Small Businesses Fear Federal Budget Cuts

story first appeared on newsobserver.com

Laura Schoppe’s small Raleigh business gets about half of its revenue from contracts with the federal government. It’s at risk of losing a chunk of that money in 2013.

Schoppe and thousands of other small companies with federal contracts are watching to see whether Congress will stop a mandatory $109 billion in federal budget cuts scheduled to take effect Jan. 2 in what’s being called sequestration. Plans for the cuts were triggered by the failure of Washington lawmakers to strike a budget deal that would begin chipping away at the U.S. deficit.

A group of lawmakers is working on an agreement aimed at stopping the cuts, and many in Washington believe that the budget reductions will be put off. But if a deal falls through, it’s estimated that 10 percent of the federal budget will be cut. No one knows yet where exactly the cuts might be made, but many economists and lawmakers expect they would have a devastating effect on small companies and slow an already lumbering economy. According to one university study, the reductions could mean the loss of nearly 1 million small business jobs. In the meantime, small company owners are trying to find ways to soften any loss of revenue by prospecting for new business, cutting back on hiring and slashing spending.

Schoppe’s company, Fuentek, helps federal laboratories license their technology innovations so they can be sold to companies for use in their own research and development.

Most of the company’s government contracts are with NASA and the Pentagon. It also works with universities.

Schoppe says she believes Congress will find a way to avoid the cuts. But she’s taking no chances and is looking for other business that will make her company less dependent on the government. One snag is that U.S. universities also face the possibility of big cuts in the money they get from the government. That could make them less able to develop and sell their own technologies. In the coming years, Schoppe’s revenue could drop more. So she’s soliciting business from overseas schools.

Jobs factor

If she isn’t able to bring in enough revenue to replace money lost to budget cuts, Schoppe says, some of her staff of 30 would have to be furloughed until more business comes in.

Congress is in recess and isn’t expected to debate or vote on sequestration until after the election. It’s a thorny issue for small business owners because the planned cuts would coincide with tax increases scheduled to go into effect in January. The combination of steep budget cuts and higher taxes is being called the “fiscal cliff” because of warnings from some economists that it will send the country into recession. A bipartisan group of senators has been working on a plan to avert the cuts by creating a plan to reduce the federal deficit over the next 10 years – but the success of any proposal is uncertain given the sharp divisions in Congress.

The cuts call for a reduction of 9.4 percent in non-essential defense spending, and 8.2 percent in non-essential spending on other programs. The risk to small businesses and the economy could be severe. Small businesses would have to eliminate more than 956,000 jobs if all the cuts were implemented, according to researchers at George Mason University and the economic forecasting firm Chmura Economics and Analytics.

Their findings are based on what they believed would be the most vulnerable agencies. But it goes beyond the job losses likely to be suffered by companies with government contracts. It also includes businesses that benefit indirectly. For example, a company that provides cleaning or catering services to a government contractor might be one of the casualties when a contractor has to cut costs. Or a retailer that depends on a contractor’s staffers for its business may have to lay off workers when sales fall.

Stephen Fuller, a professor of public policy at George Mason in Fairfax, Va. says small businesses would account for nearly 52 percent of the job losses expected from companies. The study forecasts that more than 157,000 jobs at federal contractors would be lost. Nearly 800,000 would be lost at subcontractors, suppliers and the retailers, wholesalers and service providers who sell to contractors or their employees. The exact number of small business federal contractors in the country isn’t known, but the Small Business Administration roughly estimates the number at more than 130,000.

Small Business Survival strategies

Federal contracts have been vulnerable to budget cuts over the years, even when the government’s deficit wasn’t seen as a crisis. The White House and Congress have routinely cut funding to some programs while boosting funding to others. Amber Peebles’ company, Athena Construction Group, has been a contractor and subcontractor on federal construction projects since 2009. She gets 85 percent of her revenue from the government doing everything from carpentry work to helping build hospitals for the Veterans Administration. She and her co-owner, Melissa Schneider, founded the Dumfries, Virginia-based company nine years ago. The former Marine was wounded during Operation Desert Storm in 1991, giving her company a special status that gives it preference in winning government contracts. It’s also reducing her anxiety over sequestration. Even if Peebles loses some contracts, she expects that competitive advantage to position her company to win others.

Allowing Bush Tax Cuts to Expire would Balance the Federal Deficit

Washington Post

 

The tax cuts at the heart of a fierce pre-election battle on Capitol Hill were designed when the economy was booming, the federal budget was in surplus and George W. Bush was campaigning for president on a promise to return the extra cash to taxpayers.

Today, the economy is sluggish and the national debt is soaring to worrisome levels. As lawmakers bicker over whether to extend the Bush-era tax cuts, not just for the middle class but also for the wealthy, many economists and budget analysts say there's a simple way to curb borrowing: Let the tax cuts expire for everyone.

Official and independent budget estimates show that letting tax rates spring back to pre-Bush levels for all taxpayers would bring the country within striking distance of meeting President Obama's goal of balancing the budget, excluding interest payments on the debt, by 2015.

