- The Washington Times - Saturday, October 11, 2003

Politicians care. How do we know this? Because they constantly remind us. Politicians care about the children, quality health care for everybody, and the environment. In addition, when it comes to the economy, politicians care about the small business community. Unfortunately, some elected officials have funny ways of expressing their love.

Should federal, state and local officials care about small business? Absolutely. Small business is the backbone of the U.S. economy. There has been a lot of talk lately about lackluster or nonexistent job creation. Consider that businesses with fewer than 500 employees account for 99.7 percent of all employers, and they employ more than half the private-sector work force, while creating between 60 percent and 80 percent of all new net jobs, according to U.S. Small Business Administration’s Office of Advocacy.

So, what’s the best way for politicians to express their appreciation for small business? Of course, many want to provide government handouts, such as through subsidies or government-backed loans. However, this isn’t such a hot idea. Politicians and government bureaucrats don’t operate under the proper incentives to be playing venture capitalist. Besides, why should taxpayer dollars be used or placed at risk to help certain businesses, especially since some of those tax dollars come from other businesses?

No, the best thing politicians can do for the entrepreneurial sector of the economy is to establish a hospitable climate in which all kinds of businesses are able to start up and hopefully flourish. At the federal level, we’ve seen some positive developments recently for entrepreneurs and small businesses, namely, the tax cuts passed by Congress and signed by President George W. Bush.

The key measures were reductions in the personal income tax and the capital gains tax. The top personal income tax rate has been cut to 35 percent (from a recent high of 39.6 percent), and the capital gains tax rate declined from 20 percent to 15 percent. These tax cuts are helping the economy by boosting incentives for working, investing and risk-taking.

Of course, there are still problems when it comes to the federal government. For example, the regulatory burden remains quite daunting, and huge spending increases in recent years divert resources from the private sector and raise the specter of higher taxes down the road.

What about the states? Are policies helping or hindering small business? In the “Small Business Survival Index 2003,” published by the Small Business Survival Committee each year, I attempt to provide some answers.

The report ties together 21 different government-imposed or government-related costs into one index. Among the costs included are personal income, capital gains and corporate income taxes, property taxes, electricity costs, health care and workers’ compensation costs, and crime rates. The index allows the 50 states and the District of Columbia to be ranked according to how friendly their policy environments are for small businesses and entrepreneurs. The latest rankings appear in the accompanying table.

The disparity among the states can be significant. For example, the top eight states imposed no general personal income taxes and no individual capital gains levies. Four of those states also imposed no corporate income tax.

Meanwhile, most of the worst states inflicted high tax rates on income. Just take a look at the District of Columbia, which ranked as the most hostile small business environment compared to the 50 states. The District was hurt by extremely high personal income, capital gains and corporate income taxes, along with the high health-care costs, burdensome sales, gross receipts and excise taxes, the highest crime rate, and a large number of city government employees relative to population.

There also is the question of the direction in which states are moving. Faced with some daunting budget deficits after years of rapid spending increases, many states recently raised taxes. New York, Connecticut, Arkansas and Oregon, for example, raised personal income and capital gains tax rates. Nevada imposed a payroll tax as part of a large tax increase. The National Conference of State Legislators has reported 15 states increased tobacco excise taxes this year. Rather than seriously dealing with the true source of their budget woes — that is, too much government spending — these and other states took the ill-advised step of increasing taxes, and thereby making their states a more costly place for small businesses.

One state actually implemented a pro-small business, pro-growth tax cut, however. In New Mexico early this year, newly elected Democratic Gov. Bill Richardson got a multiyear cut in the state’s personal income and capital gains tax rates passed. By 2007, the top personal income tax rate will have declined from 8.2 percent to 4.9 percent, and the top capital gains tax rate from 8.2 percent to 2.45 percent. Once fully phased in, this will dramatically improve New Mexico’s competitive position among the states.

It’s not enough for politicians to say they care about small business. Their policies must prove their love. Whether it be at the federal, state or local levels of government, low taxes, a light regulatory touch, and protecting life, limb and property create the best environment for small business success, and therefore, for solid economic growth and job creation.

Raymond J. Keating is chief economist for the Small Business Survival Committee.

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