[Senate Hearing 107-745]
[From the U.S. Government Publishing Office]
S. Hrg. 107-745
UNLEASHING THE POWER OF
ENTREPRENEURSHIP: STIMULATING INVESTMENT
IN AMERICA'S SMALL BUSINESSES
=======================================================================
ROUNDTABLE
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MAY 22, 2002
__________
Printed for the Committee on Small Business and Entrepreneurship
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
.........................................................
ONE HUNDRED SEVENTH CONGRESS
----------
JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan CHRISTOPHER S. BOND, Missouri
TOM HARKIN, Iowa CONRAD BURNS, Montana
JOSEPH I. LIEBERMAN, Connecticut ROBERT F. BENNETT, Utah
PAUL D. WELLSTONE, Minnesota OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia MICHAEL ENZI, Wyoming
MARY LANDRIEU, Louisiana PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina MIKE CRAPO, Idaho
MARIA CANTWELL, Washington GEORGE ALLEN, Virginia
JEAN CARNAHAN, Missouri JOHN ENSIGN, Nevada
Patricia R. Forbes, Democratic Staff Director and Chief Counsel
Emilia DiSanto, Republican Staff Director
Paul H. Cooksey, Republican Chief Counsel
C O N T E N T S
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Opening Statements
Page
Kerry, The Honorable John F., Chairman, Committee on Small
Business and Entrepreneurship, and a United States Senator from
Massachusetts.................................................. 1
Baird, The Honorable Brian, a Representative in Congress from
Washington..................................................... 8
Bond, The Honorable Christopher S., Ranking Member, Committee on
Small Business and Entrepreneurship, and a United States
Senator from
Missouri....................................................... 113
DeMint, The Honorable Jim, a Representative in Congress from
South
Carolina....................................................... 10
Participants
Carroll, Francis, Founder and Chief Executive Officer, Small
Business Service Bureau, Inc., Worcester, MA................... *
Cooper, Benjamin, Senior Vice President, Government and Public
Affairs, Printing Industries of America, Alexandria, VA........ *
Coratolo, Giovanni, Director, Small Business Policy, U.S. Chamber
of
Commerce, Washington, DC....................................... *
Culpepper, Lee, Senior Vice President, Government Affairs,
National
Restaurant Association, Washington, DC......................... *
Doye, Angelia, Chief Financial Officer, Gwathmey, Inc.,
Cambridge, MA.................................................. *
Eckerly, Susan, Director of Federal Public Policy, National
Federation of Independent Businesses, Washington, DC........... *
Esparza, Moctesuma, Chairman, New America Alliance, Washington,
DC............................................................. *
Feigen, Jerry, Director of Macklin Center for Entrepreneurship,
Montgomery College, Rockville, MD.............................. *
Freeland, Kathryn, CEO, RGII Technologies, Inc., Annapolis, MD... *
Garritson, Dean, Vice President, Small and Medium Manufacturers,
National Association of Manufacturers, Washington, DC.......... *
Heesen, Mark, President, National Venture Capital Association,
Arlington, VA.................................................. *
Hughes, Robert, President, National Association for the Self-
Employed,
Washington, DC................................................. *
McCracken, Todd, President, National Small Business United,
Washington, DC................................................. *
McKnight, Duane, Partner, Syncom Funds, Silver Spring, MD........ *
McKigney, Darrell, President, Small Business Survival Committee,
Washington, DC................................................. *
Mercer, Lee, President, National Association of Small Business
Investment Companies, Washington, DC........................... *
Millman, Amy, President, Springboard Enterprises, Washington, DC. *
Newpher, Richard, Executive Director, Washington Office, American
Farm Bureau Federation, Washington, DC......................... *
Phillips, Bruce, Senior Fellow in Regulatory Studies, National
Federation of Independent Businesses, Washington, DC........... *
Tatum, Douglass, CEO, Tatum CFO Partners, LLP, Atlanta, GA....... *
Von Bargen, Patrick, Executive Director, National Commission on
Entrepreneurship, Washington, DC............................... *
Wiesen, Jeremy, Associate Professor, New York University, Leonard
N. Stern School of Business, New York, NY...................... *
Wilfong, Henry, President, National Association of Small
Disadvantaged
Businesses, Silver Spring, MD.................................. *
* Comments, if any, are located between pages 11 and 133.
Prepared Testimony and Appendix Material Submitted
Page
Baird, The Honorable Brian:
Opening statement............................................ 8
Prepared statement........................................... 9
Bond, The Honorable Christopher S.:
Opening statement............................................ 113
Prepared statement........................................... 116
S. 189 analysis and text..................................... 161
S. 2022 analysis and text.................................... 193
Carroll, Francis:
Prepared testimony........................................... 198
Cleland, The Honorable Max:
Prepared statement........................................... 197
Coratolo, Giovanni:
U.S. Chamber of Commerce's Small Business Tax Policy and
Priorities................................................. 219
Doye, Angelia:
Prepared testimony........................................... 204
Feigen, Jerry:
Prepared testimony........................................... 77
Heesen, Mark:
Prepared testimony........................................... 47
Hughes, Robert:
Prepared testimony........................................... 220
Kerry, The Honorable John F.:
Opening statement............................................ 1
Prepared statement........................................... 5
S. 1903 analysis and text.................................... 135
S. 1676 analysis and text.................................... 147
McKigney, Darrell:
Prepared testimony........................................... 104
Millman, Amy:
Additional testimony and recommendations..................... 207
Phillips, Bruce:
NFIB National Small Business Poll............................ 54
Shore, Bill, Community Wealth Ventures, Washington, DC
Comments for the record...................................... 210
Tatum, Douglass:
Prepared testimony........................................... 13
Von Bargen, Patrick:
Prepared testimony........................................... 37
Wiesen, Jeremy:
Prepared testimony........................................... 108
UNLEASHING THE POWER OF
ENTREPRENEURSHIP: STIMULATING
INVESTMENT IN
AMERICA'S SMALL BUSINESSES
----------
WEDNESDAY, MAY 22, 2002
United States Senate,
Committee on Small Business and Entrepreneurship,
Washington, D.C.
The Committee met, pursuant to notice, at 9:35 a.m., in
room 428-A, Russell Senate Office Building, the Honorable John
F. Kerry, (Chairman of the Committee), presiding.
Present: Senators Kerry and Bond.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN,
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A
UNITED STATES SENATOR FROM MASSACHUSETTS
Chairman Kerry. Good morning everybody. Thank you so much
for taking time to join us today. We have a powerhouse
gathering of individuals with political, business, and
entrepreneurial experience, and I think it is very exciting to
have all of you here to share some thoughts in this roundtable
form of a small business hearing, with quotation marks around
the word ``hearing.''
I am very, very grateful to all of you. Some of you have
traveled some distance. For others, it is a closer trek. But
for all of you, time is valuable and we very much appreciate
your sharing time with us today.
We are going to have colleagues join us as well. Senator
Bond will be here a little bit later and other colleagues will
be in and out. One of the things we have found on the Committee
in the past few years is that it really helps--this is just a
better way to get at issues. The hearings tend to have their
own formalized structure and end up not being quite as
dialogue-prone, and sometimes even constructively contentious.
So I have found, and I think Senator Bond shares with me
the sense that this can be a much more productive way of really
getting at issues, figuring out an agenda, and getting
everybody's participation. I think it is a very positive way to
do things and I hope you will share that sentiment. Some of you
have participated before, many of you have not, but I think you
will find it is a very productive way to proceed forward.
As you know, we added the word entrepreneurship--and I do
not take it lightly. Sometimes things happen around here that
are cosmetic, but I do not view the addition of the word
``entrepreneurship'' to the Committee's title as cosmetic.
Entrepreneurial activity has its own special qualities, I
think, and most of you here would agree. While all small
business is inherently somewhat entrepreneurial, there is an
entrepreneurial epic and style and series of hurdles that, for
the kinds of longer-term growth enterprises that we are trying
to encourage, require a special set of disciplines and
knowledge of how to take advantage of certain kinds of
opportunities.
It is interesting that of the 600,000 to 800,000 start-ups
annually in the United States, only 1,000 of them receive what
we know as venture capital funding, and usually for more than
$1 million. The vast majority receive either informal and/or
angel investor-type funding of anywhere from $5,000 to $50,000
and wind up at some point turning the corner, many of them, and
becoming one of those companies that then qualifies for the
more traditional kinds of funding.
What is interesting to think about is so how do you measure
at the very beginning those kinds of companies? Are there some
traits and ways in which one can distinguish immediately who
has got the best opportunity to be that kind of company and get
them on a track where they find that funding sooner? Could we
have more success stories if we had a way, a set of criteria or
ways in which to determine that?
There is a whole area of entrepreneurship that is different
in America today. We do this better than anybody else. We have
the most--even though we do not always find capital flowing as
readily as we would like it to, and part of the discussion here
today ought to be how do we get access to capital. We are
always trying to refine that. That is the purpose of the SBA.
But there is a lot more to small business than just the
SBA. The SBA is one kind of relationship and often it is more
the SBIR, SBIC, 7(a), 8(a) sort of lending programs. There is a
whole other set of small business hurdles and needs that are
purely entrepreneurial that never need to touch the SBA and we
ought to be thinking about those a lot and that is part of the
purpose of this morning's effort.
There are so many opportunities now. It is extraordinary
when you think about it. The changes in the marketplace are
just phenomenal. If you go back to the 1980s, you all remember
the books that were being written about Japan, Inc., and the
end of the American era and the next century was going to be
the Asian century, China and/or Japan, et cetera.
Frankly, the people who proved that wrong were not the U.S.
Government or anybody else but business. American business
buckled down. We had that terrible word called ``downsizing,''
but it was effectively a sharpening of the pencil, really. It
was a natural process by which people became more competitive
and there was some winnowing out, and we obviously did
extraordinarily well during the 1990s.
At the same time, what Alan Greenspan called the ``virtuous
cycle'' transitioned into the ``irrational exuberance'' that
cost a lot of people, and we are still going through that
particular adjustment right now. But the basics are still
there, and there is an awful lot of money out there seeking
good deals and I think it is time to go back to basics.
There is a disturbing trend that I think most of you would
agree, and I am not sure how it impacts the small business
piece, but that is the trend towards the earnings scandals of
Wall Street, the Enron/accounting practices and the drive
towards what we have seen--I guess the way to phrase it, and
this is mostly a larger company phenomenon, but I think it
spills over into and has an impact on smaller entrepreneurial
efforts, and that is the growth by accrual, growth by merger,
growth by acquisition rather than by creation of product and
expansion of sales per se.
The phenomenon by which CEOs have had these rather
remarkable increases in options and the ways in which companies
have created, I guess, a Wall Street-oriented quarterly report
that does not, in fact, reflect what we all look for in price
earnings ratios. I think that is one reason why there are still
a lot of inflated, over-inflated values in the marketplace
today and some room for some adjustment still that we may or
may not suffer over the course of the next months.
Anyway, all of this is subject to discussion today in
whatever form you would like it to take.
I have to go to a press conference with the National Mayors
for housing shortly.
