[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000 deg.
STATUS OF SMALL BUSINESS MANUFACTURING IN THE MIDWEST
=======================================================================
HEARING
before the
SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT & GOVERNMENT PROGRAMS
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, APRIL 28, 2003
__________
Serial No. 108-9
__________
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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WASHINGTON : 2003
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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
(ii)
?
C O N T E N T S
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Witnesses
Page
Mehan, Dan, Missouri Chamber of Commerce......................... 3
Yawitz, Sheelah, Missouri Merchants & Manufacturers Association.. 5
Mittler, Mike, Mittler Brothers Machinery........................ 7
Wainwright, Don, Wainwright Industries........................... 9
Poli, Len, M. Carter Industries.................................. 11
Appendix
Opening statements:
Akin, Hon. W. Todd........................................... 19
Prepared statements:
Mehan, Dan................................................... 21
Yawitz, Sheelah.............................................. 24
Mittler, Mike................................................ 28
Wainwright, Don.............................................. 34
(iii)
STATUS OF SMALL BUSINESS MANUFACTURING IN THE MIDWEST
----------
MONDAY, APRIL 28, 2003
House of Representatives
Committee on Small Business
Subcommittee on Workforce, Empowerment and Government
Programs
Washington, D.C.
The Committee met, pursuant to call, at 1:00 p.m., in One
St. Peters Centre Boulevard, St. Peters, Missouri, Hon., Todd
Akin, [chairman of the committee] presiding.
Chairman Akin. We are ready to go.
The Small Business Subcommittee will be called to order
and, as we have done in Washington, D.C., as I have tried to
run these meetings, we try to bring them in on time, so I would
ask everybody to help out here. We are scheduling about an hour
here for the meeting, and so if all of us stick to the times
that have been indicated ahead of time, I think it will help us
to get through things, make it efficient and hopefully
accomplish our objectives as well.
It is a pleasure to join all of you, but before I begin, I
would like to recognize some key members of our Small Business
Administration that we have in our audience today. Mr. Sam
Jones, Region VII Administrator. Could you put your hand up,
please. I do not see Sam here. He is delayed. Okay. Wendell
Bailey. Let us see if Wendell is here. He was here this
morning. He may be dropping in later. Office of Advocacy for
Alan Richter, Small Business Development. Alan is over here.
Thank you, Alan, for being here again this afternoon. We had a
Manufacturing meeting earlier.
I am happy to announce that I am going to be dropping a
bill next week which will hopefully make all of our jobs
easier. It is House Resolution 1772. It is the Advocacy
Improvement Bill. It will enable the Small Business
Administration, Office of Advocacy, to work that much harder to
help small businesses. What this is, from everything I have
been able to determine, it is the most popular part of the SBA,
and that a law that says that the various agencies of federal
government have to consider the impact of any particular
changes they make on small business or business in general and,
if they do not, what is the teeth? Well, the teeth is this
Office of Advocacy, and we are strengthening that office so
that you have an advocate to go against large federal agencies
that are passing laws or rules and regulations which adversely
affect your industry in ways that are unnecessary.
That is really why we are here today, to see what we can do
to help small businesses. I know how hard it is in the
environment the way it is, and we are very interested in your
comments, try and help do what we can in our partnership at the
federal level. It is the small business owners and skilled
laborers here, the machinists, the engineers that make up the
life blood of the nation's economy. In the United States,
manufacturing accounts for 16 percent of our nation's economic
output. Makes up 81 percent of our exports. It counts for 30
percent of our national economic growth, and over 60 percent of
all research and development in this country is sparked by
manufacturing.
Missouri is no exception. In fact, we are the only one of a
few states who can boast our manufactured contributions to the
defense industry is a top component of our gross state product.
I would like to use today as a launching pad to ensure Missouri
and the entire midwestern United States is assured of an upward
trend for its manufacturing base. It is no secret that I am a
strong proponent of the President's tax cuts, an even stronger
advocate for lower taxes for the sake of manufacturing growth.
These changes alone, however, those critical, are not enough.
Missouri has lost nearly 10 percent of its manufacturing jobs
over the last five years. The information we share here could
help us more firm grasp some of the issues and hopefully
reverse some of these situations.
[Mr. Akin's statement may be found in the appendix.]
With us today we have some people who have a very intimate
knowledge of this situation. Our panelists have been kind
enough to give their time and knowledge. It is through this
knowledge that we, God willing, will arrive at a prosperous
market for our manufacturers and our communities.
In addition, I would like to introduce my very good friend
and colleague, the former congressman from a good part of this
district and, though Ken Hulshof is not on the Small Business
Committee, he is on a committee perhaps of even more importance
to small business which is the powerful Ways and Means
Committee in the House. They are looking at quite a number of
different measures which can all have a tremendously positive
impact on business and industry in general, and we are so
thankful for Ken's experience, for his good work representing
the western part of St. Charles in the past. Delighted to have
you, Ken, and if you have a statement.
Mr. Hulshof. I do, Mr. Chairman. Thank you very much and I
especially appreciate the invitation to be a participant, even
though, as you mentioned, I'm not on the Small Business
Committee. I look around the room. Your predecessor, our good
friend, now U.S. Senator Jim Talent, once convened a hearing in
this same venue and some ideas came from that hearing that are
now the law of the land. And so I'm encouraged, also knowing
your advocacy for small business, that perhaps some of the
things that will be discussed today can also bear fruit in
Washington, D.C.
As you know, you and I share St. Charles County. St. Louis
and the Highway 4061 Corridor are still in the 9th
Congressional District. But we also have had some sobering news
as far as the manufacturing sector. You point out some of the
success stories and yet I think probably our panelists are
going to talk about some of the challenges, especially that the
State of Missouri has faced regarding manufacturing and the
loss of our manufacturing base. Just late last week--as you
know, we have been on recess--in Kirksville, Missouri, which is
in my district near the Iowa border, Standard Register just
announced that they were going to be shutting down in 60 days.
