[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                        SUBCOMMITTEE HEARING ON 
                   REGULATORY BURDENS ON SMALL FIRMS: 
                        WHAT RULES NEED REFORMS? 

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

           SUBCOMMITTEE ON REGULATIONS, HEALTHCARE, AND TRADE
                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 30, 2008

                               __________

                         Serial Number 110-109

                               __________

         Printed for the use of the Committee on Small Business


  Available via the World Wide Web: www.access.gpo.gov/congress/house

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLES 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                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
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

                                 ______

          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

                                  (ii)

  





















                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Gonzalez, Hon. Charles...........................................     1
Westmoreland, Hon. Lynn..........................................     2

                               WITNESSES

Dudley, Hon. Susan E., Administrator, Office of Information and 
  Regulatory Affairs, Office of Management and the Budget........     4
Sullivan, Hon. Thomas M., Chief Counsel for Advocacy, U.S. Small 
  Business Administration........................................     6
Wagner, Mr. Chris, Deputy Commissioner, Small Business/Self 
  Employed Division, Internal Revenue Service, U.S. Department of 
  the Treasury...................................................     7
Renker, Mr. Paul, Renker, Eichs, Parks, Architects, St. 
  Petersburg, FL, on behalf of the American Institute of 
  Architects.....................................................    19
Van de Putte, Mr. Pete, Dixie Flag Manufacturing Co., San 
  Antonio, TX, on behalf of the National Federation of 
  Independent Business...........................................    21
Scribner, Mr. Scott, Plano TX, on behalf of the National 
  Association of the Self-Employed...............................    22
Santis, Mr. Lon D., Manager of Technical Services, Institute of 
  Makers of Explosives...........................................    24

                                APPENDIX


PREPARED STATEMENTS:
Gonzalez, Hon. Charles...........................................    25
Westmoreland, Hon. Lynn..........................................    27
Dudley, Hon. Susan E., Administrator, Office of Information and 
  Regulatory Affairs, Office of Management and the Budget........    28
Sullivan, Hon. Thomas M., Chief Counsel for Advocacy, U.S. Small 
  Business Administration........................................    52
Wagner, Mr. Chris, Deputy Commissioner, Small Business/Self 
  Employed Division, Internal Revenue Service, U.S. Department of 
  the Treasury...................................................    70
Renker, Mr. Paul, Renker, Eichs, Parks, Architects, St. 
  Petersburg, FL, on behalf of the American Institute of 
  Architects.....................................................    77
Van de Putte, Mr. Pete, Dixie Flag Manufacturing Co., San 
  Antonio, TX, on behalf of the National Federation of 
  Independent Business...........................................    86
Scribner, Mr. Scott, Plano TX, on behalf of the National 
  Association of the Self-Employed...............................    90
Santis, Mr. Lon D., Manager of Technical Services, Institute of 
  Makers of Explosives...........................................    95

EXHIBITS:
IRS Tax Form 8829 - Expenses for Business Use of Your Home.......   101
IRS Tax Publication 587 - Business Use of Your Home..............   102

                                 (iii)

  


                        SUB COMMITTEE HEARING ON
       REGULATORY BURDENS ON SMALL FIRMS: WHAT RULES NEED REFORM?

