Small Businesses Can’t Drive Job Growth if They’re Saddled With Higher Taxes

Posted on by Susan K. Feigenbaum

With high unemployment rates continuing to plague the nation, there has been a renewed federal focus on the “engine” of economic recovery — small businesses. The president has pledged to crack open credit markets to help these struggling enterprises grow and expand hiring. But the real remedy for small business stagnation is much simpler: The president and Congress must reject any and all health care reform proposals that will end up soaking small business owners.

The most immediate concern of small businesses is that many of them have been conveniently lumped in with “rich” Americans filing personal tax returns with net income greater than $250,00–$350,000. These are the taxpayers who will incur surtaxes and other indirect tax increases in order to finance coverage for the uninsured.

As it turns out, more than 2.5 million personal income tax filers with incomes of $200,000 or more declared income from farms, businesses, partnerships, or “S corporations” in 2005 (the latest year for which we have data). Of these entities, almost 2 million had net business income that was taxed as personal income. Lurking among these high-income filers are numerous S corporations, including businesses in the “Education, Health and Social Assistance” industry (an IRS classification). An IRS study of 1999 filings by S corporations (the latest available) reported that S corporations in the educational services category generated more than $645 million in net income; those devoted to health care and social assistance generated another $7.6 billion. Among the businesses in this latter category are virtually all of the private medical practices in the United States. In fact, federal tax initiatives aimed at stimulating small business employment have led a vast number of small businesses to incorporate as Chapter S entities.

As a Chapter S corporation, the net income of the business passes directly through to its owners for tax purposes. At the end of each tax year, this income is divided up and reported on each owner’s personal income tax return. These owners tend to be actively engaged in the business — doctors who provide patient care, for example — rather than passive stockholders.

All of the net income is taxed in the year during which it is earned, whether it has actually been distributed to owners or is retained by the business. Why would businesses retain earnings? The answer is simple: To avoid the vagaries of the small business credit market, many retain earnings to self-finance the acquisition of new plant and equipment. Small businesses that fill highly specialized market niches often require highly specialized equipment. In the case of my OB-GYN, a 3-D mammography machine that costs $500,000 promises earlier detection of breast cancer and lower mortality. Is this the type of collateral that outside lenders truly wish to loan against? And what about the $150,000+ electronic medical records system that Medicare will first encourage (through small grants) and then foist upon my OB-GYN by 2012? Sure, there are accelerated depreciation opportunities, but unless there is 100-percent depreciation during the first year of use, self-financed capital expenditures must be spread out over several years.

Clearly, increasing personal income tax rates to finance health care reform will have a depressing effect on small business investment and growth. Along with this, there are more subtle tax implications for small businesses in the current health care proposals. Take, for example, the plan to tax Cadillac employee health care plans. Businesses with a small number of employees tend to pay substantially higher medical insurance rates than large, self-insured corporations. It is not unusual for a small employer to pay an annual premium of $22,000 or more for family insurance coverage, with a $500 deductible and a 10-percent copayment. Any dollar cap on the tax deductibility of employer-provided health insurance would likely snag a disproportionate number of small businesses. The end result would be to increase the tax liability of small businesses, putting them at a competitive disadvantage relative to large companies. This disadvantage would be further exacerbated if those who are happy with their self-insured policies win their battle to be exempted from most of the insurance regulations included in the current federal reform proposals.

A more recent proposal that would negatively impact small businesses is the one that finances health care reform by increasing payroll taxes. At least some of these taxes will be passed backward to small business owners, especially those who are at a competitive disadvantage, relative to large corporations, when it comes to hiring.

Finally, many small businesses struggle to provide their employees with some type of health insurance. By and large, however, this coverage is much less extensive than the plans offered to employees of large self-insured companies, at least in part because of the higher cost of providing coverage to a small group. Should the minimum benefits package dictated by Congress be richer than what small businesses can reasonably offer, those business owners would be forced into a “pay-or-play” scenario that would undoubtedly raise their costs and reduce their competitiveness.

