It may come as a surprise that Americans are less likely to start a business, move to another region of the country, or switch jobs than at any time in recent memory.  In fact, our economic and job-creation engine is “rapidly slowing down,” according to an analysis by the Economic Innovation Group (EIG), a non-profit research and advocacy organization. (The group’s full analysis can be found at http://eig.org/dynamism).

Put another way, for the first time on record, U.S. companies are actually dying at a faster clip than they are being born.  EIG attributes this reversal of good fortune to the Great Recession, which threw the cycle of creation in the economy out of balance.

Why does this matter? New firms help to keep the economy in a constant state of rebirth, helping to replace dying industries, foster competition with existing businesses and stimulate new, higher-wage jobs.

However, during the recovery from the Great Recession between 2010-14, EIG said the economy added 104,600 firms. By contrast, the recovery from 1983-87, when the size of the national economy was much smaller, the U.S. added 491,600 new businesses.

Even more stunning, the vast majority of business creation is concentrated in a handful of metropolitan hubs. According to EIG, from 2010-14, five metro areas–New York, Miami, Los Angeles, Houston and Dallas–produced as big an increase in businesses as the rest of the nation combined.

By contrast, nearly nine out of 10 metro areas started to shed businesses faster than they could open.  “Things aren’t close to returning to normal,” EIG’s report said, adding that only one in seven metro areas now keeps pace with the national startup rate.  The rapid retreat from business creation is also intensifying “geographic inequality” in the country, EIG said.

People feel the impact of diminishing startup creation most acutely in the job market. New businesses are an important source of demand for workers and the primary generator of jobs for the future. According to EIG, the dearth of new companies cost nearly 1 million jobs in 2014 alone. New businesses are responsible for nearly all the net new jobs in the U.S. economy.

What to do about this?  EIG’s report said economic policy should be focused on addressing geographic inequality and business creation first and foremost. Policymakers can start by asking the right questions:  For example, how can we make it easier for entrepreneurs to access the capital they need to grow their companies?

EIG was formed in 2013–with support from Silicon Valley bigwigs Sean Parker and Ron Conway–to craft centrist proposals to stimulate the economy and press Congress to back them. The group helped develop the bipartisan Investing In Opportunity Act, legislation that would put billions of dollars in new private investment to work in distressed communities throughout America.

Introduced in 2016 in both the House and Senate, it has yet to pass either chamber.

 

 

A report yesterday by the new media website Axios should have gotten more news coverage and social media attention  than it did.

Axios reported that a “little-noticed” provision of the Senate health bill that provides new insurance options for small businesses and the self-employed–small business health plans, or SBHPs–could potentially make it harder for sick people and those with pre-existing conditions to obtain affordable coverage.

In a letter to members of Congress and governors, the American Academy of Actuaries said the provision could cause “fragmentation of the market resulting from an unlevel playing field. This is likely to lead to cherry-picking, adverse selection and increased costs for sicker individuals.”

The Senate bill would allow small businesses and self-employed workers to use a new type of health plan which is basically a type of association health plan, albeit one that’s more loosely regulated than existing plans under the Affordable Care Act (ACA). That is likely to mollify Senate conservatives but would be a harder sell to moderates.

For example, as envisioned by the Senate health bill, these plans wouldn’t have to abide by the same protections for people with pre-existing conditions nor would they be required to cover the ACA’s essential health benefits, such as prescription drug coverage.

Some experts are worried about how this would all play out.  In a June 30 policy brief, the nonpartisan Kaiser Family Foundation wrote: “If enacted, this provision would considerably disrupt the small group market because small employers could seek lower rates or less comprehensive coverage in a SBHP when their employees are healthy, but theoretically move back to regular small group market plans if an employee becomes ill or if the group wants more comprehensive benefits.”

Kaiser said this type of “adverse selection” could result in “significant” premium increases and destabilize the small group market. They also said the provision could similarly “disrupt” the non-group market because it would “permit self-employed individuals (in states that choose to regulate very small groups of one as small employers) to join SBHPs when they are healthy or want few benefits, but move back to regular non-group coverage if their health or circumstances change.”

In 2014, 20 percent of the people who bought coverage through the ACA’s exchanges were small-business owners or self-employed.

