Over the past week, starting with the State of the Union Address last Wednesday, President Obama has been speaking a lot about doing more to help the nation’s small business owners.  The question is whether or not the President is proposing real relief or more of the same lip service that small business owners have been getting over the past year.

Small Business Tax Credit. One of the big highlights of the Presidents speech was where he proposed a new small business tax credit that would go to small businesses who hire new workers or raise wages.  Generally speaking, small business owners would get a portion of the new worker’s salary or existing worker’s raise back as a tax credit – effectively allowing the government to subsidize a portion of this person’s salary.    As general policy goes, I hate the idea of the government subsidizing anything.  However, if they are going to help someone with subsidies to help create jobs, small businesses are where it should be.    After all, its better than spending $533,000 to create each temporary job, as we did with the Stimulus Bill.

Elimination of All Capital Gains Taxes on Small Business Investment. Wow!  This sounds great!  Except for one thing.  When someone invests in a small business, they typically invest for the long-term.  While this policy would mean well, will it really create a flood of investment into the small business market?  After all, these investments could indeed be subject to capital gains taxes again when they are sold 5, 10, or 20 years down the road.  Don’t get me wrong – I like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.

Therein is the underlying problem that I have seen with using Capital Gains rates to encourage investment all along.  Altering the tax rate in the short-term does little to spur on long-term investment.  The problem is that the tax rate is determine based on when an investment is sold – not when the investment is made.  If I invest $100,000 into a new business venture today, what will the tax policy be 15 years from now when I sale the small business?    If the President and Congress want to spur investment, they need to allow taxpayers to “lock-in” a zero-percent capital gains rate at the time they make the investment – not years later when it is sold.  Investors like certainty.  Little certainty equals little investment.  Greater certainty equals greater investment.

I do like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.  I applaud the President for this proposal.  I just happen to like it for slightly different reasons than he does.

Small Business Lending Fund. President Obama is now promoting a $30 billion fund that will be specifically designed for the nearly 8,000 small community banks (those with assets of $10 billion or less) to loan money to small businesses in hopes that it will spur job growth.   Interestingly, many in the banking industry say that the extra funds will not help lending.  They say that banks with plenty of money to lend are having trouble finding credit worthy borrowers and that small business owners are holding off on expansion and improvements due to the sluggish economy.

If a business participates in the loan program, does it subject that business to more regulation and government control?  If so, the loan may not be worth it.

Much of the success of the program will revolve around how much control the federal government wants to exercise over the program participants (the banks) and what kind of regulations the government places on the banks.    An easy example of this are the underwriting guidelines for these loans.

The federal government will have to change drastically from the ARC Loan program for small businesses if they want it to succeed.  (See prior posts, ARC Loans are Ready to Go – If You Can Find A Lender and What Ever Happened to ARC Loans?)  The ARC Loan program was a complete failure by any measure.  It was amazing to me how many SBA Lenders had never even heard of it.   A big reason for its failure was the stringent underwriting guidelines placed on the banks for a very low-profit loan for them.  They had no interest in underwriting a loan that was simply not profitable for them – even with little or no risk.

While the above three proposals are a step in the right direction, they ultimately do not solve the underlying issue.  Small business owners rarely make decisions based solely on tax results.  Regardless of whether there is a credit available, most small business owners are gong to be reluctant to hire or borrow money until they see their business moving in the right direction.

In excerpts of a speech from today that were released by the White House early, President Obama states that “Jobs will be our No. 1 focus in 2010. “  Well, that sounds spectacular, Mr. President.  I am not sure why it was such a back burner item in 2009, but at least we can look forward to 2010.  Or, are you just paying us lip service again?  Only time will tell.  In the meantime, kudos to the President for at least proposing some small business relief.

Charlotte's Bank of America repaid back its TARP loan in December.

During Wednesday night’s State of the Union Address, President Obama again mentioned a proposal that would impose a tax on banks that have yet to repay their TARP funds.   I find the very idea of this proposal outrageous and feel that it is a vast abuse of government power to impose it.  Let’s see what President Obama said on Wednesday night regarding the the banks that have yet to pay back their TARP funds:

I have proposed a fee on the biggest banks.  I know Wall Street isn’t keen on this idea, but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.

The TARP is just another example of what happens when legislation is rushed through as quickly as possible with little thought to its ramifications or a thorough understanding by the people that vote for it (such as the current Healthcare bill).   If the government wanted to limit the bonuses that the banks could pay out, they should have put that in the agreement.  They didn’t.  Why do our politicians keep voting for bills that they do not understand fully?