To promote the true survival and growth of small businesses, the first step to take would be to see to it that these companies are not saddled with higher tax burdens as a result of health care reform. The second thing would be to focus less on policies that encourage “easy credit” (isn’t this what got us into our current financial mess?) and more on policies that create incentives for small business owners to invest in themselves. Rather than increasing the tax rate on the net income of S corporations, why not instead exempt retained earnings from taxation altogether? In this way, policymakers would create a much needed incentive for small businesses to self-finance their capital needs and resume their historic role as the engine of employment growth in our economy.

Susan K. Feigenbaum is a professor of economics at the University of Missouri–St. Louis.

 

Education or Indoctrination?

Posted on by Christine Harbin

[In the interest of transparency, please allow me to post this note to indicate my change of perspective. I agree with Sarah and Donald in the comment section below that the use of President Obama’s campaign logo in classrooms was just a mixup and had nothing to do with Mr. Obama. My apologies. — CDH]

Apparently, President Barack Obama’s presence in public classrooms is not limited to songs or writing assignments.

According to an article in the Columbia Daily Tribune, supplies that display Obama’s 2008 presidential campaign logo have been sold in public schools in Columbia, Mo.

Link via Drudge Report.

Missouri Helps Microsoft Advertise With Dignity

Posted on by Sarah Brodsky

If a software company announced that it would teach, for free, tens of thousands of people how to use its products, people might view that as a ploy to snag customers. Every business wants people to be comfortable with its products so they’ll buy more. The company could put out a press release saying that it wanted to teach people out of the goodness of its heart, but customers might discern a profit motive.

Microsoft has found a solution to this public-relations dilemma: It will conduct the free training, and people will have to go through the Missouri state website to sign up. (The program is coming to other states, too.) Microsoft claims that its selfless intention is to grow the economy.

There’s no good reason for people to go through the government to collect their vouchers for training — they could just as well apply on the Microsoft website. All that this “partnership” with the state accomplishes is that it makes Microsoft look noble. The state should not be recruiting people for this training, just like it shouldn’t give out pizza samples in a grocery store or perfume samples at the mall.

I’ve got nothing against advertising and free training, but don’t ask the government to sign off on it like you’re a Newfoundland seeking official status.

In Which the Author’s Secret Agenda Is Made Plain

Posted on by Dave Roland

As our regular readers will remember, on Nov. 18, the Show-Me Institute published a study that discusses recent research on the impact that charter schools are having on students’ academic achievement. At that time, we sent the study to newspapers across the state, along with an op-ed I had written discussing its findings. As is the case with any op-ed, my ability to address nuances in the research was dramatically limited by the need to keep it short enough for newspapers to consider publishing it. Thus, I was unable to go into great detail about the various studies and instead focused on the primary goal of the piece: making people aware of this new study so they could consider it for themselves.

When the Springfield News-Leader expressed interest in running the op-ed, they asked me to trim it down by 50 words so that it would fit their publishing parameters. As I hope readers will see, an op-ed’s final form rarely allows the author to offer a comprehensive picture of all the information they would convey if space were no constraint. Perhaps as a result of this necessary brevity, some of the News-Leader‘s readers have posted a few skeptical comments about my op-ed, so I’d like to take this opportunity to respond to the points they raise.

The first issue I’d like to address is that of my motives for writing on this topic. The commenter writing under the name “Ray Smith” suggested that I am part of a general effort to “undermine public education,” and that I have simply seized upon President Barack Obama’s “Race to the Top” initiative (which, in part, promotes the expansion of charter schools) as an opportunity to promote my own agenda.

I do have one comprehensive, all-encompassing agenda when it comes to the subject of education, and I don’t care who knows it. I want to make sure that all parents have the greatest possible range of options when it comes to deciding where their children will be educated. While I, myself, am a proud product of an excellent public school system, it does not matter to me in the slightest if parents prefer traditional public schools, charter schools, parochial schools, or secular private schools. All that concerns me is that children get the best available educations — and I firmly believe that the greatest likelihood of achieving that goal is to fashion education policy in such a way that parents can vote with their feet if they decide a school is not meeting their child’s needs.

