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How Clintonomics will impact black business.

The debate surrounding President Bill Clinton's economic plan has generated controversy and intense scrutiny. The main objective of the President's plan, unveiled last February, is to stimulate growth in the private sector--especially for small business. But between the chorus of supporters and the cacophony of disbelievers, the question still remains: How will American business, especially African-American businesses, fare under the Clinton economic plan? The plan focuses on four key areas:

* reducing the federal deficit through a combination of tax increases and spending cuts;

* increasing investment through a variety of tax credits;

* containing the cost of health care; and

* creating jobs through a series of short- and long-term stimulus packages designed to put a growing number of unemployed Americans back to work.

To find out what black entrepreneurs think of the Administration's proposal, BLACK ENTERPRISE discussed key elements of the economic package with the CEOs of several BLACK ENTERPRISE 100s companies. Their consensus: guarded optimism that the economy under Clinton will grow and stimulate expansion in their businesses and give black entrepreneurs greater access to the capital markets.

The Tax Man Cometh

Republican barbs about the "tax and spend" ways of the Democratic Party haven't deterred President Clinton from using taxes as a major weapon in the fight to cut the nation's $332 billion budget deficit. The Clinton plan contains a complex array of taxes on American business. As it stands, all firms will bear the burden of an increase in the corporate income tax rate from 34% to 36%. As for the new energy tax based on energy consumption, heavy energy users in the manufacturing sector will be hurt more than service industry businesses.

But the Clinton package also includes tax incentives for purchasing new equipment, primarily intended to alleviate some of the economic woes of such capital-intensive companies as old-line manufacturers and high-tech businesses.

It's not surprising that Clinton's plan includes a heavy emphasis on stimulating the growth of small and mid-sized businesses, since this segment of the business community has been responsible for creating a high percentage of the new jobs in the United States over the past 15 years. The Clinton package includes two-year investment tax credits of up to 7% for medium-sized companies ($50 million to $100 million in sales) to purchase new equipment. There is no provision for purchasing buildings in this plan.

Businesses with revenues under $5 million will be eligible for an investment tax credit at 7% for the first two years and a permanent 5% investment credit thereafter. And companies with $50 million or less in capital will be allowed a 50% deduction of capital gains taxes on investments in their firms that are held for five or more years.

Analysts argue the pros and cons of each tax proposal. But BE 100s CEOs agree on two things: They are willing to shoulder their fair share of higher taxes if the increased revenue will significantly cut into the federal deficit. They add, the new proposals will help some firms but the overall effect will be minimal.

"I don't see minority firms suffering any more than other firms," says Ralph O. Williams, CEO of Rockville, Md.-based R.O.W. Sciences Inc. Williams says that his $24 million biomedical/health services firm "will bear our fair share of corporate taxes, but we need a reduction in other areas--like capital gains--to offset the pain."

Since R.O.W.'s revenues fall within Clinton's proposal for capital gains tax cuts on investment, Williams' company may be positioned for growth. The cut in capital gains taxes will make smaller companies more attractive to potential investors. But other firms, such as Washington, D.C.-based Black Entertainment Television Holdings Inc. (BET), have no relief because they are too large to benefit from the capital gains plan. "Like most businesses, we will pass the extra corporate taxes on to our customers," says Robert Johnson, president of the $62 million publicly held cable television network.

BET can only take selective advantage of the proposed investment tax credit because of the industry that it's in. "We're primarily in production services, and there's no credit for that," Johnson explains. Other firms in service industries will be similarly affected.

But the investment tax credits will be a boon to some BE 100s firms. Greg Calhoun, president of Montgomery, Ala.-based Calhoun Enterprises, is excited about the possibilities. Overseeing the operation of seven supermarkets in Alabama, Calhoun says that his $36 million operation is now ready to expand.

"The investment credits will help me upgrade my equipment," says Calhoun. "I'm buying new frozen food cases and meat cases at two stores that could cost from $200,000 to $800,000. The credits help me get more for the money I spend."

That's provided you have the money to spend. "Credits are good, but if the funds aren't there, you can't invest in new equipment," notes Henry Henderson Jr., president of West Caldwell, N.J.-based H.F. Henderson Industries Inc. He suggests that for black firms, the importance of the investment credits may be overblown. "I'd rather go for access to capital than for the investment tax credits," says Henderson.

CEO Floyd G. Thacker of the Atlanta-based Thacker Organization agrees that investment credit may help some firms, but says that his won't be one of them. Because the biggest chunk of its work comes from subcontracts, the $36.5 million company doesn't have to lay out much cash for big capital investments. "We're not looking at buying equipment for its tax credit," adds Thacker. "We're looking for tax credits for building low-income projects and for doing joint ventures with nonprofit organizations."

BE 100s service companies were generally unconcerned about the proposed energy tax, which will affect every American business. On the other hand, manufacturers were carefully studying this section of the proposal.

