Once again, our economy experienced a sluggish start to the new year.
Which prompts the question: Why is first quarter economic growth always the weakest of the four? Recently, armed with over 30 years of evidence, CNBC set out to explain the phenomenon.
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The answer? Nobody really knows.
The deep dive into economic indicators that are probably far beyond the average American's understanding is valuable and appreciated; but, as a small business owner, I have lived this reality, and I believe there may be a simple factor that could help answer this question: first-quarter tax payments.
Every year, small businesses must be prepared to make three tax payments between Jan. 15 and April 15. Fourth-quarter estimated taxes are due Jan. 15 of the new year, and businesses must be prepared to make two separate tax payments—first quarter estimated tax and yearly income tax — on April 15.
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For a small business that uses cash-basis accounting, having the funds to pay Uncle Sam these three payments means less capital available for investments, both in the market and back into the company, during the first quarter of the year.
Let's explore the impact this could have on the entire U.S. economy.
According to the U.S. Small Business Administration (SBA), small businesses represent 99.7 percent of all employers across the United States and create more than half of the nonfarm private gross domestic product (GDP). In a survey conducted in March, the National Federation of Independent Businesses (NFIB) found that optimism among small business owners had hit an all-point low since last year. The NFIB's Small Business Optimism Index, which is based on ten seasonally-adjusted survey indicators, fell 2.8 points since June of 2014. The greatest net drops were seen in current jobs openings and business owners' plans to make capital outlays.
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Let's take the first drop. We have small businesses representing 99.7 percent of all employers. And we have a NFIB survey that shows drops in small business job openings in the first quarter. During this time, small businesses are also planning to make three major tax payments to the Internal Revenue Service (IRS). Is the relationship between preparing for three big tax bills and a drop in job openings merely coincidence?
While a business that pays the majority of its employees an hourly wage may not make dramatic changes to its workforce from quarter to quarter, it makes sense that a small business with salaried employees would be reluctant to make new hires until after its estimated taxes and income taxes are calculated and paid. And, common sense tells us that low employment rates lead to less consumer spending, which ultimately has a negative impact on our economy as a whole.
We could make the same argument for the second indicator. We know that small businesses create more than half of the nonfarm private GDP, and we have a small business owner who does not plan to acquire, maintain or upgrade capital assets in the first quarter. Again, during this period of time he or she must plan for three big tax bills. Is the relationship between a reluctance to invest in the company and budgeting for three first quarter tax payments coincidence, as well?
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Of course, given the decades economists have spent studying trends and analyzing statistically significant data, we cannot propose to completely crack a complex economic phenomenon with largely anecdotal evidence. However, I own seven small businesses and employ over 150 people, and I know why I am unable to support growth in local economies during Q1. Perhaps I am not alone.
Commentary by Congressman Markwayne Mullin, who represents Oklahoma's Second Congressional District and sits on the House Committee on Energy and Commerce. He also owns multiple small businesses in Oklahoma. Follow him on Twitter @RepMullin.
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