[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 
          H.R. 2373, THE START-UP SUCCESS ACCOUNTS ACT OF 1999

=======================================================================

                                HEARING

                               before the

                      SUBCOMMITTEE ON EMPOWERMENT

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                    WASHINGTON, DC, NOVEMBER 2, 1999

                               __________

                           Serial No. 106-39

                               __________

         Printed for the use of the Committee on Small Business




                     U.S. GOVERNMENT PRINTING OFFICE
61-270                       WASHINGTON : 1999




                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN, 
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
JOHN E. SWEENEY, New York            DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania      STEPHANIE TUBBS JONES, Ohio
JIM DeMINT, South Carolina           CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana                DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota             GRACE F. NAPOLITANO, California
MARY BONO, California                BRIAN BAIRD, Washington
                                     MARK UDALL, Colorado
                                     SHELLEY BERKLEY, Nevada
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director
                                 ------                                

                      Subcommittee on Empowerment

                JOSEPH R. PITTS, Pennsylvania, Chairman
PHIL ENGLISH, Pennsylvania           JUANITA MILLENDER-McDONALD, 
JIM DeMINT, South Carolina               California
FRANK A. LoBIONDO, New Jersey        DENNIS MOORE, Kansas
EDWARD PEASE, Indiana                STEPHANIE TUBBS JONES, Ohio
                                     TOM UDALL, New Mexico
               Dwayne Andrews, Professional Staff Member
               Stephanie O'Donnell, Legislative Assistant




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 2, 1999.................................     1

                               WITNESSES

Kerrigan, Karen, Chairman, Small Business Survival Committee.....     4
Pages, Erik R., Policy Director, National Commission on 
  Entrepreneurship...............................................     6
Horton, Pepper, CPA, Tax Technology, LLC.........................     8

                                APPENDIX

Opening statements:
    Pitts, Hon. Joseph R.........................................    23
    DeMint Hon. Jim..............................................    25
    Baird, Hon. Brian............................................    26
Prepared statements:
    Kerrigan, Karen..............................................    28
    Pages, Erik R................................................    34
    Horton, Pepper...............................................    42
Additional Information:
    Letter to Congressman Baird from Frank Nichols, President, 
      Silicon Forest Electronics, Inc............................    44
    Global Entrepreneurship Monitor, 1999 Executive Report.......    46
    Global Entrepreneurship Monitor, National Entrepreneurship 
      Assessment; United States of America, 1999 Executive Report    94


          H.R. 2373, THE START-UP SUCCESS ACCOUNTS ACT OF 1999

                              ----------                              


                       TUESDAY, NOVEMBER 2, 1999

                  House of Representatives,
                       Subcommittee on Empowerment,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10 a.m., in room 
2360, Rayburn House Office Building, Hon. Joseph R. Pitts 
(Chairman of the Subcommittee) presiding.
    Chairman Pitts. We will call the hearing to order.
    I am Congressman Joe Pitts from Pennsylvania. Good morning 
and welcome. Thank you for joining the Empowerment Subcommittee 
today for a hearing on the Start-Up Success Accounts Act of 
1999, or SUSA. This bill was authored by the Vice Chairman of 
this Subcommittee, my friend from South Carolina, Mr. Jim 
DeMint, and by another member of the Small Business Committee 
who joins us today, Mr. Brian Baird from Washington.
    I am going to yield most of my time to Mr. DeMint, as it is 
his bill, and he can speak in more detail about it, but first I 
would like to thank Mr. DeMint and Mr. Baird for their work on 
this legislation and their leadership in the area of tax relief 
for small businesses.
    One goal of the Empowerment Subcommittee is to promote 
legislative initiatives that enable entrepreneurs to realize 
their dream of becoming small business owners and to sustain 
their small businesses once operational. The Start-Up Success 
Accounts Act, of which I am a cosponsor, is an example of this 
type of legislation, one which seeks to lessen the burden felt 
as a result of a complicated Tax Code that is not small-
business-friendly.
    Excessive taxation is especially detrimental to the success 
of new small businesses, which typically encounter numerous 
difficulties as they struggle to grow in the first few years. 
Quite often business owners are counseled to reinvest their 
profit into the business by purchasing equipment or giving 
bonuses, thereby avoiding taxation on the business's profits. 
But what if there was a way for small business owners to both 
avoid immediate taxation and save more of the money that they 
earned? That is exactly what H.R. 2373 proposes.
    This bill would allow a new small business the opportunity 
to use a tax-deferred savings account for a period of time 
during the beginning stages of business development. By 
utilizing this SUSA as a money management tool, start-up, small 
business owners would be able to retain capital by putting up 
to 20 percent of their annual taxable income, up to $200,000 
per year, into a SUSA. This supply of capital may help 
withstand periods of slow business or increased competition by 
allowing them to save when business is profitable.
    I want to welcome our witness panel, Ms. Karen Kerrigan, 
Chairwoman of the Small Business Survival Committee; Mr. Erik 
Pages, Policy Director for the National Commission on 
Entrepreneurship; and Mr. Pepper Horton, a CPA from Greenville, 
South Carolina, and entrepreneur himself. Thank you all for 
being here, and I look forward to your testimony.
    [Mr. Pitts's statement may be found in the appendix.]
    Chairman Pitts. Mr. DeMint.
    Mr. DeMint. Thank you, Mr. Chairman. I thank you for 
holding this hearing today, and particularly for your passion 
to empower the disadvantaged through our efforts for small 
businesses. Earlier this year Representative Baird and I 
introduced H.R. 2373, what we call the Start-Up Success 
Accounts Act of 1999. Our Chairman has referred to that as SUSA 
accounts.
    The purpose of this legislation is to give small businesses 
an additional tool to manage finances and particularly to 
retain capital. According to the Census Bureau, over 99.9 
percent of business closures are small firms. One of the 
primary reasons for business failures is a lack of capital. 
This problem is further aggravated by a tax system that 
discourages capital retention. The ultimate result is less 
growth and less staying power. Operating with no capital, even 
a small downturn in sales, can put a new company out of 
business.
    H.R. 2373 would allow new business start-ups to place up to 
20 percent of profits but not more than $200,000 into tax-
deferred SUSA savings accounts for each of the first 5 years of 
businesses. This would allow new businesses that are profitable 
in the first few years to set aside some profits to prepare for 
a downturn in later years. Money could be set aside in an 
account for up to 5 years after the deposit.
    The idea for this bill came from my own experience as a 
small businessman in starting my own company. It is similar to 
a bill offered by our colleague Kenny Hulshof, which would help 
farmers and ranchers manage capital with farm accounts. In 
starting my own business, I learned how hard it is to manage 
finances as you try to stay afloat, especially in those first 
few years of business. It isn't easy, especially with the 
current Tax Code, and I believe anyone who takes on the 
challenge of starting a business deserves not only our respect, 
but our support.
    I appreciate the work of this Committee in exploring ways 
to remove obstacles that often stand in the way of the success 
of small businesses. Small businesses create virtually all of 
the net new jobs in this country today, with women and 
minority-owned businesses making up one of the fastest-growing 
segments of small businesses. It is particularly important for 
this Committee to take on this challenge. That is why I am 
pleased that the Empowerment Subcommittee is having this 
hearing today to try to empower those who try to revitalize our 
Nation.
    I would like to add my thanks to all of you who are 
testifying today: Karen Kerrigan with the Small Business 
Survival Committee; Erik Pages, thank you for being here; and 
particularly Mr. Horton from my district, I appreciate you 
coming up. You not only have a lot of experiences as an 
accountant, but you started your own business and have a little 
bit of feel what it is like. I particularly appreciate all of 
you being here, and I yield back the balance of my time.
    [Mr. DeMint's statement may be found in the appendix.]
    Chairman Pitts. Mr. Baird, would you like to make an 
opening statement?
    Mr. Baird. Thank you, Mr. Chairman. I want to thank you for 
holding this hearing, and I thank my good friend from South 
Carolina, and I thank the witnesses for being here.
    We have worked together, the gentleman from South Carolina 
and I, because of our concern for small businesses. I am the 
son of small business owners. My folks--my mom owned a bridal 
shop, and then my father and mother together bought an ice 
cream store, and I saw what they struggled with through the 
lean and the good years.
    One of the things that is clear from that experience 
personally and from meeting with business owners in my own 
district is the important challenge of finding capital, and the 
Start-Up Success Account Act is designed to address precisely 
that.
    I had a business owner come to me and say it is sometimes 
easier to find the start-upcapital to just get going than it is 
once you are in place, and then you really need to set something aside 
to fund further expansion, and that is precisely what this bill is 
designed to do. The challenge is how can we make capital more available 
to our businesses as they try to expand; and importantly, how can we 
put the control of that capital in the hands of the business owners.
    As we prepared for this hearing, I talked to some folks who 
I had the very great privilege of being at the grand opening of 
their electronics manufacturing plant just a few months ago. A 
gentleman named Frank Nichols has invested every single penny 
he has got. He has mortgaged his home. He has gotten help from 
his church members, and they have a very, very exciting 
business on the line that could expand. They hope to employ as 
many as 200 people in our district.
    The challenge, however, is capital. And with the consent of 
the Chair, I would like to read a portion of a letter that he 
submitted to me as he knew I was preparing for this, and it 
tells the story why the start-up success account is so 
important. Here is what Mr. Nichols writes: ``we have tried the 
traditional source of funds. The banks are only interested if 
you have collateral of a value greater than the amount you want 
to borrow, preferably in CDs. The local economic development 
sources of funds are not available to start-ups or are limited 
to the rural or economically depressed areas. We have tapped 
our own sources to the max. Everything we own is now mortgaged 
or used to secure the leases or part of our original capital 
investments, and our credit card balances are climbing.''
    That is not an uncommon statement, and the situation here 
is if he is successful in his first year and realizes profits, 
we should put him in a situation where he can set those profits 
aside for savings for future investments rather than feeling 
that he has to spend them, perhaps, in the process, incurring 
further debt, thereby further jeopardizing his capital 
security.
    Precisely that mission is what the Start-Up Success 
Accounts Act is designed to accomplish, and I thank the 
Chairman and the witnesses today, and I am interested in 
hearing your thoughts on how we can improve the bill.
    Chairman Pitts. Thank you.
    [Mr. Baird's statement may be found in the appendix.]
    Chairman Pitts. Mr. Moore, any opening statement?
    Mr. Moore. No opening statement, Mr. Chairman.
    Chairman Pitts. Then I call on Ms. Kerrigan at this time.

