Watch out. Our next financial crisis is impending, brothers and sisters. That crisis, that looming black cloud, that lurking bête noire, is state bankruptcy. And it could be more cataclysmic than all the adjustments demanded by federal mandates passed for us in the last two years.
While there is general relief in our entrepreneurial community about the extension of the Bush tax cuts, the increasing distress of states is a floating iceberg for entrepreneurs, mostly obscured from view, but dangerous nonetheless. What is coming is potentially so bad that it is worth considering abandoning the most egregiously troubled of our states.
This incipient threat is on the doorstep and is getting insufficient attention. Where it will descend first will be California, New Jersey, Illinois, and my beloved New York. Many others will follow in their wake. Pensions, salaries and debt are overwhelming for these states. They are desperate for money. The most obvious place for states to get money is our small business community. We are simply the easiest, largest, most vulnerable money pool for them to go after.
And it is not just the states themselves. It is also their cities, their school districts, and their multifarious independent taxing authorities.
Here’s a story for you. It concerns a company I know well. My own.
Six years ago my firm received a small bill from the unemployment insurance office of New York claiming I should pay NY unemployment insurance for four out-of-state consultants I was occasionally using. I appealed the assessment and fine and won my appeal after three in-person administrative court appearances. Much to my surprise I was notified months later that my case was overturned on appeal, without me even being informed of the appeal. When I called the state to protest this high-handed, unfair action they basically told me, “Tough. That’s the way we do it.” My option, they kindly informed me, was to spend big dollars and time appealing my small debt through the regular courts. I paid. That is the kind of justice by bureaucratic fiat that small business can expect as states grow increasingly desperate.
In truth there are only a few states that actually try to nurture small business, Texas being chief among them. In a recent editorial in the NY Post (Dec. 10, 2010), Ray Keating of the Small Business and Entrepreneurship Council notes the conclusions of the “Small Business Survival Index 2010.” Keating states that, in many states, politicians have spent decades creating over regulation, high taxes, and wasteful public spending that has outrageously raised the cost of economic risk-taking and chased away business. “What we have in these states is one vast anti-enterprise zone.” My theory is that it can only get worse–lots worse–when states hit the panic button.
Call me paranoid. But watch out. As Brooks Atkinson put it in Once Around The Sun, “Bureaucracies are designed to perform public business. But as soon as a bureaucracy is established, it develops an autonomous spiritual life and comes to regard the public as the enemy.”
Amen, Brother Brooks.