Amid 'Fiscal Cliff' Stalemate, Main Street Deteriorates
To begin to grasp how "fiscal cliff" uncertainty is paralyzing Main Street business owners, just talk to Charlie Arnold, who has been running a power-washing business in Lewes, Delaware for 13 years.
"Whenever the news is about the government and the economy, it scares the seniors and the phone stops ringing," said the owner of Arnold Powerwash, among whose jobs was the Lincoln Memorial steps in Washington, D.C. Roughly a third of residents in Arnold's coastal community are over 55, and many are on fixed incomes. Lured to Delaware by its lack of state sales tax, they worry when they hear noises about debt levels and changes to the tax laws.
"Since October, my business has dropped off 80 percent and I attribute that directly to the 'fiscal cliff' discussion and the economy," he said, adding local business owners "really are scared. They don't know what to do."
Anxiety over the "fiscal cliff" isn't just affecting Wall Street. Many entrepreneurs report slower activity as uncertainty swirls about how tax hikes and government spending cuts will affect them. Faced with unanswered questions, entrepreneurs are stuck contemplating trimming costs and laying off workers—not creating Main Street jobs, which has traditionally fueled economic recoveries. (Read more: Four Reasons Why Companies Are Still Reluctant to Hire)
Arnold said there's a "huge gap" between entrepreneurs' economic reality and the stalemate between Congress and President Barack Obama. "The longer they bicker, the worse my business is," he said. (Read more: The Fiscal Cliff Explained)
Tax Implications for Entrepreneurs
Changes to tax laws is the major overhang for entrepreneurs. The National Association for the Self-Employed or NASE estimates a self-employed individual making between $60,000 to $88,000 a year would see a tax hit of $2,700 to $3,700 annually if a debt deal isn't reached by year's end. That's when the current tax rates, compliments of the Bush era, expire.
While that figure may appear small at first glance, that's a lot of money for a self-employed individual or small-business owner. In their world, robust monthly cash flow can mean the difference between staying afloat or drowning financially.
Roughly $2,700 to $3,700 more in taxes a year, "is huge," said Katie Vlietstra, director of government affairs for the self-employed association. "That is one or two paychecks they won't see in the course of a year," Vlietstra's group includes micro businesses with 10 employees or less. "The self-employed, small businesses, we're not being addressed." (Read more: November Private Sector Jobs Growth Misses Forecasts)
Vlietstra adds that the "fiscal cliff" debate has largely focused on taxing the rich; specifically, whether to raise the tax rate on incomes exceeding $250,000. But self-employed and small-business owners would also be affected by raising the tax rate for the wealthy. (Read more: More than 300,000 Millionaires Would Go Off 'Cliff')
That's because many business owners combine their business and personal incomes. And if you happen to a run a business with a spouse, it's not that difficult to exceed the $250,000 mark.
"There's no black and white between household income and business income. It's funneled through as individual filers," Vlietstra said. About 2.2 million Americans are self-employed or operate micro businesses and earn more than $250,000 annually, according to the NASE.
"No one is really talking about the $250,000 level, which includes so many of the small-business community. There's a distorted message about who's really being impacted by increasing tax rates," Vlietstra said.
According to an NASE study published last month, 61 percent of those surveyed indicated they would be amenable to giving up a significant number of deductions, if the individual tax rate were dropped to an acceptable level.
Where's the Job Creation?
Naturally, giving more money to Uncle Sam would mean less cash available to jump start businesses. "Their taxes are going to rise, which means they'll have less disposable income for hiring," said Brian Hamilton, chief executive of Sageworks, which provides analysis of privately held companies.
In fact, private companies have been slowing down recently, and not growing at the pace seen during the last few years. Private company sales have grown 6.9 percent so far this year, compared to growth of 10.2 percent for all of 2011—a decline of about 3.3 percent, according to Sageworks data. "It seems as if the administration may be banking on a general recovery to create jobs," Hamilton said.
Despite some growing skepticism about how bad the fiscal cliff will be, small businesses are busy shoring up their finances and planning for the worst. Like Arnold Powerwash, Ben Seidel, a tech consultant based in Columbia, Mo.,is holding off on big spending decisions, including adding new positions. (Read more: 'Fiscal Cliff' Warnings Rise to (Overblown?) Fever Pitch)
With his 2013 tax picture unclear, Seidel doesn't know yet if he can afford to hire staff or move forward with expansion plans for his startup, IgnitingBusiness, which offers tech consulting and website design services for small businesses. Those decisions are on the back burner.
"I only allow myself to focus on the 'fiscal cliff' to a certain degree because, honestly, I need to make more money. I have to keep churning and focusing on the cash flow and increasing my business," Seidel said. (Read more: Economy Stinks for Many, But It's Crushing Millennials)
For now, entrepreneurs feel they're getting the short end of the "fiscal cliff" stick. "They're the ones on the front lines hiring employees, making decisions about whether they'll buy new equipment or build another location," said Bob Wright, chief executive of Charley's Grilled Subs. Charley's has 210 franchisees operating more than 400 restaurants, and Wright said many operators are keeping an eye on Washington. "They'd like to know what environment they're operating in," Wright told CNBC's "Squawk Box" last month. (Read More: Denny's Franchisee Imposes Surcharge For Obamacare).
"At this point just settle it," said Arnold. "Then things will start getting better and my phone rings again and people have hope." (Read more: 'Cliff' Deal Could Slingshot Economy Higher: Executive)