Cgipson

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. 

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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. 

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. 

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.

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.

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. 

For your Thanksgiving weekend reading list: "Where Will the Jobs Come From?" a new paper from the Kauffman Foundation.

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, this news is tempered by the fact that roughly 1/3 of startups close by their second year and only 1/2 of firms make it to year 5. We see this echoed in Washington state where we are third best in the nation for business startups, but second-worst in business terminations. That means we have a high business churn rate.

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.