"It will cost us money without a doubt," says Carlton L. Guthrie, president of Lansing, Mich.-based Turmark Inc. Since Trumark is a $35.3 million metal stampings, manufacturing and welding business that practically runs shifts nonstop, it has a higher energy consumption rate than most firms. The additional energy tax almost becomes a penalty for keeping production going. "It will force us to find ways to conserve energy and use our business resources properly," Guthrie says.

Other Incentives For Small Business

A big part of the Clinton economic plan is a series of new small business incentives. Clinton proposes to increase small business' access to capital by developing a network of "community development banks" and funding $1 billion in enterprise zones (EZs) over the next four years. Another $16 billion short-term stimulus package has $3.9 billion earmarked for federal transportation spending, $2.5 billion in state and city grants, and $845 million for sewer construction and other projects. The President's goal is to stimulate the economy--and create jobs--and rebuild the nation's infrastructure while developing new technologies.

Manufacturers like H.F. Henderson Industries, which makes circuit boards for the military, are hoping to take advantage of programs that will help companies switch over from defense to other work. "We're looking to make more nonmilitary items, such as commercial circuit boards," says Henderson, the firm's president. Defense cutbacks that may cripple multinational firms like General Dynamics may actually provide an opportunity for small companies like Henderson's. "Prime contractors cut back, but they still must maintain some manufacturing ability. We're looking at some of it being subcontracted to us. It's too small for them but it's just right for us."

Other BE 100s business leaders are looking forward to the debate surrounding the federally mandated EZs that will supplement the state-authorized EZs already in place. Expanding his supermarkets to designated enterprise zones fits in perfectly with Greg Calhoun's customer base and his company's strategic development plan. "Seventy-four percent of my business is minority clientele," he says. "Before considering relocating to an EZ, I'd vowed I wouldn't open a new supermarket, but I'm looking forward to our first new store opening [in Montgomery, Ala.] within 18 months."

This store will be built from the ground up. Calhoun is also planning to open up another five stores in Atlanta. His increased costs in security are offset by the lack of competition in EZ areas, although he admits his competitors may be attracted to these areas now that strong tax incentives are available.

For some BE 100s CEOs like Carlton Guthrie of Trumark, it's not only a matter of a willingness to move into EZs, but a question of whether they will truly benefit the companies that relocate to them.

Clinton's incentives are encouraging, but the real issue for most black entrepreneurs is money--access to capital for growth and development. To that end, the President's proposal to develop a network of community banks willing to lend to small and medium-sized firms would be a welcome relief. "I don't like the changes in the tax laws. I think he [Clinton] has a better shot holding back forces that prevent banks from lending to smaller and medium-sized firms," says David Huggins, CEO of RMS Technologies Inc., a $100 million computer and technical services company in Marlton, N.J. "As long as we don't have access to funds, the rest is gimmickry, and it affects everyone, not just BE 100s companies," he adds.

James Chatman, president of Technology Applications Inc. (TAI) in Alexandria, Va., concurs. "Minority business is so young and fragile. We don't have the access to capital that majority firms--large and small--have. We've demonstrated our ability to perform. Now we need to level the playing field so that we can compete." Adds Wesley Industries CEO Delbert W. Mullins: "You never have enough money when you're a medium-sized company. I may be large in comparison to some other black companies, but in the general market, I'm still a small company ($45 million in sales)."

Halting Spiraling Health Care Costs

Cutting back health costs will help the bottom line for most BE 100s. Any day now, Hillary Rodham Clinton's committee, charged with overhauling the U.S. health care system, is expected to release its report to the President. Whatever the recommendations, the mandate is clear: Something must be done to alleviate the high cost of health care and its burden on taxpayers, employees and employers.

In 1992, Americans spent 14% of their income on health care--30% more than any other nation in the world. The President argued in his Feb. 17 address to the joint session of Congress that "reducing health care costs can liberate literally hundreds of billions of dollars for new investment in growth and jobs. Brining health care costs in line with inflation would do more for the private sector in this country than any tax cut we could give and any spending program we could promote." His goal: to cut health care and mandatory spending by $76 billion over four years.

Most BE 100s CEOs interviewed for this story concur that the cost of providing employee health care benefits is too high and eats into their profit margins. "We're getting the daylights kicked out of us," says Trumark's Guthrie. "And, costs have been steadily escalating over the last three to four years," he points out.

"Everyone knows health care costs have been way above the inflation level," says TAI's Chatman. At his $46.5 million information systems company of over 500 employees, workers are enrolled in a self-insured plan: The company subsidizes its own insurance while hiring an insurer to administrate its claims. Catastrophic illness is underwritten by a third-party carrier. Chatman points to the increase in administrative costs of health care as the culprit cutting into his company's profit margins. However, "Since everyone else is also paying more," he says that "it doesn't make us less competitive with other companies in our industry."