They employ about 250 men and women who have been there many
years. Again, this is real tough when you are the largest
manufacturer in the area to shutter your doors. I agree with
you completely that when we return tomorrow and we begin to
take up our work again that we should heed the President's call
for quick passage of an economic growth package.
As we have talked about, the ails of the manufacturing
mirror the problems facing our economy as a whole. We have
weathered the economic shock, going back to September 11 of
2001 and yet, we have got a lot of work ahead of us as far as
trying to revive some economic growth opportunities, whether
that is accelerating the income tax rate or trying to reduce
the taxation and lowering the cost of capital for businesses.
Maybe that is some additional expensing provisions. I look
forward to hearing from our panelists if, either in your
written testimony or through questions later on, as to how some
of these specific tax items might benefit you and your
companies.
So again, I'm encouraged by the fact that we have got just
some strong voices here on behalf of small business and, again,
my thanks to you in including me in this important hearing.
Chairman Akin. It is a pleasure, Ken.
I think, in order to keep things moving along here, I'm
going to go ahead and introduce our first panel. My first panel
is on the left and the second one is on the right. Total of
five witnesses. And first of all, leading off is going to be
Dan Mehan. He's President and CEO of Missouri Chamber of
Commerce. And Ken, you mentioned that there was some bad news
in Missouri. I think Dan may refer to that in his testimony.
Dan, would you please lead off for us.
STATEMENT OF DAN MEHAN, PRESIDENT AND CEO, MISSOURI CHAMBER OF
COMMERCE
Mr. Mehan. Thank you very much, Mr. Chairman. It is a
pleasure to be before you and with our colleagues of both sides
of the microphone to talk about what needs to be done to
generate economic activity and prosperity.
I have a Missouri-specific statement really. I know you
both deal with issues that impact the entire country, but I
wanted to call your attention, as Missourians, to a dramatic
statistic or two that we released in the last two weeks. This
chart to my right shows that Missouri leads the nation in job
loss in calendar 2002. These statistics are directly from the
Bureau of Labor Statistics at the Department of Labor, U.S.
Department of Labor. It shows that we lost 77,700 jobs in
calendar '02.
Chairman Akin. Mr. Mehan, this is something that you just
mentioned to me earlier this morning. It didn't quite sink in.
I had heard this before, but it didn't quite sink in. You're
not talking about per capita jobs, are you? You're talking
about state by state, just raw number of jobs, that we lead all
of the 50 states in having lost more jobs, even than, for
instance, California. Is that correct?
Mr. Mehan. That is correct. This is raw data. These are
77,700 people that lost their jobs.
Chairman Akin. And no other state in the U.S. has lost as
many jobs as we have.
Mr. Mehan. Not even close unfortunately. If you notice on
the chart and in the folder that is been distributed, it is in
the left side of the folder, it may be easier to read, but the
closest one behind us is Ohio at 62,300 jobs lost. That is
obviously over 15,000 people behind us or we are ahead of them
in job loss by 15,000 people.
Chairman Akin. And yet they have twice residents in Ohio as
we do.
Mr. Mehan. Ohio has twice the population of Missouri.
Chairman Akin. That is incredible. Thank you. Please go.
Mr. Mehan. If you look on down the line, the startling
thing--first of all, it is startling that almost 80,000 people
lost their jobs. Secondly, that we are that far in the lead in
this distinction. And I'll try to do this without knocking the
chart down. But if you look at how we compare with our
neighboring states, Missouri is bordered by eight states.
The closest state in job loss is Oklahoma with 19,700. So
if you look at the region, the midwest region, we are ahead of
the closest competitor in job loss by almost 58,000 people.
Now, that is astounding and, as you both know, it is as easy as
walking across the street to get to another state--in Kansas,
for example, on the border. So there's even two states,
Arkansas and Tennessee, that have shown gains in job creation.
Now, in Arkansas, one of our favorite subjects, two of
them, workers compensation reform and torte reform, have
occurred at the state level. I just want to call that to your
attention.
Another step to consider is that in Missouri, 70 percent of
our jobs or 70 percent of our economic activity is on the
borders and, when our neighboring states are beating us at this
game, employers and the business community are obviously and
naturally going to go to that business environment that is most
conducive to them staying in operation.
Chairman Akin. Mr. Mehan, I think what the chart I'm
looking at, what you're telling me is there are eight states
that surround Missouri.
Mr. Mehan. Correct.
Chairman Akin. I haven't done the math but it looks like on
the surface that if you add up all or the jobs that those eight
states lost, we have lost more in Missouri than we have when
you add up all of them together.
Mr. Mehan. That is correct, and I have not done the exact
math, but it is astounding. I think it is almost double out of
the eight states surrounding us, and there are those who have
said that this is not that significant because in the '90s we
outpaced other states with our job growth. I do not think that
is too relevant in 2003 to those 77,000 people that have lost
their jobs or their livelihood.
Now, we have, at the Missouri Chamber of Commerce and
Industry, have advocated reforms to workers compensation, tort
reform in the state of Missouri. Hopefully the legislature
won't heed the cry of the spending problem that we have seen
and the budget shortfall that we have encountered and saddle
the employer community with paying for that budget shortfall.
And I think we have made some progress at the state level on
that. But obviously, you both have paid attention to what to do
about Missouri's budget shortfall.
Just to conclude this presentation on job loss, the fiscal
impact to the state of Missouri is significant as well. Seventy
seven thousand jobs, using an average of roughly $30,000 as
wages, generates $2.26 billion in wages. The lost income tax
from that is $74 million. The lost sales tax is $34 million.