Obama-era regulations could mitigate some of the potential disruption. Those rules permitted some people–including many healthy people–to keep pre-ACA coverage or sign up for new policies that also didn’t comply with all of the ACA.

Actuaries offered another potential fix:  “If the rules governing [association health plans] were consistent with those governing non [association health plans], there would be fewer concerns about market fragmentation.”

Their businesses may be small, but their share of Obamacare’s pie isn’t.  In fact, according to a recent Treasury Department report, 20 percent of all Obamacare customers–1.4 million people–was either a small business owner, self-employed or both, in 2014, the first year Affordable Care Act (ACA) plans were available.

The same report, released in January,  also said that workers whose incomes were not primarily from wages were almost three times more likely to buy health insurance coverage from an Obamacare exchange than wage earners in 2014.

That year, almost 28 percent of people who purchased coverage for themselves through one of the government-run marketplaces had income that was not primarily from wages, the report said, the first of its kind to analyze participation by those kinds of workers in Obamacare plans.

Two officials, one at Treasury and the other at Health & Human Services (HHS), wrote in an HHS blog posted January 12, 2017, that “nearly 10 percent of small-business owners and more than 10 percent of gig economy workers got coverage through the marketplace.”

They continued: “The data show that the [ACA’s] marketplaces are playing an especially crucial role in providing health coverage to entrepreneurs and other independent workers.”

The report contains a state-by-state breakdown of the number of small-business owners and independent workers covered by ACA plans. The 10 states with the largest number of small-business owners with marketplace coverage were California, Florida, Texas, New York, Georgia, North Carolina, Pennsylvania, Michigan, Washington and Virginia.

Both House and Senate Republicans want to repeal and replace the ACA with bills that are, according to polls, very unpopular and which the Congressional Budget Office said would cause more than 20 million Americans to lose health coverage by 2026 and increase premiums. (That is the number of people who gained coverage under the ACA in the last six years.)

It is unclear whether the Republican-led effort will succeed; the House passed a bill in May and the Senate delayed a vote on its repeal-and-replace bill on Tuesday. What seems clear though is that Republicans apparently want to turn the clock back to the pre-ACA days, and that could have deleterious consequences for would-be small-business owners and independent workers.

And I’m not just talking about access to affordable coverage, either, although, the aforementioned blog said that prior to the ACA becoming law in 2010, workers without health insurance purchased through a job “often lacked options for affordable coverage.”

The authors of the blog post, Adam Looney, a deputy assistant secretary for tax analysis at Treasury and Kathryn Martin, an acting assistant secretary for planning and evaluation at HHS, said access to affordable health care coverage for entrepreneurs is important to starting new businesses.

They wrote: “Not only did high uninsured rates (prior to ACA) impede access to care and worsen financial security, but the risk of ending up without health insurance coverage prevented some individuals from striking out on their own.”

The phenomenon is known as “job lock.” Experts considered job lock, or individuals’ need to stay in an employment situation in order to maintain health coverage, “a significant impediment to entrepreneurship,” Looney and Martin wrote.

So, imagine you’re an enterprising, entrepreneurial research scientist at a medical school where you have patents on some promising drug therapies. You also have a family, you have some pre-existing medical conditions but you have good employer-subsidized health insurance. Knowing all this, do you strike out on your own and start a new company with questionable access to affordable health care, or do you postpone your startup dream and stay in your job at the medical school?

 

A report last month by Brookings raised some interesting questions about the proposed tax-reform plans of the Trump administration and House Republicans. Both propose large reductions in taxes paid on business income, including taxes paid by owners of pass-through businesses.  Pass-throughs–which include limited partnerships such as real estate, law firms and hedge funds–have their income pass through to their owners to be taxed under the individual income tax. The Trump plan would reduce the corporate rate from 35 to 15 percent and the top rate on income earned from pass-through business from 39.6 to 15 percent.

