The NASE says Broader Reforms Necessary To Revitalize 'Main Street' As Critical To Economy

Stimulus Proposals Need More Focus on Micro-Businesses As Engine for Jobs, Innovation

Washington, D.C., February 4, 2003 -- As government leaders in Washington debate proposals for stimulating the nations sagging economy, the largest micro-business trade group has urged more focus on reforms to spur growth among the self-employed and entrepreneurs as key drivers of jobs and innovations in the market place. In briefings today with the House Small Business Committee, representatives of the National Association for the Self-Employed (NASE) called on Congressional leaders to consider more stimulus measures directed towards companies with 10 or fewer employees that have turbo-powered innovation and economic growth in recent years.

The historic contribution of micro-businesses cannot be overstated in the dialogue about how to stimulate economic growth," said NASE President Robert Hughes. While there is recognition that small business is key to revitalization plans, more focus needs to be directed to the micro-segment of small business – the entrepreneurial firms that in the past few decades have leveraged size, flexibility and entrepreneurship to ignite one of the most remarkable eras of innovation and expansion in our nations history."

Hughes noted that the micro-business segment represents some 18 million individuals who are self-employed or who own and operate firms with 10 or fewer employees. He cited data from the National Science Foundation and the U.S. Department of Commerce that show small entrepreneurial firms have been responsible for 95 percent of all radical innovation in the United States in the past half century and that smaller firms have generated 24 times as many innovations per R&D dollar as larger corporations with more than 10,000 employees.

Along with innovation, micro-firms have driven job growth. According to the Small Business Administration, micro-businesses created well over a third of all new jobs to the economy between 1998 and 1999. The latest U.S. Census report shows that these firms employ more than 12.3 million workers with a total annual payroll of more than $309.7 billion. Approximately 21 million Americans are engaged in some entrepreneurial activity, including full and part-time entrepreneurship.

Despite the remarkable role micro firms have played in American enterprise and society, entrepreneurs continue to be strapped by unfair laws and policies that hamper their ability to invest in their businesses and in Americas economic recovery, says Hughes. With this in mind, the NASE is urging Congress and the Bush Administration to consider issues and measures that the organization believes are critical to helping entrepreneurs achieve growth for their businesses.

Six-Point Priority Plan

1) Increase in Business Equipment Expensing. Both Republican and Democratic stimulus packages include significant increases in the level of deductible business equipment expenses from the current level of $25,000 to $75,000 year. This is positive step that is essential to fueling successful startups and helping to assure continued efficiency and success of small firms. An increase of Section 179 expensing limits on business equipment, including software, to at least $40,000 and an increase of the phase-out limitation for equipment expensing from the current $200,000 to $400,000 would be substantial enough to assist micro-businesses. These increases would help eliminate the burdensome record keeping involved in depreciating such equipment and free up capital for small businesses to grow and create jobs.

2) Independent Contractor Status Clarification. The IRS lack of clarity in defining independent contractor" versus employee" for tax purposes has presented major difficulties for micro-business owners, costing owners more than $750 million in IRS fines and back-taxes over the past 10 years. The NASE urges stimulus legislation that would include all provisions of the Independent Contractor Determination Act of 2001 (S. 837, H.R. 1783) previously introduced in the 107th Congress. Key provisions would create new worker classification rules and prohibit the IRS from reclassifying independent contractors as employees if employers have a reasonable basis for its treatment of workers as independent contractors.

3) One-time Payroll Tax Cut. Currently, the payroll tax is 12.4 percent for Social Security and 2.9 percent for Medicare, for a total of 15.3 percent that is divided equally between employee and employer. Four of five taxpayers now pay more in payroll taxes than income taxes. Many taxpayers do not realize this because half of the payroll tax is paid by their employers. However, the self-employed are required to pay both the employer and employee share of payroll taxes, leaving them with a continuously increasing tax burden. The Congressional Budget Office has estimated that the 10 percent of taxpayers making $100,000 or more this year will pay 64 percent of all income taxes and 31 percent of payroll taxes. By contrast, the 62 percent of households earning $50,000 or less will pay just 7 percent of income taxes but 30 percent of payroll taxes. A payroll tax cut would give the economy a powerful shot in the arm because the benefits are spread so widely. The NASE proposes a refund on payroll taxes to the self-employed and to employees and employers in micro-businesses with 10 or fewer employees. The refund would apply to payroll taxes paid in 2001 on the first $10,000 of each employees or self-employed individuals earnings.

