[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
SMALL BUSINESS EXPENSING: INCREASING INCENTIVES FOR SMALL COMPANIES TO
GROW AND INVEST IN THEIR BUSINESSES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TAX, FINANCE, & EXPORTS
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, APRIL 3, 2003
__________
Serial No. 108-10
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia CHARLES GONZALEZ, Texas
TODD AKIN, Missouri GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan
J. Matthew Szymanski, Chief of Staff and Chief Counsel
Phil Eskeland, Policy Director
Michael Day, Minority Staff Director
Subcommittee on Tax, Finance, and Exports
PATRICK J. TOOMEY, Pennsylvania, Chairman
STEVE CHABOT, Ohio JUANITA MILLENDER-McDONALD,
MARILYN MUSGRAVE, Colorado California
JIM GERLACH, Pennsylvania FRANK BALLANCE, North Carolina
BOB BEAUPREZ, Colorado ENI FALEOMAVAEGA, American Samoa
TRENT FRANKS, Arizona DANNY DAVIS, Illinois
JIM DeMINT, South Carolina DENISE MAJETTE, Georgia
CHRIS CHOCOLA, Indiana JIM MARSHALL, Georgia
MICHAEL MICHAUD, Maine
Joe Hartz, Professional Staff
(ii)
C O N T E N T S
----------
Witnesses
Page
Jenner, Gregg, U.S. Treasury..................................... 3
Regalia, Martin Ph.D., U.S. Chamber of Commerce.................. 12
Battle, Dena, National Federation of Independent Businesses...... 13
Shapiro, Les, Padgett Business Services Foundation............... 15
Harvey, Brian, H&C Inc. Heating & Cooling........................ 16
Appendix
Opening statements:
Toomey, Hon. Patrick J....................................... 27
Millender-McDonald, Hon. Juanita............................. 30
Prepared statements:
Shapiro, Les................................................. 32
Harvey, Brian................................................ 36
Jenner, Gregg................................................ 39
Regalia, Martin.............................................. 49
Battle, Dena................................................. 63
(iii)
HEARING ON SMALL BUSINESS EXPENSING: INCREASING INCENTIVES
FOR SMALL COMPANIES TO GROW AND INVEST IN THEIR BUSINESSES
Thursday, April 3, 2003
House of Representatives,
Subcommittee on Tax, Finance, and Exports,
Committee on Small Business
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:07 a.m. in
Room 2360, Rayburn House Office Building, Hon. Pat Toomey
[chairman of the Subcommittee] presiding.
Present: Representatives Toomey, Franks, Gerlach, Beauprez,
and Millender-McDonald.
Chairman Toomey. Good morning, everyone. Thank you all for
being here today.
This morning we are going to examine potential changes to
Section 179 of the Internal Revenue Code, the provision of the
Tax Code that limits the amount of money that a small business
may directly expense in a given year versus that which must be
depreciated with respect to assets that are purchased by a
business.
The reason we need to examine this issue is because it has
a big impact on small businesses. Small businesses, as we all
know, are a big part of the key to a strong economic recovery
and getting American workers back to work. According to the
Small Business Administration, three out of every four new jobs
in America are created by small businesses. In total, they
represent more than 99 percent of all employers and employ 51
percent of private sector workers.
As the economy continues to struggle in response to the
recession that began in March 2001, we are witnessing a great
strength of small business and a great resilience as they
continue to drive our economy. That having been said, our small
businesses are still struggling. We need in Congress to create
an environment where America's small businesses and
entrepreneurs can thrive and can succeed and can expand and
grow, and that is what this should be about.
Let me just touch briefly on what Section 179 of the Tax
Code currently does. Under the existing law, in lieu of
depreciation a small business taxpayer with a sufficiently
small amount of annual investments in capital purchases may
elect to deduct up to $25,000 of the cost of qualifying
property placed in service for a given taxable year. In
general, qualifying property is defined as depreciable,
tangible, personal property that is purchased for the use in
the active conduct of a trade or business.
Now, the $25,000 amount which can be expensed is reduced by
the amount by which the cost of qualifying property placed in
service by that company for the full year exceeds $200,000,
which is an interesting mechanism that is in place. What
basically happens is there is an incentive to purchase $25,000
worth of assets. The Code is essentially neutral for the next
$175,000 worth of assets that one might purchase.
Then there is actually a disincentive for the next $25,000
which one might purchase because, if my understanding is
correct, that incremental amount over $200,000 actually then
causes you to lose the opportunity to expense the first $25,000
that you thought you were able to expense.
I think what we ought to discuss today in part is how could
we go about increasing the incentive part of this equation and
perhaps diminishing the disincentive part of this equation so
that we can encourage more businesses to put more tangible
property to work, to make more investments.
Now I will share my bias with you. In a perfect world, I
would like to see the end of depreciation schedules altogether
and go to a tax regime in which we have full expensing across
the board. It would rid ourselves of one of the most
complicated and onerous parts of the entire Tax Code. I realize
we are not going to get there overnight, and I think an
excellent place to start and move somewhat in that direction is
to increase the direct expensing limits in the Section 179,
which brings me to the President's plan for economic stimulus.
The President has proposed that we increase the amount of
tangible property that can be expensed according to Section 179
from $25,000 to $75,000. I think that is an integral part of
the President's economic stimulus plan. Increasing this limit
works in conjunction with other aspects of the President's
plan, such as accelerating the individual marginal tax rate
reductions and reducing the taxation of capital income in the
form of dividend income. I think all of these are very
constructive measures, but we are here primarily to focus on
the Section 179.
Now, the other part of the President's proposal with regard
to Section 179 is that he would also raise the threshold limit
above which one would no longer be able to take this expense
from the current $200,000 level to $325,000. What this means,
of course, is that the disincentive part of the equation does
not occur until a much more significant purchase has been made.
Increasing the expensing limit to various levels have been
included actually in each of President Bush's major economic
recovery and tax relief plans. However, the Section 179
increase has been dropped in the past and has not made it into
law yet. I think it is important this year that we work hard to
ensure that America's small businesses are included in any
stimulus package. By increasing the expensing limit, I think
our economy will improve, our business infrastructure will
improve, and ultimately the lives of every day working
Americans will improve.
I am pleased to have with us today Mr. Greg Jenner, who is
on our first panel. He is the Deputy Assistant Secretary and
Senior Advisor for Tax Policy at the United States Treasury. He
is here to discuss the importance of increasing the limit and
provide some insights as to why the Administration feels this
is important.
Before I recognize Mr. Jenner, I would be happy to
recognize my colleague, our Ranking Member, if she has any
comments she would like to make.
Ms. Millender-McDonald. Thank you, Mr. Chairman, and good
morning to all of you. I think the gridlock around here is
getting about as bad as California's highways and freeways.
I am very pleased to be here with my colleague and our
Chairman as we are holding this hearing to discuss this
important proposal to help small businesses. We recognize that
small businesses create the economic growth necessary to lift
this country out of the current economic downturn, but they
need an infusion of capital. One good way to do this is by
increasing the amount that small businesses can deduct from
equipment purchases. This will help businesses expand, spurring
economic growth.
Now, this is a bipartisan solution that provides small
employers with the right kind of assistance at a very critical
point in our nation's history. In developing our economic
recovery strategy, we must look at tax policies that create
incentives for those sectors of the economy that are best
equipped to promote economic growth. One of the best ways to
accomplish this goal is to target small businesses.
