Sequestration: What it Means for Small Business

September 19, 2012

Last week, the White House released its highly-anticipated report on the impacts of sequestration. The report, required by law, was crafted by the Office of Management and Budget (OMB) to provide Congress with details on how the sequestration cuts will be implemented.

Enacted as part of last year’s debt ceiling agreement, the Budget Control Act of 2011, Congress and the administration agreed to sequestration as a reduction in overall federal spending of about 2.9 percent. The BCA requires that if the bipartisan Joint Select Committee on Deficit Reduction, or “Super Committee,” failed to forward a deficit reduction proposal  and no other proposal is enacted by the end of 2012, that automatic budget reductions (sequestration) reduce federal spending by $1.2 trillion over nine years (FY 2013-FY2021).  Since the Super Committee failed to reach an agreement, Congress has until December 31 to take action or the sequester will be implemented.

While a seemingly low percentage, the exemption of 70 percent of federal spending from sequestration means higher cuts in other areas. Those programs subject to sequestration will actually see cuts of around 8 to 10 percent given the exemption of programs such as Social Security, veterans’ benefits and Medicaid. Another contributing factor to the increased cuts is the fact that allowable cuts to Medicare were capped at two percent.

These exclusions mean the sequestration rate for discretionary (those funds appropriated by Congress) defense spending will be 9.4 percent and 10 percent for direct defense spending. For nondefense programs, discretionary spending cuts would be 8.2 percent and 7.6 percent for direct spending. Unless Congress passes some kind of near term extension on sequestration or a broad deficit reduction plan, these cuts will go into effect January 2013.

The OMB report provides the various calculations used to determine the rate of cuts to all eligible programs, as well as the percentage applied to each budget line item, the overall estimated cut in dollars, and a listing of all budget items and which are exempted from the sequester.

NSBA—and its members—understand that in these tough economic times, belt tightening is inevitable. However, due to the exemptions and limits on cuts for several huge entitlement programs, we fear that small businesses will bear a disproportionate and unfair burden under the current sequestration plan.

There are several programs facing cuts that provide important assistance to America’s small businesses in a variety of ways including lending programs, regulatory assistance, exporting and much more. Furthermore, small businesses engaged in the federal marketplace are going to be the first to feel the pinch as contract bundling is likely to increase, and subcontractors—where many small businesses first start out—will be the first to go from many existing and future federal contracts.

According to NSBA’s recently-released 2012 Mid-Year Economic Report, 34 percent of small-business owners anticipate a recession in the coming year, the highest it’s been since December 2009. Furthermore, given that economic uncertainty remains atop the list of most significant challenges faced by small-business owners today, it should come as no surprise that addressing the deficit is the number one thing they want policymakers to do.

NSBA is calling on Congress to negotiate a deficit reduction package that makes intelligent choices among competing priorities, and includes serious tax reform to bring in revenue in an efficient and growth-oriented way. We cannot afford to continue with the current U.S. fiscal policy.

Please click here for more on NSBA’s deficit reduction proposal.

Please click here for more on NSBA’s tax reform priorities.

Please click here to read the OMB report.