A year ago the term "economic stimulus" was used to justify almost any policy proposal in either Washington D.C. or Washington state. We warned state lawmakers that true economic stimulus should focus on cutting taxes and regulations on private sector industries, thereby allowing them to grow. Increasing costs, either through tax hikes or regulatory proliferation, would cause businesses to contract. Obviously, if an economy is in retraction that means more people are out of jobs and relying on government safety nets. And if the government expanded the scope of the safety nets then that would result in higher costs to taxpayers...You see where this downward spiral is going.
Some new information from the state's Employment Security Department shows why we were concerned with state lawmakers' attempt at boosting unemployment insurance benefits in order to stimulate the economy. In fact, we wrote on this several months ago as well, but now there are updated numbers for the entirety of the stimulus program.
Last year lawmakers passed ESHB 1906, which, among other things, provided an additional $45 per week benefit for UI recipients through the end of 2009. The UI trust fund was very healthy at that time and so drawing down the trust fund by $111 million (as forecasted) wouldn't make much of a dent. We understood that, but were wary that drawing down the trust fund too much could result in tax increases in 2010 and beyond and that no one in their right mind thought that the economy would have turned around enough by January 2010 in order to justify the increased costs to the system and therefore businesses.
Sure enough, the $45 economic stimulus UI benefit ended up costing the state not $111 million as originally forecast, but $247 million -- they missed the forecast by 123%. Obviously, no one could have known just how bad our economy was going to get, but the forecast predicted 7.5% unemployment, not the 9-9.3% Washington has had the last several months.
And lo and behold, last month ESD announced that they would have to raise UI premiums an average of 54% for the business community in 2010. And yesterday, in a hearing before the House Commerce & Labor Committee (slide 13), department officials basically forecasted that UI rates would continue to increase through 2012 to rates more than double that of 2009. As one legislator asked at the hearing [and I'm paraphrasing], "Shouldn't UI taxes go up in good times and down in bad times?"
Obviously the $45 benefit is not the sole cause for the much higher tax rates that businesses will have to absorb the next several years, but the principle remains. When lawmak!
ers expand the scope and cost of government benefits, whether those benefits stimulate the economy or not, someone is going to have to pay for it. This idea was touted as economic stimulus and while the benefit surely helped those who received it, that money was never going to be able to grow the economy the way some policymakers claimed. A big reason is that this money has to be removed from businesses over the next few years in the form of higher taxes. That's not economic stimulus. That's more like a loan taken out on the back of the business community without the accompanying benefit.
This post is a few days late; the legislative session often has a way in bumping other projects. Now that the Consumer Electronics Show and Technology Policy Summit wrapped up this past weekend, the feel from both the show and the policy roundtables is that we are but at the cusp of something big. But at the same time, many of us wandering the immense halls of the Las Vegas Convention Center were nervous about where some of the talked-about government policies could take the communications industry.
One of the fun activities when the Legislature kicks off its session is to peruse the bills that are introduced. Keep in mind that for every passed bill there are 3-4 bills introduced that are not passed; in fact, many don't even get hearings. But it is still fun to highlight some of the more "interesting" pieces of legislation (a great tool to track legislation is over at washingtonvotes.org).
Two that would affect small businesses if passed:
HB 2737 -- would require employers to get waivers from the Department of Labor and Industries in order for employees to have intermittent rest breaks instead of the Department-required scheduled rest breaks. Employees are entitled to ten minutes of break time for every four hours worked, with a 30-minute break time after working five consecutive hours.
! HB 2764 -- would protect employees "from adverse employment actions because of influenza." That's right. It would be illegal to discriminate against an employee for taking time off due to an outbreak of influenza. Problem is, it is already illegal to discriminate against an employee for sickness, but not expressly influenza.
There will certainly be many more interesting pieces of legislation forthcoming. Stay tuned.
There is no question of the Internet's importance to our social and commercial way of life. It took about a decade, from the early 1990s until the early 2000s for society to truly wake up to the potential benefits that ubiquitous Internet connectivity could bring businesses and individuals. But, for as much connectivity we as a society have experienced (seriously, who doesn't have an email address or smartphone or laptop nowadays) there are plenty of ! households in this nation that either cannot connect or chose not to.
The Spokesman-Review out of Spokane today editorializes about one aspect of workers' comp reform that businesses both large and small have been asking for years: the ability to agree to a settlement option with injured employees who have experienced injuries so bad that they require permanent disability benefits.
