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Whether they were naughty or nice, small-business owners didn't get any economic gifts over the holidays.
In 2013, small-business owners will once again face a weak economy that will have them longing for the good old days of 2006. The year is shaping up to be the sixth straight of worse-than-before-the-Great-Recession economic conditions for small companies.
The Issues
Small-business owners are likely to face daunting problems in
2013: higher taxes, slow
economic growth and an unfavorable credit market.
Many successful small-business owners will face even higher taxes in the coming year. President Barack Obama and Speaker of the House John Boehner are unlikely to reverse several scheduled tax increases, including the 0.9 percentage point increase in the Medicare tax rate on wages and salaries of more than $200,000 for single filers ($250,000 for married filers); a 3.8 percent Medicare tax on unearned income of higher income filers; and an increase in the capital gains tax rate.
Related: Are Small-Business Owners Going to Spoil the Mood? (Opinion)
Economic growth will remain tepid at best. The International Monetary Fund expects the U.S. to grow only 2.1 percent in 2013. With small-business owners already telling surveyors from the National Federation of Independent Business that poor sales are tied with taxes as the single most important problem they face, the gross domestic product forecast isn’t going to bring much good cheer to the owners of small U.S. companies.
Small businesses will tap less credit next year than they did before the financial crisis and Great Recession. At the end of September, commercial and industrial loans of less than $1 million outstanding in 2007 were only 77 percent of their 2007 value when measured in inflation-adjusted terms. Given the magnitude of this decline, it is very unlikely that we will see anything close to pre-recession levels of small-business lending next year.
The Milestones
The first economic marker for small-business owners is New Year’s
Day, when automatic spending cuts and tax increases are scheduled
to go into effect. Other key dates include Jan. 30, April 26,
July 31, and Oct. 30, when the Bureau of Economic Analysis
releases its initial estimates of gross domestic product, giving
an early indication of how accurate economic growth forecasts
have been. To see how credit access is shaping up, small-business
owners might want to note when the Federal Reserve releases the
results of its quarterly survey of senior loan officers in
January, April, July and October.
Related: Love Obamacare? Get Ready for More Health-Care Legislation
Winners and Losers
It’s hard to find any winners here, and the list of losers is
long:
• The successful small-business owners who, as stated above, will
nearly certainly face higher taxes in 2013.
• Companies selling capital goods will experience reduced demand
from small-business owners who tend to cut back on capital
investment when their taxes rise.
• The unemployed hoping to go back to work will suffer as higher
taxes lead successful small-business owners to keep a lid on
hiring.
• Current employees at small companies won’t get much in the way
of raises because high unemployment and weak hiring plans will
keep wages from rising.
• Very successful small-business owners who sell their companies
will pocket less if capital gains taxes rise as expected.
• Also worse off from the increase in capital-gains taxes will be
investors in high-potential start-ups -- business angels and
venture capitalists -- whose after-tax returns will take a
hit.
• Founders of new high-potential businesses will find access to
capital more challenging since higher capital-gains taxes will
make investing in start-ups less attractive.
• Sole proprietors will see less after-tax income as the payroll
tax cut ends, adding 2 percentage points to Social Security
taxes.
• Owners of less-successful small businesses will find bank loans
tough to get because they are the marginal borrowers who are
often unable to get loans when credit is scarce.
Predictions
The odds are high that small-business owners will face higher
taxes, lower economic growth and less credit. While it’s hard to
know exactly what taxes will increase and by how much, taxes on
high income earners are going up. Barring an economic miracle,
GDP growth will be modest, coming in at or below the rate
predicted by the IMF. Without the economy accelerating, or policy
makers changing their mind about the need for stricter oversight
of the banking industry, chances are high that small-business
credit will remain well below where it was in 2007.
Related: What's the Best
Outcome for Small Business on the Fiscal Cliff?
(Opinion)
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