Small businesses, as we know, create 75 percent of all new
jobs, and they can pull America out of its current economic
doldrums. History has shown that small firms have done this
before and that we can do it again, but only if we give them
the tools to do so.
I am pleased to see Mr. Jenner here as well. We welcome
you. I thank you, Mr. Chairman. I will put my complete
statement in the record.
Chairman Toomey. Thank you very much.
Mr. Franks, did you have an opening statement that you
would like to make?
[No response.]
Chairman Toomey. In that case, Mr. Jenner, welcome. Thank
you very much for being here this morning. We would be
delighted to hear your testimony.
STATEMENT OF GREGORY F. JENNER, DEPUTY ASSISTANT SECRETARY AND
SENIOR ADVISOR FOR TAX POLICY, UNITED STATES DEPARTMENT OF THE
TREASURY
Mr. Jenner. Thank you very much, Mr. Chairman and
distinguished Members of the Subcommittee.
My name is Greg Jenner. I am the Deputy Assistant Secretary
of the Treasury for Tax Policy. On behalf of the
Administration, I would like to thank you for affording us the
opportunity to appear before you today regarding the
President's proposal to expand and simplify expensing for small
business.
As you know, Mr. Chairman, the expensing proposal is part
of a larger jobs and growth package that the President has
proposed to sustain and grow the economy. The centerpiece of
the President's plan is the elimination of the unfair double
taxation of dividends. The dividend proposal will have a
powerful effect, and I urge the Members of this Subcommittee to
support it. As Chairman Greenspan noted, it will benefit all
aspects of the economy, including small business and taxpayers
at all income levels.
The proposed amendment to Section 179 of the Code is
another key component of the President's jobs and growth
package, and that will be the focus of my remaining testimony.
As you noted, Mr. Chairman, under current law, Section 179,
taxpayers can expense up to $25,000 of equipment purchases each
year instead of depreciating them. Off-the-shelf computer
software is excluded because it is classified as intangible
property. The $25,000 amount is reduced for each dollar of
investment over $200,000. Neither the $25,000 amount nor the
$200,000 is indexed for inflation.
An election under Section 179 must be made for each taxable
year the expensed deduction is claimed. Once made, the election
can only be revoked with the consent of the Commissioner.
Current regulations provide that that revocation will only be
granted in extraordinary circumstances.
The Administration has proposed significant modifications
to Section 179. Our goal was to encourage and stimulate
investment by small business, simplify tax compliance
requirements and to reduce recordkeeping burdens. The
Administration's proposal under Section 179 would do the
following:
It will triple the amount that may be expensed to $75,000.
It will index that amount for inflation annually. It will
increase to $325,000 from $200,000 the point at which the
benefits of Section 179 begin to phase at, and it will index
that amount for inflation annually. Off-the-shelf computer
software will be included as qualifying property, and taxpayers
will be permitted to make or revoke expensing elections on
amended returns without the consent of the Commissioner.
As you can see, Mr. Chairman, this proposal has importance
far beyond increasing the amount that can be expensed each
year. Expensing encourages investment by lowering the after tax
cost of capital purchases. The Treasury estimates that for a
typical seven year asset, expensing would reduce its cost of
capital from .056 to .041.
I must note that these numbers were meaningless to me, too,
being a lawyer and not an economist, but translated into its
equivalent it is the equivalent of an investment tax credit of
8.5 percent for small business. Thus, the Administration's
proposal will encourage small business to increase their
capital investment while simultaneously stimulating demand for
capital goods.
Second, expensing is far simpler than claiming
depreciation, as you noted. This is particularly helpful for
small business, many of whom are less able to afford
sophisticated tax planning advice. The current $25,000
threshold, unfortunately, is low enough that taxpayers are
often able to expense only a portion of the purchase price of
an asset. This means that they lose any simplification benefits
because they have to depreciate the balance of the purchase
price. By raising the limit to $75,000, the President's
proposal will allow many more taxpayers to avoid the complexity
inherent in depreciation.
Third, raising the level at which the phase out begins will
increase the number of taxpayers eligible for expensing under
Section 179. This will significantly simplify tax compliance
and recordkeeping burdens. Without this change, the benefits
from the proposed increase to $75,000 would be much more
limited.
Fourth, including off-the-shelf computer software as
qualifying property will eliminate confusion and inconvenience
for many taxpayers who go out and purchase a computer and
expense it, only to find that they have to depreciate the
software because it is treated as intangible property.
Finally, permitting elections to be made or revoked on an
amended return will provide flexibility to many small
businesses who do not have the ability to hire sophisticated
tax planning advice and who later discover they may not have
wanted to expense or should have expensed and did not.
In conclusion, Mr. Chairman, the Administration believes
that this proposal presents a winning combination of benefits,
powerful incentives for small businesses to invest and grow,
important simplification and reduced recordkeeping.
With the other components of the President's jobs and
growth package, it will improve the climate for small
businesses to lead the way to a stronger economy.
Thank you very much. I would be more than happy to answer
any questions that you have.
Chairman Toomey. Thank you very much, Mr. Jenner. Excuse
me, and forgive me for this cold this morning. I have a number
of questions for you to begin with.
Mr. Jenner. Please.
Chairman Toomey. First is I want to just say for the record
I wholeheartedly and enthusiastically share your view that the
vital centerpiece of this package is elimination of the double
taxation of dividends.
It has always struck me as irrational, a double taxation on
capital formation, a disincentive to savings and investment,
and a hurdle that we impose on the capital formation and
savings in America, which in the long run I believe precludes
us from reaching an optimal maximum economic growth level
because we do not have the optimal level of capital formation
because we actively discourage it with an irrational tax
policy.
I want to commend you and the President for making that the
centerpiece of this package. I think it is vital that we pass
that.
Mr. Jenner. Thank you, Mr. Chairman.
Chairman Toomey. In addition, I think this is a very
constructive measure to increase the amount that businesses can
directly expense, and I am very, very supportive of this, but I
would like to dig into the mechanics a little bit so that I
make sure that we all understand that and think about whether
there might be perhaps even a better way to achieve this within
this idea.
Am I correct in understanding that under current law a firm
that has say $50,000 worth of tangible property purchases in a
given year could expense $25,000, and the remainder would be
depreciated?
Mr. Jenner. That is correct.
Chairman Toomey. But a firm that has $350,000 worth of
tangible assets that they purchase in a given year would not be
able to expense any?
Mr. Jenner. That is correct also.
Chairman Toomey. See, that strikes me as rather
counterintuitive. A small business that has a greater need is
not given the opportunity to expense anything at all.
I am wondering if you could share with us why is it that
this trigger mechanism is used in the first place? Why is it
that some businesses with greater needs are nevertheless
forbidden from using this very helpful feature?
Mr. Jenner. Well, not being one of the original authors of
Section 179 I can only speculate, but my guess would be, Mr.
Chairman, that that is intended as a surrogate for measuring
what is a small business. Instead of having an income limit--
Chairman Toomey. That is right.
Mr. Jenner. --the provision is measured by the amount of
investment.
Chairman Toomey. That is what I suspected as well. Do you
agree that it has the economic effect of creating actually a
modest disincentive to be purchasing tangible property at the
level that begins to reduce the amount by which you can
expense?
