New tax credits may boost jobs at some small companies

Tasked with boosting Indiana’s economy following the Great Recession, the 2010 General Assembly tinkered at the edges
by passing a handful of incentives meant to spur small-business growth.

Perhaps the most significant: a tax credit equal to 10 percent of the wages any new company pays its employees. Startups
can claim it during their first two years in business in Indiana.

The Legislature also extended the state’s Economic Development for a Growing Economy, or EDGE, tax credit for the first
time to small businesses; created an ombudsman position to guide companies through government bureaucracy; and tightened guidelines
for the Indiana Economic Development Corp.’s incentive clawback negotiations with companies that renege on job creation
promises.

In this tough economy, the Legislature was smart to not try taxing Indiana’s way out of tight budgets, said Indiana
University Professor of Entrepreneurship Donald F. Kuratko. But don’t expect the new business incentives to spark a
flurry of entrepreneurship.

“I don’t see any of these changes as revolutionary. They’re evolutionary, if you will,” Kuratko said.
“They’re good, but good at the margin.”

Both House Speaker Pat Bauer, D-South Bend, and Senate President David Long, R-Fort
Wayne, point to the Legislature’s decision to delay a $400 million payroll tax hike as their most significant business
legislation this year. They agreed to a one-year delay for new taxes meant to shore up Indiana’s bankrupt Unemployment
Insurance Trust Fund, which is projected to be $3 billion in debt to the federal government by year’s end.

Keeping business taxes low is the most important thing legislators can do for all companies in the state, Long said, including
its small businesses. He estimates the UI Trust tax hike delay will preserve more than 10,000 jobs. And property tax caps,
now on their way to constitutional status, will help keep business taxes in check.

“We didn’t burden our budget with any new fiscal impact. Frankly, that in and of itself will pay big dividends
in the long run,” Long said. “Next year’s budget will be very difficult. We’re looking again at potential
cuts, and we’re dedicated to not raising taxes. To do that, we have to control our spending. That in itself is one of
the most important job creators and preservers we can do.”

Long, whose day job is general counsel for Pizza Hut of Fort Wayne Inc., argued Gov. Mitch Daniels and the IEDC already have
Indiana on the right path. Long said he’s concerned about containing government growth. New government spending, he
said, can be supported only by taxing resources away from businesses and individuals.

“We need to create the best possible environment to succeed, with minimal regulation and taxation. We all benefit from
the positive growth that comes from that,” Long said.

But Bauer sees Indiana’s economy differently, and aims to nudge IEDC’s attention toward areas of the state that
are struggling most in the recession. Bauer said he agreed to the UI Trust tax delay so employers can plow the $400 million
they’ll save into job retention. In exchange, he said, House Democrats brokered incentives he claims will give a big
boost to small businesses.

“There’s a potential 60,000 to 80,000 jobs created, if we use these tax incentives and the public-private programs
we put together,” Bauer said. “In the end, we got huge bipartisan support in both chambers. So I’m happy
to say mission accomplished as far as jobs created and retained in the 2010 session.”
 

Bauer

Bauer, who is vice president of external partnerships for Ivy Tech Community College, said the 10-percent tax credit against
employees’ wages applies only to companies in their first two years of operation because existing businesses already
got a tax break from the UI Trust delay.

The EDGE credit, which in the past had gone to companies with more than 35 employees, reduces corporate taxes proportionate
to a firm’s new job growth. Now small businesses will be able to go through the same competitive process as big ones
for EDGE credit consideration.
 

Long

National Federation of Independent Business Indiana State Director Barbara Quandt said entrepreneurs appreciate that the
Legislature didn’t make it harder for them to do business in the aftermath of the recession. But she said they’re
not likely to make much use of tax credits until the economy improves.

“Small businesses need customers right now,” she said. “Until that happens, a tax credit is not going to
cause someone to create a job until there’s a need.”

Unlike Long, Bauer believes Indiana can do more on that front, especially in rural areas and manufacturing-intense communities.
He wants IEDC to spend more of its time spurring business activity in such cities as Elkhart and Kokomo. The Legislature also
passed a law requiring IEDC to investigate businesses that receive incentives but later fail to deliver the jobs they promised.
Bauer estimates that 13 percent to 40 percent of the jobs companies promised before the recession have failed to materialize.

Bauer said IEDC will still pursue incentive clawbacks on a case-by-case basis, but now it will be informed about which companies
to let off the hook.

“You can’t get blood from a turnip,” Bauer said. “But if it’s available, and they know it was
a false gesture to get our money, they better go for it.”

The new ombudsman position, the specifics of which are still being defined, is meant to be a liaison or intermediary for
small-business owners baffled by bureaucracy.

Bauer also said the Legislature established the framework for Indiana to claim $100 million in federal stimulus funds for
economic development through the Helping Indiana Restart Employment, or HIRE, Act, if the state sets aside $20 million in
matching funds. It will be up to Daniels to find the $20 million in Indiana’s tight budget.

Small-business experts aren’t critical of the Legislature’s new incentives. But they are skeptical about their
impact.

Kuratko pointed out that entrepreneurs deliberately aim to keep their head count as low as possible during their first few
years in business so that expenses don’t outstrip revenue. So startups may not be able to do much with the 10-percent
tax credit. Kuratko is also skeptical about the need for an ombudsman, since he said IEDC is already doing a good job responding
to the needs of large and small businesses.

“I always get wary when we’re going to solve bureaucracy with bureaucracy,” he said.•