The editorial board opines:
"Those workers would have the choice of either taking a full payment up front or collecting monthly payments the rest of their lives. The proposal includes safeguards to assure that an injured worker is fully informed about the advantages and disadvantages, usually with advice from a lawyer or a settlement officer at the Board of Industrial Insurance Appeals. The board’s appro!
val is required for any settlement, and the worker has a month to change his or her mind."
Opposition to this move often comes from labor groups concerned that workers might lose out on benefits. But no one pushing this option is actually asking for benefits to be lowered. This move would help clear up an administration problem for, in particular, small businesses, by closing the books on a claim earlier, while still giving the appropriate benefits to the injured worker.
Again, the paper says,
"The settlement option doesn’t save the system money by shortchanging workers; it does so by avoiding years of administrative overhead expenses incurred to manage lifelong cases.
This reasonable reform won’t fix all the problems with Washington’s industrial insurance system, but it’s an important part of the solution."
Agreed. Look for more suggestions on fixing the state's workers' comp system in the upcoming small business post-conference report, to be released later this month.
The state's auditor is required by law to conduct annual audits of the financial statements and actuarial assessments of the Workers' Compensation Fund. The latest audit shows that the Workers' Comp funds may be heading towards insolvency within as little as two years.
The workers' compensation system is made up of three components: the Medical Aid Fund, which pays for medical care for claimant; the Accident Fund, which pays non-medical claim costs such as wage replacement benefits, most vocational rehab, and disability and survivor benefits; and the Pension Reserve Fund, which pays benefits to all permanently disable pensioners. Both employers and employees pay L&I premiums.
It is no surprise that the contingency reserves for the Workers' Comp trust fund dipped substantially during the time in question (July 1, 2008 through June 30, 2009) gi!
ven what happened with the stock market and the economy in general, as the audit points out.
But one of the worries that we, and other business owners and groups have been saying in response to L&I's announcement of a 7.6% rate increase for 2010, is that it is not enough. No, businesses don't want an even higher increase in workers' comp taxes. The point is that the system is so broken, that the 7.6% increase during the worst recession in 70 years is not enough to make the system whole; which means that the tactic of raising taxes year after year in this area should be rethought. It's time for different measures.
The audit says that there is
"A 74.4 percent chance of insolvency in the Accident Fund within two years, 81.4 percent within three years and 89.5 percent within five years. A 3.9 percent probability o!
f insolvency in the Medical Aid Fund in two years, 12.9 percen!
t within three years and 26.5 percent within five years."
So, what if the Department wanted to raise rates in order to shore up the funds' possible insolvency?
"The Actuarial firm calculated a range of break-even rate level changes...the firm's "best" estimate is that a 33 percent rate increase would be necessary for the Accident Fund to break even. The Department estimates that a 23.3 percent rate increase would be necessary for the Accident Fund to break even. The Actuarial firm believes the Department's estimate is outside a range of reasonable estimates." [emphasis added]
"For the Medical Aid Fund, the firm's "best" estimate is that a 24.5 percent rate increase would be necessary to break even. The Department estimates that a 21.5 percent rate increase would be necessary for the Medical Aid Fund to break even. The firm belie!
ves the Department's estimate is within range of reasonable estimates."
In other words, the Department (L&I) underestimated how much rates would have to go up in order to stave off insolvency in the Accident Fund. But for 2010, the L&I approved 7.6% rate increase reflects in part a 4.5 percent rate increase in the Accident Fund and 8.4 percent increase in the Medical Aid Fund.
The business community has been sounding the bell about an unsustainable workers' comp system for awhile now, and that cost containment measures are needed in order to lower costs to the system. The Department recognized that raising workers' comp taxes by the 20-30% needed to shore up the funds would have resulted in an unrealistic burden on employers and employees. But let's hope the Department and policymakers also recognize that simply putting off higher workers' comp taxes until the economy improves is not the solution -- cutting co!
Harvard economist Greg Mankiw highlights a Wall Street Journal article from today in regards to the federal estate tax debate. To sum up, as part of the "Bush tax cuts" passed earlier this decade the federal estate tax was lowered from 55% down to 45% while the exemption level was slowly raised, from $1 million to $3.5 million today. If your estate totals less than $3.5 million, you don't pay the 45%.