Mr. Jenner. Absolutely.
Chairman Toomey. So it is kind of perhaps not intended, but
a little counterintuitive. We create an incentive to buy a
certain amount, $25,000 amount worth under current law. Then
the Code is neutral with respect to another segment of tangible
property that would be bought. Then there is actually an active
disincentive to purchase more economically.
Mr. Jenner. Yes.
Chairman Toomey. And then after you have consumed and you
have eliminated the entire opportunity to expense, then it goes
back to being neutral in the sense that everything is
depreciable.
Mr. Jenner. That is correct.
Chairman Toomey. It just strikes me as perhaps not the best
mechanism. There are many other ways to measure what is a small
business--total sales, size, for instance, number of employees,
capitalization. There are a number of mechanisms.
Do you think it is worth considering other hurdles, other
criteria for deciding who would get the benefit of this
expensing provision?
Mr. Jenner. Well, I cannot make any promises, Mr. Chairman.
I can certainly assure you that we take your concerns to heart
and would be more than happy to work with you to see if there
are other ways that we can measure what is a small business to
eliminate the disincentives to invest margin.
Chairman Toomey. Yes. I was a small business owner for a
number of years in the restaurant business. By I think all
reasonable standards it was a small business, but there were
many years in which we had requirements to make investments
that would have and did in fact preclude us from taking
advantage of this $25,000 expensing. I think many businesses
find themselves in similar circumstances.
Mr. Jenner. Well, one of the reasons, Mr. Chairman, that we
did want to increase that threshold is to make sure that more
small businesses come within the larger amount--
Chairman Toomey. Right.
Mr. Jenner. --so that the margin is much higher and would
only apply to a much smaller number of small businesses.
Chairman Toomey. And that proposal does do that. It
increases from $25,000 to $75,000, but it also raises to
$325,000 the amount of tangible property that could be
purchased before the sort of disincentive component kicks in.
Mr. Jenner. That is correct.
Chairman Toomey. It strikes me that that is particularly
important for many start up companies who are small businesses,
but can easily incur $200,000 or $300,000 in purchases to get
started, so this proposal allows more people to participate, as
well as allowing the amount by which they benefit to grow. Is
that correct?
Mr. Jenner. Absolutely correct, Mr. Chairman.
Chairman Toomey. All right. Thank you very much.
I would at this time recognize the gentlelady from
California.
Ms. Millender-McDonald. Thank you so much, Mr. Chairman.
I suppose the question has always been what is a small
business, and I guess that definition has not been defined. For
that reason, a lot of this that you have outlined today is
laudable, but when you look at small businesses in my district
I wonder just what advantage they would have in this, and I
suppose that is the question that I raise to you.
To get a sense of the businesses that will be utilizing
this change, I would like to know how many businesses currently
elect to expend and, even more so, how many minority businesses
and how many women owned businesses.
Mr. Jenner. Ms. Millender-McDonald, I am not certain of the
latter two questions, and I am not completely certain that our
data would break that down, although I promise you I will go
back and check.
Of the number of businesses that are claiming expensing
currently, that number approaches 4.2 million annually.
Ms. Millender-McDonald. And yet we are saying 4.2 million
annually contingent upon the definition of small business?
Mr. Jenner. That is correct.
Ms. Millender-McDonald. And exclusive perhaps of minority
and women owned businesses?
Mr. Jenner. That number would include all businesses,
minority and women owed. I just do not know what--
Ms. Millender-McDonald. Predicated on what we define as a
small business?
Mr. Jenner. Correct.
Ms. Millender-McDonald. Okay. Given that, I think you can
recognize the burden that is placed on a lot of minority owned
businesses, so to talk about the double taxation of dividends,
while that might be something that is very creative and I
applaud the President for that and you, too, that does not
register a lot with small businesses in my district.
For that, I would have to go back and really kind of
reassess, depending on what we will finally define as a small
business, as to how this package that you have laid out would
benefit the community that I serve. Certainly that of Watts and
Compton would perhaps have some concerns about that, given the
already burdensome provisions and burdensome task that they
have in trying to just stay afloat irrespective of.
While I do think that some kind of tax incentives, some
type of tax policy is absolutely needed for small businesses, I
will have to go back and really assess whether the package that
you have outlined to us this morning would benefit those who
are trying to create jobs in the southern California region.
Of course, Los Angeles and Long Beach, cities in my
district, would perhaps receive this much better than those who
are in the much needed area of my district, so to talk about
this and to talk about 75 percent of equipment purchased would
perhaps be something that I would need to talk with them on.
I thank you for being here. The expensing is great if in
fact the businesses that I have, the small businesses, would
even have the notion of looking at this package and looking at
the whole notion of expensing.
Thank you, Mr. Chairman.
Mr. Jenner. Mr. Chairman, if I might add, I promise you,
Congresswoman, that we will get back with you as to whether we
have that data. If we do, we will get it to you.
Chairman Toomey. Thank you, Mr. Jenner, and I thank the
gentlelady from California.
At this time I would recognize the gentleman from Arizona,
Mr. Franks.
Mr. Franks. You know how the freshmen are. They have to
turn on their microphones. Thank you, Mr. Chairman.
Mr. Jenner, just for the sake of the Committee just for
clarity and fundamentals, this Section 179 here, can you tell
us exactly how that would change the deduction? I understand
now that the first $25,000 within a given amount of capital
purchase is deductible. Can you just give us the numbers as
they are now and how they would change? Sometimes restating the
obvious is helpful.
Mr. Jenner. That is quite all right. The $25,000 amount
would triple to $75,000, so the first $75,000 of capital
purchases would be expensible rather than depreciable.
Under current law, the benefits of that $25,000 begins to
phase out dollar for dollar beginning at $200,000. That amount
under the President's proposal would be increased to $325,000,
and thus, because we are increasing the amount that can be
expensed from $25,000 to $75,000, it would phase out dollar for
dollar from $325,000 to $400,000.
We would also make certain other changes, more technical
changes. For example, those amounts would be indexed each year
so as inflation increased or decreased the value of those
dollar amounts would go up. We would also allow software, which
currently does not qualify for expensing because it is not
tangible property, to be treated as qualifying property.
We would also allow taxpayers to make or revoke their
election to expense without the consent of the Commissioner,
which gives them more flexibility to plan or to correct a
mistake if they make one.
Mr. Franks. Thank you, sir. You know, it always occurs to
me that whenever we talk about anything to do with the economy
we forget that the fundamental measure of economy is
productivity.
This seems to be an obvious incentive to productivity,
which helps everyone that is any part of the chain in the
economy. I applaud you for your efforts here and certainly
support very strongly what you are trying to do here.
Mr. Jenner. Thank you, Mr. Franks.
Mr. Franks. Thank you, Mr. Chairman.
Chairman Toomey. Thank you.
I would recognize now the gentleman from Colorado, Mr.
Beauprez.
Mr. Beauprez. Thank you, Mr. Chairman. I apologize for
being a little late. I was busy with another Committee
responsibility doing a mark up. I am glad to be here for part
of this testimony, though.
I most recently was a community banker, and the vast
majority of my clientele at our bank were small business
owners. We specifically through our bank worked with an
organization called Colorado Micro Credit that helped many very
small businesses, people looking for a few hundred dollars for
their first loan to maybe get some tools to become a landscaper
or an electrician's toolbelt, that simple.