Other taxes associated with that. The total fiscal impact to
the state of Missouri is $126 million. Mr. Chairman, you know
from your work in the Missouri legislature that this time of
year, what the state would love to--how welcome a message it
would be to get $126 million in the state coffers.
There are things under consideration, and I'll be brief. My
time is running out. But permanent repeal of the death tax we
would encourage. We hear that from our members quite often.
That type of tax relief. We had two meetings earlier today
about accelerated depreciation. Basically, it is an access to
capital issue to allow especially the manufacturing sector that
has experienced up to 40 percent of that job loss to retool and
reinvest in itself and to try to come out of this thing.
One thing I wanted to mention also is the use of health
reimbursement accounts which recently have been allowed by the
IRS to be tax deductible, tax free. The use of HRAs to help
finance first dollar health care costs combined with a high
deductible policy. We use that in a program that we run called
Missouri Chamber Care. We think it is a market-driven solution.
Won't be perfect for all employers, but it will be a source of
relief in the quest to find affordable health care and keep
those costs stable in the long run. So we encourage that usage
of health reimbursement account. Any sort of assistance from
Congress to promote that idea or that concept and make that
more marketable.
Thank you very much.
[Mr. Mehan's statement may be found in the appendix.]
Chairman Akin. Could you submit something along the lines
explaining that recommendation for the record?
Mr. Mehan. We would be happy to. Yes. Thank you.
Chairman Akin. Thank you very much.
Our next panelist will be Sheelah Yawitz, President of
Missouri Merchants & Manufacturers Association. Welcome,
Sheelah.
STATEMENT OF SHEELAH R. YAWITZ, PRESIDENT, MISSOURI MERCHANTS
AND MANUFACTURERS ASSOCIATION
Ms. Yawitz. Thank you, sir. Thank you, Mr. Chairman, and we
certainly appreciate the opportunity of being here. Our
organization represents small and medium size businesses
throughout the state of Missouri and basically we work with
them on legislative issues. So in preparing for the
presentation today, we polled our manufacturers, and I'm not
going to go over the statistics which Dan handled so well. I'll
get to the point of their responses.
From a large portion of our manufacturers, we heard that a
major contributing factor to the loss of manufacturing jobs in
Missouri is foreign competition. U.S. manufacturers are faced
with workers' comp. costs, health care costs, OSHA, EPA,
freight costs, that other countries such as China and Mexico
are not faced with on an equal basis. Another member of our
organization, Mike Mittler, who is President of Mittler
Brothers Tool & Machine, will be addressing that issue so that
you can question him about the loss of Missouri jobs and U.S.
jobs in general due to foreign competition.
But the other area that every single one of our
manufacturers said was priority and a major problem facing them
was the increasing costs of health care. And I think it is
easiest if I read from one of our members their response. This
is the president of a manufacturing company and she says, ``We
are again looking at a minimum increase of 20 percent and the
company can no longer absorb these increases. We may have to
reduce coverage to avoid passing increases to employees. Either
way, the employees lose and the employers lose.'' She goes on
to say, ``What makes the health industry need these ongoing
increases? What makes them so different than other
businesses?''
If you look at the pendulum, the past 50 years, it used to
be 50 years ago, only five decades, which is not that long ago,
the consumers paid for 100 percent of their health care costs.
Then we came to employers were paying for basically 100 percent
or close to that of the health care costs. For the past four
years, the average increase has been at least 20 percent per
year for four years. It can't be absorbed any more. So now you
have employers are saying, we can either pass the costs on to
the employees, reduce the benefits or absorb it if we can still
compete and stay in business.
Now on the positive side, there are some new tools
available to help in controlling and reducing health care
costs. One is HRA, Health Reimbursement Arrangements. In 2002,
the summer of 2002, the IRS came out with rules specifying what
the tax consequences were. So that was a step in the right
direction. We are talking about consumer-driven health care
where employees start to make choices. HRAs are employer's
money. The employer sets aside a specific, the same amount for
each employee. Then the employee can choose how they want to
spend those monies for health care costs. And those costs are
defined by the IRS. So we are not just making up how you can,
you know, use those monies.
Now, the employer can also decide, if there's left over
monies in the employees' account, to roll them over all or a
portion of the money for next year's health expenses and the
employer can also choose to say, we are going to set some of
that, or a cap thereof or all of it, for retirement expenses.
So with these type of options available, HRAs dramatically
differ from high deductible accounts. SO they're a very
positive tool.
Now, the problem is HRAs and FSAs, that is flexible
spending accounts and that is employee money, they both come
under the same definition with cafeteria plans as to who is an
eligible employee. And the IRS has said, shareholders of sub-S
corporations and partners off LLCs can not participate in
cafeteria plans. So we are asking you today to do three things.
Number one, change the definition of an eligible employee
to include shareholders of sub-S and partners of LLCs. Number
two, remove the use it or lose it from the FSA. If an employee
has leftover money in the flexible spending account, they lose
it. They do not get it back. And number three, for all
cafeteria plans, and that is set-aside pre-tax money, allow the
employee to make mid-term changes. Right now in cafeteria
plans, they can only make a decision January 1 of every year.
They can not change it.
So consumer-driven health care will control health care
costs. It isn't a fix-all, but it sure is a good tool, and we
appreciate the time. We think you can make a difference and
make it happen. Thank you.
[Ms. Yawitz's statement may be found in the appendix.]
Chairman Akin. Thank you very much. I appreciate your
testimony and also very specific recommendations that you
provided. It sounds exciting.
We are going to go ahead to our second panel and leading
off we are going to have Mike Mittler, President of Mittler
Brothers Machinery. Thank you, Mike, for joining us today.
