By Dan O'Brien
The state recently reported that after more than 13 years, Massachusetts had finally surpassed its previous peak employment level in March. Earlier this year, MassBenchmarks reported the state's economy grew at a brisk 5.4 percent pace during the final quarter of 2013.
Those are two pieces of very good news. But business confidence, as measured by the Associated Industries of Massachusetts, has chugged along at a neutral level for several months, with optimism especially lagging among small-business owners.
This, even as Jon Hurst, president of the Retailers Association of Massachusetts, stating that 2014 will likely be the state's best year for retail sales since 2006.
So why the guardedness? In a word, costs.
"Cost is the bottom line for small businesses," Hurst said in a recent telephone interview.
And costs are creeping up in a variety of places. There's the implementation of the Affordable Care Act, which affects businesses with 50 employees or more. There's legislators' push for a minimum-wage increase. And there's the reduction of the so-called Section 179 deduction, which is used by businesses making equipment and property purchases.
"There is this sense of being under siege," said Chris Geehern, executive vice president of marketing and communications at the Associated Industries of Massachusetts, a business-advocacy group. "It's not one thing. It's not just ACA. It's not just minimum wage. It's not just the Obama administration's proposed changes for overtime. It's not just tax changes. It's a series of regulatory and business cost issues that have created a level of discouragement among small-business people -- the very people who need to be encouraged at this point in the cycle."
Hurst said health costs were "pretty marginal" in 2012 and 2013 but "as soon as ACA kicked in, we're back to where we were in 2008, 2009."
"We're seeing double-digit premium increases," he said. "Some individuals are benefiting but businesses are supplementing them. Small businesses in particular, you're not seeing the same levels of increase for big businesses."
Hurst has called for a "small-business waiver" on the ACA but it has yet to gain traction among legislators.
Meanwhile, many entrepreneurs are in limbo as they wait for Congress to extend tax deductions widely used by small businesses making equipment or property purchases. One, known as the Section 179 deduction, has shrunk to a maximum $25,000 this year from $500,000 in 2013. Another, called bonus depreciation, expired at the end of last year.
"If they're going to make a change, it would be nice if it were more subtle, like from $500,000 to $400,000 or $300,000," said Bill French Jr., owner of W.L. French Excavating Corp. in Billerica. "But to go all the way down to $25,000 ... it doesn't make sense. Quite frankly, when we buy that equipment, it helps the American economy. We buy Caterpillar construction equipment, Peterbilt trucks. All American-made.
"It's a shame."
The deductions are a big deal for small companies, saving them thousands or even millions of dollars on capital investments. French, who has already spent $1.2 million this year after not realizing how low the deduction had fallen, has stopped buying gear like bulldozers until he knows how big his tax deductions will be. But in recent years, Congress has delayed voting on the issue due to worries about the ballooning federal deficit.
"It's typical of the government today to approve these things in the fourth quarter when the equipment isn't as busy," said French, who estimates he saved more than $1 million last year after making $2 million in capital purchases. "It doesn't make sense to buy to help defer costs and then have it (the equipment) sit.
"If you're going to make such a major decision, make it sooner rather than later."
Wage costs add up
As for minimum wage, the Massachusetts House and Senate have each approved separate bills to boost the state's wage from $8 to $10.50 (House) or $11 (Senate). Both chambers will need to agree on a compromise before sending a final draft to Gov. Deval Patrick, who has said he supports a minimum-wage hike.
The push to raise the minimum wage in Massachusetts comes as President Barack Obama calls for an increase in the federal minimum wage to $10.10 per hour.
Joanna Hall, owner of the Flower Mill in downtown Lowell, said that even though her sales could double this year, costs remain a concern. She said her employees make "within 50 cents" of the minimum wage, and she expects to add at least one employee to her staff of three.
"Some say it is only 50 cents, but that is just for an hour -- it adds up," she said, noting that a wage boost will also increase the amount of taxes she will owe.
Hurst also decried what could be a 32 percent to 38 percent cost increase in the state's minimum wage.
"We thought there would at least be some offsetting of these costs with reductions in unemployment insurance but this didn't happen due to the reluctance of big labor (unions)," he said (although last week, Patrick signed an unemployment-insurance rate freeze for 2014, the sixth straight year this has happened).
Hurst added his organization is not necessarily against a minimum-wage increase but that "they went too far this time." He said Massachusetts businesses are at a disadvantage compared to other states due to the lack of a separate, teen minimum wage and the continued policy of paying retail workers time-and-a-half on Sundays (Rhode Island is the only other state to do this).
"I don't think policy makers understand that payroll costs are set as a percentage of sales," he said.
Each month since mid-1991, the Associated Industries of Massachusetts has conducted a survey of member businesses regarding confidence. On a 0-to-100 scale, in which a reading of 50 is considered neutral, the index registered a reading in March of 51.1. It has has varied little in the past year, even as the state has added jobs and grown in output.
Perhaps more telling is the discrepancy between large and small businesses surveyed. Geehern, the AIM executive, said companies with more than 100 employees had a confidence level in March of 57.8, while those with fewer than 100 registered an aggregate reading of just 49.
"The economy seems to favor larger firms moreso than smaller firms," said Geehern. "This is typical in post-recession and middle recoveries. There is a lot of creative destruction. Larger companies can increase market share at the expense of smaller players. For smaller firms, coming out of difficult times requires capital and investment that they are sometimes not positioned to make."
He added that regulatory requirements tend to fall more heavily on smaller companies.
"Whereas large companies have a department to handle these things, for a 20-person machine shop it's the CEO or part-time HR person coming in on Saturday morning," Geehern said.
Nevertheless, Hurst said the employment growth and state's increased economic output bode well for retailers in 2014.
"I believe there is more optimism in 2014 for sales growth. It could be above inflation levels," he said, adding he will continue pushing for the ACA waiver. "It's just that with all these cost increases, it's tough to get ahead. It just continues to cost more to operate and employ people."
And some entrepreneurs insist that no obstacle is greater than their own ambition. Count Lydia Blanchard, proprietor of Sweet Lydia's sweet shop in downtown Lowell, among them.
"If I am worrying, it is because that is my nature," said Blanchard, who employs four part-time workers. "And I have to pay my own insurance anyway."
Follow Dan O'Brien on Twitter @dobrien_thesun.