Despite Obama pitch on benefits of healthcare reform, small business is glum

In focusing on the benefits of healthcare reform for small business owners on Thursday, President Obama targeted a group of Americans who need bucking up.

Small-business owners are glum. Their optimism is falling despite signs of recovery.

Their outlook is important because, as the employers of just over half of America's private-sector workers, their gloom could slow the economy's progress.

"This healthcare tax is pro-jobs, it's pro-business, and it starts this year," Mr. Obama said in his Thursday speech in Portland, Maine. The nonpartisan Congressional Budget Office estimates that tax credits to cover healthcare premiums would save small businesses $40 billion by 2019.

But it's not clear that small-business owners are buying the argument. Their optimism has turned down in recent months.

It's not that small-business owners aren't looking forward to a recovery. They plan on hiring new full-time employees (26.5 percent in March vs. 10.5 percent in January) and make capital expenditures (49 percent vs. 37.4 percent), according to the Small Business Sentiment Survey released this week.

But the pace of small business improvement appears to be lagging that of larger companies.

During the recession, the very smallest businesses (those with fewer than 50 employees) laid off fewer workers than midsized companies, even though they employ roughly the same number of employees, according to ADP employment reports. Then, late last year, something changed.

As the economy began to pick up, larger businesses made fewer job cuts. While the smallest businesses saw improvement, too, it wasn't as good. They were put in the rare position of being the biggest generator of layoffs in the economy.

In March, they accounted for better than half of the 23,000 layoffs reported by ADP (which doesn't include census and other government workers, which will be included in the official government's count Friday).

While the ADP data only captures the smallest small businesses, the rest of the sector also appears pessimistic.

"The small business sector has not 'caught the wave,' " concluded the National Federation of Independent Business in its economic trends report released in March. Its survey found optimism in February falling back to December levels and not much higher than the low reached in March 2009. Uncertainty about the impact of new federal laws and weak sales contributed to the gloomy outlook, the NFIB report found.

Why so negative?

"The recovery of 1980-83 was built on the Reagan tax cuts," says Al Angrisani, CEO of Angrisani Turnarounds, which put out the Small Business Sentiment Survey this week. "Now the taxes are going up. and I believe it's affecting" business sentiment. His survey found a slight increase in owners worried about the sustainability of their businesses.

Consider a small-business owner in New Jersey with $1 million gross income. According to the calculations of Mr. Angrisani, a former US assistant secretary of Labor under President Reagan, that business owner would see her tax burden rise from 40 percent to 50 percent of income because of a combination of increases in the rates of five taxes: income (federal), income (state), capital gains, the new healthcare levy on investments, and payroll.

That's overstating the case, counters Roberton Williams, a senior fellow at the Tax Policy Center in Washington. President Obama's 2011 budget calls for a repeal of the capital gains tax on small business and the vast majority of small-business owners won't be affected by the full array of taxes that Angrisani describes.

Only 7 percent of individual income tax returns that report business income have income over $250,000, the center estimates. And of those, only one-fifth get as much as half their income from business.

"Other factors matter a lot more ... like whether there is demand for more output," Mr. Williams writes in an e-mail.

That demand remains weak.

For five months, more small-business owners expected business conditions to improve than deteriorate over the next six months, according to the NFIB. But in February, the index turned negative again. The NFIB's overall optimism index hasn't stayed this low this long – within ten points of its historic low for the last 17 months – since the survey's inception in the mid 1970s.