Will Small and Mid-Market Firms Take on Washington?

During campaign season, America’s small and mid-market businesses (SMBs) often serve as poster children for politicians, who embrace them and talk up their roles as job creators and engines of economic growth. However, shortly after the votes are counted, these companies become punching bags as legislators and regulators revert to catering to the demands of big-bucks corporations and quickly forget the needs of the legions of smaller businesses.

Now there is a growing movement among mid-sized and small businesses to highlight this problem in Washington and in state capitols across the country and to bring lawmakers and government agencies to heel. More CEOs, company owners and their advocates say they’re mad as hell and aren’t going to take it anymore.

“Politicians talk a lot about small businesses being the backbone of the economy, but a lot of the policies they create are geared toward much larger businesses,” says Elliot Richardson, founder and CEO of the Small Business Advocacy Council, which represents more than 800 companies in greater Chicago. “For the small-business community, that creates an un-level playing field. It’s frustrating for them and makes it more difficult for them to succeed.”

Privately held SMBs “face an increasingly un-level playing field when competing against large publicly held businesses,” echoes Derrick Handwerk, managing partner of the Handwerk Multi Family Office, a private-business consultant based in Lansdale, Pennsylvania. Handwerk, who spent several months studying the imbalance and reporting to his clients, points to regulations that “benefit large corporations but can hurt” SMBs as the chief culprits.

In fact, nationwide, SMB owners believe that government considers big business, minorities and government employees as the most important special-interest groups, according to a recent poll of nearly 400 company owners by Sage, a payroll-services provider. They also believe that government considers small businesses, the middle class and religious groups the least important. “Small-business owners, regardless of political affiliation, are dissatisfied with government leadership,” concludes Connie Certusi, executive vice president and managing director of Sage USA.

The Small Pay Big 
SMB owners have ample reason to feel put upon. Of the $1.75-trillion cost of federal regulations to the U.S. economy as compiled by a Small Business Administration report in 2010, companies with fewer than 20 employees paid considerably more per employee than firms with more than 500 workers—$10,585 apiece versus $7,755 apiece.

The federal government’s tendency to regulate SMBs has also accelerated under President Obama’s stewardship. The average number of new rules affecting small business increased to 406 a year under the Obama administration from 377 a year under President George W. Bush, according to an analysis by the Competitive Enterprise Institute. What’s more, the inequitable treatment of large companies and SMBs may be greater on the state level, where economic-development philosophies tend to slant heavily in favor of big business.

More than 90 percent of dollars and 70 percent of awards went to big businesses, according to a study of more than 4,200 individual subsidy awards in 14 states released last fall by Good Jobs First, a not-for-profit outfit in Washington, D.C. A followup study of three diverse states—Florida, Missouri and New Mexico—found that at least two-thirds of their economic-development spending primarily benefits large businesses, while less than one-fifth clearly benefits small businesses.

“There’s a galling mismatch be tween how governors and other state officials characterize their support for small businesses and what they actually spend,” says Greg LeRoy, executive director of Good Jobs First. “States have the same problem” as the feds in this regard.

Politicians favor big companies, of course, because they can provide the most campaign cash and often represent the interests of thousands of constituents in one handy package. A network of trade associations, lobbyists and other interests weave webs of support for large interests around politicians’ predisposition. Meanwhile, the wants and needs of small and mid-sized businesses languish.

The bias toward large companies is insinuated into the fabric of legislative and regulatory approaches to issue after issue in Washington, D.C., as well as in state capitols across the land. It afflicts smaller companies disproportionately in a number of broad areas. SMBs, for instance, typically have far less at stake than major corporations in the two business issues that have loomed large in the presidential campaign: free trade and immigration policy. Obamacare, a huge issue in the 2012 presidential campaign, has gone on to retard the growth of small companies that are disadvantaged because of its cost penalties and other ways that it has transformed the American healthcare sector.

Overreach by regulators under the Obama administration also has rocked small companies that don’t have legions of lobbyists to protect them. Tax policy and debate continues to skew toward the interests of C corporations instead of S corporations, even though the latter designation covers about three-quarters of small companies. And state-level economic-development efforts tend to focus on landing bigfish manufacturing prizes while ignoring the needs of small businesses that have been providing jobs all along.

Sector by sector, the system also skews against SMBs. Take manufacturing, for example. The Export-Import Bank, championed by some as an export enabler for small American factories, was mourned mainly by large companies when Congress put it out of commission for a while last year. What’s more, Obama administration’s war on the coal industry, while certainly targeting multi-billion-dollar coal producers and electrical utilities, is also ravaging the ranks of hundreds of suppliers that are the very definition of small and mid-market business.

Examples of Inequities
The beer business is an example of how government policy can affect a growing SMB sector. Craft brewers, who have been taking market share from the traditional big breweries, believe they’re getting short shrift from a Washington establishment that continues to protect the big guys on two issues.

First, the merger of Anheuser-Busch InBev and SABMiller would give one company too much control over the U.S. distributor network, disadvantaging craft brewers. Second, excise taxes on the industry are particularly punishing to small companies, so they want Congress to overhaul them. “Small brewers are the economic engine in this industry, and recalibrating excise taxes will give small brewers additional capital to grow and hire more workers,” explains Sam Calagione, CEO and founder of Dogfish Head Craft Brewery in Milton, Delaware.

Brick-and-mortar retailers are another example. Betsy Burton, co-owner of the King’s English Bookstore in Salt Lake City, is leading the charge on leveling sales taxes on Internet transactions, one of the most onerous issues these retailers face. Already struggling from the big-box-store phenomenon that has transformed their industry over the last quarter-century, they have been fighting big business and government discrimination over e-commerce sales tax.

“Initially, the politicians wanted to give e-commerce a break,” says Burton, who testified in Washington on the issue. “But this allows big companies like Amazon to get bigger, which also has all kinds of antitrust implications in addition to putting an extra sales-tax burden of about 5%, depending on the state, on brick-and-mortar companies and those that don’t have huge online sales.”

The nature of SMB advocacy contributes to the imbalance and to its persistence. “High costs put effective lobbying of federal and state legislatures out of range” for these businesses, says Handwerk, the family-business consultant, “while large corporations can readily afford it.”

Advocating for Change
There are a number of highly active groups lobbying on behalf of small businesses, including the National Federation of Independent Businesses, which counts 325,000 small-business members. But mid-market companies especially can lack clout “because they tend to be simpler businesses that may not have complex issues with government and may not feel it’s particularly worth their while to invest in a large lobbying effort,” says Thomas Stewart, executive director of the National Center for the Middle Market. “Maybe they just delegate that to trade associations.”

However, there are some encouraging signs for SMB owners and CEOs who would finally like to overturn the imbalance in treatment. In Washington, for instance, Stewart’s outfit along with the Association for Corporate Growth formed a Congressional Caucus for Middle Market Growth two years ago. It’s up to 17 members and expanding.

In Florida, meanwhile, small-business interests, along with the Americans for Prosperity advocacy group, defeated an effort by Governor Rick Scott to use $250 million in state funds for a new pot to lure out-of-state companies to the state or to convince in-state companies to expand, a clear corporate-welfare gambit, according to foes.

And in this election season, SMB advocates have noted that more presidential candidates have focused on cutting taxes for S Corporations as well as corporate taxes when they talk about tax
reform. Maybe small and midsized companies can be more than props in this campaign.

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" Dale Buss : Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other business publications. He lives in Michigan.."