I recall one gentleman that started a bar-b-que sauce
company and simply needed the bottles and the equipment to make
his bar-b-que sauce. It has grown into quite a business for
him. It is very rewarding, as you can imagine, to see.
I do not know that I have ever seen a proposal come from
Congress that has been so enthusiastically embraced as the
increasing of the expensing allowance. I think to modernize
that is a good step. $25,000 today is not what $25,000 used to
be. I would ask at the end of my comments if you would
enlighten me, and perhaps you already have, so if you have with
my apologies again, how you arrived at $75,000, as opposed to
some other number.
I think this will stimulate the economy very well. As I
have gotten in the habit of putting it, if we can encourage
capital investment by business, which has been lagging for a
little over two years now, if we can encourage that and do it
with not just a stimulus, because when we stimulate we tend to
poke it here and it comes out there, and then we poke back
later. I would like to see us do it with good, sound economic
policy, and that is what I think this is.
If somebody buys, as you just alluded to, software or a
computer or a washing machine or a drill press, a metal lathe,
somebody has to design it. Somebody has to fabricate it.
Somebody has to assemble it. Somebody has to ship it. Somebody
has to make the packaging to ship it in. Somebody has to
unpackage it, put it on the shelf, retail it, deliver it,
install it and service it. That is how we create jobs in this
economy. I have had the pleasure again of being the community
banker for all of those small businesses in that chain. That is
I think productive.
The same, frankly, with the dividend proposal. I have been
so encouraged with the volume of jobs that are projected in the
economic model that will be created by that, and the fact is,
as I understand it, over half of the people that pay the
dividend tax are senior citizens now, which makes sense. They
are people like my mom and dad who have got a little bit of
their savings in an investment account of one type or another.
I think this is sound economic policy. Is it perfect? I do not
know. Time will tell. I applaud you for the direction.
Now that I have given you my side of the equation, and
obviously I am encouraged by this, tell me how the $75,000
number was arrived at.
Mr. Jenner. Certainly, Mr. Beauprez. First let me say that
we have always agreed that the availability of capital has
never been a problem for Fortune 100 companies. Availability of
capital is a problem, a huge problem, for small business. That
is what motivated the President to include this proposal.
The $75,000 number was arrived at in part by looking at
statistics, seeing where the various levels of investment were
for small business, again recognizing that we had to draw
lines, but trying to draw the line high enough so that we
captured the vast bulk of small businesses, making sure that
the number was high enough and the phase out range was high
enough so that we did not enlarge on one end and squeeze on the
other.
We think that we have drawn the line in such a way that the
vast bulk of small businesses will be able to benefit from the
proposal. As you say no proposal is ever perfect, but we think
that we have gotten it as close as we can possibly get.
I am not sure I gave you a direct answer to your question,
but--
Mr. Beauprez. Well, I think I heard you say it is a
judgment call.
Mr. Jenner. Certainly.
Mr. Beauprez. I accept that. Again, the vast majority--I
had an electrician in my office just the day before yesterday.
He is an electrical contractor. He is very excited about this.
Again, if we can encourage and stimulate capital investment
once again, I think that is what has been sorely lacking. That
will be a great stimulus, a positive one, but a long-term one
that I think we will see benefits from.
Thank you, Mr. Chairman. I yield back.
Chairman Toomey. Thank you. Mr. Jenner, thank you very much
for your helpful testimony.
At this time, I would invite the second panel to seat
themselves at the table.
Welcome, everybody. Let me introduce the folks on our
second panel today. We are very grateful to have each of you
with us today. To begin with we will hear testimony from Dr.
Martin Regalia. He is the chief economist and vice president
for tax policy at the United States Chamber of Commerce.
Dr. Regalia, welcome. I congratulate you on your advocacy
on small business issues. Dr. Regalia will give us his take on
the current economic landscape and explain the benefits of
raising the expensing limit not only to small business, but
also to the American economy as a whole.
I also want to welcome Ms. Dena Battle, manager of
legislative affairs at the NFIB, National Federation of
Independent Business. Welcome. Ms. Battle will discuss her
membership's thoughts on the expensing limit.
Mr. Les Shapiro, president of the Padgett Business Services
Foundation, is also with us today. Mr. Shapiro will explain how
from an accounting point of view the Section 179 comes into
play in the decision making process for his clients.
We also have with us today Mr. Brian Harvey, president of
H&C, Inc. of Laurel, Maryland. H&C is a small heating and
cooling service company with 28 employees. Mr. Harvey will be
sharing his experiences with Section 179 as a small business
owner himself and how the limit impacts his daily operations.
Thank you all for joining us. At this time I would
recognize Dr. Martin Regalia.
STATEMENTS OF MARTIN REGALIA, CHIEF ECONOMIST AND VICE
PRESIDENT OF TAX POLICY, U.S. CHAMBER OF COMMERCE; DENA BATTLE,
MANAGER, LEGISLATIVE AFFAIRS, NATIONAL FEDERATION OF
INDEPENDENT BUSINESS; LES SHAPIRO, PRESIDENT, PADGETT BUSINESS
SERVICES FOUNDATION; AND BRIAN HARVEY, OWNER, H&C, INC. HEATING
& COOLINGSTATEMENT OF MARTIN REGALIA
Mr. Regalia. Thank you very much. My name is Marty Regalia.
I am the chief economist and vice president for tax and
economic policy at the U.S. Chamber of Commerce. We applaud
you, Mr. Chairman, for holding these hearings, and we thank you
for the opportunity to testify on behalf of small business
expensing provisions that are--
Chairman Toomey. Excuse me, Dr. Regalia. Could you move the
microphone a little closer to your mouth, please?
Mr. Regalia. We are happy to be here today to comment on
the small business expensing provisions that are included in
the President's jobs and economic growth package.
Recently released data show the U.S. economy to still be
searching for confidence, balance and momentum. While the real
economy has grown over the past five quarters, the growth has
been erratic and somewhat anemic. It has averaged only 2.9
percent, and that is below the economy's potential, and it is
insufficient to create new jobs. In fact, over the same time
period the economy has lost about 1.3 million jobs. This
quarter, the growth rate is probably less than two percent, and
jobs are still being lost.
While the Fed have cut interest rates about as far as
possible, it is now up to the Congress to pass effective
economic growth legislation such as the President's jobs and
growth plan. We support the entire plan and strongly urge you
to pass it as quickly as possible.
In recent years, the importance of small business to our
economic growth and prosperity has been unparalleled. Small
enterprises and start up companies form the foundation of our
economic prosperity. Furthermore, small businesses have
traditionally accounted for most of the nation's new job
growth.
It would make sense then that any attempt to increase
growth in jobs should have a strong small business component.
One way we can achieve this is to reform the Tax Code small
business capital expensing provisions. Currently the recovery
of investment in capital expenditures by a small business
sector is limited by antiquated depreciation rules and anemic
allowances under the Internal Revenue Code Section 179. Tax
implications affect the timing of small business investment, as
well as whether or not the investment is actually undertaken.
Small business owners are keenly aware of the impact of the
U.S. Tax Code on their decisions.
In the year 2000 Treasury report, the Treasury noted that
the current depreciation system is dated, is not indexed for
inflation, and does not provide for investment and separate
depreciation rules for new types of assets, new activities and
new production techniques.
