[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON THE
INTERNET TAX MORATORIUM: THE POTENTIAL
NEGATIVE IMPACTS ON SMALL BUSINESSES
OF ALLOWING MORATORIUM TO EXPIRE
=======================================================================
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
OCTOBER 3, 2007
__________
Serial Number 110-49
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
U.S. GOVERNMENT PRINTING OFFICE
38-207 PDF WASHINGTON DC: 2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP,
Washington, DC 20402-0001
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
HEATH SHULER, North Carolina STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona TODD AKIN, Missouri
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas STEVE KING, Iowa
DAN LIPINSKI, Illinois JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa DEAN HELLER, Nevada
YVETTE CLARKE, New York DAVID DAVIS, Tennessee
BRAD ELLSWORTH, Indiana MARY FALLIN, Oklahoma
HANK JOHNSON, Georgia VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania JIM JORDAN, Ohio
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania JIM JORDAN, Ohio
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
HENRY CUELLAR, Texas DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania TODD AKIN, Missouri
MARY FALLIN, Oklahoma
.........................................................
(ii)
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
RICK LARSEN, Washington LYNN WESTMORELAND, Georgia,
DAN LIPINSKI, Illinois Ranking
MELISSA BEAN, Illinois BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
JIM JORDAN, Ohio
______
Subcommittee on Urban and Rural Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DEAN HELLER, Nevada
HANK JOHNSON, Georgia DAVID DAVIS, Tennessee
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
CHARLIE GONZALEZ, Texas LOUIE GOHMERT, Texas, Ranking
RAUL GRIJALVA, Arizona LYNN WESTMORELAND, Georgia
(iii)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
Braley, Hon. Bruce............................................... 4
WITNESSES
Bieron, Brian, eBay Inc.......................................... 5
Dewey, Brett, WickedCoolStuff.com................................ 7
McClure, David P., U.S. Internet Industry Association............ 9
Lieberman, Ross J. American Cable Association.................... 10
Keating, Raymond, Small Business & Entrepreneurship Council...... 12
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 31
Chabot, Hon. Steve............................................... 33
Braley, Hon. Bruce............................................... 35
Bieron, Brian, eBay Inc.......................................... 38
Dewey, Brett, WickedCoolStuff.com................................ 40
McClure, David P., U.S. Internet Industry Association............ 42
Lieberman, Ross J. American Cable Association.................... 44
Keating, Raymond, Small Business & Entrepreneurship Council...... 50
(v)
FULL COMMITTEE HEARING ON
THE INTERNET TAX MORATORIUM:
THE POTENTIAL NEGATIVE IMPACTS
ON SMALL BUSINESSES OF
ALLOWING MORATORIUM TO EXPIRE
----------
Wednesday, October 3, 2007
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360 Rayburn House Office Building, Hon. Nydia Velazquez
[Chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Grijalva, Braley,
Clarke, Ellsworth, Johnson, Sestak, Hirono, Chabot, Akin,
Fortenberry, Gohmert, Heller, Davis, Fallin, and Jordan.
OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ
ChairwomanVelazquez. Good morning. I now call this hearing
to order on the Internet tax moratorium, the potential negative
impacts on small businesses of allowing the moratorium to
expire.
With the advent of the Internet, electronic commerce has
been a driving force for economic growth in our country. Small
businesses in particular have played a vital role in the
digital economy where many entrepreneurs and Internet
connections can serve as an avenue to start a new business or
grow an existing one.
Today's hearing will focus on the Internet tax moratorium
and its spending expiration. Since 1998, federal law has
prohibited taxes on Internet access and has insured priority
between online and off-line sales.
As we have witnessed over the past 15 years, the Internet
has proven to be the great leveling field in American business
today, permitting small firms with fewer resources to compete.
In a recent survey of small business owners, 83 percent
reported that the Internet had improved communications about
their company. Additionally, over 60 percent stated that the
Internet has opened up new markets for their businesses.
The current moratorium has played an important role in
encouraging Internet sales for small businesses. However, with
many states and local governments under pressure to find
additional sources of revenue, some have advocated against
extinction.
Today's discussion will examine the impact the expiration
will have on small businesses competing in a technology driven
economy. It is fairly clear that the moratorium has been a
catalyst for the growth in E-commerce among smaller companies.
The current nondiscriminatory tax treatment has allowed many
small businesses to use the Internet as another medium to
expand.
While the overall degree of impact may be argued, the
growth by small businesses in Internet commerce cannot. eBay
alone reports that approximately 250,000 sellers make their
full-time living from home-based businesses. They are earning
unpredictable taxes, many of which will be regressive in
nature, could place small businesses at a disadvantage.
Studies have shown that a hike in these taxes could hit the
smallest E-retailers the hardest. It could also add significant
paperwork burdens for small businesses that simply do not have
the resources to meet the new requirements.
While some may discount the impact of higher access fees,
it is important to consider the overall price sensitivity of
the market. Assuming that Internet access is taxed similarly to
wireless communications, small businesses could see an upwards
of 15 to 30 percent increase in their Internet bill. For some
that could make the difference in the decision whether to
market products and services on line.
The moratorium was created as an economic policy to allow
small businesses to compete. The prohibition has made the
Internet a gateway for entrepreneurship, regardless of race,
income or neighborhood. Many of the most commonly known
Internet companies in the world, including eBay, Amazon, and
Google, started as very small Internet companies. We should be
careful to make sure we are not preventing the next Google.
At a time when small businesses face many obstacles, we
should be advancing policies that help small firms compete in
our digital economy. With the moratorium set to expire in a
little less than a month, it is important for the Committee to
fully understand the implications if Congress fails to act.
I appreciate the witnesses coming here to discuss this
important issue and look forward to your testimony.
I will now yield to the Ranking Member, Mr. Chabot, for his
opening statement.
OPENING STATEMENT OF MR. CHABOT
Mr.Chabot. Thank you, Madam Chair.
And good morning. I want to thank all of the witnesses for
being here today to examine the negative effects of allowing
the Internet tax moratorium to expire.
I also want to thank you, Madam Chair, for holding this
very important hearing, and I agree with almost all of the
comments, if not all of the comments, that you mentioned. I
think you are right on point.
Since 1998, Congress has insured that Internet access is
not subject to either state and local taxes or multiple and
discriminatory taxes on Internet commerce, regardless of the
technology consumers use to access the Internet. If the
moratorium is allowed to lapse, American taxpayers could be
exposed to countless new and onerous taxes from states and
municipalities simply for accessing the Internet.
The Internet has changed the way we communicate, as the
Chair mentioned, the way we learn and do business, all for the
better. Since the moratorium was first adopted, tremendous
investment, growth, and innovation in the scope and use of the
Internet has occurred.
By preventing unnecessary taxation of the Internet,
Congress fostered growth and productivity and innovation and
widened public access to information. While Americans use the
Internet for a myriad of reasons, E-commerce has particularly
flourished and continues to grow at an exceptional rate. In
2006 alone, online retail sales exceeded $100 billion,
increasing 24 percent over the previous year.
This is especially important to small businesses as the
Chair mentioned. An Internet connection opens doors to the rest
of the world. No longer must an entrepreneur focus his or her
marketing strategies to just their neighborhood. With the
advent of the Internet, the world is their neighborhood and,
quite literally, the sky is the limit.
Although this expansion is impressive, there is still more
that we must do to insure equal access among all Americans.
Internet usage still lags behind in rural and lower income
areas, and many experts have reported that the United States
has fallen from fourth to around sixteenth in broadband
deployment since 2001.
In order to reverse this trend we must keep Internet access
costs as a minimum. Prohibiting unnecessary taxes will help
accomplish this goal.
In addition to making the moratorium permanent, I believe
we ought to reexamine the grandfather clause as well. I have
been and still am concerned about this provision because I
believe it rewarded a handful of state tax administrators who
rushed to tax Internet access.
With America's small businesses already strapped with high
legal costs, regulatory burdens, onerous taxation, high energy
prices, and rising health care costs, they should not be
slapped with new taxes on Internet access. Simply put, allowing
the moratorium to expire would result in a tax increase on
small businesses and on American families.
Permanently extending the moratorium would allow the
unfettered growth of the Internet and E-commerce to continue.
Tax cuts, innovation, and the free market are the surest
formula for economic growth and prosperity. The surest way to
stifle achievement, progress, and growth is to involve the
government.
The evolution of the Internet has directly contributed to
the growth of the U.S. economy. As Internet usage has grown, so
has E-commerce. Every day millions of Americans are online
making various transactions from buying products to managing
their bank accounts. By making permanent the Internet tax
moratorium, Congress can assure that this vital tool remains a
key driver of economic growth.
Again, thank you, Madam Chair, for calling this hearing on
such a critical and timely issue. I look forward to the
witnesses' testimony, and I yield back the balance of my time.
ChairwomanVelazquez. Thank you.
And now I recognize Mr. Braley for an opening statement.
OPENING STATEMENT OF MR. BRALEY
Mr.Braley. Thank you, Madam Chairwoman, and thank you for
holding this hearing.
As the Chair of the Contracting and Technology
Subcommittee, I work with Ranking Member Davis very often to
talk about the intersection of issues of technology and their
impact on small businesses, and that is why I am so pleased
that we are having this hearing today.