While the White House plan is expected to address several burning health care concerns, including the payment and reimbursement structure, there is likely to be as much disagreement on how to solve the problem as there is on the underlying cause of the astronomic growth in fees.

Controlling costs through managed competition will not affect the cause of the problem, argues R.O.W.'s Williams. "What's been missing is an emphasis on using the least expensive tools of health care, which are prevention and health education, particularly for minorities and the disadvantaged," he argues. "There's too much emphasis on cost control and the way we develop health services, and not enough on the way to prevent disease."

On the other hand, Williams is hoping that the renewed interest in health care reform will be an opportunity to boost his $24 million company's bottom line. But, he sees increased competition from large majority firms as a big challenge. "I think there will be more opportunities for small and minority businesses like ours to conduct research on health care delivery systems. However, we'll have to compete with major academic institutions, national think tanks like the Rand Corp. and big research companies. And, since there's a tradition of going to renowned establishments, such as the Brookings Institution and the National Academy of Science, we probably won't get a fair share of the pie."

Whether their companies can garner new business through health care reform or simply reduce the cost of their health benefits, BE 100s CEOs are hopeful about the details of the proposal--even if it means paying higher taxes. "I'd be a proponent of higher taxes, if it's going toward de-escalating the cost for health care," says BET's Robert Johnson. "The one thing I agree with the President on is that until you bring the cost of health care in line, we will continue to have a high budget deficit," he adds.

What About Minority Business?

President Clinton to his credit has appointed high-level minority administrators throughout his Administration. So when he unveiled his plan for American in his February address to Congress and made no specific mention of minority business, many observers didn't know what to make of it. Was the omission a move of inclusion--sending the message that minority businesses should be thought of in the same breath as all American business? Or a move of exclusion--sending the message that minority business issues would not be dealt with because they serve a narrow special interest?

"I don't think anyone is specifically pitching minority businesses. I think they're pitching small business in general," says Johnson, who believes the term "small business" is being used as a code word to include minorities. He believes that this forces minority businesses to go head-to-head with majority small businesses, and that these majority companies can be more successful since they receive the banking support denied minority businesses.

BE 100s CEOs believe that their firms can compete with majority-owned small businesses, but a system of regulations and racism saddles them with handicaps amounting to a "Catch-22."

"If we get a special deal because we are a minority business, it may be held against us. But as long as we're different, there will always be prejudice against us," says Henderson. "Either there has to be fairness in the procurement process or minority set-aside contracts must be reserved for us."

Set-aside programs such as the Disadvantaged Business Enterprise (DBE) program don't really work for successful black firms, according to Floyd Thacker of the Thacker Organization. DBE firms are rarely considered for lucrative prime contracts, a situation which limits them to smaller subcontracts. And once in the program, Thacker believes firms face the frustration of dealing with the system's bureaucracy. "Agencies like the Department of Transportation perform size-standard tests on firms when they don't need to. They make demands for things that the law doesn't require," he says.

The Small Business Administration's (SBA) 8(a) program drew similar complaints, particular about its 8(a) restrictions. At the top of the CEO's complaint list: A company cannot leave the program until its nine-year duration is up; a firm cannot be sold while in the program, even if a lucrative offer is made; and a firm cannot make a public offering, acquisition or merger while in the program, even if such steps would enhance the company's business.

R.O.W.'s Williams says that his company, which was selected 1992 SBA Small Minority Business of the Year, has grown enough to leave the 8(a) program, but it can't. "When you're ready to fly, they keep strings on you... My business should be able to do whatever is necessary to survive. If I'd known I'd be so constrained, I wouldn't have joined 8(a)."

Under the leadership of Joshua Smith, CEO of Maxima Corp., the now-defunct United States Commission on Minority Business Development, created during the Bush Administration, dealt with some of these problems in its report on minority business issued last September. (Maxima Corp. is a $45 million BE 100s systems engineering company.) President Clinton hasn't formally commented on the report's recommendations, and many in the minority business community think it is time he did.

Harriet Michel, president of the National Minority Supplier Development Council, organized a group composed of the leaders of minority business associations and minority business owners who met with Administration officials in early April. "Minority-owned businesses have their own set of problems that don't affect other small businesses," she declared, adding, "just having those issues included and represented among small business discussions is not sufficient. The problems facing minority businesses are specific and unusual and should be looked at as a separate set of issues."

The group's goal was to convince the President that the nation must develop a plan to strengthen minority business. "Over the next four years, Clinton should keep an eye on small business, but black business in particular," emphasizes Greg Calhoun. "There is a need for black-owned businesses because we hire more black people than anyone else. We keep that part of the American work force contributing to the overall economy."
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
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Title Annotation:Bill Clinton's economic plan
Author:Scott, Matthew S.
Publication:Black Enterprise
Article Type:Interview
Date:Jun 1, 1993
Previous Article:A talk with America's top business advocate.
Next Article:Redefining beautiful: black cosmetics companies and industry giants vie for the loyalty of black women.

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