[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
       SMALL BUSINESS EXPENSING: JOB GROWTH THROUGH THE TAX CODE


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

                             FIELD HEARING

                               before the

      SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT & GOVERNMENT PROGRAMS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, AUGUST 9, 2005

                               __________

                           Serial No. 109-29

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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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
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

     SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT AND GOVERNMENT PROGRAMS

MARILYN MUSGRAVE, Colorado Chairman  DANIEL LIPINSKI, Illinois
ROSCOE BARTLETT, Maryland            TOM UDALL, New Mexico
BILL SHUSTER, Pennsylvania           DANNY DAVIS, Illinois
MICHAEL FITZPATRICK, Pennsylvania    RAUL GRIJALVA, Arizona
LYNN WESTMORELAND, Georgia           MELISSA BEAN, Illinois
THADDEUS McCOTTER, Michigan          GWEN MOORE, Wisconsin
JEB BRADLEY, New Hampshire

                     Joe Hartz, Professional Staff

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Henderson, Mr. Jim, Regional Advocate, US Small Business 
  Administration, Region VIII....................................     5
Jones, Ms. Linda, Owner, Area Rent-Alls..........................     6
Hau, Mr. Craig...................................................     9
Lautzenheiser, Mr. Ron, Owner, Big O Tire........................    10
Pehkonen, Mr. Rob................................................    11

                                Appendix

Prepared statements:
    Henderson, Mr. Jim, Regional Advocate, US Small Business 
      Administration, Region VIII................................    18
    Jones, Ms. Linda, Owner, Area Rent-Alls......................    25
    Hau, Mr. Craig...............................................    28
    Lautzenheiser, Mr. Ron, Owner, Big O Tire....................    29
    Pehkonen, Mr. Rob............................................    31

                                 (iii)