We are here today to talk about an important issue, the
Internet tax moratorium, which began in 1998 and is set to
expire on November 1st. That is why it is essential that we
take a look at this issue now. The expansion of electronic
commerce in this country can be directly related to the
affordable Internet access and tax parity between online and
off-line sales.
The Internet, as we all know, has become a huge economic
development tool, especially for small businesses, many of
which are located in remote parts of this country. If we make
this moratorium permanent, this will allow these small
businesses to know what costs they will be dealing with as they
attempt to start new ventures or expand upon an existing one.
Many of these small businesses will go on to become large
Internet companies and have the potential to employ thousands
of Americans and add billions of dollars to our economy. eBay,
which has already been mentioned, is one of the companies
represented by our panel today, is certainly a prime example of
this.
We as a government have a responsibility to promote a
permanent tax moratorium on the Internet when there is still so
much untapped potential in the electronic commerce industry.
That is why I am a proud co-sponsor of H.R. 743, the Permanent
Internet Tax Freedom Act. In addition to helping small
businesses grow, a permanent Internet tax moratorium will help
insure that all Americans can afford Internet access. It will
also promote further broadband deployment in rural areas, such
as in many parts of my district in Iowa, which still lack
affordable access to high speed Internet.
If taxes on Internet access are raised, the number of
consumers who are able to afford it will go down. If the
Internet were taxed similarly to wireless communications, many
consumers and small businesses would see upwards of a 17
percent increase in their Internet bill. For small companies
operating on thin profit margins, this increase could make the
difference between their success or failure.
I look forward to hearing from our witnesses today and
hearing how an extension of the tax moratorium would affect
each of them. It is essential that we act promptly on this
legislation to extend the Internet tax moratorium before the
current legislation expires on November 1st. Our nation's small
businesses are counting on us.
Again, thank you, Madam Chairwoman, and thank you to the
witnesses for joining us today.
ChairwomanVelazquez. Thank you.
Does any other member seek recognition for the purpose of
an opening statement?
[No response.]
ChairwomanVelazquez. I also want to take a moment to
introduce a new member of this Committee, Mazie Hirono. She is
currently serving her first term representing the Second
District of Hawaii in Congress. She sits on the Committee on
Education and the Committee on Transportation and
Infrastructure.
She recently joined the Committee on Small Business. Ms.
Hirono is welcome to this Committee.
Ms.Hirono. Thank you, Madam Chair.
ChairwomanVelazquez. And so we are going to start with our
witnesses. Our first witness is Mr. Brian Bieron. Mr. Bieron is
the Senior Director of Federal Government Relations for eBay
Inc.
Founded in 1995, eBay Inc connects hundreds of millions of
people around the world every day empowering them to explore
new opportunities and innovate together. eBay Inc. does this by
providing the Internet platforms of choice for global commerce,
payments and communications. Since its inception, eBay has
expanded to include some of the strongest plans in the world,
including eBay, Paypal, Skype, Shopping.com, and others. eBay
Inc. is headquartered in San Jose, California.
Mr. Bieron, you will have five minutes to make your
presentation. Welcome.
STATEMENT OF BRIAN BIERON, SENIOR DIRECTOR, FEDERAL GOVERNMENT
RELATIONS, eBAY INC.
Mr.Bieron. Thank you very much.
Madam Chairwoman, Ranking Member Chabot, and members of the
Committee, I would like to thank the Committee for giving eBay
this opportunity to discuss the importance of the Internet
access tax moratorium to small businesses.
At eBay, first of all, we agree with the opening
statements. They are far more eloquent than mine will be. So
thank you for beginning on such a high note.
We believe that the Internet is a good thing. We believe
that it is a remarkable, revolutionary, empowering technology.
Of particular importance to this Committee should be the fact
that the Internet is a powerful force supporting American small
business success in the global 21st Century economy.
Today small retailers across America are using eBay to
reach a global customer base. Some are primarily eBay based
businesses. Many use eBay as well as other Internet channels to
reach Internet enabled consumers.
Finally, more and more traditional brick and mortar
retailers are augmenting their storefront business with
Internet sales. All in all, we estimate that over 720,000 small
businesses use eBay in the United States as a primary or
secondary marketing channel.
The evolution of brick and mortar small businesses adopting
the Internet is a particularly interesting story. There was a
time when many traditional small business retailers seemed
threatened or maybe awed by the Internet. It was a ``gee whiz''
technology that might make sense in Silicon Valley, but what
did it have to do with a small retailer trying to stay afloat
on Main Street in towns and small cities across America?
The reality of the past decade is that the Internet has
proven to be a remarkable tool for those small businesses. In
the retail industry, small entrepreneurs face a world of global
behemoths. Those multi-billion dollar businesses source product
globally and use technology to relentlessly increase efficiency
and drive down prices.
Mega retailers have been relentlessly pressuring small
business retailers for decades. In a word, the Internet has
been a lifeline for many of those small businesses. The
Internet allows a small retailers to tap into the global
economy in two key ways.
First, the small business can use the Internet, the
ultimate open and level playing field, to reach a global
customer base. For example, approximately 15 percent of the
sales of U.S. small businesses using eBay are cross-border
sales, and those numbers are going up.
Yes, eBay is enabling a small business export success
story. This holds tremendous hope for U.S. small business
growth.
Second, the Internet increasingly allows small businesses
to source their products globally. The mega retailer is a
global giant buying from factories in every country of the
world and selling from stores in every corner of America. Now,
the Internet allows the small retailer to likewise find the
best products at the best prices anywhere in the world.
So what does this mean for your consideration of the
Internet access tax moratorium? We believe that you should take
up the mantle of Internet enabled small businesses and call on
your colleagues to extend the moratorium on access taxes and
multiple indiscriminate taxes on the Internet permanently.
By the way, along with learning quite a bit from our
community about how small businesses use the Internet, we also
think that we have learned a little bit about how markets work.
In fact, eBay has often been called the most perfect market.
Our marketplace is super efficient benefiting hundreds of
millions of consumers worldwide and hundreds of thousands of
small businesses.
We know that when you raise prices you reduce demand.
Anybody or any study that tries to make the case that even if
you raise prices you will not reduce demand is highly suspect
on its face. If taxes on Internet access go up, fewer small
businesses will use the Internet.
More importantly, fewer consumers will use the Internet,
and for small businesses using the Internet, that means fewer
sales and less opportunity to compete with the big retailers.
That is bad news.
So in conclusion, we support maintaining the core
regulatory principles that have underpinned the Internet as a
small business success story. On the tax front, this includes
policies such as the tax free treatment of Internet access.
This Committee should make a strong statement for small
business by calling on your House leadership to rapidly bring a
permanent tax moratorium to the House floor.
Thank you, and I am happy to answer any questions.
[The prepared statement of Mr. Bieron may be found in the
Appendix on page 38.]
ChairwomanVelazquez. Thank you, Mr. Bieron.
Our next witness is Mr. Brett Dewey. Mr. Dewey is the
President and CEO of WickedCoolStuff.com, which is based in
North Hollywood, California. Mr. Dewey's company, owned by him
and his wife, sells toys, tee shirts and other small gifts
exclusively online.
Started in 1999, it employs six full-time employees
throughout the year and increases its staff during the holiday
season. Mr. Dewey's testimony will focus on the potential
negative impacts that an expiration of the moratorium will have
on a business such as his.
Welcome, sir.
STATEMENT OF BRETT DEWEY, CEO, WICKEDCOOLSTUFF.COM
Mr.Dewey. Thank you, Chairman Velazquez, Ranking Member
Chabot, members of the Committee.
Good morning. Thank you for inviting me to be here today.
It is quite an honor.
My name is Brett Dewey, and I own a small online company
called WickedCoolStuff.com that sells toys, tee shirts, and
other gifts that we think are wicked cool.
I hope my testimony helps explain some of the importance of
extending the Internet tax moratorium. Unlike a lot of people
you may hear from, I am not part of a formal coalition or any
an experienced insider. In fact, this is the first time I have
done more than vote or write a letter to my Congressman.
I got here using frequent flyer miles earned on my company
credit card. I am sleeping on a friend's sofa. I have to say
this room seems a lot smaller on TV.
WickedCoolStuff.com is a real, live Mom and Pop operation.
My wife Cynthia and I run the company out of a warehouse in the
San Fernando Valley region of North Hollywood, of Los Angeles.
Our son Alex is almost three and primarily helps by playing
hide and seek among the shelves and boxes.
We have five full-time permanent employees, and as the
Christmas holiday approaches, we will probably add eight full-
time seasonal staff to help with the rush.
Cynthia and I provide health insurance to our full-time
employees after they have been with us several months, and we
would like to do more, but we cannot afford to. We try to be
good employers and good community members. We believe that
makes good business and is the right thing to do.
The Internet tax moratorium has been in place since before
we started WickedCoolStuff.com eight years ago. Letting it
expire now would be a new tax on our small business and one we
cannot afford.
Just like every other small business, ours has its ups and
downs. Right now, like many small, online retailers we are in a
down. We are taking steps to improve sales, and I am optimistic
we are headed for another up. But a new tax right now would be
devastating to our business. At the moment we are looking up,
but a new tax would have us looking out.