We do have two pieces of legislation that are particularly
important that we are discussing, also, the BRIDGE Act, which
is a piece that a number of you here have worked on and I am
anxious for further discussion of that. I think you are all
familiar with the details of it, but it essentially sets aside
tax liability as collateral for lending to help firms retain
working capital that they cannot get otherwise because banks
are closing the credit lines. It is a lot harder to get credit
below larger amounts of money today. A lot of small companies,
small businesses, are just shut out.
So that is one approach, and I am very grateful to
Congressmen Jim DeMint and Brian Baird--thanks very much--for
their cosponsorship of the BRIDGE Act in the House of
Representatives. We look forward to a good discussion on that.
The second piece of legislation is a piece that I have
championed for some time. When Dale Bumpers was here as
chairman in 1993, we passed a targeted capital gains reduction.
I have reintroduced a capital gains bill with a zero capital
gains tax for stock in small businesses with market value of up
to $1 million. The stock must be held for 3 years. We may
change that time period to 5 years. It was set during the
period when the time return on investment had ratcheted down so
significantly. I think we are back into a more normal cycle now
and we probably ought to ratchet it back up.
But this is for critical technology areas, the theory being
that that could excite the movement of a lot of capital to
those areas where the highest value-added jobs are created and
where the United States has the greatest interest in trying to
create and hold on to market share and be at the lead.
I thank Doug Tatum very, very much, CEO of Tatum CFO
Partners, and I am very grateful for his input. He has been
really instrumental in helping us design the BRIDGE Act and I
think he will make an important contribution to the discussion
today.
While I am not here, Patty Forbes will facilitate the
dialogue, she will be in charge, and I think she has a lot of
experience in helping to pull useful information from
participants.
So thank you again for being here. We appreciate it very,
very much, and if I could turn to my colleagues from the House
for their opening thoughts, I would like to do that.
[The prepared statement of Senator Kerry follows:]
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STATEMENT OF THE HONORABLE BRIAN BAIRD, A REPRESENTATIVE IN
CONGRESS FROM WASHINGTON
Mr. Baird. First of all, thank you all for being here. I
have just come back from yet another trip back to my district,
and I can tell you, what I hear from our small businesses is
that the need for capital right now is the critical determining
factor, not just in the growth, but in the survival of many,
many businesses and particularly high growth rate businesses.
With the recession, more and more businesses are saying to me
that they just cannot get the capital to expand, and yet it is
the expansion on which their survival may depend.
As the Senator knows, the BRIDGE Act is an effort to
address that. My good friend Jim DeMint and I have worked on
this for a couple of years now and the goal is, as many of you
know, to try to find a mechanism whereby rapid growing
businesses can obtain capital. The somewhat speculative nature,
by nature of a rapid growth business, makes it difficult for
them to go to a bank or traditional lending institution and get
the capital, because for the banks or lending institutions to
do the due diligence necessary to verify that the loan is a
good one costs so much overhead for them that they would have
to charge a prohibitive interest rate.
So as the folks from Tatum have pointed out, this places
fast-growth businesses in essentially a no man's land where
they need and could benefit from capital to grow, but they
cannot obtain the capital that would allow them to grow, and
the bill we have put forward essentially allows almost a self-
lending mechanism whereby tax liabilities are deferred and can
then be used to fund expansion. Those, however, would be paid
back to the Treasury with interest so that the net capital cost
to the Treasury is actually a positive in the sense that, over
time, they will return an interest on that. We believe it is a
creative way to provide a fast-growing and large potential
employing sector of our economy with capital.
I applaud my good friend, Jim DeMint, for his leadership
and I know he will have some things to add to that.
[The prepared statement of Congressman Baird follows:]
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Chairman Kerry. Fine. Thank you very much.
Jim, thanks very much for being with us. Thanks for your
help.
STATEMENT OF THE HONORABLE JIM DeMINT, A REPRESENTATIVE IN
CONGRESS FROM SOUTH CAROLINA
Mr. DeMint. Thank you, Senator and all the folks on the
Senate side who have shown a lot of vision in this. I think we
tend to go to the traditional fixes when looking at stimuli and
this is a new idea. It is something that, Doug, you have found,
takes a lot of cultivation on the government side, but the fact
that it has come this far is very encouraging to me.
I was a small businessman for years and it was amazing that
every year, we would sit down and figure out how to disperse
what little capital we had into bonuses or whatever to avoid
taxes, so we really did not accumulate the capital we needed to
grow like we should.
A better example is even yesterday in a hearing for the
Small Business Administration with a veteran who started a
business in his home after 20 years in the service. He talked
about the process of starting a business with $600. He went out
and got 17 credit cards to get their lines of credit and he had
so much money borrowed on those cards, paying 20 percent, he
was not paying himself any money and the sad fact was, he was
actually showing a profit because he was not paying himself any
money or paying rent and he had to pay taxes. So the tax code
was actually taking his capital while he was trying to grow. He
now has 100 employees, but it was not because we helped him.
I think the next Microsoft, the next Apple Computer, is in
someone's home right now. The fact that it is very difficult to
get capital is something we need to look at, not to give them
money, but this bill, the BRIDGE Act, basically allows them to
borrow from their own tax liability, to use that as collateral
to leverage the collateral they have to grow their business.
Many of our traditional fixes for taking a tax load off
business can apply to large companies, generally do, companies
that can be downsizing, laying off people, and still get the
benefit of some of our approaches to reducing tax liability.
But this bill is targeted at the companies that are creating
jobs today, the ones that are growing. It actually qualifies
them based on whether they are growing or not and have been
growing.
So this targets a relatively small amount of Federal
revenue. By just allowing these companies to defer their tax
obligation, use it as collateral, they can leverage even a
small amount of money, $10,000 or $20,000 to $50,000, they can
leverage $50,000 in tax liability probably to $100,000 or more,
keep their own money and grow their business, and then pay
their tax liability. We are not giving them money. We are
allowing them to keep their own money and manage their own cash
to grow their businesses.
This is a novel idea and I think one that can be expanded
in a number of different directions once we prove it out. The
bill is very limited in the sense that it does not apply to a
broad spectrum of businesses, but it does apply to several
hundred thousand companies in this country that are providing
almost all of the net new jobs, and to push this through the
Senate, to have an example over here, it would be a pleasure to
help you, Senator, because we think that this is an idea that
may be our best tax idea in a long time. Thank you so much for
your initiative on this.
Chairman Kerry. Thanks so much. Thank you for your
expertise and thanks for being here.
We have three presenters who are going to start off the
conversation, the aforementioned Doug Tatum, and thank you,
Doug, for being here, Patrick Von Bargen and Mark Heesen. Why
do you not start off, Doug, and then we will go to Patrick and
then Mark.
STATEMENT OF DOUGLASS TATUM, CHIEF EXECUTIVE OFFICER, TATUM CFO
PARTNERS, ATLANTA, GEORGIA
Mr. Tatum. Thank you, Senator, and Congressmen Baird and
DeMint. I will not repeat what has been said earlier about the
BRIDGE Act. I did, however, I believe, have some materials that
you might find interesting. There are four businesses: Les
Walker, CEO of DocuSource, California, you will find that in
your package; Eliot Weinman, who is a CEO and entrepreneur up
in Massachusetts, up in the Boston area; Ed Rankin, who is the
CEO of PeopleSolutions and one of the ``Inc. 500 Fastest
Growing Businesses in the United States;'' and then Harden
Wiedemann, CEO of Assurance Medical in Dallas.\1\
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\1\ Statements located on pages 18-34 in Mr. Tatum's prepared
testimony.
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I think you will find that interesting, because these are
little vignettes of CEOs who, effectively, fell into no man's
land and into the capital gaps and their comments on what would
have happened had they been able to defer their tax liabilities
and retain that capital in their businesses, and I think you
will find that fascinating if you get a chance to look at that.
But I would summarize my comments by saying we are blessed
with an entrepreneurial culture which is the single most
important economic competitive advantage that we have as an
economy. Senator, I have spoken to over 1,000 CEOs in the last
90 days on no man's land, by the invitation of various
associations, and I point out in every one of those speeches
that your name change in this Committee is hugely significant,
because if you get 100 CEOs in a room, small business people,
men and women, every one of them had aspirations to grow. Every
one of them believed they had that opportunity or they would
not be in the business.
We know statistically that a very small number of those
will break out of being small and become emerging growth
entrepreneurial businesses. Those businesses are entirely
different than small businesses, and so your name change is
hugely instrumental in describing the difference, both in this
city particularly, but is recognized out around the country as
being a significant understanding of the issues.
Those businesses that grow and grow rapidly, by virtue of
their growth are negative cash flow, but they are economically
profitable. What we have, I think, is in summary in terms of
tax policy, is that we need a world class farm league. You
cannot build a great major league baseball team without a farm
league, and these emerging growth companies are the farm
leagues for the venture capitalists, my friend over here, Mark
Heesen. These are the future large companies. Those four CEOs
whose stories we provided you in written form generated several
hundred employee jobs, several hundred high-quality jobs in a
matter of 24 months in their businesses and every one of them
indicated they had to slow down, stop, or sell as a result of
the cash flow constraints.
So I almost summarize the BRIDGE Act as a correction in an
error in the tax code. I am not so sure that the policymakers
really understood the consequences of growth on a microeconomic
basis to rapidly growing companies. The interesting thing, back
in--I forgot the date, 30 years ago, when the SBA--the Federal
Reserve, who we had an opportunity to brief on this, did a
study indicating there was a capital gap for these companies.
Well, that capital gap is still here today and it is
exacerbated by a lot of issues that we can get into.
So it is very, very important that if the research of
Patrick and his group is as significant as we believe it is,
which is that a very small number of companies have generated
all the jobs, and I am suggesting to you that the jobs are not
going to be created by large corporations in the future, and I
think there is research to indicate that, that this group of
companies is our most precious national asset. Tax policy that
allows them to retain capital or tax policy that allows
investors to invest in these companies and defer capital gains
is the single most important thing we can do to creating a
great farm league in the next 20 years.
So I will rest with that and turn it over to my colleagues
here and look forward to some questions.
[The prepared statement of Mr. Douglass Tatum follows:]
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Chairman Kerry. Thank you, Doug.
Patrick.
STATEMENT OF PATRICK VON BARGEN, EXECUTIVE DIRECTOR, NATIONAL
COMMISSION ON ENTREPRENEURSHIP, WASHINGTON, D.C.
Mr. Von Bargen. Senator, thank you for this opportunity to
speak. I am Executive Director of the National Commission on
Entrepreneurship. I am delighted to say that most of the points
I was going to cover here have already been covered by Members
of Congress, which is a truly delightful situation to have. But
let me highlight a few points that have been made and maybe add
one or two.
In this report we did of high-growth companies, we found
several things. First of all, when we gathered the research to
find out whether these companies were important to the economy,
we came up with a number of roughly two-thirds. That is, about
two-thirds of the new jobs in the economy are created by these
companies. Well over two-thirds of the innovation in the
economy are created by the companies, and somewhere between
one-third and two-thirds of economic growth can be accounted
for through various correlations by these companies.
