Washington, D.C. – Congress and the federal government are never at a loss for finding ways to regulate and tax business. Expect an uptick of activity in 2007.
Republican control of Congress, for example, produced Sarbanes-Oxley, broad security and reporting requirements that emerged from 9-11 impacting businesses across many industries, and a forthcoming withholding requirement on government contractors, just to name some examples. Unfinished initiatives, and then some, will get new life under the Democratic majority.
Will there be any positives for small business that come from the new Congress? That’s a good possibility. Some significant bills have already been introduced. Several have a shot at passage, but there’ll be trade-offs. I will report on these in my next column.
For now, the bulk of inquiries I receive from entrepreneurs want to know where it might hurt. Will my regulatory and tax costs go up? How will they impact operations or cash flow? Well, here are some key items to watch that could impact the bottom line of business owners in 2007:
Minimum Wage Increase: The U.S. House quickly pushed through a minimum wage hike last week. The 41 percent wage increase (phased in over 26 months to $7.25/hour) will impact many firms, especially those in low-cost or disadvantaged areas of the nation. Recognizing the impact, several leading Democrats in the U.S. Senate have determined that “offsets” are necessary – that is, small businesses should be given relief to blunt the cost burden associated with higher wages and payroll taxes.
Senate Finance Committee Chairman Max Baucus , D-Mont., and Ranking Republican Chuck Grassley, R-Iowa, have offered an $8 billion tax relief package, which will likely be subject to pay-as-you-go (PAYGO) rules. This means Congress will either need to raise taxes or cut spending elsewhere to “pay for” the incentive package.
Business tax increases are always a tempting target as revenue offsets. So, in the end, businesses may get relief on one side of the ledger to compensate for the higher payroll costs associated with the wage hike. However, some may find they are getting hit with a tax increase in order to get that relief. Seem far-fetched? Such a scenario is not out of the question. (See tax increase section below.)
Data Security Regulations: In a previous column last year, I reviewed House-passed legislation that would mandate new rules on every business with respect to the security of employees’ and customers’ personal data.
The Senate did not pass a bill last session, but the Congress is expected to renew its push for nationwide rules. The previous House bill proposed that businesses establish a security policy for collecting, maintaining, selling and disseminating personal information, and identify a person within the company that is responsible for information security management. Yes, that would include every small business.
If a breach of personal data occurs — that is, if it is known or suspected that personally identifiable information such as a social security number, or credit card number is exposed – the business owner would be required to notify all affected parties, report the breach to the Federal Trade Commission (FTC), post that information on the company Web site, and to the extent possible or necessary publicize the breach to alert customers and employees (past and present) about the exposure.
While it is in the best interest of businesses to protect such data, and new technology is enabling tighter security environments, Congress thinks uniform federal regulations are necessary. (Some states have enacted their own laws.) The Congressional Budget Office pegged the cost of the previous House bill at $128 million over five years. That expense could go higher as Democrat-critics of the bill claimed the legislation was too weak.
Potential Tax "Tweaks" and Increases: Democrats are publicly airing their differences over taxes — more specifically, whether to raise them or not. Getting less attention is cross-party collaboration on tax matters, which probably should concern business owners the most. In addition, PAYGO rules will have Congress sniffing the corners of the tax code to come up with “offsets” (tax increases).
Social Security Reform: On tackling the shortfalls and challenges of the social security system, the talk is focused on raising more revenues.
“Everything would have to be on the table and compromises made,” said one influential Republican House Ways and Means Committee member at a closed door meeting recently.
Members of the Bush administration have been making similar statements. What are the politicians pondering? The talk includes raising the taxable wage cap from its 2006 level of $94,200 to $150,000. A payroll tax increase is also on the table.
Last-in First-Out (LIFO): The LIFO method of accounting was almost repealed by the Senate last year. Members of both parties view it as a “revenue raiser" for the government, and continue to look at it as a way to pay for Alternative Minimum Tax (AMT) repeal or relief.
Acceleration of the 3 percent withholding mandate on government contractors: In 2011, every business that does business with government at any level will have 3 percent of each payment withheld. An end-of-session effort to accelerate the withholding provision was thwarted in the waning days of Congress last year, but it remains a live item to offset spending proposals this year.
Other tax paperwork and changes: Both parties want to address the “tax gap.” One broad approach that has legs includes more reporting requirements by businesses to the Internal Revenue Service (IRS). These third-party reporting ideas simply mean more paperwork for small firms.
Tax increases have also been proposed. One idea recommended by the Joint Committee on Taxation, for example, would “modify the amounts subject to self-employment tax for partners and subchapter S corporation shareholders in personal business services."
Business owners will also be hearing about many proposals that impose more regulations on the workplace. From a sick leave mandate to requiring that all businesses offer payroll deduction opportunities as a way to help employees save for retirement — there will be legislation and hearings on these issues (and others), but little action over the next two years.
Congress and the new majority have a sense of urgency to get something done for the American people. Business usually figures into those plans, which means added costs, paperwork and time from business owners in 2007.
Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council, a research and advocacy group based in Washington, D.C. that works to protect small business and promote entrepreneurship. She is also founder of Women Entrepreneurs, Inc. , an association helping women business owners succeed through education, networking and advocacy. Kerrigan can be reached at email@example.com .