Here are the main points of the Brookings analysis:

• Most businesses are pass-throughs.  Of the 26 million businesses in 2014, 95 percent were pass-throughs while only 5 percent were C-corporations.
• Almost all businesses are small.  In 2014, almost 99 percent of businesses had $10 million or less in sales and receipts.
• Pass-throughs are not necessarily small business. A small number of large businesses account for the majority of pass-through profits and economic activity.
• Pass-through businesses now earn a majority of business income.  In the early 1980s, C-corporations produced almost all business income. In 2013, only 44 percent of the income of business owners was earned through C-corporations.
• Pass-through businesses pay lower tax rates than C-corporations.  The gap between the lower rate on pass-throughs and the higher rates faced by C-corporations creates a major incentive for businesses to un-incorporate and to organize as pass-throughs.
• The multitude of business types encourages inefficient tax avoidance.  With so many options to choose from when determining how to structure a business and whether to distribute business income as profits, wages or capital gains, business owners have considerable incentive and ability to avoid tax.
• The growth of pass-through businesses has eroded corporate and payroll revenues. If the relative shares of pass-through and C-corporate activity were held at 1980 levels, the average tax rate on business income in 2011 would have produced at least $100 billion in additional revenue in 2011 alone.
• Pass-through income is primarily earned by high-income individuals.  About 70 percent of partnership income accrues to the top 1 percent, compared to less than 50 percent of corporate dividends and 11 percent of wages.
•  Pass-through businesses are responsible for a significant share of the tax gap. About 41 percent of the tax gap from 2008-2010, or $190 billion, was due to pass-throughs underreporting income and thus paying too little income tax.

To my way of thinking, if most of these changes come to pass, the biggest winners will be high-wealth individuals, not small businesses, and government funds for services such as infrastructure,  retirement and healthcare for seniors  will be more scarce.

Brookings’ research noted that the growth of pass-through businesses has eroded the payroll tax base, which funds the Social Security, Disability and Medicare trust funds. In 2011, about 71 percent of pass-through income was subject to Social Security or Medicare taxes; in 1994, the share was greater than 88 percent. Republican healthcare proposals, if passed, would make this chasm even wider.

Individuals in the bottom 80 percent earn virtually no pass-through income.  Moreover, those with higher incomes tend to receive a much greater share of their income from business compared to those with lower incomes, as the top 1 percent earn only about 11 percent of wage and salary income. Thus, any reductions in the tax rate on pass-through businesses, while it might benefit some small businesses, would largely benefit high-income taxpayers.  It’s what economists call “upward redistribution.”

Finally, pass-through businesses already aren’t paying their fair share, and are primarily responsible for the tax gap, according to Brookings. The tax gap measures the amount of tax liability that should be paid but is not. About 41 percent of  the $190 billion tax gap from 2008-10, was due to pass-through businesses underreporting income for income and payroll tax purposes.  Sole proprietors were responsible for about 30 percent of the individual income tax underreporting tax gap.

 

 

 

 

 

 

A week ago, on May 18, Brookings published a report that Philadelphia has a strong “innovation economy” but city leaders–both private and public–need to do more with its existing assets to “compete globally and benefit local communities.”

The report examined the role of the University City-Center City innovation district as a regional economic hub and a key part of Philadelphia’s efforts to become a world-class innovation city.

Philadelphia is the 6th-largest metropolitan area in the country and ranks among the Top 10 metros based on its total annual amount of public and academic research expenditures. But the report also noted that the city “underperforms” on several key metrics given its size and assets.

Brookings said that in order for Philadelphia to improve its economic competitiveness and grow more firms and jobs, the region needs to leverage and align its strengths and should establish an “Innovation Council” to drive innovation within the district and beyond.

One key recommendation stood out to me:  Establish an “Anchor Firm Entrepreneurship Initiative” to leverage the resources of anchor-tech to connect city startups with customers, support training and mentorship programs, increase access to capital and help develop physical spaces in which startups can grow. Much of that is already happening, but it needs to be scaled.

Ironically, perhaps, the same day Brookings issued its report, the widely-respected Kauffman Foundation, which specializes in the study of entrepreneurship in the U.S., released its annual Index of Startup Activity.  The index is a comprehensive indicator of new business creation in the U.S. In addition to national startup activity trends, the index looks at activity in all 50 states and the 40 largest U.S. metro areas.

The index covers approximately five million companies, capturing business activity in all industries. It relies on three factors to assess each metro area’s fitness as a startup hub:

• the rate of new entrepreneurs in the economy (calculated as the percentage of adults becoming entrepreneurs in a given month;
• the opportunity share of new entrepreneurs (calculated as the percentage of new entrepreneurs who left minimum wage and salaried jobs, other labor-market statuses and school to start their own companies) and;
• startup density, or the number of startups out of every 1,000 businesses in the metro area.