We also found that these companies are across all
industries. They are not just all high-technology companies.
And we found that there are these companies in every single one
of the 394 different labor market areas that we studied in the
United States.
Now, in another study we did, which is called ``Five Myths
About Entrepreneurs,'' we really, for purposes of this
roundtable, focused on two big important needs of these
entrepreneurs. One, of course, is securing enough capital to
grow a company, to hire new employees, to purchase or lease
equipment, to make the investments that need to be made in
order to grow the company and capture more market share.
And, of course, the second biggest challenge was convincing
very talented, creative people to leave larger, more secure
companies and join in what is a risky venture, and that is
usually done with stock options and stock issuances.
But the first challenge, this need to raise capital, of
course, is the discussion point for this roundtable, and just
to frame it, it has been done in different ways here, but first
of all, it is not a venture capital problem. We know that even
though the average venture capital deal size has dropped
considerably over the last year-and-a-half or 2 years,
certainly venture capitalists do not invest at levels roughly
below $3 million on a general basis, and there seems to be
enough venture capital in the system still to meet the needs of
companies desiring, and at a level of growth where they can use
venture capital.
On the other end, it is not a bootstrap capital problem
yet. That is, entrepreneurs seem to have access and are very
good at convincing friends and families to invest in their
companies. They are very good at applying for credit cards.
They can do second mortgages on their homes. They can apply
savings. That can get them up to somewhere between $100,000 and
$300,000. So it is not that problem that is the issue.
The issue is really what we call early stage capital, which
is in the range of if a company needs somewhere between
$100,000 and $3 million, what does that company do? And when
you think about the lending behavior of banks, you are really
reduced to two possible pots of money to fund that growth. One
is to take the profits, the retained earnings in the company,
and reinvest those in the growth needs of the company, and the
other is to convince wealthy investors, angel investors, to
purchase stock in the company and fund this next stage of
growth.
So we have those two pots, and right now, we have obstacles
in the way of both of them. I think, as Doug pointed out, he
cannot believe that the tax system really meant to do what it
did in terms of creating this obstacle for companies to use the
profits that they are generating on their growth path to
continue the growth. We know on the basis of what was attempted
in 1993 with Section 1202 of the Internal Revenue Code, this
targeted capital gains system, that we have gummed that up
enough that that is not being used by wealthy investors.
So we are here today to discuss the BRIDGE Act, which deals
with that first problem of retained earnings used for
investment and growth, and then also the Affordable Small
Business Stimulus Act, which would deal with the wealthy
individual investor issue.
[The prepared statement of Mr. Von Bargen follows:]
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Ms. Forbes [Presiding]. Thank you.
Mark.
STATEMENT OF MARK HEESEN, PRESIDENT, NATIONAL VENTURE CAPITAL
ASSOCIATION, ARLINGTON, VIRGINIA
Mr. Heesen. Thank you very much. I am Mark Heesen,
President of the National Venture Capital Association. I agree
with what has been said so far, that venture capitalists
basically need a farm league. Without a farm league, there is
no investment in emerging growth companies down the line.
Venture capitalists in the year 2000, venture-backed
companies made up 11 percent of U.S. GDP. That is an incredible
number when you think that there are only several thousand
venture capitalists in the entire country, and yet those
venture-backed companies made up 11 percent of U.S. GDP, 12.5
million jobs, and $1.1 trillion in revenue. So there are a very
few emerging growth companies, gazelles, out there that we
invest in that become super stars. There are a lot of failures,
as well, and venture capitalists do not like to talk about
their failures, but it is an important part of the process.
But we cannot even get to those companies unless there are
basically programs put together that encourage
entrepreneurship, and unfortunately, things are
countercyclical. When times are good, basically, entrepreneurs
do not need government as much and you always hear
entrepreneurs say the best government is no government at all.
The reality is that entrepreneurs need government--it is a very
important element about how they grow, particularly when it
comes to capital gains.
People will not invest in what is very often a speculative
venture, a high-tech company or another type of an emerging
growth company, if he or she does not believe at the end of the
day that they will get some sort of financial gain out of it.
They can put the money in a bank, they can put it in a mattress
and it will do better at the end of the day very often than
putting that money into a small company that could become an
emerging growth company. You have to give them some incentive
to put money there and capital gains differentials do that.
Section 1202 is a perfect example of a very good intention
that has not, frankly, worked because of bureaucrats at the
Treasury. Congress tried to fix that problem back in 1998 and
we are still working with Treasury to try to get Section 1045
fixed. This bill, S. 1676, would make marked improvements in
Section 1202.
Those are absolutely imperative if we are going to see
emerging growth companies move through the process. Venture-
backed investors, by and large, are not tax sensitive because
they are pension funds, they are colleges and endowments, they
are banks and insurance companies. Most of them are not tax
sensitive. However, the high net worth individuals and the
entrepreneurs themselves who are not high net worth are
extremely tax sensitive, and so it is important that we look at
that early stage so that we have a very good crop of candidates
in which to invest.
What we have found in the last year is a dramatic downturn
in the amount of venture capital investing in this country and
that will likely continue through this year. However, what we
have seen over the last couple of quarters is an increasing
interest in early-stage companies again, which I think is very
good news. But it is just a small portion of all the companies
that need financing in this country. Venture capital has been
given kind of rock star status lately and the reality is that
it is a small portion of companies that we fund. Many of them,
as I said, become very important companies, but it is a small
portion of those companies in which we invest and there are a
lot of others that need things like the BRIDGE Act so that we
can look at them down the line.
Another important element, I think, just to address is
something that is coming down the pike effective January 1 of
2003 and that is the taxation of ISOs and ESPPs, incentive
stock options and employee stock purchase plans. This has
nothing to do with the other stock option issue that everyone
is hearing about.
But employers, small employers, and employees who are
making under the Social Security limit of $85,000 are going to
be paying an extra tax come January 1 of 2003, a combined tax
of 15 percent on their ISOs and ESPPs. That is a major hit on
small companies and it is something that the Treasury has
reversed a 30-year policy on. The House has actually passed as
part of the pension bill a provision that would not allow
Treasury to do this. The Senate has not yet acted upon this,
but it is a very important issue to small businesses. Thank
you.
[The prepared statement of Mr. Mark Heesen follows:]
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BARRIERS TO ACCESS TO CAPITAL
Ms. Forbes. Thank you very much.
Before we get too far into our discussion with all of you
who have come so far, we appreciate your being here, as
everyone has said.
I would like to introduce Mark Warren, who is Senator
Bond's tax counsel, and Ryan McCormick, who is Senator Kerry's
tax staffer. If we have detailed tax knowledge, I am going to
be turning to them because I am not a tax expert.
If you look in your packets, there should be an agenda in
there. Some of you have been to our roundtables before, but if
you have not, when you would like to speak, you just take your
nameplate and put it up on end like this and I will try to
recognize you in the order that you put them up, but sometimes
I do not get it quite right, so we will get to you eventually.
We do kind of move the conversation along, so you will see
there are sort of estimated times next to some of these topics.
We will do the best we can to get everyone's views in, but
please be assured that if you have written comments, the
entirety of your written comments will be placed in the record.
This is transcribed, so if you could please say your name and
the group you are with, that will help our court reporters.
Mark, did you want to say anything? No?
Congressman DeMint, did you want to say any more? No? Okay.
All right. So looking at our agenda, the first thing we
would like to talk about is we would like to hear your views on
what you see as the barriers of access to capital. We have
touched on this a little bit, but we have sort of three points
here and you are welcome to address any of the three.
Mr. Warren. One point that I think the presenters have
focused on a lot is a segment of the small business community
that is very rapidly growing and very significant. But I look
at it in terms of the progression of a small business, and what
has not really been touched on, and I know a whole lot of
groups here represent, are the very small businesses, those
that are just getting started, those that are not corporations
with stock that would benefit in terms of capital gains trades.
And that, I think, is a constituency that we have to keep in
mind, as well, because if they do not have the opportunity to
grow, then you are never going to reach that high growth stage.
So I would appreciate hearing from you all if there are ideas
that we can do either outside of the tax code or through the
tax code that would also benefit that constituency, as well.
Mr. DeMint. Could I make just a comment?
Ms. Forbes. Yes, sure.
Mr. DeMint. Just as a note on the BRIDGE Act, as I
understand the way it is written, this could be a one-person
company that is growing. When you have a very small base to
start with, it is easy to meet our growth requirements, so it
is not necessarily between $300,000 and $1 million. A person
who can defer a few thousand dollars the way the BRIDGE Act is
structured, and for a one-person company starting, the ability
to have a few thousand capital, leverage it into ten, you can
add an employee, can rent space.
So this is something that is designed to help not only the
gazelle emerging growth companies, but applies just as easily
and probably more often to a tiny little company that went from
$10,000 in sales to $20,000. They have doubled their revenue,
and if they do that over a few years, they have met our
criteria. There are obviously other needs of small business,
but this is what we hope to fit in that slot, too.
Ms. Forbes. Does anyone have some comments or views on any
of these barriers? One of the questions that we have had is at
what point do companies turn the corner, and prior to that, how
can you identify that point and how can you get them to turn
the corner faster.
Mr. Esparza.
Mr. Esparza. Yes. My name is Moctesuma Esparza and I am
here representing the New America Alliance, a Latino business
leaders' initiative. Our organization is made up of very
successful Latino business leaders and would generally fall
outside of the goals of support that this legislation
contemplates.
However, I would like to bring attention to the fact that
this legislation, as has been discussed, does not really take
into account that there are historical structural inequities in
the access to capital for Latinos in particular and for other
minorities in the country. The equity that most entrepreneurs
use as bootstrap, which comes from friends and relatives, comes
from the accumulated equity in home ownership that has been
generated over generations.
Particularly in our communities, it is not that long ago,
certainly in our memory, that restrictive covenants restricted
the ability of Latinos to purchase land in particularly
desirable, upscale possible areas or in areas that equity could
be increased in, and certainly redlining in regards to home
loans has historically restricted this generation of equity,
and the equity that is available in our communities is far
below the national average as a consequence of these historical
structural inequities.
So certainly I think that it must be acknowledged that in
our communities, the access to bootstrap capital is greatly
restricted by the lack of accumulated equity in home ownership
or access to credit cards.
And further, in regards to the early stage, the
availability of access, even social contact with venture
capitalists or banking institutions is greatly restricted. I am
a fairly successful business person and the only support that I
was able to find in terms of being able to go and acquire
capital came from an African American-run SBIC and private
equity fund, which is represented here by Mr. Duane McKnight,
and had it not been for their particular focus on seeking out a
company like mine, I would not be at this table today.
I have now launched a new company and I have gone out to
the capital markets, to the private equity firms, the venture
capital firms, and I have found nary a Latino anywhere in the
ranks of these companies and I have found that the educational
effort that I must expend to introduce them to the tremendous
profit opportunity available in the Latino community is a
tremendous time consumption of energy and that, generally, they
only want to do what they know and they only want to work with
the people that they know.