STATEMENT OF KAREN KERRIGAN, CHAIRMAN, SMALL BUSINESS SURVIVAL 
                   COMMITTEE, WASHINGTON, DC

    Ms. Kerrigan. Thank you. First of all, let me thank you for 
inviting our group, the Small Business Survival Committee, for 
being a part of this important hearing. On behalf of SBSC and 
its more than 50,000 members, I am pleased to have this 
opportunity to testify in support of the Start-Up Success 
Accounts Act of 1999. I am Karen Kerrigan, Chairman of SBSC, a 
nonpartisan, nonprofit small business advocacy and watchdog 
organization headquartered in the Nation's capital.
    Let me also thank you, Mr. Chairman, for holding this 
important hearing, and, of course, both Congressman DeMint and 
Congressman Baird for their leadership in introducing H.R. 
2373. Many times our organization has had--our staff, members, 
our small business members, members of our board of directors 
have had the honor to testify before Congress regarding the 
hurdles faced by the small business entrepreneurial sector of 
our economy and the ways that our elected officials can help 
create an economic and policy environment favorable for their 
growth, success and, of course, their survival.
    SBSC is pleased that the Congress continues to place the 
needs of small business at the top of its agenda, and we are 
encouraged by bipartisan initiatives such as the SUSA Act of 
1999 that will make a meaningful difference for many young 
enterprises across the country.
    Access to capital remains a serious obstacle for many small 
firms as it was in 1995 when the delegates to the White House 
Conference on Small Business ranked the issue as one of its top 
priorities. Out of the 60 recommendations that were presented 
to the President and to Congress, 15 of those related to 
capital needs. Many of the efforts undertaken by the Congress 
since that conference to lower the tax and regulatory burden on 
small businesses, to help increase risk-taking and 
entrepreneurship, as well as increase capital access, for 
example, cutting the capital gains tax, have been a plus for 
members as well as small businesses in general.
    Passage of the SUSA Act of 1999 sponsored by 
Representatives DeMint and Baird is another way, a creative and 
common-sense solution that would assist many small businesses 
through the tumultuous and challenging early years of their 
development. Because the Tax Code discourages capital 
retention, many small businesses are often faced with cash 
shortfalls at critical phases. These periods include times when 
a business needs extra capital for expansion and growth or 
cycles when business activity may slow down and there is little 
flexibility in managing fixed expenses, or simply periods of 
adjustment when the business needs an infusion of cash to react 
to changes in the marketplace.
    The SUSA option whereby new small businesses would be 
allowed to place up to 20 percent of taxable income into tax-
deferred savings accounts for each of the first 5 years of 
operation opens up new financial planning as well as financing 
opportunities for small firms most in need of these tools.
    This Committee has studied the difficulty that many small 
businesses face in securing adequate capital to finance their 
growth. As most Committee members know, many banks require a 
documented track record of success, while venture capital and 
angel relationships are extremely competitive. These networks 
are often difficult to penetrate. Unfortunately, the tremendous 
success of venture funds in raising significant amounts of 
capital have made small investments less attractive. This means 
that small businesses need more tools to be self-reliant for 
their capital needs.
    The Center for Venture Research of the University of New 
Hampshire estimated that about 300,000 growing companies and 
about 50,000 start-ups need equity capital each year. That was 
estimated in an analysis that the university conducted for the 
Small Business Administration. CVR projected that total funding 
needs for these companies amounted to $60 billion.
    The SUSA solution would help small firms get out of the 
trap of passing through excess capital to avoid double 
taxation, subsequently followed by a frenzied search for 
capital to grow the business or to keep it afloat. Let me add 
that the owner can spend an inordinate amount of time and 
resources seeking such capital during times of need. The SUSA 
alternative in this regard promotes self-sufficiency and 
efficiency. In addition, the funds in these accounts will 
probably give the small business owner more leverage in 
securing competitive loans.
    As more and more individuals determine that small business 
ownership is a goal they would like to pursue, particularly 
women as well as minority Americans, it is incumbent upon our 
elected officials to identify areas where public policy, 
particularly the Federal tax system, may beunwillingly 
assisting business closures. There are steps that can be taken to save 
some of the 99.9 percent of small firms that close their doors, and it 
is within the means of Congress to help salvage some of these 
businesses. This is especially true in many of our urban areas where 
small business success and nurturing of an entrepreneurial climate may 
be the only hope for the revitalization of inner cities, and the same 
can be said for small towns and small to mid-sized cities where 
factories and businesses have either left the country or moved to more 
hospitable business climates.
    There is a need for the SUSA Act of 1999. Since the 
inception of SBSC just 5 years ago, hundreds of small 
businesses have contacted our offices in search of capital for 
their promising businesses. It is little solace to such 
entrepreneurs when we explain to them that we only serve as a 
watchdog group advocating legislative measures to increase 
access to capital for businesses that are in the start-up 
phase. However, we have learned a lot from these entrepreneurs, 
and we feel strongly that the SUSA Act of 1999 is one way to 
equip such businesses with an option that allows each one of 
them to chart their financial destiny and their survival.
    Again, I congratulate Representatives DeMint and Baird for 
introducing and pursuing with great vigor H.R. 2373. We support 
this initiative and look forward to working with Members of the 
U.S. House of Representatives to ensure its passage. Thank you, 
and I look forward to answering questions from Committee 
members.
    Chairman Pitts. Thank you.
    [Ms. Kerrigan's statement may be found in the appendix]
    Chairman Pitts. Before we ask any questions, we will 
receive testimony from all three of the witnesses. I now turn 
to Mr. Erik Pages, policy director of the National Commission 
on Entrepreneurship.

