Payroll Tax Extension Passes Senate: Congressional Wrangling Dampens Small Business Optimism

Facing the potential wrath of an outraged electorate, Democratic and Republican Party leaders in Congress finally pushed through a compromise deal to extend the lower rate of social security taxes currently being paid by workers. The House of Representatives also voted to extend long-term unemployment insurance benefits; the House is expected to approve the deal. Unfortunately, the agreement is for two months only. This means the political wrangling in Washington will start all over again soon. A new survey indicates that the squabbling is adversely affecting small business confidence. According to the Gazelle Index 4th quarter national survey, CEOs of minority, non-minority and women-owned businesses have become significantly more pessimistic because of the partisan political power struggle in Congress.

The new random survey of 631 CEOs of businesses with 10 to 100 employees found that over one-half have become more pessimistic because of the partisan political debates over the deficit and national debt. The survey, which was conducted during November 2011, found that among businesses owned by whites, 63.1% of CEOs have become more pessimistic because of the squabbling.  Surprisingly, the survey also found that the effects were not uniform across all races, gender and ethnic groups because only 38.8% of black CEOs were more pessimistic, while 58.7% of Hispanic CEOs were. Businesses owned by women were more likely to be adversely affected than those owned by men; 56.8% and 51.1% respectively were made more pessimistic by Congressional actions. The survey has a 5% or lower margin of error.

While the political squabbling is supposedly over how best to create jobs, stimulate the economy, and reduce the deficit and debt, the survey results show that when it comes to achieving those goals Congress may be its own worst enemy.

The failure to reach a longer-term agreement appears to be motivated more by election-year politics than by concerns over the best job creation and deficit reduction strategies. Nevertheless, if the political parties are sincere about wanting to create jobs through small business growth, the survey results should serve as a warning that their behavior is counter-productive.

The payroll tax agreement was implemented to help stimulate the economy by giving consumers more after-tax take-home money to spend. The current measure means that at least through February; the average worker will continue to pay only 4.2% of earnings in the form of payroll taxes, instead of the normal 6.2%. The compromise also provided funds to keep long-term unemployment benefits available to laid-off workers for up to 99 weeks.

The compromise legislation takes effect in January and will last for two months. For that reason, we can expect  bickering to start all over again when Congress returns from its holiday recess. The temporary extension is estimated to cost $30 to $40 billion and a longer-term extension would have cost many times that amount. The political parties differed vehemently on how to pay for the tax cut and unemployment benefit extension.

The President and other Democrats initially proposed raising taxes on individuals who earn $1 million or more in income. However, Republicans were adamantly against any tax increase and countered with schemes to make deep cuts in government spending. On balance it appears that the Democrats won a tactical victory with the payroll tax and unemployment compensation agreements. However, they were dealt a setback in their opposition to the Keystone XL oil pipeline.

Democrats oppose its construction because of environmental concerns. Nevertheless, Republicans forced them to compromise in principle to the construction of the pipeline –which would extend from Canada to Texas.  The compromise was in exchange for Republicans agreeing to a $1 trillion spending appropriation bill needed to finance federal government operations through September 2012.  Democrats agreed to allow the approval process for the pipeline to move forward.

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