Why Obama job creation plan focuses on small business

President Obama's new job-creation plans hinge largely on small business, and on the notion that tax breaks can spur these employers to start hiring.

It's a high-stakes strategy. The nation needs millions of jobs, and the track record of incentives for small business hiring is mixed. But it's also a strategy that Mr. Obama can hardly avoid trying.

Start with the obvious point: Most jobs are in the private sector, and most private sector employers are small businesses.

"Over the past fifteen years, small businesses have created roughly 65 percent of all new jobs in America," Obama said in a Washington speech laying out his plans, which include a tax credit for firms that hire.

But the reasons are also particular to the current downturn. Small employers have been particularly hard hit by financial crisis, facing tougher credit conditions now than large firms. And for many of them, hiring is on hold because of uncertainty. Either they worry about the strength of an economic recovery or about the future of government policies on matters such as healthcare and taxes.

Family firms have been hesitant to hire

Little wonder that the typical family firm is on hold when it comes to hiring.

"The small business feels like there’s mortar fire coming in from all directions," says Brian Bethune, an economist at IHS Global Insight in Lexington, Mass.

The concern was underscored in a survey released Tuesday by the National Federation of Independent Business, which represents many employers that don't make it onto the Fortune 500 list.

The survey's index of small business optimism fell in November. While 7 percent of respondents said they plan to hire in coming months, 17 percent said they plan to cut payrolls. For those who want to borrow, getting a loan is difficult, with a net 15 percent of firms reporting loans harder to get than in their last attempt.

“The economy may be turning, but small firms are not convinced things will improve anytime in the near future,” said William Dunkelberg, the federation's chief economist, in releasing the numbers.

Obama is trying to break that logjam.

Programs targeted at small employers rank first in a three-part plan he laid out to jump-start job growth next year. (The other two legs of his plan are government spending on infrastructure, and a rebate program to encourage household investments in energy efficiency.) All three broad proposals involve spending that would require congressional approval.

Ways to help small businesses

In a summary of the Obama's jobs plan, the White House outlined several programs targeted especially at small employers, some of which simply extend program already under way:

• A short-term tax incentive for small businesses that hire in 2010. Economists are divided on this idea, but it has some backers on left and right, who say the incentives can be designed to expand payrolls at a modest cost to taxpayers.

• Zero capital gains tax for small businesses. To improve access to capital, the administration is calling for a one-year elimination of the tax on capital gains for new investments in small business stock.

• Extension of enhanced expensing provisions for small businesses. This would extend through 2010 a Recovery Act provision that allows small businesses to immediately expense up to $250,000 of qualified investment. Obama also wants to extend Recovery Act tax incentives for depreciation of capital spending.

• Increased loan guarantees from the Small Business Administration, and an elimination of SBA fees. This would extend provisions in the Recovery Act through the end of 2010.

Obama also called for the Treasury to continue efforts to use the Troubled Asset Relief Program (TARP) to support small business lending. In that way, some of the jobs program might be paid for directly by the TARP.

The administration also argues that, because the TARP program is costing less than expected, as much as $200 billion has been freed up to pay for other parts of the jobs program, without increasing projected federal deficits.

See also:

Obama jobs plan: big ideas, but a big hole to fill in hiring

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