                              ----------                              


                        Wednesday, July 30, 2008

                     U.S. House of Representatives,
                 Subcommittee on Regulations,Healthcare, and Trade,
                                       Committee on Small Business,
        Washington, DC.
    The Subcommittee met, pursuant to call, at 10:06 a.m., in 
Room 1539, Longworth House Office Building, Hon. Charlie 
Gonzalez [chairman of the Subcommittee] Presiding.
    Present: Representatives Gonzalez and Westmoreland.
    Chairman Gonzalez.  Good morning, everyone. My apologies 
for being late. This hearing on the Regulatory Burdens of Small 
Firms: What Rules Need Reforms? is now called to order. I am 
going to start off with an opening statement so that everybody 
understands the procedure. I make an opening statement. The 
ranking member will make an opening statement. Other members 
can submit opening statements in writing. They will be filed 
and then we will proceed with the testimony of the first panel 
comprised of three witnesses, and I will give you instructions 
at that time.
    I am still trying to catch my breath. I actually came up 
from the basement. And at my age I shouldn't have done that. 
The stairs are killers. I am very interested in the results of 
a recent survey of small business owners conducted by Suffolk 
University and released by the American Management Services . 
The poll found that 63 percent of respondents believe that the 
Federal Government is doing nothing to help small businesses. 
64 percent believe that the administration and the SBA 
specifically aren't doing enough for small businesses. This 
poll reflects the current challenging climate in which many 
small owners struggling to stay afloat may find themselves 
today.
    The volatile costs of gasoline, the ever-increasing cost 
for health care and the crumbling housing market are negatively 
impacting small businesses. Tough times like these highlight 
the Federal Government's responsibility to make sure we are not 
placing undue burdens on the small business community. Under 
the best of circumstances, operating a small business is an 
enormous undertaking.
    For many entrepreneurs business begins and ends at their 
desk, and there are never enough hours in any given day. The 
last thing these men and women need is to be bogged down by 
excessive paperwork. But unfortunately, complex Federal 
regulations have already created a time-consuming logistical 
nightmare for countless small businesses throughout our 
country. Many government regulations use one-size-fits-all 
policies that often fail to account for small business needs. 
Consequently, small firms end up bearing a disproportionate 
share of the Federal regulatory burden. Despite having tighter 
profit margins, they are forced to pay more to comply with 
government rules than their corporate counterparts.
    This discrepancy is so great, in fact, that small 
enterprises spend 45 percent more on regulatory compliance than 
big businesses. That adds up to $2,400 in additional fees per 
employee. And when it comes to various other regulations, the 
differences are greater still. Some of these rules can cost 
small businesses as much as 364 percent more to comply. One 
specific regulation, tax reporting, is 67 percent more 
expensive.
    In other words, we are forcing small businesses with 
limited capital to pay more than big businesses with deep 
pockets. In an attempt to address this inequity, Congress 
passed the Regulatory Flexibility Act way back in 1980, which 
requires government agencies to consider the effects of their 
policies in small businesses. But after three decades, it has 
fallen short of accomplishing its original goal. This is 
because Reg Flex tends to be inconsistent in its application.
    For example, there is no uniform method of practicing 
Section 610 which, if properly employed, would stem the 
inequities currently facing small firms. Section 610 requires 
Federal agencies to periodically review rules, and gauge their 
impact on small businesses. But while it is a good requirement 
in its design, it has not been applied consistently. 
Recognizing Reg Flex's shortcomings, this committee has already 
taken steps to improve this system.
    Last December, we passed H.R. 4458, which will 
significantly overhaul the regulatory process. Among other 
provisions, the bill introduced by Mr. Brad Ellsworth of this 
committee provides an important clarification to Section 610.
    In that same vein the Small Business Administration 
launched the regulatory review and reform initiative, or r3, 
last year. This rule promises to improve the Reg Flex system by 
identifying and addressing its ineffective policies. It will 
also allow entrepreneurs to raise their own concerns and 
suggest targeted reforms. R3 has the potential to be an 
invaluable resource for small firms. It will not only give them 
a voice in the Federal regulation process, but it will also 
address some of their most significant challenges. For example, 
SBA's Office of Advocacy hopes to use this rule to simplify tax 
policies for at-home businesses. R3 promises to confront this 
issue, along with other concerns, head on.
    As we will discuss today, many Federal compliance policies 
are outdated and unnecessarily complex. Small business owners 
should not have to put hours of their time towards untangling 
these regulations because, as this committee and our 
entrepreneurs well know, such time would be better spent on 
conducting business as usual.
    In today's hearing, we will look at the effects of 
regulatory burdens on small firms. We will also explore 
potential solutions, such as the Small Business Regulatory 
Improvement Act, and the r3 program. I want to thank all of the 
witnesses in advance for their testimony. The committee is 
pleased they could join us today. And we look forward to their 
insight on these issues.
    [The statement of Chairman Gonzalez can be found in the 
appendix at page 25.]
    Chairman Gonzalez.  At this time, it is my privilege to 
yield to the ranking member, Mr. Westmoreland, for his opening 
statement please.
    Mr. Westmoreland.  Thank you, Mr. Chairman. Let me just 
say, I really appreciate the chairman having these hearings. He 
and I have talked. And I come from a small business background. 
I was in the real estate building development business. And I 
certainly understand Federal regulations on small business. And 
as the chairman and I have talked, we have come up with a 
different subject matter that we want to have a hearing on. And 
I really do thank him for this.
    When I was elected to serve in Congress, I was issued a 
mandate by my constituents to reduce the impact of Federal 
Government on our daily lives. And after 4 years, I don't know 
that I might have failed in that because I can't think of 
anything we have reduced in the last 4 years. I am all too 
aware of the feeling that our own government is working against 
us. This us-versus-them belief is held in small businesses all 
across this country. And honestly, I cannot blame anyone for 
thinking that because most small business people, Mr. Chairman, 
work 18 to 20 hours a day just trying to keep their small 
business in business and they really don't have time to keep an 
eye on the government and what the government is doing to try 
to revamp or reorganize their business to make the government, 
I guess, seem like they have a responsibility.
    Recent government estimates place the cost of complying 
with Federal regulations at $1.1 trillion. That averages out to 
about $10,000 per household, and I don't know how much per 
small business. But we are here today to constructively address 
what we already know. Excess Federal regulations negatively 
impact America.
    I think Washington has made a few good steps. However, they 
have been baby steps. President Bush's executive order 
directing Federal agencies to place more emphasis on the 
economic impact of regulatory proposals is a good idea. 
However, I feel that it missed an opportunity by not addressing 
the loopholes in the Regulatory Flexibility Act. The executive 
order also stops short of preventing agencies from using narrow 
interpretations of Reg Flex in order to ignore their 
congressionally imposed responsibilities.
    SBA's Office of Advocacy is to be commended for its 
proactive approach to reducing this burden on small business. 
The r3 program is another step towards this goal. Involving 
stakeholders in the process of pinpointing rules that merit 
review makes good sense. However, the combination of Federal 
agencies' distaste for transparency and the Office of 
Advocacy's lack of authority to force those agencies to 
consider reforming unnecessary regulations creates an 
environment where very little can be accomplished.
    To be clear, I am not waving a white flag at this issue. 
Everyone in this room has a vested interest in seeing small 
businesses grow and thrive in a global marketplace. In order 
for that to happen, we must work to increase American 
competitiveness by reforming and removing the regulations that 
restrict growth. This is a top priority for me and our Nation's 
businesses. And the question is, is it a priority for the 
agencies in Washington? I welcome these distinguished guests, 
witnesses, panelists. And I want to thank you for your 
willingness to come here and testify and take some tough 
questions. And again, Mr. Chairman, thank you for holding this 
hearing.
    Chairman Gonzalez.  Thank you very much, Mr. Westmoreland.
    [The statement of Mr. Westmoreland can be found in the 
appendix at page 27.:]
    Chairman Gonzalez.  Believe me, I appreciate your 
cooperation and that of your staff. And I always want to start 
off by acknowledging the fine work of the staff of the Small 
Business Committee, and the subcommittee especially, but on 
both sides and that is majority staff and minority staff. They 
worked really hard putting the memo together and giving us some 
great explanations and background.
    A special thanks to the witnesses I have already expressed. 
The way this will work is each witness will be given 5 minutes 
to make their statement. You have your written testimony, which 
will be made a part of the record. So if you can just summarize 
it in those 5 minutes, it doesn't seem like enough time, but we 
will follow up with questions. And since it is just the ranking 
member and myself at this point, we will have plenty of time 
for you to expand and to elaborate on some of the statements 
you would like to make.

    PANEL I - PARTICIPANTS IN ORDER ARE: HON. SUSAN DUDLEY, 
 ADMINISTRATOR, OFFICE OF INFORMATION AND REGULATORY AFFAIRS, 
 OFFICE OF MANAGEMENT AND BUDGET; HON. THOMAS SULLIVAN, CHIEF 
      COUNSEL FOR ADVOCACY, UNITED STATES SMALL BUSINESS 
   ADMINISTRATION; CHRIS WAGNER, DEPUTY COMMISSIONER, SMALL 
  BUSINESS/SELF EMPLOYED DIVISION, INTERNAL REVENUE SERVICE, 
              UNITED STATES DEPARTMENT OF TREASURY

    Chairman Gonzalez.  And I will be introducing the witnesses 
as they testify. The first witness is the Honorable Susan E. 
Dudley. Susan E. Dudley was appointed in April 2007 to serve as 
the administrator of the Office of Information and Regulatory 
Affairs at the Office of Management and Budget. From 1998 
through January 2007, Ms. Dudley served at the Mercatus Center 
at George Mason University, where she directed the regulatory 
studies program from 2003 to 2006. Welcome. And we look forward 
to your testimony.