We started WickedCoolStuff.com eight years ago in a spare
bedroom. When the boxes took over the living room, den, garage
and started to creep into the kitchen, we decided it was time
to get a warehouse. Since then we have grown to as many as
seven full-time employees and sales over 1.3 million at our
peak, down to our current level of five full-time employees and
projected sales of under a million this year.
In our best year, Cynthia and I paid ourselves about
$60,000, although this year we are unlikely to draw any salary,
relying on savings and a home equity line to keep our home
running.
I have prepared a small chart that is included in my
written testimony to help explain the financial realities of a
small company like ours and why letting the Internet tax
moratorium expire now would be so devastating. These numbers
are based on our experience, and while they may not withstand
an IRS audit, they give you a pretty good idea of what it costs
to run a very small business like ours.
The handout is for a hypothetical company called
HypotheticalExamples.com. An online retailer expects to sell a
million dollars of small plastic hypotheticals this year. Most
of the company's income goes to buy wholesale goods, which cost
about $500,000. Another 200,000 goes to shipping those goods
both from the wholesalers to the warehouse and then again out
to the consumers; $135,000 for salaries, none of which goes to
the owners; 17,200 goes to health insurance; 15,000 for payroll
taxes; rent is 33,500; marketing is another 34,000; Internet
and E-commerce hosting, 19,000; another 9,950 to various local
taxes and workmen's compensation; $34,000 goes to utilities,
bookkeeping, bank fees and insurance. That leaves just under
$2,000 for the owners of HypotheticalExamples.com to share as a
salary, which comes to roughly 17.50 a week each.
While this may not sound like WickedCoolStuff.com and may
sound like less, the numbers are drawn from our experiences. It
is not our company. We are unlikely to do even that well this
year. Cynthia and I are working hard to turn our company
around, and we are confident we can. We are actively adding new
features, new products, and trying new marketing.
But letting the Internet tax moratorium expire would derail
those efforts and with it our company. Our options would be to
lay off employees, stop providing health insurance for our
staff, and their families rely on it, or close our doors
completely.
A new tax now would be the equivalent of changing the rules
in the middle of a game we are currently not winning.
Thank you, again, for inviting me here today. I hope that
my testimony has been helpful. Typically I would give you all a
WickedCoolStuff.com gift certificate or a Star Wars bobble head
as a thank you, but I understand there are rules about that
sort of thing.
[Laughter.]
Mr.Dewey. Instead, I encourage you to visit our Web site
and purchase one for yourself and your staff and maybe your
constituents. We could use all of the help.
I look forward to your questions.
[The prepared statement of Mr. Dewey may be found in the
Appendix on page 40.]
ChairwomanVelazquez. Sure. Thank you very much for you
testimony.
Our next witness is Mr. David P. McClure. He is the
President and Chief Executive Officer or the U.S. Internet
Industry Association, the primary U.S. trade association for
Internet commerce and connectivity.
Mr. McClure has written and lectured extensively on
management and technology issues and is considered an authority
on strategic business planning, telecommuting, technology
policy, and technology integration for businesses with members
of every site engaged in virtually every facet of the Internet.
USIIA works to craft a business environment in which Internet
companies can thrive.
Welcome, sir.
STATEMENT OF DAVID P. McCLURE, PRESIDENT AND CEO, U.S. INTERNET
INDUSTRY ASSOCIATION
Mr.McClure. Thank you very much.
Chairwoman Velazquez and members of the Committee, thank
you for the opportunity to speak.
My name is David McClure, and I am President of the U.S.
Internet Industry Association. For 15 years, we have been a
trade association that serves businesses engaged in Internet
connectivity, online content, and electronic commerce. Our
members, the majority of which are small businesses, are
concerned that without your action they are going to
immediately be subjected to multiple, discriminatory,
retroactive and crippling taxes. The impact of allowing the
Internet Nondiscrimination Act to expire without extension
would be felt specifically in three ways by small businesses.
First, they would see an immediate loss of customers. It
was alluded to before by Mr. Bieron, and we have data to back
it up, that Internet connectivity is price elastic. That means
as the price goes up, demand and use goes down.
Studies by Ernst & Young, by the University of
Massachusetts and others have confirmed this elasticity. You
can also look at the data by the Pew and Internet Life Project,
which for the past decade has tracked this extensively. If
taxes are permitted that would raise the cost of basic Internet
access and raise it by as much as 30 percent, by the way, the
predominantly working families that are not on the Internet
today would not be able to get there, and families that now
have basic Internet access would not be able to afford it any
longer.
Secondarily, there would be a loss of opportunities for
small businesses to survive and to grow. In today's economy,
small businesses in America are able to compete globally due in
part to this nation's superior infrastructure. The Internet
backbone, our rich diversity of broadband, and the growing
wireless network spanning almost every corner of the nation,
but the growth of this infrastructure depends on sustained and
increasing levels of private investment. We are looking at as
much as one trillion dollars that will need to be invested
between now and the year 2015.
If the tax moratorium is not extended, states and
localities by their own numbers will take about 35 billion
dollars a year out of our industry in taxes and that does not
count the cost of compliance. That is raw taxes.
If you add that up, between now and 2015, that is $320
billion. That is almost a third of the trillion dollars we are
going to need to build and sustain the kind of broadband
network this country needs and deserves.
Again, that is not counting the cost of compliance. And I
want to talk about the cost of compliance because that is
really the most crippling effect. Look. We know from an Ernest
& Young study of the cost of compliance for sales taxes that
the burden is disproportionate. If you look at companies
selling nationally with collection responsibilities for taxes,
in the 46 states that do collect taxes, 14 percent of their
sales go to sales taxes, 14 percent for a large company.
For a mid-size company, that goes up to 48 percent, but
here is the shocker. For a small company, 87 percent of their
sales tax goes to the cost of compliance. These are companies
that do not have fully staffed tax compliance departments. They
cannot afford it. They are not going to be able to maintain it.
The original Internet Tax Freedom Act was not as some have
retroactively suggested, an effort to give states time to find
a better way to tax. I was there. I helped draft the Internet
Tax Freedom Act in 1998 for Senator Wyden, and it was an
alarmed and informed response to a significant pattern of
abusive, punitive, and destructive taxes passed by local
authorities with little regard to how their actions would
affect consumers, businesses, the economy or our national
interest.
It was Congress' way of putting an end to this abuse. John
Marshall, the U.S. Supreme Court Justice who shaped much of our
Constitutional law, noted that the power to tax involves the
power to destroy; that the power to destroy may defeat the
power to create. There is no clearer example of how this abuse
of power and its negative impact on creativity will affect us
than the imposition of multiple discriminatory and predatory
taxes on America's small businesses.
Thank you.
[The prepared statement of Mr. McClure may be found in the
Appendix on page 42.]
ChairwomanVelazquez. Thank you, Mr. McClure.
Our next witness is Mr. Ross Lieberman. Mr. Lieberman is
the Vice President of Government Affairs for the American Cable
Association.
Based in Pittsburgh, the American Cable Association is a
trade organization representing 1,100 smaller and medium size
independent cable companies who provide broadband services for
more than eight million cable subscribers primarily located in
rural and smaller suburban markets across America.
In his role with ACA, Mr. Lieberman is the trade
association's senior government advocate overseeing all Capitol
Hill and Federal Communications Commission activities.
Welcome.
STATEMENT OF ROSS J. LIEBERMAN, VICE PRESIDENT OF GOVERNMENT
AFFAIRS, AMERICAN CABLE ASSOCIATION
Mr.Lieberman. Thank you.
Chairwoman Velazquez, Ranking Member Chabot, and members of
the Committee, thank you for inviting me to testify on the
Internet tax moratorium and how its potential expiration would
impact small cable and broadband providers and consumers across
the country.
My name is Ross Lieberman, and I am Vice President of
Government Affairs for the American Cable Association. In a
telecommunications world that is dominated by industry giants,
ACA is the voice for nearly 1,100 small and medium sized cable
companies that serve more than eight million subscribers. Our
members range from family run cable businesses serving a single
community to multiple system operators that focus on smaller
markets in rural areas. The average operator size is about
7,500 subscribers, but some ACA members serve fewer than 1,000.
ACA members are vital businesses in their communities. In
addition to providing broadcasting cable programming, many of
our members offer unique local programming, such as high school
sporting events and religious services that are not available
from satellite TV companies. Most importantly for the purposes
of this hearing, our members are rolling out high speed
Internet access in their communities where no other company
offers it.
The ACA supports continuing the Internet tax moratorium. At
a time when the costs of running their businesses are
increasing, small cable operators are deploying broadband
despite the financial hurdles of offering such services.
Congress can safeguard these investments and insure high speed
Internet access remains affordable by passing legislation that
prevents state and local governments from imposing taxes on
these services.
Small cable providers offer broadband services at
reasonable prices. Operators in rural America where the median
household income is below national averages are particularly
aware that their customers cannot afford to over spend on
products and services, including high speed Internet access. If
broadband is priced too high, then take rates will suffer.
Our members face various economic challenges offering
broadband in their markets. First, the cost to upgrade a cable
only system to provide Internet access is more difficult to
recoup for operators with a small number of subscribers.
