Small Business

Modernizing the Tax Law for Small Businesses

Annette Nellen — Sun, 13 Apr 2008 16:59:00 -0400

On April 10, 2008, the House Small Business Committee held a hearing - “Modernizing the Tax Code: Updating the Internal Revenue Code to Help Small Businesses Stimulate the Economy." The Committee also issued its own report - “Seven Ways to Stimulate the Economy by Updating the Internal Revenue Code." In addition to having witness testimony online in written form, the Committee has videos on YouTube about the hearing. This can all be accessed at this summary of the hearing.

I think the ideas presented by witnesses and in the Committee's report fall into two categories:

Tweaks to the federal tax law to make compliance and doing business easier for small businesses.
Changes that reflect the fact that most of the federal tax law was written before we entered our global, interconnected, knowledge-based economy and society and thus is in need of modernization.

Examples of Category 1 suggestions:

Repeal the AMT
Make the 2001 and 2003 tax cuts permanent
Allow greater choice of tax year for non-corporate businesses
Increase meals deduction for small businesses

Examples of Category 2 suggestions:

Allow non-resident aliens to be shareholders in S corporations
Stop treating cell phones and PDAs as listed property for depreciation purposes since these are not luxury items, but necessities of operating a business; detailed recordkeeping of use is not productive
Create a simpler tax systems, even with less incentives, due to the significant compliance costs small businesses face
Simplify the home office deduction to be a standardized deduction
Shorten some depreciation lives to be more in line with today's technology

The focus of the hearing was improving tax rules for small business to stimulate the economy, not just to modernize the tax law. However, there were several good ideas that remind us how out-of-date the tax law is (such as treating cell phones as questionable business items and giving personal computers a 5-year depreciation life).

What are your ideas to modernize the tax law to better help small businesses succeed in today's economy?

COVERAGE: Health Costs Squeezing Small Businesses -- And Their Workers

Joanne Kenen — Wed, 09 Apr 2008 15:40:00 -0400

We've known for years that small companies face a struggle to offer health care to their workers, or pass on more of the costs to the employees. But, with health costs increasing every year, these struggles are even more pronounced. More bad news; the plans they offer are also of a slightly lower quality, Jane Sarasohn-Kahn at Health Populi tells us.

Small companies don't have the bargaining clout of a huge corporation, and with fewer workers, they can't spread the risk as well. Federal legislation to allow them to band together has been stuck for years, victim in part of deep disagreement about the role states should have in regulating insurers or requiring specific benefits. But a new study from the Kauffman-RAND Institute for Entrepreneurship Public Policy (KRI) sheds light on coverage trends among big and small firms between 2000 and 2005.

The report found that in 2005, overall, the average firm spent 7 percent to 10 percent of payroll on health insurance. But the smaller firms spent more. The smallest offering firms (fewer than 25 employees) shouldered the highest overall burden, spending, on average, 11 percent of payroll on health insurance. Moreover, in 2005, half of all small businesses offering insurance spent more than 10 percent of payroll on it.

People who worked at small firms that offered health insurance paid more out of pocket too—1.9 percent of earnings compared to an employee at a business with 100 or more employees spending 1.3 percent.

But as our colleague Sarah Axeen reminds us, as health costs continue to rise, only some of the increase is shifted on to workers (through increased out-of-pocket spending, for example). The employers shoulder the remainder. Since cost increases cannot be completely shifted on to workers in the short-run (because of factors like union contracts, minimum wage laws, and the unpredictability of the increases) employers are bearing the burden through lower profits and reduced international competitiveness. For small businesses, with razor-thin profit margins, this competitive disadvantage is felt all the more acutely.

To summarize: health insurance is becoming unaffordable, especially in the small business setting, leading to even more uninsured workers and families. As Health Populi put it, "As health insurance costs continue to increase, a growing number of employers face that global competitive advantage that is unique to American business: covering health care." We agree. These trends strengthen the case for rethinking how we link insurance to the workplace, and improving the individual marketplace so it is efficient, equitable, and affordable. We need to cover everybody in a sustainable system because our global economic competitiveness is not just about trade policy. It's about health policy.

COVERAGE: Bipartisan Bill Addresses Small Business' Concerns

Elizabeth Carpenter — Wed, 02 Apr 2008 23:04:00 -0400

Left, right and center know that more than 80 percent of small businesses owners say finding affordable health care is a challenge. But lawmakers have been stalemated for years about a solution. Four senators took a bipartisan step forward today offering a bill called SHOP - the Small Business Health Options Program.

Senators Richard Durbin (D-Il), Olympia Snowe (R-ME), Blanche Lincoln (D-AR), and Norm Coleman (R-MN) introduced the latest policy proposal designed to increase access to affordable, quality health insurance for small businesses. Just 59 percent of small businesses offered any health coverage to their workers in 2007, and fewer than half of very small businesses (9 workers or less) did.

Under the Small Business Health Options Program or SHOP:

States would be required, over time, to eliminate medical underwriting (i.e. charging sick people higher premiums) in their small group markets.
A new national small group marketplace would allow small businesses to access nationwide plans in addition to state specific packages.
Small employers who choose to offer insurance would be awarded tax credits based on firm size and their contribution on behalf of their employees. NOTE: Businesses would not be eligible for the tax credits if their state fails to enact additional insurance market reforms (limits on how much insurance premiums can vary) specified in the legislation.

As many of you may remember, state benefit mandates were a serious point of contention during the Association Health Plan (AHP) discussion in 2006 (and numerous similar debates stretching back years). Under SHOP, state plans would follow their own state's benefit mandates, but the national ones would offer a benefit package to be developed by the Institute of Medicine.

More than half of our nation's uninsured are self employed or work in firms with less than 100 employees. Small employers don't have access to the economies of scale, robust risk pools, and choice of insurance products that large employers enjoy.

We are always happy to see bipartisan action on the health reform front and look forward to working with the small business community to develop a sustainable system of coverage for all Americans.