       SMALL BUSINESS EXPENSING: JOB GROWTH THROUGH THE TAX CODE

                              ----------                              


                        TUESDAY, AUGUST 9, 2005

                   House of Representatives
       Subcommittee on Workforce, Empowerment, and 
                                Government Programs
                                Committee on Small Business
                                                     Washington, DC
    The Subcommittee met, pursuant to call, at 1:30 p.m., in 
The Commissioners Hearing Room, Larimer County Courthouse, Fort 
Collins, Colorado, Hon. Marilyn Musgrave [Chairwoman of the 
Subcommittee] presiding.
    Present: Representatives Musgrave and Beauprez.
    Chairwoman Musgrave. Good afternoon. I want to thank you 
all for coming. I am very happy to be here today and I would 
like to thank Larimer County Commissioners for allowing us to 
use this room. They have great facilities here and I appreciate 
their accomodation so very much.
    Before we begin I would also like to thank my good friend, 
Congressman Bob Beauprez, for joining us today. I am very happy 
to have him here. I served with him on the Small Business 
Committee in the 108th Congress. He is an invaluable asset to 
Congress and he has quite a life story to tell. He has very 
good real world experience when it comes to business. I so much 
appreciate that.
    He has owned a small business. He has had to make a 
payroll. He has had to find affordable health insurance for his 
employees and he has had to comply with government regulations 
and those are no small task.
    He also realizes the immense burden placed on small 
businesses by a federal government and he has excellent ideas 
as to how to rectify that situation. Really when you look 
around at the members of Congress, few have had the experience 
that Congressman Beauprez brings to Congress and to this 
hearing today.
    You know, when you look at the Members of Congress, perhaps 
too few of them have ever had to make a payroll themselves and 
they have no idea of the challenges that small business owners 
face. Despite the significant tax relief that Congress and 
President Bush passed for small businesses, the tax code is 
still ridiculously complex and burdensome.
    A 2001 study conducted by the SBA's Office of Advocacy 
found tax compliance on average $1,200 per employee for small 
firms compared to $562 per employee for large firms. That is a 
significant handicap for a small business because anybody who 
understands opportunity knows that every extra minute spent 
deciphering the tax code is one less minute that the owner can 
spend growing his or her business, providing new jobs, and 
revitalizing our economy. We must continue to strive for less 
burdensome levels of taxation along with simplicity in our tax 
code.
    This brings us to the topic today, expensing. As many of 
you know, Section 179 of the Internal Revenue Code limits the 
amount a small business may directly expense in a given year 
versus what can be depreciated over time. Under the Jobs and 
Growth Tax Relief Reconciliation of 2003 signed into law by 
President Bush, the maximum allowance was raised from $25,000 
to $100,000 and the phase-out threshold from $200,000 to 
$400,000 in '03 through 2005.
    The American Job Creation Act of 2004 extended the 
enhancements made by the '03 Bush tax cuts through 2007. 
Unfortunately, without further action by Congress these limits 
will return to $25,000 and $200,000 respectively when the 
expensing limit expires in 2007.
    Earlier this year I introduced HR 1678 which will extend 
the higher Section 179 limits through 2010. Maintaining the 
higher limits will result in higher demand of goods, benefiting 
manufacturers and equipment sellers. It also means small 
business owners will have extra money in their hands to hire 
more employees and put the new equipment to use immediately. 
Extending higher limits of Section 179 through 2010 helps 
provide greater stability and more tax relief for small 
business owners allowing them to better plan for their future.
    We must always look at ways to foster growth from within 
small businesses and Section 179 can certainly play a major 
part. In a perfect world I would like to see the end of 
depreciation schedules allowing both large and small businesses 
to expense everything; providing an immediate and healthy boost 
to the business community.
    Depreciation and the record keeping that goes along with it 
is a complex and time-consuming process. For a small business 
that may be using cash accounting, expensing the cost of 
equipment purchases is much easier and much more realistic. 
Realizing that we cannot get to that point overnight, an 
excellent place to provide certainty and confidence in the tax 
code is maintaining the direct expensing limits under 179 of 
the IRS code.
    Small businesses are the backbone of our economy. We hear 
this all the time. They represent 99 percent of all employers. 
More than half of all U.S. employees work for small firms and 
they generate between 60 and 80 percent of all new jobs in 
America. Small businesses are the main component of our 
economic engine and we as your elected officials must do all we 
can to foster, not hinder, their growth.
    Extending the increased spending limits is a good start but 
we must and will do more. High and confusing taxes are some of 
the most important issues we will be working on to help small 
businesses grow and prosper. I am eager to hear today's 
testimony but before we begin I would like to recognize 
Congressman Beauprez for some opening comments.
    Mr. Beauprez. Thank you, Madam Chair. Let me return the 
favor a little bit. You were very, very generous in your 
comments. You have obviously worked tirelessly in Congress and 
on the Small Business Committee especially and it has been duly 
rewarded by asking you to chair this important subcommittee. I 
think it should be noted by your constituents and all of us in 
Colorado by a round of applause, if you don't mind.
    There are a few things from my time in elective office, 
which is small by comparison to you, but there are a few things 
that I have taken note of. One of those is that politicians 
will almost uniformly from the city counsel level of the 
President of the United States pledge allegiance to supporting 
a strong expanding job-creating economy. Who isn't going to 
pledge that they will do that? When you have people like 
Congresswoman Musgrave that actually understand how you can 
make that happen, it becomes very, very different.
    What we are talking about today with your bill, HR 1678, is 
exactly that. When we first discussed this during the Jobs Act, 
the big tax bill from the 2003 Congress, there were actually 
members of the United States Congress who openly said, ``Gee, 
if we increase expensing from $25,000 to $100,000, that won't 
do much, will it?'' Well, I just found that absolutely 
perplexing that anybody in the United States Congress would 
actually say that. They not only said it, they really believed 
that was the case. They just didn't know. No basis of 
understanding.
    I have run a dairy farm before and then later our own 
little community bank, which is a small business really just 
like anybody else's. It immediately made sense to me, 
especially from running the bank, 85 percent of our loan 
customers at that bank were small business people. Most of them 
owned or operated mom and pop some people would call them.
    I immediately reasoned, let's see, if we can take from 
$25,000 to $100,000 that expensing allowance, we are basically 
saying we will spot you the first about 35 cents on the dollar 
of everything that you would like to purchase between that 
$25,000 and $100,000. Would that make a difference? You bet it 
would.
    Walk in a machine shop and somebody, the guy running that 
place, will immediately tell you, ``Yeah, I would like to get a 
new drill press, a new lathe.'' You walk into almost any 
manufacturing firm and they are going to have a long list of 
equipment they would like to purchase, retail operations. 
Absolutely. Guess what happened even as we just talked about 
these tax cuts? The economy got going again, didn't it? Just by 
talking about it.
    Then when the President signed it, we immediately saw a 
spike up, GDP went to over 8 percent. It went up over 8 
percent. We have had 14 consecutive sustained quarters of 
growth. Eight of them over 3 and a quarter percent. It looks 
like more in front of us.
    Jobs. We have created now almost 4 million new jobs in just 
over two years. The new job numbers out just the other day are 
extremely encouraging. Over 200,000. In Colorado alone last 
month--we are still waiting on the newest of the new. Jim, 
maybe you have those, I don't know, but I haven't seen the 
newest one.
    I have seen $49,000 in Colorado and we were lagging a 
little bit. We were just a little bit slow getting going again. 
I think a lot of that was due to the fact that we took such a 
blow and we were so dependent on the high tech sector. Then 
what our airlines are going through wasn't all that helpful 
either. We took a pretty good hit but we are coming back, 
49,000 new jobs.
    We are about the 25th largest work force in the nation. Of 
the 50 states we are just about dead even. But when you look at 
job creation, there is only about 12 or 13 of those 25 states 
that are bigger than us. Only about half of them that are 
creating jobs faster than we are.
    Our GSP, gross state product, is growing at about 3.8 
percent so we are out performing even a very robust national 
economy right now. Why do I say all that? I say all that, Madam 
Chair, because I think it is important we keep it going. The 
last thing in the world that would make any sense to me is that 
once you get something headed in the direction you want it to 
go in, why would you turn the steering wheel and send it in a 
different direction?
    We know why the economy got going. It is the hard work of 
people like right here in this room, especially you that are 
going to testify to us today. You are the ones that get the 
economy going. At best maybe we can implement decent policy 
that gives you a chance to get it going and realize your 
dreams, make a difference, create jobs and opportunity and get 
this economy going again. I think one of the big ways that we 
did implement some good policy is by increasing the expensing 
deduction as we did in the last big tax bill.
    I have the wonderful opportunity now of serving on Ways and 
Means and when we get back shortly after Labor Day we will be 
taking up, Madam Chair, the whole issue of these taxes, these 
tax cuts that we put in place that I think made so much sense.
    The testimony we are going to hear from this panel today 
and your leadership will be very important to us getting the 
collective information at the Ways and Means Committee to 
hopefully make the right decisions as we go forward. What can 
we do and what can we do without. This is one that I think made 
a huge amount of difference. I look forward to the testimony 
from these witnesses. With that I will yield back.
    Chairwoman Musgrave. Thank you, Mr. Beauprez. I want to 
welcome the witnesses today. We are very mindful of your 
expertise and your firsthand knowledge on these issues. I 
certainly want to extend my appreciation for you taking time to 
be before us here today.
    We have a rather primitive timing system here because we 
don't have lights like we do in Congress but we are going to 
have a green light when you are at about--when you have spoken 
for three minutes you will get that. When you have spoken for 
four, you will get the yellow.
    When you get the red you have had your five minutes but 
blessed are the merciful for they shall receive mercy so don't 
get nervous. I appreciate your being here today and we are 
going to start off with Mr. Jim Henderson, a regional advocate 
for the SBA Region 8. Thank you so much for being here.

