A Bright Idea on Taxes: How the BRIDGE Act can help small businessmen and America

National Review, March 24, 2003 by Kate O'Beirne

A new idea in Washington has more trouble gaining traction than the city's commuters on icy streets. While there will be pitched battles over accelerating tax-rate reductions and eliminating the tax on stock dividends, lawmakers agree on the need to help small businesses. Unfortunately, the most elegant way to help the most promising entrepreneurs will be ignored unless the Bush administration and Hill leaders give it the attention it deserves.

The BRIDGE Act (Business Retained Income During Growth and Expansion) is the brainchild of Washington outsiders with vast business know-how. They have persisted in promoting their novel plan, despite a chilly reception by insiders who lack an understanding of the problems faced by entrepreneurs. The BRIDGE Act would permit a profitable, promising small business, with $10 million or less in gross receipts, to defer up to $250,000 in federal income taxes for two years, and pay the taxes owed with interest over the next four. The deferred tax amount would be placed in a trust account to be used as collateral for a loan. The idea is to help businesses during a critical time in their growth when outside financing is difficult and costly to obtain. In making their case, the bill's sponsors point to an estimate that such a tax deferment would create over 640,000 jobs in its first three years. According to the Joint Tax Committee, allowing small businesses to retain their profits temporarily, thereby "bridging" their funding gap, would "cost" government several billion dollars in tax revenue in the early years, but would result in a $1.1 billion net revenue gain over a ten-year period.

In the last Congress, the BRIDGE Act received the kind of bipartisan support that is rarely given to a tax plan and that would all but ensure passage if the bill could win floor consideration. It was sponsored by Jim DeMint (R., S.C.) and Brian Baird (D., Wash.) in the House, and in the Senate by John Kerry (D., Mass.) and Olympia Snowe (R., Maine). It will be reintroduced in the next few weeks. And the proposal has attracted enthusiastic support from the business press. George Gendron, editor-in- chief of Inc. magazine, wrote in December 2001, "The BRIDGE Act is an ingenious, fiscally sound mechanism for keeping billions in the hands of a group that makes the most efficient use of capital." According to a study by Cognetics, a Massachusetts-based research firm specializing in the economics of small business, rapidly expanding small businesses with fewer than 100 employees created the lion's share of new jobs in the last decade -- 85 percent of them from 1994 to 1998. Rep. DeMint senses a "chemical reaction ready to happen," but the key ingredient missing is support from either the Bush administration or the GOP congressional leadership.

With politicians clamoring to help small business, and daily reminders of sluggish job growth in an already weak economy, why isn't this sound, bipartisan initiative at the top of Washington's tax-reform agenda? Therein lies a tale of politics and policy, illustrating how a good idea can get tripped up.

When he began to sell his idea in Washington, Douglass Tatum, the bill's inspiration, quickly encountered an experience gap on the part of his Washington audience every bit as challenging as the capital gap faced by the entrepreneurs he was trying to help. Tatum is CEO of Tatum CFO Partners, an Atlanta-based firm he founded that has 450 partners and 30 offices nationwide and provides financial officers to firms on a temporary basis. A few years ago, Tatum put together a booklet entitled "No Man's Land: Where Growing Companies Fail," based on his firm's experience with emerging "growth businesses." He distinguishes these companies from other small businesses with a simple example: "A small businessman owns a dry cleaner, the entrepreneur I am talking about owns two, and wants to own ten or twelve." Tatum says that there is less of a problem with start-up money for such ventures, which are generally underwritten by loans from family and friends or by credit cards. But when the need for capital exceeds personal assets, commercial lenders prove unwilling to service relatively small loans of less than $1 million.

Tatum explains that a fast-growing company using the most common form of accounting has taxable profits but faces an increasing negative cash flow as it spends its cash to keep up with growth. (Profits are determined on a yearly basis, but, month to month, a company may face shortfalls.) Tatum understands what few in Washington do: Entrepreneurial companies hit a capital gap and face negative cash flow precisely because they are profitable. He recalls one macroeconomist who echoed the common misunderstanding of Washington experts when he erroneously protested that it wasn't possible for a profitable company to have a negative cash flow.

While the economic experts proved unfamiliar with the microeconomics of small business, Tatum detected a philosophical objection when he talked with Bush administration officials, who were lukewarm about his "targeted" tax proposal. But the BRIDGE Act helps companies in every sector of the economy and the country. It's only targeted to the extent that it's aimed at helping companies that create jobs.