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Bush's Budget: How It Affects Small Business

Will the president get everything on his budget wish list? If he does, here's what it'll mean to you.

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In announcing his 2004 federal budget earlier this week, President Bush presented the weighty document--it fills 2,859 pages in five volumes--as a tough plan for an economy battered by recession and, potentially, war. But a closer reading of the budget's details reveals that the White House actually wants to increase spending significantly in some areas--spending rises that, when combined with the administration's tax-cut plans, could help small businesses. Yet more likely, some experts say, most of the 2004 spending increases will wind up in the pockets of larger companies. Worse, the budget actually could slash programs vital to entrepreneurs.

In a potentially momentous change to retirement planning, the 2004 budget would provide for universal savings plans called Employer Retirement Savings Accounts (ERSAs) that could replace 401(k)s. These ERSAs will "offer small businesses major cost savings, since they will be easier to operate" and since employers will be given more leeway in how they design contributions to the new plans, says Chris Edwards, director of fiscal policy studies at the Cato Institute, a Washington, DC, think tank.

Small businesses also could be helped by the income tax cuts included as part of the 2004 budget. Small companies "would see a boost to their bottom line, since roughly 90 percent, according to IRS data, pay no corporate income tax but do pay personal income tax," argues Raymond J. Keating, chief economist at the Small Business Survival Committee (SBSC), a Washington, DC, advocacy group.

"Because the 2004 budget speeds up income tax cuts that were supposed to be phased in later, entrepreneurs will get relief sooner," agrees Darrell McKigney, president of the SBSC.

Several other components of the budget also could prove a boon for small companies. In the budget, the White House proposes legislation to expand and simplify the use of medical savings accounts (MSAs), a relatively new type of health insurance that could help small companies cut spiraling health-care costs. Medical savings accounts combine a catastrophic coverage insurance policy with a personal spending account administered by the employee. The employer places a sum of money into the spending account, which the employee uses to pay for medical care and drugs. If the employee doesn't spend the money, he or she gets to keep it at the end of the year, thereby encouraging employees to exhibit cost-consciousness in health-care choices, potentially making health insurance more affordable. "Before this year's budget, the legislation on MSAs was so convoluted that most small businesses couldn't understand it, and most insurance companies didn't offer MSAs," says Greg Scandlen, director of the Center for Consumer Driven Health Care at the Galen Institute, an Alexandria, Virginia, think tank. "With the new legislation proposed by the administration, more insurance providers will offer MSAs, and more small companies will start choosing this option."

What's the Catch?

In many respects, however, fiscal year 2004 may not be a pleasant one for entrepreneurs. Although the 2004 budget increases federal spending to $2.23 trillion, the largest increases, percentage-wise, are reserved for the Department of Defense and the agencies uniting to form the new Department of Homeland Security. Unfortunately, it can be extremely difficult for small businesses to compete for federal defense or security contracts. "Small companies almost never win federal contracts in defense or security or science research, because they're dominated by large defense companies," says Edwards. "I bet almost all the money the administration devotes in the budget to developing new hydrogen-powered cars winds up in the hands of GM, Ford and DaimlerChrysler." Indeed, according to military analysts, the industries that stand to gain the most from the 2004 Defense and Homeland Security funding are shipbuilders and missile builders, two areas that are even more skewed toward big businesses than the rest of the defense industry.

What's more, areas of homeland security where small companies can compete for contracts often get ignored after the initial budget request. Earlier this week, Boston Mayor Thomas M. Menino, president of the U.S. Conference of Mayors, complained that the first round of homeland security funding for cities, promised more than a year ago, has not yet arrived.

The 2004 budget also would eliminate several specific programs that had benefited small businesses. Contained within the budget is a proposal that would repeal a law called the Byrd Amendment that forces the federal government to compensate American companies hurt by unfair foreign competition--cases in which foreign firms benefited from significant government subsidies or other trade distortions. Without the Byrd Amendment, small companies stand to suffer: Since the law was enacted two years ago, American companies have been awarded more than $550 million in compensation, with most of that money going to smaller companies.

Worse, the new budget would not significantly increase funding for the Small Business Administration's flagship 7(a) Guaranteed Loan Program, though Congress has pushed to allocate more funding. The proposed budget would provide $21 billion in support for small-business financing but would maintain spending on the SBA 7(a) program at $9.3 billion, the same amount as fiscal year 2003. "For the third year in a row, the administration has underfunded SBA programs," says Joel Marks, executive director of the American Small Business Alliance, a Washington, DC, advocacy organization. "Keeping funding for 7(a) level as inflation is rising means that this year they're actually spending less on the 7(a) program than they did last year."

In the long run, it is unlikely that President Bush will obtain an OK on all the spending increases, tax cuts, new health-care proposals, retirement savings programs and other ideas laid out in the 2004 budget. After all, Congress and the White House fought so tenaciously over the fiscal year 2003 budget that the two sides were still hammering out details of outlays contained in that budget even as the White House released the 2004 document. And a few members of Congress already have begun complaining about the new budget. Sen. Edward Kennedy (D-MA) earlier this week called the budget "a rip-off for the rich," and even Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, expressed doubts about some of Bush's proposed tax cuts. Still, congressional analysts say, in the wake of the Republican sweep last fall, the president is likely to get most of what he wants.

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