And then for calendar year 2010, the tax goes away. Completely. No tax. At all. (I'm re-emphasizing this because when was the last time you saw a tax disappear?)
But as part of the compromise to get the legislation through, even though the federal estate tax disappears in 2010, it comes back in 2011 with a vengeanc!
e. Unless Congress acts, the rate will go back up to 55% and the exemption level will drop back down to $1 million -- any estate valued over $1 million will be subjected to the tax.
The Wall Street Journal article points out the macabre situation in which some families are finding themselves. Individuals with terminal illnesses and families with ailing members are taking into account the date of January 1st. If their family member hangs survives until January 1st, 2010, the estate they leave behind will not be taxed. If not, the family could lose at least half the estate's value to taxes (and more when you throw in the fact that about half the states have state estate taxes, including Washington's, which tops out at 19%).
This is a very uncomfortable subject to discuss in the realm of public policy. Far be it from those families from wanting to look crass, but the article points out coherent but ill entrepreneurs who themselves are trying to hang on unti!
l 2010 because they don't want to die with the knowledge t!
hat half of what they spent their lives working towards went back to the government, which already taxed their earnings in the first place.
As Congress debates this issue early in 2010 after it returns from recess it should take these stories to heart. Another concern, to be expanded upon in a later blog post, is that one idea Congress is kicking around is to make the tax retroactive, so that estates of any well-off individual who dies between January 1st and whenever the new estate tax law kicks in (say early Spring) are still subject to the tax. This brings about a whole new set of concerns as retroactive taxation is not good public policy for a variety of reasons.
The estate tax was created to prevent the rise of a permanent aristocracy in this country. In 2011, that sentiment will negatively impact thousands of American households; probably not the impact the original supporters of the estate tax had in mind. Nor did they have in mind the awful situat!
ion of dictating life and death decisions based upon tax policy.
In the arena of public policy, legislation that is often introduced using the reasoning of, "there ought to be a law..." is often a sure-fire way to highlight misguided policy. Combine the "there out to be a law" sentiment with government's penchant for involving itself in matters wholly outside its jurisdiction and you end up with issues like the Terry Schiavo case, et. al.
The latest version of this wayward thinking !
is happening in Indianapolis, where the previously undefeated Colts of the National Football League at 14-0, this past Sunday yanked their starters during the second half of a close game against the New York Jets. The Colt's coaching staff's thinking was more or less along the lines of "we have home field advantage wrapped up, let's use our starters for a bit and then rest them and minimize exposure to injury." Similar tactics are used in preseason games, and all major sports teams in every league do this from time to time.
The second and third string Colts were unable to protect the lead and eventually fell to the Jets 29-15 in front of a sold-out home crowd. The fans were not pleased; and they have a right to be upset. No one is happy to pay good money only to see their beloved team lose. Most of us understand that it is simply part of the game.
There really is no justification for the resolution, just that fans and supporters are upset that the Colts played the strategic, long-term angle by saving their best players for the playoff run and therefore risked ending the team's 23 straight regular season win streak. Fans are so mad that they had to witness a loss that they want a full refund. Shouldn't they be happy their team is 14-1 and the number one seed going into the playoffs?
So Seattle fans have faith. If this resolution gains traction and withstands a court challenge (in actuality, neither will happen) then we can expect more than one game's worth of refunds for the NFL season that was 2009.
As the legislature gears up for session in January and with the state facing a multi-billion dollar deficit (yet again), now is the time to pay close attention to trends the legislature may take. Perusing this pre-filed bill page can be useful.
One of the bills introduced today is House Bill 2493, an act "relating to the taxation of cigarettes and other tobacco products." Sponsored by Representative Cody, the bill, if passed, would raise cigarette taxes yet again. Currently, the state charges $2.025 per pack for cigarettes.
Reading through the bill, it looks like the taxes would amount to $1 per pack more if the legislature and the governor sign off on the bill. That's about a 50% tax increa!
se for smokers.
If the goal is to eradicate smoking, then the tax should be hiked even more. If the goal is to raise money for education programs, health care centers, water quality, and programs to stop youth violence, then a 50% increase in taxes will most likely move people towards purchasing tobacco from non-sanctioned sellers (aka the black market). The state says it already loses over $200 million in tax revenue per year to illegal sales of untaxed cigarettes.
If policymakers are looking for a quick buck to help shore up the $2.6 billion budget deficit, this isn't the way. If, however, policymakers want more people to live up to what is sure to be their 2010 New Year's resolution, then raise the tax even more. My hope is that whatever our elected officials end up doing, they are honest about their motivations behind the tax hike.