Using this methodology, the news for Philadelphia is not as good. Of the 40 largest metro areas, Philadelphia (which also includes Camden and Wilmington) ranked No. 36 on the list. Worse, it trended worse than the 2016 index, when it ranked No. 34.  The five metros with the highest startup activity were Miami, Austin, Los Angeles, San Diego and Las Vegas.

Clearly, Philadelphia has some challenges when it comes to business startup activity. It’s an old story, but bears repeating.  Too many academic researchers are loathe to leave their cushy university cocoons to make the startup leap. And, as recently chronicled in this blog, the city’s tax structure is not very startup-friendly.

But Brookings has given the Philadelphia metro area a roadmap to boosting startup activity. Their is certainly a plethora of assets here, but it’s up to leaders–both private and public–to harness those assets to gin up economic growth and boost startups.

 

 

During his budget address to City Council on March 2, Philadelphia Mayor Jim Kenney said that among the nation’s 10 largest cities, Philadelphia ranked first in poverty and last in job creation.

Kenney also noted that Philadelphia even trailed perpetually economically distressed cities like Baltimore and Detroit.  Then the mayor said this: “Nearly every task force, commission, committee and working group that has looked at how to improve Philadelphia’s economy has noted that our tax policy consistently holds us back.”

It was a blunt and honest appraisal, something you rarely hear from a politician.

In recent years, the city has incrementally reduced some of its most onerous taxes, including a wage tax that’s much higher than Philadelphia’s suburbs. Some 60,000 small businesses in Philadelphia no longer pay a Business Income & Receipts Tax, commonly known by the acronym BIRT, as a result of a reform that exempted the first $100,000 of a business’s gross receipts from the tax.

Another reform in 2013 exempted all new businesses that create three jobs in their first year of operations and have six employees by the end of the second year from BIRT for the first two tax years of operations in the city.

But the reforms have done little to really goose the city’s economy. We need to take a bigger bite out of BIRT if we want to speed up growth. BIRT levies a 1.45 percent tax on a business’s gross receipts above $100,000 and 6.45 percent tax on taxable net income. Every individual, partnership, association or corporation engaged in a business, profession or other activity in the city must file a BIRT return, even if they did not have taxable income during the preceding year.

BIRT, which accounts for 14 percent of the city’s general fund revenue, is expected to generate $445 million for the city in the fiscal year that ends June 30.

When you have to write a check to the city for 1.45 percent of gross sales over $100,000, that’s money a business doesn’t have to reinvest in the business or hire new workers.

Consider a business that had $1 million in gross sales in Philadelphia in 2016. That business would have to pay $13,050 to the city plus 6.45 percent of whatever taxable net income they had.

A few weeks after Mayor Kenney gave his budget address, TechNet and the Progressive Policy Institute released a report that identified 15 “emerging” tech hubs, ranking Philadelphia No. 10 on the list. (StartupPHL says there are 5,100 tech businesses in the city.)

TechNet said the emerging hubs were likely to be more successful if they followed an agenda that included tax incentives to encourage investment in local companies and a pro-innovation regulatory and fiscal policy that reduced the burden of taxation and regulation on small companies.

A good place for Philadelphia to start would be to abolish the gross receipts portion of BIRT.  That’s money that could be better used for business growth and job creation.

An annual analysis of America’s small business environment by Allstate/USA TODAY, released yesterday, found increasing optimism and innovation among small business owners, despite the rising cost of doing business.

The Allstate/USA TODAY Small Business Barometer combines a survey of almost 2,600 small business owners with a comprehensive databank of key public metrics, including past performance, recent growth and increased sales, to measure the strength to America’s small business climate, both nationally and in 25 major metropolitan areas. The barometer then assigns an overall score from 0-100, with the average score being 58.

Overall scores ranged from a high of 63 (considered “strong”) in Cleveland and Nashville to a low of 56 (considered “solid”) in Los Angeles.  Philadelphia scored 57 in the survey.