   STATEMENT OF MR. JAMES HENDERSON, REGION VIII, OFFICE OF 
           ADVOCACY, US SMALL BUSINESS ADMINISTRATION

    Mr. Henderson. Thank you Congresswoman Musgrave and 
Congressman Beauprez and the Committee. It is a great honor and 
privilege to be here today with you to submit not only some 
verbal comments but also our written testimony which I will be 
summarizing with my comments.
    As you said, I am Jim Henderson and I am the Regional 
Advocate for the U.S. Small Business Administration, Office of 
Advocacy. It is a small portion of the Small Business 
Administration that was created specifically to be a voice for 
small business because a lot of times small businesses simply 
do not have the time to get to hearings like this and express 
their views. So that is one of the missions we have at the 
Office of Advocacy.
    I also want to say that if there are any tough questions 
you throw at me later, I brought my tax counsel here, Candace 
Ewell. She is also from the Office of Advocacy. She can handle 
the tough ones and I will take the easy ones.
    Small businesses, as I said earlier, finds it difficult to 
have the time and the Committee asked specifically what is the 
impact of the expensing provision on the small business 
community? Section 179 has had a significant positive impact on 
the small business community in particular in two areas.
    One, it enables them to increase their cash flow and the 
other is it dramatically reduces their paperwork as you alluded 
to in your opening comments about the difficulty of the tax 
code in deciphering that whole process.
    We looked at the data in 1999. The tax data that we could 
get a hold of showed that 69 percent of the business that 
elected to take advantage of expensing for their purchases were 
actually small proprietors and individual farmers. That 
represents nationwide about 2.9 million small businesses so 
there are a lot that look to this provision to help them manage 
and operate their business.
    Chairwoman Musgrave, it is your leadership, and Congressman 
Beauprez' leadership as well, that has helped in a number of 
other areas in making the regulatory environment more user 
friendly, if you will, for the small business community. We 
commend you on that.
    With regard to the expensing provision, I think the 
quickest way to drive home its importance is to just cite some 
examples. One example I would like to mention I got from one of 
the CPAs in Colorado Springs about a firm that he was coaching, 
if you will, to open up a medical clinical. A medical clinic is 
very high-intensity capital investment. He explained to him the 
benefit of using the expensing provision.
    In fact, they used it nearly to the max to open this 
clinic. But what was even more dramatic for them was by having 
the latest state of the art equipment, it enabled them to 
compete more as they started their start-up business. The other 
thing was by expensing and bring some of that money back into 
the business they were able to hire a couple of key employees 
that they wanted to have at the very start of their business 
operation.
    Another example I would like to cite also comes from 
another CPA is a town, actually a very small town. It has a 
cheese plant in it and they wanted to upgrade their operation. 
It was going to be a substantial investment in new equipment.
    Again, they took advantage of the expensing provision which 
enabled them to expand that operation in that small community. 
But by using that expensing provision and bringing some of that 
capital back in to their cash flow, they were able to move from 
having 13 or 14 employees up to 20 employees.
    If you sit in one of these small towns and see where one 
business has been able to increase by six employees, that in 
that local economic area is a significant impact. That is why 
we are very concerned that this legislation that you have 
proposed to extend the higher expensing provisions is extended. 
I see that I have the yellow light already.
    The importance of this legislation just cannot be, I think, 
overstated. It has a dramatic effect and with the smaller firms 
as they look at managing their cash flow and trying to make a 
decision whether to bite off that big chunk for a large piece 
of equipment in their operations, this will enable them to make 
that decision much easier and move ahead and create the 
expansion of their operations through hiring maybe additional 
people in their own business and, of course, helping the entire 
economy in the area they are in.
    We feel it is a tremendously important provision. We think 
that HR 1678 needs to be enacted and I thank you kindly for 
your time and your attention today and just urge your success 
in getting this extended. I want to extend our support in 
anyway we can to help. Thank you.
    [Mr. Henderson's testimony may be found in the appendix.]
    Chairwoman Musgrave. Thank you very much for your 
testimony. I don't know about you, Bob, but it seems like the 
witnesses are a long ways away. It is a great room but they are 
a long ways away.
    Ms. Jones, if you will pull the microphone as close as you 
can or get as close to it so we can hear you. We are looking 
forward to your testimony and thank you very much for being 
here.