Whether serving 5,000 or 500,000 customers, cable operators
must purchase some of the same equipment.
Second, the cost of maintaining a cable network is high
when the distance among subscribers is great. A small cable
company might need an employee to travel an hour or more to
make a service call to a subscriber's home.
Third, access to capital can be difficult. To pay for the
necessary upgrades and maintenance costs, many of our members
must turn to bankers on their local main streets, not
financiers on Wall Street.
At this time, small cable operators' overall business costs
are increasing. The most significant concern for ACA members is
the rising cost of cable and broadcast programming. Small cable
operators have no leverage in negotiations with network
broadcasters and national programmers who demand double, even
triple the fees previously paid for the same content.
Small cable operators are also troubled by costly
regulations, particularly new ones recently placed upon them by
the FCC. On June 1st, the Commission mandated that cable
operators begin to apply more expensive digital set top boxes
with separable security to their subscribers.
Then on September 11th, the Commission adopted rules that
force cable operators to carry certain broadcast stations in
both digital and analog formats, requiring our members to make
costly upgrades to their systems. This is important. These
costs are making it difficult for our members to remain viable
and reinvest in affordable advanced services for their
communities.
The ACA supports continuing the Internet tax moratorium and
urges Congress to pass legislation before the ban expires on
November 1st. Our members are concerned that an expiration of
the moratorium could have an unfavorable impact on their
businesses and communities. Without the moratorium, state and
local jurisdictions are likely to impose a patchwork of new
taxes on American consumers and businesses simply for acquiring
the broadband connection. These taxes would increase prices and
make Internet access less affordable for consumers.
New taxes on broadband access would be especially
problematic if excessive state and local cable taxes were
simply extended to the Internet. Most cable subscribers already
pay a franchise fee of up to five percent. Imposing similar
taxes on broadband access would discourage some consumers from
signing up for the service.
To tax a service that is neither fully deployed nor adopted
seems to contradict congressional intent to expand broadband
coverage and penetration.
Our members who live in the towns in rural areas they serve
also support the Internet tax moratorium because they know
first hand how broadband access has improved their communities.
It has made their towns a better place to live, work and raise
a family.
In addition to offering the service to consumers, some of
our members provide broadband to their local hospitals,
schools, and businesses, enhancing their home town's overall
quality of life. At a time when the benefits of these services
are coming to rural America, our members believe government
should continue to take its hands off approach with respect to
taxes.
Chairwoman and members of the Committee, thank you again
for the opportunity to testify on this topic of importance to
small cable operators and consumers.
[The prepared statement of Mr. Lieberman may be found in
the Appendix on page 44.]
ChairwomanVelazquez. Thank you very much, Mr. Lieberman.
Our next witness, Mr. Raymond Keating. Mr. Keating is the
Chief Economist at the Small Business & Entrepreneurship
Council.
SBEC is a small business advocacy group with more than
70,000 members across the nation. As Chief Economist, Mr.
Keating writes and speaks on a wide range of issues impacting
the entrepreneurial sector of the economy.
Furthermore, he is an expert on taxation, federal, state
and city budget issues, and a host of other small business
issues.
Welcome, sir.
STATEMENT OF RAYMOND KEATING, CHIEF ECONOMIST, SMALL BUSINESS &
ENTREPRENEURSHIP COUNCIL
Mr.Keating. Thank you very much.
Chairwoman Velazquez, Representative Chabot, members of the
Committee, I very much appreciate you having this hearing today
and inviting us to speak.
As you mentioned, I am Chief Economist with the Small
Business & Entrepreneurship Council. We have members all across
the nation. We are nonpartisan, nonprofit, and we work on
public policy issues really from A to Z that impact small
businesses and entrepreneurs, and that obviously includes the
Internet tax moratorium, the moratorium on Internet access and
multiple and discriminatory E-commerce taxes.
And we strongly favor making that moratorium permanent. I
would like to touch on four points very quickly regarding this
issue. The first one is the economy, and as we all know, I
think the watchword right now in the economy is uncertainty,
and you can look at a whole host of issues, positives,
negatives.
On the negative side, you have energy costs, housing and
sub-prime lending problems, consumers being somewhat less
confident, and some recent disappointing reports on retail
sales and manufacturing production.
On the flip side, there are positives. There is certainly
rising household net worth, increasing investment in
nonresidential structures. Exports look good, and there is good
growth in real disposal personal income in recent months.
And then, of course, there is a whole host of mixed issues
out there right now. Real GDP growth was pretty good in the
last quarter, but not so great since late 2005. A critical
issue is private domestic investment, private sector
investment. That was up again in the most recent quarter, but
it was down in the previous three. And of course, employment
growth is a big issue, and we saw that the last month that we
have data for that was not good news. But if you look back a
little farther, there certainly are positives.
So in this mix comes tax policy, and it certainly matters a
great deal. And, again, there is a lot of uncertainty there. If
you look at the broader tax issue of the 2001 and 2003 tax
measures, those are due to expire soon. So what is going to
happen there? Obviously entrepreneurs and small businesses are
very concerned. Are they going to be extended? Are they going
to be made permanent? Are some of them going to be allowed to
expire and thereby imposing a large tax increase?
And the Internet tax moratorium access on the Internet
taxes, on Internet access is a big issue there, and it is
another uncertainty for many small businesses. The possibility
that states and localities could be imposing tax increases on
Internet access in E-commerce would loom as a very big
uncertainty and a very big problem for a lot of small
businesses. That is number one.
The second issue that I would like to talk about is
broadband access and investment. Higher taxes on Internet
access would mean that the growth in broadband access would be
restrained, and that would take a competitive disadvantage that
we have right now and make it worse.
You will see in my written comments that we broke out a
table on where the U.S. ranks in terms of broadband household
penetration rates among various developed nations and
unfortunately come in last. So creating more uncertainty and
opening the door to higher Internet taxes are not positive
policy developments for investing in those networks.
All of these things obviously affect small businesses, but
then there is the direct impact on small business. They will be
hurt in various ways. Obviously the taxes they pay for Internet
access, the reduced customers via the Internet and their goods
and services potentially facing multiple and punitive levels of
taxation. These are all significant negative threats to the
bottom line of small businesses across the country.
As many people have mentioned here so far today,
advancement in the computer and telecommunications technologies
have been invaluable for the success of small businesses, and
that is a big reason why we need to make this Internet access
tax moratorium permanent.
And the final issue I would just like to bring up is about
state and local government. There are many state and local
officials that do not like the idea of a permanent band on
Internet access taxes. Unfortunately, folks tend to view the
Internet as a cash cow to be milked rather than a source of
economic opportunity for all, and the argument is often made
that without these additional revenues, somehow or other we
will be denied the revenues for necessary services, vital
services from state and local governments.
But when you look at the numbers, it is really hard to
accept that, I think. Really state and local governments have
been quite literally in the taxpayer dough. When you look at
total revenues, from 1995 to 2005, that is the most recent data
that we have from the Census Bureau, total revenues went from
1.4 trillion to 2.5 trillion for state and local governments
across the country. That was a 78 percent increase compared to
about 22 percent in inflation over that same period, and part
of that was sales and gross receipts taxes, and those jumped 62
percent over that period.
And of course, keep in mind more revenue in the hands of
government means fewer resources left in the private sector for
consumption, investment, and job creation. If Congress wants to
hamper the Internet and related economic opportunities in
growth, then clearly this Internet tax moratorium should be
ended, but if they wish to see the full potential of the
Internet realized, then the current tax moratorium should be
made permanent.
Thank you very much, and I look forward to your questions.
[The prepared statement of Mr. Keating may be found in the
Appendix on page 50.]
ChairwomanVelazquez. Thank you.
And now I would like to address my first question to Mr.
Dewey. Not only are you a voter, but also you are a real
person. It is really great to have real people here.
I assume that affordable broadband access has been a
crucial factor in allowing you to effectively operate your
online store. Would you have been hesitant entering this
industry had you known the rules of the game could possibly be
changed and new or unpredictable taxes could be levied on your
business?
Mr.Dewey. Oh, yeah. It is making me nervous right now. We
have got a business model set up, and as I stated before, it
has been a shaky year. So if you throw something new at me or
something unpredictable or something where I have got to take
care of taxes in many different places, then definitely it is
going to affect our business in the negative.
ChairwomanVelazquez. Thank you.
Mr. Bieron, due to the fact that many states did not have
the ability to tax Internet access when the moratorium was
enacted, there is very little data as to what an Internet
access tax might look like. Of the states that are levying
Internet access taxes, Hawaii levies its general excise tax,
New Hampshire its communication services tax, and Washington
State its business and occupation tax.
If there is a way to predict, what services will be taxed
if the moratorium was not extended and at what rate?
Mr.Bieron. I mean, I would agree that it is very difficult
to predict, although some of the witnesses have referred to
some either current cable level taxes or current cellular phone
level taxes. I think at eBay we are concerned about two things.
First of all, whatever type of tax they choose to just levy
on access, it is going to reduce demand, and so in particular,
reducing consumer demand is a bad thing in the business that we
are in, and more importantly, in the business that our small
business retailers are in.
