Attack on Small Businesses

In June, the Democrats in control of the Wisconsin Legislature and the Doyle Administration signed into law a host of new taxes on small businesses.

First, there is the increased income tax, allegedly taxing the wealthy but in reality taxing small businesses because business owners own their companies as "pass-through" entities, which means that the income from their businesses flows directly through to their own personal tax return.

But taxable income is not take-home pay because small business owners also have to re-invest most of their profits back into their businesses in order to grow the business, provide working capital, and reduce debt.

Likewise this past June, the Legislature and the Doyle Administration passed a hefty increase in the capital gains tax. Some of the tax increase came cleverly disguised in the form of reduced deductions.

Again, small businesses will be the ones most hurt, especially those thinking of selling their business to their adult children. Effectively, this tax increase means that many small business owners who were thinking of selling and using their nest egg to retire will now have to work years longer in order to build up additional value in their business to offset the tax increase.

Of course, small business owners are not stupid; they’ll simply move their official residence to another (tax free) state a year before they sell, and that’s the unfortunate consequence of tax increases; they force Wisconsin residents to leave the state, taking their capital with them.

The state also eliminated many Tommy Thompson-era laws like the Qualified Economic Offer, which means that we’ll see large increases in school expenditures as the elimination of the QEO means the teachers union can negotiate unlimited increases in pay and benefits.

But wait, there’s more! The state is doubling down by reducing state aid to cities and school districts with cuts of up to 15%, which means cities and schools districts will be forced to impose double-digit property tax increases next year as well.

When small business profits are down significantly this year and next, hitting them with a combined 30% to 40% increase in aggregate taxes is unconscionable. There also could be the added burden of a proposed health care surtax.

Now add in the coming energy tax if Cap and Trade is passed, along with a new health care tax, and the burden on small businesses is going to be overwhelming next year. Worse, small business owners will lose control over their own fate as the government steps in to dictate health care rules, energy regulations, and a whole host of other new regulations.

And while small business owners are suffocating from all the tax increases next year, they will have the added pleasure of seeing their government bailout large corporations using those tax dollars, but not assist CIT Group, which is a provider of credit and "factoring" for 950,000 small businesses across America. Think of CIT as the Federal Reserve Bank for small businesses; CIT acts as a clearinghouse for payments, thereby providing the temporary liquidity small businesses need to survive. The CIT crisis will have a much larger impact on Main Street than any single large corporation that has been bailed out to-date.

While Obama provides tens of billions to GM, AIG — I guess you need an acronym to get bailed out! — and a whole list of other large corporations that got themselves in trouble, administration officials do not see fit to assist CIT. Yet CIT provides the lifeblood of liquidity to small businesses that without it, will incur severe cash crunches.

Sure, if GM failed it would affect around 4,000 suppliers, but if CIT fails, it will impact almost one million businesses. Shutting down credit to those businesses will, in turn, impact millions of other small businesses.

We let the investment banks tap into the Federal Reserve Bank; why not let CIT? Unlike the investment banks who were gambling for profit, CIT is actually providing a fundamental business purpose. And while I don’t like bailing out businesses of any kind with tax dollars, once the government started down this path, selecting which businesses live and which die is a recipe for political meddling.

Talk about Caesar fiddling while Rome burns. Obama is distracted, trying to remake the best health care system in the world when it’s not broken; meanwhile, the lifeblood of small businesses across America is going to go under without help. Apparently, our emperor (like Prince Henry Paulson before him) only likes to help large corporations. You didn’t see him show any sympathy towards the 4,000 car dealers that are going to be closed.

Add to this the multi-million compensation packages being offered to attract talent at government-owned banks ($6 million in one case), and you have got to pull your hair out at the lack of common sense being displayed by our present government. Do you know how many small businesses that one pay package of $6 million could help?

The administration is more than happy to pour billions into large corporations, but is not willing to directly help small businesses. Likewise, the vast majority of the stimulus money has gone in as transfer payments to state governments to bail them out of their spending excesses with very little to help Main Street America. Have you ever wondered how Doyle and the Democrats magically closed a $6 billion deficit and still managed to spend 6% more than last year?

Being an optimist, I hate to the bearer of bad news but folks, if we don’t wake up to reality and to the charade that our elected officials are pulling on us, small businesses are going to be in a world of hurt next year.

Tip of the Month: Declining foreign purchases of U.S. Treasuries combined with massive federal government borrowing signals increasing interest rates in the future. The Wall Street Journal reported foreign purchases of U.S. treasuries in May were under $8 billion, compared to a monthly average of $95 billion in 2006.