A disturbing article in the Los Angeles Times today touches on California's troubling business climate. "Small-business bankruptcies rise 81% in California," says the headline. The story goes on to relay tales of woe from small business owners in the Golden State, and it aint pretty.
Nationally, bankruptcy filings for small businesses are up 44% from this time last year, as the article points out, and a large part is the continued lack of access to credit, stemming from the financial market meltdown in 2008. Last month, president Obama laid out a plan to increase small business lending from financial institutions -- namely by leaning on them to increase their lending (see "no such thing as no strings attached") to small businesses. But there is only so much that the President can do in that regard.
The better !
course of action that policymakers in Congress and Olympia can do, however, is to simply make it less expensive and onerous to run a business and refrain from causing such uncertainty in future tax rates and regulations with the current debate on health care and cap and trade.
Businesses need a certain level of predictability when it comes to taxes and regulations, and higher levels of both will lead to lower levels of productivity, jobs and economic growth.
The U.S. Small Business Administration is considering revising the definition of "small business." Currently, the SBA defines a small business as a firm with fewer than 500 employees.
The variations have changed a little in the 50+ years of the SBA, and the government agencies that predated the SBA. However, the 500 employee mark and $7 million or less in revenue hasn't changed since 1984.
The state of Washington loosely defines a small business as a firm with fewer than 20 employees or less than $3 million in annual gross revenue.
I have often wondered at why the SBA continues to categorize businesses with up to 500 employees as a small business. I much prefer the state's definition. I realize that one of the original reasons for this was to ensure a more level playing field for smaller firms to !
compete with large businesses for government contracts. But how many businesses do you know that are truly small businesses with 499 employees? Probably not too many.
But if you feel strongly that the SBA definition of a small business should change then make sure you chime in. They are accepting comments until December 21st.
In a release from ESD, Commissioner Karen Lee outlined the plan that will see the average total tax rate to increase from 1.55 percent in 2009 to an estimated 2.38 percent in 2010 -- a 54% increase, even if the 2010 rate is less than the previous recession-recovery years of 2004-05.
The Department also said,
"Many employers will pay higher taxes in 2010 due to their own layoffs and the effec!
t those layoffs have on their experience rate. Employers that had no layoffs in the past four years will pay no experience tax in 2010. However, they will pay the minimum social-cost tax, which is increasing from 0.35 percent in 2009 to 0.95 percent in 2010...
The social-cost tax will increase sharply because benefit payouts far exceeded taxes collected in 2009 -- e.g., nearly $2 billion paid out and about $1 billion in taxes collected..."
No one could realistically forecasted just how bad the economy would get and its effect on state finances. However, the recession is also wreaking havoc on our state's business community. Couple this with the 7.6% workers' comp increase and the talk of $700 million in taxes for 2010, and this is a recipe for prolonging the economic hurt in this state, particularly for small businesses.
this year the state legislature authorized a permanent increa!
se in UI benefits, along with a temporary increase through the end of 2009. We had concerns that bumping up the benefits, and adding a temporary "economic stimulus benefit" on top of that would draw down the state's substantial reserves too quickly, which would force the state to raise UI taxes in the future.
"Unemployment Insurance was created to aid workers with insurance benefits against the risk of losing a job. It cannot be suddenly passed off as a way to grow the economy, because it does not. Real growth in the economy is the only way out of a deep recession. Raising UI benefits may be a laudable goal for helping those who lost jobs through no fault of their own, but passing higher UI benefits off as something that stimulates the e!
conomy is disingenuous...
As long as policymakers avoid drawing down the UI trust fund too much, they will avoid the problems that accompany “stimulus” spending – that of prohibitive transaction, opportunity and debt service costs.
But a major worry with the state increasing UI benefits through drawing down the reserve is what happens if the reserve is drawn down too far? The coffer would have to be repaid through higher UI taxes, thus raising the cost of business in Washington and negating the benefits of any multiplying effect."
Two of the questions I get asked most is, "I often hear that small businesses create most of the jobs. Is this true and if so, why aren't policymakers doing more to help small businesses?"
The first question is pretty easy to answer. Yes, small businesses do tend to create most of the new jobs, particularly during economic recessions. But one of the points from the Kauffman foundation paper is that we (the media, policymakers, think tanks) sometimes may be too focused on small businesses and not focused enough on new businesses.