But then, half of the regime is also the prohibition on
multiple and discriminatory taxes. We have always looked at
that as the prospect that if that prohibition is not there, the
incentive is created at the state and local level to
potentially try to use taxes to discourage distant type of
businesses where local business interests could attempt to
encourage their elected representatives at the local level to
impose taxes that would give them a benefit because it would be
a higher level of tax on Internet enabled businesses.
We think that the--and honestly, only people's creativity
and, more importantly, government's creativity to structure
taxes would limit how that could be done.
And so we would simply see that as a great danger. If you
open up that flood gate, it is hard to predict how it would be
used, but certainly any small business that is trying to use
the Internet to reach customers far away potentially competing
with business locally, I mean, we see the future as essentially
small business everywhere adopting the Internet to help run
their business, but that creates, unfortunately a competitive
dynamic that would be bad.
ChairwomanVelazquez. That was my follow-up question. Thank
you.
Mr. McClure, when Congress first passed the ban on Internet
taxes in 1998, the Internet did not provide many of the
services that we now use, such as music and video. Some say
that Internet service providers may attempt to bundle these
extra services with Internet access to avoid paying taxes.
Is it possible, given the way the moratorium is now worded,
that Internet service providers may be able to bundle services
together to avoid taxation?
Mr.McClure. No, I think we have seen clearly that there has
been a division. After all, this law has not stood alone since
1998. We have gone through two revisions of it, and in both
cases the states and municipalities have had the opportunity to
come back and say, ``We are concerned about this issue,'' and
it gets addressed in those processes.
What I find interesting now is they are using as an
example, voice-over IP that somehow if voice-over IP is
included in this taxing regime, that they will be able to
bundle them and somehow be able to avoid taxes. That is not
really the case. The reality is the voice-over IP is an
Internet service. It is packet switched telephony, and it is by
virtue of federal court decisions not the venue of the state
under the Commerce Act, the commerce clause of the
Constitution.
It is not the purview of the states to tax it. So it is not
a question of somehow this act is preventing them from taxing
legitimate things they might otherwise tax. The carve-out is
very clear. We are not looking to expand it. We are simply
looking to protect what we see as protection of American
consumers against very predatory taxes.
ChairwomanVelazquez. Thank you.
And in light of the members that are here, I am going to
recognize Mr. Chabot, but once we finish with all the members,
I will come back and ask more questions.
Mr.Chabot. Thank you, Madam Chair.
Mr. Dewey, I think I will start with you as well. We were
just going on one of our Blackberries back here on your Web
site, and we think it has got a great Web site.
[Laughter.]
Mr.Chabot. But I was just thinking with your name, the
WickedCoolStuff, which is a very clever name, I think, you
know, if we had started a business like this, if I had the
money, say, back in high school and a good idea and the
Internet existed back in the late 1960s when I was in high
school, we might have called it GrooveyStuff or FarOutStuff or
something like that.
I am just wondering if the name. Are you concerned that it
might be dated down the road and WickedCool might be pretty
lame somewhere down the line?
Mr.Dewey. Not a concern yet, but we are always looking to
the future.
Mr.Chabot. Good. What are some of your better selling
items, shall we say? We will give you a little free advertising
here.
Mr.Dewey. One constant seller would be the classic Superman
tee shirt. We sell that big S logo worldwide around the world.
Every day we sell a shirt like that. We sell tee shirts and
bobble heads and gift items and things like that, movie and
cartoon inspired items that people enjoy and especially at gift
time.
Mr.Chabot. Very good, and we wish you the best. I hope
there are a lot of folks that take your example and create
jobs, and I especially was impressed, and I think the Chair was
as well, that you are paying health care for your employees
even though you are not rolling in the cash yet. Hopefully you
will be some day. But our compliments for that, and that has
been one of the goals of this Committee, to find ways to make
health care more affordable, especially to more small
businesses around the country.
But thank you for having the courage to, and I hope you
stick with it and I hope you are successful, and our
compliments to you.
Mr. Bieron, if I could go to you next, some people have
said that E-commerce is destroying Main Street retailers, but a
recent study of historic Main Street downtowns found that they
are having an economic renaissance with E-commerce, as you
mentioned, attracting customers to them from around the world.
Would you comment a little bit on that again?
Mr.Braley. No, that is absolutely a trend that we think has
emerged in the last sort of recent years. I mean, Internet
time, people joke about Internet time. Things happen really
quickly. Certainly when eBay was founded a dozen years ago,
there was no honest thought on the business side that this
would become in terms of sellers really a small business
engine. Just, I mean, nobody went to eBay originally because
they really wanted to work for small businesses.
That is how it has evolved. Likewise there was a time when
it was seen that the Internet was a threat. Now, as you have
said, increasingly your small Main Street business has a source
of supply of goods to sell. In many cases their biggest
inhibiting factor on the business side was traffic. It was
buyers, and you know, when you are trying to sell on the
Internet actually one of the big challenges is having that
source of something to sell.
And so the small business that currently exists with the
brick and mortar store, they already have that half of the
equation taken care of. The Internet gives them the other half
which, if they are effective in driving traffic, and eBay is a
way to get traffic, you know, it kind of completes that cycle,
and then suddenly you can do business.
And so, no, we absolutely believe that it is an engine that
is going to keep Main Street small business alive trying to
compete with the big box retailers who honestly over a number
of decades from our perspective really are the competitive
pressure that in many cases really hurts Main Street.
Mr.Chabot. Thank you.
Mr. McClure, would you talk briefly about many of us would
just go beyond an extension of the exemption on not taxing the
Internet, the moratorium? We prefer to make it permanent. Could
you talk a little bit about is there a cost to the uncertainty
to business by not making it permanent as far as planning into
the future?
Every couple of years you have got to wonder are they going
to start taxing us or not. Could you discuss that briefly?
Mr.McClure. Yes. We have seen that very clearly. I mean,
our companies, and we represent a great number of
infrastructure companies, not just large companies, but very
small rural companies, but they are independent small
businesses, and they have to lay out the money, and they have
to go to the investment markets to get it. Uncertainty raises
the cost of that money.
Uncertainty makes that money less available. Just as
uncertainty in the marketplace right now makes it more
difficult to buy a home, to get the loan to buy a home or a new
car, we are looking at that on a much grander scale. We are
talking about a trillion dollars.
So any time you inject uncertainty into the marketplace,
you are going to raise the cost of that capital, make it more
difficult to get and make it more difficult to achieve that
goal.
But let's look even beyond that, sir. Let's look at simply
what we want as a national policy. If we sit here today and say
we must as a national priority have broadband to every American
family, to every school child who needs to do homework, to
every senior citizen who needs it for health monitoring
services; if we want to put broadband, high speed, affordable
broadband to every corner of America, then how does it make
sense to say we are going to start down this road and then
erect a large barrier called $35 billion a year in new taxes on
that service?
It does not make any sense. If this is, in fact, the
nation's priority and if we're to believe virtually everyone in
this Congress, it is a priority and it does not make sense not
to make this a permanent tax moratorium.
We are not talking about E-commerce taxes. We are not
talking about the larger universe of taxes. We are talking
about a narrowly scripted tax that helps us to meet our
national goal of affordable broadband to every American. That
is how it makes sense, sir.
Mr.Chabot. Thank you.
Madam Chair, in the interest of time, I will let other
members and I will yield back, too.
ChairwomanVelazquez. Thank you.
Mr. Braley.
Mr.Braley. Thank you.
Mr. Keating, let me start with you. I made a reference
earlier in my opening statement to the impact that the Internet
has had in rural communities and rural small businesses. One of
the best examples of that from my district is a business that
creates high end lighting fixtures that move from the Bay area
in California to a remote community in Clayton County, Iowa,
Elkader, and is now marketing its products all over the globe,
and there have been a number of successful spinoff businesses
that have arisen from that as this community has embraced the
opportunities that come from Internet sales and marketing.
One of them is a product called Little Miss Match that
takes mismatched socks and mittens and sells them to young
girls who are a target audience that really embraces that
product.
But one of the things that I am interested in from you is
getting some sense of the geographic scope of the tax policies
we are talking about today based upon what you hear from your
members and how these tax policies impact them in places other
than our large urban shopping areas.
Mr.Keating. Well, I think you are hitting a critical area
as a topic in geography because small business owners in those
rural areas are probably the ones that have been empowered the
most, right? Because when you're in an urban setting, you know,
a dense suburban area, you have got a market at hand if you are
a Mom and Pop shop. But now the rural businesses are the ones
that are able to literally reach around the globe.
So it is a very exciting thing. Geography becomes less and
less of an issue. So it has been very exciting to look at how
those businesses have been empowered.
Now, what does it mean in terms of tax policy and how they
are going to be hurt? They are going to be hurt the most
because they are the ones that have to be able to reach out.
They are relying on this high tech, wonderful computer world we
live in, the Internet, to reach all of those customers, more so
perhaps than those companies in those other areas.
So it is most critical to them, and I think it is important
for members of Congress to keep in mind and, quite frankly,
elected officials at the state and local level, to keep in mind
the impact of taxation. Because of the Internet and because of
these technologies, businesses can become a lot more mobile.
I happen to live in New York. You do not have to live in
New York City or work in New York City anymore to make a nice
living or to start up a business and succeed. You can be in
South Dakota. You can be in Wyoming. You can be in Iowa.