"If we actually ended the Bush-era tax cuts, that would pretty much do it," Obama's recently departed budget director, Peter Orszag, said in an interview last week with CNN's Fareed Zakaria. "If you do a bit on the spending side and then end the tax cuts, you pretty much get there."

But for all the election-year hand-wringing about deficits, no one in Washington is talking about letting the tax cuts lapse on schedule in January. Instead, Senate Republicans have offered a measure that would extend all the cuts, adding nearly $4 trillion to the debt over the next decade. This week, Senate Democrats say they plan to unveil a bill that would preserve most of the cuts for most Americans. That would add nearly $2 trillion to deficits by 2020.

Obama argues that allowing the cuts to expire for the wealthiest 3 million taxpayers - one of the chief differences between the two Senate proposals - is more fiscally responsible than the GOP's position. "The first thing you do when you're in a hole is not dig it deeper," he said at a town hall meeting Monday in Washington.

But the Democrats' plan also represents a pretty big shovel, budget analysts said.

"Both parties are being disingenuous here," said Robert Bixby, executive director of the nonprofit Concord Coalition, which advocates balanced budgets. "When I hear the Democrats saying Republicans are willing to add to the deficit, well, the Democrats are willing to add $2 trillion to the deficit themselves. The Democrats are doing almost as much damage to the deficit as the Republicans are."

Although the down economy might offer good reason to keep tax rates low for another year or two, putting more money in the hands of consumers, Bixby and other budget experts say it makes no sense to maintain that level of taxation permanently when the government is borrowing more than 40 cents of every dollar it spends.

The nonpartisan Congressional Budget Office predicts that the economy would be stronger with the cuts, but only through 2012, when the extra borrowing they require "would reduce or 'crowd out' investment in productive capital." Even former Federal Reserve chairman Alan Greenspan, an early advocate of the cuts, now says Congress should let them expire.

"I am very much in favor of tax cuts, but not with borrowed money," Greenspan said in an interview last month.

The budget outlook was far rosier when Bush conceived the cuts, which were one of the biggest tax reductions since World War II. Thanks to tax increases and robust economic growth, the Clinton administration had balanced the budget for the first time since the 1960s and was starting to pay down the national debt.

Bush pushed the cuts through a Republican Congress in 2001 and 2003, lowering levies on inherited estates, dividends, capital gains and income at all levels. He wiped out a de facto tax penalty on married couples filing jointly, doubled the child tax credit and created a 10 percent tax bracket at the very bottom of the income scale. At the upper end, he cut the top rate from 39.6 percent to 35 percent.

Lawmakers also revised the alternative minimum tax (AMT), an expensive parallel tax structure that would otherwise have deprived millions of people of the benefits of the cuts. That added billions more to the cost.

What would it cost to keep the cuts now? Preserving them all, with the AMT fix, would reduce revenue by nearly $3.9 trillion over the next decade, according to the CBO. The extra borrowing would tack an additional $1 trillion onto the nation's interest payments, the CBO says.

Defenders of the tax cuts say that those costs are irrelevant and that the real problem is rising levels of federal spending.

"Washington is scheduled to spend $46 trillion over the next decade. I wish the people who are focusing on criticizing the tax cuts would focus on the $46 trillion in runaway spending," said Brian Riedl, a budget expert at the Heritage Foundation. "The numbers are very scary, and even economically painful tax increases will not make a very large dent in the budget deficit."

But a paper to be released Tuesday by the Center for American Progress (CAP) shows how difficult it would be to stabilize the debt solely through spending cuts. If all the tax cuts were extended, Congress would have to cut $325 billion in 2015 alone to get the deficit down to Obama's target of 3 percent of the gross domestic product. If the cuts were preserved only for the household incomes less than $250,000 a year, as Obama has proposed, Congress would still have to cut $255 billion.

A one-year reduction of either size would amount to the sharpest cut in federal spending "since the military demobilization after World War II," said Michael Ettlinger, the paper's co-author and CAP's vice president for economic policy.

Ettlinger and co-author Michael Linden conclude that closing the gap would require "really painful and politically difficult" actions, such as slashing highway funding and agriculture subsidies by two-thirds and taking deep bites out of Pell college grants, the Pentagon, housing assistance - even Social Security.

Ettlinger is not among those who call on Obama to let the Bush tax cuts expire, saying it would break the president's campaign pledge to protect the middle class. Still, he added, "we're going to have to put revenue on the table."

So far, neither the White House nor congressional leaders have come up with a plan to avoid trillions in fresh borrowing if the tax cuts are extended - and that's making moderates in both parties nervous. After Senate Minority Leader Mitch McConnell (R-Ky.) put out his nearly $4 trillion tax plan last week, several Senate Republicans said they would prefer a less expensive temporary extension of two to three years.

Meanwhile, more than 30 House Democrats have signed a letter calling on Speaker Nancy Pelosi (D-Calif.) to consider extending all the cuts temporarily - a plan that would not only cost less but also let them avoid raising taxes on the wealthy in an election year.