Here are the key findings:

• Optimism and innovation are surging and 64 percent of small business owners say there has never been a better time to own a small business.
• The small business economy is stronger now than in late 2015, with 55 percent of those surveyed saying their business revenue increased in 2016.
• Despite increased optimism, small business owners still face stress, with 75 percent reporting they faced some or a great deal of stress, about the same as the 2016 survey found.
• Cost is one of the major challenges of owning a small business–and costs are rising. Some 51 percent of owners said the cost of materials and equipment they need are higher this year than last.
• Veterans offer crucial benefits to small businesses, and the survey found that small businesses owned by veterans or who employ veterans tend to perform better than the norm when it comes to past performance, recent growth and increased sales. Owners who hire vets say it’s the right thing to do and that employees with military backgrounds know how to work as a team and have personal traits that are valuable to operating a business, including self-discipline and being on time.
• Younger business owners adapt and innovate more. There’s a widening gap between those owners under 50 and those over 50. The survey found that younger owners are more likely to report their businesses are doing well, are more likely to be optimistic about the future and more than twice as likely to be hiring.
• Female business owners face unique challenges, with women reporting more stress from family pressures and family health than men. Female-owned small businesses tend to make less income than their male counterparts, with 41 percent making annual income of less than $100,000 compared to 21 percent of men’s businesses. And just 10 percent of women’s small businesses make more than $1 million in annual income, compared to 24 percent for men’s small businesses.

For more information, including national results and the scores for 25 major markets, visit http://www.allstate.com/barometer.

If you own a small business, there’s a lot to like in President Trump’s proposed overhaul of the federal tax code for businesses and individuals.

First of all, Trump is proposing to drop the corporate rate from 35 percent to 15 percent, but the new rate would also apply to small businesses and pass-through entities–partnerships, limited liability companies, S-Corps, startups and the like–who now pay taxes through the personal income tax code, where the top rate is 39.5 percent.

Small businesses–mom-and-pop operations, hedge funds, real-estate partnerships, law firms, etc.–would pay a new business income tax rate within the personal income tax code that matches the 15 percent corporate rate under Trump’s proposed business tax overhaul.

The administration said in a statement that taxing small businesses at current high personal-income tax rates stifles them and also stifles tax reform because efforts to reduce loopholes and deductions to the very rich and special interests end up hitting small businesses and job creators as well.  (The administration proposes to eliminate all deductions from the personal tax code except for mortgage interest, charitable giving and contributions to 401-K retirement plans.)

Other proposed reforms include eliminating the alternative minimum tax and the Obamacare tax on capital gains for high earners.

Director of the National Economic Council Gary Cohn and Treasury Secretary Steven Mnuchin said at a press briefing earlier today that the new lower business and personal rates would provide a stimulus for the economy that would lead to significant GDP growth–at least three percent annually and likely more–a huge number of new jobs and an increase in after-tax wages for workers.

Some skeptics weren’t buying the stimulus argument. Jared Bernstein, who was chief economist for Vice President Joe Biden in the Obama administration, told MSNBC: “No tax cut has ever paid for itself through growth.”

Of course, this is the administration’s opening bid in negotiations with Congress, which will ultimately pass a bill for Trump to sign.  And, just as the Bush tax cuts expired in 2013, these cuts would also expire 10 years after passage. That’s because the Senate is likely to pass any tax bill through reconciliation, which would require only 51 votes, but would also sunset the legislation.

Tax-policy experts cautioned that the outline of the Trump plan on its face would jack up the budget deficit and were skeptical of administration claims the tax cuts would pay for themselves with increased economic growth. The conservative Tax Foundation concluded that a 15 percent corporate tax rate would reduce federal revenues by $2 trillion over the next decade.

The Tax Policy Center, a liberal-leaning research group, said Trump’s plan would add $7 billion to the national debt over the next decade, leading to higher interest payments on the debt and driving up interest rates.

To make up for these losses without specific pay-fors, the economy would have to grow by 5 percent, which is unlikely given past performance. According to government data, the annual growth rate has averaged just 2.9 percent since World War II.  That’s because the U.S. has  a mature economy and, as a result, you don’t get big spurts of economic growth like you see with emerging economies.

 

 

 

 

 

 

 

 

 

President Trump signed legislation on April 3 that repealed Obama-era rules that were approved by the FCC in October 2016 to protect consumers. The rules, which had not yet gone into effect, would have required ISPs like Comcast and Verizon to seek consent from their customers in order to share sensitive private data such as financial and health information, social security numbers and web browsing history and location data.