As should be clear, many parents do not believe that their local traditional public schools are the best educational option for their children — and, with that being the case, it makes the most sense to help those parents find alternatives that will serve their families better. I suggested in my op-ed that, to the extent that charter schools expand the range of options available to parents, they serve as a step toward this goal. Thus, expanding charter school availability represents good policy. In my mind, it is merely a bonus that the best academic research is showing that most (though far from all) charter schools are performing as well as or better than their traditional public school counterparts when it comes to certain measures of academic achievement.

Which brings us to Mr. Smith’s suggestion that I believe charter schools to be a “magic bullet” that will solve the education problems rampant in our state — and his intimation that I was ignoring evidence that I did not like. To the contrary, when writing the op-ed, I wanted to make sure that I pointed out the evidence in our own study that calls into question whether charter schools always generate better results than traditional public schools. Mr. Smith correctly points out that the Stanford study shows that a significant number of the nation’s charter schools appear to be attracting students, even though the schools do not currently appear to measure up to their traditional school counterparts in regard to academic achievement as measured by standardized tests. The reason I addressed the Stanford study in the op-ed was because the authors of the recently released Show-Me Institute study did not have access to research that isolated Missouri’s charter schools, and I believed that it would be valuable to highlight the fact that, in spite of the Stanford study’s broader findings, the data do suggest that Missouri’s charter schools are performing better than most.

Here at Show-Me Daily, I can address the Stanford study’s findings a little more broadly. For charter opponents, of course, the suggestion that some charter schools are not improving their students’ academic achievement is a clear signal that these schools need to close. Maybe … but maybe not. I have previously stated on this very blog that I do not generally oppose the closure of especially bad charter schools. But the facts also bear out that official action is not necessarily needed to close these schools, because in cases where the situation is truly bad, parents will voluntarily move their children to a different school and that bad school will fail for lack of funding (much as any other business would).

Also,as I note in the op-ed, parents consider a wide array of factors when deciding where to send their children to be educated — and, for many parents, academic achievement may not be the most important factor. So, if a charter school lags a little bit behind its traditional charter school counterparts in academic performance, but dozens of parents still want to send their children there, maybe government officials shouldn’t force its closure. After all, we don’t allow government officials to tell wealthy parents what factors they can consider in choosing a school for their children, so why should we assume that government officials are within their rights to tell lower-income parents what factors they can consider?

And, finally, I will add that I would actually prefer that Missouri not seek “Race to the Top” funding. In my opinion, the Tenth Amendment should preclude the federal government from interfering with educational matters, because they have always been reserved to the states. While I do think it would be good policy to expand the availability of charter schools in our state, if Missouri’s legislators are not persuaded that a particular policy is the best idea for our families, they certainly shouldn’t adopt it simply because the federal government is dangling money out there as an incentive.

Will You Find a Doctor When You Need One?

Posted on by Stephen Feman

Somehow, amidst the politically charged health care discussions, it seems that some have overlooked one practical thing: If the health care insurance rolls increase, as some expect, will there be enough doctors in the future? The number of graduates from U.S. medical schools has been constant at about 16,000 per year in the recent past. But our country grew by 50 million people from 1980 to 2000, and the number of new doctors has fallen as a percentage of the population. Just a year ago, the American Association of Medical Colleges (AAMC) estimated that if there are no changes in the American demographic distribution, there will be a shortfall of more than 150,000 physicians by the year 2025. The number of new students enrolled in medical schools reached a new record of 18,036 this year (up only 1.6 percent from last year). But there will not be enough. In fact, the AAMC indicates that an increase in enrollment by more than 30 percent will not make up for the growing demand. If that is an expected demand, shouldn’t there be some indication of a supply-side response?

If one thinks about the AAMC report, it seems that there may be an even greater problem than the organization has estimated. That is because few medical students are choosing primary care specialties. The growth of the aging baby boomer population means there will be an even greater shortfall. In some states, people are concerned about these issues, but there seems to be little discussion in Missouri.

