WHY THE $5,000 TAX CREDIT WON’T WORK

Lesson for Small Business

The President has proposed an up to $5,000 tax credit for Small Businesses for each employee they ADD in 2010, and an additional tax break for salary increases given to employees making under $100,000 a year. The purpose of this is obviously to add badly needed new jobs.

To receive the maximum $5,000 credit, you would have to hire someone for at least $80,645. An employee you hired for $50,000 would earn you a credit of $3,100. It’s a sliding scale.

I do not believe many new jobs would be created through the program although the attempt will incur a significant cost.

Here’s why I don’t think this well-intentioned plan will work and, in fact, will produce negative results. If you are one of the many Small Businesses who are struggling in this economy or are doing well by maintaining your business, why would you spend $50,000 on a new hire to receive a $3,100 credit? It makes no sense. Small Business entrepreneurs are smart and practical, particularly with money. They have no bailout net. They will hire when they need to and not before. This proposal will adversely affect their cash flow.

There is another group of businesses that are doing well right now and are looking to hire to handle their growth. They will hire with or without government credit. It is a waste of taxpayer money to give them this gift, as it will not alter their behavior.

Both groups are reluctant to hire or borrow money until they know the new rules of the game. How much will their taxes be increased? What will their new healthcare costs be? What will new local taxes be, considering that most states and municipalities are in financial straits? Who will be governing, and will they rein in spending? Is inflation around the corner? Etc. These smart entrepreneurs will not spend expansion money on new hires until they know the answer to these and other questions. They know there is no urgency to hire now, as there will still be highly qualified people available tomorrow. 

There is another cost associated with this proposal that has gotten little press coverage. What will the administrative costs be to implement this plan? It must be monitored, or there will be lots of gaming in the system. I would imagine that the new bureaucracy created will be very costly, but the good news is it will unfortunately create new governmental jobs.

There are a lot more companies eligible for these credits than one would think. Small Businesses are not only home based solo workers or small local retail stores. According to the SBA (Small Business Association, a government agency), Small Business is defined in terms of number of employees or average annual receipts.

Companies with 500-1500 employees or $7,000,000 to $35.5 million dollars in receipts fall into the definition of Small Business and are thus eligible for these tax credits. These large Small Businesses who are doing well will be hiring a lot of employees because they need them and not due to the tax credit. However, the government will be giving them money for jobs that would have been created anyway and thus adding unnecessarily to the plan’s cost. (for more info about Small Businesses definitions at http://www.sba.gov)

There is a lesson in here for Small Business owners. I liken the Small Businesses in this situation to the customers of the government. The government created a plan without a clue as to the mindset and needs of their customers. I cannot imagine that the decision makers in government who created this tax credit plan TALKED to Small Business CEO’s. If they did, they would have discovered their plan would not work.

So, Small Business owners as you grow and your business gets more complex and time-consuming, do not lose sight of your customers and their changing needs.