The Herald Bulletin

Morning Update

Local Business

December 1, 2012

Uncertainty of fiscal cliff concerns local business people

ANDERSON, Ind. — Two local business owners say they’re already prepared for the worst as political leaders in Washington continue wrangling over tax hikes and spending cuts.

“I think the biggest issue of the fiscal cliff is uncertainty,” said Pete Bitar, founder and owner of Xtreme Alternative Defense Systems.

Even if a compromise is reached by Dec. 31, that won’t be a successful outcome as far as he’s concerned Bitar said.

“All businesses have to do their planning now for the coming year. Most people establish budgets in October and November. Without knowing what the impact on credit will be, it’s impossible to plan,” he said. “And the consequences are no expansion, no growth, no hiring and no risk, which is the essence of entrepreneurship. I don’t think this administration understands that.”

That profound sense of uncertainty will make 2013 a very different year from 2012 when his company expanded from eight employees to 20.

Sen. Dan Coats, R-Indiana, said Friday he shares Bitar’s frustration.

“This has been my concern, too. We have wasted all of 2012 with everybody saying we should wait until after the election,” Coats said. “And now I’m doubly frustrated with the lack of progress post-election.”

After spending much of the week meeting with business leaders and traveling around the country meeting with voters, the Obama administration on Thursday unveiled a new plan to stave off the so-called fiscal cliff.

It calls for $1.6 billion in new taxes, including higher taxes for those households earning more than $250,000 per year.

The proposal also calls for $50 billion in new economic stimulus spending, including a home mortgage refinancing program, extending federal unemployment benefits and continuing the Social Security payroll tax cuts.

In return, the administration agreed to consider $400 billion in new cuts to Medicare and other entitlement programs.

The scope of that proposals, especially the new spending measure, caught Republicans by surprise, and they immediately rejected it.

Both Democrats and Republicans say they want to preserve tax cuts for the vast  majority of Americans

Republicans want deeper spending cuts and significant changes to entitlement programs, while the Obama administration is pushing for higher taxes on wealthy individuals who earn $250,000 or more.

If a compromise can’t be reached by year end, taxes will rise by more than $500 billion and deep spending cuts will go into effect.

That’s the so-called fiscal cliff.

Coats called the proposal “laughable,” adding that he hoped it wasn’t an opening gambit for serious negotiations.

“This is the time for sitting down face-to-face,” Coats said. “What he proposed yesterday was laughable at a time when everyone Democrat, Republican, liberal and conservative agrees the time has come to cut back on spending and he doesn’t put forth one spending cut.”

Republicans did not immediately respond with a counter officer, but Coats ticked off a number of proposals that have been discussed for more than a year the increased Social Security costs including means testing for high net worth individuals, closing tax loopholes and restructuring Medicare and Medicaid spending.

“If we don’t make long-term structural changes, at the current rate of spending these programs are going to go broke.

Under the worst case scenario if Congress and the administration can’t reach a compromise, 90 percent of U.S. household will face higher tax rates beginning in January.

Low income households would primarily be affected by the expiration of the temporary cut in Social Security taxes, the elimination of all tax cuts enacted since 2001, and enhanced tax credits from the 2009 economic stimulus program, according to a Tax Policy Center Analysis.

Higher income households would be hit harder by elimination of the 2001/2003 tax cuts and new health reform taxes. Middle income taxpayers would be hit with nearly $2,000 in higher taxes.

Ball State University Economist Michael Hicks said in a report issued by the Center for Business and Economic Research that if we sail over the fiscal cliff, the short-run economic impact for Hoosier families would include tax increases ranging from $1,800 for a household earning $40,000 per year to approximately $6.5000 for a household with earnings of $200,000 per year.

In addition, the report said the Indiana economy would take a significant hit.

Overall employment would be 1.2 percentage points lower each year from 2013 to 2018 than it otherwise be for that period.

And the overall size of the economy (as measure by gross domestic product) would decline by 0.9 percent, and personal income would shrink by about 1.3 percent during that period.

For Marcy DeShong, the owner of Midwest Luxury Baths and Bronze Bay Tanning salons, higher taxes on people earning over $250,000 would have particular impact on small business owners because of the way partnerships, sole proprietor and “S” corporations are taxed.

“What most people don’t realize is that all the income from your company passes through the owner whether you take it as income or not,” she said. So small business owners will frequently take small salaries and reinvest a larger proportion of their revenue to finance growth.

If those business owners have to pay higher taxes, she said, that will reduce the amount of money available for business growth.

“At a time when we’re being encouraged to add jobs to the economy, the president’s proposal will do just the opposite,” she said. “It’s just not business friendly, and a lot of what’s happening with this administration is not business friendly.”

Despite Washington dysfunction in reaching a compromise, DeShong said most business will survive.

“I think business people will figure it out and do what has to be done. They will work harder and most will survive,” she said.

Find Stu Hirsch on Facebook and @StuHirsch on Twitter, or call 640-4861.

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