In Wisconsin, it was found that they were short 374 primary care physicians this year, and by 2030, there will be a 14-percent shortfall. In Massachusetts, the state’s health care experiment resulted in 440,000 new people with health care insurance, and their problems are going to be even greater given that about 52 percent of their medical residents in training are planning to move out of state after graduation. In Connecticut, just like in many other states, there is an aging physician population among those involved in “family practice,” and doctors are finding it difficult to recruit young physicians.

Both the House and Senate bills proposed to reform the nation’s health care system speak about the need to increase the numbers of primary health care practitioners. However, if one performs a comparison, a resolution to this issue does not appear to be addressed in a direct manner in either version. The bills under discussion now seem aimed at increasing incentives to providers, but not increasing provider numbers. It takes years to train competent physicians. If these bills (or some combination of them) pass into law, and if provider incentives attract more Americans to want to become physicians, this country will still continue to have an inadequate physician supply for many years. This lag period will harm us all.

In the past some have thought that physicians induce a service demand. How that figures into our current problem was discussed elsewhere recently. But physician-induced demand does not matter when there are not enough physicians. If things continue as they are now, someday you will be old and sick and unable to find a competent physician.

Raw Milk

Posted on by Sarah Brodsky

This Springfield News-Leader editorial is absolutely correct:

It’s not like this family is forcing their products on anyone. They’re simply trying to meet a demand, like a good business is wont to do.

The family in question sold raw (unpasteurized) milk from their farm, as is legal in Missouri. Then, their two daughters brought the milk to a parking lot where customers could pick it up — also legal. What happened next got them in trouble with the law: Undercover investigators from the county health department asked to buy milk even though they hadn’t paid in advance, and the girls sold a couple of gallons on the spot.

This quote from a previous article illustrates the attitude behind the sting operation:

“That’s the problem with a distribution center. If they have extra milk because a customers hasn’t shown up, they’re very tempted to sell it instead of taking it back to the farm,” [Springfield-Greene County Health Department Environmental Health Administrator Karen] Prescott said. “Then they cross the line of being a food establishment.”

According to the government official, the family’s little makeshift stand in a parking lot is a food establishment, and it’s going to be subject to all the same regulations as a permanent grocery store — including the law that prohibits food establishments from selling raw milk.

The state’s lawsuit harasses this family for no constructive purpose. Nobody was coerced or misled in the voluntary transactions in a parking lot. The family and their farm’s customers stand to lose, and no one stands to gain.

Changes to College Funding System Could Increase Efficiency, Transparency

Posted on by Abhi Sivasailam

 

In the realm of higher education funding, Missouri can do better than the system it currently has in place, which is currently characterized by little accountability for education funding, few effective measures of quality, and meager increases in access to the underserved, all while college tuition continues to rise. During the past few decades this system has sought to address problems in higher education related to access, affordability, and quality by lavishing an ever-increasing amount of funds and resources on higher education institutions within the state.

That this approach is failing to expand access or quality measures, or to reduce tuition costs, should be of little surprise. The ultimate question that those who fund higher education should address is not one of how much to fund, but how to fund.

In 2004, Colorado began an experiment in higher education funding when its legislature ratified Senate Bill 04-189 and created the College Opportunity Fund (COF), intending to end the traditional method of direct funding for universities. The new system called for students as young as 13 to sign up for the COF, with the hope that such early enrollment would force both parents and children to begin thinking about college financing options as soon as possible. When students enroll at a state college and authorize the state to disburse funds for their education costs, the state’s support is reported as a line item on their tuition bills.

University funding has never been very transparent; both the average taxpayer and the average student have little knowledge of how state money works to help students. As a result, the amount of taxpayer money that a given university receives for each student is somewhat arbitrary. Often, the per-student subsidy reflects the amount that the state can afford to spend, rather than the extent of student needs or costs.

Under the Colorado plan, the state’s contribution shows up in the tuition bill, so parents and students know the degree and change of state aid from year to year. This transparency helps students hold legislators accountable for their education spending, providing an additional incentive for the lawmakers who set education funding policy to keep student needs in mind.