               STATEMENT OF HON. SUSAN E. DUDLEY

    Ms. Dudley.  Thank you for inviting me, Chairman Gonzalez 
and Ranking Member Westmoreland. I appreciate the opportunity 
to discuss the Office of Information and Regulatory Affairs, or 
OIRA as we call it, our efforts to ensure that the Federal 
Government understands the impact of regulations on small 
businesses, considers cost-effective regulatory alternatives 
for small businesses, and looks for ways to reform regulations 
to lower burdens on small business without sacrificing 
important public protections.
    Small entrepreneurs are the engine of economic growth in 
America. They represent over 99 percent of employers and 
provide 60 to 80 percent of net new jobs. Yet as you pointed 
out in your opening remarks, Mr. Chairman, they bear 
disproportionate regulatory and paperwork burdens. OIRA, along 
with SBA's Office of Advocacy and other Federal regulatory 
agencies, is working both to minimize unnecessary burdens and 
also to help America's small businesses comply with regulatory 
and reporting requirements.
    Since OMB began to keep records in 1981, Federal agencies 
have published over 120,000 Federal rules in the Federal 
Register. Operating under Executive Order 12866, which was 
issued by President Clinton in 1993, OIRA coordinates 
interagency review of the most significant of these rules prior 
to publication. We estimate that the average yearly cost of the 
new major regulations issued between 2001 and 2006 is about 47 
percent less than over the previous 20 years, and yet the 
average yearly net benefits of new regulation has increased 
substantially.
    While we are working to ensure that new regulations are 
cost effective based on projections of what their impact will 
be, most existing Federal rules have never been systematically 
evaluated to understand their actual benefits and costs. Given 
the number of existing regulations on the books, it would be 
valuable to understand which of them are working as intended 
and which could benefit from reform. One tool to do this is 
Section 610 of the Reg Flex Act as you both have discussed. The 
Office of Advocacy's recent guidance to agencies on conducting 
610 analyses should make this promising tool more valuable. The 
comprehensive approach envisioned by Section 610 has advantages 
but it also may not target regulations in most need of reform.
    In some cases, businesses and consumers have adjusted to 
regulations that have been in place such that they are no 
longer binding. In an effort to identify regulations most in 
need of reform, both OIRA and the Office of Advocacy have 
solicited nominations from the public for regulations that are 
unduly burdensome, outdated or have resulted in unintended 
consequences.
    In response to our 2004 request for nominations, the public 
made 189 recommendations, focussing on regulations that largely 
affect the manufacturing sector. Working with the relevant 
agencies, the Office of Advocacy and the Department of 
Commerce, we selected 76 of these for priority consideration 
and action. To date, agencies have completed approximately 70 
percent of the 2004 manufacturing reforms, and we plan on 
providing a comprehensive update on the status of these reforms 
in our 2008 draft report to Congress. We have also followed 
with interest the Office of Advocacy's r3 initiative, which I 
am sure Tom Sullivan will talk more about. Several of 
Advocacy's top 10 are similar to nominations OIRA has received. 
And we are working together with agencies to pursue these 
reforms.
    OIRA also has authority, under the Paperwork Reduction Act 
and the Small Business Paperwork Relief Act, to reduce existing 
burdens on small businesses. These statutes give OIRA and 
agencies responsibility for eliminating unnecessary, 
duplicative, and unjustified paperwork burdens, particularly on 
small entities.
    In addition to seeking public comment and OMB approval of 
initial collections of information, agencies must seek and 
obtain extensions of OMB approval at least once every 3 years. 
This provides a vehicle for ensuring that existing paperwork 
burdens are re-examined on a regular basis.
    Finally, let me note several E-Gov initiatives that, while 
not reducing the number of regulations and paperwork burdens on 
small businesses, are designed to simplify and streamline 
compliance. Business.gov is a one-stop shop where businesses 
can locate the government compliance guides and forms they deal 
with on a regular basis, thereby reducing the effort needed to 
comply with government regulations. Business owners have self-
reported saving over 3 million hours so far this year alone by 
using this portal. The Business Gateway Initiative also 
promotes data harmonization to reduce the complexity of 
reporting processes and improve the reuse and distribution of 
information across Federal, State and local agencies. And we 
plan to release a comprehensive analysis, including several 
case studies shortly by mid August. Thank you.
    Chairman Gonzalez.  Thank you very much. Appreciate that 
and look forward to some questions and some responses from you.
    [The statement of Ms. Dudley can be found in the appendix 
at page 28.]
    Chairman Gonzalez.  The next witness is the Honorable 
Thomas M. Sullivan. Mr. Sullivan is the chief counsel for the 
Office of Advocacy at the U.S. Small Business Administration. 
Prior to joining the SBA, he worked as executive director of 
the National Federation of Independent Business Legal 
Foundation. Mr. Sullivan, as head of the Office of Advocacy, is 
charged with independently advancing the views, concerns and 
interests of small businesses before Congress, the White House, 
Federal regulatory bodies and State policymakers. Mr. Sullivan.


              STATEMENT OF HON. THOMAS M. SULLIVAN

    Mr. Sullivan.  Thank you, Mr. Chairman, Representative 
Westmoreland. Good morning, thank you for allowing me to appear 
before the committee. My name is Tom Sullivan. I am the chief 
counsel for Advocacy. And because my office is independent 
within this Small Business Administration, the views expressed 
here don't necessarily reflect the position of the 
administration or the SBA. This testimony was not circulated 
for comment through OMB. My job is to try and remove regulatory 
barriers that stifle small businesses' ability to create jobs, 
drive innovation, and build communities. The main tool used by 
the Office of Advocacy to accomplish this is the Regulatory 
Flexibility Act. Section 610 of that Act requires agencies to 
periodically review the rules that are on the books and 
consider revising them to reflect modern conditions in order to 
ease the burden on small business.
    GAO reports, law review articles, this committee and others 
have pointed out that government has not done very well in 
streamlining, downsizing or modernizing existing Federal rules 
and regulations. To try and address this problem, last year my 
office launched the small business regulatory review and reform 
r3 initiative. It is designed in part to improve compliance 
with Section 610 and further the goals of periodic review. 
Through r3's public rule reform nomination process, small 
businesses and their representatives can point out existing 
agency rules they feel should be reviewed and revised.
    Last year small business stakeholders nominated over 80 
rules for review and reform. 10 of those nominations were 
chosen for the top rules for review and reform this February. 
Now we are working with agencies to respond to those calls for 
reform. My office will post online agency responses to the top 
10 reform nominations next month, and we will update that 
progress report every 6 months. When the Office of Advocacy 
started to receive suggestions last year for rules that should 
be reviewed and reformed, we evaluated them to see one, whether 
the rule being nominated has ever been reviewed before for its 
impact on small business.
    Two, whether technology, economic conditions or other 
factors have changed since the rule was originally drafted. 
Three, whether the rule imposes duplicative requirements. Four, 
whether that rule could reasonably be reformed to better 
accomplish its intended objectives with less burden on small 
business.
    And lastly, we evaluated the overall importance of the rule 
to small business and communities. Let me be clear to the 
subcommittee, just because a rule that was not nominated for 
reform does not mean that my office ignores it. Rather, the 
nominations that were not chosen as the top 10 rules for reform 
have given my office valuable insight into how we prioritize 
the regulatory issues of concern for small business. Three 
weeks ago, we kicked off our request for nominations for next 
year and we have already received about a dozen suggestions. I 
believe that the r3 program will be an important tool for 
keeping agencies' attention focused on Section 610 of the Reg 
Flex Act and improving the quality of reviews of existing 
regulations. Given the importance of periodic reviews of 
current rules, Congress, my office and Small Business have a 
common interest in the long-term success of r3. Thank you, Mr. 
Chairman. And I would be happy to answer questions.
    Chairman Gonzalez.  Thank you very much, Mr. Sullivan.
    [The statement of Mr. Sullivan can be found in the appendix 
at page 52.]
    Chairman Gonzalez.  Our next witness is Mr. Chris Wagner, 
who is deputy commissioner of the Small Business Self-Employed 
Division in the Internal Revenue Service. Mr. Wagner has held 
numerous positions and enforcement functions in the IRS. He 
also served as the Deputy National Taxpayer Advocate. Welcome, 
Mr. Wagner, and you may begin your testimony.