The problem would best be remedied through full expensing
of business equipment. At the very least, the amendment of
Section 179 to allow progressively greater expensing amounts
and enhanced phase outs is warranted. Such measures would spur
additional investment in business assets and lead to increased
productivity, creation of more jobs and greater economic
growth, and I believe that is good public policy.
Current proposals, such as the one embodied in the
President's jobs and growth plan, would go a long way toward
enabling and enticing the nation's small business to increase
their investment in productivity enhancing business property.
The President's Section 179 expensing provision would
triple the maximum deduction and introduce enhanced phase out
levels, stemming the erosion in the value of this depreciation
deduction that would otherwise occur over time. This in turn
would further augment current cash flow and encourage and
enable these companies to invest in new machinery and
equipment, increasing their productivity, providing a further
boost to the economic sector that produced and serviced these
items.
In sum, the funds would be used to grow businesses, to
boost the nation's economic growth and create new jobs. We
believe that the President's package in total is what is needed
to get this economy going, to move this economy from just below
its potential to just above its potential and to start creating
new jobs.
This particular provision is directed at small business
investment. It is a provision that is long overdue and will be
a big help in encouraging these businesses, which are the
primary driver of the U.S. economy, to take on more investment
and create more jobs.
Thank you very much.
Chairman Toomey. Thank you, Dr. Regalia.
At this point I welcome and introduce for testimony Ms.
Battle.
STATEMENT OF DENA BATTLE
Ms. Battle. Good morning, Mr. Chairman, Mr. Ranking Member
and distinguished Members of the Committee.
My name is Dena Battle, and I am testifying on behalf of
the 600,000 members of the nation's largest small business
group, the National Federation of Independent Business. On
their behalf, I appreciate the opportunity to discuss the
importance of Section 179 expensing legislation and the impact
it will have on small businesses.
Today's uncertain economic times are especially tough on
our small business owners. They tend to experience economic
ripples harder and faster than anyone else. Thus, small
business owners tend to be an early warning system for our
economy's health.
The most recent small business economic trends report
revealed that sales for small businesses have continued to
decline, reaching the lowest levels registered in the past two
years. In addition, our small business optimism index fell
three points in February, another alarming plunge. Most small
business owners are not optimistic that the economy is
recovering right now.
Allowing small business owners to expense critical
investments is a key component of an expanding economy since
this money will be used immediately to purchase products, grow
business and create new jobs. Under current law, the majority
of NFIB members' growth is limited because they exceed the
small business expensing limit in the first three months of the
year. If this expensing exemption is increased, well over
1,000,000 small businesses would be able to purchase equipment
and grow their business, and that will result in overall
economic growth.
This issue is more about people than it is about numbers.
Carolyn Galvin, owner of Storeel Corporation, says that she is
going to quadruple the investments that her company will make
this year if expensing limits are increased. She plans to
upgrade her PCs, buy new table saws and possibly purchase a new
forklift. Another NFIB member that I talked to about this issue
said the increases in Section 179 limits would allow him to
hire three new employees, and that is real economic growth.
Another crucial element in the President's proposal for
Section 179 is the increase in the investment limit. The
current investment limit penalizes small business owners for
making substantial business investments. Increasing the
investment limit to $325,000 as proposed will encourage
business owners to make decisions based on business
considerations, not tax considerations.
The Tax Code, with all of its complexities, takes time away
from a business owner's focus on running and expanding his or
her business. If that business owner is able to expense rather
than depreciate, it gives them the time to focus on running
their business, not filling out tax forms.
These small businesses are major job creators in local
economies, and that means that they contribute dramatically to
local tax bases as well. According to a recent Bureau of Labor
Statistics projection, small firm dominated sectors of the
economy have or will contribute more than 60 percent of the new
jobs from 1994 to 2005.
Small business owners have survived and served as this
nation's job growth engine, despite the economic challenges
that they have faced over the last two years. By lifting this
burden, we will help them to reach their full potential and be
able to see the true power of the American entrepreneurial
spirit.
Thank you, Mr. Chairman, for your leadership on this issue
and for holding this important hearing.
Chairman Toomey. Thank you very much, Ms. Battle.
At this time I welcome and would introduce Mr. Shapiro for
his testimony.
STATEMENT OF LES SHAPIRO
Mr. Shapiro Thank you, and good morning. It is a pleasure
to be here today on behalf of Padgett Business Services.
Padgett has approximately 300 offices in the U.S. It
provides accounting and tax services exclusively to small
business clients. Small business is our exclusive client base.
We define small business as those with fewer than 20 employees.
As a practical matter, most of the clients Padgett serves are
comprised of five or fewer employees, many of them mom and pop
operations. We are proud to represent their interests.
When contacted a few days ago about whether or not Padgett
could possibly be here with you this morning, believing that an
accountant's perspective could balance this panel, we were
pleased to consider the matter. However, a significant problem
we had in that regard was that this time of year is not the
time to find an accountant available to be with us.
Consequently, we made the decision that I would get the job
by default. We respect the endeavors of the Small Business
Committee and its Subcommittees, so here I am, even though I am
not an accountant and, for that matter, not a practitioner.
However, I have worked with accountants most of my professional
life and am familiar with accountants' experiences, with their
mind sets and even with their souls.
Increasing the Section 179 limit from $25,000 to $75,000
ostensibly should be welcomed by small business owners and
those who serve them. We applaud the effort of the President to
recognize the special circumstances of America's small business
owners and to provide them needed breaks with respect to their
taxes and paperwork burdens.
Certainly the ability to write off as much as $75,000 in
the year of purchase of business equipment is a good thing.
Life would be somewhat simpler for the small business owner. He
or she no longer would have to deal with annual calculations,
such as depreciation, for most purchases and would have
significant tax savings with which to enhance the business
through such things as increased marketing, employee benefits
and hiring new employees.
With that said, we do not see the immediate tax saving
necessarily as a planning tool. Our experience shows that the
small business clients we serve do not make substantial
equipment purchases frequently. When they do, it is based on
their judgment that the equipment is needed and that its
purchase is the right thing to do. They are going to buy the
equipment under any circumstance.
Consequently, the tax saving often becomes secondary during
the planning phase. It is an unexpected bonus, an incentive
perhaps. Let me emphasize that this is not to belittle the tax
saving, but to demonstrate that such saving is not always the
dominant force in our clients' planning strategies.
We respectfully suggest that there are some alternatives
and expansions to the concept that appear relevant. As already
suggested, our experience shows that the real world of small
business is such that small business owners do not spend more
than $25,000 on equipment in most years, at least not our
client base. Spending more than $75,000 would be rare. However,
there are obvious exceptions to this.
An alternative that may be prudent is that in those years
where there is an excess of the maximum amount spent, be it
$25,000 or $75,000, the taxpayer would be able to carry forward
the difference between what was actually spent and the maximum
for the 179 allowance. There, of course, would have to be a
great deal of structure to a program of this nature. However,
we believe this would be a significant benefit to small
business owners.
Yet another concept that would be helpful to them is to
expand the definition of purchases to which 179 would apply.
There is greater potential for financial harm to a small
business owner who builds a new structure on his or her
property or who makes needed repairs to existing real estate
than for the purchase of a new piece of equipment.
