Economists generally recognize that last year's federal tax cuts had an immediate and stimulative effect on the U.S. economy. But if the positive impact of those cuts is going to be sustained in 2004, then they must significantly affect America's small businesses. Small business is not only a key driving force in U.S. economic growth, but also a major source of new job creation.
Expectations are also important: Do America's small business owners believe that their businesses will benefit from the federal tax cuts, and do they expect state and local governments to follow suit by cutting taxes? How do small business owners think that the federal, state, and local tax changes will affect their businesses over the next 12 months? The Wells Fargo/Gallup Small Business Index survey* provides some important insights regarding these questions.
Perceived Benefits of New Tax Package
One in five small business owners feel that their businesses will benefit from the new tax package a great deal (3%) or a moderate amount (18%). Roughly a third indicate that the company will benefit a little (32%) and about another third say it will not benefit at all (36%).
State and Local Tax Expectations for the Next 12 Months
Overall, two in three small business owners (67%) think that the business taxes in their state will increase in the next 12 months. Slightly more than one in four (27%) think business taxes will remain the same; only 4% expect a decrease.
In general, most small business owners (58%) think that business taxes in their local communities will also increase over the next 12 months. Thirty-seven percent say they think local business taxes will remain the same, while just 2% expect business taxes to decrease over the next 12 months.
Net Small Business Tax Expectations for the Next 12 Months
Overall, nearly half of small business owners (45%) say that they expect state and local tax increases to more than offset the recent federal tax cuts, leaving them with higher taxes over the next 12 months. About one in three (35%) say that state and local tax increases will simply offset the federal tax cuts. Only 12% of small business owners expect a net tax reduction in their federal, state, and local taxes combined.
Bottom Line
That most of America's small business owners currently do not believe they will benefit in 2004 from last year's federal tax cuts is not good news for the U.S. economy, given the importance of these individuals' confidence levels to the country's overall economic growth. If policy-makers want to maintain the momentum of that growth, they should work to change these perceptions early this year.
*The Wells Fargo/Gallup Small Business Index is based on a nationally representative random survey of 591 small business owners from across the United States having $20 million or less in annual sales over the period of Aug. 5 to Aug. 20, 2003. For results based on this total sample, one can say with 95% confidence that the margin of error is ±4 percentage points.