STATEMENT OF MIKE MITTLER, PRESIDENT, MITTLER BROTHERS
MACHINERY
Mr. Mittler. Thank you, Mr. Chairman and Congressman
Hulshof. As you said, I'm Mike Mittler from St. Peters,
Missouri. This is my hometown city hall that we are testifying
at today. Welcome and thank you for the opportunity to testify
on behalf of my coworkers and the 2,000 member companies of the
National Tooling and Machining Association regarding the state
of U.S. manufacturing and tooling today.
We feel our industry is under attack. We are faced with a
very unfair playing field imposed by our own government,
including unfair tariffs, excessive regulations, an overly
strong dollar, and unfair competition from China, a communist
country.
As you said, I'm President of Mittler Brothers Machine and
Tool, and I'm the National Secretary of NTMA. I will be the
National Chairman of that organization in 2006. Mittler
Brothers is a full service job shop machine shop providing
custom precision machining, design, engineering and building of
special machines and a proprietary product line of metal
cutting and forming equipment for the racing and metal
fabrication industry. We are located in Foristell, Missouri. We
currently employ 40 people and our products are sold world-
wide.
We think that every manufacturing company in the country
and in the world does business with our industry. The U.S.
tooling and machining industry employs close to 450,000 people
nation-wide. We account for shipments of $43 billion. The metal
working industry includes machinists, dye makers, mold makers
as well as tool and die designers, and we believe, without
them, the mass production of manufactured goods would not be
possible.
We have already heard the loss of jobs, particularly in
Missouri, and the loss of jobs in the country, and so we know
that we are losing industry at an alarming rate. Unlike typical
down turns of the past when manufacturers simple cut back and
waited for recovery, in the current down turn, manufacturers
are rapidly relocating outside the U.S. and large numbers of
small and mid-sized U.S. manufacturers are closing down
permanently due to foreign competition. The resulting loss is a
loss of family-sustaining blue collar jobs, it is undermining
the U.S. middle class and devastating communities where
manufacturing is essential to the local economy.
I think you're aware of the ITC report that tells you the
bleak outlook of the tooling and machining industry, and I
think it tells a lot about the future of the U.S. economy. We
are currently in an over capacity situation, and part of that
over capacity is caused by American manufacturers moving
offshore to find lower government regulations, lower taxes and
cheaper labor. A typical example of that is companies such as
Emerson Electric based here in St. Louis have moved almost all
their motor manufacturing offshore. As they move offshore, we
lose the opportunity to provide them with tooling and machining
services that we provide, and the result is also, as
demonstrated by Mr. Mehan, is the loss of good paying wages and
jobs that go with those, particularly large here in the State
of Missouri.
Local tooling companies such as ours have lost from 10 to
50 percent of their employees in the last two years from this
lack of work and from these companies moving their
manufacturing offshore. And this does not count the number of
companies that have closed altogether, again exemplified by the
high number of people that have lost their jobs. Foreign
companies are becoming more technologically advanced, able to
offer significantly lower prices, sometimes as much as 60
percent. We believe our industry could see as many as 50
percent of the shops close their doors in the next couple of
years. The NTMA has lost 400 members in the last two years,
many of them a result of companies going out of business,
simply no longer in existence.
You heard from Sheila earlier about the cost of health
care. We have had increases. We echo her comments. We have had
increases as high as 25 percent in our company and in our small
company with 40 people, we currently spend in excess of
$150,000 a year for health insurance costs. That is a very
large cost for our small company.
The banking industry we think is part of the problem. Many
companies are having their working lines of credit withdrawn
due to the loss of profits in our industry, so we think there's
a real issue there. Our 1999 National Chairman of NTMA just
recently was forced to close his business due to losing his
working line of credit. We have been very fortunate to have a
strong banking relationship in our company, but only as a
result of personally guaranteeing all the loans that the
company has.
So not only is it important to the economy but, as you
stated earlier, in Missouri, in the St. Louis area
particularly, the defense of our nation is very critical and a
large amount of these jobs in the local area are defense-
related with Boeing as the leading supplier of many of the
weapons that you just saw our country strong. We are really
against any work of defense prime contractors sending defense
work offshore. This practice is going on and is not being
monitored by the DOD.
Chairman Akin. We are starting to get a little close on
time. Are there specific things that you'd want to--other than
what you just said, that you want to add as recommendations
or----.
Mr. Mittler. Well, I think that stemming the tide of loss
of jobs and the unfair competition from China with the fact
that they have lower tariffs to bring their product into our
country. We have very high tariffs and freight costs to try and
export our products world-wide. So that is one particular area
that we'd like some help on.
Chairman Akin. Thank you very much.
Mr. Mittler. Thank you again for your support of small
business and thank you for your support of manufacturing.
[Mr. Mittler's statement may be found in the appendix.]
Chairman Akin. Thank you very much, Mike, for testifying.
And now Mr. Wainwright. Mr. Wainwright is Chairman/CEO of
Wainwright Industries but also was--were you the acting
president of the National Manufacturers Association, was it
last year, Don?
Mr. Wainwright. Chairman.
Chairman Akin. Chairman.
Mr. Wainwright. Of the National Association of
Manufacturers.
Chairman Akin. Thank you.
STATEMENT OF DON WAINWRIGHT, CHAIRMAN AND CEO, WAINWRIGHT
INDUSTRIES
Mr. Wainwright. And thank you for this time, Mr. Chairman
and Mr. Hulshof. Thank you very much, Congressman Hulshof.
This is quite an opportunity. I'm the Chairman and CEO of
Wainwright Industries here in St. Peters and in the St. Louis
region, of course, where I've spent my entire life. So I've
seen this area in the manufacturing for 35 years. Wainwright
Industries is a subcontractor to larger manufacturers in the
aerospace and automotive industries. We supply steel components
to those industries. We employ about 200 people in this area of
two different plants.
