Tasos Katopodis/Pool via AP
Isabel Casillas Guzman heads the Small Business Administration. Since 2021, the Biden administration has tried to revive the SBA’s founding mission under Guzman.
It’s commonplace during an election year to hear politicians (or even actors playing politicians in movies) trot out some version of the line “Small businesses are the backbone of our economy,” and court their support. This year, both presidential candidates have rhetorically made small-business entrepreneurs a centerpiece of their campaigns, and that’s mostly taken the form of plans to slash taxes for them.
The Harris campaign recently unveiled a proposal to expand a tax deduction for startup businesses from $5,000 to $50,000, in contrast to her overall pledge to raise taxes on wealthy individuals and corporations. She mentioned this small-business plan in the opening answer she gave at the presidential debate in Philadelphia on Tuesday.
But actual independent business owners are not clamoring for lower taxes, at least not compared to higher priorities like accessing credit, according to their own survey responses.
This contrast was put in stark relief in Washington yesterday at a fireside chat between Federal Trade Commission chair Lina Khan and Small Business Administration head Isabel Casillas Guzman. These are two of the regulators in the federal government who deal most closely with small-business groups, hearing their concerns and aspirations.
The issue of taxation did not come up once during the chat or during the question-and-answer period from business owners in attendance, many of whom were in town from across the country for the SBA’s Regional Regulatory Fairness Board meeting this week. That’s not to say business owners wouldn’t like paying less in taxes, as anyone would. But the fact that it’s not the top priority indicates that the tax question is more of a rhetorical gimmick than a solution to problems in incumbent-dominated markets.
Small-business growth has been increasing recently under the stewardship of both regulators. As cited by the SBA’s Guzman, 19 million new businesses have filed since the end of 2020. This has been one of the leading causes for job creation over the past four years. But there are still barriers hampering the sustainability of those new market entrants.
Khan and Guzman discussed how the regulatory environment and enforcement of competition laws can create “a level playing field” for businesses of all different sizes. Ensuring business can access credit from lending institutions was a top issue, as was protecting businesses from predatory practices imposed by larger companies.
Regulatory enforcement powers can equally be used as a tool to reshape the business environment and favor independent operators.
Next to tax cuts, slashing red tape is another caricature for what all business owners want from the government. But as the theme of this conversation showed, regulatory enforcement powers can equally be used as a tool to reshape the business environment and favor independent operators.
“New financial lenders [to a startup] need trust and strong regulations helps shore that up,” Guzman said in opening remarks. One of the SBA’s roles is to help small businesses access government funding and grants to help new owners either get their start or weather rough patches in the market. Government assistance also provides backing for them to get capital from private-sector financial institutions. The partnership comes with close government scrutiny of business practices, giving lenders faith that these investments will be secure.
The SBA was originally founded in 1953 to bolster the overall goals of anti-monopoly laws, but soon became a backwater for inaction. Since 2021, the Biden administration has tried to revive the SBA’s founding mission under Guzman, as her conversation with Khan highlighted.
Guzman emphasized leveraging the government’s contracting authority to give smaller players a leg up, and diversifying the supply base for government procurement, an early policy from President Biden. The SBA assisted this initiative by putting rules in place to “debundle” some government procurement that had been needlessly favoring large, vertically integrated firms.
Khan recognized that businesses are wary of one-size-fits-all regulations that impose compliance costs smaller companies may not be able to handle. Large firms can more easily pay billing rates of a big law firm to deal with compliance.
“Not all rules or regulations are created equal … we’re not pushing a regulation that will be better for big business,” she explained to the audience.
Instead, Khan explained how the new regulations enacted under her tenure are aimed at setting the conditions for fair competition. Khan framed the FTC’s enforcement of abusive practices by large companies against consumers as equally applicable for protecting small businesses, like junk fees imposed on independent operations.
“Monopolies set their own rules in the market almost like private regulations … we’re seeking to break them,” Khan said.
One particular rule she highlighted is the FTC’s Made in America provision ensuring that companies using foreign sourcing don’t get to falsely advertise their products the same way as companies supplying their goods domestically. “The principle here is that dishonest businesses can’t divert business from honest ones,” Khan said.
Another is the noncompete ban, typically associated with liberating workers from restrictive covenants barring them from taking better-paying jobs at competitor firms. Khan made the case at this event for why this rule was just as critical for small business to thrive. She raised an example from the glass manufacturing market, which is highly consolidated, with essentially three giant players. Khan heard directly from an enterprising glass company that believed they had found a better way to manufacture a new product. After a few years, they hit a ceiling and struggled to operationalize their business idea, in large part because they couldn’t attract the necessary talent in the industry, who were all tied up by restrictive noncompete agreements.
Her story underscored that a pro-labor regulation was not just good for workers but would also unleash innovation by allowing new startups to access the full scope of labor talent only available to dominant firms. That rule is currently tied up in courts because big-business groups are challenging it.
The development of artificial intelligence was an example where enforcers view regulatory intervention as necessary to level the playing field. Khan thinks the current trajectory of AI has the risks of stifling “disruptors” and instead preferencing Big Tech firms. The current tech giants can leverage their data power, cloud computing capabilities, and priority access to semiconductors through long-term contracts with manufacturers.
Many of these sectors associated with AI, such as chips and cloud computing, rely heavily on government contracting, an area where the SBA and FTC’s responsibilities could overlap moving forward.
Guzman told the story of how new businesses have been revitalized since the pandemic, a period that crushed many of the older independents trying to hang on. Though new business formation has generally been picking up, many more niche categories of independents have been hit hard by abusive middlemen.
One of these groups is franchise owners. Khan singled out this group as a chief example of how business owners get ripped off from false advertising. The larger parent company will woo in a franchisee by making promises about the future earnings or other benefits that never actually materialize. Franchisees have told the FTC that fees get stacked onto their royalty rates, even though they were never notified about these charges before signing a contract to start the franchise. The FTC’s franchise rule governs these types of agreements, and Khan said the commission plans to enforce it expansively to crack down on these sorts of predatory practices.
Another struggling group of businesses at the moment are independent pharmacies. In the question-and-answer period, one operator explained how pharmacy benefit managers essentially dictate to stores below-cost reimbursement rates, so her store is constantly taking losses on certain prescriptions. She’s forced to work with the big three PBMs; otherwise her store will get cut out of the network by insurers who cover a significant segment of her customers.
She told a vivid story about receiving a call from a local hospital where a nurse had been exposed to a splash of blood from a patient who was HIV-positive. The nurse needed immediate medication to treat the exposure, but the nearby CVS where the hospital was contractually obligated to turn to first for its own prescriptions hadn’t filled the pill bottle in over 48 hours. This pharmacist’s independent store was able to immediately fill the prescription even though they knew they’d be forced to take a loss on the drug, which is quite expensive, from the PBM.
After hearing this example, Khan responded, “I hear a lot about how big is inherently more efficient, but small business can be both more efficient and flexible in many cases.”