            STATEMENT OF LINDA JONES, AREA RENT-ALLS

    Ms. Jones. Good afternoon, Chairman Musgrave and 
Congressman Beauprez. My name is Linda Jones. I own and operate 
Area rent-Alls which has two facilities in Westminster, 
Colorado with a total of 15 employees. I am also a past-
Director on the board of the American rental Association which 
represents Colorado, Arizona, New Mexico, Utah and Wyoming.
    I want to thank you for the opportunity to testify before 
you here today on the impact of Section 179 of the federal tax 
code on rental businesses. I will summarize my testimony, but 
ask that the full extent of my remarks be included in the 
record.
    ARA's membership includes more than 4,000 rental businesses 
with 6,200 locations and 960 suppliers. The majority of ARA's 
members are small, family-owned and often multi-generational 
rental businesses. ARA members rent construction equipment and 
tools to contractors and home owners and party and event 
supplies to commercial and private clients.
    The entire rental industry generates more than $24 billion 
in annual revenue. Approximately 80 percent of the ARA members 
operate businesses that generate less than $1.5 million in 
annual revenues and 95 percent of ARA members are businesses 
that generate less than $3 million in annual revenue.
    The rental business is capital intensive. Rental businesses 
need equipment inventory to serve their customers. ARA 
estimates the total rental inventory in 2004 was valued at 
$34.1 billion (new equipment value). We believe the annual 
replacement cost for equipment in the rental industry ranges 
between $3.4 million and $6.2 billion. ARA estimates that more 
than 90 percent of our members reinvest less than $400,000 
annually making them eligible for Section 179.
    Now, let me give you a little of my background. I am a 
second-generation rental store owner. My parents and 
grandparents started the general tool/construction rental store 
in 1962. I purchased Area Rent-Alls from my parents in 1986. At 
that time I added costumes rental to our inventory to increase 
income for business during slow seasons. I expanded to a second 
location in 1994 and at that time I added wedding and party 
equipment. Thus, my rental business reflects both costume and 
party rental and equipment rental for homeowners and 
contractors.
    In the 1986 Colorado recession, I managed the rental store 
with two employees. That year 13 rental stores in Colorado went 
out of business. I feel fortunate enough to have survived that 
economic downturn. Today I have 15 to 18 employees all of whom 
have families to support. I would like to add that I have never 
had to lay off any employees in spite of the rise and fall in 
our economy since 1986. I would hope the reason for that is 
good management skills, which brings me here today to talk to 
you on Section 179.
    I would like to tell you how Section 179 has personally 
helped my business. In 2003 I was able to use $57,000 of the 
allowable expensing for purchasing equipment within Section 
179. This actually equated to a tax savings for my business of 
approximately $7,360. That same year I incurred a 30 percent 
increase in health insurance premiums.
    This tax savings gave me the funds to maintain health 
insurance coverage for my employees. This fact alone is very 
significant for my employees and their families and for me as 
an employer to hire and retain good employees.
    Section 179 not only benefitted the health insurance for my 
employees but also helped me to add new inventory with updated 
safety features for my customers. In 2004 I was again able to 
use $64,000 of the allowable Section 179 expensing. Again, this 
savings, due to the availability of Section 179, was 
immediately reinvested into my employees' healthcare benefits, 
and aided me to continue to update equipment in my rental 
inventory.
    This tax benefit allows me as a small business owner to 
continue to reinvest in the economy of my community by 
providing the public with the service of rental equipment. I 
also realize that all costs of maintaining and growing my 
business continue to escalate, the costs of maintaining my 
property and equipment, advertising, training and education for 
my employees of similar expenses. The tax benefit of Section 
179 affords opportunity for continued growth for the right 
reasons to individuals involved in small business.
    I have not estimated the total amount of the $100,000 of 
Section 179 allowable expensing for the year of 2005 but I know 
I have planned to use an increased level from previous years. 
The availability of Section 179 motivates me to continue to 
grow my business and is a key component within my business 
plan.
    It gives me the ability to react to opportunities for 
increased profits to expand my business. My goal is to combine 
my two rental stores into one larger location. This goal is 
achievable in a more reasonable time frame only because of the 
availability of Section 179. It is a vital part of my planning 
for the future and for ensuring a bright and profitable future 
for my rental business. Section 179 continues to be an 
instrumental business tool within the goals of Area Rent-Alls 
and I am sure for all small businesses.
    Madam Chairman and Congressman Beauprez, I and I am sure 
many small businesses would like to thank you for sponsoring HR 
1678. In summary, the current provisions of Section 179 help 
small businesses like mine compete by providing incentives to 
invest in new equipment. The option of expensing more of our 
investment dollars also allows us to manage cash flow and 
generate additional free cash allows us to expand our 
businesses and increase employment in our communities.
    Passing HR 1678 would be a positive step for small 
business. However, ARA strongly supports the position that the 
current Section 179 provisions should be made permanent. Small 
businesses like mine and so many other members of the American 
Rental Association need a simple, straightforward way of 
managing their tax exposure.
    I urge you to consider our position in your future 
deliberations on Section 179. Small business owners want to 
continue to be a part of the future of our local economies. The 
assistance you can give us to do so through your policy 
decisions will make a dramatic difference to our future.
    That concludes my remarks, Madam Chairman. Once again, 
thank you. I will be happy to answer any questions you or 
Congressman Beauprez have at this time.
    [Ms. Jones' testimony may be found in the appendix.]
    Chairwoman Musgrave. When you try to say Congressman and 
Beauprez--
    Ms. Jones. That is tough.
    Chairwoman Musgrave. I have been stumbling, too. I 
understand, and I know him very well.
    Mr. Beauprez. There ought to be a law.
    Chairwoman Musgrave. Yes, there ought to be a law. Thank 
you. That is a great story of how resilient you have been and 
it is encouraging to hear about business growing sometimes 
under adverse situations. Thank you.
    Chairwoman Musgrave. Our next witness is Mr. Craig Hau.
    Welcome. We are happy to have you here today. He is a 
commercial broker from The Group Inc. here in Fort Collins.

