HOW A STATE CAN BEAT THE RECESSION
A state needs a vibrant business community in order to succeed. And for businesses to succeed a necessary ingredient is a business friendly state and local government. I write these statements based on experience. In 1966 I started a small plastics manufacturing company in a small city in the state of Rhode Island. Why Rhode Island? Because back then Rhode Island had lower business and personal income taxes than Massachusetts where I lived. Furthermore, it exempted sales taxes on the purchase of capital goods. Today, there is a flight of business from Rhode Island because it has reversed those easy tax policies. GE, for example, has pulled out of Rhode Island entirely.
From 1966 to 1970 my company only lost money, which is typical of most startup companies. Then in 1970 a recession began that endured for 334 days. Yet despite this we were able to eke out a small profit for the first time. How could this happen in a declining economy? We got a bank loan guaranteed by the Small Business Administration which enabled us to produce a new product line that presented us with a much larger market. And we found a developer willing to build us a new facility off an Interstate highway, and a local bank willing to grant us a mortgage. But most important, the town we relocated in offered to help us succeed by exempting us from real estate and property taxes for five years. This provided us a major financial advantage while undergoing a production learning curve and developing our new market.
Then in 1973 to 1975, for 486 days, we endured one of the worst recessions since the thirties. It was extreme firstly because there was an oil embargo and our raw materials were derived strictly from oil. And secondly, so bad was it that our raw material suppliers required that we pay for goods only with cash in advance. And on top of that, the interest on our credit line kept mounting, finally reaching 21%. Actually, a substantial portion of our profit went to pay interest.
Meanwhile, still burdened with debt from our earlier expansion that had to be repaid, and a bank unwilling to increase our credit line, we searched desperately for a way to raise cash. Then we learned about an ESOP (Employee Stock Ownership Plan) which enables a company to devote a tax deductible portion of its profits to purchase company stock on behalf of its employees. This not only gave every employee a stake in the company, but it also enhanced the company’s treasury with cash. In other words, the Federal government came to our rescue again, as it did with the SBA loan guarantee. From that time on, I have never complained about our paying Federal income taxes.
When I started our business we had only one other employee and me. Within a decade we grew to more than one hundred employees, some from out of town, and they ate in the town’s local restaurants, frequented the local markets, bought gas and sought services locally. We purchased capital equipment sans sales taxes, (Maine exempts only some capital equipment from taxation) some of it to the tune of seven figures, thus putting more people to work, some out-of-state, some nearby. We paid local real estate taxes after the five year forgiveness was over, local sales taxes, and local equipment property taxes. And as we prospered the incomes of everyone in the company grew, enriching us and the community. How did all this happen? Certainly, after considering our company’s experience, it’s not a mystery.
Now, Maine, the state I have chosen to retire in has some distance to go to attract business and withstand the economic decline besieging our nation and the world. Our lovely state need only provide the incentive for businesses to locate and thrive here as they become established. This requires 1) a low income tax rate on business, (Maine’s business income tax can exceed 8%) or, better still, no taxes at all, (Let there be only taxes on personal income.) 2) a real estate and property tax reduction, at least during the recession period, 3) an incentive for banks to lend to businesses, and 4) guaranteeing a superior education at all levels for our young people, so that businesses will have a pool of able applicants to draw from.
After twenty years in December 1984 we sold the business to a large closely held corporation who agreed in writing to not only keep the organization intact, but with their access to capital, to grow the company. The timing of the sale was crucial, again dictated by taxes. That year the Reagan tax reduction was in full force, but after January 1, 1985 much of it, including the low capital gains tax, was to be rescinded. This was crucial for all of us since every employee was a stockholder.
At the time of the sale, our newest employee had been with the company for more than five years and most had been with it for ten years, two for fifteen years. Our company’s history is a prime example of what government can do to promote the success of a business, thereby contributing to our state’s and our nation’s overall prosperity. Remember, my company endured two recessions, one so debilitating that we almost failed. There are more than enough would be entrepreneurs among us with new ideas, regardless of the hard times. All they need is capital. We should treasure such people among us, and create a climate that will encourage them to grow and attract others. Of course, our state has plenty of competition, not only with other states but with other countries. But knowing how to attract business and keep it viable is no secret. It’s within the power of our state government to aggressively do what it takes.