I want to thank you for this opportunity and tell you about
the unprecedented challenges that today threaten our
competitive leadership in manufacturing, not only in the state
of Missouri but in the United States itself. Over the past year
and two months, we have seen the weakest manufacturing recover
from the recession since the Federal Reserve started keeping
tabs on this back in 1919. The data shows that December 2001,
manufacturing production has edged up only 1.6 percent,
drastically slower than the first 14 months of the six previous
recessions and growth in manufacturing has averaged 10.8
percent and other recessions as we came out.
But the weakest of manufacturing is perhaps best reflected
in the loss of employment, as we have talked about previously.
Manufacturing nation-wide has lost for 32 consecutive months
more than 2.1 million in all jobs. From July of 2000 through
last December, the overall attrition of manufacturing jobs was
11.3 percent or more than one out of 10, and here in Missouri
during that time we have lost 45,300 manufacturing jobs alone
or 11.2. Our experience pretty much reflects the national
experience.
This is a frightening trend that we can not afford to
ignore. Manufacturing is essential to the economic growth and
employment opportunities of the state and the nation. During
the prosperities of the '90s, manufacturing was the largest
contributor to economic growth. Manufacturing accounts for a
quarter of the U.S. economic output, 64 percent of exports, 62
percent of the research and development and 27 percent of the
growth of this nation. It is the driving force of technology,
progress and productivity growth that has made this happen.
Indeed, during the late half of the 1990s when the overall
economy recorded respectable productivity gains of 2.5 percent
a year, manufacturing roared ahead at 4.5 percent a year,
almost double that of the rest of the economy.
Loss of manufacturing is particularly critical because we
are the ones that have the best jobs and we have a major ripple
effect throughout this economy when we do not have those jobs.
Manufacturing workers are among the best paid in our country,
earning 20 percent more than the average wage and more than 80
percent of them have received health insurance paid by their
employers. In addition, manufacturing jobs tend to create and
support more employment than other sectors of this economy. Our
most conservative estimate suggests that of 16.5 million
manufacturing jobs, we support at least 9 million other jobs in
the economy. In other words, for every manufacturing job, 1.8
jobs are then created.
It is also essential to emphasize the contribution
manufacturing makes to the national security, which was already
brought up, a contribution that has been dramatically
revisable, of course, in the last few weeks with Iraq. Our
ability to deal with the regime of Saddam Hussein and the
minimal loss of civilian lives among Iraqis and relatively few
casualties among our own troops is based upon the advanced
digital, laser and communication technology of our industries.
From the advanced fighter planes to the high tech ordnance
guidance systems to night vision goggles is all a story of
manufacturing's genius at work. Manufacturing is our nation's
laboratory of innovation where our most creative people,
equipment and breakthroughs in technology and the quest of the
break-through products and more efficient processes that are
the heart of our productivity.
But hundreds of shuttered factories and more than two
million lost jobs are very short. We have seen this happen
across our country. We have a problem and we have to deal with
now. In my view, we face three fundamental policies, challenges
that must be met.
One, the economy remains listless and it is uninspiring.
First step is getting manufacturing back in high gear with tax
breaks. We need tax breaks. The tax reduction proposed by the
Bush Administration is a reasonable start. Two, rapidly rising
business costs stemming from the general indifference and the
burden of government rules and requirements on business are
becoming an economic burden on our companies and our workers.
For some companies, the cost is simply too much. And three,
while manufacturers must contend with steadily rising costs of
doing business, unprecedented foreign competition makes it
impossible for them to keep pace.
Thank you very much, Mr. Chairman.
[Mr. Wainwright's statement may be found in the appendix.]
Chairman Akin. Thank you very much, Mr. Wainwright and I
appreciate your comments. We have got one more witness. These
are actually owners of small businesses on panel two, and we
have Len Poli. He's the President of Carter Industries. Len,
thank you so much for joining us this afternoon.
STATEMENT OF LEN POLI, BUSINESS MANAGER, M. CARTER INDUSTRIES
Mr. Poli. Thank you, Mr. Chairman. My name is Len Poli. I'm
actually the business manager for M. Carter Industries. M.
Carter Industries is a small manufacturer of service station
and liquid handling equipment for the petroleum industry. We
market our products throughout the United States and to about
20 countries outside of the United States and throughout the
world.
We made a conscious effort to broaden our marketing scope
into the international arena in the early '90s and today that
is proven to be a good decision. About 30 percent of our sales
are international. This business has a stabilizing effect on
our total business because the U.S. market continues to
fluctuate. As one of my customers recently commented, if this
roller coaster ever gets level and straight again, I'm not
certain I'll know how to handle it.
Everything that is involved in a small business over a
large business has a cost. Containing these costs is a major
part of what I and every manager and owner of small business do
every day. Some we have direct control over and some we do not.
Component costs for products we can control to a degree. Labor
costs we can control, again to a degree. Federal, state, local
taxes, regulations, certifications and business insurances we
have very little control over or no direct control. All of
these have a direct impact on our ability to be competitive in
the U.S. and world markets.
At the beginning of this year, we decided that new
equipment purchases would be necessary to reduce costs of
making certain components. One machine is now on order and will
be delivered in June. Another will be ordered later this year.
This new equipment is more efficient and provides a cost
savings in the components for our products. This first machine
is a modest cost of only $40,000. The next will be about four
times that. Needless to say, we would appreciate the proposed
accelerated write-off for investment in equipment.
Additional savings are projected from changes implemented
at the foundries where we have aluminum castings made. However,
the costs that we can not control continue to increase.