                   STATEMENT OF MR. CRAIG HAU

    Mr. Hau. Thank you, Madam Chairman, Representative 
Beauprez. A little history on myself. I have been a resident of 
Fort Collins since 1972 and have been in the real estate 
business since 1976 here in Fort Collins so I have had the 
opportunity to deal with a lot of small business owners and 
acquisitions of properties.
    Fortunately over the years I have been able to also invest 
and my experience with the tax code is mainly personal but also 
from partners that I am associated with that own other small 
businesses. I own part of and manage about 16 corporations and 
limited liability companies. There are a couple of construction 
companies but most of them are real estate investment groups.
    I manage the properties that are owned by those entities. 
We always check with our CPA to see what is the wise thing to 
do in capital investments. The code as it is written definitely 
inspires small business to invest in equipment. Personally I 
did that in '03 and '04 and plan to continue that.
    I think that alone with acquisition of those items for 
construction companies and maintenance companies, you know, 
their tractors and trailers and mowers and trucks and that sort 
of thing. But also the part of the code that encourages small 
businesses to acquire their housing for their businesses, the 
offices and facilities because they escalate depreciation on 
qualified items for the permanent tenant improvement part of 
the premises.
    That part alone in '04 we help broker. In fact, I had a 
couple of patent attorneys as partners. We went together and 
had an office building built. I was just kind of making a few 
notes but about $14 million of the construction in seven 
buildings happened in '04 because of the inspiration of that 
part of the code. A lot of people don't think it has an effect 
but it really truly does. Those buildings are on Timberline 
Road by Low and Caribou if you would like to know where they 
are.
    I think the extension of the bill inspires small business 
to invest, inspires business people in the community from the 
legal, the financial, the medical people, all of them really, 
to spend that money and the ability to write it off up to a 
certain level.
    I should also mention the fairness. A lot of people don't 
realize that whether you own two companies or 10 it is still 
$100,000 per individual through that ownership as it is passed 
down to your personal tax return. It is not a windfall, let us 
say, if you own more than one company. It is really fair across 
the board.
    It has made a difference. In Fort Collins I have personally 
seen it. I have partners that I am close to that also spent 
their capital and invested in equipment. We would very much 
like to see it extended.
    It makes a lot of sense. The bill was put together for a 
purpose. It was to expand the economy and create jobs. We have 
about a dozen employees and have increased that because of our 
expansion. It seems to be a very good thing. My personal 
experience with it is that it does work and it fulfills its 
mission.
    Other than if you have questions for myself, that's pretty 
much my testimony. We appreciate all that you do and I think it 
makes great sense to extend it until they revise the entire tax 
code perhaps through that time. Thank you.
    [Mr. Hau's testimony may be found in the appendix.]
    Chairwoman Musgrave. Thank you for your testimony. It is 
interesting to hear what a difference it has actually made 
right here in Fort Collins. We appreciate that. There is a bill 
out there, HR 1388, and that is sponsored by Congressman Wally 
Herger from California and that is the permanent bill.
    Quite frankly, what we are going to be able to do hopefully 
is through 2010 but it is very important because of the 
predictability and the certainty that you all need to work 
towards a permanent so we will be continuing that.
    Okay. Our next witness is Mr. Ron Lautzenheiser. We are 
happy to have you here today.

         STATEMENT OF MR. RON LAUTZENHEISER, BIG O TIRE

    Mr. Lautzenheiser. Madam Chair, you thought Beauprez was 
bad. Try Lautzenheiser. Good afternoon, Madam Chair, and 
Congressman Beauprez.
    Mr. Beauprez. Well done.
    Mr. Lautzenheiser. My name is Ron Lautzenheiser. I would 
like to thank you for taking time to visit our city and to 
solicit input and ideas about job growth through the tax code. 
Specifically HR 1678 as it relates to Section 179 of the code. 
I am the owner of two Big O Tires and Automotive Service 
Centers and two Grease Monkey Lube Centers located in Larimer 
and Weld counties.
    In addition to representing my own retail centers, I am 
representing the more than 550 independently owned Big O Tire 
and Automotive Centers, the 1,200 small businesses that are 
active in the Fort Collins Area Chamber of Commerce and the 
more than 50 small businesses located within our new Urban 
Renewal Boundary in North Fort Collins.
    After spending 30 years in the world of the large 
corporations, I founded our first automotive center in 1996 and 
we expanded in 2001, 2003 and 2005. Together the centers employ 
more than 50 persons. Over the last nine years I have used 
government programs to assist in the start up of all of these 
businesses. Specifically the SBA 7(A) programs, the loan 
guarantees and, of course, Section 179 of the code. Without 
these important programs I would very likely not be in business 
today and would not be employing our more than 50 associates.
    The current tax law signed by President Bush in 2003 which 
increased the Section 179 capital equipment write-off limits to 
$100,000 in year one, was very instrumental in my decision to 
start two new automotive centers in years 2003 and 2005. In 
addition to opening new centers, we also acquired new capital 
equipment for use in our existing centers in 2004 and 2005.
    The purpose of new capital equipment allows me to produce a 
higher quality product or service usually with less repair and 
maintenance cost. It helps my business be more efficient and, 
therefore, more competitive in the market place. Section 179 
help me defray the cost of capital acquisitions because 
immediate tax savings leads to immediate reinvestment.
    Extension of the current deduction limits to 2010 will help 
alleviate my personal concern about the timing of capital 
acquisitions. Opening a new center usually requires real estate 
acquisition and construction. This is a lengthy process which 
starts two to three years prior to a center opening. With the 
current law expiring in 2007 it is probably already too late 
for me to open new centers in our area and utilize the current 
$100,000 deduction limit if it is allowed to expire.
    Fort Collins also has a new URA on the blighted North Side 
of our city. The URA is in year one of its 25-year life. The 
extension of Section 179 to year 2010 would greatly assist many 
of the 50 plus small businesses located within the URA boundary 
who are trying to turn this blighted area of the city into a 
job growth area.
    Many of the 550 Big O Tire and Automotive Centers are 
currently making decisions about whether to purchase new 
capital equipment. The average new center purchase is $200,000 
to $300,000 of capital and employs 10 to 15 associates. Section 
179 deductions have a strong influence on these decisions.
    In conclusion, I would like to thank the Congresswoman and 
Congressman for their efforts in working towards the passage of 
1678. Raising capital, particularly at affordable rates, is one 
of the small businesses' greatest challenges. It ranks right up 
there with the high cost of health care. In my work as a 
volunteer Fort Collins SBDC mentor to new franchise business 
owners, I see their ability to raise capital as one of their 
real hurdles and extension of 179 will be of tremendous 
assistance to them as it will to all businesses.
    Again, my thanks to Chairperson Musgrave and Congressman 
Beauprez. Thank you.
    [Mr. Lautzenheiser's testimony may be found in the 
appendix.]
    Chairwoman Musgrave. Thank you for your excellent 
testimony.
    We have another interesting name here. Rob Pehkonen is here 
to testify. We are very happy to have you here and look forward 
to your testimony.

