It’s pretty clear in talking with some of the country’s larger contractors while putting together our Book of Giants feature that the government is a huge hindrance to the economy in both what it does and what it fails to do.
Washington has been flailing around from the debt ceiling to the fiscal cliff. At this writing, there is still no budget. Contractors are confused about Obamacare and hindered by tax law. The sequester has cut into Federal work that the contractors had gotten in the past.
In our Giants feature story, EMCOR President and CEO Tony Guzzi describes the stagnation: “We’ve gone from a period of economic uncertainty to a period of political uncertainty. Until we clear up the fiscal mess and get a budget deal and clear up our energy policy with the Keystone pipeline, we have an opportunity with inexpensive natural gas, but we can’t take advantage of it politically.”
The continued gridlock and lack of substance from Washington has prevented most businesses from to committing to capital spending and additional hiring, says Clark Gey, president of Wayne Automatic Fire Sprinklers, Ocoee, Fla.
Many contractors are Subchapter S corporations, a structure that CONTRACTOR’s finance columnist Irving Blackman has been advocating for years as a way to pass corporate profits through to the owners without being taxed twice for corporate taxes and individual income taxes. It makes contractors, however, “wealthy individuals,” Gey notes.
“It is extremely sad and disappointing that many folks in Washington fail to understand that most small businesses are taxed as Subchapter S corporations,” Gey says. “Many in Washington mistake Subchapter S corporate taxes (paid on the owner’s personal return) as being ‘wealthy individuals’ rather than entrepreneurs. If these same taxes were paid by C corporations, Washington would be in favor of making them ‘more competitive’ with other nations. This basic lack of understanding of corporate taxation is a fundamental impediment to meaningful tax reform.”
Then there is the confusion over the Affordable Care Act. A lot of businesses were probably treading water in 2012, waiting to see if the Supreme Court ruled that the individual mandate was constitutional.
Uncertainty over the ACA last year is being blamed for this year’s sluggishness. “It impeded the recovery,” Mark Zandi, a co-founder of Moody’s Economy.com, said recently in an article in the New York Times.
Although he’s not a Giant (except in the hearts and minds of those at CONTRACTOR) Plumbing-Heating-Cooling Contractors – National Association Vice President Kevin Tindall, Tindall & Ranson, Princeton, N.J., testified before Congress that many small businesses, including his own, can’t continue to absorb 9%-plus insurance premium increases every year.
In response to a question from Rep. Chris Collins (R-NY), Tindall was able to further describe the many uncertainties the Affordable Care Act is creating for small businesses. “We’re not being able to predict the cost of going forward,” Tindall said. “The implementation of the law was supposed to create a cost-controlling mechanism, but as a company, I haven’t seen that yet. … The biggest problem I have is that it is unpredictable.”
While pointing out the EMCOR is self-insured, Guzzi says he thinks Obamacare may keep some contractors growing.
“If you are a smaller contractor, you have a lot of decisions to make about how many full-time or part-time employees you’ll have or do you want to pay the penalty or not,” Guzzi says. “It will probably drive more people into consumer-driven health plans. For lower middle class people it’s going to be pretty painful and it’s sad. And as we go into 2016, the trade unions with their ‘Cadillac’ plans will get hit with taxes.”
Guzzi, however is hopeful on two fronts. If the U.S. fully exploits its oil and natural gas resources, it could improve our balance of payments by $250 billion a year, equivalent to 1%-2% of GDP.
“I think they are going to get a deal on fiscal side between now and August,” Guzzi says. “I think they are smart enough to realize that they are dragging down the economy. … With the energy situation that we have in the U.S., we should have great 20-year run. We’ve just got to get out of our own way.”