                   STATEMENT OF CHRIS WAGNER

    Mr. Wagner.  Good morning, Chairman Gonzalez and Ranking 
Member Westmoreland. My name is Chris Wagner, and I am the 
deputy commissioner for Internal Revenue Service Small 
Business/Self Employed Division. I appreciate the opportunity 
with talk to you today about the IRS's efforts to reduce 
burdens for small businesses. The small business self-employed 
division is made up of 26,000 employees who serve about 57 
million taxpayers, roughly about 1/3 of the tax-paying 
population. This consists of 9 million small business 
corporations and partnerships with assets of $10 million or 
less, 41 million self-employed and supplemental income earners, 
and 7 million other taxpayers who file employment, excise, 
estate, gift and fiduciary tax returns. Because the employees 
within my division work directly with small business men and 
women, they understand the critical roles small business plays 
in our Nation's economy. Small businesses represent more than 
99 percent of all employers and employ half of all private 
sector workers. While my division at the IRS does enforce the 
tax laws against small businesses, we also have an obligation 
to assist them in understanding and complying with the tax law.
    This taxpayer service aspect of what we do is critical 
because we know that some level of noncompliance reflects a 
lack of understanding by small businesses of their true tax 
obligations. This lack of understanding is often a function of 
complexity of the Tax Code and the burden associated with 
complying.
    One of these areas that affects small businesses, and an 
area of prime interest to the members of this subcommittee, is 
the home office deduction. In 1976, Congress passed legislation 
providing very limited circumstances in which an individual, or 
an S corporation taxpayer, may take a deduction for an office 
in the home. Much has changed in the past three decades. And 
due to technological advancements and other significant changes 
to business environment, many more small businesses are now 
able to operate effectively out of the home. In fact, according 
to the Small Business Administration, home-based businesses 
represent over 50 percent of all small businesses. This 
evolution makes the benefit of claiming a business deduction 
for an office in the home even more valuable to small business 
taxpayers.
    However, because of the complexity involved in claiming the 
deduction, we believe a number of small businesses that are 
eligible to claim deductions do not. The IRS has looked 
extensively at this issue and explored ways to simplify the 
computations required to claim the office in the home 
deduction. We concluded that reducing burden on business 
taxpayers with home office expenses could best be accomplished 
through a legislative change. One of the challenges we 
identified was the statutory requirement to recapture 
depreciation.
    Homeowners claiming deductions for an office in their 
personal residence are required to recapture depreciation 
allowed or allowable when selling their home. In other words, 
whether depreciation is claimed or not, additional computations 
are necessary and a tax liability occurs when the home is sold. 
Despite the fact that we are unable to simplify the home office 
deduction, we continue to work with small businesses, helping 
them understand their obligations and how to claim the 
deduction. Here are a few ways that we work with the public and 
third-party stakeholders to help small businesses comply with 
their obligations. We have posted information on our Web site, 
IRS.gov, providing links to specific publications with 
information on the home office deduction.
    We work with partners such as the Small Business 
Administration, State and local government agencies and 
community organizations to provide small business tax workshops 
and other educational seminars which include information on 
home office deduction. We have produced educational materials 
to supplement forms and publications such as the virtual small 
business tax workshop, which can be viewed online at IRS.gov or 
ordered as a DVD. An entire chapter of the workshop is devoted 
to the home office expense. We issued a home office deduction 
fact sheet that is used in outreach and is available on IRS.gov 
in both English and Spanish.
    Mr. Chairman, my written statement discusses in greater 
detail many of the things we are doing to reduce the burden on 
small businesses as well as the steps we are taking in terms of 
outreach and education. I appreciate the opportunity to be here 
this morning to elaborate on a few of those issues. Thank you, 
and I will be happy to respond to any questions.
    Chairman Gonzalez.  Thank you very much, Mr. Wagner.
    [The statement of Mr. Wagner can be found in the appendix 
at page 70.]
    Chairman Gonzalez.  And I will lead off with a question for 
each member of the panel. And I will start off with the 
administrator of the Office of Information and Regulatory 
Affairs. And you referred to it as OIRA?
    Ms. Dudley.  Yes.
    Chairman Gonzalez.  OIRA. I am trying to figure out when we 
actually look at the regulatory scheme and its impact on small 
businesses. Now we can do it before the regulation is adopted 
and of course then once it is implemented and its effect. Your 
office, if I understand it, actually comes in at all stages of 
this, but I think it is really important--that you come in 
before the adoption of regulation--can you explain that quickly 
to me? And how in the world can you really do that, I mean, 
with the complexity and the enormity of the Federal Government 
today?
    Ms. Dudley.  Under President Clinton's executive order, my 
office reviews--and what we do, we conduct an interagency 
review. So we would engage Tom Sullivan's office as well as 
other agencies on all regulations both before they are proposed 
in the Federal Register, and again before they are issued in 
final form. All regulations there are classified as 
significant. So of the 120,000, I would say probably a little 
over 20,000 of those went through the interagency review that 
we coordinate. And we review them--do you want more details on 
how--
    Chairman Gonzalez.  I am just wondering, the percentages 
that are reviewed subject to review or whatever, are there any 
changes that actually occur as a result of the review? And this 
is not criticism of anyone. I just know that there is only so 
much time in a day. You only have so much in the way of staff. 
The ability to actually accomplish that particular task. I 
mean, how realistic is that? And in accomplishing that task, 
how many of these regulations actually get sent back for 
tweaking, review, total overhaul and such?
    Ms. Dudley.  Usually when I am sitting in the seat, I am 
getting criticized for changing too many regulations.
    Chairman Gonzalez.  That is a good criticism.
    Ms. Dudley.  I can actually give you statistics on that. 
Because when we conclude review--there are four options; 
withdrawn by the Agency, consistent with the executive order 
with changes, so that means changes that took place as a result 
of the interagency review; consistent without change; or 
returned to the agency. And we have statistics on how many are 
in each of those categories. I will be happy to give you that.
    Chairman Gonzalez.  Yeah. If you would. And I think in some 
measure--and it is good to actually share that with many 
individuals or small businesses that may be in contact with--
and saying look, we do have someone out there. And this is not 
about fixing blame. And I think Mr. Westmoreland and I are 
together on this. This is about fixing the problem. And as a 
matter of fact, Mr. Sullivan's initiative and everything came 
to light as a result of another hearing we had.
    Now let's say it is ongoing. Now you come in after the 
fact. We have the regulation out there, and we are talking 
about 610 and such. How do you function even in that particular 
environment? What is the best vehicle? How do you actually do 
that? How do you perform?
    Ms. Dudley.  Our focus has been primarily on the new 
regulations. And so I think that is where you would see the 
greatest effect on the regulations. But as you say, it is 
complicated. We don't know what the real impacts will be. And 
it is important to look at the regulations that are in place. 
To do that, we have sought recommendations from the public for 
over several years. And what we are doing is, in response to 
those recommendations, we are going back to the agencies. We 
have done something similar to what Tom's r3 does: identify 
priority regulations for reform, gone back to agencies, and are 
working with those agencies on completing those reforms, I hope 
before I leave office.
    Chairman Gonzalez.  Thank you very much. Which leads me 
right into what Mr. Sullivan has been doing because I think all 
eyes are probably on your office, Mr. Sullivan for guidance. 