And new areas, particularly considering that the future
workforce and the future vitality of this great Nation, is
dependent on empowering the Latino community, which will
quickly become 1-in-4 Americans in the next 30 years, is of
vital importance to the future health of this country and that
providing capital flow to this community and of easing the
problems of bootstrap, of early stage, and of access to venture
capital must be considered in any legislative effort to attempt
to help these problems that entrepreneurs face.
And so far, I have not heard, nor have I read, that any
consideration is given to this or any dialogue has been
addressed to this. Thank you.
Ms. Forbes. Thank you.
Bruce Phillips.
Mr. Phillips. Thank you. My name is Bruce Phillips. I am
with the National Federation of Independent Businesses. I would
like to speak a little bit to Mr. Warren's comments about
established small businesses.
We represent about 600,000 small firms, of which the
average size is about seven. But I would like to call your
attention also to the fact that we publish research, and there
is a copy if you would like to pick one up on the way out, a
national small business poll where we asked--this is Dun &
Bradstreet-weighted information, so it is representative of the
country as a whole--we asked 750 companies how many wanted to
grow and which ways they wanted to grow.
[The poll submitted follows:]
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Obviously, keeping tax rates lower, permanently lower, is a
number one issue for many of these companies. When we asked the
question, how many of you would like to be able to have $100
million in sales within the next 5 years, of the half that said
they wanted to grow--half of the firms in the survey said, in
fact, they were content with their present size--about 8 to 9
percent of the companies said they would like to be doing $100
million in sales within 5 years. Well, if you take about 9
percent, give or take, of $3 million, you are in the $300,000-
$400,000 company range, and that is the target, I think, that
this group is concerned with.
One of the questions that really struck me, when business
owners were asked what they liked to do best, the thing that
came out increasingly was they were most interested in
operations and serving customers and providing the best
possible product. When asked what they liked to do least, the
answer was to raise money, finance, which led me to believe,
how do we make this leap between the people who clearly need
the money and would like to grow and the people who do not have
time because they are wearing four hats at once, trying to make
payroll, trying to meet suppliers, trying to meet customers, et
cetera, et cetera?
I guess I concluded that it is education, that we need more
linking, more networks, more groups like what the Kaufman
Foundation has done. Many small firm owners will take a few
hours occasionally to go out and listen to some people, even
bankers, people who have gone through this process and have
obtained a fair amount of money in the angel capital stage. But
it is, frankly, a very, very difficult process.
We know that there are at least 300,000 or 400,000 people
in the farm leagues, as the gentleman said. The problem is, how
do we get these people who are so busy with their 6-, 7-, 8-
employee companies and who need the money and many of whom
would like to get the money to, in fact, to apply for it, to
sit in the seminars, et cetera, et cetera? And I think that is
one of the two problems of very small firms and continues to
be, by the way.
Ms. Forbes. Thank you.
Mr. Hughes.
Mr. Hughes. Thank you. My name is Robert Hughes. I am a
self-employed CPA from Dallas, Texas. I am also the President
of the National Association for the Self-Employed, a
microbusiness trade association that has about 200,000 members
around the country. Our typical member has fewer than 5
employees.
In concert with what our colleague was saying across the
table about bootstrap capital for small business, it is my
belief that that is one of the most important issues that we
should address when we begin talking about working capital for
business. It is at this level, microbusiness, that jobs are
created, innovations are made, and the economy is stimulated.
Right now, we know that 34 percent of microbusinesses use
credit cards to purchase inventory. We know that 64 percent of
those same businesses use credit cards to purchase their
capital acquisitions for equipment and business machines. We
know also that one of the detractors of growth in entrepreneur
business is access to working capital.
So we think while we like some of the provisions of the
proposals that are on the table, we think that they should be
expanded to include microbusiness, as well, in the areas of
zero to $300,000 of working capital.
Another provision of the bill that seems to be an oxymoron
to me is that as a tax professional, we spend a tremendous
amount of time endeavoring to reduce the tax liability of the
businesses with whom we work. As you know, that is a
significant consideration in terms of the future growth and
cash flow of the organization.
In order to take advantage of these provisions, it is
necessary, of course, to have tax and it is then contradictory
to say that we can increase our working capital because we want
to generate a tax liability. If we could find some method that
would enable us to provide working capital through tax deferral
that would not somehow conflict with what we are trying to do
from a profit perspective, would enable us to still minimize
our tax liabilities and provide some working capital
requirements, it would be useful, as well.
In addition, while the bill may--I am not sure that it
does--should extend to sole proprietors as well as
corporations, S corporations, and partnerships.
Ms. Forbes. Thank you.
Mr. Carroll, I am sorry I missed you earlier. I know your
nameplate was up.
Mr. Carroll. Thank you very much, and good morning, ladies
and gentlemen, Senator Kerry, and all staff from all the
various Members of Congress as well as my colleagues from the
small business community.
My name is Frank Carroll. I am Chairman and Founder of
Small Business Service Bureau, which is a national small
business organization of over 50,000 small companies. I am
delighted to be here with Small Business Service Bureau's Angie
Doye, co-founder and CFO of Gwathmey, who, with the CEO, Judith
Gwathmey, has built an innovative, highly successful small
business in Cambridge, Massachusetts.
The fast-growing, creative firm is exactly the type of
company that will benefit enormously from S. 1903 and S. 1676
and my congratulations to all of you Members of Congress and
small business people who have worked on it. We all realize
that bills have to be tweaked, and in some cases, certainly S.
1676 needs a little tweaking.
But in the interest of time, I would like to introduce and
to call on Angie and let her tell us how these bills affect her
company. I know how it affects our other members, but let us
hear from another small business person who could tell us about
her company, with your permission.
Ms. Forbes. Sure.
Ms. Doye. My name is Angelia Doye. I am the CFO of
Gwathmey, Incorporated, located in Cambridge, Massachusetts. We
are a small biotechnology company that was founded on an SBIR
grant back in 1996. We now have 9 employees. We have been
awarded seven SBIR grants since 1996, and with those SBIR
grants we have been able to build the technology and to acquire
the equipment that we needed to service the biomedical
industry.
One of the problems that we are facing especially, even
right now, is we are trying to get a bridge loan from the bank
in order to be able to expand the business. As we have
developed the technology in-house, we have also had to acquire
personnel, and in looking to do that, we have found that we
have to build our contract basis with the industry and that is
what we are in the process of doing now.
It takes about 2 to 3 months just to secure a contract from
a biotech or pharmaceutical company if you move quickly. So we
have asked for a bridge loan from a couple of different banks,
and one of the problems that we come up with is the cash flow
issue. Of course, because we have basically been founded and
operated from SBIR grants, the cash flow is small because you
do not make profits off of grants. But the industry contracts
have started to build up.
We have got equipment, and every time we purchase
equipment, understand that because we are a biotech company, a
piece of equipment is anywhere from $40,000 to $70,000. As we
acquire the equipment we need to service the industry at the
end of the year, it becomes a tax problem--well, a tax problem
to me. It is a tax liability.
The money we do get at the end of the year that we call
profits, we wind up paying out in taxes. So it is a vicious
cycle for us in that we acquire the equipment, we get the
personnel, but at the end of the year, we are taxed, so we do
not have the money we need to go forward into the next quarter.
So we have months now where we have enough money and other
months where we do not. So the bridge loan, we figured, would
get us to the point where we have the bigger contracts coming
in toward the end of the year, but we have been denied due to
the cash flow.
And the equipment that we have, the banks are telling us
that it is too specialized for them in case we default on our
loan based on what our cash flow indicates. So I think that the
BRIDGE Act is something that would be very useful for us. We
have been encountering this about 3 years now.
Ms. Forbes. Thank you very much.
Giovanni Coratolo.
Mr. Coratolo. I am Giovanni Coratolo with the U.S. Chamber
of Commerce and I think, certainly from my members, what I have
heard, I think it is important to address this when you address
the issues of access to capital and its barriers, is certainly
focusing in on some of the traditional lending institutions
and, in specific, the 7(a) program in which we have seen
subsidy rate miscalculations that have provided the government
with the hidden tax on business and capital of up to $1 billion
over the last decade.
Certainly, we see this as something that needs fixing. We
see our members that have struggled in the access to capital
and institutions that have matriculated out of that process.
That is important. Certainly, this is something that we applaud
the efforts of Senator Kerry and Senator Bond both, who have
been on record to provide the fixes or encourage fixes to this
area so that this is an area that we see that does need
attention and needs focus.
And also, the level of funding in this year's 7(a) program
is something that we are very concerned about, so that, I
think, is important to have on the record.
Ms. Forbes. Thank you very much.
Jerry Feigen.
Mr. Feigen. Thank you, Patty. My name is Jerry Feigen. I am
Director of the Macklin Center for Entrepreneurship at
Montgomery College in Rockville, Maryland. I have been in this
arena for quite a while.
In fact, in the early 1970s when I was with SBA, I tried to
use the word ``entrepreneurship'' in a document we were going
to publish and I was shot down because they thought nobody
would understand it or pronounce it. Thank goodness we are here
at a day where it is more than SBA, as the Senator said. It is
an educational career alternative in high schools and colleges
and universities and has much deeper roots.
I think the BRIDGE Act is a great first step for a limited
number of companies and I support it. I think the issues of
costs are always there, banking costs. What are they going to
add on to the piece of the pie and what is Treasury going to
add on in terms of the processing and paperwork and those kinds
of things? But I think it is a great first step.
I would like to go to the other end of the spectrum. We are
at a point in this country where VCs always talk about
pipeline. The pipeline for entrepreneurship has never been
greater at all levels. Demographics in the immigration area and
in the minority area are just ballooning and the career
alternative for entrepreneurship is at its greatest height.
We just did a program with the NIH last April, April 18,
2002, 500 scientists from the bench to business showed up, 87
percent of whom want to have an entrepreneurial career, want to
take their science someplace. These are people without a great
deal of money, but a lot of intellectual knowledge. They do not
know how to put a business plan together. And importantly,
there are not sources, except some of the VCs are now--of the
activity in the venture area, bio-focused venture funds are
still maintaining some growth.
So I think there is an issue there. How do we mine those
entrepreneurs that are not only bio, but IT, science,
engineering? They are coming out of the woodwork and out of the
school systems and they are feeding off of themselves and the
access to their capital means has to be taken care of.
[The prepared statement of Mr. Feigen follows:]
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Ms. Forbes. Thank you.
Todd McCracken.
Mr. McCracken. Good morning. I am Todd McCracken. I am
President of National Small Business United. I will try to be
very brief.
As I think we have already seen this morning, and I think
only half the folks have spoken, the credit and capital picture
for small business is incredibly complex and there is no silver
bullet, there is no one fix for small business at large. I
mean, we are trying to have a conversation at one table where
we are talking about SBICs and venture capitalists and bank
loans and credit card borrowing and the start-up dry cleaner
and biotech firms, all in the same conversation. It is a pretty
difficult thread to try to maintain.
But it is clear that small businesses often have great
difficulty obtaining capital, although the difficulty seems to
have been less in the last few years than it was for a great
many years. But it is cyclical in nature and I would like to
try to raise one issue that I think relates to the issue that
the BRIDGE Act is trying to get at, and it is an issue that
comes back over time with the economy, and that is basically
the problem of the banking regulators.