Business insurance continues to rise. Our health insurance
premiums increased 15 percent on last renewal. Workers' comp.
jumped 20 percent, and just this week we renewed our product
liability, product casualty and general liability insurance
policies. The product liability increased 67 percent. This
sounds high, but it was 83 percent until we increased the
deductible to a maximum level. I must add in here that last
year's increase was 30 percent.
It is also disturbing to have a $1,050 premium addition to
our property policy to cover acts of terrorism. I thought that
with the federal government's backing of the insurance
industry, I thought this was an unnecessary gouge.
Physician malpractice insurance costs have made headlines
but liability insurance is a major problem for every business,
whether it is a manufacturer or not. Some of my distributors,
my customers in the United States, are forced with a decision
of whether to maintain a full fleet or cut back, just so they
can maintain the same level of insurance costs.
Many of the federal regulations and certifications that
affect us have appeared to be written for larger companies
without any tolerances. The EPA sets guidelines that may be
appropriate to a company with 500,000 gallons of waste water
per day but the same applies to one with 500. OSHA's rule for
forklift operations and operators and safety inspections are
set if the operation was 24 hours a day, not as we do, 30
minutes every two weeks. No one is against is safety, but
common sense certainly has a place. If the garment industry
followed this same line, we'd all be wearing the same size
suit. Some of us would look okay.
In our industry, the EPA's related certifications restrict
the ability of small businesses to compete and strain larger
ones. We do not manufacture the vapor recovery fueling
equipment that is common in the St. Louis area at your service
stations here and in other cities. The certification cost alone
for each system is $250,000. That is beyond our budget. Some of
the best ideas and inventions have come from small operations
such as ours. Research and development is restricted to money,
personnel and equipment. Over the years, we have been
successful in developing some new products, some of which have
been patented. Vapor recovery projects have been shelved
because of the exceptional high cost of certification.
Currently, we are involved in reducing static electricity.
We export to many countries and only a few do not levy a
duty on the products that we ship. This gives our competition
unfair advantage. For instance, Turkey has a 15 percent duty on
all U.S. products coming in. They buy the same product from the
Netherlands without any. Argentina has an 18 percent. In other
countries, they're zero.
To add on to something that just--that Mike was talking
about. From China, for instance, the duty going into China from
our product is 12 percent with a VAT tax of 17 percent while
they can ship the same product here with zero.
Thank you very much.
Chairman Akin. Thank you very much, Len. Appreciate your
joining us today. We could have broken things up in a couple of
ways, I suppose, and had the industry representatives in a
sense, then had the actual owners of businesses. I thought it
was better just to go ahead and let each of you make your
statement and then proceed with some questions. We have some
time, and I would defer to you, Ken, if you'd like to take the
first shot at some questions.
Mr. Hulshof. I appreciate that, Mr. Chairman. I assume for
the purpose of the record the entire written statement of the
witnesses will be included. Is that right?
Chairman Akin. It will be included.
Mr. Hulshof. Let me ask, first of all, Ms. Yawitz or you,
Mr. Mehan, the idea of associated health plans. I assume each
of you would support or do support associated health plans. Is
that right?
Ms. Yawitz. We have concerns. We do support them, but we
have to also look at the history of association type of plans.
They weren't called association plans before. They were
employer welfare--multiple employer welfare plans. Our concern
is a plan would either take in only good risks that leave the
not so good risks with where are they going to get coverage or
a plan that only attracted the negative risks.
Mr. Hulshof. Okay.
Ms. Yawitz. So the more options we have on the table, the
better, but I would like to see how this is going to differ
from what used to be called the multiple employer welfare plan.
Mr. Hulshof. Mr. Mehan, I've heard some of those concerns
expressed by some providers. What--is there a good response
from the Chamber regarding it? Not to put the two of you at
odds, but what is a response to the idea that the risk pool is
going to be skewed were we to enact associated health plans?
Mr. Mehan. I agree with what Sheila just said with some
other concerns, as well. I think what you'll find and what--
when the Missouri Chamber had an association plan in the '90s,
what typically happens is they attract a lot of clients, a lot
of policies, and they follow a bell-shaped curve of success
where people will join and then, over the course of time,
you'll find that the better risk pools or better risk employers
in there will find other coverage elsewhere or be offered more
economical coverage by the insurance industry. So then that
pool is left with a higher degree of risk. That is the--
typically, it is sometimes referred to as the death spiral,
that sort of thing.
Now the other thing that I think needs to be in any reform
or any market-driven reform is health care costs have got to be
accurately reflected and accurately portrayed to the employees
who are using them. My concern or one of our concerns on AHPs
is that it does not necessarily involve the employee in that
decision. I think employees and users of the program that
employers are purchasing have to understand, to put it simply,
that this is not just a $10 payment and the rest is borne by
the--by someone else. So----
Mr. Hulshof. Right.
Mr. Mehan [continuing]. Better data, better utilization of
data, can help with that.
Mr. Hulshof. I appreciate that and certainly, as the
Chairman and I and others understand, this is a vexing problem.
In fact, the ones having to pay the bills nodding in agreement
with you as far as providing health insurance which used to be
a standard benefit and yet now is being costed out of the
market. And Ms. Yawitz, as you pointed out before and maybe to
state it in a different way, as someone in a family, we buy our
own life insurance, car insurance, home insurance, and yet we
rely upon our employers to provide our health insurance.
Let me shift gears quickly and ask a tax question. I
appreciate your indulgence, Mr. Chairman. Actually, Mr. Poli, I
pulled out. You said common sense has a place. I think I got
that. That is why we are here in Missouri and not in
Washington, D.C. That is why we are holding this hearing and
the Chairman has convened this hearing here.
Specifically, Mr. Mittler, on this expensing and, Mr.