First off, a fee is just a more politically acceptable term for a tax.  What he is doing is proposing a tax on the banks that have not paid back their TARP funds.  The problem is that regardless of what these banks are doing with the money, they have no contractual obligation to repay the funds yet.  The deadline for setting up a TARP repayment system is 2013.

When TARP was passed in 2008, they setup rules for how things would be handled.  Now, President Obama wants to change those rules on the banks mid-stream.

Imagine if your brother-in-law loans you $50,000 to start a business, and you sign a written agreement stating that you will pay the amount back in a lump sum in 5 years.  A year and a half goes by, and your business is chugging along nicely.  You decide to reward yourself with a new flat screen TV for the living room.  Now your brother-in-law comes over and has a hissy-fit because you are spending money on a new television, but you have yet to repay the $50,000 to him.  To get back at you, he decides he is just going to help himself to the better part of your DVD collection.  I can see how he may want his money now rather than later, but that was not your agreement.    If your brother-in-law wants his money sooner, he needs to work with you to amend the agreement, not just start taking things.

In his post, Is the Bank Tax Unconstitutional, Peter Pappas of the Tax Lawyer’s Blog discussed the constitutionality of the Bank Tax and whether the banks have a legal or a moral obligation to repay their TARP funds early.   I can see how someone may argue that it isn’t right for them to take bonuses when they have yet to repay their debts.  But do the people making those arguments think that it is morally acceptable to go out and eat an extravagant dinner when they have yet to repay their credit cards debts or home mortgage.  The fact is that the banks had until 2013 to setup a TARP repayment system.  The banks have NOT broken that agreement.

The TARP is just another example of what happens when legislation is rushed through as quickly as possible with little thought to its ramifications or a thorough understand by the legislators that vote for it (such as the current healthcare bill).  If the government wanted to limit the bonuses that the banks could pay out, they should have put that in the agreement.  They did not.  Why do our politicians keep voting for bills that they do not understand fully?

During last nights State of the Union Address, President Obama discussed taxes on numerous occasions.  He made several statements that I took note of that I will discuss over the next few days.

Firstly, he was emphatic when he stated the following:

“We cut taxes for 95% of working families.  We cut taxes for small businesses.  We cut taxes for first-time homebuyers.  We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college.  As a result millions of Americans had more to spend on gas, and food, and other necessities, all of which helped businesses keep more workers.”

The fact is, there were a few tax cuts that were passed this year.  I have no idea how President Obama assumes that it affects 95% of working families.   I remember back in the corporate world whenever we have a “State of the Company” type address, we had to look at every number or percentage that we stated and have detailed backup supporting it and even had the auditors reviewing the numbers before our CEO could report to our shareholders.  It is funny how our nation’s CEO, our President, can just go out and blurt out unsubstantiated numbers and have the vast majority of people take it as fact.

Let me review the primary tax cut proposals that the Administration passed this year.  I will save the massive list of proposed tax increases for a following post.  While there are a few of these proposals that are actually new tax breaks, many of them are just extensions of tax provisions that were already in place prior to President Obama taking office.  His administration just chose to extend them, but in virtually all cases, they are set to expire again at the end of 2009 unless they act upon them again.  The expiration of these tax cuts would amount to taxpayers paying more tax in 2010, than in 2009.

Below is a partial list of items that President Obama may be considering a “tax cut”:

First Time Homebuyers Credit. This credit was originally enacted in 2008, but was extended and enhanced twice in 2009, most recently in The Worker, Homeownership, and Business Assistance Act of 2009.  A tax credit of up to $8,000 is now available for qualified first-time homebuyers in 2009.  In addition, a tax credit of up to $6,500 is available for qualified existing homeowners who purchase a new principal residence,  *See details in my post from October, “First Time Homebuyers Credit.”

Making Work Pay Credit. This credit is targeted to lower and middle income taxpayers and is equal to a maximum of $400 for individuals and $800 for married couples.  To qualify for the maximum credit, a single person must have earned income of no more than $75,000 and no partial credit is given if earned income exceeds $95,000.  For married couples, the earned income limit for a maximum credit is $150,000 with individuals making $190,000 or more receiving no credit.

Unemployment Compensation. The first $2,400 of unemployment compensation received in 2009 in excluded from income for federal income tax purposes.  This exclusion was only for 2009 and has expired unless it is adopted again sometime this year.

Sales and Use Tax Paid on Automobiles. This is a  temporary deduction for sales and excise taxes paid relating to the purchase of a qualified new automobile, light truck, or motorcycle purchased through December 31, 2009.  (Please note that limitations on the value of the vehicle and a taxpayers income may apply).