     STATEMENT OF ERIK R. PAGES, POLICY DIRECTOR, NATIONAL 
         COMMISSION ON ENTREPRENEURSHIP, WASHINGTON, DC

    Mr. Pages. Thank you, Mr. Chairman, and members of the 
Subcommittee for inviting me. My name is Erik Pages, and I am 
here representing the National Commission on Entrepreneurship. 
We are a new organization with a 3-year charter to help 
government policymakers better understand the needs and 
interests of entrepreneurs, and to inform public policies that 
support these needs. We were established by the Kauffman Center 
for Entrepreneurial Leadership, which is part of the Kansas 
City-based Ewing Marion Kauffman Foundation.
    On behalf of all of our Commissioners, I want to thank the 
Subcommittee for holding this important hearing. We also 
commend Representatives DeMint and Baird for their leadership 
in sponsoring H.R. 2373. It is an important proposal that could 
play a critical role in supporting entrepreneurs across the 
Nation.
    H.R. 2373 is designed to provide support to one of the 
fastest growing sectors in the business world. As the 
Subcommittee members certainly know, we are enjoying a true 
boom in entrepreneurship in the United States. Let me give you 
some recent data to support this point. I would like to submit 
two reports for the record which detail these points.
    In cooperation with the Kauffman Foundation, we recently 
released a study of start-up activity in the United States and 
nine other industrialized countries. This study, The Global 
Entrepreneurship Monitor, found that America is far and away 
the most entrepreneurial country on Earth. This was not a 
surprise to us. What did surprise us was the pervasiveness of 
entrepreneurship across the United States. Each year Americans 
start anywhere from 600,000 to 800,000 new companies that hire 
employees. That adds up to roughly 14-16 start-ups for every 
100 existing businesses. At the same time an additional 2 
million new businesses are started each year as self-employment 
ventures. So overall, roughly 8 percent of the American adult 
population, that is nearly 16 million people, are in some stage 
of trying to start a new business. This is a very robust level 
of new business activity.
    But as you know, the vast majority of new start-ups do not 
succeed. This is no surprise as starting a new company is a 
high-risk venture. We are continuing to study the factors that 
lead to business success and failure, but I can highlight some 
preliminary factors that appear to play a role, and H.R. 2373 
addresses what is probably the most critical external factor in 
a new firm's success, acquiring and retaining capital.
    Our Commission has found that capital is readily available 
for most businesses in the country today, but unfortunately, 
this good news does not apply to all entrepreneurs. Our 
research has uncovered a capital gap that often exists for 
small start-up companies.
    When a company is first started and has limited capital 
needs, say under $50,000, funds can generally be obtained from 
family and friends or from less orthodox sources like credit 
cards. Thus, most people who start a self-employment venture 
can generally find funds for that purpose.
    However, when a company needs funding in the range of 
$50,000 to $1 million or $2 million, sources of equity capital 
often dry up. Most venture capital funds are seeking larger 
deals, and banks continue to shy away from high-risk start-ups. 
Angel investor networks, which are growing in importance, are 
available, but not all start-ups have been able to access these 
sources of funds. Like venture capital, angel capital funds 
tend to be highly concentrated in specific geographical 
regions.
    Let me talk about the Start-Up Success Accounts Act of 
1999. As our analysis indicates, H.R. 2373 is targeted on the 
right problem. The first 5 years of a company's life are its 
most tenuous. Even if a company is profitable, it must reinvest 
its profits into fixed assets, recruiting and training new 
workers, expanding distribution channels and other tasks. Thus, 
even successful entrepreneurs face major challenges regarding 
cash flow during the first 5 years of existence. If firms 
survive through this transition period, they tend to succeed. 
Indeed, firms that survive after 3 years show significantly 
lower failure rates than comparable businesses.
    Moreover, many of these firms become what are commonly 
referred to in the economic development profession as gazelle 
firms. These are companies with annual sales growth increases 
that exceed 20 percent or more for 4 years. The typical gazelle 
firm does not simply take off after finding a hot niche. The 
typical Internet story is not what happens for most companies. 
It is far more common to see a gradual development phase over 3 
to 5 years, say, followed by robust but not explosive growth.
    H.R. 2373 seeks to support these new firms by creating a 
tax-deferred account known as a Start-Up Success Account 
wherein small businesses can place annual deductions of up to 
20 percent of income or $200,000 during the first 5 years. 
These funds would be drawn from operating income, and 
withdrawals would be treated as taxable income in the year in 
which they were drawn. These accounts could provide an 
additional safety net for businesses in their critical start-up 
phases. During a firm's first 5 years, it will inevitably hit 
some type of downturn that affects capital flow.
    Under current rules, entrepreneurs often use credit cards 
or take on new loans to weather the tough times. These new 
accounts could provide a direct source of alternative capital, 
or theycould be used as collateral to secure more competitive 
loan rates. By allowing new firms to avoid taking on new debt, we can 
help set the stage for more rapid future expansion and job creation.
    We believe that H.R. 2373 includes several provisions that 
are particularly important. First off, the limitations on the 
availability of the accounts in terms of the time period, 5 
years, and the size of the company, under $5 million in gross 
receipts, makes sense. We believe that this program must be 
tightly focused on new entrepreneurs and start-up companies.
    Secondly, the bill contains some restrictions on the use of 
the accounts, and we believe that the Subcommittee might 
consider additional language to ensure that the accounts are 
explicitly used for new business and are not diverted for other 
purposes.
    Finally, we believe that the SUSA accounts would be 
particularly helpful to women and minority entrepreneurs. These 
business founders often start their firms with lower levels of 
initial investment, and thus face higher risks of failure in 
the event of a business downturn.
    Some other steps in addition to its consideration of H.R. 
2373, we urge the Subcommittee to consider other steps to 
support America's entrepreneurs. We recommend that you examine 
the issue of angel capital and steps that can be taken to 
create local angel investor networks around the Nation.
    We also urge you to review current technology transfer 
programs and examine how we might make these programs more 
friendly to entrepreneurs.
    Finally, we believe ultimately that the most effective 
programs to support entrepreneurs must start at the State and 
local level. We would be happy to work with the Subcommittee in 
examining these issues. We will soon be releasing an analysis 
of State best practices in supporting entrepreneurship, and we 
will forward these findings to the Committee when the report is 
released.
    In conclusion, on behalf of the National Commission on 
Entrepreneurship, I commend the Subcommittee for holding this 
important hearing and for its leadership in supporting 
America's entrepreneurs. These visionaries are the engine of 
the new economy, and your support is critical to their 
continued prosperity and vitality. Thank you, and I look 
forward to your questions.
    Chairman Pitts. Thank you for your testimony.
    [Mr. Pages' statement may be found in the appendix]
    Chairman Pitts. Mr. Horton.