Because you are basically in charge of being this advocate for 
all these small businesses. Someone is just going to assume you 
are the one that should be keeping pulse on what is going on 
out there and identifying. So I do want to commend you for the 
3r initiative that you took. I think that is a great vehicle. 
And that is what I would like to do is maybe concentrate my 
questions on a couple of things about--and for the benefit of 
the audience, we were having another hearing in which Mr. 
Sullivan was testifying on the Regulatory Flexibility Act.
    And I was suggesting that we should have some sort of a 
site, you know, ask Nydia or complain--and meaning Nydia, not 
out of disrespect, but actually a great deal of affection and 
admiration. Chairwoman Nydia Velazquez. She is the chair of the 
Small Business Committee, and you would just go in on the 
Internet and you would file your biggest grievance against some 
regulation. So Mr. Sullivan informed me, he says, well, we 
already have that. Nydia was very happy to hear that it would 
not be her Web site or whatever.
    Mr. Sullivan, we are identifying vehicles. How do we get 
this input from the small business community? So you have 
something here. But in our discussions in the office the other 
day, I think one of the concerns, of course, is one that we do 
something. And that is what we are doing here and that we act 
on it. And you all will have your own recommendations but also 
about continuity. So let's say during your tenure and during 
Ms. Dudley's tenure, and who knows what 2009 holds other than 
it is going to be a new administration, and maybe we can be of 
assistance to make sure there is some continuity regardless of 
change and regardless whether it is a McCain administration or 
an Obama administration. There are great changes.
    So what are your views on vehicles such as 3r? What else 
can we do to identify those regulatory schemes that really do 
need some reform from the ground up? What can we do within the 
agencies and departments, that they meet their own 
responsibilities in that regard? And then about continuity.
    Mr. Sullivan.  Thank you, Mr. Chairman. I think primarily 
to make the regulatory review and reform initiative work, it 
will depend, in large part, on the oversight mechanism here in 
the House and also in the Senate. The administration can work 
as aggressively as possible. But without the type of oversight 
insistence that this committee is looking over agencies' 
shoulders to make sure they are sensitive to the burden on 
small business, it won't work very well.
    The r3 initiative, even though I am very proud of it taking 
place under my leadership, is an acknowledgement that there has 
been a law on the books for 28 years that hasn't worked very 
well. And we are excited that working with that law, the 
Regulatory Flexibility Act has progressed enough to have this 
type of initiative. But we are still in the infancy about 
looking at, how do we take the existing $1.1 trillion 
regulatory burden and how do we streamline, downsize and 
modernize it to lessen its impact on the small business 
community?
    So I think the simple answer to your question is, this type 
of initiative will depend very much on the vigilance of this 
Oversight Committee to make sure that agencies, when asked by 
the small business community--and please keep in mind, I am 
simply a megaphone for that small business community. My job is 
to connect Main Street with government agencies and hopefully 
have those agencies have a better result. To the extent that 
this committee makes it clear to those agencies that you are 
looking over their shoulders to make sure that when Main Street 
small businesses voice their concerns, they are heard and 
responded to will go very far in making the r3 initiative a 
success.
    Chairman Gonzalez.  And I apologize. It is r3. And again, I 
just commend you for that effort. But I think it is important 
that you have advocates on this committee. And hopefully we 
will be back for the 111th Congress so that we can be making 
those recommendations regardless of who may be in charge at 
that point in time. One last question is, it is important 
though to deliver. And that is that we heard, not only heard 
and that it was credible and a legitimate complaint and that 
there are changes. I think a sure-fire way to frustrate your 
effort is if we don't respond. So that is imperative, is it 
not?
    Mr. Sullivan.  Yes, Mr. Chairman. You have recognized 
really what GAO has recognized as a failing of the 
implementation of Section 610. The Government Accountability 
Office, GAO, did a review recently and said that over the 
period of 5 years, agencies had actually conducted 1,300 610 
reviews. And that seems like a great number. The problem is 
that many small businesses and folks in the small business 
community are first unaware that these reviews happened. To the 
extent that there are positive outcomes of these reviews, I 
don't think that those have been adequately explained or 
described on how they benefit a small business's bottom line. 
So this r3 initiative, the regulatory review and reform 
initiative, is also in part to help agencies, to say, you know, 
the credibility of the Office of Advocacy, our relationship 
with small businesses is at an all-time high. Let us use that 
credibility to make your reviews of rules and regulations 
worthwhile.
    And to the extent that you do something positive, then 
let's amplify that positive so that a small business owner 
knows that it affects their bottom line. Because the disconnect 
that exists between reviews or the lack of reviews, according 
to GAO, is harming the 610 implementation.
    So we are hopeful that this initiative long term gives 
agencies the ability to seek approval of reforms that they take 
and not hide it from public comment from small business 
comment.
    Chairman Gonzalez.  Thank you very much, Mr. Sullivan. And 
a question to Mr. Wagner. Obviously, one of the top 10 was the 
home office deduction. And you have covered it and such. And 
there can be a difference of opinion here. I mean, and the IRS 
may have already responded to Mr. Sullivan. He may already be 
posting their response. And I think that response may be, this 
will take a legislative fix as opposed to regulatory. And we 
can maybe have a difference of opinion on that. And we will 
probably let Ways and Means figure that one out for us.
    How often do you come to that conclusion as you review some 
sort--is review the IRS Code and the regulations that accompany 
the enforcement of the Code as requiring a legislative fix as 
opposed to a regulatory fix because obviously legislative takes 
a lot longer.
    Mr. Wagner.  Correct. It really depends on the law. Quite 
often we are able to make adjustments as we put out 
regulations. But actually, the laws that we are given in the 
Internal Revenue Code are really very detailed. So most of the 
regulations we put out are interpretative regulations.
    We are just kind of interpreting what is in the Code 
itself. So there are times that we are able to do things 
through regulation and we do apply regulations when we can. But 
there are times when we are limited by the Code or other 
sections of the Code from doing something. In the case of the 
office in the home deduction, that is kind of where we are with 
that particular issue.
    Chairman Gonzalez.  Mr. Wagner, I am going to read 
something that staff actually prepared regarding--after they 
reviewed some materials from the IRS. And you said in your 
statement that regulations promulgated by IRS are not subject 
to review under Reg Flex, Regulatory Flexibility Act, because 
the Agency is only allowed to consider the administrative 
impact, the administrative impact of compliance with a 
regulation, not the tax burden itself.
    So you are making this distinction. You are saying well, 
sure, it is going to cost a small business a whole lot of money 
because they conduct all their business out of that spare room 
in their house. But our regulation can be so complex, it can't 
comply. So they don't go ahead and attempt to get the 
deduction. But the bottom line for them is, yeah, it is their 
bottom line. It does impact them. But what you are saying, 
there is a distinction between the administrative compliance 
cost and the consequence of the tax burden.
    Mr. Wagner.  Right. Because when you look at the actual 
Code itself, the law itself, if that is causing the burden, if 
we make adjustments in the regulations that add to the burden 
that is caused by the tax law itself, then that is what we 
would consider. So we are saying the administrative burden that 
we add through the regulations is what we would consider under 
the reform, the Regulation Flexibility Act.
    Chairman Gonzalez.  And I understand that. And I think in 
the discussions it may be esoteric. But to the small business, 
it is that bottom line. It is a burden because the regulation 
does not allow them to take advantage of the deduction which 
