Computer Bugs, New Governor, Tax Reform on Horizon

For small business, 1998 was a year of new developments, previews and announcements that remain to be worked out in 1999.

If the “devil is in the details,” as the saying goes, small business should pay close attention as the year 2000 computer-bug problem looms, a new state governor takes office, Los Angeles city tax reforms work their way to the ballot and an assortment of federal and local measures affect small businesses.

Developments to watch in the year ahead include:

* Y2K: In 1998, the Y2K computer glitch got wide exposure. Congress held hearings, the Small Business Administration posted information on its Web site (https://www.sba.gov/y2k), and the news media went wild with doomsday scenarios.

Still, many small firms have failed to protect themselves from a largely preventable problem that will drive more than 330,000 companies out of business, according to federal estimates. National Small Business United, a nonprofit small-business association, found that 38% of businesses surveyed in November had yet to take a single step toward Y2K compliance.

“I think a lot of [the indifference] is that small businesses don’t act unless there’s an immediate issue in front of them,” NSBU’s David D’Onofrio said.

So look for a last-minute scramble to prepare, plus more help from the federal government. Likely proposals include tax deductions of up to $20,000 to help laggards become Y2K compliant and an SBA loan-guarantee program equal to 50% of loans up to $50,000.

* Gov. Gray Davis: The Democrats will control both the Legislature and the governor’s mansion for the first time in 17 years, meaning business owners may see a much more liberal-leaning, pro-labor agenda in Sacramento. Republican Gov. Pete Wilson stymied previous efforts to increase the minimum wage, boost workers’ compensation benefits, expand business health insurance requirements and create stricter environmental controls. Some small-business activists fear Davis will be far less likely to wield a veto in these areas.

Conversely, some small-business advocates say the same Democratic team bodes well for minority- and women-owned firms set back by Wilson’s efforts to dismantle affirmative action. A more Latino-friendly business environment is expected from a Legislature that includes Assembly Speaker Antonio Villaraigosa (D-Los Angeles), state Sens. Richard Polanco (D-Los Angeles) and Richard Alarcon (D-Los Angeles) and Assembly members Cruz Bustamante (D-Fresno) and Rod Pacheco (R-Riverside).

* Los Angeles city tax reform: After two years of work, Mayor Richard Riordan unveiled a proposal this month to overhaul the city’s Byzantine business tax code. His plan would simplify the system by whittling 64 tax categories down to just eight, while reducing tax rates across most industries. The proposal calls for a tax amnesty that would waive penalties for scofflaws and for beefed-up enforcement to encourage business registration. While the changes won’t put Los Angeles among the ranks of the best-value-for-business cities, the measure provides some much-needed remodeling of the 1930s-era system.

City Council approval is needed to put the measure on the June ballot, where it then must win support from voters. That’s where small businesses come in. Some may emerge as advocates to make sure the measure passes, while others, namely home-based writers and artists who believe they should be exempt from city business taxes, could form a vocal opposition.

* Living wage expansion: L.A.’s 2-year-old “living wage” law was modified in November to exempt small firms with seven or fewer employees and less than $200,000 in annual gross revenue. It was expanded to include not only service businesses under contract to the city, but also leaseholders, such as small businesses operating at Olvera Street, Griffith Park and Los Angeles International Airport. Over time, as city service contracts are renewed, the living wage regulations will bring about 10,000 workers to a $7.39 hourly wage rate with benefits, or $8.64 without benefits.

Look for the concept to expand next year to include Los Angeles County with its sprawling court system, jails and parks. The Living Wage Coalition, a group of labor and community organizations, seeks a $7.82-hourly rate under a proposed incentive program. Businesses paying their workers at that level and bidding for county contracts would get bonus points toward approval of their bid. That proposal must be approved by the Board of Supervisors.

* Federal legislation: Congress was consumed by the impeachment battle this year, but still managed to pass some measures to aid small business. Among them were restructuring of the Internal Revenue Service along “customer” lines, including a small-business division.

Also approved in 1999 were further increases in health insurance tax deductions for the self-employed. Those folks can deduct 65% of the cost of their premiums next year, 70% by 2002 and 100% by 2003.

A temporary moratorium on taxes for goods sold over the Internet also will help small business, particularly innovative e-commerce ventures. But look for Congress to return to the issue and reexamine a hodgepodge of laws in which some states charge sales taxes and others none.

Also, look for Social Security privatization and its impact on small business. Activists will be watching to ensure that small-business owners won’t have to become keepers of investment fund information and even more paperwork for their employees.

* Federal income tax reform: This year, a drive by the National Federation of Independent Business to abolish the IRS tax code passed the House of Representatives. But it failed by a tie vote in the U.S. Senate. The NFIB will keep the pressure on next year as it works to substitute a national sales tax or a radically simplified income tax for the current, complicated federal tax code.

NSBU also will be pushing for a national sales tax next year. Although Clinton has said he’ll oppose any radical tax changes, the two small-business organizations want to keep the momentum going on this issue.

* Home-based business taxes: The Writers Guild of America West, which is suing the city of Los Angeles to overturn a requirement that writers and artists pay city taxes, took its battle to the state Legislature this year with a tax-exemption proposal for home-based businesses. The measure was tabled, but it’s already back again for next year as Assembly Bill 83. The new bill seeks to exempt from city taxes all home-based businesses that have not filed a fictitious business name statement and don’t solicit business at the residence by advertising.

Look for more action on this measure by the guild, as well as attempts to beat back home-based business tax proposals in other Southern California cities.