment level of 2007. By comparison, the April 2011 report indicated the recovery of jobs would be accomplished in 2014. And, the February 2010 report indicated the recovery of jobs would occur in 2013.3 The answer to the question “When will we get there?” is taking longer than had been expected. Meanwhile, tens of thousands of unemployed workers and thousands of young people entering the labor market in Maine are wondering what opportunities will exist for them. Existing and new small business owners are wondering, too.

Various business leaders briefed the Forecasting Commission in late October on trends in particular industry segments. As noted in a staff summary:4

Bankers – “Maine banks are well-capitalized and very liquid but have faced increased compliance expenses due to new regulations.”

3 Report of the Consensus Economic Forecasting Commission, Maine State Planning Office, Augusta, ME, series.

4 Summary of CEFC Data Gathering Session on October 25, 2012, Maine State Planning Office, Augusta, ME, October 2012.

Builders & Contractors – “The construction backlog indicator has trended down to just under 5 months, which means jobs may be starting to dry up a bit. An informal survey of about one-third of members found that conditions have been fairly stagnant over the past year.”

Auto Dealers – “[E]mployment in auto dealerships has remained relatively stable, recovering from the dip caused a few years back by the auto industry bankruptcies. There are workforce concerns in the coming years, particularly around the availability of technicians with the computer skills that are now needed.”

Manufacturers – “While some segments of the manufacturing industry are stagnant, others (such as aerospace and medical devices) are growing. [T]he skills gap is the biggest issue for the industry, both in Maine and nationally. Companies are unable to find the skilled workers they need.”

Where the jobs of the future will come from and what types of businesses will create those jobs are key questions.

In the past, small businesses have led the recovery of jobs lost in a recession. In the past, small businesses have been the key seedlings of future growth, innovation, and economic vitality.

But, to borrow from Yogi Berra, “The future ain’t what it used to be.”

A year ago and into 2012 the National Governors Association held a series of regional meetings around the country that were focused on the topic of growing state economies. A keynote presentation at those meetings by McKinsey & Company – Faltering Engine: What’s Happening to Today’s Small Business? – noted that the rate of startups (new firms less than 1 year old) is down significantly from the highs and lows of 1993 to 2010.5

The McKinsey presentation noted several causes including sharply decreased optimism, financing problems, and hurdles caused by regulations and taxes.

“Uncertainty” and “caution” are key words that I hear from small business owners in Maine.

They are uncertain about economic trends and whether future demand for a product or service is predictable enough to support adding jobs or taking out loans for investment in new machinery and equipment.

Uncertainty about costs is another factor. Will new government programs affecting business – federal, state, local – entail costs that are manageable? The costs and effects of the Affordable Care Act are on the minds of many business owners.

5 Faltering Engine: What’s Happening to Today’s Small Business?, McKinsey & Company, Discussion Document, National Governors Association, October 11, 2011.

Uncertainty about workforce preparedness also concerns small business owners. Will the workforce have sufficient skills and be available in sufficient numbers? What will be involved in training or retraining workers of the past for the jobs of the future?

These are general themes. What one hears from particular sectors – retail, services, tourism – varies by location of the business and time of the year. Business owners who survive a significant recession vow to be cautious about over extending themselves in the future; they become more risk averse.

Years ago I heard a definition of small business that perhaps captures this spirit:

A small business is one that is independently owned and operated. It has missed at least one payroll. It is small enough to be exempt from government regulations it knows about but large enough to be cited for violating regulations it never heard of. It has at least three fewer employees than it really needs to get the job done. And, it has been in business long enough for the owner to periodically question the wisdom of ever starting it in the first place.

Meanwhile, there are business owners engaged in technology development, or exploring innovative uses of technology, who are eager to obtain funding for research, development, production, and marketing. They are excited about what their business is doing and scared that they are not moving quickly enough, that some other business, somewhere else in the world may be working on the same idea and may be a step ahead.

Most importantly, small businesses need certainty regarding taxes and regulatory actions in order for them to further plan and grow their businesses. However, the uncertainty surrounding the fiscal cliff has hampered their ability to do so.

Uncertainty and the “Fiscal Cliff”

A slew of tax provisions important to small business are set to expire at the end of 2012. These expiring taxes add up to an almost $500 billion tax increase for 2013 alone. This is a major concern for small business owners because it creates uncertainty since owners do not know what their tax liability will be in 2013.

Because most small businesses are organized as pass-through entities, which pay taxes at the individual rate, the expiration of the lower individual rates first instituted in 2001 will hurt small businesses more than other taxpayers. Allowing only the top tax rates to expire will cost 710,000 jobs and shrink the economy by 1.3% in the long-run according to Ernst & Young and will cost 200,000 jobs in the short-run according to the Congressional Budget Office.

In addition to individual rates, the estate tax rate will increase from 35 percent to 55 percent and the exemption will drop to $1 million from $5 million. This will result in 13 times the number of small businesses subject to the estate tax. Also, unless it is “patched” next year, the AMT will hit more small business owners. Finally, many important tax provisions, such as expensing under section 179, will be greatly reduced next year.

Congress must act immediately to permanently extend current individual income tax rates, maintain the estate tax at current levels, and extend other expiring business tax provisions that help small businesses to succeed.

Conclusion

I appreciate that the Senate Committee on Small Business and Entrepreneurship is taking a close look at legislative proposals to strengthen entrepreneurship that as a result will help create jobs and grow the economy. As you move forward, I urge you to be mindful of the unique challenges – such as regulatory, workforce, tax, financial, attitudinal – that face small businesses.

Thank you.