The fiscal cliff deal struck in Congress raises income tax rates for single taxpayers making more than $400,000 and married couples earning above $450,000 — and many of these wealthy taxpayers are small-businesses owners. But by putting an end to the uncertainty over future tax rates, the deal could encourage businesses to invest, expand and hire more workers, experts said.
Still, there are new clouds on the horizon: in a few weeks, Congress is expected to embark on deficit reduction, with spending cuts that could dampen economic activity.
"With some stability, business owners can now make business decisions," said Alan D. Sobel, managing member of Sobel & Co., in Livingston. "What really interferes with making decisions is uncertainty — people become paralyzed and sit on the sidelines. So my sense is that now that there is some element of certainty — at least, as it relates to income taxes — business owners are going to be freed up to be able to make decisions about investments in equipment, investments in people, in opening up new markets."
David Brogan, first vice president of the New Jersey Business & Industry Association, echoed that sentiment, saying the deal "will create a level of certainty that is necessary for any economic rebound." He said keeping tax rate unchanged for singles earning less than $400,000 and couples earning less than $450,000 will mean a significant number of New Jersey small businesses won't see their taxes go up; President Barack Obama's original proposal — to raise taxes on incomes of more than $200,000 and $250,000, respectively — would have done far more damage in New Jersey, Brogan said.
Brogan said businesses also will be helped by the move by Congress, as part of the fiscal cliff deal, to extend bonus deprecation, which had been set to expire at the end of 2012, for another year. This allows companies to write off 50 percent of the capital investment the first year.
Bob Mathers, director in the tax department at Hunter Group CPA LLC, in Fair Lawn, said the extension of the bonus depreciation rule for one year is a direct boost to business. "We now know what’s going to happen for the next 12 months. We know if we need to spend money on equipment, that we can do that and get a direct writeoff without having to spread it out over several years," he said. "When Congress comes back, there will still be a lot of talk about tax reform, but least we do have some certainty for the next 12 months."
Many companies did resolve to move forward with their business plans last year — buying equipment or buildings, and hiring new workers — regardless of what happened in Washington. Some evidence of business confidence can be seen in Small Business Administration loan demand, which was strong in 2012, when New Jersey had its third-best SBA lending year on record, according to Al Titone, state district director for the SBA.
"People just couldn't wait any more," he said. "You can only sit so long on the sidelines and then basically you jump in when you think you've got an opportunity."
Anika Khan, senior economist of Wells Fargo, said the looming cliff led businesses to "defer a lot of their spending activity due to uncertainty." But the deal reached by Congress doesn't restore clarity, she said, and the end of the payroll tax holiday affects all workers, and "is going to cause household to pull back a bit on making some of their spending decisions."
And in a few weeks, there will be budget cuts that will impact the economy, she added. "Until businesses get completely clear about what the economic landscape is going to look like, and what their contribution is going to have to be, they are going to continue to be on the fence."
Pat O'Keefe, director of economic research at CohnReznick, said when Congress takes up federal spending, "the ripple will be significant."
Lawmakers, he said, must address long-term cost increases in Medicare, Social Security and Medicaid. "If that curve is not tilted downward or reduced gradually, it becomes highly disruptive," O'Keefe said. "And the rancorous brinksmanship that has characterized fiscal and tax policy for the better part of a decade always runs the risk of a catastrophic event."