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Owners left in fiscal cliff-hanger

Santa Clarita Valley business leaders share concerns about the effects of federal spending cuts

Posted: November 25, 2012 2:00 a.m.
Updated: November 25, 2012 2:00 a.m.

Poll results showed that by nearly a 2-to-1 ratio, small-business owners believe spending cuts for education, health care and infrastructure would hurt the economy more than tax increases on the top 2 percent.

Uncertainty over the budget calamity facing the country is doing more to retard growth and hiring among companies than if the company CEOs had the particulars and could just swallow the bitter pill of tax increases and spending cuts, local business owners said.

While American business owners held their collective breath waiting for the outcome of a presidential election, there remains one more hurdle before they make plans to grow or hire.

And it’s a big hurdle — the doomsday scenario of the “fiscal cliff.”

If Congress does not strike a deal in time, automatic spending cuts and tax increases will take effect in January.

Each day that Congress fails to forge an agreement is another day that business owners delay making any plans to move forward, they say.

“People expect some tax increases and some cuts,” said Frank Di Tomaso, executive chairman and CEO with the Bank of Santa Clarita. “Knowing what they are is better than dealing with the unknown. Then we can all move forward.”

The Small Business Majority, a national small-business advocacy organization surveyed 500 small-business owners nationwide in November.

Poll results showed that by nearly a 2-to-1 ratio, small-business owners believe spending cuts for education, health care and infrastructure would hurt the economy more than tax increases on the top 2 percent.


Of course, defining what equals a top wage earner isn’t that easy, said Owen Powell, co-owner of Bouquet Auto Parts.

“It depends on where you live; $250,000 out here doesn’t go as far as it does elsewhere,” he said.

Powell said two women were in his store buying a car battery. One woman was trying to save money because although her household income exceeded the limit by $20,000, she had five kids to raise, he said. The woman said she was “by no means living a wealthy, lavish lifestyle,” he said.

On the other hand, more than three-quarters of the business owners polled are concerned about an increase in the employee portion of payroll taxes, which typically saves the average household $1,000 a year.

“That is going to make a difference if the tax goes back in,” Powell said. “It will directly hit take-home pay and you’ll see people cut back on disposable purchases first. It will hurt our economy.”

The economy is slowly recovering,” said John Arensmeyer, founder and CEO of Small Business Majority. Allowing the tax increases and drastic spending cuts that going over the fiscal cliff would trigger would cripple small businesses and middle class, and with them our fragile recovery, he said.

Among other concerns, 81 percent of small-business owners are concerned about an eightfold increase in the number of households facing the alternative minimum tax.

Alternative minimum

The alternative minimum tax was enacted in 1969 to ensure people with many deductions — such as family and mortgage deductions — still pay a minimum amount of taxes each year by managing the number and dollar amount of tax deductions that can be taken.

But, because it was never adjusted for inflation, it risks trapping more and more families in the tax net each year.

Congress had been passing reprieves but unless it acts swiftly to increase the amount of income exempt from the tax, Small Business Majority believes the number of households expected to be hit by the tax to increase from 4.4 million to 32.9 million and translating to an extra payment of about $2,800 per family.

As the increase hits again, it will hit a lot of small-business owners, said Calvin Hedman, founder and president of Hedman Partners.

“That will mean less spending,” he said. “There will be less cash available to hire people or expand their business. Business owners will have to recover first before they can focus on growing the business.”

All the focus is on the wealthy and big wage earners, Hedman said. “But, it’s the small-business owner out there that gets hit with all these changes that Congress makes.

“If you really want the economy to take off, get that engine going,” he said. “Don’t cut off the supply of gas to it.”

Also worrisome are looming defense cuts. Sixty-five percent of the small-business owners are concerned, according to the poll.


Some $500 billion in defense cuts could occur over the next 10 years.

But, it’s not just the cuts themselves that cause worry, said Joe Klocko, formerly with Woodward HRT of Valencia and now director of the Center for Applied Competitive Technologies at College of the Canyons.

The proposed cuts would average about $50 billion per year, which is not as consequential as allowing what is spent, to be spent in the wisest way possible, he said.

Congress authorizes the money or orders the cuts, but doesn’t authorize flexibility with how the money is spent, Klocko said. They should leave that to the experts; the joint chiefs of staff for defense should be able to say how best to “accommodate the budget.”

There’s a difference between making straight 10 percent cuts across the board versus making smart cuts, he said.

Dan Stohr with Aerospace Industries Association, the defense industry’s largest trade group, said cuts need to be made but that they need to be made “strategically and thoughtfully.” The automatic cuts planned under sequestration are neither, he said.

And business owners are concerned about capital investments.

Capital spending

More than three-quarters of small-business owners support permanently allowing small businesses to expense qualified capital investments up to $1 million. More than eight in 10 are anxious about the cuts that would reduce the amount of qualified capital investments small businesses can expense to $25,000.

“Congress should look to encourage capital spending,” Hedman said. “Getting a tax deduction for buying a machine can influence business owners to make that expenditure and it has a domino effect. A business that buys equipment can hire more people.”

Growing businesses also need a trained workforce to kick-start their plans for 2013.

Technical training

Cuts to state grants for job-specific technical training worry 86 percent of the small-business owners. Money for technical training is always at risk when money is tight, Klocko said. But training provides skilled workers for companies who want to hire.

“Spending cuts for education hurt the economy.” Powell said. “And it would hurt the businesses generating income through the local college. College of the Canyons is a big component of this valley.”

The ‘known’

At the end of the day, it’s difficult for business owners to plan, hire, buy machines or decide whether to expand when there is uncertainty, Hedman said.

Hedman’s advice is for political leaders to just make a decision and keep it. Don’t tweak the decisions every year. Set a clear path and let business owners know the rules so they can operate smoothly and in a forward motion.

“Uncertainty causes paralysis for business,” he said.




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