obviously does affect their livelihoods.
    Thank you very much for your responses. And thank you, Mr. 
Westmoreland, for your patience. And I recognize Mr. 
Westmoreland, the ranking member, for his questions.
    Mr. Westmoreland.  Thank you, Mr. Chairman.
    Ms. Dudley, in your opening statement, you talked about the 
2007 OMB report to Congress. What was the cost between 2001 and 
2006? And what was the cost over the previous 20 years? You 
mentioned that there was a 47 percent deduction. And you may 
not have those figures now. But I think that that would be 
interesting to actually have those figures.
    Ms. Dudley.  I will get them to you. I don't have them 
right here, but I will get them to you.
    Mr. Westmoreland.  Also the other question is, you 
mentioned--and yet the average yearly net benefits of new 
regulation has increased substantially. Can you explain what 
one of those might be?
    Ms. Dudley.  What one of those regulations might be?
    Mr. Westmoreland.  Uh-huh. That has got a positive net 
benefit to somebody.
    Ms. Dudley.  Our report to Congress lists the regulations 
of the previous years. And so it lists the costs and benefits. 
For the most part, we try to make sure every regulation we 
issue does have net benefits unless otherwise constrained by 
law. There are some statutes that say you can't really consider 
those factors. But to the extent that agencies are allowed to 
consider them, we work with them to try to make sure they do.
    Mr. Westmoreland.  Okay. But do you have any examples of 
what those might be? Could you get some examples? I mean, and 
show me kind of how you go through and try to determine what 
the net benefit is, and how that is I guess associated with who 
the regulation is placed upon.
    Ms. Dudley.  I think that is a very good question because 
sometimes the benefits accrue to different people than the 
costs accrue to. So for example environmental regulations will 
often have very large net benefits. And the benefits are social 
benefits over several hundred of years whereas the costs may be 
falling on people, particularly small businesses today. Others, 
the benefits and costs are borne more by the same people. For 
example our vehicle fuel efficiency regulations. The benefits 
are expected to accrue to drivers who will save money in 
gasoline if they have more fuel-efficient cars. One thing I 
should note is on environmental regulations and occupational 
safety and health regulations, Tom's office under SBREFA, the 
Small Business Regulatory Enforcement and Fairness Act, gives 
Tom's office and a small business panel the opportunity to get 
involved and focus right in on what are the impacts of this on 
small businesses, even before I see it for review. So it 
provides for an even earlier stage of review, for those two 
agencies in particular.
    Mr. Westmoreland.  I am very familiar with both those 
agencies. And trust me, we will have people wearing bubbles 
before it is over and they won't be able to work.
    The other thing I wanted to comment on you to talk about 
the flexibility for community drinking water systems. Very 
familiar with this. In fact, in one of the counties I 
represent, they basically had to run a water line out there, 
very expensive for the homeowners because it was a small 
drinking system. You have in here that it was started in 1996 
when an amendment to the Safe Drinking Water Act came up. You 
talked about the denominator had mentioned that there was 
really no way--or it had never been found to be unaffordable.
    In other words, all the different tests that you had to go 
through, it was really impossible to prove to the EPA any of 
these things. And you said that this nomination is similar to a 
reform recommended by OMB by the public in 2002, which was 
approximately 6 years after this came out. And then you say, 
and we are also interested in working with advocacy and EPA to 
see that this nomination is pursued to completion. It is 2008. 
It has been 12 years.
    Ms. Dudley.  Yes. And it is a high priority of mine 
personally and Tom's personally. There are different legal 
interpretations of how to use the Clean Air Act. And I think it 
remains to be seen whether we actually see that finished this 
year. I would like to very much.
    Mr. Westmoreland.  Well, you can understand what the 
concern might be in trying to look at some of these if it takes 
you 12 years and you haven't done it yet. I am assuming this 
has gone through different administrations and so on and so 
forth. And I think that, in and of itself, is a problem.
    Mr. Sullivan, you and I had a great conversation the other 
day. And I am going to ask you the same question I asked you in 
my office.
    How many regulations have been done away with during your 
time at the administration?
    Mr. Sullivan.  Mr. Westmoreland, I will give you the same 
answer, although with a little bit more research that I have 
had--
    Mr. Westmoreland.  Good. You found one?
    Mr. Sullivan.  I did. I did. First of all, the Regulatory 
Flexibility Act that my office oversees really does put the 
responsibility on the Agency to make a final decision. And I 
think that is important for the Committee to absorb, is that I 
tried to lead agencies to the right place. I tried to give 
advice on how their actions will impact small business. And 
with respect to Section 610, I try to give advice on how their 
existing rules may be out of date and how to reform them to 
help small business. But ultimately it is their decision. And 
we use every tool possible to convince agencies to do good for 
small business.
    I would have to say in direct response to that question, we 
are not always successful. And because of that, we don't have 
very many rules that we have done away with. However, since I 
have been chief counsel for advocacy--or in the last several 
years there have been a few notable rules that do show 
Washington, D.C.'s sensitivity to how regulations impact small 
business.
    The first is one that I worked on extensively when I was 
with NFIB and that was the ergonomics regulation that was 
passed under the last administration. My predecessor, Jerry 
Glover, was courageous in standing up and telling his own 
administration that that was not good for small business. And 
he did not prevail. However, thanks to Congress and the 
President, they overturned that rule. So that is one. But it 
did take an act of Congress.
    One that is a little bit more recently, and I do view as 
EPA's responsiveness to small business concerns, was several 
years ago they were considering requiring every pollution 
report to be filed electronically. And small businesses were 
very concerned that this would cost close to $40,000 to update 
their computer systems, receive training, and they pleaded with 
then-Governor Whitman. Governor Whitman was the head of EPA at 
the time. They said, you know this may be a good idea at some 
point when the technology highway is such that every small 
business has the exact software, exact computer systems. Maybe 
this will make sense and maybe it will be an efficient way to 
submit pollution reports. But right now it will devastate us.
    And we presented that material to the Environmental 
Protection Agency. And because of her leadership, they withdrew 
the rule. So that is one that I am very proud of. And with this 
r3 initiative, we were looking for other rules that may be 
duplicative or out of date that we can also work with the small 
business community and agency leaders to say, maybe we don't 
need that rule anymore.
    Mr. Westmoreland.  And Mr. Sullivan, that is the NP--the 
national--the pollution?
    Mr. Sullivan.  The actual rule that they were thinking of 
doing, it has a long acronym that is pronounced CROMERR, but it 
has to do with record keeping on a whole slew of different 
environmental reports that are required. It is not restricted 
to one particular Clean Water Act--
    Mr. Westmoreland.  Because there is a national permit that 
you now have to get for storm water run-off. Even though cities 
and counties and States have a permitting process, you now have 
to have a national?
    Mr. Sullivan.  Yes. Yes. Mr. Westmoreland, you and I did 
talk about a rule that this administration did take a 
leadership position on. And it was the Environmental Protection 
Agency's construction and development rule. And there was a 
different EPA administrator at the time. But when small 
businesses, and in particular your former livelihood, the home 
builders and others said, you cannot require--you should not 
require another Federal form to be sent to Washington, D.C. 
that is basically already required at a local level.
    The home builders believed that sending that other Federal 
form to Washington would not make the rivers and streams 
cleaner. And the head of EPA agreed and did not go ahead with 
the proposed rule at the time. There was legal action. And now 
the Environmental Protection Agency is under a court order to 
