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America is currently in a state of transition. With the Trump administration making radical changes to tariffs and tax laws, many small business owners aren’t exactly sure how these laws will affect them. While many are optimistic, many others are cautious.

Earlier this month, CNBC, First in Business Worldwide, and SurveyMonkey, a global provider of survey software products, announced the results of their quarterly CNBC/SurveyMonkey Small Business Survey in which they aim to measure the vitality of the American economy as well as the view from Main Street on jobs, taxes and other hot topics. Each quarter, CNBC and SurveyMonkey poll over 2,000 small business owners. In addition to measuring small business confidence nationwide, the large sample size gives CNBC the power to uncover trends by geographic region and among specific small business cohorts. This survey provides a crucial window into the response of small business owners to the new tariffs and tax laws.

According to the 2018 Quarter 3 survey, 58% of small business owners surveyed say overall business conditions are good, up from 53% in Q2, and up 39% from the third quarter of 2017. While the past year has seen conditions improve for small businesses, many have concerns about how the changing tariffs and tax laws will affect them going forward.

First in January 2018, and more recently in June, Trump  increased tariffs on many foreign goods such as solar panels, steel, and aluminum, which protected industries in those arenas but also drove up the prices of goods for American consumers and businesses in other arenas. As a result of these tariffs, China, the European Union, and Canada, among others, have implemented retaliatory tariffs. While these tariffs were put in place to protect domestic industries such as the American steel industry, which receives a boost from the fact that it is now cheaper to buy from them than foreign options, they actually do more harm to smaller, local businesses than good.

A secondary, unintended result of these tariffs is a ripple effect of increased costs to businesses that use those products in making their goods. For example, as the cost of steel increases due to the 25% tariff imposed by the Trump administration in June 2018, American manufacturers that use steel in their products must raise prices to accommodate for increased expenses; small businesses that rely on products made by manufacturers who use steel in their machinery must also accommodate for the increase in expenses and raise prices. The tariffs affect small businesses in particular because unlike major corporations, small businesses are often unable to absorb the additional costs without lowering wages, firing workers, or else risk increasing prices above a market value set by larger businesses who can afford to keep prices lower.

Additionally, the retaliatory tariffs impose added barriers to international expansion of small businesses. These retaliatory tariffs mean that American exports will be taxed in foreign countries, driving up their prices abroad, and making otherwise strong American export companies less competitive in the foreign market.

While most small business owners are unsure of how the Trump administration’s new tariffs will affect them, 34% of small business owners (65% of Democrats and 13% of Republicans) predict that the tariffs will hurt business. Despite the general sense of uncertainty, 51% of those polled (including 50% of Republicans) believe free trade agreements help small businesses. Small business owners are increasingly divided along party lines when it comes to their views on trade: 34% of Republican small business owners expect these changes in trade will have a positive effect on their business (up from 29% a year ago), while 58% of Democrats expect they will have a negative effect on their business (up from 31% a year ago). Of all individuals polled, 8% of small business owners say they’ve already made changes, and 21% are planning to make changes, as a result of tariffs.

Another major change to American legislation that will affect small businesses is the new Tax Cuts and Jobs Act, which was signed in December. While the Trump administration claims that these tax laws will stimulate the American economy, Democrats argue that they favor major corporations over small businesses due to the fact that large corporations have more expenses to deduct and are more likely to be able to afford the hobby-related expenses that are no longer tax-deductible. However, small business owners are largely optimistic. The new tax laws lower individual tax rates, increase the business expense tax deduction limit from $500,000 to $1 million per year, and allow companies filing as pass-through entities to deduct an additional 20 percent. In response to these tax deductions, 33% of small business owners plan to increase headcount over the next 12 months, up from 31% in Q2 and 26% in Q3 2017.

Although these tax laws appear to be putting more money in the pockets of small business owners, there is a darker side to the Tax Cuts and Jobs Act that may increase financial difficulties for the smallest of businesses who deduct few business expenses so will not make use of the increased limit, but rely on the ability to deduct certain expenses. The new tax laws no longer allow for deductions of certain business expenses such as travel cost and membership dues, which may prove to be a problem for many. Because small businesses may struggle to afford those expenses if they are not deductible while larger companies can, the most qualified employees are leaving small businesses to work at larger firms, and small businesses are struggling to attract talent and fill positions. 16% of small business owners polled (but 41% of small businesses with 50 employees or more) have had open positions for at least three months. 45% of small-business owners believe the candidates applying for their open jobs are not properly trained, and 28% of small business owners believe they are unable to fill skilled positions because large corporations are able to offer better pay and benefits.

Ultimately, 22% of all respondents believe the most important issue in the upcoming midterm elections is taxes/spending, followed by the cost of healthcare (16%) and the wealth gap (14%). Small business confidence is at a record high, but small business owners are cautiously optimistic. While many respondents expressed strong opinion for or against the new tariffs and tax laws, the vast majority remained uncertain. The overall takeaway is that we as a society need to make a more active effort to educate small business owners on how changing policies will affect their businesses so they can best prepare for what lies ahead.

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