Small business owner’s guide to the election

By Kent Hoover

updated 1:13 p.m. ET Oct. 16, 2008

Restoring the health of the U.S. economy will dominate the domestic agenda of the next president, whoever he is.

John McCain and Barack Obama have fundamental differences on how to do that. McCain emphasizes the role that low tax rates play in economic growth, while Obama thinks government investments in targeted areas, such as alternative energy and the creation of new businesses, are important.

Both, however, will be constrained by fiscal realities — the ballooning federal deficit and the still-uncertain cost of the nation's financial crisis. They may have to drop or defer large chunks of their agenda.

For businesses, one thing seems clear: Companies will face more government regulation. Both candidates are "likely to be big regulators," said Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University.

This report looks at how the outcome of the election could affect small businesses in four key areas: taxes, health care, energy and the rules governing union organizing.

Taxes
John McCain claims Barack Obama wants to raise taxes on small businesses.

That is true if the business owner makes more than $200,000 a year (or $250,000 per family). Obama has proposed increasing personal income tax rates for the top two income brackets to what they were during the Clinton administration: 36 percent and 39.6 percent.

Rates for other income brackets would be unchanged under Obama's plan.

Earnings at most small businesses are passed through to their owners for tax purposes and are taxed at individual income tax rates.

Only 2 percent of taxpayers with small business income will pay taxes at the two highest rates in 2009, according to the Tax Policy Center.

McCain, Obama on taxes John McCain’s plan: Individual income tax: Keep two tax rates at 33 percent and 35 percent. Corporate tax: Reduce tax rate from 35 percent to 25 percent. Capital gains: Maintain 15 percent tax rate. Estate tax: Collect 15 percent tax on estates worth more than $5 million. Barack Obama’s plan: Individual income tax: Increase top two rates to 36 percent and 39.6 percent. Corporate tax: Reduce tax rate for companies that expand or start operations in the United States, while repealing breaks for companies that retain earnings overseas. Capital gains: Increase rate to 20 percent for individuals making more than $200,000 and eliminate tax on investments in small businesses and startups. Estate tax: Collect 45 percent tax on estates worth more than $3.5 million. Sources: McCain, Obama campaigns

Obama's proposed tax hike, therefore, would affect relatively few small businesses.

These small business, however, are "an important slice of the small business community," said Todd McCracken, president of the National Small Business Association. They tend to be higher-growth small businesses that create more jobs than lower-income companies, he said. "You don't want to give those people reasons to do unproductive things," such as sheltering their income.

A business owner who makes about $300,000 a year probably puts $100,000 of that back into the business, said Dewey Martin, a certified public accountant in Hampden, Maine, who represents about 125 business clients and also chairs the accounting department at Husson College.

"If you take money out of their pockets, they're not going to be creating jobs," Martin said.

Obama also has proposed tax cuts for lower- and middle-income Americans, however, so most small businesses would pay lower taxes under his plan, according to his campaign.

McCain has proposed making the rate cuts adopted during the Bush administration permanent, including the 15 percent rate on capital gains and dividends.

He also proposes reducing the corporate tax rate from 35 percent, which he says is the second-highest rate in the developed world, to 25 percent to make U.S. businesses more competitive

Health care
John McCain and Barack Obama would go in opposite directions when it comes to the employer's role in providing health insurance.

McCain's health care plan would encourage individuals to buy insurance on their own. Health benefits provided by employers would be taxed as income. Individuals would receive a $2,500 refundable tax credit ($5,000 for a family) for health insurance premiums. They would be able to purchase any plan offered anywhere in the country.

Obama, by contrast, would require all but the smallest employers to provide health insurance to their workers or pay additional taxes to the government. Small businesses would receive a tax credit to help offset the cost of health insurance.

McCain, Obama on healthcare John McCain’s plan: --Would provide a refundable tax credit of $2,500 to individuals ($5,000 per family) for health insurance premiums; employer-provided benefits would be treated as income. --Would allow individuals to purchase health insurance nationwide, across state lines. --Would work with states to establish a guaranteed access plan for individuals who have been denied insurance because of pre-existing conditions or other reasons. Barack Obama’s plan: --Would create a national health insurance exchange for individuals to buy coverage, including a government-sponsored plan similar to the one offered to federal employees. --Would provide small businesses with a tax credit to offset the cost of health insurance premiums. --Would require larger employers to pay additional taxes if they don’t provide health insurance. Sources: McCain, Obama campaigns

Individuals could buy insurance from a national health insurance exchange, which would offer various plans, including a government-sponsored plan similar to the coverage now provided to federal employees.

McCain contends his plan would reduce health care costs by making individuals better health care consumers and by increasing competition among health insurers. Employer-provided coverage would still be an option, he said, and individuals would be able to take their insurance plan with them from job to job.

Critics, however, said McCain's plan would gut the employer-based system, which provides most Americans with their health insurance, by removing the incentive to offer health benefits.

"I don't think politically it's going to be possible to throw off the employer-based system," said John Arensmeyer, chief executive officer of Small Business Majority, a national organization that prefers Obama's approach.

Obama's proposal, however, also would face political challenges, despite Democratic control of Congress.

The economy likely will remain weak when the next president takes office. As a result, a "pay or play" insurance requirement for businesses would be "extremely difficult to push through," said Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council.

And Obama's tax credit likely won't be large enough to enable small businesses to afford the benefit-rich coverage available through his national insurance exchange, Kerrigan said. Obama is "out of touch with how expensive it might be for small businesses," she said.

Still, Kerrigan sees a chance that Congress would create some sort of federal insurance pool and provide small businesses with tax credits for insurance purchases. Comprehensive health care reform is less likely, she said.

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"When that happens, that's when you lose people," Kerrigan said.

The financial meltdown, high gasoline prices and spiraling budget deficits also may have made health care reform less urgent than other priorities.

Only 4 percent of small business owners said health care was the top issue in this election in a survey conducted in September for Discover Financial Services. That compares with 52 percent who said the economy was the top issue. Health care also trailed the war in Iraq, government ethics and corruption and immigration.

Arensmeyer, however, said action on health care can't wait, since fewer small businesses can afford to provide coverage every year.

"This is yet another crisis we need to deal with," he said.

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