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Caldeira: Franchises Offer a Valuable Avenue to Job Creation

While the past few months have brought positive news on the economic front, unemployment still stands at 8.5 percent, more than 13 million individuals are out of work and, more troubling, 5.6 million workers have been unemployed for 27 weeks or more.

Despite the dire need to address unemployment, Congress and the Obama administration remain mired in gridlock and seem incapable of galvanizing bipartisan support for policies that would provide a sustainable, long-term, pro-growth environment for America’s small businesses.

To be sure, Congressional hearings this week focusing on job creation in the House Small Business and Education and Workforce committees are a start to bring important focus to the challenges small businesses are facing. Yet until lawmakers can put aside election-year politics and partisan rancor, America’s small-business owners are likely to continue feeling both uncertainty and trepidation as they consider hiring new workers.

As an industry that represents a wide cross-section of small businesses, including restaurants, health care, hotels, business services, automotive and retail, franchising is a leading indicator of where the economy is heading.

And there are reasons for optimism in our industry’s performance history and its outlook for 2012. New job creation by franchise businesses outpaced other businesses in the downturn by 14 percent, and the industry is forecasted to grow more than 2 percent in 2012. While not at pre-recession growth levels, franchising remains a bright light in a still challenging economic recovery, outpacing overall U.S. economic output.

Why is that? As the recession took its toll on the payrolls of corporate America, seasoned business professionals who were laid off saw franchise ownership as an opportunity to invest in a proven concept they could own and operate themselves. With more than 825,000 franchise establishments in the United States, opportunities abound in a host of highly skilled businesses such as senior care, technology and tax preparation.

Now, with the economy improving, many of these new franchise owners are eager to expand as sales grow amid increases in consumer spending. Which brings us back to the political stalemate in Washington and the lack of focus on pro-growth policies that will enable the job creation our country so urgently needs.

Nearly 85 percent of franchisors say they plan to increase units in 2012, with one-third planning to grow by more than 6 percent. Yet the same survey found a host of concerns, including difficultly accessing capital, the specter of higher tax rates for corporations and individuals (including many franchisees) beyond 2012, regulatory issues such as new labor law rulings favorable to unions that threaten small employers and the cost of the health care law’s implementation.

Congress could solve small-business owners’ anxiety over tax rates by passing comprehensive tax reform that lowers the corporate and individual rates. Most franchise businesses file their taxes as LLCs and S-corporations, and they do not pay the corporate income tax. Instead, they declare their business profits on the owners’ personal income tax return and are taxed at the personal income tax rate. With Bush-era tax rates set to expire, the time is now to address taxes in a comprehensive manner, rather than a piecemeal, one-off approach.

The access to capital challenge, due in large part to Dodd-Frank, creates a stricter regulatory environment for lenders and borrowers. While lenders have boosted small-business lending recently, regulators are still rejecting quality loans, unnecessarily and unintentionally holding back job creation. For every $1 million lent to franchise businesses, 34 new jobs are created.

Regarding regulations, the House has already passed bills addressing the overreach of the National Labor Relations Board and the health care law. A recent Hudson Institute study showed 3.2 million jobs would be put at risk because of the employer mandate provision in the health care law, which forces employers to offer coverage or pay a penalty. A bipartisan group of more than 200 lawmakers is cosponsoring bicameral legislation to repeal the mandate.

Unfortunately, these issues will take leadership and a willingness to compromise by both parties that is unlikely to come this year.

In the meantime, Congress should move swiftly to pass the payroll tax extension for the rest of the year, while also retroactively applying many business tax extenders that small-business owners will continue to rely on in the absence of a comprehensive solution to simplify the tax code. These extenders, which expired last year, include the 100 percent bonus depreciation; 15-year straight-line recovery for qualified leasehold improvements, restaurant buildings and retail improvements; and the Work Opportunity Tax Credit for lower-skilled workers and the long-term unemployed, among others.

Passing them now would give small-business owners much-needed confidence in Washington’s ability to get something done that can actually help them grow. Now, wouldn’t that be something.

Steve Caldeira is president and CEO of the International Franchise Association.

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