Both the Senate and House voted–largely along party lines with Republicans in the majority–to repeal the rules at the end of March. Critics contended the new rules were onerous, duplicative of FTC rules and unnecessarily imposed additional compliance costs on businesses.

The Trump administration wants the FTC to police privacy issues connected to broadband providers and Internet companies like Google and Facebook. According to FCC Chairman Ajit Pai, prior to 2015, the FTC “was protecting consumers…policing every online company’s privacy practices consistently and initiating enforcement actions.” (In 2015, the FCC stripped the FTC of its authority over ISPs. Pai says he will work with the FTC to ensure that customers’ online privacy is protected.)

The  now-repealed rules were intended to give consumers, and by proxy small businesses who interact with them on the Internet,  control over how their online information was being used.  Now, presumably  ISPs will be able to monitor small businesses and consumer behavior online and use personal information to sell targeted ads.

In any event, the repeal of those rules, at least in the immediate future, is likely to shift the burden of protecting consumer privacy back to small businesses. That means small businesses need to be able to protect consumer data privacy themselves. If you’re selling any goods or services online, you’ll need to take steps to make sure your customers feel safe.

A recent article in Small Business Trends identified a couple things small businesses can do.

For one thing, small business owners who are concerned about their own privacy and the privacy of their business should weigh using a Virtual Private Network (VPN) for company business as well as ensuring that websites used are encrypted. A VPN provides the security measures businesses need. In the same way a firewall protects the information stored in your computer, the VPNs protect data you’re sharing through public networks. This allows you to  run around the proposed security rollbacks to assure your clients their data is safely shared with you.

Secondly, small businesses are encouraged to use an Encrypted HTTPS Protocol. It’s not as complicated as it sounds. The “s” at the end of the older “http” means that all the information passed between your browser and the website you’re connected to is encrypted. That “s” means all the data you share between you and your client is safe, regardless of any changes to privacy laws.

  

When the Trump administration released its budget blueprint for fiscal year 2018 in March, I was surprised to notice that a host of independent agencies–including the Overseas Private Investment Corporation (OPIC)–were having their federal funding totally eliminated.  (Congress, of course, will have the final say, and has yet to weigh in.)

Unlike many foreign aid models, OPIC uses a market-based approach by mobilizing private sector capital for public good. It was established in 1971 and helps American businesses expand to emerging markets in Africa, South and Central America, as well as Mexico and the Caribbean.

It works like this:  OPIC provides direct loans and guarantees, in addition to risk insurance, in cases where commercial financial institutions are unwilling or unable to lend. Put another way, OPIC facilitates investments that would not likely happen otherwise.

OPIC has received bipartisan support and pursued its mission on a self-sustaining basis at no net cost to American taxpayers for the past 39 years, according to a report in Forbes on March 31 by Willy Foote, founder & CEO of Root Capital. Root has worked with OPIC for the past seven years to connect small coffee growers in Latin America and Africa to global markets.

Last year,  OPIC returned every cent of funding it received from the feds plus $239 million it earned as income. During the Obama administration, OPIC generated $2.6 billion in deficit reduction.  Foote says he can’t understand why Trump wants to cut an agency that makes money for taxpayers.

Foote is not alone in his assessment. “I understand why some Americans watch their tax dollars going overseas and wonder why we’re not spending them at home,” said Bill Gates, in an article in TIME last month. “These projects keep Americans safe. And by promoting health, security and economic opportunity, they stabilize vulnerable parts of the world.”  Sen. Lindsey Graham (R-S.C.) has likened support for OPIC as akin to “buying national security insurance.”

Private investors are understandably wary of working with enterprises in fragile or failed states, Foote writes, “but when capital flows to these small businesses and local entrepreneurs, lasting peace becomes more probable.” Foote fears such communities are more likely to backslide into violence if OPIC is eliminated.

For five decades–under both Democratic and Republican administrations–OPIC has shown how a market-based model can responsibly invest in businesses and jumpstart economic development that likely wouldn’t occur otherwise, said Foote, adding that OPIC “achieves this while supporting American enterprises, advancing the country’s foreign policy objectives and providing steady financial returns for taxpayers. This is a model that should be expanded not eliminated.”