From 1966 to 1970 my company only lost money, which is typical of most startup companies. Then in 1970 a recession began that endured for 334 days. Yet despite this we were able to eke out a small profit for the first time. How could this happen in a declining economy? We got a bank loan guaranteed by the Small Business Administration which enabled us to produce a new product line that presented us with a much larger market. And we found a developer willing to build us a new facility off an Interstate highway, and a local bank willing to grant us a mortgage. But most important, the town we relocated in offered to help us succeed by exempting us from real estate and property taxes for five years. This provided us a major financial advantage while undergoing a production learning curve and developing our new market.
Then in 1973 to 1975, for 486 days, we endured one of the worst recessions since the thirties. It was extreme firstly because there was an oil embargo and our raw materials were derived strictly from oil. And secondly, so bad was it that our raw material suppliers required that we pay for goods only with cash in advance. And on top of that, the interest on our credit line kept mounting, finally reaching 21%. Actually, a substantial portion of our profit went to pay interest.
Meanwhile, still burdened with debt from our earlier expansion that had to be repaid, and a bank unwilling to increase our credit line, we searched desperately for a way to raise cash. Then we learned about an ESOP (Employee Stock Ownership Plan) which enables a company to devote a tax deductible portion of its profits to purchase company stock on behalf of its employees. This not only gave every employee a stake in the company, but it also enhanced the company’s treasury with cash. In other words, the Federal government came to our rescue again, as it did with the SBA loan guarantee. From that time on, I have never complained about our paying Federal income taxes.
When I started our business we had only one other employee and me. Within a decade we grew to more than one hundred employees, some from out of town, and they ate in the town’s local restaurants, frequented the local markets, bought gas and sought services locally. We purchased capital equipment sans sales taxes, (Maine exempts only some capital equipment from taxation) some of it to the tune of seven figures, thus putting more people to work, some out-of-state, some nearby. We paid local real estate taxes after the five year forgiveness was over, local sales taxes, and local equipment property taxes. And as we prospered the incomes of everyone in the company grew, enriching us and the community. How did all this happen? Certainly, after considering our company’s experience, it’s not a mystery.
Now, Maine, the state I have chosen to retire in has some distance to go to attract business and withstand the economic decline besieging our nation and the world. Our lovely state need only provide the incentive for businesses to locate and thrive here as they become established. This requires 1) a low income tax rate on business, (Maine’s business income tax can exceed 8%) or, better still, no taxes at all, (Let there be only taxes on personal income.) 2) a real estate and property tax reduction, at least during the recession period, 3) an incentive for banks to lend to businesses, and 4) guaranteeing a superior education at all levels for our young people, so that businesses will have a pool of able applicants to draw from.
After twenty years in December 1984 we sold the business to a large closely held corporation who agreed in writing to not only keep the organization intact, but with their access to capital, to grow the company. The timing of the sale was crucial, again dictated by taxes. That year the Reagan tax reduction was in full force, but after January 1, 1985 much of it, including the low capital gains tax, was to be rescinded. This was crucial for all of us since every employee was a stockholder.
At the time of the sale, our newest employee had been with the company for more than five years and most had been with it for ten years, two for fifteen years. Our company’s history is a prime example of what government can do to promote the success of a business, thereby contributing to our state’s and our nation’s overall prosperity. Remember, my company endured two recessions, one so debilitating that we almost failed. There are more than enough would be entrepreneurs among us with new ideas, regardless of the hard times. All they need is capital. We should treasure such people among us, and create a climate that will encourage them to grow and attract others. Of course, our state has plenty of competition, not only with other states but with other countries. But knowing how to attract business and keep it viable is no secret. It’s within the power of our state government to aggressively do what it takes.
posted by Hugh Aaron at 9:30 AM
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