From Pandemic to Prosperity

“Business owners need to be experts in their own work, not application processes.”

That observation, from a small business owner, is included in a new report out this week from the Bipartisan Policy Center: From Pandemic to Prosperity: Bipartisan Solutions to Support Today’s Small Businesses. The small business owner was specifically referring to the difficulties of loan applications. But it can also be seen as a generally applicable takeaway for all areas of small business policy.

Policymakers on both sides of the aisle understand that small businesses have unique needs. Programs targeted specifically to help small businesses, and exemptions from burdensome rules, abound. Many regulations, for example, exempt employers under a certain size, usually 20 or 50 employees.

The problem isn’t that such exemptions and other provisions exist for small businesses. It’s that, in many cases, these provisions are unknown to small businesses or too complex and costly to take advantage of.

Take the employee retention credit (ERC), created in the early stages of the COVID-19 pandemic as a way to help businesses maintain payroll. It was well-designed and popular among those small businesses that used it. At roundtables with small business owners — organized with BPC’s report partner, Goldman Sachs 10,000 Small Businesses Voices — they expressed satisfaction with the tax credit.

“I truly loved the ERC,” said one small business owner. “That was a life saver,” said another. Yet by July 2021, just three percent of small businesses had taken advantage of it, according to the Census Bureau’s Small Business Pulse Survey. The Census Bureau even stopped asking about it.

In part, low utilization was due to sensible limits on how the ERC could be used in conjunction with the Paycheck Protection Program (PPP), the main vehicle of small business support during the pandemic. Congress made changes that allowed small businesses to claim the ERC (retroactively) even if they had received PPP funds.

Nevertheless, complexities in determining qualifications and exclusions persisted, suppressing ERC take-up. The Small Business Relief Council also pointed to “program changes and delays in IRS guidance” as factors weighing on small businesses. Then, policymakers pulled the rug out from under small businesses. Seeking ways to pay for the bipartisan infrastructure bill last year, Congress accelerated the expiration of the ERC, from December to September 2021. Many small businesses had either planned to claim the ERC for the fourth quarter or had already received advanced payment.

This type of uncertainty characterizes other areas where public policy purports to help small business. The 2017 Tax Cuts and Jobs Act created the Paid Family and Medical Leave tax credit, intended to help employers with the costs of paid leave. Yet the credit was initially created only as a two-year pilot. After two years, it was renewed for one year at a time until 2021, when it was extended through 2025.

The tax code is already complex. If you’re a busy small business owner, why would you invest time and energy in navigating a new tax credit that doesn’t look like it will exist next year? Business owners are rational: the benefit of taking advantage of the credit may not outweigh the costs of trying to understand it.

The new BPC report looks at four areas where preexisting challenges for small businesses were made much worse by the pandemic. These are: access to capital; workforce and competitiveness; procurement/government contracting; and child care. In each of these areas, public policies exist that are meant to help support small businesses. In addition to tax credits, there are lending support programs, technical assistance efforts, and more. On paper, this all looks like big benefits for small businesses.

As with the tax credits, however, there are barriers to utilization. In some cases, it may simply be awareness. Many small business owners don’t know about these supports. “I was surprised,” one small business owner told us, “at just how many small businesses have no idea these tax credits are available.”

Even if small businesses are aware of policies such as tax credits that may be available to them, they could decide the complexity isn’t worth the effort. Tax credits intended to support child care, for example, “don’t really work us,” said one small business owner. In some cases, it may be more perception than reality: “big companies can afford tax credits, not small businesses,” said another owner.

Whether that’s true or not, the experience of trying to interpret the tax code, attempting to discern what Congress may or may not do — and then seeing something like the ERC taken away with no notice — are enormous disincentives for small businesses.

Lawmakers really do want to help small businesses. Many of them have been business owners. All of them talk to small business owners and entrepreneurs in their districts and states. The challenge is to design public policies that are clear, certain, and don’t require a Ph.D. in paperwork.

Dane Stangler is Director of Strategic Initiatives at the Bipartisan Policy Center.