Oct. 29, 2010
Will Small Business Jobs Act Boost Economic Growth?
The recently enacted Small Business Jobs Act of 2010 fulfills a promise U.S. President Barack Obama made to entrepreneurs soon after his election, pledging to create incentives aimed at encouraging small-business creation and growth.
Many experts agree that the package of finance and tax incentives represents some good news for small businesses struggling to cope with weak economic conditions. Although some faculty at Emory University and its Goizueta Business School and other observers praise the new initiative, others wonder if it will have the necessary impact to help jump-start the economy.
"Until now, large companies have been the biggest beneficiaries of stimulus programs and tax incentives," says Thomas Smith, an assistant professor in the practice of finance at Goizueta. "The accelerated tax write-offs featured in the new act are a good idea, since they’re aimed at incentivizing businesses to make capital purchases that can have a ripple effect throughout the economy."
Among other changes under the Small Business Jobs Act, companies can reduce their taxable income by immediately expensing the costs of certain kinds of newly acquired business assets, instead of depreciating them over their "useful life," a period of years determined by the Internal Revenue Service. Generally, companies like to expense their assets quickly as a way to significantly reduce their tax liability.
The asset write-offs, popularly known as Section 179 after the applicable part of the Internal Revenue Code, were previously limited to $250,000 in a given year. The new act raises the threshold to $500,000 of newly purchased assets per year, subject to certain limitations, during 2010 and 2011.
In another bid to get businesses to spend more, the act extends and revises the so-called bonus depreciation rules, which let taxpayers depreciate 50 percent of the cost of certain assets in the first year they are placed in service.
An earlier set of bonus depreciation rules expired at the end of 2009, but the new act extends it to assets placed in service through the end of 2010, and certain assets may qualify even if they are purchased and put into service through 2011.
Some observers have questioned the timing of the legislation, suggesting that few small business owners will risk making significant capital expenditures during the current downturn. They also complain that the bonus depreciation rules, while welcome, have such a limited timeframe that few businesses will not have enough time to plan and get financing for the capital purchases.
Smith, however, isn’t so sure about that.
"The fact is that machinery and equipment is either wearing out—or, in the case of computers and other technology-based assets—is becoming obsolete," he says. "Businesses that want to stay competitive aren’t likely to hold off on necessary purchases just because the economic recovery isn’t moving as quickly as they hoped. Obama’s responses to the recession may not all be perfect, but he’s moving in the right direction."
If Smith was hedging on his view of the tax incentives, another Obama initiative has his full support.
"I think the tax incentives were a good idea, but the $30 billion that’s being released to banks to stimulate small-business lending is even better," he says. "Many small business owners I’ve spoken with have complained that they’ve wanted to take advantage of expansion and other opportunities, but simply couldn’t get loans to finance their plan."
Besides replacing aging assets, some business want to upgrade to more efficient machinery and equipment that can reduce their operating and other costs, adds Smith.
"It’s difficult to say with certainty exactly what the catalyst to spur business activity will be," Smith observes. "But we’ve got to try bold, new initiatives like these, as well as other strategies, to incentivize businesses to start hiring again. To do nothing would be myopic."
Perhaps, but this economy presents some unique challenges, says T. Clifton Green, an associate finance professor at Goizueta.
"Although the recession is officially over, we seem to be having the jobless recovery that people feared, in that unemployment is still very high," notes Green. "The idea behind the $30 billion government bank-loan program and the tax credit initiative is to get small businesses spending to expand their businesses and hire new people."
But large companies can easily borrow at historically low rates, "and they are not using the money to expand," he adds. "Rather than hiring, they're using new debt to buy back stock or replace old technology that they held off replacing during the recession. The recent behavior of large business suggests the small business act may not have the intended new hiring effect."
Indeed, William J. Carney, a chaired professor of corporate law at Emory, stresses that another administration initiative, healthcare reform, may have already undermined any benefit the Small Business Jobs Act may have provided.
"Congress meant well by pushing businesses to provide healthcare insurance," he says. "But it could be counterproductive to hiring, especially among low-wage employers who don't want to take on "Cadillac" insurance programs for minimum-wage workers. We've already seen pushback from McDonald's Corp. and other big employers that complained and are getting limited waivers."
Yet New York City entrepreneur and Goizueta graduate Brett Klasko believes that more credit access could boost businesses.
"Opening up the lending channels is a good idea," says Klasko, chief executive officer of the marketing firm Phinaz whose subsidiaries, Ticket Boosterand Investors Alley, focus on the sports and financial industries, respectively.
"The additional federal funding could give banks an incentive to lend," he adds.
If the effectiveness of this program and others is in debate, then how—or if—such legislation can stimulate a positive response with voters in the midterm elections is even murkier.
"I don’t know if this program and others will really help the Democrats much in the midterm elections," notes Klasko. "For example, the president has been pushing to let some or all of the Bush-era tax cuts expire, and I don’t think that’s a good idea, since it will end up hurting businesses."
Obama may hope that the administration’s most recent stimulus effort will help Democrats in the November elections, but Goizueta finance professor Tarun Chordia does not believe it will help the economy much.
"The act, like the previous "cash for clunkers" and "homebuyers’ incentive," might just move some activity forward," he says. "It might not really create new activity, and we’ll suffer the aftereffects later on."
In contrast to these "small fixes," there’s a real need to upgrade infrastructure, says Chordia. "We currently have spare capacity in the economy, and it is important that the right projects are funded. There is a large debate in economics between those who feel that government spending on infrastructure projects during downturns can help future GDP growth and those who feel that government spending is generally wasteful. It is probably true that projects funded for political reasons, just before the November elections, are likely to be wasteful.
Chordia believes that big issues like the hangover in the housing market will take at least two or three years to resolve, regardless of what the federal government does.
"This recession is different than past slumps," explains Chordia. "In this one, we’ve seen a broad retreat in asset prices, and it will take time to get supply and demand back into balance. At this point the motivation for the stimulus programs seems to be the November election."