Businesses mull impact of tax cuts
Photo/David A. Rodgers
Melanie Collins, who owns a home childcare business in Falmouth, opposes the tax package because she believes working people will have less money to spend on businesses such as hers
The controversial Bush-era tax cuts, extended by a lame duck Congress at the last minute in a furious ideological battle, were no less contentious within Maine’s business community. In the days leading up to the House and Senate votes in December, business owners around the state weighed in, writing newspaper op-eds, calling congressional leaders and speaking out publicly. While many wanted to maintain tax breaks for the working and middle classes, others questioned the wisdom of extending tax cuts for the wealthy.
In the end, Congress approved taxpayer cuts for all income levels for the next two years, at a cost of more than $850 billion, with the hope that the extra dollars in people’s pockets will push along a sputtering economic recovery. The package includes many other provisions, including capping a 15% capital gains and dividend tax, reducing the payroll tax and extending unemployment insurance and a series of business tax breaks designed to encourage investment.
Now that the furor has subsided a bit, small business owners are assessing the lay of the land. The tax extensions are meant to give companies a stable fiscal foundation to expand or create jobs, and to inspire consumers and investors to spend. But it remains to be seen whether Maine business owners will be spurred to action.
Charles Colgan, an economist at the University of Southern Maine, says of all the breaks, the cut that reduces the Social Security tax on many payrolls will provide the brightest spark. “Even though the so-called Bush cuts got extended, the payroll cut will affect a lot more people, and put a lot more buying power into the economy into the short term,” he says. “Businesses large and small will see some benefits from this.”
The back and forth
All the business owners interviewed for this story pointed to the overall health of the economy as the most important influence on their business’ stability and future growth.
Jim Wellehan, the owner of Lamey-Wellehan Shoes, whose business profits in good years exceed $250,000, worries that the country is no closer to closing its deepening deficit, which he fears will ultimately drive up interest rates and lead to a debasement of the currency. “We’re looking at something that may be more disruptive to our economy than positive to our economy,” he says of the tax package. “And secondly, we obviously need an economy to work, but more important than the economy is the society, and if we don’t have a good society, we won’t have a good economy.”
“I know [the tax package] will have a negative impact [on my business],” says Melanie Collins, who owns a home childcare center in Falmouth. “The money we would have gotten from [taxing] the rich, we could have put into all the services our communities use, and it would lessen the amount of taxes the rest of us have to come up with. When everyday working people have to fill the gap by giving a handout to the rich, everyone has less money to spend, and they have less money to spend on my business.”
On the other end of the spectrum, Doug Newman, owner of Newman Concrete Services Inc. in Richmond, says pushing down taxes for everyone buoys confidence. “I think increasing taxes would have been very harmful for the economy,” he says. “Extending the tax rates was, for me, more about allowing the recovery to continue rather than any sort of direct benefit.”
And Dana Connors, president of the Maine Chamber of Commerce, agrees with him. “By extending the cuts, it frees up money, and allows [business owners] to put their money back into their businesses,” he says. “The money not going into taxes can be reinvested into people or productivity or equipment.”
Helping or hurting?
In the debate over whether to extend the temporary tax cuts for the country’s top earners — individuals with incomes above $200,000 and households earning more than $250,000 — Republicans argued that small businesses would be hurt without them. (The income of many business owners is taxed at individual rates.) But Democrats pushed back by arguing that only 3% of businesses nationwide would be affected because most small businesses don’t make more than $250,000 in profits.
In Maine, roughly 6,500 individuals — or about 1% of taxpayers — file returns with federally adjusted gross income above $250,000, while also reporting some other business income, according to Maine Revenue Services. Mike Allen, the director of economic research at MRS, estimates that based on this number, they probably represent around 4,500 to 5,000 businesses in Maine. It’s difficult to parse these individual returns to accurately determine how many companies might make these profits, he explains, since individual income can come from varied sources.
In 2011, the total federal liability for the state will be $3.6 billion. Had the tax cuts not been extended for anyone, the state’s taxpayers, poor and rich alike, would have paid an additional $1 billion in federal taxes. “That would have been a huge federal tax increase for Maine taxpayers, and we had concerns about how that would affect the sales tax in the state,” Allen says.
Business owners are now waiting to see how the months ahead unfold.
Newman, the owner of the concrete business, had to lay off more than 100 workers in the past two years, cutting his force down to about 30. He says in good years, he can post a profit above the top tax thresholds, but not lately. Once he starts generating profits again, he says he’ll start hiring. At the moment, however, he’s in “survival mode” as he waits for more projects. “Just hiring a person is a huge investment, about $50,000 to $75,000,” he says. “It takes a lot of confidence, and we need certainty that the economy is headed in the right direction. And if the government is taking a bigger chunk of profits, it is much more difficult to do.”
Wellehan, who owns six shoe stores in Maine with about 100 employees, says with or without the tax cuts, he was planning to make energy upgrades in the coming year to reduce his company’s carbon emissions. Investing in energy conservation, and performing philanthropic deeds like giving shoes to homeless shelters, has helped his company grow, even in the downturn, he says. “I think it was very helpful, because we have people who appreciate us,” he explains, adding that in comparison, “corporate America is not always a shining example” of business accountability.
In the end, Maine business owners say they hope the economy rights itself, even while their prescriptions for it differ along with their taxation philosophies.
“We are sort of hopeful,” Newman says. “We’re starting to see signs that there might be some improvement, and we look forward to getting these guys back to work.”
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