We hear anecdotally from members now who are in a growing
stage. They may or may not be in the BRIDGE Act's definitions
of a fast-growing company, but they are certainly successful
companies but, nevertheless, have cash flow problems that in
years past, in most times, they are able to get a bank loan to
get them past these times. In the last year or so, that has
become much more difficult for them and the reasons that appear
to be for this are that the banking regulators are changing the
rules of the game, basically, for the banks, in particular, for
how they judge the creditworthiness, how they rate the value of
inventory and other assets, for instance, of the businesses'
assets.
I want to raise the issue because we think it is critically
important, because the way the bank regulators function now is
in times of great economic boom, they have almost an ``anything
goes'' attitude sometimes, and then when the economy starts to
go south, they exacerbate it by changing their standards and
there ought to be some level of uniformity in what constitutes
a good loan and it should not be different in July of 1998 than
it is in August of 2001.
I do not know if anyone who knows more about this and is
smarter on these issues than I am has any particular ideas on
how we can achieve some of that uniformity from the regulators,
but I think it is crucially important.
Ms. Forbes. Okay, thank you.
Darrell McKigney.
Mr. McKigney. Thank you. I am Darrell McKigney. I am
President of the Small Business Survival Committee. We have
been supporting the BRIDGE Act for some time, testifying for it
on behalf of the House. We appreciate Senator Kerry's effort on
that.
But one of the things that kind of gets me thinking about
the BRIDGE Act is it really highlights to me how much taxes
make the difference between success or failures of businesses.
We heard from Angelia this morning about how all the profit
goes to taxes, and it strikes me that one of the simplest
things we could do to provide capital for small businesses is
continue to cut taxes, to make the tax cuts that were passed
last year permanent. That is a big help for small businesses.
The biggest angel investors out there a lot of times are
parents and people who give money or gift money to take care of
an estate. The estate tax is going out of business or is
phasing out and then it is going to rear its head back up. We
ought to make that permanent. We ought to make it easier for
people to gift money to friends and family. Those are the
people who often know those businesses and those people the
best. That is a good opportunity.
Mark, I think, brought up self-employed people. The
fastest-growing part of the workforce right now are self-
employed people. I think they have increased something like 30
percent over the last decade, and with technology, that is only
going to increase and it is a great opportunity. The thing is,
they run into, I think, a couple of specific issues.
One, they immediately run into payroll taxes, and that gets
into the issue of Social Security reform. There ought to be a
way that people can invest their money privately so there is
more capital out there for the rest of us to access and get a
better rate of return when they retire and, at the same time,
lower rates so they do not have to pay so much.
The other issue I think they run into is so many times if
they are using a home office or they are using a car or a
vehicle, it is very hard to deduct those things and a lot of
times their personal expenses are mingled in with their
business expenses, and those are, in addition to a lot of the
other areas that were brought up here, I mean, those are some
things that I think we could look at that would have an
immediate consequence for people.
[The prepared statement of Mr. McKigney follows:]
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Ms. Forbes. Okay, thank you.
Amy Millman.
Ms. Millman. Thank you, Patty, for inviting us to join this
roundtable and for pulling all of these great folks together. I
wanted to mention one theme that comes up from the women
entrepreneurs that we talk about. They want to say thank you
for making the distinction between the small business, the
world of small business, the world of entrepreneurship. There
are some very significant differences in the way these
companies start, grow, and then there are some very similar
aspects.
I think the issue that we have faced in small business
development and in entrepreneurial development is the
difference between large and small, and the government makes no
distinctions, for the most part, between large and small. When
you are a fast-growth company, those distinctions begin to
blur, and so what is happening to many of the entrepreneurs
that I run across, very much like Angie, are that they have
grown to a point now where the large corporate tax regulations,
requirements, are kicking in before they really have reached
profitability.
They asked if there would be some recognition of this
phenomenon which other small businesses have experienced over
the years, but at a slower pace. They are experiencing it very
quickly and it has meant the difference between staying in
business and not. So there are lists and lists that they are
giving me of rules, regulations, some State, some Federal, that
have caused them all of a sudden to put the skids on their
enterprises, much to the consternation of Mark Heesen's
members.
But, in general, that is basically it. As the input comes
in, I would like to have the opportunity to be able to forward
their thoughts to you.
Ms. Forbes. Please do.
Jeremy Wiesen.
Mr. Wiesen. Thank you. I come at entrepreneurship in three
different ways. I am a business school professor at New York
University, but I have been at UCLA, Berkeley, Stanford,
Wharton, Columbia, so I may have been in your neck of the
woods.
In the 1980s, I started, with others, Financial News
Network, which was the complete start-up acquired by CNBC later
on, started in a garage, basically, in Los Angeles. After that
started, something called Tofutti Company, which maybe you have
some Tofutti Cuties in your icebox here, or your kids do. It is
still around and going strong.
Thirdly, aside from teaching entrepreneurship, I have
started something called the Global Goals Institute with Dr.
Christian Kling, who is here today, and we have developed
several ideas and one of them that we focused on in a group
meeting was to amend Section 1244 of the Internal Revenue Code.
I have always been a big fan of Section 1244. I remember in law
school, they told us, ``if you do not remember Section 1244,
you may be sued for negligence.'' And then when I went to the
Wharton School, they said, ``by the way, if you do not remember
Section 1244, you may be sued for negligence.'' So I have
always remembered Section 1244 and I have actually taken
advantage of Section 1244.
It was enacted in 1954. It focuses on losses. The amendment
to Section 1202 focuses on gains. Section 1244 says to the
angel investor, you can deduct up to $50,000 a year as a
person, $100,000 as a couple, from losses in small businesses
that you have invested in. It was amended in 1978. Prior to
that, it was $25,000 and $50,000. As of 1978, prior to that,
the size of the company had to be $500,000 in capital. It was
raised in 1978 to $1 million in capital. That is the capital
limit at the time that you invest.
At the Global Goals Institute with Dr. Kling, we have held
meetings and we have not found anybody who is opposed to
raising those limits. We think it is appropriate. Just on an
inflation basis, they ought to be doubled.
So from a tax point of view, and I have been speaking to
folks on the Committee to try to push this forward. I would be
very interested in your ideas, because I think as an investor,
you not only think what happens if it works out, can I save
some money on gains--I can see Douglas is enthusiastic about
this----
[Laughter.]
Mr. Wiesen. But what about those losses? If you can write
off the losses against ordinary income and not just against
capital gains, I think it is a tremendous incentive.
In this paper that I have prepared today, I have a bunch of
other ideas and most of them go to how to link into
infrastructures. I know that at Financial News Network, if I
had not brought Merrill Lynch, a firm of very great repute 20
years ago, anyway----
[Laughter.]
Mr. Wiesen. ----If I had not brought Merrill Lynch in as an
early investor to Financial News Network, we would not have had
our studios, our advertising, and many things. And at Tofutti,
if I had not been able to do a national distribution deal with
Haagen-Dazs, you would not see any Cuties in the supermarkets.
So these were two complete start-ups that depended upon linking
into existing business infrastructures, and I think that at
another hearing at another time, we ought to think about how--
and I have ideas here of how to encourage small businesses to
be able to link into existing business infrastructures.
[The prepared statement of Mr. Wiesen follows:]
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Ms. Forbes. Thank you.
Richard Newpher.
Mr. Newpher. Thank you very much, Patty. I appreciate the
Senator putting together this meeting and giving us an
opportunity to speak.
I am Dick Newpher with the American Farm Bureau Federation,
and I am not part of the farm team that has been mentioned here
a couple of times. I wish I were. It would at least represent
that I was a lot younger than I am.
[Laughter.]
Mr. Newpher. But I am with the American Farm Bureau and we
have 5 million member families across the country, not all of
whom are farmers. There are not 5 million farm families in
America. There is probably somewhere around 2 million. We do
appreciate very much the concern that is expressed with regard
to capital and the concern that is also expressed with regard
to taxes and capital gains taxes and estate taxes especially.
You know, agriculture has traditionally lived off the value
of its property, the equity in its land and the holdings to
raise capital. Most of my life and most of the history of
American agriculture, bankers were quite willing to que up with
money because they knew that there was a piece of land out
there that had the ability to be sold and recover the loan and
so on.
We are rapidly finding in agriculture that that is
changing. Our margins are getting smaller. Our debt loads are
getting sufficient that the bankers, especially given the fact
that about every 10 to 20 years you have a break in the land
prices in agriculture, the bankers are not quite so eager to
lend us money as they had been, and so we have a great interest
in the capital as an existing business. We do not fit the
description exactly for new and emerging and things of that
nature, but we are a very critical business to rural America.
The bills, and I would like to echo a little bit about what
Robert Hughes said in the one specific bill, to make sure that
any legislation like this is available to sole proprietorships.
We are, by and large, partnerships, sole proprietorships,
Subchapter S corporations. We do have agriculture corporations,
which you read about in the paper as being the nasty people in
agriculture and taking over the world, which is another myth
that needs to be dispelled. But we need to make sure that when
we look at these things, we look at all the business structures
that might be about in our land and especially in agriculture,
which are predominated by those types of structures.
We have, I think, many needs, especially with regards to
tax legislation. We have numerous examples of strong
agricultural businesses that, because of the death of the
principals in the business, had to be highly mortgaged and/or
partially sold in an effort to keep it going for the next
generation. It was mentioned earlier, for a country to do
damage through its tax code to existing viable businesses is
probably worse than not passing new legislation to help us in
the future.
In the capital gains area, we very often are stopped from
restructuring, changing our businesses in ways that would make
sense for us in rural America and in agriculture because the
changing of selling of assets, when our assets are principally
land, causes us to have capital gains liability and so we
resist change as a result of having tax liability, and that is
another, I think, travesty of the tax policy that should be
changed and should be eliminated.
If you go into the specific legislation, S. 1903, we have a
request for, in agriculture, and we have a couple of bills in
agriculture that could very easily be merged with these bills
that would enable agriculture to set aside 20 percent of its
net income per year in an account that could be taken back into
the cash stream anytime in the next 5 years, and you could do
that for 5 successive years, and then at that time it would
become subject to tax automatically.
Those kinds of things to help us to help ourselves and not,
when we have a good year, take the tax off the top, and when we
have a bad year, there is nothing there to income average and
help with our tax responsibility, is another area that we could
very easily, I think, help, either by amending into S. 1903 or
passing individual legislation.
In addition and in closing, I would encourage, as was
encouraged earlier by Darrell McKigney, that we need, and we
have had significant tax policy change. We need to make sure
that that tax policy remains in place and that we make
especially the estate portion of that tax policy permanent so
that we can rely on our businesses being passed from generation
to generation.
I thank you for the hearing and we will be here the rest of
the afternoon.
Ms. Forbes. Thank you very much.
We have been joined by the Committee's Ranking Member,
Senator Bond. Thank you.
OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, RANKING
MEMBER, COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A
UNITED STATES SENATOR FROM MISSOURI
Senator Bond. Patty, thank you very much, and thanks to all
of you for coming out for this very important discussion.
