Mario Burgos

Clear thinking and straight talk from the top of a mountain.

Wednesday, February 10, 2010

Explaining it Another Way

Some of you, actually just one person, likes to take me to task time and time again for standing up for small business and insisting that the proposed gross receipts tax and income tax increase negatively impact those most likely to actually help the economy rebound by creating new jobs. This individual argues that a couple of hundred dollars more in taxes really shouldn't be a big deal to a business making $200,000 in profit. But, nothing could be further from the truth.

First, let's consider the environment in which these tax increases are being pushed:
Please note that no efficiencies to government bills have been adopted and no true cuts to the budget have yet to be made, however tax increases on the private sector are being considered.  Unemployment in our state is at a 22 year high, and our focus must be on job retention and creation. 
That's the current reality spelled out in a recent communication from the Association of Commerce and Industry (ACI).  Mind you, no efficiencies or true cuts are being made even though we know at a bare minimum there are $129 million in cuts that could be easily made. We also know that the despite all of the hype, government stimulus money did not create new jobs.  At best, it may have saved some public sector jobs.

We also know that big business isn't adding to their employee roles. So, that leaves small business to come to the rescue. Only someone who has never run a business could argue, "What's $500 in additional taxes?" They'll smugly try to make the case that $500 is not enough to put someone on the payroll. But, that's because they think jobs are added in the private sector in the same manner as they are in the public sector.  They are not.

In the government arena, if you want to add a $40K a year employee, you have to raise $40,000 a year in addition taxes. In the small business sector, a $500 investment could very easily result in a $120,000 to $240,000 in new salaries.

Let's explore this a little further with a real life example.  Last week, I spent $500 in travel expenses to meet potential customers for a new and innovative technology.  The meeting went very well. If the deal is closed it will result in a contract that could easily be worth $1M or more.

New people will be added to the payroll to fulfill the contract. They will have paid benefits and won't need to be supported by the state. The $500 that was not collected in taxes will likely save the state (i.e. taxpayers), tens of thousands of dollars in the form of unemployment benefits that will not have to be paid.  In fact, these wage earners will pay state income and gross receipts tax far in excess of the $500 in additional taxes on my business. If they get to keep their house because they are once again gainfully employed, they will also pay property taxes.

Now, let's go back to the scenario being pushed in the legislature. They want to take another $500 (or more) away from small businesses. This is a zero sum game. My business has a budget. If you pull $500 from it in the form of additional taxes that money has to come from somewhere. Due to the tight credit market, it can't come from my retained earnings.  Nor, can it come from any line item that will keep me from fulfilling my current obligations.

So, that means it will come from marketing dollars. It might be one less trip I can take to market my business. Or, maybe ten or more marketing lunches that can never be scheduled. Or, a critical conference that has to be passed up.

Those are all possibilities. The one undeniable fact is that it it will be four, five or a dozen jobs that will never happen because elected officials refused to do the right thing and cut unnecessary spending.

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