Businesses Dread Potential Tax Hikes...and Defense Spending Cuts

Aug 20, 2012

"If you can’t keep what you make, it’s as if you didn’t make it in the first place," says Ryan Robinson of Signal Metal Industries. (Photo: Ian Wagreich for the U.S. Chamber)

Largest Tax Hike in History Looms

With a “fiscal cliff” of automatic tax increases and spending cuts set for January 1, 2013, businesses are reevaluating their future investment and hiring plans.

On the tax side of the equation, the following will occur at the end of 2012 unless Congress acts:

  • All marginal individual rates increase.
  • The capital gains tax rate goes up.
  • The dividend tax rate skyrockets.
  • The death tax reverts to 2000 levels.
  • The AMT patch ends.
  • Marriage penalty relief expires.
  • The child tax credit is cut in half.
  •  Annual business “extenders” end.

Also on January 1, the new health care law slaps a 0.9% surtax on salary income over $200,000 ($250,000 per couple) and a 3.8% surtax on all forms of investment income received by “high income” individuals (over $200,000 per individual and $250,000 per couple).

An Uncertain Outlook

According to the U.S. Chamber’s most recent quarterly small business survey, 90% of the respondents are concerned about the impending fiscal cliff and that Congress will fail to take action to prevent it. Nearly 60% say that expiration of the 2001 and 2003 tax rates and other business provisions, coupled with sequestration, will directly impact their businesses’ growth.

A number of small businesses spoke to Free Enterprise about the impact that tax hikes will have on their companies.

Peter Gunnerman, co-owner (with his 84-year-old father), Advanced Refining Concepts LLC, a green fuel development business

Sparks, Nevada, 28 employees

“This is like a recurring nightmare. My dad is 84 now and is still involved in the company—but, in reality, at 46 years old, I’m doing the lion’s share of the work. It’s a family-run business, and we’ve invested $31.5 million of our own family’s money into the company. … And that’s money that we’ve paid taxes on already. And when my dad passes away, I get to pay taxes on that again at a rate that will absolutely destroy my business and all the jobs I create.”

Ryan Robinson, president and co-owner, Signal Metal Industries, a second-generation family-owned business that designs and builds heavy equipment for the steelmaking and mining industries

Irving, Texas, 215 employees

“It’ll crush us—hit us right square in the nose for sure. We’re the so-called evil doers. These are the rich guys. Yep, we make over $200,000, but we risk it every day for 215 families who have a place to have their careers. These tax increases will take away money that we certainly would have put back in our company.

“One of the things as an owner of a company is that most of our net worth is wrapped up in our company. Increasing taxes doesn’t incentivize people to be entrepreneurial and take risks. If you can’t keep what you make, it’s as if you didn’t make it in the first place.”

Michael Mathon, president and owner, Global Equipment & Manufacturing, Inc., a privately held company that designs and manufactures integrated equipment packages

Chesterfield, Missouri, 5 employees

“The uncertainty of the tax situation, as well as the pending health care legislation, has me thinking about selling my company. I’ve spent much money and the last five years building it, but the tax burden and uncertainty have me seriously debating the sale.”

Bob Pickering, president, Savannah Tank and Manufacturing, Inc., an employee-owned tank and process equipment manufacturer

Savannah, Georgia, 22 employees

“We are a small metal fabrication company with 22 employees. Three years ago we had 30 employees. While we have the backlog of orders [and therefore could] hire additional employees, the current situation with possible tax increases, health care costs, and economic uncertainty has curtailed any present hiring. We will continue to use overtime to keep up our production and will not buy any large ticket equipment until we see the light at the end of the tunnel.”

