[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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