The Small Beer Bill

SEPTEMBER 11, 2010

Editorial Page Editor Paul Gigot, Deputy Editorial Page Editor Daniel Henninger and Senior Economics Writer Steve Moore analyze the President’s press conference.

President Obama continued his Economic Contradiction Tour yesterday at a White House press conference, urging businesses to invest and lend more while attacking them for greed and sending jobs overseas. We’ll see in November if voters buy the cognitive dissonance, not least on his professed concern for small business. 

Mr. Obama hit Republicans hard for not passing his $42 billion Small Business Jobs Act, but Americans should realize that there’s less here than meets the soundbite. The bill contains $12 billion in targeted tax cuts, such as a 100% exclusion of capital gains income for certain small start-ups, expensing for certain capital purchases, and new deductions for start-up expenses.

These sound great, except only a fraction of businesses will be eligible and the write-offs last for only one or two years. One of the larger capital gains tax exclusions, for example, will apply to stock purchased between 2009 and January 1, 2011, which is only months away. In terms of the overall economy, these are very small beer.

The White House is right that a capital gains tax cut will help small businesses raise capital. So why raise that tax rate to 20% from 15% on January 1 for everyone else? This bill isn’t even a net business tax cut, because the temporary small business cuts are offset by permanent corporate tax increases. Mr. Obama is promising $12 billion of tax cuts with his left hand while proposing to collect about $300 billion in tax increases from this bill and others with his right.

More troubling is the bill’s $30 billion Small Business Lending Fund. We’ve called this Son of TARP because it authorizes Treasury to purchase preferred stock in banks with less than $10 billion in assets if they agree to increase their lending to small businesses. This empowers Uncle Sam to take equity stakes in community banks and savings and loans so long as they lend as Congress sees fit.

The bill encourages risky loans by applying a sliding-scale interest rate on Uncle Sam’s preferred stock. Banks that issue fewer new loans will pay as much as 5% interest, while aggressive lenders will pay as little as 1%. This sounds like a recipe for lower credit standards. The Small Business Administration, which receives an increase in its lending limit in this bill, has already had a default rate between 7% and 12% during this recession and recovery.

The lending fund also directs banks to submit a lending “plan to provide linguistically and culturally appropriate outreach” for the loans. Treasury is supposed to give special consideration to banks that are “minority-, veteran-, and women-owned and that also serve low- and moderate-income, minority, and other underserved or rural communities.” In others, Congress wants more politically directed credit of the kind encouraged by the Community Reinvestment Act and Fannie Mae that did so much to create the subprime lending debacle.

Private banks aren’t lending less because they’re stingy, but because they’re finding fewer good credit risks. Wells Fargo CEO John Stumpf recently told Bloomberg that his bank is “sitting here with tons of liquidity,” but that most small businesses don’t need more credit. “They need more equity. They need more profitability.”

Which brings us back to Obama Administration policies. Its new burdens on small business include a looming increase in capital gains and personal income tax rates, roughly half of which will come from noncorporate business profits; a minimum wage increase to $7.25 an hour from $6.55 in July 2009 when the jobless rate was 9%; the oil drilling moratorium, which has hit hundreds of small energy companies; the new health insurance mandate on employers with more than 50 employees; the new ObamaCare 1099 tax filing requirements; an increase in the death tax rate to 55% next year from zero today; a Medicare payroll tax increase to 3.8% from 2.9% starting in 2013; and compulsory unionism for government contractors and federal construction projects (Executive Orders 13496 and 13502.)

The best thing the White House could do now to help small business would be to call for a regulatory, tax and mandate moratorium. As part of his fall campaign strategy, Mr. Obama wants voters to believe that the paltry recovery has nothing to do with his policies. Small business owners know better.

Printed in The Wall Street Journal, page A12