We have listened to stories from our clients and even
within the Small Business Committee family that the small
business community would be well served by coming to terms with
the problem by expanding the tax benefits for all business
investments of the nature I have discussed.
For example, the cost of a new roof for a business
structure is such that the depreciation schedule may outlive
the life of the business and/or its owner. Helping the owner at
the front end would be sound and consistent with the
President's commitment to small business.
Again, thank you, and, of course, I will welcome any
questions.
Chairman Toomey. Thank you, Mr. Shapiro.
At this time I would like to welcome and introduce for his
testimony Mr. Harvey.
STATEMENT OF BRIAN HARVEY
Mr. Harvey. Good morning. Thank you, Mr. Chairman and
Committee Members.
On behalf of the Air Conditioning Contractors of America,
ACCA, I would like to thank you for providing me this
opportunity to testify today on this very critical issue to
small business.
ACCA is the national non-profit trade association that
represents the technical, educational and policy interests of
the men and women who design, install and maintain indoor
environmental systems. We are the folks who keep your homes
warm in the winter and cool in the summertime. We have over 50
federated chapters with approximately 5,000 local, state and
national members. Most are family owned businesses, many in the
second and third generations.
I presently serve as president of the National Capital
Chapter of ACCA. In addition to being an active member of ACCA,
I am the owner-operator of H&C, Inc. based in Laurel, Maryland.
I have 28 full-time employees, and we have been in business
since 1969. I am a real, live business person.
My testimony today is to strongly urge the Congress to
adopt the proposed changes to Section 179 of the Internal
Revenue Code contained in President Bush's economic stimulus
plan.
Like most small business people, operating my business
sometimes is a lot like a juggling act. Vehicle purchases are a
big thing for us. When I purchase a vehicle, I look at which
guy wants a new truck. Then,there are guys who should have a
new truck, but they do not want a new truck because they are
emotionally attached to their old truck. Then there are usage
issues. You have a guy who is working out of a pick-up truck.
As his career progresses, his responsibilities change. He may
change over to a van to do a different type of related service
in our industry.
Thrown in that mix I have to cosider recently available
rebates, financing incentives, all of these with deadlines,
many with year-end deadlines. So all these things are thrown
into the mix. Like most things in life, it comes down to a
matter of dollars and cents. Can I afford to make such a
purchase? If I do, what are the tax implications and
incentives?
Service vehicles are the life blood of my business. I have
to go to my customers. My customers cannot come to me. If your
furnace breaks, you cannot bring it to my warehouse to get it
fixed. I have to come out there. Our particular company offers
24 hour service 365 days a year, so our trucks are running
almost constantly, tens of thousands of miles a year. We try to
maintain them as best as we can, but their life span generally
is a matter of three to five years.
This particular issue is of extreme importance to me
because in December I needed two new vehicles. I ended up
purchasing one only because I could not take the deduction for
the second one until this year, so I delayed the purchase of it
until this calendar year.
As a result, I probably was not able to get as good a deal.
If you walk into a dealership and you are buying two trucks you
certainly have their attention better than if you are buying
just one vehicle. However, my whole 179 expensing allowance was
used up in one vehicle. Honestly, that was the sole determining
factor in not buying the second truck.
Understand, too, that when I buy a vehicle I buy the truck
and then I send it to another company to get ladder racks and
tool bins installed. That is $1,500 or so in someone's pocket.
Then I send it down the road to the guy who letters the truck.
That is $500. Most likely it will get upgraded. When I get a
new truck the technician will say, ``I have to have new
stuff.'' They get new tools, new ladders, new safety gear, the
whole nine yards. It is not just the vehicle, but it is a whole
conglomeration of things.
It is not just vehicles. My business actually manufactures
the sheetmetal ductwork. We do that in-house. I have a 15-year-
old piece of machinery. Its replacement cost is $70,000. I
would like to proactively replace that piece of equipment, but
I will not. One day I am going to come into the shop, and it is
not going to work. Then I am going to say ``okay, now I have to
buy the new one.''
There are a lot of people like myself. A couple things she
mentioned. You know, we need a new forklift. There are lots of
things that we need. Given a tax incentive, yes, I would be
stimulated to spend money. I really would.
Thank you.
Chairman Toomey. Thank you very much, Mr. Harvey.
I would like to actually start my first question, if I
could, with you. It is interesting. Your personal experience
seems to differ from the general indication that Mr. Shapiro
suggested for his clients.
Mr. Shapiro, correct me if I mischaracterize your opinion
on this, but it seemed to me that Mr. Shapiro's judgment was
that most purchases made by at least his clients are driven by
the need for the equipment or the absence of need and that the
tax treatment is sometimes not even known and not a significant
consideration.
It sounds to me like because it is part of the cost of that
item, it very much weighs on your judgment when you are making
a purchase. In fact, am I correct in assuming that it could
actually change your decision in a given year as to whether or
not to make a purchase?
Mr. Harvey. It did in fact in December. I delayed the
purchase of a vehicle. Actually, the truck that was getting
replaced ended up needing a new transmission in January.
Chairman Toomey. Would you say that if the President's
proposal had been the law in effect last year, would you have
bought two trucks instead of one?
Mr. Harvey. Honestly, I probably would have bought three.
Chairman Toomey. You probably would have bought three
trucks?
Mr. Harvey. Yes, sir.
Chairman Toomey. Instead of one truck?
Mr. Harvey. Yes, sir.
Chairman Toomey. That strikes me as a big difference.
Another question for Mr. Harvey, if I could. You are
probably aware of this, but your customers, when they go out
and buy new air conditioning and heating units, they are not
able to take advantage of this expensing provision because it
is excluded from the qualified property under Section 179.
Now, if we broadened the kinds of property that would
qualify for this, which is something I think Mr. Shapiro
suggested that we consider, expanding the kinds of property
that would qualify, do you think that would have a positive
impact on your business?
Mr. Harvey. When he mentioned the roof, I kind of got a
cold chill. My building is going to need a new roof soon. I
thought holy smokes. Yes.
Chairman Toomey. Yes. I was wondering if perhaps Ms. Battle
or Dr. Regalia might be able to suggest any kind of statistics
that might help us with regard to either the percentage of
small business or the number of small business or any other way
to quantify how many folks might be able to benefit from an
increase in the amount that could be expensed?
In other words, is it true that $25,000 is such a large
purchase that very few people ever go over that, or is it your
opinion that there are many, many small businesses that
routinely buy more than that, and it would benefit them? Is
there any way to quantify that? What is just your judgment
intuitively?
Mr. Regalia. Well, I am sure there are ways to quantify it,
and I am sure the Treasury has some numbers that are not always
accessible to us outside of the government in terms of the
gradations of people around the point that they mention.
About 4.2 million people take this deduction right now. We
know there is somewhere in the neighborhood of 20,000,000
businesses. As you start to expand both the amount of the
deduction from $25,000 up to $75,000 and you also increase the
phase out limits, I think you start to expand quite
significantly the amount of businesses that would see this
deduction as a real benefit.
When you start to work then on the type of qualified
expenditures that can be taken you expand even again, so I
think that my judgment is that this would be a substantial
increase to move from $25,000 to $75,000, to move the phase out
from $200,000 up to $325,000, and to expand the qualified types
of investment. It still would fall short of what we would
really like to see, which is full-time expensing for these type
of expenditures.