come back again with a similar approach. And my office is 
working very hard with EPA, once again, to make sure that the 
views of small business enter into the process so that what 
comes out of EPA reflects a sensitivity to small business.
    Mr. Westmoreland.  Thank you, sir. And Mr. Wagner, just a 
couple questions for you.
    In your statement, you had the burden reduction form 
13285A. Do you know how many of these Burden Reduction Act, I 
guess, processes have actually been adopted by the IRS, how 
many have been submitted and how many have been adopted? I can 
imagine what some of the submissions you have got were. But do 
you know how many have been adopted?
    Mr. Wagner.  I do not know the exact number of how many 
have been adopted. But I know we have had a lot of good 
suggestions come through and we have adopted but I don't have 
the actual number.
    Mr. Westmoreland.  One of the things that the Chairman 
mentioned was the home office deduction. And I know a lot of 
people that just quit doing it just to keep from being audited 
or called upon by the IRS. Does the IRS have any proactive--in 
other words, if they see a certain number of things that are 
being filed wrong or incorrectly, are they proactive in looking 
at that administratively to see if there needs to be some type 
of clarification or change when so many people are doing 
something wrong or improperly or seem not to understand it?
    Mr. Wagner.  We do a lot in the area of outreach and 
education on a lot of issues that we have in the IRS. So we are 
always looking for areas that we see that people are making 
mistakes on. This area particularly happens to be one, the 
office in home deduction. Looking at the data we have, they get 
it wrong about half the time. About half the time they get it 
correct, the other half they are either claiming too much or 
claiming too little on the office in the home deduction. 
Taxpayers let us know if there is an area that we need to look 
at to see if we can make some improvements.
    First of all, we knew there was a burden in this particular 
area, plus we get a lot of feedback through a lot of different 
organizations, external stakeholders even people who are 
claiming the deduction are telling us it is difficult to claim 
this deduction, to calculate it. That is why we looked at it 
and have spent a lot of time trying to figure out how can we do 
a better job at making this less burdensome. And we have spent 
much time looking at it extensively. And that is how we came to 
the conclusion that for this to really be addressed properly, 
to really reduce the burden on taxpayers, it would take a 
legislative change to do that. That is how we got the 
conclusion. That is an example.
    Mr. Westmoreland.  One final question, Mr. Chairman. I will 
make it quick. And this is to all of you. What brings about a 
rule or regulation change? Does somebody in your office just 
think of it? Does it come from suggestions? Does it come from a 
legislative action? And I guess it could do all of the above. 
If it comes from legislative action, is there any consultation 
with the legislative branch to find out exactly what the 
legislative intent of the law was versus what some person in 
your office may think it should be? And I know that is a 
multipart question. But I would love to hear from each one of 
you about it.
    Ms. Dudley.  I will start with a quick answer. I think it 
does come from all three. I would say in order or frequency, it 
would be legislative change, discussions with the public. And 
that is largely through the nomination process that OMB has 
conducted and the r3 process that Office of Advocacy is doing. 
And then I would say a distant third would be initiatives from 
within our offices.
    Mr. Westmoreland.  Do you check to see what the real 
legislative intent was from the legislator or from the 
Committee, from which it came before you start enacting rules?
    Ms. Dudley.  The agencies that are given the authority from 
Congress, they would take the lead on that. So our role is to 
review theirs. So I am not sure of the extent to which that is 
done. I assume it is done but I don't know.
    Mr. Sullivan.  Congressman Westmoreland, I also agree with 
Susan Dudley that changes to regulation do come from all three 
places, legislative agency activity and from small businesses 
and their association representations here in Washington, D.C.
    But I believe and it has been my experience as the chief 
counsel that the more agencies rely on small businesses to help 
them get it right, the better off they are. I see time and time 
again when a small business owner who is also the plant 
manager, who is also the accountant, who is also the H.R. 
manager, when they sit down with OSHA, when they sit down with 
Department of Labor, when they sit down with EPA and say, you 
know you may have gotten this proposal wrong, here is how I 
would do it. The discussion that is not adversarial at that 
point makes remarkable changes to the outcome. And I will give 
you one example of how a regulatory change does happen.
    Bill Farren was a small business owner, very successful gas 
station owner from Pine Bluff, Arkansas, and in the 1980s he 
got very upset that he had to fill out a Federal form that told 
his local fire chief that he had gas on the premises.
    Now because Mr. Farren was so aggravated by this, he 
decided to tell his Members of Congress, he told my 
predecessor, he told the Chair and ranking members of the Small 
Business Committee, he told the head of the Environmental 
Protection Agency, Carol Browner, that this rule should be done 
away with. And because of the tenacity of that small business 
owner, the rule was eventually changed and done away with. And 
many times, Congressman Westmoreland, that is what it takes.
    Mr. Westmoreland.  Sure.
    Mr. Wagner.  I am not the expert to speak on this for the 
IRS. Our Chief Counsel is the one who really should be talking 
about this. But I would say that we definitely do get 
recommendations from all three areas that you just talked 
about.
    Mr. Wagner.  But also, we do look at the legislative 
intent. As a matter of fact, that is one of the discussions we 
had about this particular issue for the office in the home 
deduction. We came to the conclusion it would take legislation 
to correct this. We looked at the legislative intent of 
Congress when they created the exception in 280A. And that is 
how we came to that conclusion. That is definitely something we 
consider in our regulations.
    Mr. Westmoreland.  Thank you, Mr. Chairman.
    Mr. Gonzalez.  Thank you very much, Mr. Westmoreland. And 
just one last observation. And that is, I think, Mr. Wagner, 
when you pointed out that on the home office deduction, that 
half of the time people get it wrong or something. If that is 
not a huge red flag. I mean, you can understand people's 
reluctance. And in my discussion with a dear friend of mine, 
who is actually a tax court judge, he was explaining to me 
about exclusive use, the very restrictive standard and how 
people get tripped up. You know, did you ever, you know, do 
anything on that computer or that television for one second? 
Did you watch ESPN for 5 minutes? And boom, you are in trouble.
    I think there are some--and I know there is going to be a 
disagreement whether we can do it through regulation or a 
legislative act, we need to be providing that. I mean, with the 
Internet out there, we are really talking about micro-
businesses now. Small businesses we understand, but within that 
definition are just thousands and thousands of micro-
businesses. And which lends itself, obviously, to operating out 
of someone's home. We have to accommodate at that or else we 
shouldn't have that deduction. But I think it is a fair 
deduction for, again, proper use, when properly used.
    But I want to thank all three witnesses. And at this time 
you are dismissed. And hopefully, we will see you again. And 
thank each of you for your service, and we will go ahead and 
set up for the next panel. We are going to resume the hearing. 
And I am going to make an assumption, Mr. Sullivan is here, and 
I realize the other witnesses may not be able to--from the 
previous panel, because of scheduling, may not be able to stay 
and listen to the testimony. I assure the witnesses of the 
second panel we have representatives from those agencies.
    So your testimony is very important not just for the 
information you provide members of the committee, but also 
those very agencies that we have been discussing and their 
actions. Again, I will be introducing the witnesses right 
before they testify. Instructions to the witnesses again, green 
light means you have the 5 minutes. When the yellow light comes 
on, that is 1 minute. And then red, that is the end of your 5 
minutes. But please understand your full statements are made 
part of the record. And further, we will have time for 
questions and answers.


