Small Businesses will qualify for new tax breaks for their start-up costs under the new bill. Image from Flickr.

With an estimated cost of $7 billion over 10 years, Congress has passed a package of small business stimulus measures. This package will increase tax cuts, spur lending and provide new equity financing. This bill is in response to the increasing costs of starting a business, and will be overseen by the Treasury’s inspector general.

Small business bill cuts taxes

The small business bill is a combined bill that closes tax loopholes and renews tax cuts for small businesses. There would be $3.6 billion in tax breaks for small businesses to be implemented over the next decade. These tax breaks would be paid for by increases in taxes on some large-business investments. Small businesses would also be able to deduct startup expenses from their taxes. This provision of the bill began as a separate measure in Congress, but is being combined as it is sent to the Senate.

Additional money to flow to small businesses

The small business lending bill would create three major avenues for small businesses to get money. First, there would be a $30 billion fund of “preferred stock” that banks would be allowed to tap based on their lending to farms and small businesses. There would also be $2 billion given to states to help increase state-funded loans to small businesses. Third, the Small Business Administration would be authorized to match $1 billion of private investment in startups.

Paying for the small business bill

In order to pay for the estimated $7 billion cost of the small business loans bill, the government will be increasing some taxes. Specifically, tax breaks for Grantor-Retained Annuity Trusts — trusts set up to avoid taxes on gifts — will be rescinded. Additionally, taxes on the sale of some stock would be increased to the point of standard income taxes as opposed to capital gains taxes.

Vote on the small business bill

The small business bill has passed the house on a 241-182 vote. The bill is now being combined with the $3.6 billion tax-cut bill for small businesses and will go to the Senate. The bill is expected to pass the Senate, though not easily. Some Senate Republicans are arguing that this bill is really “another bank bailout” masquerading as a small business stimulus package. Democrats counter that the bill takes a balanced approach to traditional and non-traditional lending for new businesses.

According to a recent article in the Wall Street Journal, President Obama has come up with a proposal for a $30 billion lending program for small businesses.  The funds would be allocated out of remaining TARP funds, and be used to inject capital into largely community banks that lend heavily to small businesses. The proposal immediately came up against detractors, as Obama’s budget decisions become more and more embattled.  Small business lending is seen as one of the keys to stimulating economic recovery and rightly so – giving a cash advance to only the hugest of businesses makes little sense, given the scope of the economy overall.

Small businesses make up over half of US employment

It is estimated that over half of all workers in the US work for a small business, or a business that employs 500 people or less overall, and also that small businesses contribute about half of US GDP. Small businesses, by nature, are able to fill niches better than their large corporate counterparts. They are better able to deliver goods and services than their competitors to specialized markets, in everything from payday loans, community banks and credit unions, music stores–you name it.  They also have far smaller overhead.  Part of the program will be tax incentives for small businesses, such as breaks for new jobs created or higher wages for employees.

Opponents cite TARP rules and budget deficits

Those who aren’t exactly for the program come from both sides of the aisle, as Obama’s spending policies are seen to be even more excessive than his predecessor.  In a Senate hearing for the bill, Senator Judd Gregg (R – NH) told White House Budget Director Peter Orszag the White House was using TARP as a “piggy bank” and that the program was intended for debt relief.

“The law is very clear. The monies recouped from the TARP shall be paid into the general fund of the Treasury for the reduction of public debt.” – Sen. Gregg

The Chairman of the Senate Budget Committee, Kent Conrad (D – SD) also criticized the current administrations’ failure to address the long term solvency of current spending policies, though gave credit to the need for stimulating vital sectors of the economy.

Problems of US debt

US Government debt at present is estimated to be around $8.5 trillion, or close to 90% of the Gross Domestic Product.  Growing national debt is becoming one of the hot button issues facing the US government, and dealing with the debt is going to be an enormous issue in the next election.   Both administrations after Clinton (Bush and now Obama) have seen record deficits and debt increases.  The national debt has been trending upwards since the 1970s, and saw it’s biggest increases under Presidents Reagan, Bush (the younger), and Obama.  The stimulus packages are necessary, but it seems that the legislature is tired of seeing Presidents willing to spend without cutting back on other expenses.   Our government is going to emergency loans before long.