So people in all of those states, all of those people that
are representing businesses have to keep in mind what is going
to happen if this moratorium goes away. What are the dangers to
small businesses in general, but also, what is going to be the
impact on the state if we decide to go ahead and do something
on the Internet access tax front.
Mr.Braley. Mr. McClure, following up on that idea, one of
the things that I think really transformed business
relationships in this country was the advent of E-mail
communications in addition to Internet shopping opportunities,
and how it enabled people, customers, suppliers, vendors to
develop personal relationships with people they never actually
had met in their lives.
And one of the astounding things that arose out of that is
when you would meet someone in person for the first time. You
had the sense that you were lifelong friends because you had
been communicating with them for so long.
Could you talk a little bit about some of the human side of
the explosion and the growth of Internet sales and how that has
impacted the future of the business that we have been talking
about here today that will be also impacted by this tax policy?
Mr.McClure. Yes, I can. And just for the record, I would
like to note, sir, that I am a Hawkeye class of '73. So let me
salute you.
[Laughter.]
Mr.McClure. I think we focus sometimes--it had to be said.
Mr.Braley. Let me say I am very proud of the fact that both
the Minority Staff Counsel and the Majority Staff Counsel, like
me, are University of Iowa College of Law graduates. So we
really are pleased to have you here today.
Mr.McClure. Thank you very much.
So often we focus on E-commerce, and we talk about the
miracle of electronic commerce without looking at the miracle
of communication, and you have hit it immensely there. Imagine.
I raised three children, and I can tell you first hand that
without Instant Messaging their social lives would have been
totally destroyed.
[Laughter.]
Mr.McClure. If you look today to the miracle that is
communication, it has happened largely because of the Internet.
Cell phones today are moving toward the Internet. Why? Because
that is the preferred method of communication. It has enabled
me to communicate with people around the world. My closest
friends now are in places like Germany and Australia. That
simply would not have happened when we were growing up.
It is an amazing technology, and if we move there into the
social networking sites, if we look at even what it has done to
jobs, your ability to find a job, your ability to find a mate,
it is an amazing process. Communication is the miracle of the
Internet, not just commerce.
ChairwomanVelazquez. Time has expired.
Mr. Fortenberry.
Mr.Fortenberry. Thank you, Madam Chair, for holding this
important hearing.
Mr. McClure, I want to give you a friendly warning. When
you tout your educational credentials as being from the
University of Iowa, you are also talking to Representatives who
have constituents that go to the University of Nebraska, but we
want to minimize tensions in this room.
[Laughter.]
Mr.Fortenberry. All on the same page in trying to think
about creative ways to expand the opportunities that have
exploded on the Internet.
So in fun, I appreciate your comments and your willingness
to be here.
I did want to ask you a direct question as well though. You
had made a comment that 87 percent of Internet taxation goes
toward compliance. I think we need to go back to probably what
was an original point stated. We need to be careful. We are
talking about two things, two issues here. One is taxation on
access to the Internet and taxation on Internet commerce. They
are separate entities, taxation on E-commerce.
I assumed you were talking about E-commerce sales tax
collections as 80 percent of that collection activity going to
compliance. Was I correct in that understanding?
Mr.McClure. That is correct, and I am sorry if there is
some confusion over that, but the data on sales tax collection
is the best data that we have in terms of percentage of
compliance. For small businesses, 87 percent of the cost of
collecting and remitting taxes is tied up in the sheer
compliance cost according to Ernst & Young.
Since we cannot effectively measure the impact of
collecting and remitting taxes on Internet access or multiple
and discriminatory taxes on E-commerce, this is the best proxy
that we have. And the point I was attempting to make is that
the level of compliance cost is disproportionate. For a large
company that already engages in multi-state activities and may
have nexus in multiple states, the cost is lower because they
have already absorbed and provided for that cost. Small
businesses have not.
So disproportionately this impacts small businesses to a
much greater degree than it would a large or even medium size
company. And that was the point I was trying to make.
Mr.Chabot. Would the gentleman from Nebraska yield for just
one moment?
Mr.Fortenberry. Certainly.
Mr.Chabot. If I could just ask for a clarification, did I
hear you say that if you collected the tax, 87 percent of what
you got, 87 percent was in just collecting it?
Mr.McClure. Yes, sir.
Mr.Chabot. The cost was in collecting it. So you only get
13 percent basically that the governments can use. The other 87
percent was just for compliance?
Mr.McClure. No, sir, because the 87 percent is absorbed by
the company. The amount of taxes they have to remit do not
change, but the cost of collecting and remitting those taxes
does.
Mr.Chabot. All right. Thank you.
I thank the gentleman for yielding and I yield back.
Mr.Fortenberry. Yes. I think that is an important point.
Let's just give a simple example. If a small company has
interstate commerce of $1,000, let's assume sales tax costs are
five percent in the particular state. That would be $50.
Therefore, I am going to get stuck doing some math here. That
is a bad example.
[Laughter.]
Mr.Fortenberry. Let me back out, but the major portion--
Mr.McClure. Perhaps I can clarify by saying suppose that
the company is required to collect $5,000 in taxes and remit
that $5,000.
Mr.Fortenberry. Right.
Mr.McClure. For a small company, you can add another 87
percent to that $5,000 on top of that for the cost of
compliance.
Mr.Fortenberry. I see. I understand. I think it is an
excellent point to be made.
How would you define small business in the parameters in
which you are talking about?
Mr.McClure. Generally, and there are lots of definitions,
as you know, but generally when we look at it from an
accounting standpoint, and I have some credentials there as
well, we are looking at companies of fewer than 200 employees
with revenues somewhere less than $10 million per year.
Mr.Fortenberry. Well, I think this is a significant finding
from this hearing, Madam Chair, about the high cost of
compliance and particularly I would assume elasticity of demand
is significant on Internet sales as well, as it was suggested
on Internet access. So that is an important point to be made.
I would end on this quick story. I have a grain farmer in
my district, a small, traditional grain farmer struggling to
make ends meet; converted the business model into an Internet
sales of specialized hay products for the pet market. Now that
struggling grain farm has I think it is about 50 employees;
just received one of the major business awards of the year;
provides very good jobs in a rural county of Nebraska.
This is the power of what we are talking about here. So I
think I appreciate all of your input and your involvement in
this industry that has, again, resulted in so much economic
good for small businesses as well as people who work for small
businesses throughout the country.
ChairwomanVelazquez. Time has expired.
Ms. Hirono.
Ms.Hirono. Thank you, Madam Chair.
Mr. Keating, you represent a nationwide organization, and I
am wondering whether you have or you are aware of any national
demographic data on the people who are engaging in Internet
selling. In other words, is there any data on the number of
women, the minorities, in rural areas? Do you have that kind of
information or are aware of where that kind of information is
available?
Mr.Keating. Actually, I do not have it at my fingertips,
but we do talk about that on our Web site, and I can get the
information to you. But SBECouncil.org, we have all sorts of
analysis on those types of things.
And, you know, as a broad brush statement, it is just
across the board. I mean the numbers are, you know, every
imaginable business. I mean, our group, you know, we range from
the consultant in the home based business, the one person shop,
to manufacturing firms, to high tech and everything in between,
and all of them one way or another are dramatically impacted by
obviously the Internet, but they are out there selling things
on the Internet, and it cuts across all demographics: women
businesses.
The growth, of course, as you know, in women businesses
right now is far outdistancing males and in various ethnic
groups the growth rates are dramatic right now. It is a very
exciting time in terms of the growth of small business, and all
of them are working with or through or on the Internet, and we
can certainly get you some more information on that in terms of
some exact numbers.
Ms.Hirono. Thank you very much.
One question for Mr. McClure. In your testimony you noted
that if the moratorium is not extended, states and localities
will take more than $35 billion per year out of the economy.
How did you get that number?
Mr.McClure. Well, that is actually a number generated by
the states and municipalities based on what they claim they are
losing each year because of this act. So we can assume that
would be the minimum level that they would begin with.
I would also point out the 30 percent figure that we use
because it tends to be higher than some of the estimates of
other groups which have said that Internet taxation would only
be a modest five percent or maybe as much as 14 percent.
If you look at telecommunications taxes nationwide, you
need only look to Richmond, Virginia, where local taxes on
telecommunications are at 30 percent, and they are not alone.
It is in many districts nationwide.
Our fear is that by the time you heap on multiple
indiscriminate taxes, 30 percent is going to be a very low
figure.
Ms.Hirono. Thank you.
And of course, Hawaii is one of the states that has an
exemption from this moratorium, and I am sure I will be very
unpopular if we get rid of that exemption. However, I am all
for supporting small businesses.
Thank you, Madam Chair.
ChairwomanVelazquez. Ms. Fallin.
Ms.Fallin. Thank you, Madam Chairman.
I am still looking over all of the testimony here. I had a
couple of questions.
I enjoyed the conversation with the gentleman on the 87
percent of the cost, the taxes and the cost of doing business
if taxes were to be collected over the Internet, and I was
thinking about my daughter. Is it Bieron? Is that how you
pronounce your name?
Mr.Braley. Bieron.
Ms.Fallin. Bieron. She buys nothing but things over the
Internet. She just loves the Internet, and she called me up
yesterday here in Washington, and she said, ``Mom, I bought a
dress for $5.00. It is absolutely gorgeous.''