                 STATEMENT OF MR. ROB PEHKONEN

    Mr. Pehkonen. Thank you Congresswoman Musgrave and 
Congressman Beauprez. A little background on myself. I own a 
couple of different companies. I own some real estate. Then 
most people in Fort Collins kind of know me as the Maytag man. 
I own the Maytag store here in Fort Collins. The revision of 
Section 179 has been very instrumental in the growth of the 
Maytag store.
    My testimony is very, very simple. My company has tripled 
in dollar volume and doubled in the employees that I employ in 
the past 12 months due directly because of the revision of 
Section 179 of the Internal Revenue Tax Code allowing small 
business to expense the full value of new capital equipment, 
furniture, computer, office equipment and other expenses 
incurred in open up three new retail appliance stores in the 
Colorado area. I am in favor very much, as I am sure we are all 
surprised, in HR 1678 extending the higher expensing limits up 
to $100,000 and an investment up to $400,000.
    I own and operate five appliance retail stores in Colorado. 
I have one in Fort Collins, one in Greeley, one in the 
Northglenn area, Lakewood, and then also down south at 
Southwest Plaza. If you had asked me 12 months ago, I only own 
two. I own the Fort Collins store and also the Greeley store.
    The current law signed by President Bush in 2003 was a very 
strong deciding factor that helped make it possible for me to 
undertake this major expense and expansion in my business. It 
helped reduce the high cost of adding three new retail 
locations in 2004 and also 2005 and helped provide up-front 
additional cash flow by reducing my tax liability and in turn 
helping my business grow from 10 employees to currently 23 with 
a planned 28 by the end of the year.
    My appliance business is very much like many small 
businesses around the country. My company goal is very simple. 
It is ``Depend on Us'' taken as an extension of the Ol'Lonely 
repairman theme of dependable product at a cost effective 
price. My showrooms have all the product hooked up live and 
plugged in so my customers can check out the appliance in my 
showroom before they take it home to their home.
    It is very expensive to remodel a showroom, to have hot and 
cold running water by the washers, have drain lines so that we 
can actually do laundry in the showroom, power up all the 
equipment, and hook everything up live. It is very, very 
expensive.
    An average cost of a new showroom for me to add is about 
$150,000 per location. Simply stated, the revision of the tax 
code allowed me to expense more of these expenses in the year 
that I incurred the expense versus over the next five to often 
37 plus years helping me directly grow here in Colorado.
    I use the Subcommittee to continue their backing of HR 1678 
and allow small business to grow, to allow our community to 
grow, and allow the economy to grow, and allow more people to 
be employed. I look forward to answering any questions that you 
have and helping you understand the importance of HR 1678 in my 
small business and many small businesses across the country. 
Thank you.
    [Mr. Pehkonen's testimony may be found in the appendix.]
    Chairwoman Musgrave. Thank you very much for that excellent 
testimony.
    Mr. Beauprez, do you have questions?
    Mr. Beauprez. Thank you, Madam Chair. Yes, I do. First of 
all, thank you. A very sincere thank you to the witnesses. I 
think you really highlight what I suspicioned was the case and 
I referenced in my opening remarks, how important this was to 
small businesses. Frankly, I wouldn't have imagined maybe all 
of the examples, especially the rental business, a perfect 
example but that candidly had escaped me.
    I had a very good friend who was in that business. I will 
say because you probably won't that in addition to it being 
very important to your business, a very healthy well-stocked 
rental business is critical to the construction trade, the 
agricultural trade, on and on and on, to the whole business 
economy. On any given day his parking lot was probably as busy 
as any place in town so a perfect example of why this part of 
the tax code was very, very important. Thank you especially for 
your testimony.
    Rob, you made me think, you and Mr. Lautzenheiser as well. 
You both made me think how important it is that we deal with 
this issue soon. You were both talking about the planning you 
do, the staging. What would happen if we punted on this, if we 
said, ``Well, we have some time. We don't need to do it just 
this year.'' Rob, how about you first of all.
    Mr. Pehkonen. It is very difficult just because of what Ron 
an alluded to. There is one reason why I opened up one new 
appliance store in 2004 and two, which I will be very honest, 
was very, very difficult. A retail establishment to train 
employees, to saw cut floors, to acquire leases, to acquire 
government entities in order to allow us to remodel in that 
fashion took an awful lot of work to move things up very 
progressively so that I could make sure and comply with what 
needs to be complied to be able to exercise the option of 
Section 179.
    If you just punt on it and wait, it is very difficult for 
business to plan future growth when they are unsure on whether 
or not they are going to be able to take advantage of the tax 
code in Section 179. A small business person that is unsure 
about something in the future usually is also going to pass on 
the opportunity of expanding their business.
    Mr. Beauprez. Anything you want to add, Mr. Lautzenheiser?
    Mr. Lautzenheiser. I don't know if I would totally vacate 
plans to grow just because of this particular code but it would 
certainly slow down. I would not open as many centers. Again, 
it goes back to the acquisition and timing and cost of capital. 
It is that simple. We went from 96 to 201 five years and then 
with 179 gave us the impetus to purchase an existing business 
and convert it to a Big O because of the write-off.
    The cost of the equipment was between $100,000 and $200,000 
so we could expense it immediately. It has significant impact 
and has caused us to move much quicker than we would have in 
2003. 2004 and 2005 we opened new centers and, of course, that 
