Blog: Rob Cleveland

The great debate over health care reform occasionally drags in small business owners propped up as good reasons not to pass legislation. The implication is that mandating health care for small businesses would put them out of business because of the added costs that requirement would bring.

That argument, of course, assumes that the small business provides no health care, or very little health care at the moment. And that assumption is both incorrect and a slight to those small concerns that have taken body blows to their ledgers over the last decade suffering egregious and seemingly arbitrary hikes in heath care costs.

For the last 15 years, ICON has not only provided excellent health care coverage for its employees, but there has never been any “pay in” from the employees’ salaries. Two years ago, when Humana announced our health care costs were going up 18 percent, we held the line on this policy, even though it had a significant impact on company resources.

Now, just 24 months later, Humana is back with another 15 percent health care increase, and now we might have to face the reality of asking employees to contribute, taking money out of their pockets, and putting it into the hands of a health care company.

Anyone who insists that the plans working through Congress are going to hurt small business doesn’t get it: small businesses all around the country are already feeling the pain from cost increases due to health care. Here are a few basic facts:

• Health care costs have risen 30 percent compared to the cost of our own services provided to customers over the last two years and 10 percent faster than to company-wide salary increases.
• Switching health care companies isn’t an option. All of them have dramatically increased their prices since the health care debate has taken root, and no one is offering lower health care costs.
•  Health care remains one of the chief recruiting tools for small businesses competing with larger companies who are given better rates from the major health care companies.

The Obama plan offers this: “many small businesses that provide health insurance for their employees would receive a small business tax credit to alleviate their disproportionately higher costs and encourage coverage.”

For those small businesses already providing health care coverage, the prospect of a tax credit for doing what amounts to the right thing by employees is a major improvement. Beyond this, the prospect of a “government alternative” that actually provides a lower cost option would be another welcome option.

But it doesn’t mean that we would choose the government alternative; this is a major flaw in the health care debate. Small businesses can choose a government alternative to try and save money. It doesn’t mean that employees – current and future – will accept it.

In nearly every interview we have conducted with a potential employee, health care and the specific provider we carry, always is discussed. As ICON competes for good talent, our health care program is key. If the government-run health care option is considered a discount alternative, talent will go elsewhere. So the fact that a lower-cost option is available does not mean businesses will unilaterally make that selection.

The U.S. is one of the few countries providing health care on the back of business. And as those costs have gone up disproportionately, our competitive capacity has been reduced. At the small business level, health care costs have a very direct, dampening effect. Some alternative needs to manifest, or what at one point was a benefit for employees, may become an incentive for small businesses to find labor alternatives that do not carry such a burden.

When the State of Michigan began issuing credits to the film industry for bringing their work here, projections on the number of jobs and the impact on the Michigan economy were lofty and, perhaps, even exaggerated.

Now, some special interest groups are roiling up against the credit system, insisting that the money spent has done little for the Michigan economy since the bill was signed in April, 2008.

And there is precisely the problem – a lack of patience. Here in Ann Arbor, the film industry descended on the town quickly and in full force. Almost overnight, well known stars and their extensive crews are blocking off streets, taking over restaurants and cutting deals on everything from office space to haircuts.

The problem: Ann Arbor area businesses haven’t figured out how to capitalize on the film business yet, because it is still relatively new. Back in Los Angeles, (or Toronto or New York), businesses understand their place in the film business, and know how to structure themselves to provide added value that can come at a premium, can be sustained and can be profitable.

Back here in Ann Arbor, Hollywood producers and local businesses are just figuring each other out, with one-off deals and single arrangements being made for facilities, locations and services – no long-term commitments and no investment in the future.

But that will change over time. If the state government sustains the momentum by continuing the credits, dollars will move in and local businesses will begin to make investments that provide greater value to Hollywood, and drive up revenue. As those businesses ramp up, they will need to hire people to manage that new business, and the hiring will begin.