I said, ``Well, great. It saves Mommy money.''
But I was thinking about, you k now, if she were to ever
want to sell things on the Internet as a small business person
and she hopes to kind of have a small business some day and
about the collection, and by the way, I am a co-sponsor on this
legislation. That is where I am at. But what would someone like
a young person who is wanting to start up a company, and if the
moratorium was not passed to be made permanent? What would it
do to a young person or small business owner that is trying to
start up a new company as far as having to learn how to collect
the taxes and the time commitment and the financial accounting
practices? What would it do to that small business owner?
Mr.Bieron. Sure, and I do think it is important that we
distinguish Internet access taxes. There are actually three
kinds of taxes we are sort of talking about here. There is
Internet access taxes which are going to show up on your
Internet bill. So the bigger the small business, the more
connectivity, the more band width they are paying for; usually
the more money they are paying for their Internet services.
Therefore, they are going to have that bill.
Then there is the kinds of multiple and discriminatory
taxes, which in particular in the digital world would be a real
threat. If you want to deliver movies over the Internet
compared to somebody who has a Blockbuster video store, you
know, the idea that potentially a state or locality without the
current prohibition could put a 20 percent tax on a downloaded
video where it is maybe a seven percent sales tax in a store,
that is a discriminatory kind of Internet tax.
And then the third category would be the currently with the
Quill decision, the issue of sales tax collection is based on
nexus so that your daughter's small business would be required
to collect and remit sales taxes to the State of Oklahoma when
she sells to a customer in Oklahoma, but if she sells it across
the country, she would not have the burden of having to know
what's the sales tax rate when she sells to San Jose,
California. Who do I send those taxes to?
So the compliance cost that Mr. McClure was referring to, I
think would be the idea that in the sales tax world adding more
jurisdictions where you have to collect and remit is
extraordinarily expensive for small business.
Actually the question was how do you define a small
business. Actually the Small Business Administration of which
this Committee knows something about, one of the things they do
is define how big small businesses are for all of the various
programs that are over there, and in the area of E-commerce, E-
commerce retailers are considered small businesses up until the
point where they have sales of $21 million, which I often say
seems like a lot unless you are competing with Wal-Mart. then
21 million is not a lot.
But changing the Quill decision and requiring a small
business to start to collect and remit taxes for the 15,000
sales tax jurisdictions that are in America we think would be
actually so expensive that it is inconceivable that small
businesses could do it without immediately having to simply
outsource the service to technology providers, but that would
be the burden, is that if she wanted to sell when she gets to
the point where she is buying and selling dresses just because
that's what she likes to do, having to know what the sales tax
is everywhere when it is a sales tax holiday, you know, all of
those things, and then where you send all of those taxes to,
and then keep all of those records for all of those
jurisdictions because you could be audited by any one of them
in that world is extraordinarily difficult to even conceive of.
Ms.Fallin. Thank you. I appreciate that answer.
Can I ask one quick question of Mr. Keating?
ChairwomanVelazquez. Sure.
Ms.Fallin. I think it was under your testimony that you
list the other countries in the world that have better access
to broadband, and you show the United States ranked towards the
bottom. I was just curious if any of those other countries have
a tax on the Internet on sales.
Mr.Keating. I do not know the answer to that actually. I
will certainly look into it for you though.
Ms.Fallin. I am just curious because I notice there are a
lot of countries that have better access than we do, but I just
do not know where they are as far as tax and the Internet.
Mr.Keating. And just on your earlier question very quickly
is two things to keep in mind now is that when you have any
tax, a new tax that comes in, if it applies to individuals and
businesses, businesses tend to get hit harder, and the harder
they get hit, the small guys get it even worse compared to the
big guys.
And then there is the regulatory aspect. When you look at
the numbers, however you want to shake it out, per employee
cost, regulations, particularly on the tax front, hit smaller
firms much, much harder than it does the big guys.
So the big guys most likely are going to be able to weather
these things much better than the smaller firms.
ChairwomanVelazquez. Time has expired.
Ms.Fallin. Thank you.
ChairwomanVelazquez. Mr. Ellsworth.
Mr.Ellsworth. Thank you, Madam Chairwoman.
Mr. Bieron, first I want to thank your company for their
position on the reselling of the banned toys that I heard about
just in the last few days. Thank you for that position. I hope
they continue that, and I hope other companies follow that
lead.
Mr. Dewey, thank you. The reason I asked for this Committee
as a third committee was for people like you back in Indiana. I
think Indiana beat Iowa last week, didn't they, by the way?
[Laughter.]
Mr.Ellsworth. Oh, when Indiana wins a football game, we
brag a lot.
My question is pretty short really. One thing I have found
since coming to Congress other than you sell bottle head
dollars and sometime in eight short months, you feel like a
bottle head doll up here, but there is always the other side of
the coin. If we had another hearing tomorrow or who is going to
come into my office next week and watches this and takes notes
and says, ``That is all bunk. There is another side to this
story''?
It sounds like you have pretty broad support in this room,
but who is going to come in and tell me the other side of this
story? Who is the enemy here?
And as far as you want to go and maybe Mr. Keating and Mr.
McClure are the appropriate people.
Mr.Keating. Well, I think you are going to hear from a lot
of state and local officials and the folks that represent them.
The National Governors Association, I believe, is not too
thrilled with this idea. The American Federation of State,
County, and Municipal Employees are not too keen on it. So I
think it is pretty predictable that is who you are going to
see, and they are going to talk a lot about needing more
revenue for vital services and the sky is falling and so on.
But, again, I think if you take a look at the actual
numbers, as I said, those are just some broad numbers that I
cited, but the growth in revenue has been tremendous at the
state and local level, and the key is there just like at the
federal level. If you have a growing economy, a growing,
healthy economy, you are going to have more government revenue.
That is one of the benefits.
So then the question becomes does taxing the Internet make
sense to keep the economy growing, and I would say no.
Mr.McClure. A more important factor will be who you will
not hear from tomorrow. You will not hear from consumers who
want those taxes. You will not hear from economists. You will
not hear from consumer advocates. You will not hear about
anyone who has a responsibility for the growth of broadband,
and that includes most state legislatures.
You are going to be talking to people who are looking to
raise their revenues, and honestly, they cannot give you a good
justification for why they need the revenues, which is why it
is now being repositioned and repackage is somehow a state's
right. You see, it doesn't have to do with the taxes. It has to
do with rights. Very clearly, it is not a constitutional right
to tax interstate commerce. So the important thing to remember
is you are not going to hear about the people who care about
deploying broadband to every American family.
Mr.Ellsworth. What about industry that is going to say this
gives you the unfair advantage or we always hear about leveling
the playing field, and you hear that a lot. Is there any
industry that is going to come in and say you are getting
unfair advantage here?
Mr.McClure. I do not think so, sir, and I do not want to
muddy the waters again by talking about taxing electronic
commerce because this bill is not about that, but if you go
back to the Quill decision, one of the things that the Supreme
Court was very clear about is that taxes are a payment for
service. Those brick and mortar companies receive direct
services. They have received roads that go to their premises.
They receive police protection and fire protection, and taxes
are the way they pay for those services.
When you have an electronic company that has no nexus, when
it does not have that presence, it does not receive those
services and, therefore, there is no justification for the
payment of taxes simply because you want more money.
Mr.Ellsworth. Thank you, Madam Chairwoman. I yield back.
ChairwomanVelazquez. Thank you.
Mr. Gohmert.
Mr.Gohmert. Thank you, Madam Chair.
And I do appreciate you all being here, your testimony.
After my alma mater A&M lost to Miami, I was heard to say that
I think too many schools are spending too much of their
emphasis on athletics and need to get back to academics, but
after last weekend, I think we have got the right proportion.
[Laughter.]
Mr.Gohmert. But the 87 percent cost of compliance intrigues
me because the way it was described by Mr. Bieron I can see
that just being a nightmare trying to figure out which city,
which state gets which part of which taxes, and then you could
have disputes over who should be getting that, and understand I
am signed on. I do not want to see the Internet taxed, but when
I hear a number like that, it does seem to be a little extreme
because I think what the proponents are talking about is some
scheme where, you know, you send taxes into a central
repository and maybe even let them figure out which states get
what, and it does not look like it would be an 87 percent cost
of compliance to do that, does it, Mr. McClure?
Mr.McClure. It would be lovely if there were such a
process, sir, but the fact is that process does not exist. It
is all black box stuff. Give us the right to tax and somehow we
will figure out a way to do it fairly.
They have been asked for more than a decade to figure out
how to do it fairly, and then Congress would consider it. They
have yet to come before you and say, ``This is our plan to do
it fairly.'' It is all black box stuff.
And let me point out we are not--
Mr.Gohmert. Well, now, I need to dispel one thought that
you have got, and that is linking the United States government
and fairness. I have just been here three years, and I have not
seen that linkage yet. We are still looking, and especially
when it comes to taxes.
But we do hear states, local government. We need revenue.
More and more is going across the Internet. It is going to kill
us locally. I have not exactly worked out how since the economy
is booming and the federal and state and local governments,
most of them, are receiving more money than in history, how
this terrible intrusion called the Internet has been such an
adverse effect.