is the longer planning process. The 179 if it expires in '07 
absolutely is affecting us right now as to what we will do 
absolutely. We will just stretch out our planning. That's all.
    Mr. Beauprez. Mr. Hau, if I might, did I hear you correctly 
that you utilized some of the provisions in the tax code here 
in Fort Collins built about $14 million of new real estate?
    Mr. Hau. That is correct. We do that obviously in 
conjunction with our clients, CPAs, but certain portions of the 
home improvements of buildings can be written off one time up 
to $100,000. They also qualified so that was a motivation. A 
majority of the people that built the office buildings in this 
one office park in '04 to get the buildings built and get the 
seals acquired before the end of the year to get that tax 
write-off on those qualified portions of the building.
    Mr. Beauprez. So you just answered a follow-up question I 
would have had which is what kind of buildings were these? 
These are office buildings?
    Mr. Hau. These are all office buildings. Medical and legal 
and psychiatrist and accountants and attorneys.
    Mr. Beauprez. Would it be fair to assume then from what you 
just said that in addition to growing your own business in the 
partnerships you are involved in, it created a whole bunch of 
other jobs and stimulus to the local economy?
    Mr. Hau. Not only in my case but, I think, overall in the 
economy. My personal opinion is probably 75 or 80 percent of 
those buildings would not have been built if the incentive of 
the initial write-off was not there.
    Mr. Beauprez. Can you guess how many people are working in 
those buildings now, or will?
    Mr. Hau. Oh, there has got to be 100. If you look at the 
construction part of it is pretty large. All the way through 
from the development of the land through the finalization of 
the buildings, all different aspects of the construction. 
Interestingly enough when you condominiumize a building it can 
also not just be one deduction per building. It is per 
condominium unit so the impact is pretty significant from the 
real estate side. At least the home improvement part of it.
    Mr. Beauprez. And last, especially when you talk about it 
being in real estate, those buildings aren't going away any 
time soon. It is a very permanent commitment to the local 
economy.
    Mr. Hau. Right.
    Mr. Beauprez. I guess last, at least for right now, Madam 
Chair, another observation. I am listening to all of you and 
your businesses and I guess it is great if you expand and add 
employees and such. I am guessing you did that, though, in 
reaction to some growing demand. If I could just add a further 
observation about the tax bill that we did pass, we increased 
things like the child tax credit and immediately sent folks, 
moms and dads, a check.
    We immediately reduced the tax burden on everybody who pays 
taxes. We created--we didn't create, they had already created. 
We just let a few dollars sit in people's pockets that wouldn't 
have otherwise been there so they could come to their rental 
shop, that they could come to the Maytag store, that they could 
exercise their own judgment in creating the demand to which I 
guess it is fair to say you all reacted to.
    It is funny how it actually does work out there if we put 
some good policy in place. I think you have highlighted very 
excellent policy and you have also highlighted why we really do 
need to do this sooner rather than later, whatever it is we are 
going to do. That would be my last comment. Again, from the 
Ways and Means Committee if you are unaware, I am going to 
guess that I am speaking very much on behalf of both the Chair 
and myself when I say if we had our druthers, we would make 
this permanent.
    Chairwoman Musgrave. Absolutely.
    Mr. Beauprez. We deal in kind of a funny world back there 
where we have to score things and you hear about how different 
legislation is scored. What that really means is what is the 
cost. We never measure the anticipated benefit of which you 
have testified to at some length, the benefit obviously. We 
estimate the cost of some legislation.
    In other words, the reduction of the federal treasury of a 
tax cut. We get tied up then in that funny budget mechanism 
when it is permanent, then the cost is almost incident the way 
we score taking into account no counterbalancing benefit. When 
you have only got a few billion, tens of billions, hundreds of 
billions, that is where we get put in our legislative box.
    That is our problem but it quickly becomes your problem. 
The only reason I went through that lengthy speech is so that 
maybe somebody reads in this testimony that we ought to change 
the way we do business back in Washington, too. With that I 
will yield back.
    Chairwoman Musgrave. Here, here. That is so true. We need 
to have a realistic way of looking at how our tax policy 
changes behavior and changes revenue that is coming into the 
federal treasury.
    I just have to comment to all of you, this is the American 
dream, owning your own business, working hard, moving up, 
creating jobs and affecting those families, those employee's 
families that work for you.
    I just wondered, Jim, if you could give us an idea of how 
many small businesses fail.
    Mr. Henderson. How many fail?
    Chairwoman Musgrave. Yeah, how many fail. Do you know? A 
lot of people want to own their own business. What is the 
success rate?
    Mr. Henderson. We have done quite a bit of analysis and we 
look at it more from the start and the stopping of the 
business, not that they failed because a lot of businesses go 
out of existence not because they failed but because of 
circumstances. They may be a mom and pop shop and they want to 
retire so they just close it down.
    There are other situations like that where businesses cease 
to exist. But our data shows that typically when you look at 
small businesses that start in one year, after a four-year 
period 66 percent of those will still be in existence. Now, 
that is substantially higher than conventional wisdom. You 
always hear that 90 percent of them fail in the first year. Our 
data does not support that.
    Brian Headd in our economic shop has done extensive work in 
