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In Part I of "The Impact on Small Businesses of the Jobs Act" EisnerAmper's Tim Speiss addresses the tax breaks and key provisions of the The Small Business Jobs and Credit Act of 2010.See "The Impact on Small Businesses of the Jobs Act: Part I."
In Part II, Speiss, writes about the economic impact of the Act on small businesses.
On September 23, in a 226-186 vote, the House approved a $42 billion bill to provide aid to small businesses. The legislation includes $12 billion in tax breaks and would create a $30 billion facility to expand credit access to small businesses.
The economic impact
Small-business lending fell from $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010, according to Federal Reserve Chairman Ben Bernanke. What is unknown is what caused the decline in lending. Was it because credit was hard to come by, or because demand for small-business loans was just weak?
One community bank CEO testifying before the Senate Committee on Small Business and Entrepreneurship said the bill will expand small-business lending by $300 billion and will reach more than 8,000 community banks. But this may not pump up small businesses' bottom lines. Banks’ unhealthy balance sheets may restrain the supply of credit, and weak consumer demand may reduce the demand for small-business loans.
The tax provisions in the bill, while putting some capital back into the hands of small-business owners, are modest and may be insufficient to overcome businesses’ anxiety about the weak economy.
Some conservatives have labeled the $30 billion loan fund as the successor to the TARP bailouts, saying that the bill is simply a backdoor way for community banks to get rescue funds like their big brothers on Wall Street. Like larger equity stakes made in Wall Street banks by the TARP legislation, the equity stake by the Treasury may fail to induce small-business lending. This is especially true for severely undercapitalized institutions.
Many community banks are still undercapitalized. In the second quarter of 2010, 45 FDIC-insured banks failed and the number of “problem banks” rose from 775 to a recent peak of 829. Although “problem banks” are excluded from the bill’s loan fund, many small banks face similar risks. Unfortunately, undercapitalized institutions that need the Treasury’s help the most will be in the worst position to extend credit to small businesses.
For the largest community banks (those with assets greater than $1 billion and less than $10 billion) the stake cannot exceed 3% of risk-weighted assets, a relatively small infusion when compared to potential losses on commercial real estate loans and other assets. Compared to the stake the
Treasury took in Citigroup or Bank of America, banks that actually reduced small-business lending under TARP, the proposed equity infusion into community banks is minuscule.
Another criticism of the legislation is that there is no mechanism to force banks to lend. Community banks are required to pay a 5% dividend to the Treasury, but this rate does not rise if banks fail to increase their small-business lending portfolio. According to the payment schedule outlined in the legislation, banks can even accept the Treasury’s money and reduce their lending to small businesses for two years, while continuing to pay the 5% dividend rate.
Weak loan demand
Weak banks remain a key concern, but a far greater problem is whether or not small businesses need more bank loans.
Although the data on small-business lending remains quite poor, surveys of large banks’ small-business lending portfolios suggest that loan demand among small businesses is flagging. According to a report by the Congressional Oversight Panel, small-business portfolios at the largest banks fell by 5% more than their overall lending. According to data from the Federal Reserve’s Senior Loan Officer Opinion Survey, commercial and industrial loan demand from small firms remained unchanged in the second quarter of 2010, after declining every quarter since 2006.
The weak loan demand may reflect different intentions on the part of business owners from what lawmakers wish. A monthly survey conducted by the National Federation of Independent Business (NFIB) reported that only 1% of small-business owners plan on creating new jobs in the next three months.
According to NFIB chief economist William C. Dunkelberg, “Weak sales and uncertainty about the future continue to hold back any commitments to growth, hiring or capital spending.” While access to bank credit is necessary for expansion, small businesses appear more concerned with sluggish demand.
Additional Tax Benefits
Some of the tax breaks in the bill will be spent by small businesses. However, if demand remains weak, those businesses will be reluctant to spend. So the overall impact of these tax breaks on the economy will be small.
Example: For every dollar in tax breaks for bonus depreciation, the economy only grows by 25 cents. The $5.5 billion tax break for bonus depreciation would only increase GDP by $1.4 billion, according to Mark Zandi, chief economist at Moody’s Analytics. Of all the options for government stimulus, bonus depreciation is among the worst in terms of bang for the buck.
Again, businesses are reluctant to spend and hire because of a weak consumer sector. Many businesses also have significant excess capacity, indicating that they can increase output without more investment. More factories are in use now than at this time last year, but excess capacity today is consistent with levels seen at the depths of many previous recessions.