                   STATEMENT OF PEPPER HORTON

    Mr. Horton. My name is Pepper Horton, and I am a CPA from 
Greenville, South Carolina. I would just say I am very nervous. 
I would like to thank the Committee for the opportunity to come 
up here and testify today on the SUSA Act of 1999.
    I started in 1989 as a CPA with Ernst & Young where I 
worked for 10 years, and eventually left Ernst & Young to start 
my own practice so I could deal with smaller businesses that 
could not afford me when I was working with a larger firm.
    I feel that experience has given me a pretty good 
understanding of how large businesses operate and how small 
businesses operate. As a small business itself, I understand 
the pressures in how companies manage their cash flows. And 
having a lot of accounts receivable from large companies, I 
understand how they manage their cash flows as well as how they 
are stretching their payables. I find a great deal of 
satisfaction working with new businesses and feel that I can 
really make an impact with these businesses as they try to get 
off the ground.
    In reading through my colleagues' presentations, I was 
suddenly concerned that my presentation was too technical, and 
that really comes from my background. Whenever I see a piece of 
legislation, I immediately read the code and try to answer the 
questions what does the bill say, sometimes just as importantly 
what doesn't it say, and try to figure out how I might use that 
bill to help my clients. So I apologize if I have gotten too 
technical.
    After reading the act and rereading the act, I summarized 
my thoughts into the following points, the first being double 
taxation. This bill would clearly be a great benefit to regular 
or C corporations in managing their cash flow. A corporation's 
net income is taxed at the corporate level, and when these 
earnings are distributed to the shareholders, the earnings are 
taxed again as dividends. Double taxation creates an enormous 
incentive for business owners and their consultants to keep 
corporate taxable earnings low. As a result, business owners 
engage in tax-motivated spending at or near year end.
    If there is one thing I have learned in my career, it is 
that tax-motivated spending is at best an inefficient use of 
resources, and is often tantamount to throwing away a dollar to 
save 40 cents. That is one of the things that I try to 
continually stress to my clients, that spending money to avoid 
taxes is usually, like I said, throwing away a dollar to save 
40 cents.
    One of the most commonly used mechanisms for lowering 
corporate profits is increasing compensation to employee 
shareholders. Of course, the Tax Code mandates that employee 
shareholder compensation is reasonable. However, ``reasonable'' 
is a subjective term and often produces a range of compensation 
amounts that could be considered reasonable. As a result, 
business owners often have a huge incentive to accept 
compensation amounts that are on the high end of what is 
considered reasonable instead of what the business actually 
needs. This bill would mitigate that motivation by allowing 
corporations to receive the same tax effect as ``comping out'' 
the corporation's profits while still keeping the cash inside 
the corporation for future use that may or may not be 
anticipated.
    Another use for the bill would be funding expansion. As a 
business grows, it must increase its inventory, secure new 
office or plant space, purchase new equipment, and train new 
employees. While section 179 allows many businesses to expense 
their equipment purchases, all of the other expansion-related 
expenditures generally must be capitalized for tax purposes. 
This can leave a new business in the unfortunate situation of 
having a tax liability because all of the spending that they 
have done is not deductible, or least not 100 percent 
deductible. It is amortized over a number of years, sometimes 
up to 39 years. It can leave the business in the unfortunate 
situation of having a tax liability with little cash on hand. 
At the end of year 2, for example, a new business could place 
some of the cash on hand to fund year 3's expansion into a SUSA 
account and immediately reduce the business's tax liability. 
Even if this cash is only temporarily placed in a SUSA account, 
it provides a new business with a valuable tax deferral. Funds 
which would have ordinarily been remitted to the Treasury will 
still be in the private sector creating jobs and funding 
economic expansion.
    The third point is smoothing out earnings. As you are 
aware, our tax brackets are graduated so the individuals and 
corporations with higher taxable income pay tax at a higher 
marginal rate. One possible use of SUSA accounts would be in 
the smoothing out of a business's earnings to avoid income 
spikes from temporarily thrusting taxpayers into a higher tax 
bracket. While generally accepted accounting principles, or 
GAAP, aim to match revenues with expenditures in the proper 
period, the Tax Code tends to accelerate income recognition and 
defer deductions inorder to increase revenue. This and a host 
of other business factors can lead to the bunching of income in a given 
tax year. This bill could provide taxpayers a tool to lessen the sting 
of abnormally high taxable income in a single year.
    On the self-employment tax section, section (e)(3) of the 
bill provides that the amounts included in gross income under 
the section will not be included in determining earnings from 
self-employment. This creates a planning opportunity to lessen 
the impact of the self-employment tax depending on how the 
business is classified for tax purposes. Sole proprietorship, 
single member LLCs and most partnerships' net earnings are 
subject to self-employment tax. My experience has shown that 
self-employment tax can have a potentially devastating effect 
on new business owners if they are not properly advised. If my 
understanding of this bill is correct, this provision provides 
an exclusion of the amount deposited in a SUSA account from the 
self-employment tax. That is a tremendous benefit.
    One of the things that I have noticed, and I have felt 
myself as a new business owner, is that the self-employment tax 
can kill you. Especially for people leaving the corporate world 
to start a business. They really don't understand how the self-
employment tax works, and they usually end up getting the April 
surprise when they do their tax returns and find out that they 
have not paid enough to cover the self-employment tax.
    The bill's most obvious benefits are to provide the 
business with an opportunity to defer income taxes for up to 10 
years while earning a return on the funds. In doing so, 
however, the bill encourages businesses to retain earnings 
rather than engaging in tax-motivated spending. However, I am 
concerned that as the business grows and as its profits expand, 
that the income from the SUSA will be taxed at a higher 
marginal rate than would have been paid in the year the deposit 
was made.
    What I mean by that is that if a business's earnings are 
moderate in years 1 through 5, and the business continues to 
grow, the cash coming out of the SUSA account may be taxed at a 
higher rate than the tax benefit that was received when it went 
into the SUSA account. Some tax consultants may be a little 
reluctant to recommend to clients that they potentially expose 
themselves to paying higher marginal tax rate.
    In conclusion, I would like to express my sincere 
appreciation to the Congressmen for their efforts to assist 
small businesses. As a consultant to many small businesses and 
as an owner of a small business, I am impressed with their 
apparent understanding that small businesses are the backbone 
of our economy and will be the number one source of new jobs as 
we move into the next century.
    Obviously I would love to see a bill that eliminated the 
double taxation that encourages debt financing and tax-
motivated decision-making or a bill that simply lowered the tax 
rate that new businesses face. However this bill is clearly an 
effort to assist small businesses in managing their tax 
liability and overall cash flow. The unavoidable fact is that 
our Tax Code contains very few provisions aimed at helping 
small businesses get off the ground, and this bill is clearly a 
step in the right direction, and I am therefore happy to 
support it.
    Chairman Pitts. Thank you.
    [Mr. Horton's statement may be found in the appendix.]
    Chairman Pitts. We will go to questioning now from the 
Members.
    Mr. Horton, I would like to start with you. You mentioned 
in your testimony that the U.S. Tax Code often works against 
small entities. What do you think is the most detrimental 