this area. He has been quite recognized for some of his fine 
work in this arena. We think we are beginning to get a better 
handle on the starting and the cessation of business operations 
with the data that he has been working with.
    Chairwoman Musgrave. When I heard testimony from you folks, 
it occurred to me that success rate for businesses is going to 
be much higher if you can have a favorable tax environment. I 
would like you to comment on that. How does that help 
businesses when they are starting up?
    Mr. Henderson. You are absolutely right on the money. In 
fact, we just released a study last month that looked 
specifically at marginal tax rate and what affect that had on 
the willingness of people to enter into their own business 
operation or to cause them maybe to get out of business.
    The thing that it showed, surprise, surprise, if you got a 
lower marginal tax rate, more people were willing to take the 
risk, get in and try their idea. Conversely, the higher the tax 
rate, the more folks that found they were running into a 
situation maybe with some other troubles with their business 
operations and decided to call it quits rather than tough it 
out.
    What you do in terms of tax policy is critical to 
businesses. They look at a lot of different factors when they 
decide to open a business but tax policy is one that has a very 
important impact. As all the panel here who are on the streets 
and have testified, an expensing provision that has been 
increased as this one has needs to stay at that level, if not 
increased.
    That's one of the things that I asked when I called a 
number of small business consultants and accountants before 
coming here today. One of the things that was recommended was, 
you know, ``I've had three businesses,'' one of the accountants 
said, ``that have maxed.'' This could be 500. There are always 
people that can even use a little bit more help. They said, 
``At the minimum make sure they understand how vital it is that 
this cannot go back to $25,000.''
    Chairwoman Musgrave. Thank you very much.
    Ms. Jones, I really am intrigued by your resiliency and the 
story of the growth of your business. You did allude to the 
fact that because of this tax break you could pay for benefits 
for your employees. Could you comment on how this gives you 
more choice in your business?
    Ms. Jones. Well, by using the tax incentives, like I said, 
not only can I--you know, it is always a numbers game in 
business and you have to figure out what is the best for you. I 
think employees are the best part of the business anyway. 
Without my employees I don't have a business. Like I kind of 
said, I need to be able to retain good employees.
    If I don't have any kind of health insurance at all, they 
are going to go somewhere else. I actually kind of counsel a 
lot of my employees. They figure they are going to go somewhere 
else and they can maybe make a little more money somewhere 
else. When I show them what their benefits are to them and 
their families, then they stay. The almighty dollar is nice but 
when you have the welfare of your family to take care of, that 
is definitely help on that side.
    Chairwoman Musgrave. Does anyone want to comment anymore on 
predictability or certainty in regard to business growth?
    Mr. Henderson. If I may, Madam Chairman.
    Chairwoman Musgrave. Yes.
    Mr. Henderson. The Office of Advocacy has also done a study 
that looked at that. They found that predictability and 
permanence in the tax code is important but predictability is 
probably even higher so they can do the planning. That is one 
thing I heard loud and clear from our panel here. The length of 
time of the planning that they are doing, they are looking at 
'07, '08, '09 for some of their operations.
    With the tax code if we don't know what is going to happen 
for sure after '07, it just creates this cloud. Once you get a 
cloud in front of it like that, it creates the uncertainty to 
make good decisions. By having that permanency, and 
particularly predictability in the tax code you are going to 
enable the small business community to do much, much better 
than they will if there is any uncertainty. I know you can't 
eliminate all uncertainty but what you can do to reduce the 
degree of uncertainty would be monumental.
    Chairwoman Musgrave. Thank you. Mr. Beauprez, anymore 
questions?
    Mr. Beauprez. Less a question and maybe an observation 
again here. I think there is a perception out there in some 
quarters that if we give business, I would say, incentive, some 
say just a tax cut, but it works the same way, somehow that 
money kind of goes in their pocket or something. You buy a 
deeper down quilt for your bed. I guess if you are a down 
quiltmaker that is pretty good deal, too.
    What all of you have said is because of these tax 
incentives you have done exactly what I, of course, having been 
a business person before and understood you would do, you have 
invested it and you multiplied it and it magnifies. That is 
exactly how an economy gets going and how job growth works.
    This has been extremely valuable testimony and some real 
stories that I will be able to use and testimony I will be able 
to use when the Ways and Means Committee meets and we take up 
the issue of what do we do about the expensing and whether or 
not we can extend. Perhaps a miracle happens and we can make 
permanent this portion of the tax codes.
    I thank all of you for being here. Madam Chair, I applaud 
you for holding this hearing. The timing couldn't be more 
perfect nor could the panel. Well done.
    Chairwoman Musgrave. Thank you. I am encouraged by what 
this has meant to you and why this legislation is important. I 
thank you for your expertise and I applaud you for what you 
have done for the economy in Northern Colorado. This is where 
it is all taking place, where jobs are created. You are 
affecting our area in a very positive way and I want to thank 
you for taking time to be with us today because I am very well 
aware of how hard small business owners work. I thank you for 
your time. Thank you. This hearing is adjourned.
    [Whereupon, at 2:43 p.m. the Subcommittee was adjourned.]
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