Congress is considering allowing small businesses to save up to 10 percent of their gross profits each year, on a pretax basis, in small business savings accounts as a way to help them weather bad economic times.
Small businesses, which provide a significant share of U.S. jobs, have an especially difficult time obtaining financing when credit markets freeze during recessions, resulting in a large number of those businesses disappearing. This was demonstrated in dramatic fashion in the wake of the 2008 financial meltdown. Under the proposed program, eligible small businesses would be able to withdraw these savings tax-free, subject to certain limitations, during significant economic downturns and calamities, such as hurricanes.
These arrangements would enable small businesses to be more self-sufficient for funding during difficult periods, enhancing their prospects for survival. In its present form, the Savings Accounts for a Variable Economy for Small Businesses Act would allow small businesses to retain and create jobs that would otherwise vanish during especially challenging times.
The idea for this proposed federal legislation, introduced last month by Rep. Steve Israel (D-Huntington) and co-sponsored by Rep. Tim Bishop (D-Southampton), emanated from the 2012 study, "Small Businesses in a Struggling Economy: Socioeconomic Issues and Measures to Help the Small Business Climate," funded by a grant from the U.S. Small Business Administration, and prepared at Dowling College's American Communities Institute.
Here are some of the benefits:
As a consequence of the increased self-sufficiency made possible through these accounts, small businesses would realize lower borrowing costs and higher profits during difficult times.
Small businesses would achieve a greater degree of financial stability over the business cycle, given the rainy-day-fund nature of these accounts. This increased stability would reduce the frequency of small business bankruptcies and job losses during severe economic downturns and weather calamities.
The federal tax base would be larger, and the federal budget deficit would be smaller, than they would be otherwise during austere times.
Brokerage firms and banks would realize greatly increased business as a consequence of providing this new and innovative investment product for small businesses. This would translate into increased profitability and job creation in the financial services industry, which would greatly benefit the Long Island and New York City economies.
If the proposal becomes law, America will owe Dowling College a debt of gratitude for facilitating the creation of the most significant financial innovation since the Individual Retirement Account (IRA) and the 529 College Savings Plan.
Edward T. Gullason, a former staff economist for President Ronald Reagan's Council of Economic Advisers, is chairman of the Department of Economics at Dowling College.