Chairman Toomey. Yes, and I am a big believer in full
expensing for all of these things.
I guess another way to look at this is if you look at the
way the joint Tax Committee and the Treasury quantifies this as
a cost to the Treasury, the implication is that there would be
literally millions of businesses that would benefit from this
further expansion.
Ms. Battle, did you have anything to add to that?
Ms. Battle. Well, I was just going to say I think the
Administration's numbers right now say about 4.1 million are
able to use expensing. I know that the numbers under the new
proposal would add another 508,000 that would be eligible in
addition to those that are already eligible, so that is a
substantial number.
Another thing I would just say outside of the numbers is
many of our businesses, many of our members, some of their most
substantial investments come in the first year as they are
starting up. I think that speaks to how crucial this is now as
these small businesses are trying to get started and get going
in a struggling economy. This will help them dramatically. I
think that is an important point to make.
Chairman Toomey. Right. One other qualifying point, if I
could make it, as our tax expert, Mr. Clark, informs me, that
in just such a case where someone would incur a large cost and
perhaps not have the income against which to fully enjoy the
benefit, current law does allow you to carry forward that--
Ms. Battle. Correct.
Chairman Toomey. --expensing provision so that in a future
year when you do have sufficient income you still capture the
value of that expensing provision.
Thank you. At this point I would be happy to yield to the
gentlelady from California.
Ms. Millender-McDonald. Thank you so much. This has been a
very interesting panel. The dichotomy of the small businesses
and their concerns really did show the range here today.
Mr. Regalia, indeed we have lost I think in excess of 1.3
million jobs now as we tend to calculate more, and I am so
happy that the Chamber of Commerce supports this expensing
proposal. If you had to choose between the dividend tax cuts
and the increased expensing, what will the Chamber push for?
Mr. Regalia. That is kind of a Sophie's choice really. I
think that the Chamber right now is supporting the entire
President's package. We believe that the package as a whole
shows a remarkable balance in terms of who it tries to help and
how it tries to help them. It has a short run stimulus of a
significant nature, and then it does things like this which
encourage longer term investment.
If you try to do one and the other, you end up, you know,
kind of being a sprinter in a long distance race. You will
start out of the gate quickly, but then you will run out of
gas. This type of provision gives you that long-term stamina.
It increases your ability over time to continue to grow.
You know, I would be very hesitant to try and pick winners
and losers in the President's package. When you look at the
dividend portion, it does a number of things. It has immediate
stimulus. It lowers the cost of capital, which would stimulate
investment among bigger firms. It increases or will increase
the stock market, which has wealth effects, all of which create
demand. Much of that demand is satisfied by smaller firms.
Also when you look at investment, much of the type of
investment that businesses across the board take on is
satisfied, is produced by smaller firms, and so what you are
trying to do with this package is to create an environment
where everybody can find their niche and grow. It does not just
help one. It really tries to help all.
This particular piece is a very, very important piece, but
it still has to, you know, be remembered that it is a piece.
What we would like to see is the entire package because when we
look at the economy right now we see an economy that is still
losing momentum. It is just not the war. The stuff that
happened in the early 1990s after we won the last Gulf War
definitively, we still saw two or three years of sub-par
economic growth.
I think the President recognized that this time around. I
think we are going to win the war, but then we have to win the
economic war. This is the type of package that will help do it.
This piece is a very important part.
Ms. Millender-McDonald. Well, the economy was flourishing
in the latter part of the 1990s. You will have to admit to
that. Certainly after 9-11 I think a lot of that had an impact
on the economy as well, given the state that we have found
ourselves in given 9-11.
I will ask you. Have you defined what a small business is
with reference to the Chamber of Commerce? If in fact you have,
do you think this package would be an important one for small
businesses that have fewer than 20 employees?
Mr. Regalia. Well, I think it is interesting. When we look
at the Chamber's membership, we have about 90 percent or so
that are small businesses, about 70 some percent that are less
than 10 employees small businesses, which I would call very
small businesses.
The SBA defines small business I believe in some of their
data up to 300 employees and in other data up to 500 employees.
Ms. Millender-McDonald. Yes. That is correct. It varies.
Mr. Regalia. You know, rather than put a limit on or to try
and label a business as small or large, I mean, if you talk to
individuals that have 100 employees they think of themselves as
kind of medium sized, but in many cases they operate very
similar to smaller businesses. I do not think you gain anything
by that limit.
We think of businesses that are in this range as being of a
small business nature, and we think that, you know, they do not
have some of the access to capital that businesses that employ
many more people and are larger in terms of their net revenues
and their gross revenues.
Ms. Millender-McDonald. But I think we do have to look at
small businesses irrespective because when we talk about
entrepreneurialship and we try to get people to come into this
whole notion of that, of course, then we have to look at that
range from the lower to the perhaps 100, 500 or whatever. I
think with that then it does become an important factor.
Mr. Regalia. Absolutely. Taking an entire package and
focusing different pieces on different parts of the picture,
the mosaic that you are trying to create, is a very good way to
go. I think the President did it with this package. This piece
certainly is an integral part, is a part that adds tremendously
to the overall package and should be included in any bill that
is passed.
Ms. Millender-McDonald. I would like to ask the question to
I guess all of you except Mr. Harvey because I suppose the
answer would be yes with him. Would you like to see the
expansion of the qualified types of investments to include that
of roofing and air conditioning and others that have been
outlined by Mr. Shapiro?
Mr. Regalia. Yes, we would.
Mr. Shapiro Of course we support it.
Ms. Millender-McDonald. Yes, of course. I should have left
you out of that equation as well.
Just one other question, Mr. Chairman, if I might ask Mr.
Shapiro. You said that the dominant force is a strategy far
beyond what has been outlined in this proposal. Can you quickly
tell me what that dominant force might be for those clients of
yours?
Mr. Shapiro For tax planning?
Ms. Millender-McDonald. For tax planning, yes.
Mr. Shapiro For planning purposes, not necessarily tax
planning.
Ms. Millender-McDonald. Yes.
Mr. Shapiro I think that our client base recognizes that a
purchase of any sort with or without the tax benefit will still
cost them money.
I found Mr. Harvey's statement about his buying three
trucks a little scary because his business will still be out
the difference between the tax saving and whatever is left
over. I think that is the difference.
It may be an incentive, and I think there is a difference
between incentive and planning. As an incentive it may be a
tiebreaker in making the decision to purchase the additional
equipment or the new equipment or the replacement equipment,
but not necessarily the dominant force.
Would you spend $10 to save $2? You know, a good business
answer is maybe. It all has to factor into it. It is very
difficult for us, based on our client base, to say that the 179
limit is the dominant force in planning.
Chairman Toomey. Thank you.
Ms. Millender-McDonald. Mr. Chairman, let me just say that
this has been a very interesting panel of people. Thank you so
much.
Chairman Toomey. Thank you very much.
The gentleman from Arizona?
Mr. Franks. Thank you, Mr. Chairman and panel. I just
appreciate so much, as everyone does, you coming here. I mean,
you folks are certainly the leaders of this economy. You are
the ones that make it all work for all of us.
