The SC House GOP proposed tax cut for small businesses will cost South Carolina’s General Fund $60 million per year while generating no economic development benefits. This bill reduces the tax rate on businesses which are not “C” corporations (“sole proprietorships, partnerships, and ‘S’ corporations, including limited liability companies taxed as sole proprietorships, partnerships, or ‘S’ corporations”) from 5 % to 3 %.
The advocates for this change, our good friends with the SC Small Business Chamber of Commerce, do not argue anything but equity on behalf of this change. “We want parity with big business,” they argued to the subcommittee, in the face of a proposed elimination of corporate income taxes.
These cuts are significant to the budget, but small to the business owner—only 2 % of profits. For a business with $100,000 in profits, that would be a $2,000 savings—too little to fund new employees or productivity-improving investments.
According to the federal Small Business Administration: “Most of South Carolina’s small businesses are very small as 77.8 percent of all businesses did not have employees and most employers have fewer than 20 employees.” Small businesses are fragile businesses. In 2009, we had 16,515 business openings in South Carolina—but 17,519 closings, including 389 business bankruptcies according to the SBA. Those businesses on the verge of bellying up will have no profits. Cutting taxes on profits won’t help them at all.
Businesses with fewer than 500 employees lost 65,943 net jobs in 2008-2009 in South Carolina, more wiping out the job growth in the previous three years. Barely affecting this loss was the increase of 2,028 net jobs in businesses with 1 -4 employees.
The economic development narrative so often repeated at the State House that “small businesses drive jobs creation” is exaggerated. Small businesses create a lot of jobs and, through failures, destroy nearly as many. As a study by the St. Louis Federal Reserve found: “…when one accounts for job destruction, small businesses appear to account for a significantly smaller share of net new jobs created in the private sector than many people might believe.” But small and medium-sized businesses are still an important part of net job growth.
There are real things that would actually work to help small businesses and grow our economy if that were your goal. A cross-national study of small and medium-sized enterprises (SME) concludes: “There is a general consensus that the competitiveness of an individual SME is strongly related to the “quality” of its owner/manager. “Quality” is, in this context, strongly related to the human capital of the individual, in turn influenced by a combination of formal education, training and experiential learning.”
Economic development authority Timothy J. Bartik of The Upjohn Institute for Employment Research recently observed: “There is good research evidence for several policies that provide services to increase the productivity of small and medium sized businesses. Two policies with rigorous evidence of cost-effectiveness are customized job training and manufacturing extension programs,” which he elsewhere describes as providing “smaller manufacturers with information to improve their productivity through new technologies and better methods of workplace organization, business planning, and marketing.”
South Carolina politicians routinely utter pious mouthings about their commitment to small businesses. We have some of the helpful programs, such as Small Business Development Centers, but expanding and adding to them and providing significant resources would be real steps to helping small businesses.
With this $60 million, we could better fund public education, health care and infrastructure—the things that businesses looking to relocate here are looking for. Or we could redirect these funds to building the human capital in small businesses. There is little evidence that those pushing the SC House GOP Caucus tax package are interested in doing anything but “to shrink government to the size where we can drown it in a bathtub.” Down that road lies ruin.