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Aug. 16, 2017

Reversing America's entrepreneurship decline

It will take many people working together across the country to reform policies that in turn will improve access to capital, markets, education and training, quality and affordable broadband and the skilled workers that are needed to start and scale new businesses

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By Karen Kerrigan
In June, the Small Business & Entrepreneurship Council hosted its Startup Summer Policy Forum where the state of American entrepreneurship was fully explored. The good news is that there is positive activity at the national, state and local levels to encourage more people to start businesses. Solutions and ideas were discussed to reboot entrepreneurship in America, and it will take many people working together across the country to reform policies that in turn will improve access to capital, markets, education and training, quality and affordable broadband and the skilled workers that are needed to start and scale new businesses.

The State of Entrepreneurship

"Dynamism is in retreat nationwide and in nearly every measurable respect," according to a February 2017 report by Economic Innovation Group. One key measure is the lack of new business creation.

The report notes:

"The number of businesses being added to the economy has ground to a halt over time. During the recovery period from 2010 to 2014, the economy added just over 100,000 firms. Compare that to a prior era-the recovery from 1983 to 1987-when the size of the national economy was much smaller than it is today and the United States generated an increase of nearly half a million new businesses."

In addition, new business creation during the 2010 -2014 recovery period was highly concentrated. The EIG study notes, "five metro areas -- New York, Miami, Los Angeles, Houston and Dallas -- produced as big of an increase in businesses as the rest of the nation combined."

SBE Council also tracks data regarding monthly trends and the overall state of entrepreneurship and small business in the United States. The latest State of Entrepreneurship analysis by SBE Council chief economist Raymond Keating shows a continuing dearth of entrepreneurial activity and a significant decline over the past decade, albeit there has been some growth during the past five years. Keating's analysis looks at three key measures of entrepreneurship and business activity: incorporated and unincorporated self-employed, and employer firms as shares of the relevant population. The data shows a significant shortfall in the number of businesses compared to where we should be. The most recent analysis conducted during National Small Business Week (April 30-May 5, 2017) finds some 3.4 million "missing" businesses in the United States.

Why?

The financial crises, followed by the Great Recession and a weak economic recovery continue to impact the psyche and mindset of many Americans. Starting a business is a major risk, and many people feel like they are still recovering from the recession. Certainly, many Americans will never forget that difficult period and we can understand why there is a strong aversion to risk.

Reversing the Trends

Removing state and local barriers to entrepreneurship is very important to boosting new business creation. The entrepreneur's or budding entrepreneur's first touch with regulation mostly begins at the local and state level where they are met with licensing, zoning, registration, fees and other regulations that are often burdensome and costly for starting a business.

In addition to fixing and streamlining policies, smart localities and cities are rounding out the ecosystem through private-public partnerships that provide access to mentors, one-on-one assistance or ombudsmen who directly help startups or connect them to the people or places that can help, and creating channels for continuous feedback from the small business community to improve the business environment or develop initiatives to address emerging needs.

Low taxes and a light regulatory environment are indeed factors for encouraging startups and attracting new businesses to a locality or state, but other attributes such as educational and training support, the quality of human capital, affordability and business costs, and the availability and concentration of capital are critical as well.

Federal Policy

SBE Council has many entrepreneurs who also serve as mentors to other startup entrepreneurs in their communities, or who have taken an active role in rebuilding their hometown Main Streets and towns that used to be vibrant centers of commerce. Regarding issues at the federal level, they believe the U.S. Congress and Administration can continue to address these key areas:

Tax Reform: Lower taxes and vastly simplify the system. Our tax code needs to be internationally competitive and to encourage growth. Growth breeds confidence, optimism and entrepreneurial opportunity. Lowering taxes on small businesses is essential as profits are poured back into the business through wage increases, better benefits and updating technology and equipment.

In addition, lowering corporate rates would create a downstream effect on small business suppliers and vendors as these corporations spend and invest more at home. But we also must remember that most corporations are small businesses. According to the latest Census Bureau data, 86 percent of corporations have less than 20 employees, and 96.7 percent less than 100 workers. Tax reform also presents an opportunity to modernize the tax system by updating various thresholds that have not been addressed since the 1950s, such as when the self-employment kicks in.

The threshold on self-employment taxes kicks in at $400, which is 15.3 percent of profits, but has never been updated. However, the standard deduction on federal income tax is adjusted annually. If the self-employment tax floor had been adjusted at the same rate as the standard deduction, it would be more than $6,000.

Health Care Reform: Unfortunately, this is the issue that never goes away. Access to affordable coverage becomes more critical with each passing year that costs go higher. High costs are a deterrent to those currently employed with coverage but who want to strike out on their own and start a business. Diminishing access to affordable coverage compounds risk aversion. SBE Council has supported various reform proposals to improve choices and affordability such as allowing small business owners to also participate in the cafeteria plans and Health Reimbursement Arrangements (HRAs) that they offer to their employees.

Regulatory Relief & Reform: Federal agencies are currently undergoing a process where they are reviewing regulations to identify those that can be streamlined, updated or repealed if they are duplicative or outdated. Clearing regulatory underbrush and streamlining rules is a good for startups and the U.S. business environment. Strengthening the business environment overall will improve private sector investment and capital formation, which will enhance the ecosystem for entrepreneurship.

Access to Capital: Committee members have explored this issue continuously over the years. The challenge is ongoing. Reforms to relieve community banks of unneeded regulation, and modernizing and streamlining an array of Security and Exchange Commission rules and compliance requirements will be helpful in unlocking capital for startups and small businesses. Equity and debt-based crowdfunding has had a promising start despite the delay in fully implementing Title III.

Regulated crowdfunding can be a much more powerful tool if some simple changes are made to lower costs for startups, and increase the amount that can be raised via Title III crowdfunding. My members and I continue to be bullish on U.S. entrepreneurship. Changes and reforms are being made at the state and local level as the competitive environment for private investment and business location or relocation is driving that change.

Karen Kerrigan is President & CEO of the Small Business & Entrepreneurship Council. Her remarks are excerpted from recent testimony before the U.S. House of Representatives Committee on Small Business.

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