I just wanted to ask perhaps a hypothetical question, but
sometimes, you know, when you are new you are not caught up in
the institutional inertia, and you just think well, what would
happen if we all became appropriately obsessed with free
enterprise here and just simply said that since there is some
consensus in this country that providing jobs is a good thing
and that buying equipment that other people have to build is an
incentive to build jobs is a good thing, and providing services
to people and products to people is a good thing.
What if we just became completely obsessed with free
enterprise and said we are going to allow businesses in
general, big, small or indifferent, to expense as they do, of
course, their payroll, their equipment purchases and just about
anything that goes to productivity?
Am I just new, or is it something that would really make a
difference in this economy? Is this something that any loss
that we had in revenue to the government by taxing some of
those things, would it not be made up significantly more in the
added productivity that it would incentivize, and would it not
be a lot better for our economy in general? I mean, somebody
take a shot at it.
Mr. Regalia. Well, I think that clearly the ability to
expense would enhance the overall investment in the economy,
which would in turn improve productivity growth, and that
expands or increases the potential rate of growth of the
economy, the jobs creating rate of growth, and is the
definition of what standard of living is in an economy. It
would increase the standard of living.
You know, certainly you have transitional periods because
the Treasury is used to collecting revenues on a staggered
basis, but once that was done you are really not reducing the
amount of revenue that the Treasury collects in total over
time. You are changing the timing of it.
Once you get through that timing problem you then have a
situation where, to the discussion that was taking place
earlier, you remove the Tax Code from the investment decision,
and that would be a benefit to the economy as well so that you
would make decisions on when you need trucks.
I mean, you do not buy a truck to save $2. You buy a truck
to service your customers. You have to service your customers
when they need that service, so you take the expense when you
have to take it within reason, but you adjust at the margin for
changes or aberrations in the Tax Code.
To remove that from the Tax Code is a benefit to allow
business decisions to be made on the basis of need rather than
on the basis of a Tax Code, especially one that is not all that
up-to-date. I think it would have a profound impact on the
economy to move to outright expensing.
When you look at what a good Tax Code would be as kind of
defined in theory, and this is theory that is included in a
number of books, textbooks that we studied years ago, it
includes immediate expensing. It removes the double taxation on
savings, removes the double taxation on things like dividends.
One of the things that it does in this vein is also to
allow for expensing in the year in which the purchase is made.
Mr. Franks. Mr. Chairman, I just agree with the gentleman
so very much. It just occurs to me. I am a former small
business owner, and, you know, we have somehow this class
battle over making sure that we be hard on the business people
and the corporations, but I just would perhaps just remind the
group that if we do take away corporations' profit and their
ability to do things we take away corporations. We take away
business. We take away everything from everyone.
It just occurs to me that if we want to tax something, let
us tax the profits on corporations. Let us tax the things that
they do not put back into the economy. That is probably an
appropriate place to do it if we are going to do it.
The idea of being able to let corporations expense those
things that all of us agree is good activity for this economy
just seems fundamentally positive for everyone in the economy.
I do not know why we somehow stumble over what seems to me to
be an obvious truth.
Thank you, Mr. Chairman.
Chairman Toomey. Thank you.
The gentleman from Colorado?
Mr. Beauprez. Thank you, Mr. Chairman.
An observation, first of all. I think we rightfully,
understandably are focusing on the direct beneficiary or at
least the potential beneficiary if these rules were changed, if
these updates were made, the small businessman who suddenly
could expense three times as much of his capital investments.
I hope, Mr. Chairman, we do not lose sight of the fact that
there are indirect beneficiaries too, and a great many of them,
people that are going to be supplying whatever goods that are
being acquired. Somebody has to make those and deliver those
and that whole speech again.
A question for at least Ms. Battle and Dr. Regalia, and
maybe the other two would like to respond as well. Mr. Shapiro,
I will use your comment as the takeoff for this question. I
accept the premise that many small businesses --before I was a
banker, I was a dairy farmer, and certainly, you know, if the
tractor died we went and got another one. You did not have much
choice. Need probably predicates tax planning in many cases. I
accept that.
Here is my question. My sense, and the two of you here on
the right from your membership's perspective please respond. My
sense is that given the times we are going through these kind
of uncertainties, and there is just kind of a knot in the belly
of a lot of people, that there has been a holding back of
purchases that might otherwise take place, be that a new truck,
be it adding another employee, be it upgrading office
equipment, be it whatever.
If one could do that with pre-tax dollars, as opposed to
post-tax dollars, we might provide a little bit of
encouragement to get on with those purchases, those
investments, and untie that knot in the belly. Have you any
sense from your membership as to whether I am on track or not?
Ms. Battle. Our membership certainly indicates that this
would be substantial in their decisions on what to purchase.
Most of our businesses are, as you know, very small and
independently owned.
Mr. Beauprez. If I can interrupt, what is the average size,
employee base, of your businesses?
Ms. Battle. About five. These are very small businesses.
These people have taken a substantial risk to open a business,
and they are very concerned. They think long and hard before
they make a purchase. I do think that changes in the Tax Code
do have a significant impact on how they make their decisions.
They are aware that this is part of the President's
package, and they contact us regularly. They let us know that
this will be something that will affect their decision making
when they purchase things.
Mr. Regalia. I think everything you do in the tax area
affects somebody at the margin. Is it going to change someone's
mind that was not going to make any expenditure to suddenly do
one? Probably not. What it does is it reduces the cost of the
expenditure. It leaves the business with more choices as to
where to allocate their scarce resources.
When you start to do that in small amounts across a wide
number of companies, you start to see a profound impact in the
economy as well. That in turn generates more demand, which in
turn drives the need for even more investment.
Everything in the economy is connected. You cannot affect
one end without in some way affecting somebody down the road or
up the stream from where you are. That is why the entire
package is such an important and well crafted package. It
stimulates demand. It encourages investment. It works towards
short-term growth. It encourages people to make decisions and
allows them to make those decisions in a less costly fashion
that in turn creates the entire economy and spurs that overall
economic growth.
This is an important piece. Small business is an important
piece of the economy. This will allow them to make the
decisions they want to make. It will provide them the
wherewithal to make those decisions when they want to make them
instead of having to look to the Tax Code, instead of having
someone in Mr. Shapiro's firm say oh, do not do that now. Wait
until next month, or wait until next year. That kind of waiting
slows the entire economy down.
Mr. Beauprez. Thank you.
Mr. Chairman, I yield back.
Chairman Toomey. Thank you. That obviously indicates a
vote. We have 15 minutes, which gives us plenty of time for the
five minutes for the gentleman from Pennsylvania who has no
questions?
Mr. Gerlach. I have no questions.
Chairman Toomey. In that case, I would thank very much all
of our witnesses on the first panel and the second panel.
Ms. Millender-McDonald. May I just say one word?
Chairman Toomey. I will yield to the gentlelady from
California.
Ms. Millender-McDonald. Thank you, Mr. Chairman. It has
been great to start this year off with you as the Ranking
Member on this great Committee.
We have heard from small businesses, from a different range
of businesses, from different types of businesses, and I think
this is a plus when we begin to deliberate and to move the
agenda of the President's package.
Again, I thank all of you for coming today. It is going to
be a pleasure to work with you.
Chairman Toomey. Thank you. The feeling is mutual. I thank
all the witnesses for being here, as well as the Members.
This hearing is adjourned.
[Whereupon, at 11:20 a.m. the Subcommittee was adjourned.]
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