I have to apologize, because as so often happens in the
Senate, this is the ``Perfect Storm'' day for me. I was looking
forward to being here, but the Smithsonian this morning had its
initial kickoff of the major effort to collect all the
artifacts from September 11 and bring together the pictures,
the clothes worn by heroes who rescued living survivors from
the Pentagon, a tremendous array of information and memorabilia
and information that is already coming in, and I had sponsored
last winter the legislation designating the Smithsonian as the
central repository. I felt that I had to be there for that, and
I have two other things going on.
I am relying on Mark and Patty and the others to keep us up
to speed on what happens here, but I am going to have to
express my sincere thanks, tell you a few brief things, and
then excuse myself. I think it is extremely important that we
have this discussion for all of us, through our staffs, to
learn about how we can increase the access to capital for the
entrepreneurs who keep this country growing.
I think last summer we made great progress in easing the
capital drain by reducing tax rates. Some 20 million small
businesses are taxed on personal rates through proprietorships,
partnerships, and Subchapter S corporations, and that means
that individual rate reductions do directly affect and help
small business. That means that small business will be able to
put that money back into purchasing new equipment. That means
hiring new people, providing better benefits for those who are
there.
The tax bill also addressed another capital drain by
dramatically reducing the death tax, putting it out of its
misery in 2010, meaning that we save in small businesses, in
very many instances, hundreds of thousands of dollars in estate
planning costs currently incurred to try to figure out how to
keep the business or the farm going when the owner dies.
Now, as a lawyer--actually, I am a recovering lawyer. I am
in the 12-step process----
[Laughter.]
Senator Bond. I know that lawyers and accountants benefit
greatly from estate planning, but we can find something else
for them to do if small businesses and farms do not have to
spend that much money trying to avoid this estate tax.
With all of the strengths of the United States Senate,
however, we do have a procedural problem. We did not get to the
60 votes that we needed to extend the effective date of that
tax bill and I would hate to see, like some Frankenstein
monster, the tax rates rise from the grave in 2011 and penalize
anybody who did not have the decency to die in 2010. It seems
to me a rather macabre tax impact.
But also, let me point out one other thing that will, we
think, bring money into the entrepreneurship of small business.
The Small Business Investment Company Capital Access Act of
2000 will permit and encourage tax-exempt investors like
pensions and endowment funds to invest in small business
investment companies. Currently, the tax law imposes a special
tax on investment earnings by tax-exempt institutions and that
puts about 60 percent of the private capital potentially
available for starting up small businesses off the table.
There has been a significant contraction in the amount of
money available, namely, the capital available in the private-
equity market, and during the time this SBIC program has taken
on a significant role. We think that this change in the tax
code to permit tax-exempt entities without penalty to
participate in the SBDCs would pave the way for much more
investment capital to be invested and to be made available for
small businesses.
In closing, I urge you to look outside the tax system to
stimulate investment in small business. We need to make the tax
code simpler and the least burdensome possible, but we also
need to be sure that we do not impose other burdens on small
businesses and farm enterprises through regulatory efforts or
activities that make small businesses and farming unprofitable.
So with that, I leave you with thanks and my best wishes
for a continued productive discussion, because these
roundtables do help us refine and define the issues that we are
going to pursue on the floor of the Senate. With that, again, I
am going to have to beg your indulgence as I go on to the third
of my four responsibilities this morning, so thank you very
much.
[The prepared statement of Senator Bond follows:]
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Ms. Forbes. Thank you, Senator Bond.
Duane McKnight.
Mr. McKnight. Good morning. I am sort of wearing two hats
here today. I am general partner with Syncom, which is a
venture fund that has been around since 1977, and also as Vice
Chairman of the National Association of Investment Companies,
which is a private equity organization that has about 35
members, about $1.2 billion in capital currently in its
membership, and these firms focus primarily on underserved
markets in venture capital, primarily minority entrepreneurs,
women, and similar opportunities.
Just listening here, I just wanted to also follow up on Mr.
Esparza's comments. The capital access issue is not an equal
opportunity problem in many respects, not only from a minority
standpoint, but also from a gender standpoint and, to some
degree, a geographical standpoint, as well. We even heard that
there are some issues with respect to the type of corporate
structure you may have. There are some people with different
corporate structures who also do not have capital access
because of that structure.
I say that to suggest that any legislation that is put in
place, a blanket legislation that is put in place to try to
address some of these intricate issues that we have, needs to
address some of the things that are particular to certain
groups in the capital access scenario.
Also, we have talked mainly about small business growing
organically, and as you know, small businesses can also grow
from an acquisition standpoint, and I think tax legislation
with respect to giving access to opportunity plays a large part
in the drawing capital to small business, because many times,
the opportunity to grow that is not there that restricts the
capital from flowing. That could be primarily in the form of if
a small business wants to acquire another company, where that
company would receive some sort of capital gains deferment upon
selling, would rather sell to a small business, give a small
business an opportunity to buy that company as opposed to a
large business.
As you know, the small business that would probably buy
that company would probably maintain those employees. A large
company buying that same company would probably RIF most of the
employees under that scenario. So if there was some ability to
allow small business to acquire a company, the acquiring
company's shareholders are able to defer tax or even have a tax
reduction would go to a large extent of allowing small
businesses to grow in that fashion, as well.
Ms. Forbes. Okay. Thank you very much.
I am going to call on Lee Mercer, Kathy Freeland, and Dean
Garritson, and then we will sort of close out this first
section and move on to the second, so if you want to be looking
ahead a little bit and seeing if you have any particular
comments you would like on the record having to do with tax
considerations affecting capital and labor investment
decisions. I think some of you have touched on this, but that
is where we are going next.
So with that, Lee.
Mr. Mercer. Thank you, Patty. I am Lee Mercer with the
National Association of Small Business Investment Companies. I
would like to thank Senator Kerry and Senator Bond for all that
they do to help our program and in so doing to help small
businesses. Regarding Senator Bond's statement, I should note
that Senator Kerry and Senator Bond both have introduced
separate pieces of legislation that actually do the same thing,
which would make it easier for debenture SBICs to raise money
from tax-exempt investors by declaring that debenture
indebtedness is not acquisition indebtedness, which
automatically creates UBTI for a tax-exempt investor.
Why is this important? I want to kind of go back to
something that Mr. Von Bargen stated. He said, most VCs do not
invest below $3 million. The SBIC program does. That is, in
fiscal year 2001, SBIC investments actually represented 55
percent of all venture capital transactions in this country and
the average investment size was $1 million and the median
investment size was about $300,000. Now, that is 55 percent of
transactions. It is probably only about 15 percent of the
money, but it is a large number of transactions.
Does it solve the problem? No, it does not solve the
problem, which is why the BRIDGE Act, I think, is an
interesting proposal and why we were one of the first, I think
Mr. Tatum would say, we were one of the first to sign on as
supporters of it. If you look at what it does, (A) it is a very
efficient way to get capital to fast-growing companies if the
government decides that they want to support that group,
requiring no costly infrastructure to do it.
It is, in essence, if you look at the deal flow problem
from both the venture capitalists' point of view, and from the
small business's point of view that is trying to raise money,
the venture capital professional may be able to look at 200
deals in a year, but only 30 or 40 of those that they get
interested in, and maybe only 15 or 20 of those would they
actually do significant due diligence on, and that one
professional would then make perhaps three, at most four,
investments in a year.
So what that tells you is that if you just get down to the
15 or 20 where the venture capital professional is doing
serious due diligence, those companies merited some support,
probably, some level of support. They were growing fast enough
so that the venture capitalist was willing to spend a
significant amount of time investigating them and did not
choose to--only chose to invest in three out of the 15, but
those other 12, if they were growing fast enough, the BRIDGE
Act would be a substantial help, and I know I am kind of
blending between A and B.
The other thing that I would like to say is in the 6-plus
years that I have been at NASBIC, and I was a practicing lawyer
for many years a long time ago--I guess I am a recovering
lawyer, too.
[Laughter.]
Mr. Mercer. The thing that strikes me as a hurdle for small
businesses is that I am continually amazed at how few small
businesses that actually have good stories to tell do not have
a business plan that is in a format that will allow venture
capital professionals to digest it quickly so that they can put
it into this 200 down to three formula that they use. I mean,
that is a true hurdle. I get business plans, what people
purport to say are business plans, at my office all the time
asking me to forward them to SBICs and they are just not--you
cannot do it. So that is a real hurdle, and I do not know the
answer to the question other than the fact that I have always
suggested that SBA needs to do as much as they can to solve
that problem.
Ms. Forbes. Okay, thank you.
Mr. Mercer. One more thing. I would note that People
Solutions, which was one of the stories, is last year's SBIC
and NASBIC Portfolio Company of the Year, and a great success
story for everybody concerned.
Ms. Forbes. Thank you for making that additional point.
Kathryn Freeland.
Ms. Freeland. Good morning. My name is Kathryn Freeland. I
am a CEO and sole shareholder of RGII Technologies. We are an
information technology solution provider primarily to the
Federal Government marketplace.
My journey to entrepreneurship was much like many of the
stories that have been told today, especially with the one that
Mr. DeMint mentioned earlier this morning, as well. RGII
started out bootstrapping $3,000 and a lot of credit card debt,
and I must say that that is the way many small businesses
begin, especially those small businesses that happen to be
minority small businesses, the Latino community, the African
American community, the women-owned business community. We tend
to have to start that way.
But I must say that without the SBA, and many of us do turn
to the SBA because maybe we do not have all the information
that we need or the access to the venture capitalists or we may
not want to give up the ownership in our small businesses that
we are trying to grow from ground zero at that time, we end up
going to SBA for assistance, and I must say, without SBA's
assistance, RGII would not be where we would be today.
RGII is a $30 million company now, almost 350 employees,
but the challenges along the way to get us there mostly
centered around access to capital. And so even though we had
access to the marketplace, the government contracts and what
have you, financing those government contracts was a challenge.
We could win them, but how could we support them?
And so, again, the BRIDGE Act, and as Mr. Warren mentioned,
how do you help those microsmall businesses that they may not
need hundreds of thousands of dollars, they may just need
$10,000 to $15,000 to $25,000 just to get them started.
So I would implore looking at the BRIDGE Act and making
certain that we are including those microsmall businesses in
the mix. Is it really centered around helping all levels of
small businesses and not just those who have reached the peak
where that $250,000 tax relief may be of assistance.
So in the midst of all of that, again, the banking
community is not taking the risks. They were not 12 years ago
when RGII started and they still are not today, and so we do
need the additional assistance to help those small businesses
that are trying to get from point A to point B to really make
their dreams a reality and what their business plans, as Mr.
Mercer said, are stating.
So I thank you for the opportunity to come and talk to you
today.
Ms. Forbes. Thank you very much.
Dean Garritson, you have been very patient. Thank you.
Mr. Garritson. Hi. I am with the National Association of
Manufacturers, and while most folks might know that we
represent some 85 percent of industrial output, fewer people
know that the NAM represents, or 80 percent of the NAM's
members, almost 85 percent, are small manufacturers, and the
average small manufacturer at the NAM is about 80 employees.
