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Sequester and Fiscal Cliff: What’s the Impact on Small Business?

Those of us here in the U.S. have been hearing a lot about “sequester” (variation “sequestration”) — and its cousin, “fiscal cliff.”  I’d be willing to bet that quite a few of my fellow small business owners have no idea what those terms mean.  Politicians bandy them about  as if they think we all know what they are talking about.  In fact, we are focused on our families, our businesses, our communities, our faith — not what happens in Washington.

So I set out to find out what the words sequester and fiscal cliff really mean.

Budget US Government [1]

What is sequester?

Sequester [2] refers to mandatory government spending cuts that are looming.  On January 1, 2013, $109 billion in spending cuts will automatically kick in across the board, according to the Christian Science Monitor.  But that’s just the first step.

Over time $600 billion in cuts are required in defense programs, and another $600 billion in domestic programs.

What is the fiscal cliff?

The term “fiscal cliff” is a shorthand term for the impact of those cuts.  A big deadline is looming on January 1, 2013 when the cuts start going into effect.

In addition, certain tax increases will also go into effect.

The resulting impact is so dramatic that it could throw the country back into a recession.  In other words, we’re headed toward a financial precipice.

What will be the impact? 

The proposed changes are so sudden and deep that the Congressional Budget Office  estimates they would shave gross domestic product (GDP) by 4% in 2013, triggering another recession (i.e., negative growth). That could lead to higher unemployment, with a loss of 2 million jobs.

Even if you believe that government spending should be cut, as I do, the problem is that mandated cuts will be made across the board.  They may not be the right cuts.

The analogy I use is that one day in your business you decide to finally address your red ink.  You decide you need to  cut expenses.  But you do it by laying off your best sales people and not paying your  insurance premiums. Then the sales orders slow to a trickle.  Then you have a fire and lose all your inventory and equipment, with no insurance to replace it.   Hmmm, maybe you should have found have other expenses to cut.

How does sequester and the fiscal cliff affect small businesses?

Sooner or later with high spending, there has to be a reckoning.

However, when you cut spending across the board, you can cut the legs out from important programs that should not be cut.  Defense cuts, for example, could hamper the ability of our country to defend itself and stay as secure as Americans expect.

And when you raise taxes, are you raising the right taxes?  Or do the higher taxes strangle growth among the very groups you expect to create economic growth, such as jobs?

For small businesses specifically, the tax increases would impact those who make over $250,000 a year.  As Professor Scott Shane points out, with help from George Haynes of Montana State University, raising taxes on those making more than $250,000 would affect the business owners that employ a whopping 93 percent of employees [3] in small businesses.  And since many business owners sacrifice for years to reinvest in the business — in anticipation of it paying off later on — the taxes will hit them just as those years of sacrifice start to pay off in higher earnings for the business owner.

A Tax Foundation report [4] also suggests that tax increases on those with incomes over $250,000 would slow growth and have an impact on business owners, because so many businesses report pass-through income.

The American Enterprise Institute suggests the sequester defense cuts would hurt small businesses in the defense industry [5], in particular:

“As Aerospace Industries Association President Marion Blakey has put it, 70 cents of every defense dollar goes to small firms.   In 2011, 20 percent of Department of Defense contracts and 35 percent of subcontracts were awarded to small businesses specifically.  Small business’ value to the defense industry goes beyond the raw percentages. Smaller, specialized firms are often the only producers of niche equipment, software or technology, and as such, play an indispensable role in the military’s supply chain.”

As for the healthcare law (“Obamacare”) that is phasing in, it’s hard to tell what impact that is going to have on small businesses.  The law is so complex and the discussion so politicized– it’s hard to know what to believe.  What we do know is that when the U.S. Supreme Court declared it constitutional, they also declared it a tax [6].

 What can you do about the fiscal cliff?

Demand that our lawmakers address spending and our national debt, and pass a budget.  Shamefully, this country has not passed a real budget in years. If we ran our businesses that way, we’d end up in bankruptcy.

Deciding what to spend on — and not — and deciding  how to pay for that spending, require hard choices.  That’s true in  your family budget or your business budget or the government’s budget. No one says it is easy.  But the reason we pay elected officials is to sort through and make those judgments – not just default to across-the-board cuts that could hurt more than they help.