Since 1980, nearly all net new jobs created were in firms less than 5 years old. In fact, the businesses most likely to create new jobs are those aged 1-5 and then the older, established and large businesses!
. In fact, an interesting chart on page 8 of the report shows that over the last 30 years, "excluding the jobs from new firms, the U.S. net employment growth rate is negative on average." Take away the jobs created by startups and the country will most likely have negative growth in jobs. That is pretty substantial.
However, that is not all bad as the Kauffman Foundation paper points out,
"When we talk about young firms, then, we're talking about an ever-changing assortment of dynamic firms -- entering and exiting; c!
reating and destroying jobs. Such messiness is not cause for d!
ismay or alarm; it is the provenance of net job creation. If we want to chart a rapid employment recovery, we need to foster such messy dynamism."
This echoes Schumpeter's theory of creative destruction. So then, what does it mean for jobs in our state during this recession? After all, our unemployment rate is a stubborn 9.3%, even while the nation's continues to rise at a fast clip; it's up to 10.2% now. And, as you may recall, unemployment numbers are a lagging economic indicator -- meaning that rate will only begin to decline after the economic recovery is well underway (which is still a ways off).
The authors of the Kauffman paper have this to say,
"The slow recovery of employment may also work to spur even higher rates of firm formation: instead of waiting around for new jobs, people may take their future into their own hands.!
So what can policymakers do in the short term to help these new, and therefore mostly small, businesses -- therefore answering the second part of the question I get asked most? The authors make two suggestions. One, government can help unfreeze the credit markets, because those are the lifeblood of many businesses. But a much bolder approach, they advocate, would be "to grant a payroll tax holiday for new and young companies, thus fostering job creation."
Certainly, granting a tax or licensing fee holiday for new companies has some difficulties, particularly since both Washington state and Washington, D.C. are stuck with huge budget deficits (mostly of their own doing) but such bold action would back up policymakers' talk of jobs, jobs, jobs.
Small business owners, legislators, and policymakers from all over Washington gathered in SeaTac this past Tuesday to discuss the state's business climate at WPC's 2009 Statewide Small Business Conference. During several interactive issue breakout sessions, business owners suggested and discussed solutions to improve the climate for small businesses in Washington. This was the fourth statewide small business conference hosted by WPC since 2003.
But OK, what now? Policymakers just got slapped upside the head by a corporation based out of Chicago. Boeing officials looked at Washington and sized us up and looked at Charleston and sized them up. They made a busine!
ss decision and we lost. That should say something about what we are offering the business community.
Of course there is an internal labor/management dynamic that the state can't influence. Or can it? South Carolina is a right-to-work state, where workers do not have to be members of a union as a condition for employment (a novel concept). Of course, this will never fly in Washington state -- just as long as we're prepared to lose business over it apparently. Should we have the discussion on mandatory unionization if that is truly one of the big causes for Boeing's decision yesterday? If so, then the question really is, why shouldn't we discuss it?
There are many reasons why some states are more competitive than others. Some reasons cannot be helped -- natural resources and open-water access are some of the reasons why Washington is more competitive in lumber, shipping, and agriculture than, say, a Midwest state. Likewise, it would be a bit of a!
challenge for Washington to compete with Florida over oranges!
, or Alaska for oil or Louisiana for catfish.
However, beyond natural resource advantages, policymakers and entrepreneurs can make a difference in how a state is perceived viz a viz business friendliness or an infrastructure for innovation. Those are intangibles not decided upon by nature. Microsoft didn't grow and succeed here because of the air, water or lumber. Neither did Boeing, Amazon, T-Mobile, Costco, UPS or most of the other of hundreds of thousands of businesses that were founded in this state.
This is just the type of issue we'll talk about at Washington Policy Center's 2009 Statewide Small Business Conference. We'll talk about the things that policymakers can control and can improve upon to make our state more attractive to people. Because that seems to be getting lost in the discussion. Businesses don't make these decision!
s, people make these decisions, often based upon what's best for the company so that it can continue to offer goods or services to its customers -- who just happen to be people as well.
Join us on November 10th at the SeaTac Hilton for discussions on competitiveness, health care, our state's tax system, workers' compensation, unemployment insurance, environmental regulations and more, including sessions on how to survive in this economy and why it's important small business owners remain involved in the political realm.