Wainwright, you touched on it briefly, as well. The idea that
if you're on the cusp and you're looking at your books to
decide whether or not to make an investment in your plant, tell
us how increasing the expensing provisions or maybe raising the
threshold because it is not been indexed with inflation, how
would that directly help you in making a decision that yes, we
are going to make this capital purchase this year? Mike or Don
either or Mr. Poli.
Mr. Wainwright. Yes, sir. The two things you look at, of
course, your return on your investment. In other words, how can
you recover that investment? In other words, it has to pay for
itself. So to go about that--that is one of the provisions. The
other one is, you know, will this make me more productive, to
make my entire business more productive for the future? And
both of those things are tied together.
So if we look at a new piece of capital equipment, the
chances are the reason we are looking at it is to cut cost, to
be more productive, to be able to compete with the foreign
nations that continue to give us a--put us in a deflationary
bent in this country. So if you give us a faster write-off,
what we are going to be able to do is get our money back
sooner, and that would just as--time is money and that just
gives us our investment back much quicker. So we have the
incentive then to go out and spend.
Let us say back in the 1980s when we went to supply side
when Reagan put in supply side. You know, we had 100 percent
write-off in the first year of anything we purchased at that
time. I mean people were putting in steel mills at $750-800
million a shot, being very productive. But they were able to
write that off in the first years or they could recoup their
investment in the first year of what they needed to recoup. And
that just flared industry and got it going because once you
start the supply side, the demand side will then pick up. If
you give people--I'm not saying we do not need some tax relief.
But if you give people on the consumption side a tax relief and
they're afraid they're going to lose their job, they aren't
going to spend that money because they're worried about their
job.
But if you give them--if you give the employer the option
to be able to invest in his organization to make it more
competitive in the world markets, to grow their business, and
there's activity in that business, the people feel very
confident and you also give them a tax relief on that
consumption side and they start spending that money. Then we
get the economy going. We have seen this in seven of the last
nine recessions, that capital investment has led us out of the
recession. Yet this time, you see what's happened. We have got
1.6 percent growth where we have usually jumped out of a
recession at about 10.8 with capital investment leading us.
Mr. Hulshof. Thank you.
Chairman Akin. Thank you very much. Let me first jump to
one of the things that you made some comment about in terms of
tax. If you had to choose one particular tax, you could only
choose one where we would do some reform, I've gathered from
your comments--this is for any of the five of you--that it
would be something along the lines of more rapid depreciation.
You think that would probably do more for the manufacturing
side to get things going. Am I correct in that assumption and,
if there were a second thing, what would be your second choice
after more rapid depreciation?
Mr. Poli. I agree the more rapid depreciation would be, as
Don was just saying, that is a primary.
Chairman Akin. Right. Anything else like double tax and
dividends would still be second behind the more rapid
depreciation?
Mr. Poli. Well, as touched on earlier just for a brief
second, was the repeal of the death tax also and particularly
in small business and in Missouri with a large rural and
farming community also, repeat the death tax to keep the farms
in the family and keep the manufacturing in the family. To make
that repeal permanent would be a real benefit also.
Mr. Wainwright. Mr. Chairman, I would like to say one other
thing about the capital investment. In manufacturing, which we
are talking about--this is a manufacturing business that we are
talking about at our meeting. In manufacturing, we are capital
intensive. You know, machines--in 1950, we made up 25 percent
of the GDP. We employed 34 percent of the work force. In the
year 2002, we are at 25 percent of the GDP and we employ nine
percent of the work force. That is productivity and that is the
way we go. That is the only way we can be competitive. And so
when you talk to heavy investment, capital intensive
manufacturing, yes, that is the number one.
Chairman Akin. That has got to be first. It is got to be
first. I think the second thing that I was hearing--and correct
me if I'm wrong--but I think I was hearing you say that the
cost of health care is probably another one that is right up
there in terms of your list of priorities all the way across
the board. And if you were going to do some things in health
care, Ken asked you about the associated health plans and yet
you mentioned some ideas here that were a little bit different.
Particularly you, Sheila, talked about, you called them an
HRA, health reimbursement accounts, and FSAs and things like
that and some things that we could do to change the way
cafeteria plans apply and all. Would you say that would be one
of the top things? We have been working in the House and
limiting the amount of punitive damages that physicians can be
held for which, of course, reduced the cost of medicine
somewhat and we are interested in moving ahead with AHPs. But I
think what I was hearing you say, there may be some things
other than the AHPs that you like almost better.
Ms. Yawitz. Yes.
Chairman Akin. Is that true or am I putting words in your
mouth?
Ms. Yawitz. No. You're exactly on target.
Chairman Akin. Is that the same for you, Dan? Are you in
the same boat with Sheila on that, that there may be something
better than an AHP to give you the flexibility?
Mr. Mehan. Yes. That is true.
Chairman Akin. Okay.
Ms. Yawitz. AHP is an unknown factor.
Chairman Akin. Right.
Ms. Yawitz. Okay. So, you know, what we know we have here
are some good tools that need some refining and the cafeteria
plan--well, let's back track. I mean everybody, manufacturer,
this is a global market so anything that reduce and helps us to
compete with foreign competitors. Let us not repeat that. But
then the manufacturers themselves. We just represent them.
Okay. They are their own companies over there, which is, you
know, the bread and butter. They are the ones. At the bottom
line is all of these costs that are not on a same ratio with
Mexico and China, and health care is there.
When you can allow the partners and the shareholders also
to participate in pre-tax dollars, taking off whether it is
health care dependent, medical costs and health care premiums,
you're going to have more participating in that. Plus, the
flexible spending account is not coming near to its potential
by employees. It doesn't come close because of the lose it or
use it factor. If an employee knows that their premiums are X
amount of dollars of year, their out of pocket, their
preventative medicine, da-da-da-da, adds up to $500. Okay. All
of a sudden, the employer changes their plan mid-year or
something changes in their personal, and let's say their costs
at the end of the year are only $300. Do you know where the
$200 goes? To the employer. So how can an employer promote
flexible spending accounts when there's the possibility the
employer is going to be retaining the employee's money at the
end? It doesn't make sense.
