As the November election approaches, small-business people and entrepreneurs are going to be facing some tough questions about what issues matter the most to them. One person closely following these issues is Thomas Sullivan, the outgoing chief counsel for advocacy at the Small Business Administration. Sullivan has headed the Office of Advocacy, which is meant to act as a watchdog over the rest of the federal government on behalf of small businesses, since 2002 and is concluding his service on October 24. We talked to Sullivan about his perception of the major challenges for small businesses today.
During your tenure at the SBA, what changes have you seen in terms of the most important issues affecting small-business people?
The biggest issue stays the same. The one issue that I have consistently heard all over the country meeting with small businesses is healthcare. And not just access to healthcare but cost of healthcare. That's the key distinction that seems to be lost as we approach the November election. Almost everyone focuses on access to healthcare. But in some ways they are ignoring small businesses' main concern, which is the cost component. Small-business owners almost uniformly pay attention to cost. When they make an investment, they want to see the value of that investment. When it comes to healthcare, they want government to fix it so that cost is the primary concern. How do you keep costs down? It's a tough issue. There isn't a silver bullet.
Is the cost of healthcare such a major issue because it's becoming harder for small-business owners to provide healthcare to their employees?
It's more than that. It's the way small-business owners think. When small-business owners look at their bills at night, they think cost first. When you look at healthcare, it's actually been the top concern for about eight years. The top two concerns on many surveys are generally healthcare and taxes. I have never seen healthcare be at the top of the concern list for as long as it has been. If their premiums keep going up between 25 and 50 percent every year, then they no longer have access to healthcare.
People like John McCain are focusing on making healthcare more portable—less tied to jobs.
Again, folks unfortunately and naively are looking for some sort of a silver-bullet solution. Portability has to be part of the solution. But no, you can't just all of a sudden shift away from employer-provided care. The idea of shifting a little bit makes sense, but not in the way it's being debated right now. The way it makes sense is because of the inequities of the self-employed person, and that has not been covered at all in this campaign. You've got over 21 million small-business owners who file as individuals. That's an amazing number. The total small-business universe is only about 28 million. Here's the kicker: Right now, they do not get pretax healthcare deductibility. They're paying over 15 percent more on taxes for the healthcare premium than someone who has healthcare in an employer-sponsored plan. Should an individual be able to take responsibility for his or her plan? The answer is yes. But, in my view, it's completely distorted. I wish folks would recognize the small businesses that are at complete disadvantage in getting coverage. There have always been a series of bills introduced by Congress that seek to allow self-employed to have pretax deductibility, just like corporate filers do. It has not gotten anywhere. I think it is completely unfair that the fabric of entrepreneurship in this country is at disadvantage to get healthcare.
Have any other issues gained as much importance as healthcare?
More recently, about three issues have eclipsed that. First is energy security and cost of fuel. The cost of fuel will only heighten as we get toward Christmas. Research from my office shows that 53 percent of small businesses are home-based. So when you talk about the concern of heating your home, you can't separate small businesses from that. Second, it's the economy. Small firms have been tightening their belts for over a year. There is a very large contingent of small-business owners who are a little peeved right now that 12 to 14 months after they knew they had to cut their expenses and stop hiring, the rest of the world woke up to this financial crisis. I'm not saying that offers any solution, but it is an acknowledgement that as small business goes, so does the economy.
You mentioned home-based businesses. How is the nature of small business changing?
We've really studied the phenomenon of self-employment. Depending on which glasses you're wearing, it's either a good thing or a bad thing. Self-employment has risen at a tremendous rate in this country over the last five years. In my view, that is outstanding. More people have the ability to be Bill Gates. Other folks look at the phenomenon and say, "Well, that's just because companies are laying people off."
Are the laws keeping up with this trend toward self-employment?
Your ability to figure out the advantages of filing as an individual or filing as an S-corporation or other type of corporation, and actually filling out the paperwork—it's absurd, it's so complicated. That does two things: First, it drives people underground, which is bad for the economy. Second, it stymies people's desire to be an entrepreneur and make it on there own. One thing we've really taken up the flag for is simplifying the home-office deduction. How bizarre is it that Congress passes a law saying that if you have a home office, you should be able to deduct that? Then we turn around as a government and make it so complicated that very few people want to take the deduction for two reasons. One, they know it flags an audit. Two, it's so complicated, why take the risk? So on the one hand, we say we want to reward people who are working out of their homes, but on the other hand, we take those rewards away.
Describe the state of the regulatory burden facing small businesses.
One-size-fits-all federal regulations do not work when it comes to small businesses. We see an overall federal regulatory burden of $1.1 trillion. If you took all the federal rules and regulations and the burden that they pose on the economy, you're looking at over a trillion dollars. That isn't the taxes you pay. It's the complexities to comply with the tax code and environmental and other regulations. We have studied how it impacts small business, and we have found that, for firms fewer than 20 employees, they have a 40 percent greater burden than their larger business counterparts.
It's very simple as to why there is this disparity. If you look at a husband and wife doing their taxes at the end of March—even if they have an accountant, it's their name on the return. It's their liability. It just makes sense that it takes longer for them to do it than a corporation that has an accounting department.
What can be done about this burden?
What we [tried to do] in my office is connect small-business owners with the people who are writing the rules. Lo and behold, we found that you can filter out tons of unnecessary costs and still allow agencies to meet their goals. When we connect a group of builders with the Environmental Protection Agency to make sure that construction activities don't pollute storm water runoff, we have found over and over again that the person building the homes is able to talk to EPA and say, "If you just tweaked this here you're going to get better sediment control." Because of things like that, we have filtered out in the last six years over $65 billion in unnecessary regulatory costs.
What about on an individual level—what can a small-business owner do?
There are two things. One is be involved. The chambers of commerce, the manufacturing association, the automobile parts supply association—it doesn't matter, but wherever you are in the economy, be involved. The job of these associations is to bring your issues to me. Without small-business input, I can guarantee that government will make the wrong decisions.
The second is we do have an initiative, the Regulatory Review and Reform Initiative, that asks small businesses and associations on an annual basis, "Give us the rules that agencies should review and reform." It started 20 years ago with a gas station owner who thought it was absurd that he had to report to his local fire chief on a federal form that there was gas on the premises. Through his tenacity, this gentleman convinced the EPA administrator [at the time] to remove that rule. There are other rules out there that only small businesses know are out of date. We try to tap into what small-business owners know. The website for this initiative is Sba.gov/advo/r3. I'm very optimistic that this will be a long-term initiative, because there are Republican and Democratic members of Congress who strongly believe in this initiative. That should make sure that whoever is sitting in my seat next year will be well advised to continue this.
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