Business Climate

WPC's Center for Small Business focuses on improving Washington's small business climate by working closely with business owners and policymakers. The Center provides accurate information and analysis on the state's regulatory climate, tax structure, health insurance systems, and more.

What's New

Small business bankruptcies up sharply in California

December 22, 2009 in Blog

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.

SBA may redefine "small business"

December 14, 2009 in Blog

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. 

Unemployment Insurance Taxes to Increase 54% in 2010

December 11, 2009 in Blog

No sooner has the dust settled from the Governor's announcement that she intends to seek tax increases in 2010 to help shore up the $2.6 billion budget deficit than the Employment Security Department today announced that Unemployment Insurance taxes for the state's employers are going up in 2010.

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. 

In fact, I wrote in a Legislative Memo earlier this year that, 

"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."

Well, that future is almost upon us. 

Young companies are the engines of job creation

November 25, 2009 in Blog

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.

Obama to Ron Sims: Everything is in your jurisdiction

November 16, 2009 in Blog

On Sunday, the Washington Post reported on the federal government possibly taking over yet another industry, local rail systems.

Under the proposal, the U.S. Department of Transportation would do for
transit what it does for airlines and Amtrak: set and enforce federal
regulations to ensure that millions of passengers get to their
destinations safely.

The proposal to impose federal oversight over local rail agencies is another example of a growing trend of the Obama administration to centralize power in Washington D.C. This deliberate concentration of power has been seen most dramatically in the auto, health care and financial industries. And with the upcoming Surface Transportation Reauthorization Act, Dr. Ron Utt from the Heritage Foundation details how the federal government will also centralize even greater authority over transportation policies.

In October, Ron Sims, Deputy Secretary of Department of Housing and Urban Development spoke at Cascadia's Beyond Oil Conference at Microsoft and gave us a glimpse of his role in this massive centralization!
of power. He began his remarks with this introduction:

“I have an interesting Job. I have both the responsibilities for day to day operations of the Department of Housing and Urban Development and then two major policy initiatives. I’m called the new breed of deputy secretaries. And one of those is “sustainability” and “livability.” It’s really interesting when you talk about how to transform an agency because we were told by the President that we could not exist in silos anymore. That it would be unacceptable for us to go to any meeting and say the problem we face in any major urban area or even the rural areas across the country was not our jurisdictional issue. That would not be a good meeting. There would not be a positive result. The President at that moment would thank you for your service and replace you.” (here is the video)

Centralization of power at the federal level means local officials have less control over policy decisions. It also means the federal government has an ever increasing role in our lives. And I think we all get a little anxious when federal officials claim that every issue is now within their jurisdiction.

Small businesses rank top policy priorities

November 13, 2009 in Blog

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.

Small Business Owners Offer Solutions to Improve Business Climate at Statewide Small Business Conference

in Press releases

Seattle - Small business owners, legislators, and policymakers from all over Washington gathered in SeaTac yesterday to discuss the state’s business climate at Washington Policy Center’s 2009 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.

2009 Statewide Small Business Conference

November 10, 2009 in Events
Tuesday, November 10th, 2009
8:00 am - 1:30 pm
Hilton Seattle Airport & Convention Center
Seattle, WA

 Legislative Breakfast PanelThis year’s conference was very well received by the over 250 attendees. Small business owners, legislators, and policymakers from all over Washington gathered in SeaTac on Tuesday, November 10th, to discuss the state's business climate at Washington Policy Center's 2009 Small Business Conference.

The Use and Abuse of Washington's Community Renewal Law

November 6, 2009 in Publications

Following the Kelo v. City of New London decision by the United States Supreme Court in 2005, many public officials have strenuously argued that eminent domain reform is unnecessary in Washington State because the Washington Constitution protects property owners from the kind of abuse that occurred in Kelo. These officials are wrong.

Small Business Owners Will Gather to Discuss Business Climate

in Press releases

Seattle – Small business owners and policymakers from around the state will gather in SeaTac next week to discuss the state’s business climate and ideas for how policymakers can make Washington more supportive of businesses and job growth.  Washington Policy Center’s biennial Small Business Conference comes as Boeing announced its decision to build a 2nd 787 line in South Carolina rather than here, a move which shows Washington faces serious competiveness challenges from other states.

What: WPC’s Statewide Small Business Conference