Colorado also committed to direct funding for a portion of university expenses through fee-per-service contracts, and to conditional funding based on performance measures. In that system, a university is funded directly for progress toward broad state goals, such as increased graduation rates or expanded minority enrollment. This policy has helped some more than others, but unarguably has helped make college funding more effective and accountable. By introducing conditional funding, Colorado universities have begun striving to reach performance benchmarks, rather than just using tuition money to climb in national rankings through extravagant but ineffective spending.

Furthermore, by doing away with guaranteed funding, the state has created incentives for universities to keep operating costs and sticker prices low, in order to attract a larger pool of applicants. Three private universities are currently participating in the COF program, a competitive process of funding allocation that encourages all institutions to work toward greater efficiency by keeping programs that work and cutting costly ones that do not.

It is time for Missouri to take a critical look at higher education. Regardless of whether the state adopts the Colorado plan, lawmakers should look to lessons learned by other states and craft a system that encourages universities to compete and innovate in order to receive government funds. Taxpayers deserve a system that absorbs their dollars in the most efficient way. Students deserve an education that is accountable, affordable, and of the highest quality. Funding students instead of institutions would be a first step in the right direction.

Abhi Sivasailam is an intern with the Show-Me Institute and an economics student at the University of Missouri–Columbia.

 

Offering Incentives for Early High School Graduation Would Save Taxpayer Money

Posted on by Abhi Sivasailam

 

A simple policy change could help gifted students pay for college, use school resources more efficiently, shrink overcrowded classrooms, and allow teachers to focus on students who require extra attention, all while saving the state — and, thus, Missouri taxpayers — money. By offering students a portion of the state funds that would have been used to pay for their public school educations, Missouri would establish early graduation incentives for public high school students who are willing and able to complete the curriculum at an accelerated rate.

Missouri would not be wading into uncharted waters by establishing such a program; both Arizona and Texas have already implemented successful early graduation incentive programs to provide aid to their students. The Arizona program, known as the Early Graduation Scholarship Grant, disburses aid to graduates of Arizona public high schools, provided that students graduate at least one semester early and attend a postsecondary institution at least half-time. The amount of aid that a student receives in this program is contingent upon how early that student graduates, and the amount of courses that student takes upon graduating. A student who graduates a year early and enrolls full time at a postsecondary institution receives up to $1,250 during the first year of enrollment, and up to $750 during the second year. A full-time enrollee who graduates one semester early receives up to $1,000 during the first year of enrollment and up to $500 during the second year.

The Texas plan, the Early High School Graduation Scholarship, has elements similar to the Arizona plan but also encourages high school students to earn college credit. This plan stipulates that aid must be used at higher education institutions within the state of Texas. Per the plan, a student graduating high school in fewer than 36 months receives $2,000, with an additional $1,000 if that student has earned 15 hours of college credit prior to graduation. A student graduating after 36 to 41 months of high school receives $500, and an additional $1,000 for 30 college credit hours. A student graduating in no more than 41 months receives $1,000, provided that student has earned 30 college credit hours.

In Missouri, a policy that blended elements of the Arizona and Texas programs could produce a win-win-win-win situation for the state government, taxpayers, students, and schools. During 2006, the amount the state paid $3,250 per pupil to school districts. Suppose that Missouri develops a program granting $1,000 to any student graduating one year early. Also, suppose that 2,569 students participate in the program (the number that participated in the similar program in Arizona, a state containing roughly as many students as does Missouri). This would amount to an annual taxpayer savings of nearly $6 million.

Meanwhile, the student would enjoy a scholarship that pays for a substantial chunk of tuition at an in-state institution. As for school districts, although they would lose a portion of state revenue that would otherwise go to students who have graduated early, the largest slice of their revenue pie — taxes on local property values — would remain untouched. Schools and teachers would then be able to devote more time and money to students who need the most of both in order to be successful.

Often, we attempt to solve our problems in education through spending. Here, we have a tool that can both expand college access and increase per-student resources, all while saving money. That makes for sound policy, one that the state should seriously consider.

Abhi Sivasailam is an intern with the Show-Me Institute and an economics student at the University of Missouri–Columbia.

 

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