Why the 2010 Tax Breaks Won't Make Small Businesses Hire


The old saying that you can't judge a book by its cover applies to the Small Business Jobs Act, as well as most of the other federal tax legislation enacted in 2010 with the ostensible purpose of encouraging small businesses to hire more workers. Practically speaking, that's understandable. Who would vote for a bill titled "The Act That Sounds Good, But Probably Won't Do Much to Boost Employment at Small Firms"?

Let's start with the Section 179 expense deduction changes that represent one of last year's major tax modifications. Businesses have always been able to deduct the cost of investments in certain assets, including items like computers, software, machinery, and office furniture. And for many years the Section 179 provision has permitted small companies to deduct the full amount of eligible investments in a single year, instead of having to parcel out the deduction over several years through depreciation. What last September's jobs legislation does is raise the Section 179 deduction limit from $250,000 to $500,000.

Now, $250,000 is a nice chunk of change. You can buy a lot of laptops for that kind of money. Since the Section 179 expense limit hike is only good through the end of 2011, the idea is that small firms will move swiftly to buy those laptops or desks or forklifts and hire people to use them. What are the problems with this?

To begin with, most small companies are too small. According to the Census Bureau, the average business has less than $1 million annual revenues. How often is the typical business going to make an investment of more than a quarter of its annual revenue? More to the point, how often is tax law going to drive the size or timing of that decision? It seems unlikely that many machinists will be hired to operate drill presses purchased thanks to the Jobs Act.

There is more to the legislation than that. It also offers a limited-time opportunity to write off 100 percent of investments of up to $250,000 of eligible real property. This can include leasehold improvements and improvements to retail stores and restaurants. So, theoretically, store owner and other businesses will improve and expand their operations and hire more people to wait tables and operate cash registers.

Probably the biggest problem with this one is that it simply acts to shift in time investments that would -- and perhaps should -- be made at another time. An investment in real property, more than an investment in equipment, is a long-term play. What is likely to happen with this one is that a small business that was going to expand now anyway will simply take advantage of the tax break when it does so. That's not going to result in any more hiring than otherwise, unless the owner plows all the tax savings into hiring employees that, presumably, he or she would need anyway.

Some of these investments, especially the ones in equipment, may not only fail to cause hiring that wouldn't otherwise occur, they may discourage it. That's likely to be the case if a business owner uses the tax break when acquiring equipment that will reduce the labor content of a product or service. Robots aren't seen today as quite the nemesis of labor that they used to be, but it seems likely that some, at least, of these tax breaks will be applied to robots or the equivalent, resulting in reduced need to hire and perhaps even layoffs.

There's more. Tax breaks are mostly of use only to profitable companies. If you don't have profits, you're already not paying taxes, so a tax break is useless unless, as is sometimes the case, it can be applied to profits generated in another year. And many, many businesses are not generating profits at any specific moment. In some industries, such as retail, only a bare majority of companies are profitable at all in a given year.

Fast-growth small companies, of the sort that generate the lion's share of the jobs attributed to small companies, are perhaps the most likely of all to not be profitable. Anyone who has tried to lead a rapidly growing company knows that it is difficult to be profitable when you are hiring lots of new people.

And, of course, almost any company, profitable or not, needs to experience or anticipate growth to justify hiring. A large number of the country's small businesses are not in growth mode. They are stable, or even declining for reasons that have little to do with the national economy. They are not likely to hire many, if any, people.

Finally, almost no state taxing authorities have followed the feds' lead on these tax breaks. While federal income taxes generally represent a heavier burden for tax-paying businesses, the lack of state follow-through does dilute the impact of the jobs-oriented tax breaks.

It may be that a tax break targeting individuals will do as much for the economy and businesses as the breaks targeting small firms. That's the forgiveness of 2 percent of the Social Security contribution. If consumers have more money in their pockets, they are likely to spend it, increasing demand for the products and services small businesses require. That will put more of them in growth mode so they have good business reasons -- as opposed to tax reasons -- to hire.

Mark Henricks has reported on business, technology and other topics for The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications long enough to lay somewhat legitimate claim to being The Article Authority. Follow him on Twitter @bizmyths.

Image courtesy of Flickr user David Reber's Hammer Photography, CC2.0