What we have found is a different problem with access to
capital than some of the issues raised today, but some have
hinted at it, Todd and others, and that is that the access to
capital from the current lending community and the traditional
lending community, banking, is significantly restricted.
I have got just one chart. I will pass it forward. You can
see the first number is the Federal funds rate and the second
line going the same direction is actually the nature of
commercial and industrial loans. So while the rates for money
are getting cheaper, the loans are not getting through.
[The charts submitted follow:]
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There are three numbers that kind of explain that. One is
during the last calendar year, $70 billion was taken in by the
banking community, and I am sorry the banking community is not
here because they are going to hear me not beat up on them at
the end of this. But of that $70 billion that they took in,
what did they do with the money? As it turns out, $70 billion
was restricted or reducing commercial industrial loans and $140
billion went into Treasury. That is not good for the
entrepreneurial and manufacturing community, which is a very
highly capital-intense community.
But what we have found, that despite the decreasing
interest rate, the dollars are not flowing, but we are not
beating up on bankers. We have heard enough from the banking
CEOs of small and medium-sized banks, regional banks that
service more than 80 percent of our members, is that the
regulators have come to them with a rather broad swath and told
them in no uncertain terms to reduce lending to certain SIC
codes. We find that to be way too broad a sweep. In fact, we
described it, or some of our partners in this fight have
described that as while the Comptroller at Treasury has gone
out witch hunting, they have just got a couple of folks
sweeping the front porch with a broom, and it is entirely true.
The regulating community, from the Comptroller at Treasury,
is a little too harsh and a little too broad and a little too
bureaucratic to be able to provide individual lending to
individual enterprise levels, and we find that regulatory
structure to be overly reactive in a down-cycled economy.
It will not surprise anybody to tell you that we have got
some thoughts on taxes, but I am going to hold on to those for
the second half of this.
Ms. Forbes. Thank you very much.
TAX CONSIDERATIONS AFFECTING CAPITAL AND LABOR INVESTMENT DECISIONS
Ms. Forbes. Let us move ahead to the second portion. We are
not exactly sticking to the time, so we may have to cut this a
little bit short because I know that the Chairman wants to hear
your views on the two bills that he has introduced, especially
if you have recommendations on broadening them, some of you
have mentioned that. So why do we not turn to the tax
considerations affecting capital and labor investment.
There were some questions that we would like to hear from
you, especially those of you that are representing large
groups. What are the primary tax considerations that small
business must make when determining to make capital or labor
investment decisions and how do these differ, and you have the
manufacturers, you have those self-employed, you have other
groups that might--we are sort of trying to figure out if there
is like a one-size-fits-all solution.
Mark.
Mr. Warren. Let me just add one other kind of question to
the mix. We heard from a lot of the groups here at the end of
last year and the beginning of this year that there was a lot
of progress made with Treasury's announcement of the new $10
million threshold for cash accounting. I think that that
change, especially for the microsmall business starting out, is
a significant improvement in terms of reducing complexity and
burden.
I wonder, given some of the proposals out here that would
require accrual accounting, is that going to be a significant
hurdle imposed by the tax system?
Ms. Forbes. Mr. Culpepper.
Mr. Culpepper. I am Lee Culpepper with the National
Restaurant Association and I just want to make a quick point
under topic two: Tax Treatment of Capital Investments.
Restaurant buildings are currently depreciated over 39-and-
a-half years, which is an absurd schedule. The average
restaurant is renovated every 6 to 8 years, and that is just
one example, I think of the depreciation schedule overall that
is really not well thought out. It is based more on politics
and it is based more on needs in terms of the budget than it
really is on the useful life of property.
So in terms of something that would help restaurants, and
perhaps small businesses in the country at large, an update of
the depreciation schedule to comport more with what is
accurately going on in the economy would be very helpful.
Ms. Forbes. Thank you.
Ben Cooper.
Mr. Cooper. Thank you, Patty. I am Ben Cooper with the
Printing Industries of America. It is interesting to be here
with high-growth companies. Printing is a little bit different
situation. We are a roughly 500-year-old industry and continue
to do reasonably well, but kind of reaching for the first time
in that 500-year-period a bit of a downturn. One of the issues
that we think about with this is to what degree does the
government become a partner or an impediment?
I recall back in the early 1980s when one of our industry's
favored tax themes, the investment tax credit, was eliminated.
One reason it was eliminated was because companies, including
companies in our industry, were making equipment purchase
decisions not based on growth, but based on the tax code.
We have some similar kinds of problems now, only in
reverse, and that is that the tax code has become an impediment
and it has almost no bearing on reality, similar to Lee's
situation. I think one aspect of the tax code that borders on
comical is that we are still carrying a 5-year depreciation
schedule on computers while we allow software, and this is even
absurd, to be depreciated over 3 years. I am not sure how many
of you could justify that. And when we say computer, it is
entertaining to look at the tax code because among the things
the tax code actually classifies as computers are calculators
and similar office machines. What means is they really have not
reexamined the term ``computer'' since the late 1970s.
But to carry a computer on your book or any kind of
computer system for 5 years, it is comical. That tends to
benefit larger companies, who tend to lease and can turn the
equipment over. As you move down the scale of companies, they
are not leasing, they are buying, and most of our members are
maybe of a nature and generation where they do not tend to
throw things away, so because they do not dispose of it in a
rational way, even though they may have it in the closet, it
may be holding plants or what else, it is still carried on the
books.
We have been working on this issue, I think, for--I think
this is the seventh year. We were pleased to see the 30 percent
bonus depreciation because that helped a great deal.
One of the things, and I know NAM shares our views on this,
it is a little frustrating because the emphasis, not in this
group, but the emphasis you hear in the economy on the high-
tech sector, somebody is buying that high-tech stuff and it is
manufacturing companies. If we do not buy, they do not sell,
and if the tax code is an impediment to buying, they are not
going to sell. So I think we have to start looking at this
thing as a bit more of a partnership.
We were very disappointed and have been disappointed for
several years that the Congress has not been able to take a
look at depreciation schedules. I am actually at the point now
where I would go back maybe several decades and say that we
probably should do away with the corporate income tax
altogether and make things a lot simpler, but at the very
least, what we ought to be doing is looking at more innovative
ways to use depreciation, and maybe first and foremost to allow
companies to take a schedule that makes sense for their
business, not based on a schedule that the Federal Government
sets out that seems to purport to some universe that is no
longer rational.
Ms. Forbes. Thank you.
I am just going to ask Ryan McCormick to respond a little
bit to your comments because I know that Senator Kerry and
Senator Bond have a bill that addresses some of--or two bills.
Mr. Cooper. And there are many bills, yes.
Mr. McCormick. I just wanted to say, I think Senator Kerry
shares your concerns about depreciation schedules. I think that
having accurate depreciation schedules greatly enhances the
ability to encourage business investment and he was a strong
advocate of the 30 percent bonus depreciation provision in the
economic stimulus act.
We have included in S. 1676 a proposal to shorten the
depreciation schedule for computers from 5 years to 3 years and
for computer software from 3 years to 2 years. That is a start.
I know there are a number of other items which also deserve
consideration, but at least in terms of the high-tech
equipment, we wanted to get started on that as soon as
possible.
Mr. Cooper. Not to overstay my welcome here, but one thing
to keep in mind, we are talking about computers, and I know you
are aware of this, but we are not talking about PCs. In our
industry, computer systems for relatively small companies, we
find companies with 10 and 15 employees are spending hundreds
of thousands of dollars in computer purchases and it is the
type of equipment where our industry is going, and this is not
unique in printing, it is true throughout manufacturing, where
the computer technology, it pervades the manufacturing field
now and it is that equipment that is in this 5-year category.
Ms. Forbes. So you are saying the definition needs to be
looked at, not just the number of years?
Mr. Cooper. The definition is comical. You could not even
identify a computer based on the definition that is used in the
code now. You would not be able to recognize what you were
dealing with. We have been working with Treasury, and I think
that as a result of one of Mr. Archer's recommendations several
years ago, there was a study done by Treasury on depreciation
schedules, and to tell you the level to which this thing has
come, they said that there was--this is almost a direct quote--
anecdotal evidence that computers are depreciated faster than 5
years, but no empirical evidence.
I do not know what they were looking at, but to say that
there is only anecdotal evidence that computers are turning
over faster than 5 years is laughable. I do not blame them so
much for that, it is just part of the system that we are in now
that we cannot move these things quicker than we do.
Ms. Forbes. Okay.
Yes, Mark.
Mr. Warren. Let me just add to one point that Ben raised. I
think this is a classic example of the partnership issue, where
you are buying technology. If Congress were able to both look
at the definition and make the useful lives a little more
reasonable, which is one of the things that Senator Bond set
out to do at the beginning of this Congress with the 5-year
reduction in the class life to 3 years for computer equipment,
as well as to allow software to be depreciated quicker and also
expensed, you get that partnership. In addition, you encourage
better productivity and efficiency within the businesses and
that spreads, as well, because then your customers are more
likely to be buying from you, whether or not it is the IT
community.
I think that is what Chairman Greenspan has said over and
over again, that the productivity and efficiency of our
manufacturing and our overall economy is the key to getting us
back to a more robust economy, so that is a very good point.
Ms. Forbes. Thank you.
Doug Tatum.
Mr. Tatum. I was going to talk to you about the cash basis
issue. I have a briefing here prepared by one of my partners,
but that rule generally does not apply to manufacturers,
wholesalers, retailers, publishers, and a variety of people
that are around the table.
One other part, as I read it, indicates that it provides
that the taxable income must be determined under the method of
accounting on the basis for which the taxpayer regularly keeps
income in keeping its books, and that might be a
misinterpretation of that.
Mr. Warren. The consistency requirement was removed in the
final rule.
Mr. Tatum. Okay, because I was going to say, it is
important that businesses look at their financial status under
accrual and the banks and the capital markets require that,
regardless of whether you are reporting on tax basis.
The other thing, back to your comment earlier, the BRIDGE
Act, Angelia and Kathryn, would have applied to you probably
your second year in business. So one of the case studies
indicates that the opening second year of business, the company
was at $100,000 in revenue. So it is the accumulation of a
quarter-million dollars up to $10 million, but it allows you to
retain that capital even when you are small and growing, and
that capital is extraordinarily precious in those early days,
and so those are two issues that I wanted to comment on.
Mr. Hughes. Just one third method, and that is percentage
completion for contractors may need to be included, too.
Ms. Forbes. Okay.
Dean Garritson.
Mr. Garritson. Trying to find one-size-fits-all in a tax
issue, good luck.
[Laughter.]
Ms. Forbes. I was not saying that that was the right
approach. I was just trying to get you to identify the
different approaches.
Mr. Garritson. Agreed. I was just thinking, to get 30
people around the table from different industries to agree that
there is only one ox that should be fattened, umm. It is a
difficult bill to try to fit, but I am wondering if we do not
get there by some of the modifications of depreciation. We
heard it from Lee and from Benjamin with their organizations.
Depreciation, we all use similar schedules, despite the nature
of the assets.