I understand conceptually we have got more goods being sold
across the Internet than ever before, and so perhaps some of
those are not being sold locally with local sales tax that
would have been, but it is an interesting dynamic.
Do you have any explanations as to how more commerce is
going across the Internet and yet most states and local
governments are receiving more revenue than ever? Anybody?
Mr.Bieron. Just to provide some data behind that, the
Department of Commerce's, and quarterly they update with the
retail numbers, and they break out Internet commerce. So at
eBay we would say, you know, Internet commerce is growing
rapidly, but traditional retail is so immense that it is almost
hard to fathom the difference.
Right now E-commerce in the U.S. is estimated at just under
three and a half percent of total retail. So last year that was
about $125 billion of E-commerce retail, compared to over three
trillion in total retail.
So in some ways, I mean, again, at eBay we would say that
this growth is great. Obviously it is our business to empower
small businesses to do that, and so we see the future being
very bright, but at the same time we should not lose
perspective on the fact that traditional storefront retail is
trillions and trillions of dollars.
And so honestly with that growing, traditional retail last
year grew approximately four percent. Online retail grew about
20 percent, but the baseline for the traditional retail was so
huge that actually sales tax revenues for the state reached
record levels.
So when they come in and talk about the Internet, you know,
threatening their economics, their revenue stream tremendously,
I mean, maybe in 50 years you would set these growth rates,
that would be the case, but today some of that really is kind
of crying wolf.
Mr.Keating. If I could, and again, I think it goes back to
understanding the phenomenon of economic growth and what that
means for government revenues overall. You are not just talking
about sales tax revenues. You are talking about income tax
revenues. All the other taxes that are paid because of or due
to an expanding economy, so you have all of those benefits that
come into the equation.
What you will hear though is a very selective definition of
E-commerce is increasing by X amount or Internet access is
increasing by X amount, and if we could get our hands on that,
you know, that equals X number of dollars.
But it does not necessarily mean that government should or
needs to get their hands on those additional revenues.
Mr.Gohmert. Thank you.
My time has expired.
ChairwomanVelazquez. Your time has expired.
Mr.Gohmert. Thank you, Madam Chairwoman.
ChairwomanVelazquez. Mr. Lieberman, I would like to address
one other question to you. Cable companies have obviously made
efforts to expand access to broadband Internet and other
technologies. You stated that many of your members are small
and medium size cable companies that are serving smaller
communities, particularly in rural areas.
What challenges will your members face in its attempt to
provide expanded services if the moratorium was not extended?
And in particular, how do you believe it may affect efforts in
broadband deployment?
Mr.Lieberman. Thank you.
You are correct. Our operators do serve smaller markets in
rural areas, and the reality is that many of our members are
already offering broadband services in those areas. It is truly
the smallest of our operators that are still looking for ways
to deploy those services because of their size and the
difficulties in terms of the costs and spreading those costs
over the number of customers served.
ChairwomanVelazquez. Would you also talk about how this
broadband deployment has benefited small businesses?
Mr.Lieberman. Oh, absolutely. Well, mostly our operators
from their beginning have been video providers, offering
services to consumers in homes. Certainly when they have
upgraded their systems to offer broadband services there has
been new opportunities in order to offer these services to
businesses, and that has been a growth area for many of our
members, and they have been able to gain a lot of business
consumers in their communities.
ChairwomanVelazquez. Mr. Lieberman, the Internet access
taxes are taxes on the service providers. What is the
likelihood that cable providers such as yourself would be
forced to pass those taxes onto consumers and small businesses
much like television and fun taxes?
Mr.Lieberman. The unfortunate reality is that they would
likely be passed along to the consumer. Our operators are
running their businesses on small margins and do not have the
capacity to absorb those costs and would have to pass it along.
ChairwomanVelazquez. Mr. Chabot, do you have any other
questions?
Mr.Chabot. Just briefly, and again, I was going to go to
Mr. Lieberman also. I would not want him to feel left out in
this, but there have been a lot of questions that have not
necessarily been related to the cable industry.
But let me ask one other thing, Mr. Lieberman, if I can,
and that has to do with the rates. Could you tell me what the
mindset of your consumer is right now relative to cable rates
and going along with the question that the Chairwoman asked
about how they would feel about rates being increased if this
tax, the exemption, did not continue? So, in other words, taxes
went up.
How would the general public, in your view, feel about
that?
Mr.Lieberman. They certainly would have a lot of
frustration. Obviously in the video sector for us, costs are
increasing. We constantly hear about it from our consumers,
about those cost increases, and question why. Certainly, on the
Internet side, we rolled out services that we believe are
affordable and increasing costs on those through taxes, we
certainly would hear back from our customers why.
And just to give an example of a small cable operator,
there is one in western Texas that serves 1,700 video
subscribers and 300 broadband services. The average income in
two of the counties, the household income is 30,000. For two of
the other counties, it is 22,000.
There is demand for Internet and broadband Internet, but
there is also the difficulty in providing it at an affordable
cost. An Internet tax would have a serious impact on the
ability for people in these communities to be able to purchase
that, and that is a concern for a lot of our operators in those
type areas.
Mr.Chabot. Thank you.
And, Mr. Keating, our colleague from Indiana who is not
with us at the present time, but mentioned who would be on the
other side of this because we actually have a panel here which
is actually somewhat unusual here, but then the Chairwoman and
I are completely together on this. So I guess we could have
drug a governor in here or somebody, but that is what happened.
You know, when I co-sponsored this bill, in fact, I think I
was one of the original co-sponsors of the legislation some
years ago, the first phone call I got was from my governor. We
were county commissioners together, and he went to the
governorship and I came up here. He was also the lowest rated
governor of all the governors over the last couple of years,
too. I will not tell you what state I am from so that you
cannot figure out who he is from, and he is really a very good
guy and I like him a lot even though, you know, he has had some
real rough times over the last couple of years.
But in any event, that was the first call I got from him,
was how devastating this would be, you know, to my people in
Cincinnati and all of the people of Ohio if we put on this
extension and did not allow them to tax and how important that
was to let them get this tax, et cetera.
So that is one group, is local elected officials and
governors, et cetera, and the other group that we got some
criticism from was the so-called, you know, brick and mortar,
some of the stores perhaps that say it is an unfair advantage.
And you have already touched on this, but could you briefly,
Mr. Keating, again deflate that argument as to why this is a
bad thing from the point of view of local elected officials and
brick and mortar folks?
Mr.Keating. Absolutely. You know, I think the first thing
is to look at the actual numbers, is to see what has been going
on in regards to the revenue front for state and local
governments. You know, I think the exceptional person that
holds office at that level is going to say, ``You know what?
Revenues are rolling in pretty good. So we are okay.''
So you have got to look at the numbers. The numbers show
that revenues have been increasing at a dramatic rate, about
better than three times the rate of inflation. So that is
number one.
Number two is, again, the issue of allowing small
businesses to flourish through the Internet, having the
foresight to say, okay, if we impose this tax what is it going
to mean to the economy overall. What is it going to mean to
these small businesses? Do we want to really take those steps
and cause these problems where, again, a lot of the big guys
are going to be able to handle this in terms of the tax itself
and all of the red tape and everything that goes along with the
regulatory aspects of the tax, but the small guys are not going
to be able to handle this.
And then finally, the other part of the equation is do the
small guys matter. Well, of course they do, and when you go
back and look at all of the aspects of where an innovation
comes from, where does job growth come from, and any year it is
60 to 80 percent of net new jobs come from small businesses.
They are employing a little more than half of the private
sector work force. So do you recall want to go down this path
and open up the door to these taxes that are going to do such
damage to small businesses and entrepreneurs?
Mr.Chabot. Thank you.
And then finally, one quick question. You mentioned in your
written statement the 2001 and 2003 tax cuts that were passed
here in Congress that the President signed into law. In your
opinion, how important are these tax cuts to economic growth
that we have seen and how important is it that we make those
tax cuts permanent?
Mr.Keating. Oh, huge. A huge issue. I mean, when you look
at when the 2003 tax cut went through, the middle of 2003, it
was no mere coincidence that at that point the economy started
to pick up. Private sector investment picked up dramatically.
Keep in mind that most businesses, better than 90 percent
of businesses pay the personal income tax rather than the
corporate income tax. So it hits the bottom line of small
businesses. If you want, access to capital is critical. So
lower capital gains tax is very important.
All of those things are in that package. The estate tax,
all of those things impact small businesses in a big way, and
we need to make that permanent, as we need to make the Internet
tax moratorium permanent, to help them and to get that
certainty into the equation.
Mr.Chabot. Thank you very much, and I want to thank the
entire panel for their testimony. I thought it was very good.
ChairwomanVelazquez. Thank you.
And I, too, want to thank all of you for your willingness
to be here, to discuss an issue that is important, and it has
been demonstrated that it has an impact on small businesses.
Given the fact that the Small Business Committee has expanded
jurisdiction over issues that affect small businesses, we
intend to be engaged in this issue.
I ask unanimous consent that members have five legislative
days to enter statements and supporting materials into the
record, and with that this hearing is adjourned.
[Whereupon, at 11:40 a.m., the Committee meeting was
adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]