House Passes Small Business Bill

Today, the House passed HR 5297, the small business bill that had been stalled in Congress for weeks. It is expected that President Obama will sign it into law right away. Meant to provide capital for banks to loan to small businesses, the bill will establish a $30 billion lending fund that will buy equity in community banks and have them pay varying dividends based on how much they increase lending (CBO actually expects this provision to raise $1 billion over ten years). Also, the bill will increase the allowable size of Small Business Administration loans from $2 million to $5 million, fund a State Small Business Credit Initiative, and allow the exclusion of 100 percent of the sale of small business stock from capital gains taxation.

The bill is ostensibly deficit-neutral, with the costs coming upfront, as you'd expect from a stimulus bill. CBO’s most recent cost scoring of the bill, which came a month and a half ago, indicates that the bill will increase deficits in 2011 by about $85 billion. After that, the bill will reduce the deficit in each year, eventually making it deficit-neutral--in fact reducing the deficit by $500 million--by the end of the ten-year outlook.

The bill is paid for with a few tax measures. They include greater reporting requirements (i.e. reducing the tax gap), and a tightening of the cellulosic biofuels credit.

The "paid for" is just on paper though. Since the House simply passed the Senate's version of the measure, it also passed the timing gimmick included in the Senate bill: allowing for more rollovers into Roth IRAs. Since the rollovers are taxable, they would raise revenue over the ten-year outlook. But since withdrawals from Roth IRAs are tax-free and withdrawals from traditional IRAs are not, it would decrease revenues in the future. It's unclear how much this specific provision would cost in the long-run, but it would surely be a net decreaser of revenue. Also, if this provision were excluded from the ten-year cost estimate, the measure would not be deficit-neutral.

We would have preferred the bill to be passed gimmick-free, as the House's original bill was. This is the type of shortsightedness that has plagued fiscal policy for far too long.

Check out (where we now have this bill posted) for information on all other related recovery measures.