Frank Beer, Radio Shack Franchisee

Manhattan, Kansas, 7 employees

“If we were to see a major increase in taxes, this would create a situation where there would be nothing left, and it would simply make more sense for me to go work for someone else. What would that mean? It would mean I would lay off all seven of my employees (reducing payroll taxes); my storefront would be empty (meaning the property taxes would potentially go unpaid); the value of the property I am in would go down (hence, a reduction of future property taxes collected); without my sales, the state of Kansas and the city of Manhattan would not get the majority of the roughly $68,000 that we currently collect in sales taxes (as most of my sales will go to the Internet); and the list goes on and on.

“Not only would this possibly reduce income to government as a whole, but it would deprive our community of what we offer. No longer would it have many of those small local shops that treat their customers as the friends and neighbors that they are. This would be a sad loss for all.”

Darlene Miller, CEO and owner, Permac Industries, Inc., a precision machine-parts manufacturer

Burnsville, Minnesota, 39 employees

“I bought Permac Industries in 1995 when it had just 7 employees and old technology. Today, Permac is a leader in precision machining of aerospace and medical parts as well as products for food service and recreational industries.

“Without 50% bonus depreciation, we won’t be buying new equipment, which means we won’t need to hire any more employees. Increasing my income taxes and complicating my estate planning just might convince me to take that first cash offer to buy my company.

“Politics need to be put aside. Make this country safe for small businesses like mine so that we can keep building this economic recovery. Inaction on the fiscal cliff could result in an economic death sentence for many of my people and perhaps for my business.”

Go to www.friendsoftheuschamber.com/fiscal-cliff for more information on the looming tax increases. 

One Million Jobs Could Be Lost Due to Sequestration

As the clock ticks down toward the end of the year, federal contractors are beginning to prepare for automatic defense spending cuts, with many of them bracing for the worst. 

Automatic, across-the-board budget cuts— known as sequestration—will occur at year’s end if Congress cannot agree on a deficit reduction plan. The $1.2 trillion in cuts—split between defense and nondefense programs—is the result of a compromise reached in 2011 by members of Congress to resolve the debt ceiling crisis.

Studies show that the impact of the cuts will be immediate and catastrophic. A George Mason University study finds that in the first year of implementation alone, the automatic spending cuts will reduce the nation’s GDP by $215 billion and decrease personal earnings in the workforce by $109.4 billion. Even more alarming, the study finds that 1 million jobs could be lost as a result of the FY 2013 mandated funding reductions.

The cuts would ripple through the defense and aerospace industries, increasing the cost of equipment, putting some suppliers out of business, and producing layoffs.

Large contractors, such as Lockheed Martin, are threatening massive layoffs, but it’s small contractors that are likely to be hit the hardest by a vastly reduced federal defense budget. Approximately 70 cents on the dollar of defense investments flow down the supply chain to small and medium-size firms, according to Aerospace Industries Association President Marion Blakey.

Pennsylvania Firm Feels the Pinch

John Polacek, chief operating officer of JWF Industries in Johnstown, Pennsylvania, says that first-tier military subcontractors like his company will get hit first and hardest. “Sequestration is pretty much a catastrophic event for small businesses,” he says. “When you sit back and think about what the [large, primary contractors] are going to do if sequestration takes effect—the first thing they’re going to do is look at what they’re outsourcing to small business. And if I were them right now, I’d be working on a plan to in-source the work.”

JWF Industries, which employs 427 people and specializes in parts fabrication for tactical vehicles used by the military, is already scrambling to adapt. Defense contracts used to make up 80% of its business. Today, as the U.S. military scales back its efforts in Iraq and Afghanistan, defense contracts make up 40% of JWF’s business—a still significant portion, according to Polacek.

To bolster his business and prepare for the uncertain, Polacek has stepped up his efforts to attract new commercial business, particularly in the oil and gas industries. “You insulate yourself as much as you can. At the same time, you prepare for the worst and hope for something better,” he says.

Congress should put aside partisan politics and do what’s best for the country, adds Polacek. “Most of these small businesses aren’t located in Washington, D.C. They’re in small towns where there aren’t a lot of other jobs. This will be devastating to the small towns across the United States.” 

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