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. No Republicans supported the bill in the House, while 16 Democrats voted against the small business legislation. Many of those Democrats, including Reps. Frank Kratovil (D-Md.), Stephanie Herseth-Sandlin (D-S. Dak.) and Baron Hill (D-Ind.), face tough re-election prospects this fall.
[Treasury announced "State-by-State Funding Allocations” on Oct. 8.]
Small businesses will benefit from increased credit from community banks as well as tax relief. But these benefits are likely to be overshadowed by other factors: Banks have to be healthy enough to lend, and small businesses have to demand the loans. The bill’s tax credits, while helpful to many small businesses, will probably not guide business decisions to expand and grow the economy. Supporters of the Senate’s version say the bill will indirectly affect small-business growth and job creation. The bulk of the legislation calls for the Treasury to make investments in community banks, but the incentives for those banks to increase small-business lending would be weak.
All of the tax breaks in the bill would increase 2010 GDP by a mere 0.05%.
Key provisions of the Senate bill include:
1) Small Business Lending Fund
The $30 billion Small Business Lending Fund, to be established at the Treasury Department, would tend to the business of investing in so-called community banks. These financial institutions have assets equal to or less than $10 billion. The size of the equity stake is small, ranging from 3% to 5% of risk-weighted assets, allaying concerns about government influence over banks’ lending decisions.
In return for the preferred equity stake, banks would be required to pay the Treasury a 5% dividend payment. Over a two-year period, this rate declines on a sliding scale based on increases in banks’ small-business lending portfolios. The more these banks lend to small businesses, the smaller the dividend payment to the Treasury. For example, if a bank increases small-business lending by 2.5% , its dividend payment to the Treasury declines to 4 %.
If the opposite is true, payments go up. After a two-year period, if banks have not increased small-business lending, the dividend payment increases to 7%. The program also has a pricey incentive built in to encourage banks to repay the Treasury and get out of the program: After four-and-a-half years, dividend payments on all participants in the program leap to 9%.
The program is structured, however, in a way that leaves the Treasury with few teeth to ensure that community banks are using Treasury funds to increase small-business lending. While banks that increase lending to small businesses pay the Treasury a smaller dividend payment, there is no financial penalty for failing to increase lending during the first two years. This does little more than encourage banks to participate in the program.
The bill also provides $900 million
for a State Small Business Credit Access Fund to supplement state programs to increase and support small-business lending.
2) Tax Breaks
This part of the bill is intended to encourage business investment and hiring to the tune of $7.7 billion for advanced depreciation and tax deductions for qualifying investments in property. But the impact of the tax breaks may be limited: They extend existing stimulus programs that expired at the end of 2009 or are due to expire at the end of 2010.
The bill also includes a tax deduction for qualifying investment in personal property, such as restaurants and retail space. This extends existing stimulus legislation to 2010 and 2011, and significantly raises the threshold for the tax write-off.