If you buy the notion that capital equipment spurs
productivity and that productivity, given that labor growth can
only grow at 1 percent per year for as far as the eye can see,
so that productivity is the only way you are going to be able
to get non-inflationary economic growth, then you are kind of
straddled with the notion that you have got to be able to
reduce the costs of capital assets over time, and that means in
our tax code either access to capital at better rates or, more
importantly when you look at the tax code and specifically this
section of the discussion, depreciation. It just is not any
more complicated than that.
And then broad-based depreciation that you supported,
particularly the bonus depreciation, was extraordinarily
helpful to a number of businesses. The capital equipment
sectors of the manufacturers, we do not expect to expand much
more in the way of capital equipment. Actually, we expect to
spend a lot less than we did last year and last year was a bad
year. So that sort of bonus depreciation that you were able to
pass, very effective.
To continue that sort of depreciation discussion would be
very much appreciated, at least in the small, medium, and the
large manufacturing sector of the economy, but for our purposes
as a small manufacturer that has no other place to go than
either cash flow or the banks, we would like to see some help
in the Comptroller of the Currency, and then the second half of
that is the depreciation with respect to cash flow by virtue of
lower taxation.
Ms. Forbes. Thank you very much.
Giovanni Coratolo.
Mr. Coratolo. Thank you, Patty. Several things that come to
mind when discussing investment decisions affecting capital and
labor driven by the tax code, number one, certainty about tax
code, and certainly we see the problems with the tax
legislation that has been recently passed and its expiration
within 10 years, and I think that has been mentioned. In order
to make proper investment decisions, a lot of investors need to
have certainty of those decisions over length of time or else
it really undermines that investment and certainly induces a
lot of risk in that decision making process, so that may scare
away some of the capital.
We certainly proffer, which has been mentioned, the
elimination of the estate tax, making that permanent after
2010, and also accelerating the Economic Growth and Tax Relief
Reconciliation Act of 2001, trying to make that permanent,
also. But also, making decisions, investment decisions on
capital and labor, we really should address AMT.
The AMT unfairly penalizes businesses that invest heavily
in plant and equipment and machinery. The AMT significantly
increases the cost of that capital, discourages investment and
productivity enhancing assets by negating many of the capital
formation incentives provided under the regular tax code. So
this is something that we do not normally look at, but still,
it does add a layer of complexity in making those investment
decisions that those investors have to take into account, and
certainly we have to be careful of when we look at capital
formation and those decisions that are spurred by the tax code.
Thank you, Patty.
Ms. Forbes. Thank you.
Susan Eckerly.
Ms. Eckerly. I am Susan Eckerly. I am with NFIB. I work
with Bruce.
I thought Dean raised a good point, particularly when
Giovanni added a new tax item with respect to AMT. I think we
probably have a pretty healthy list of tax cuts that all of our
organizations would like, and one thing I think that would be
good to look at is the calendar. We only have about, what,
after the recess last week, there is June, July, and basically
September, three legislative work periods, and I doubt much
will happen in September other than the funding end game, in
which to close out some of the tax legislative items that are
already pending now for this Congress.
One thing that has already passed the Senate is the
expensing limits that have been raised that are in Senator Bond
and Senator Kerry's bills, and anything that both Kerry and
Bond can do as leaders of the small business in the Senate to
push those would be great because there is an opportunity, I
think, to advance those before the end of the year, and there
is already a lot of momentum behind those. I know particularly
the Senate had a great vote on those.
And also, I mean, other folks have mentioned obviously the
tax permanency. We have, hopefully, a vote coming up before the
end of June on the death tax and those are things that already
have momentum, already have been acted on this year that we can
advance on, and although there are other items that are
mentioned here that are good, hopefully, there are a lot of
members represented by all our organizations and hopefully we
can stir the grassroots to help sort of finish what we have
already started so far this Congress.
Ms. Forbes. Okay. Go ahead.
Mr. Warren. Just to keep us grounded with what Susan and
Giovanni and others have said, a number of these tax
provisions, while in and of themselves, they are discrete, they
all do flow together into the whole access to capital notion.
Going back, a number of people have said it before, I think
Senator Bond, as well: the more that we do not demand that a
business pay in taxes, the more capital that they have in hand
to reinvest in equipment and grow their business and create
jobs and keep jobs in this environment, especially for the
microbusiness, the very small. That, I think, is a significant
issue that warrants some discussion and for us to keep in mind.
Ms. Forbes. Mark Heesen.
Mr. Heesen. I thank you. I just wanted to echo what Susan
said in the respect that we have to look at this realistically
about what can be done over the next 6-7 months, frankly, and a
lot can be done at Treasury, and that is the Senate putting
Treasury to do things that they have, frankly, not done for the
last number of years, and when you look at Section 1045 on the
qualified small business stock, that is something that the
Senate certainly can put its foot on the ground and say,
Treasury, you have been trying to work on regulations, or you
have been saying you are going to be working on regulations for
years. Depreciation is another example. Come January 1, 2003,
like I said, without Treasury doing something or without
pressure being put on the Congress, we are going to see another
major tax increase on smaller companies.
These are things that can be done without legislation being
passed and when you are looking at literally 40 legislative
days between now and any legislation being passed probably in
March of next year at the earliest, let us look at things that
really can work in the very near term, and there are some very
concrete things that can be done for the smaller companies and
emerging growth companies by some little pressure on Treasury.
Thank you.
Ms. Forbes. Okay. Thank you.
POLICY PROPOSALS TO STIMULATE SMALL BUSINESS INVESTMENT AND CAPITAL
FORMATION
Ms. Forbes. If there are no more comments on this
particular section, I think we need to move on to the last
section. Go ahead.
Mr. Warren. What about the UBTI bills?
Ms. Forbes. Sure. Absolutely.
Mr. Warren. The floor is also open for the change in the
unrelated business income rules to allow greater investment by
tax-exempt organizations into SBICs, since they are a
significant funder of investment capital.
Ms. Forbes. And let me just say, we are very aware of how
few weeks are left. It sounds like a long time, but we are
trying to get--I mean, one thing about the BRIDGE Act, it does
have bipartisan support in both Houses. So assuming--and
Senator Kerry is on Finance, and Senator Snowe, who is the
cosponsor here. So, hopefully, that will have a vehicle to go
on. Obviously, it is probably not going to go by itself. I
mean, it could theoretically, but it is pretty unlikely.
Similarly, on this UBTI piece of legislation, or there are
different versions of it, but if we can get momentum on the
House side, then maybe we can get--it is not that
controversial, it is just complicated and that makes it a
little bit tricky in terms of getting the Finance Committee
people to include it in something, especially--in that case, it
does not cost any money, but if a bill costs money, then you
have got to overcome that hurdle, as well.
So we welcome your comments on the BRIDGE Act, the UBTI
proposal, the Affordable Small Business Stimulus Act,
particularly the capital gains incentives part of that.
Okay, Ben.
Mr. Cooper. Well, certainly, as we mentioned before, we
support the provisions in the Small Business Incentive Act.
Those are things we have been looking for for a long time.
One point about the expensing provisions which are in the
legislation, which Susan also referenced, the levels right now
are, frankly, so low that if you are in anything other than
service or retail, you really cannot take advantage of it.
There is a sense that that may be what it was intended for, but
even moving up to the modest levels that it is moving up in the
proposed legislation will allow small companies in our
industry, and over half of our companies have fewer than 10
employees, it will allow those companies in certain years to be
able to take advantage of expensing and I think that is very
important, particularly in light of the difficulty in getting
the depreciation schedules resolved.
So I do think that that is an important piece of
legislation, and we really do not have a--I do not think the
BRIDGE Act applies to our industry particularly well. I think
that most of our folks would welcome an opportunity to have
that sort of tax problem, to have that kind of profit. It does
not exist in our industry. In fact, I think the goal in most of
our smaller companies in our industry is to have even enough
income to be taxed. We have almost the reverse problem.
However, if these companies succeed and have to advertise, that
would be a good thing. We would like that.
Ms. Forbes. Thank you.
Robert Hughes.
Mr. Hughes. We, too, like the Act a lot. We think it will
do a lot to stimulate microbusiness. We do have some concerns
about the capital gain exclusion provisions on the sale of the
stock, not so much from the way it looks on paper, because who
could deny that that would be good. However, I think in actual
utilization out in the field, the provision will have very
limited usage and acceptance for these reasons.
The first is that when small businesses are sold, the
professional is probably going to use a stock sale as the last
choice. Typically, there may be an asset sale as opposed to a
stock sale, and if so, this provision probably would not apply.
The second part of it is that the formation, the entity
formation has changed significantly in the last 10 years. The
entity of choice, in my opinion, today is the limited liability
company as opposed to some other flow-through entity, like an S
Corporation. In fact, few S Corporations are formed these days
compared to limited liability companies, and it is not clear--I
think it does not apply, but it is not clear that it applies to
limited liability companies that operate as corporations but
are certainly not taxed the same way corporations are taxed.
So if an entity was formed, the business was successful,
operated 3 to 5 years, whatever the criterion ends up being,
and then the business were sold, this provision would have no
effect, and so in some way, that provision needs to be
structured so that it will allow for the transaction to escape
some portion of tax, not just a corporate entity.
Ms. Forbes. Everybody else just loves these bills and does
not have anything else to recommend? Okay.
[Laughter.]
Ms. Eckerly. Patty, just to give you a response with
respect to the BRIDGE Act, our members sort of suffer the same
fate as Ben's, and unfortunately, I do not think they would be
able to take advantage of it at this point.
But certainly with respect to, I think it is S. 1676, there
are several provisions in there that we support. I know Senator
Bond has got some of those same provisions----
Ms. Forbes. Similar.
Ms. Eckerly. ----And we would love to see--hope that that
could proceed this year. I mean, particularly with respect to
expensing, the depreciation schedules, to echo what Ben said,
are complex. Our members generally expense and need to see
those expensing limits raised to really--that would benefit
them probably the most.
Ms. Forbes. Okay. Mark, do you have anything?
Well, thank you all for coming. You have raised some really
interesting points and some really helpful points.
Jerry, did you want to say something?
Mr. Feigen. Just one quick thing. I know we are all going
to be feeling the aftermath of Enron and the regulatory and the
pendulum, which should occur and will affect all of us deeply
when the pendulum swings the other way. I just think we really
have to be on top of what changes the SEC and the Treasury
Department. We worked 20 years to get certain exemptions in
focus and respect and we need to live with the aftermath, but
it should be based on what we say we can live with.
Ms. Forbes. Okay, and Giovanni wanted to comment?
Mr. Coratolo. I certainly want to thank Senator Kerry for
having this and Senator Bond. It is a terrific way to present
our views and our thoughts and certainly the format is
terrific, so we applaud your effort in this respect.
Ms. Forbes. Thank you very much. Thank you. Thanks
everyone.
I will remind you, if you have written comments or if
something occurs to you, we leave the record open for about a
week after today, so let us say until the end of next week, if
you have additional things you would want to submit. Thank you
very much.
[Whereupon, at 11:36 a.m., the roundtable was adjourned.]
LEGISLATION
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COMMENTS FOR THE RECORD
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