So as far as the association plans, I think they're there
on the table but a little refining on what you have already
available is going to bring it down to consumer awareness, no
different than we were. When I was a little girl, my dad paid
100 percent for all of our medical costs. Okay. When my husband
was employed, the employer made 100 percent and 80 percent of
the employee costs. We are somewhere in between and the fact is
I go and I have a $10 co-pay. I purposely asked last time, how
much does the prescription actually cost? $77. Employees do not
care because they're not paying. I do not fault them for it.
Chairman Akin. Yes.
Ms. Yawitz. It is an educational campaign.
Chairman Akin. If you were to take a look at some of these
different line items in a manufacturing business, all of which
add to your costs and all of which hurt competitive nature, how
big is health insurance compared to things like workers' comp.
or product liability or business insurance or these other
things? Is health insurance the biggest one of that sort of
insurance package of overheads?
Ms. Yawitz. Usually you'll see a cycle where workers' comp.
is high or property, casualty and health care is low.
Unfortunately for the employer, they're both at their peak. So
one used to be able to offset the other. Workers' comp.,
there's a few more options out there for self-insurance and
group self-insurance, so it takes you out of the traditional
market place to help smaller businesses. Both the Chamber and
our association have these group self-insured plans. Health
insurance affects--I do not care if you're an Ameron Huey who
is sitting here in the company--I think he'd support--down to--
our company has seven employees, when you're talking about 20
percent increase per year.
Chairman Akin. So it gets to be pretty--So now, I didn't
quite get an answer to my question. Do you think health
insurance is probably one of the biggest in terms of the size
on your bottom line and also the rate at which it is growing?
Is that probably one of the worst?
Mr. Wainwright. I would say so, Congressman. The one thing
you have to realize is that we do not want to lose the greatest
health care system in the world. We still are the healthiest.
It is a great country, the health care system we have. It is
out of control from a cost standpoint right now. That is the
thing we need to bring under control. So we do not want to
federalize this, and that is why we need to get on this because
that is the way it is heading. And I see some larger
corporations that are ready to throw the towel in and say, let
us federalize it. We cannot do any more. And that is the thing
that has got me worried.
So we need to really start looking at this and really
getting involved and making sure, and the things that were said
by the associations are very true. People need to be involved.
You need to have your people involved so you understand where
the costs are and why are there costs and they need to work for
wellness to try to keep it down.
But to come to your point on what is the most costly. When
there is something you cannot control, that is what is costly
to a business. In other words, workman's comp. You know, we
work extremely hard in the state to make sure we keep--have one
of the better states, one of the low cost workman's comp. bills
in the country but yet still cover our employees, and how do we
do that? Well, we make sure that our people are safe in those
plants, they understand the system, they're well taken care of
and we are able to monitor that and to explain to them and
they're able to keep those costs down to help us and that is
how we do that. So we can sort of control that. We can control
a lot of those. Unemployment costs. We can control those.
So the type of cost that you can do things to--health
insurance. They walk in and tell you it is going up 30 percent
this year. Well, you can shop around a little bit but generally
it is pretty much across the board and that is it. You have
either got to have lower health--lower quality health care for
your people or pay the bill. So we have to pay the bill.
There's no way to get the high quality and cut the cost in this
situation and keep it under control. So yes, it is a very
vexing problem. I probably have four or five people that spend
six to eight months a year trying to keep costs under control.
We have been self-insured. We are big enough to be self-
insured. Due to the liability situation over the last couple of
years, we have moved back to the full insurance. But what
happens when you're fully insured, it is like being with the
federal government. Then you drop everything because you do not
worry about the cost again. You know, you say, well, we are
taken care of. You need to be involved and yes, it is one of
the most important and highly escalating costs for business
right now.
Chairman Akin. Thank you very much. I appreciate your
response to those questions and last question goes to
Congressman Hulshof.
Mr. Hulshof. Just really more of a comment than a question,
and I appreciate, Mr. Wainwright, included within your written
testimony. I know that time did not permit but you also
referenced a national energy policy which we can't lose site of
as far as making a sustainable economic growth and the
manufacturing as far as a reliable supply at affordable price.
In the House, we had that discussion just before we took our
Easter recess and, of course, have given to our colleagues on
the other side of the United States Capital what we think is a
pretty good energy policy as far as conservation, in addition
to looking at other reserves, and so I appreciate you
mentioning that.
And lastly is a comment. Mr. Mittler, you also pointed out
in your written testimony the permanent repeal of the death
tax. You know, the 2001 tax reduction that passed the House and
passed the Senate that the President signed into law, if it was
good policy then, it remains good policy now and again, this
unusual exercise we have gone through where technical Senate
rules prohibiting us from making tax reductions permanent. If
we fail to act in Congress, what that means is in a few years
down the road, we are going to have a substantial tax increase
and, as a business person, there is really no legitimate way to
plan ahead to take care of your family business to pass it on,
not knowing whether or not there will be an inheritance in 2010
and 2011 or not.
And so I share--and I know Todd shares your enthusiasm as
well. And again, I just want to thank you, Mr. Chairman, for
allowing me to participate in this hearing.
Chairman Akin. Thank you very much, Congressman. Thank you,
all of our panelists for your insight and all of the expertise
that that represents and also thank the others who are here
participating and interested in what we are taking a look at
and we have taken your written comments for the record and
again, thank you all for participating. Have a good afternoon.
Meeting is adjourned.
[The meeting was adjourned at 2:15 p.m.]
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