Education Incentives. The Recovery Act significantly enhanced the HOPE scholarship credit and renamed it the American Opportunity Tax Credit (AOTC).   The new credit has a higher maximum credit amount, is partially refundable, and is available to some higher income earners.  It is also expanded to apply to the first four years of post-secondary educations (as opposed to two before.)  This credit is set to expire at the end of 2010.   I just don’t understand why if a credit such as this is a “good idea”, they just don’t make it permanent to start with.

Child Tax Credit. The Recovery Act enhanced the child tax credit by making a larger portion of the credit refundable for 2009 and 2010.  Basically, what this means is that someone who owes no income tax can still receive the money back – in essence, paying a “negative” amount of tax.

Earned Income Tax Credit. The Recovery Act increased the Earned Income Tax Credit, or “Welfare Credit” as I like to call it.  It is truly one of the biggest lies in the tax code.  I am not sure how giving a bigger welfare payment to people that don’t pay taxes can be considered a tax cut, but the administration thinks it is.  This is another refundable credit that allows taxpayers that pay no income tax to get thousands of dollars paid to them.  You can read more about the Earned Income Tax Credit in my post from last year entitled, “President Elect Obama: Stop the Tax Code Lie.”  As you can see, he chose to keep the “tax code lie” alive and well.  Heck, he even expanded upon it.

Bonus Depreciation. The 2009 American Recovery and Reinvestment Act (“Recovery Act”) extended bonus depreciation deduction for property placed in service in 2009.   This allows businesses to deduct 50% of the qualifying property in the first year that it is placed in service.  Please note that this is not really a “tax cut” in the sense that if it had not been extended, tax payers would have paid more in 2009 than 2008.  Extending it through 2009 just lets the tax law stay at the status quo – it really is not a tax cut.  On the other hand, if it is not extended again, it could be considered a tax increase in 2010.

Section 179 Expensing. The Recovery Act also extended the $250,000 limit on qualifying property that can be expensed by qualifying small businesses under Section 179.  Once again, this is not really a “tax cut” in the sense that they extended the law to match what it was in 2008.  Unless they change the law again, it is set to drop to $134,000 in 2010 and $25,000 in 2011.

Work Opportunity Tax Credit Expansion.  The credit rewards employers that hire individuals from targeted groups.      The Recovery Act expanded the targeted group to unemployed veterans and disconnect youth.

Energy Tax Credits. The 2009 Recovery Act expanded and extended many energy tax incentives for businesses.

COBRA Premium Assistance. This really isn’t a tax cut, but is worth mentioning here since it does directly affect the pocketbooks of those that it applies to.  This provision allows individuals that have been involuntarily terminated to pay only 35% of their COBRA health insurance premiums to their former employers for nine months, and their former employers are required to treat this as full payment.  The employers then get to claim a tax credit for the other 65% of the premium on their payroll tax returns.  Thus, it should result in no additional liability to the employee or the employer.  Of course, the taxpayers are picking up the other 65%.  The government subsidy is not taxable to the recipient.   Currently, COBRA Premium Assistance is only available for individuals involuntarily terminated prior to February 28th, 2010.   There are a couple of bills that are proposing to extend this even further.

NOL Carryback. One of the big changes that the administration is taunting as a big tax cut for small businesses isn’t a tax cut at all.    Both of the major acts past this year expanded the ability of small and medium sized businesses to count the losses sustained in 2008 or 2009 to recoup taxes paid in the prior five years.  I feel this is a good idea because it gives these struggling businesses some much needed cash at a time when they are hurting the most, but it is not a tax cut.  If the law were not passed, the losses sustained in 2008 and 2009 would apply to future years.  Ultimately, the taxes paid over an extended period of time would be equal (assume no change in tax rates.)

As you can see there are numerous rules and laws that were passed that could be what the President was talking about when he made the above statement.  I am just not of the opinion that stopping a tax increase from taking place can actually be considered a tax cut.  Like I said before, you are maintaining status quo, you are not cutting anything.

I also don’t think that sending a check to someone that doesn’t pay any tax can be called a “tax cut” either.  How can you cut zero?  There is nothing there to cut.

Nonetheless, there are several items listed above that are indeed tax cuts, and I applaud the Obama Administration for passing legislation to enact the true tax cuts or to keep them alive.  Still, I feel that they are falling woefully short of 95% of all Americans – especially on a net tax basis.

As long as we have a national deficit, one must ask themselves whether or not we are not just delaying the taxation to future generation.  While we as Americans simply can not afford to pay more taxes, we have to demand that our government stop spending money on things we can not afford.

Of course, let’s face facts.  This is a fairly short list of tax cuts.  The bottom line is that the fact that they have not had any significant tax increases is not due to a lack of desire.  Tomorrow, I will provide a long list of tax increases that have been proposed by this administration.