effect of our Tax Code on our Nation's small businesses?
    Mr. Horton. One of the worst is double taxation of 
corporations, and that is one reason why I try to get clients 
in early when they are trying to decide what type of entity to 
choose so I can steer them away from a regular corporation, 
because the double taxation, the same dollar of earnings is 
taxed twice.
    But the general complexity of the payroll taxes tend to 
give clients a lot of trouble. I feel like every one of my 
clients get penalized by the IRS in the payroll tax area even 
though they are trying as hard as they can to comply. In fact, 
they hire me, and sometimes I get them penalized, too. It is 
frustrating because I am a paid professional, and I end up 
slipping up and getting the client penalized.
    There are provisions like section 179 that allow businesses 
to expense their equipment purchases, but they have also got to 
buy inventory, and that is not immediately deductible. That is 
cash out the door that does not provide an immediate tax 
deduction. So you can end up in a situation where a corporation 
has paper profits, but no cash to pay it.
    Chairman Pitts. Thank you.
    Mr. Pages, you mentioned in your testimony that you 
recommend that the Subcommittee examine the issue of angel 
capital. For those of us not as familiar with that, can you 
explain?
    Mr. Pages. Angel capital refers to individual investors, 
often former entrepreneurs, who invest their own wealth in 
starting new companies. We found through this study there is a 
huge amount of angel capital available in this country, around 
$50 billion. If you compare that to the amount spent last year 
in venture capital, which I believe was roughly $16 billion in 
new investments, you have a huge differential there. So there 
is much more angel capital available for start-up businesses 
than there is venture capital. Venture capital is largely for 
bigger deals and is not available for the types of start-ups 
that we hope to help through this legislation.
    As Ms. Kerrigan noted, it is very hard to break into 
networks to put the business together with the investor, and if 
there is some way to create networks so we could spread, if you 
will, the wealth from all of this angel capital that is 
available to other parts of the country, it would be a very 
helpful step that the Subcommittee could take.
    What we find now is that the places where there is lots of 
venture capital, Silicon Valley, Austin, the Boston area, there 
is a lot of angel capital, too. And in effect you are caught in 
a chicken and egg situation. People get rich and they invest 
back in the areas where they grew up, and the places that don't 
have those entrepreneurs located there, it is very difficult 
for them to get started in terms of creating an angel capital 
network.
    Chairman Pitts. Ms. Kerrigan, how many members of the Small 
Business Survival Committee are start-ups or small businesses 
within their first few years of existence? How many of your 
members would be able to take advantage of the SUSA accounts, 
and do you feel that they would benefit from this legislation?
    Ms. Kerrigan. I would say the majority of our members are 
those small businesses or small firms who have endured the 
first 4 or 5 years, the ones who have gotten off the ground, 
who can become more active in an organization such as ours and 
pay membership and stay informed on policy issues and 
legislation and how it impacts their business.
    I would--and this would be a guess, we can go back and do 
this research certainly with our membership, but I would guess 
probably about 5 percent of our membership are those businesses 
who are in the start-up years and who want to know what is 
going on in the Nation's Capital and State capitals nationwide 
and how that may impact their business; SBSC members also 
include a lot of investor types who invest in these types of 
businesses.
    So what we want to do, obviously, is grow our membership to 
large numbers, and include the start-ups. That is part of our 
mission and goal, to not only represent our membership, but 
also represent the needs of all small businesses nationwide. So 
I would say 5, about 5 percent or so are in that start-up phase 
right now.
    Chairman Pitts. Thank you.
    Now I would like to recognize the Ranking Member of the 
Subcommittee, the lady from California, Ms. Millender-McDonald.
    Ms. Millender-McDonald. Thank you, Mr. Chairman. I am sorry 
that I was late getting here.
    Ms. Kerrigan, I want to start with you. You mentioned just 
a few minutes ago talking with the Chairman about the need to 
look into small businesses and what will perhaps work for them 
or to find the exact needs for the small businesses. As we do 
recognize the first 5 years of small businesses really are 
tenuous, if you will, because of the obstacles that are there. 
When you do your needs assessment, are you going to do--what 
small businesses are you going to do, across the board, women, 
minority, all, or what?
    Ms. Kerrigan. When we do a needs assessment, we look at the 
needs of our members, which generally relate to taxes and 
regulation and other obstacles that are put up by the 
government in terms of affecting their growth and success and 
their competitiveness, but we look at what the obstacles are 
faced by many start-ups as well.
    We base that needs assessment on looking at what the 
climate is for small firms. Obviously with 99.9 percent of 
business closures being small businesses, we have a concern 
that, and one of our priorities it, to help those who are just 
getting in business get off the ground and become successful.
    So we believe that our tax and regulatory agenda pretty 
much is generally representative of all different types of 
businesses. Whether it is agriculture, minority-owned 
businesses, women-owned businesses, these are broad issues that 
impact all businesses. I hope that I am answering your question 
correctly.
    Ms. Millender-McDonald. In a sense, but let me just ask you 
this. As you stated in your testimony, access to capital is one 
of the most important obstacles, and we need to recognize that. 
The basic assumption of this bill, however, is that a business 
must be in the black in order to be able to use these accounts. 
Do you think that during the first 5 years small businesses on 
the average have enough earnings to make this bill a practical 
solution?
    Ms. Kerrigan. Yes. Are you asking if this will address the 
capital needs?
    Ms. Millender-McDonald. Yes.
    Ms. Kerrigan. Absolutely it will. It would be a practical 
solution, because if you do have a business, for example, that 
is forced to spend its money year end, as was noted by our 
expert CPA at the end of the table, rather than putting it 
aside and keeping it for a need later down the road, this just 
makes sense, giving them incentives to think ahead not only in 
terms of financial planning, but also for self-financing 
opportunities.
    Yes, I think this is a practical solution for many--is it 
going to be something for all firms? No. But it will address 
the needs of many small businesses out there.
    Ms. Millender-McDonald. But it will not necessarily address 
the needs of some minority firms that I have talked with given 
that they do not find themselves in the black for the first 5 
years, so they are not a position in terms of any access to 
capital?
    Ms. Kerrigan. It is not the silver bullet. I don't think 
that it will address all needs, but I think it will help many 
small firms.
    Ms. Millender-McDonald. And I suppose I get back to the 
needs assessment then, you will certainly look into how can we 
help small minority businesses to survive in that they will be 
the employer of many of those who will be seeking jobs. 
Critical of that is of women and men coming off of welfare to 
work. It is important that we look at a needs assessment that 
is representative of a minority group.
    Ms. Kerrigan. Yes, a broad-based needs assessment not only 
in terms of further reducing capital gains taxes or targeting 
capital needs towards urban areas, but also looking at what 
local governments can do to lower the tax burden in cities, and 
in terms of what they are doing perhaps to assist in either 
business closures or not enabling their own communities.
    Ms. Millender-McDonald. And I would be interested in seeing 
what local governments are doing for this, given that they are 
strapped themselves most often.
    Ms. Kerrigan. I will get this to the Committee. We have not 
brought it down to the city level yet, but we do conduct a 
small business survival index. It looks at the climate for 
entrepreneurship for all 50 States, and we rank them based on 
