The Democratic nominee wants to boost startups – which are doing just fine – but what about the 6m existing firms?
Kamala Harris has announced initiatives to help small businesses in the US. It’s a smart – and welcome – move given that 46.4% of all private sector employees work for small businesses. I do worry, however, that she is targeting the wrong issues.
Among the vice-president’s proposals is to “cut down” on government bureaucracy, creating a “standard deduction” for small businesses and “making it easier” for businesses to get occupational licenses to operate across state lines. She wants to “suggest new steps” for more investments in rural businesses with an “expansion fund” that would make it easier for businesses in those areas to get access to capital. She also wants to mandate that “one-third” of federal contract dollars go to small businesses.
All of these proposals sound good. Like so many other of her proposals, they lack details, so it’s very difficult to comment on their impact and their cost. But Harris did get specific about one idea: taxes on startups. If elected, Harris wants to increase the small business “startup tax deduction” from $5,000 to $50,000, which would not only allow more startup expenses to be written off but would defer this deduction to years when profits are being generated.
“My plan will invest in small businesses and innovators throughout America,” Harris said.
Sounds cool. But unfortunately, what she’s proposing is targeting the wrong small businesses.
The Biden administration recently announced that there have been about 19m new startups since the president took office in 2021. According to the treasury department, entrepreneurship “continues to surge” with “the United States averaging 430,000 new business applications per month in 2024, 50% more than in 2019”. Do we really need more incentives for startups? They seem to be doing fine.
The small businesses that really need help are the more than 6m established, employer-owned companies. These are my clients. Their optimism is at historically low levels, small manufacturers are “mired in a slump“ and the service businesses are struggling to grow. According to the Small Business Administration (SBA), 99.9% of businesses are small businesses (more than 33 million in total), and they employ 61.7 million Americans, totaling 46.4% of private sector employees.
These are the businesses that Harris should be helping. How? Here are four ways.
The first would be to extend the qualified business income tax deduction that was part of the 2017 Tax Cuts and Jobs Act. This is a huge deduction for “pass-through” companies that make up the vast majority of established small businesses. This provision allows most of these businesses to deduct 20% of their costs before their income “passes through” to their individual returns. It’s an enormously helpful tax benefit and it expires at the end of 2025. Extending or making permanent this deduction would have a huge impact on these voters. I’m one of them, by the way.
The second has to do regulations. Under the Biden administration, new regulations from various agencies have limited the use of independent contractors, increased overtime pay, added new harassment rules, expanded fines for safety, made it easier for unions to organize and introduced rules to ban non-compete agreements, among other measures. All these issues are important. But while larger companies can absorb these costs, small businesses – and the organizations that represent them – have been fighting these rules in court. Why? Because they’re costly. Exempting the smallest of companies (maybe those with fewer than 10 workers?) from many of these rules would cut their costs, reduce their administrative burden and let them invest, hire and grow.
Third, investing in rural businesses and mandating more government contracts is nice in theory. But ever heard of Apex Accelerators? The HUBzone Program? The 8(a) Business Development Program? I didn’t think so. These are programs that already exist to help businesses get government contracts but they’re underutilized. The money should go into advertising and public relations campaigns to increase the awareness of these resources.
Finally, there’s a “silver tsunami” of baby boomer business owners who are looking to move on to their next phase in life and are putting their succession plans together. It’s estimated that an $80tn transfer of wealth will occur in the US over the next two decades. Unfortunately, many employees – particularly in rural areas – may be left without jobs if these businesses shut down without a buyer and many business owners may find themselves without the retirement savings they were hoping for. A great way to address this challenge is to encourage the creation of employee stock ownership plans, or Esops. There are already generous tax incentives to form these entities, where employees can purchase equity in their companies from their employers. But these rules could be expanded to smaller organizations and the incentives sweetened in order to motivate more business owners to sell their companies to their workers.
The startup environment in the US is already strong and I’m not worried about this country’s entrepreneurism. What concerns me is the state of the existing small business owners that are core to our economy. The pizza shops, gasket distributors, building materials suppliers and accounting firms. What will our next president do for them?
