NEW YORK More than 1,000 miles from Washington, D.C., Marie DeNicola’s small business is already experiencing the consequences of lawmakers’ inability to compromise on the budget.
If Democrats and Republicans don’t come to a consensus soon, a combination of billions of dollars in tax increases and budget cuts will go into effect Jan. 1. This “fiscal cliff,” as it is commonly being called, is already hurting DeNicola’s company – Mainstream Boutique, a Minneapolis-based chain of 23 franchise stores that sell women’s clothes. DeNicola recently got a painful email from a prospective franchisee who said she changed her mind about opening a store because of uncertainty about the economic and political climate.
“It was like a punch in the stomach,” says DeNicola, who also operates one of the stores. “It’s a little scary – because of the unknown, small businesses aren’t waiting until January or February to see what happens. People are reacting now.”
Going over the cliff could have a range of negative ramifications. If people have to pay higher taxes, they likely will spend less. Businesses will hold off on hiring or making investments that could help them expand. Federal budget cuts will put billions in government contracts in jeopardy. Economists and lawmakers warn that without an agreement, the U.S. could slip back into a recession. And they say that small businesses have the most to lose.
Like her potential franchisee, DeNicola also is holding off on big moves because of the cliff.
One of the biggest concerns for small merchants is the pending expiration of the 2 percentage point cut in payroll taxes that gave consumers more money to spend in 2010 and 2011. If the tax cut isn’t extended, the government stands to get $95 billion – money that consumers won’t be spending at Mainstream Boutique and other small businesses. Long-term jobless benefits also will expire, giving people who have been out of work for a long time $26 billion less to spend.
The prospect of consumers spending less troubles Greg Jones. The owner of three Five Guys Burgers and Fries franchises in Florida is concerned that customers who might normally stop in three times a week will cut that back to once. Restaurants like his lost business to cheaper options like McDonald’s during the recession. He’s worried that will happen again. Jones wants to open two more Five Guys locations, but says he might not be able to if the country goes over the cliff. If his existing restaurants aren’t profitable enough, he won’t get the money he needs to expand.
During the presidential campaign, Republican candidate Mitt Romney contended that small-business owners would be hit so hard by the scheduled increase in the top tax rate – a jump from 35 percent to 39.6 percent – that they’d stop creating jobs. That rate would affect single taxpayers who earn $200,000 or more and households that earn $250,000 or more. But Democrats and advocacy groups including Small Business Majority say the number of business owners who would be affected by that increase is less than 5 percent.
“This is a myth that just continues to get life without any substantiation,” says Rep. Gwen Moore, D-Wis. She says the bigger issues are the 2 percent payroll tax cut and unemployment insurance extension. If they’re allowed to die, she says, businesses like Jones’ Five Guys franchises will suffer.
“That’s the bottom line – how many people are going to be out eating those burgers and fries,” she says.
Small-business owners who rely on federal contracts are worried about how much business they’ll get from the government if big spending cuts go into effect. Vince Fudzie, CEO of Triune, a general contracting company based in Dallas, says business with the government has been shrinking since 2006, and the cliff presents yet another challenge. He’s already been waiting to find out if he’ll get approval to finish a dormitory project for the Department of Labor that’s 95 percent complete.
In the meantime, he’s frustrated by lawmakers’ inability to reach a deal.
“We elect these seemingly reasonable people to go to Congress and they seem unwilling to get along,” he says.