which are more business-friendly than others. We look at a lot 
of different programs and policies and how these impact small 
businesses.
    This is, I think, an important tool. I think this will work 
for many small businesses, and, in fact, I think it will help 
many minority and women-owned businesses.
    But there are a lot of other measures and initiatives that 
the Congress is pursuing right now, things that the Small 
Business Administration is doing, things that the 
administration is doing that I think address this broad-based 
need. I would agree with you.
    Ms. Millender-McDonald. Mr. Pages, as I have said in the 
questioning, speaking with Ms. Kerrigan, that start-up 
businesses are the most tenuous in that the first 5 years are 
very critical, and oftentimes they find themselves not in the 
black after 5 years. But as you stated in your testimony, after 
the first 3 years, the success rate tends to improve. How would 
this bill help those companies during the first 3 years when 
most of the earnings would be used to pay off their debt?
    Mr. Pages. In many ways I would think I agree with Ms. 
Kerrigan about the impact of the bill. If you think of start-up 
businesses in three categories, you have those that are going 
to succeed with or without some stimulation or support from the 
government, and those that are going to fail. There is a middle 
category of firms who are on the edge. I think that is the 
appropriate target for this legislation, companies that are 
showing slight profit in the first 5 years.
    Ms. Millender-McDonald. So it is not for all small 
businesses then?
    Mr. Pages. I think that is right. As you have noted, many 
of these companies do not show a profit during the first 5 
years. I think we need to look at other ways to support those 
companies. This is targeted at those companies that are showing 
fluctuations in income in the first 5 years. They do need to be 
profitable to be supported by this bill.
    Ms. Millender-McDonald. Is there any specific industry area 
which would find these accounts more useful than others, Mr. 
Pages?
    Mr. Pages. Well, we haven't looked at that. My general 
sense would be that more volatile industries might have greater 
benefit of--these types of provisions because they would see 
their earnings fluctuate more greatly over a 5-year period. You 
think of the classic Internet businesses or information 
technology businesses where there is a lot of turmoil in the 
company and a lot of ebb and flow of its profits. This is the 
type of safety net, if you will, that might help those typesof 
sectors rather than a more established traditional sector of the 
economy, but we have not looked at this in great detail.
    Ms. Millender-McDonald. While we have many pieces of 
legislation coming before us with small businesses, and we do 
recognize small businesses will be the catalyst by which the 
economy continues to spur in the new century, we have to look 
at how we can get those small businesses that are going to 
employ that work force that is going to be the majority women 
and minorities. And given that this bill does not specifically 
target individuals whose main source of income is a small 
business, but rather allows a deduction of funds received from 
a qualified small business, would requiring that the funds 
deferred not only come from a small business but be the main 
source of income for the individual serve the underlying 
purpose of the bill better or what?
    Mr. Pages. I think the bill is appropriately targeted. I 
think it will have a big impact on women and minority 
entrepreneurs. If you look at start-up business rates, 
minorities, particularly African-Americans, show much higher 
rates of entrepreneurship than whites and Hispanics, 
particularly as education level goes up.
    What we do find, however, is that they are 
undercapitalized.
    Ms. Millender-McDonald. I was going to say that they do not 
succeed because of not having access to capital.
    Mr. Pages. That is correct. So this is one way to help them 
preserve the limited resources they have. It is not going to 
save everyone, if you will, but it is one other way to sort of 
conserve that precious cash that they need, particularly if 
there is a downturn. If we do have an economic downturn, the 
companies that are most poorly capitalized are going to be the 
first to fail. So this is very important to help these kinds of 
companies conserve their cash.
    Ms. Millender-McDonald. Mr. Horton, you stated that H.R. 
2373 would be a great benefit to regular C corporations in 
managing their cash flow. You also stated that the bill would 
allow corporations to achieve the same tax effects as 
compensating to the employees the corporation's benefits while 
keeping the cash inside the corporation for future use.
    As I understand the bill, the only eligible entities 
allowed to use the tax-deferred under the SUSA accounts are 
individuals. Am I correct, or would the provisions under this 
bill allow corporations to defer their profits through the SUSA 
accounts?
    Mr. Horton. My understanding is that it is available to all 
entity types, unless I am misunderstanding that.
    Ms. Millender-McDonald. Both individuals as well as 
corporations?
    Mr. Horton. Right.
    Ms. Millender-McDonald. If you were to buy stocks from a 
small business corporation, would I place my dividends in a 
SUSA account, Mr. Horton, even though this is not a main source 
of income, and I have no direct stake in the day-to-day 
managing of the corporation?
    Mr. Horton. The corporation itself--if my understanding of 
the bill is correct, the corporation itself would put the money 
in the SUSA account, not the stockholders.
    What I was referring to about compensating out the 
earnings, what typically happens at year end is the corporation 
looks at where it is earningswise and tries to compensate its 
owner/employee as much as possible in order to increase the 
compensation to the shareholder and decrease the earnings to 
the corporation to avoid the double taxation. Am I answering 
your question?
    Ms. Millender-McDonald. To some degree I am following what 
you are saying, anyway. Did you want to finish up because I am 
concluding here. You have answered as you see fit?
    Mr. Horton. Right. In the C corporation environment the 
double taxation is an incredible motivation to taxpayers to try 
to lower the corporate earnings, and that is why I think a lot 
of the statistics at the corporate level are somewhat doubtful, 
because these corporations do whatever they can to keep their 
earnings as low as possible in the corporation.
    Ms. Millender-McDonald. Mr. Chairman, thank you. Many small 
businesses agree that the SUSA bill is a good bill and has the 
potential to lead to many positive outcomes for small 
businesses, like the ability to use the tax-deferred funds for 
leveraging with larger companies. However, most start-up 
businesses struggle in the first 5 years, as I have said 
before, and this is what concerns me about the bill. I think we 
should look at the--I think we should look at the current 
support mechanisms that are in place to see why more businesses 
are not succeeding, and with that I thank you.
    Chairman Pitts. Thank you.
    Because of the excellent attendance of the membership, we 
are going to start using the lights. We are asking go ahead and 
use your time limit on the first round. If we need to, we can 
go to a second and third round.
    Mr. DeMint. Thank you, and thanks again for your 
encouragement of this bill. And one of the things in addition 
to just getting your endorsement today is to find ways to help 
make this bill better. We do want to look at the language that 
was questioned. The intent of the bill is that it relates to a 
business entity. The point is to encourage people to leave 
capital in a business entity rather than have tax-motivated 
spending or to pass it through as salary.
    My experience in business as a solo consultant, my first 
couple of years in business, is we didn't make a lot of money. 
At the end of the year, it was just a matter of do we leave a 
few thousand dollars in the company, or do I take it out as 
salary.
    The accountant always said take it out as salary because 
you may need it as salary in a couple of months, and you would 
have paid taxes twice on it if you do that. So consequently, as 
I went through those first few years of business, there was 
seldom enough capital to move ahead to hire people, and I think 
the growth was slower. It was not necessarily just a matter of 
survival, but there was tax-motivated spending of buying 
something that we didn't need to reduce our profits or maybe we 
didn't need then. But the point here is to try to encourage 
