2006 Small Business Policy Review

For most entrepreneurs, Washington did little to help or hurt business operations in 2006. On the margins, there were some policy and legislative moves that helped the bottom-line, and for the most part initiatives imposing new burdens did not fully advance.

The big exception, however, will in time impact small businesses that do business with government. In 2011 a new mandate kicks-in requiring governments at all levels to withhold 3 percent of each payment made to vendors. Yes, another cash flow issue to add to the list. (*More on this below.)

At the end of the year there is always a “what could have been” or “thank goodness that did not happen.” A lot of good initiatives died in the Senate, as did some bad ideas. The story will continue in 2007 and the Small Business Beltway Report will continue to keep you updated with the latest.

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Of course, new rules that advanced at the state and local level impact the environment for entrepreneurs and small business growth. New “business fees” and employer mandates come to mind (mandatory paid sick leave in San Francisco, for example).

I invite you to send me these "highs and lows," and I will share them with readers in my next column — where I will also look at potential “threats to the bottom line,” courtesy of Washington in 2007.

(Send your “highs and lows” and comments to: kkerrigan@sbecouncil.org.)

2006 Small Business Policy High and Lows:

The Highs:

Tax Relief Extended: Planning business operations under a tax code where provisions are forever “temporary,” phasing in and out, or expiring is certainly challenging. Congress extended some key tax provisions this year, but none were made permanent.

In the May 2006 tax bill, the Section 179 expensing increases were extended for another two years along with lower capital gains tax rates. The research and development (R&D) tax credit was finally extended during the lame duck session – it covers expenditures in 2006 (retroactively) and 2007, and creates a new Alternative Simplified Credit.

The simplified method should enable more businesses to use the credit. In addition, a two-year extension of the Work Opportunity and Welfare-to-Work Tax Credit were included, as well as a one-year extension of the deduction for energy efficient commercial buildings.

Improved and Expanded HSAs: In its final days, the 109th Congress moved a provision in the broader tax bill to improve access to Health Savings Accounts (HSAs). From an administrative perspective, the enhancements should ease the transition to HSAs especially for small firms and the self-employed. Yearly contribution limits are increased, and individuals are allowed to make a one-time transfer from health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs) into the HSA (up to the amount that was in the account as of September 21, 2006). The bill also eliminates contribution penalties for mid-year enrollees, and allows employees (on a one-time basis) to make a tax-free transfer of money in their individual retirement accounts to their HSAs.

SEC Extends Section 404 Compliance Deadline/Accelerates Reforms: The Security and Exchange Commission (SEC) was roundly criticized for rejecting the course of action prescribed by its very own small business advisory group, which put forward a host of recommendations to help ease the cost and complexity burdens associated with Sarbanes-Oxley (SOX), Section 404.

Twice this year the agency extended the compliance deadline on internal control reporting for smaller public companies, most recently in mid-December, making the new deadline Dec. 15, 2007. On the same day, the SEC announced that companies of all sizes that have recently gone public will be provided a transition period to comply with Section 404.

And, the Lows:

Eminent Domain Protections Die in Senate: The U.S. Supreme Court’s infamous Kelo v. City of New London decision set off a firestorm of protest from concerned citizens and lawmakers across the political spectrum. Eminent domain abuse has largely fallen under the guise of “economic development,” and thousands of small businesses have been the victims of such schemes.

In broad and diverse efforts to correct the inequities of Kelo, state legislatures, citizens and the U.S. House of Representatives got busy. The U.S. Senate, however, did not.

In the House, the “Private Property Rights Protection Act of 2005” passed by a whopping 376-38 in late 2005. The legislation, which aims to curb eminent domain abuse by withholding federal economic development funding from states and localities that abuse their eminent domain authority, was similarly introduced in the Senate. Unfortunately, it was never a priority for action.

Health Plans Stall: The HSA expansion bill was an unforeseen bonus for small firms, yet it was another disappointing year for enabling legislation to establish small business health plans. The Small Business Health Fairness Act, H.R. 525 – legislation that would enable small firms to group together and negotiate for more health plan choices at affordable rates – passed the House in July 2005 by a vote of 263-165. The Senate moved on a conceptually similar measure, the Health Insurance Marketplace Modernization and Affordability Act, S. 1955 — but it only received 55 votes of the 60 needed to proceed under Senate rules.

*Withholding Mandate on Independent Contractors: Just about any business that has a contract with government at the local, state or federal level will have 3 percent of their payments withheld starting in 2011. This provision was silently tucked into the “Tax Increase Prevention and Reconciliation Act of 2005,” which was signed by President Bush in May 2006. Many members of Congress were unaware they voted for the new mandate.

A slow revolt is brewing among government contractors nationwide, and a bill was introduced in both houses to repeal the provision. However, attempts have been made to accelerate the implementation date of the withholding mandate.

In the waning days of Congress, for example, Republicans and Democrats proposed accelerating the mandate to 2007 in order to “pay for” other programs. That effort was foiled following an effective lobbying blitz, but the provision remains a tempting “off set” target, particularly next year, if the Democrats make good on their promise to institute “pay as you go” rules.

Minimum Wage Hike Momentum: Many small businesses pay above the minimum wage, but they still don’t like the idea of government setting private-sector wages. Business owners in thriving economic areas may shrug their shoulders at mandated wage increases, but start-ups and firms in less prosperous areas of the country could be devastated by such hikes.

The public and most politicians think raising the minimum wage is a good idea. On Nov. 7, in every state where voters directly cast their ballot for a minimum wage increase the measures passed. A minimum wage hike is on the 100-hour agenda outlined by incoming Speaker of the House Nancy Pelosi, D- Calif. President Bush supports an increase in the minimum wage too, as long as it has “small business offsets.”

The wage hike is coming, though the offsets are questionable.

The War on Eateries: Still want to own your own restaurant one day? Government seems to be constantly working to increase its share as silent partner. The trans fat ban in New York City, minimum wage hike proposals across the board, the ban against foie gras in Chicago, full smoking bans, mandatory calorie counts on menus, potential meal taxes … the list goes on!

It seems counterintuitive, but at least in the midst of all this trendy regulating twenty-three states have had the common sense to protect restaurants from obesity lawsuits. None-the-less, we Americans love our eating establishments. The National Restaurant Association estimates that sales will increase 5 percent in 2007, to $537 billion. So future restaurant owners take heart — even with government’s growing interest in what consumers choose to put in their mouths, the market remains a hot one for innovative approaches in meeting our nation’s diverse dining demands.

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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 kkerrigan@sbecouncil.org.