Take the local area fitness center and spa. In Hollywood, staying trim and working out is a religion all on its own. Stars also like privacy and seclusion – especially when they are sweating and gasping for air just like everyday people. A local fitness center can’t afford to lock out repeat local customers for just one VIP, and conversely they can’t really charge that VIP a premium if the place isn’t private.

But that business could decide to make the investment to expand, create a private space and then charge higher dollars for it. And from there it stands to reason that they would need to hire a manager to handle the VIP room, lining up customers and handling them when they came in. The same scenario plays out for caterers, transportation companies, equipment leasing, restaurants, creative agencies, office and studio space – the list could go on.

Of course these investments becomes a bad idea the moment Michigan repeals the credit, and Hollywood takes its caravan on the road. The jobs are lost, the investment is a bust and the area business would have been better off never expanding. Put another way, no business owner worth their wages is going to make an investment in the film business until there is a clear commitment from the state to keep the credits online.

Expecting area businesses to make these investments and generate jobs in only 18 months while investment capital is nearly impossible to come by is incredibly unrealistic. The credit protests smack more of opportunistic political backbiting and less about what is best for Michigan

Until Lansing telegraphs a long-term commitment, yes, the dollars being spent aren’t likely to instigate much in the way of strong, sustainable business that creates thousands of jobs. And just to put the credits into perspective, 45 states offer some type of tax credit to the film industry, with 20 states offering serious incentives. Michigan, right now, happens to be the best. Given that Michigan has had trouble lately being a leader in anything except unemployment, the film credits should continue, and State legislature should give Michigan businesses something they can count on in the future.

The State of Michigan always seems to find its way to the top of lists we all wish didn’t exist. Lately it is the national unemployment list driven largely by the meltdown of the domestic car business. In an effort to try and staunch the bloodletting, Michigan has spent considerable dollars to incentivize businesses to build jobs here in Michigan.

ICON began looking at the State of Michigan’s MEGA tax credit for high-tech jobs in late 2007. The program isn’t widely advertised, but regional and local business publications almost always pick up reports once the credits are issued, representing the best way for companies to compare themselves with those issued tax credits and decide if they should apply.

Few companies are forecasting major growth plans now compared to this time two years ago, but those who are recognize that Michigan’s Business Tax is a big impediment, so much so that outsourcing or hiring contract employees often is a better option. ICON faced that dilemma, knowing that it would have to continue to staff up through 2009 to meet growing demand, and the tax credit seemed like a good option to take the pressure off of full-time employee commitments.

The process began with Ann Arbor Spark who reviewed our business plan and our model for growth over the next five years. From there, representatives from the Michigan Economic Development Council (MEDC) also interviewed the company principles, and ultimately approved the application.

Key factors in having the application approved were the ability to demonstrate a strong business plan and then graft that plan into the structure that allows MEDC to make an overall assessment. The tax incentive program was originally designed to instigate more manufacturing jobs and as a result, the application and the review process have a corollary focus: wages and capital equipment investments are chief concerns rather than salaries and benefits.

But once the case is made, and the MEDC approves the application, a formal approval process takes place in Lansing, and tax credits are put in place. The good news for businesses just starting the process: the program doesn’t start until you are ready. So if the first year doesn’t meet the minimum expectations, the program can begin a year later.

ICON hit its target growth for 2009, and the tax credits definitely played a roll in our decision-making process. In some cases, where contractors or out-of-state developers were available, we chose instead to hire on full time, in part to meet our targets and qualify for the credit. In the end, the fiscal offset probably doesn’t net ICON a significant return, but full time employees almost always prove to be more effective than outside help. These days in particular, people hired on full time with benefits see themselves as extremely fortunate.

There is mounting pressure to cancel these types of tax credits and other incentives to drive up employment here in Michigan. Those who advocate eliminating these incentives must have solid jobs or trust funds and certainly aren’t in the business of running a business. Employers here are finding any edge they can to cut costs, and with labor representing the biggest expenditure for most companies, it is the easiest place to look.

If Michigan doesn’t find innovative ways to reconstitute its job base, we can look forward to many more years of being…number one.