people to leave money in a company without bad tax consequences 
so that company would be stronger, better able to hire people, 
and would be stable in the future, and we want to be make sure 
that the language of the bill reflects that.
    One question, we want to make sure that we don't have 
unintended consequences of this bill or unnecessary complexity. 
One of the things you mentioned, Mr. Horton, that got my 
attention is that there might be some reluctance to use these 
accounts because the tax rate may be lower in the first year 
than it is the fifth year when the money is taken out.
    Would it be your recommendation that it be taxed at the 
rate when it was put in, or is there some way that we can 
improve this so it is not a risk to the company to save 
capital?
    Mr. Horton. I think it would be beneficial to cap the 
amount of tax paid when the funds come out the SUSA account to 
the amount that would have been paid had the funds not gone 
into the SUSA account. That certainly creates a little bit of 
administrative complexity, but I think that is probably 
manageable.
    If the taxpayer were in the 15 percent bracket when the 
money goes into the account, and theyare in the 35 percent 
bracket when the money comes out of the account, they have deferred 
themselves into 20 percent of extra tax liability.
    Mr. DeMint. Well, that is a great point.
    Does any other panelist have any concerns about unintended 
consequences or unnecessary complexities in what we are trying 
to do?
    Ms. Kerrigan. No. I wouldn't--when we talk to a lot of our 
members about various things that we can do to fix the Tax Code 
to help small businesses, there is always the question, well, 
gee, shouldn't we--rather than further mucking up the system or 
making it more complex, shouldn't we just overhaul the entire 
system or do some type of simple flat tax? Since the Congress 
really hasn't come to any agreement of whether that should be 
done, what type of tax system we should have, we still think 
that there are things that have to be done. We can still do 
things to help small businesses.
    This is an immediate need, and the Congress needs to react 
in an immediate way and not let this whole debate over 
complexity and what type of system we are going to move to 
paralyze them in their efforts right now, because there are 
small businesses who need their help, in terms of looking at 
various parts of the Tax Code, whether it is estate tax relief, 
SUSA accounts, capital gains tax, whatever.
    Mr. DeMint. All right. Good.
    Mr. Chairman, I yield back.
    Chairman Pitts. Mr. Baird.
    Mr. Baird. Mr. Chairman, I neglected earlier to ask 
unanimous consent to introduce Mr. Nichols' letter into the 
record.
    Chairman Pitts. Without objection.
    [The information may be found in the appendix.]
    Mr. Baird. I have a couple of questions, and my good friend 
Mr. DeMint--it shows why we are working together on this--
precisely picked up on the question that you addressed, Mr. 
Horton, and my staff and I kicked that very issue around this 
morning, in fact, and it is something we might want to explore.
    One of the things that I want to pick up on a little bit 
is, as Mr. DeMint said, to me the issue is how do we provide an 
engine to the economy, not how do we proliferate small 
businesses. And there may be some small businesses that do not 
succeed perhaps through bad management, maybe they have a 
product that nobody wants, et cetera. But there will be a 
subset of businesses who are succeeding and are, in fact, 
generating revenue, and those maybe are more likely candidates 
of engines of job creation.
    The way I see this bill is it is targeted at precisely 
those businesses who are having early success, who have the 
potential to expand on that early success, if they can find a 
way to better manage and access their own capital, rather than 
spending themselves into a precarious debt position or lack of 
capital situation.
    So yes, I agree with the Ranking Member that there will be 
needs to help other businesses who are not profitable early on 
find capital, but part of what I am seeing here, and certainly 
what many business owners locally have told me, is that this 
empowers the successful business that is already demonstrated 
an achievement to be even more successful.
    Does that square with your experience and as you look at 
this bill, your thoughts about it?
    Mr. Pages. Yes, I think you have got it exactly right. Not 
all entrepreneurs are created equal is one way to look at it. 
There is a certain subset that we call high growth, and those 
are the companies that really generate most of the economic 
development, most of the net new jobs. You need a base of all 
sorts of small businesses for those types of entrepreneurs to 
prosper, but it is really a small subset of these companies 
that are the net creators of new jobs in this country. Again, 
the term I used in my testimony was ``gazelle'' firms, but it 
is really fast-growing, high-growth entrepreneurs is really 
what you need to encourage to foster local economic development 
and to create lots of new jobs and innovation and technology.
    So this is the subset you really want to focus on.
    Mr. Baird. Let me ask one other question.
    Mr. Nichols, from my district, raised an interesting 
question. He thought that this might be--the access to this 
opportunity might be a way to leverage more competitive loan 
rates. Any thoughts on that? It was a possible use that had not 
occurred to me, but it is intriguing. Any thoughts on that from 
you folks?
    Mr. Horton. Well, one thought, there is a provision in the 
bill that prevents the account from being pledged as collateral 
on a loan, and I think that if that were removed, then perhaps 
you are right, this could be used to secure a loan and get more 
favorable interest rates. My reading of the bill right now is 
that it is similar to an IRA where if you pledge it as 
collateral on a loan, then it is treated as distributed.
    Mr. Baird. What would be the pros and cons of that as you 
see it, Mr. Horton?
    Mr. Horton. Well, if you could use it as collateral, then 
you could leave it in the account, leave it in the corporate 
form and still get a loan with more favorable terms. If you 
leave it the way it is now you may see the money coming out of 
the accounts rather than staying in the accounts.
    Ms. Kerrigan. I was just thinking, it may not be something 
that could be pledged against a loan, but on the other hand, if 
you do have a SUSA account and depending upon the size of that 
account, and what money you have set aside as a business owner 
for future cash needs, I do think that planning says something 
about business management and the business itself in terms of 
how you are thinking ahead like financial planning, planning 
for future crises or what have you. So I don't know if it 
serves as a direct pledge, but more of an indicator that this 
business has its act together. It is thinking ahead, and it is 
using all the tools available to succeed in the future.
    Mr. Baird. So the lender will look at that, and even though 
they are not saying, we could directly access that capital to 
pay back the loan, they could say, here is a business that is 
planning ahead, that is not operating right on the margin, and 
that is a sense of security for a lender.
    Ms. Kerrigan. Yes, in terms of looking at that, but plus 
all the broader business practices as well.
    Mr. Horton. Even on a more basic level than that, it will 
show up on the company's balance sheet, which makes the balance 
sheet look more favorable to a lender.
    Mr. Baird. I want to just close by thanking you all. I know 
that Mr. DeMint and myself really do want this bill to help 
businesses. And, Mr. Horton, you apologized earlier for being 
so detailed and technical, but no apology necessary. I am 
sincerely grateful to you and each one of you for what I think 
are very insightful analyses. And I want to invite you, after 
you go home, going home on the airplane or whatever, and you 
may be saying, gosh, there are some ways to make this better. 
Mr. DeMint and I would be very open to your suggestions about 
how to improve it, if it has problems. We are not here to have 
anyone say what a great bill we have done, we are here to learn 
from you and, if it has problems, to improve those and make the 
bill even better. So I look forward to your interaction. Thank 
you, Mr. Chairman.
    Chairman Pitts. Thank you.
    Mr. LoBiondo.
    Mr. LoBiondo. No questions.
    Chairman Pitts. I think the other Members have gone. We 
will start the second round.
    Mr. DeMint.
    Mr. DeMint. I think in the interest of time and our 