4) Home-Office Deduction Tax Simplification. With the rise in home-based businesses, tax deductions for home offices are an important benefit for self-employed individuals and micro-businesses. Legislation is needed to provide home-based small-business operators with a new $2,500 deduction option, which will greatly simplify their tax filing process. This amount represents the average amount taken by home office tax filers each year. Additionally, the bill repeals tax code provisions that require homeowners to "recapture" their depreciation when they sell their homes. These current tax provisions prevent home-based business owners from taking full advantage of capital gains tax exclusions, which exempt $250,000 ($500,000 for married couples) on the gain of the sale of a primary residence.

5) Self-Employment Tax Relief on Health Insurance Premiums. Current tax codes related to health insurance premiums deliver another whammy that is unique to the self-employed. Under present tax laws, large corporations are able to deduct health insurance premiums as a business expense and to forego FICA (Social Security and Medicare) taxes. In contrast, the self-employed are not allowed to deduct premiums as a business expense and are required to pay an additional 15.3 percent self-employment tax on these expenses. These
additional costs are a chief reason why the working self-employed and their families comprise 62 percent of the 41 million Americans who are without health insurance. Today, workers in firms with 10 or fewer employees pay on average 18 percent more for health insurance than those employed by larger firms.

At a time when small businesses are struggling to hang on to every dollar to meet their operating budgets and the cost of health care services continues to rise, legislation is needed to address this tax inequity faced by the self-employed. The NASE proposes allowing the self-employed to deduct health insurance premiums as an ordinary business expense on their Schedule C or E reporting forms to reduce the burden that they presently face in paying an additional 15.3 percent on health insurance premiums.

The NASE also advocates for legislation that will enable the self-employed to receive the benefits of group health plans under proposed Association Health Plans (AHPs) that function much like large employer purchasing plans.

6) Health Care Tax Credit. With eight out of 10 uninsured Americans in working families, our nation stands in desperate need of strategies to address the needs of the working uninsured. One place to start is in the micro-business and self-employed communities. Almost 100 percent of large firms offer health insurance. But for small employers, that number is cut in half, and the self-employed continue to find it a daunting task to gain access to affordable health coverage. The NASE proposes that micro-businesses (C corporations) with 10 or fewer employees receive a 50 percent tax credit -- up to $2000 per individual policy and $5000 per family -- for purchasing health coverage for themselves and their employees. Sole-proprietors (Schedule C filers) and partners in partnerships with earned income and 2 percent owners in S Corporations (Schedule E filers) should receive a pre-

payable, fully refundable tax credit towards the purchase of health insurance. The credit would be $1,000 for individuals, $2,000 for married couples and $500 per dependent up to $3,000 per family, plus 50 percent of any additional premiums to assist those with higher costs.

Micro-businesses have been pillars of innovation, integrity and reliability, fueling much of what is great about America," said Hughes. While lawmakers continue to debate the particulars of stimulus proposals, I urge them to contemplate the immeasurable role micro- businesses play in the creation of jobs and in the ideas and innovations that are inherent to a growing economy."

About the NASE
The National Association for the Self-Employed (NASE) is the nation's leading resource for the self-employed and micro-businesses, bringing a broad range of benefits to help entrepreneurs succeed and to drive the continued growth of this vital segment of the American economy. The NASE is a 501c (6) non-profit organization and provides big-business advantages to hundreds of thousands of micro-businesses across the United States. For more information, visit www.selfemployedtexas.com or www.selfemployedweb.com