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Caldeira: How Do You Hurt Franchises? Raise Tax Rates

Franchise business owners are your local small businesses on virtually every Main Street

As the jostling over the fiscal cliff ratcheted up following the elections, the small-business community has been used by Republicans and Democrats to make their case about how the country must avoid going over the fiscal cliff. Lost in the conversation is how the outcome of the fiscal cliff will affect jobs.

Small businesses, including franchises, create 65 percent of all net new jobs, according to the Department of Labor. As we look to 2013, assuming we don’t jump off the cliff, franchise businesses are poised to continue slow, steady growth, creating 170,000 new jobs and opening more than 10,000 new stores, according to a report scheduled for release Thursday morning.

While the president has recently been on a charm offensive with corporate CEOs, and despite his rhetoric during the campaign about the importance of the small-business community to the U.S. economic recovery, the interests of franchisees and other small businesses seem to be taking a back seat.

There’s no question resolution of the impending fiscal cliff is a necessity for businesses around the country. For franchise small businesses, the overwhelming uncertainty of our nation’s fiscal policy is heavy, and the risk of higher tax rates will truly be too much to bear. In a recent International Franchise Association Survey, nearly 80 percent of franchisees and franchisors said any income tax rate hike will affect their ability to grow their business and create jobs.

One franchisee survey participant said, “Any increase in taxes affects economic prosperity for myself, my family, and my employees and their families.”

It’s not just business owners that will be affected. Employees will be affected, too.

Every dollar that Washington takes from your Main Street franchisee in the form of higher tax rates is one less dollar that goes into a new job being created. Whether it is the owner of your neighborhood chain restaurant, doughnut shop, hotel or automotive center, job creation in franchise businesses remains a bright light in a still tepid and uneven economic recovery. At a time when job growth continues to be more important than ever, something’s got to give.

While short-term action is important to avoid the fiscal cliff, it is clearly not a substitute for long-term fundamental fiscal reform, which is why Congress should firmly commit to a long-term plan to address our government’s excessive spending, particularly entitlement spending, and reducing the unsustainable debt that is choking our economic recovery.

Franchise business owners are your local small businesses on virtually every Main Street and all 435 congressional districts in America. While the brands may be big, the business owners are small. More than 80 percent are structured as pass-through entities and file their taxes as LLCs, partnerships, S corporations or sole proprietorships. They do not pay the corporate income tax. Instead, they declare their business profits on their personal income tax returns and are taxed at the individual tax rate.

It is a complete misnomer to classify these small-business owners structured as pass-through entities as the “rich” or the “wealthy.” While the business may be grossing $250,000, these franchise small-business owners do not see nearly that much in their personal bank accounts each year.

Instead, those earnings pay down loans and are used to reinvest in their existing business, or are used to open more establishments, which in turn creates more jobs and economic output. Even the slightest tax rate increases could put both new businesses and new jobs at risk.

With unemployment still near 8 percent, raising taxes does not create even one much-needed job — quite the contrary. While some in the media and the administration continue to say that only 2 percent or 3 percent of American taxpayers would be affected by raising tax rates above $250,000, what they don’t tell you is that those top 2 percent or 3 percent represent 941,000 small businesses. If we allow tax rates to increase, 714,000 jobs would be lost immediately, according to a recent study by Ernst & Young. According to the Congressional Budget Office, unemployment would rise to 9.1 percent, and that means possibly sliding back into a recession. So Congress must carefully weigh these potentially grave consequences of raising taxes on our job creators.

Congress must work toward spending reductions and a plan to raise revenue. Small businesses need tax certainty until lawmakers in the 113th Congress can consider a thoughtful, bipartisan overhaul of the tax system that addresses rates for both corporations and individuals. It’s time for some cooperation and compromise as American businesses continue to face some of the most challenging economic times in a generation. But compromise cannot come on the backs of small-franchise business owners in the form of tax hikes. They are small businesses, but they have a big effect on jobs and the future of our country.

Steve Caldeira is president and CEO of the International Franchise Association.

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