panelists, really my questions have been answered, except to 
Mr. Baird's point. If there is anything else that has crossed 
your mind as a way to make this bill better, it is really draft 
legislation at this point. The hearing is one step on improving 
it. So any concerns you have, don't leave without expressing 
them, and if any of you have any thoughts on the way home, let 
us know, because in the next week or two we want to refine the 
language and finalize it. But you have really covered a broad 
spectrum and added a lot of encouragement and confirmation to 
us to move this bill through as one tool for new businesses to 
be successful. So thank you.
    Any other comments?
    Chairman Pitts.  Ms. Millender-McDonald.
    Ms. Millender-McDonald. Mr. Chairman, I just want to 
emphasize that when you say success accounts or start-up 
businesses, you are really talking about successful businesses, 
you are not talking about fledgling businesses, because in a 
sense this bill will not really be a source of support for one 
who has not been in the black for 5 years or better, but rather 
those who have seen success as they have gone along.
    So this still does not address a small business that is not 
in the black, but rather successful businesses as they continue 
to thrive and pretty much offer new jobs, but the jobs aren't 
in areas where it is most needed. So while this will not be 
that panacea, I am just suggesting the bill is really for more 
or less successful small businesses or those that are thriving 
and not those that are fledgling.
    Chairman Pitts. Mr. DeMint.
    Mr. DeMint. Just to respond briefly, I think we all agree, 
it won't apply to all businesses, but it only does apply to new 
businesses, and perhaps the benefit will be to those that have 
a faster start. But it is not unusual for a business at any 
time to have a good year and then a very bad year, or to start 
out, as I did, with a contract that ended after the first year, 
to have significant profits in one year and then be out trying 
to borrow money the next year. It is just a bad system that 
discourages those companies in the first 5 years, if they do 
have a profitable year, to get all of the capital out of the 
company instead of trying to maintain some so that they can get 
through the next year. It would be very unusual for any new 
business to just start off and have five great profitable 
years, and if they do happen to have a good year or two, we 
would want them to reinvest and grow even faster.
    I think it will help the company that is making almost no 
money. If only you set aside $1,000 or $2000, if you are a solo 
practitioner and keep it in the business instead of as a 
salary, it does give you a little staying power.
    So I think the application will be, again, not totally 
inclusive, but I do think it would help the solo entrepreneur 
as well as the companies that start off fast and then have a 
bad year somewhere in those first 5 years.
    Thank you.
    Chairman Pitts. Thank you.
    Mr. Baird.
    Mr. Baird. I would like to echo what Mr. DeMint said. I 
appreciate your concern. I actually see this bill as having 
great potential to help women and minority start-ups. You 
needn't have a profitable 5 consecutive years. At any point 
where you experience profit, you can use that profit to put 
into a SUSA account, and the model I would have that I think 
would benefit greatly minorities and women entrepreneurs would 
be, for example, the very small corner grocery store that you 
see people with their--the mom is in there, the dad is in 
there, the kids are in there. They are starting from 5:00, and 
they are working until 10:00 at night, and they are 
purposefully starting small, and they are being tremendously 
frugal, and they are taking those savings and they are putting 
them aside. They have been successful right from the get-go 
because they have started within their means. They are working 
tremendously hard, they are putting sweat equity into it, but 
they are also willing to forego the short-term profit so that 
they can later expand. So for 3 or 4 consecutive years, they 
could keep their operation relatively small, put a lot of sweat 
equity into it, take this money, set it into a SUSA account, 
and then after 4 years expand, and that is when they draw on 
the SUSA account, because they have saved the personal money to 
expand versus every year being right on the margin.
    Or let's say you have a woman working a business out of her 
home. She has a little office, she has not a lot of expenses, 
but she does generate a profit. She sets those aside in a SUSA 
account. After 3 or 4 years it has built to the point she can 
establish an office outside the home.
    I see plenty of applications, if people are frugal and 
successful early on, to use this, and I think it has a lot of 
potential for women and minority-owned businesses.
    Chairman Pitts. Would any of the witnesses like to comment 
on that?
    Mr. Pages. I would just simply offer that if there is a 
company that is growing on an aggressive growth path and 
profits in the first 5 years is probably going to quickly grow 
too big to access the accounts, and I think the accounts should 
not be designed for that type of company. I think Congressman 
DeMint has the right picture of this. The typical account user 
will likely have ups and downs in the first 5 years of 
existence and is really much more tenuous than the really fast-
growth company that kind of just gets hot right from the start. 
That is not our vision of where this legislation would apply.
    Chairman Pitts. Ms. Kerrigan.
    Ms. Kerrigan. I would agree with everything Congressman 
Baird said. I would like to change the assumption here to the 
fact that women-owned businesses in this country are 
tremendously successful, so I think we need to think about this 
more in a positive way in terms of how it will impact many 
women-owned small businesses.
    There is a huge success story here in terms of female-owned 
firms and women-owned businesses, the amount of economic growth 
that they are responsible for in job creation, and all that 
other good stuff. And looking at the growth, the phenomena of 
women-owned businesses and also the growth of many minority-
owned businesses, you have to assume with that growth and their 
success that there is going to be a portion of those businesses 
who will benefit from this.
    But I again would like to add, do we need to be doing more 
for small businesses beyond this? The answer is absolutely yes. 
There are obstacles and government-imposed burdens and a lot of 
things at the local level, I think, that are hurting their 
chances for success and survival. Someone who considers 
themselves a fledgling business in their first year and may not 
make a profit, perhaps this is something good in their second 
year or third year that they can benefit from.
    So anyway, I am just reaffirming or supporting the comments 
of the Congressman.
    Chairman Pitts. Thank you.
    Mr. Horton.
    Mr. Horton. One thing I wanted to point out, the term 
``small business'' is very broad. It is true that this bill 
would not help businesses that are losing money, but let us not 
forget that, at least with most of my clients, that some of 
them have an idea, and they are trying to start this big 
business, and they are willing to lose money for years and 
years and years trying to get it going, but most of them are 
men and women who want to open five restaurants in a town or 
five auto repair shops. They may be able to stand losing money 
in year 1 and possibly year 2, but if they are not making money 
after that, they are going to give it up, because they need 
this to earn a living.
    So I think under the tent of small businesses, there are a 
lot of different businesses, and I don't want us to forget 
about the men and women who are starting businesses to provide 
them with money to eat, not necessarily just to come up with a 
good idea that may make them rich.
    Chairman Pitts. All right. Are there any other questions? 
Any closing comments from anyone?
    If not, this has been an excellent, excellent hearing. We 
thank you for your very informative testimony. We will keep the 
record open for 5 legislative days for anything you would like 
to add.
    Chairman Pitts. Mr. Pages, you have a couple of reports 
that you would like to make a part of the record.
    [The information may be found in the appendix.]
    Chairman Pitts. If there is nothing else, the Subcommittee 
hearing is adjourned. Thank you.
    Ms. Kerrigan. Thank you.
    Mr. Pages. Thank you.
    Mr. Horton. Thank you.
    [Whereupon, at 11:15 a.m., the Subcommittee was adjourned.]



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