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.
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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.
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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.
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