    PANEL II - PARTICIPANTS IN ORDER ARE: MR. PAUL RENKER, 
   PRINCIPAL, RENKER EICH PARKS ARCHITECTS, ON BEHALF OF THE 
AMERICAN INSTITUTE OF ARCHITECTS; MR. PETE VAN DE PUTTE, DIXIE 
     FLAG MANUFACTURING COMPANY, ON BEHALF OF THE NATIONAL 
FEDERATION OF INDEPENDENT BUSINESS; MR. SCOTT SCRIBNER, PLANO, 
   TEXAS, ON BEHALF OF THE NATIONAL ASSOCIATION FOR THE SELF-
   EMPLOYED; AND MR. LON SANTIS, MANAGER TECHNICAL SERVICES, 
               INSTITUTE OF MAKERS OF EXPLOSIVES

    Chairman Gonzalez.  And again, just like the other 
witnesses, you may be able to elaborate on some of the 
information you wish to provide us. The first witness is Mr. 
Paul Renker. Mr. Paul Renker is the principal of Renker Eich 
Parks Architects in St. Petersburg, Florida. His firm 
specializes in educational facilities and historic restoration. 
Mr. Renker is testifying on behalf of the American Institute of 
Architects. Founded in 1857, AIA is the leading association for 
licensed architects, with more than 83,000 members. Welcome, 
Mr. Renker.

                    STATEMENT OF PAUL RENKER

    Mr. Renker.  Good morning, Mr. Chairman and Ranking Member 
Westmoreland and members of the Subcommittee. I am Paul Renker. 
I am an architect, small business owner, and a member of the 
American Institute of Architects. Thank you for inviting me to 
discuss the Federal procurement regulation that has been 
identified under the SBA's r3 initiative as being burdensome on 
small businesses that contract with the Federal Government. 
Commonly referred to as the retainage clause, the Federal 
Acquisition Regulation rule for fixed-price architectural-
engineering services allows Federal agencies to impose a 10 
percent withholding, or retainage, on fees. This 10 percent can 
be hell until the full construction of a project.
    This retainage clause presents an unnecessary burden to 
nearly 230,000 small A/E firms who contract with the Federal 
Government. It is a strong deterrent for small firms for three 
reasons. First, 10 percent is higher than the amount withheld 
under many other types of service contracts. For small design 
firms with a very small profit margin, having 10 percent of 
their fee held back for what could be years greatly restricts 
their cash flow.
    Secondly, A/E firms typically complete the major portion of 
their work in the design phase, long before construction is 
complete. This leaves design firms short of 10 percent of the 
payment amount for a substantial period of time. The result, as 
the chairman of the American Council of Engineering Companies 
Small Firms Council recently said, is an interest free loan to 
the Federal agencies at the small firms' expense.
    Third, a 10 percent retainage requirement is not necessary 
in order to protect the taxpayers. There are common methods of 
determining whether performance of A/E services has been 
satisfactory long before payment of services or completion of 
construction. Furthermore, the withholding is counter to the 
Brooks Act, which establishes the qualifications-based 
selection process, or QBS, for A/E firms.
    QBS ensures that only the most competent and capable firms, 
those with a proven track record of good performance, are 
selected for design contracts with Federal agencies, even 
before they negotiate potential fees. I would like to take a 
few moments to relate our firm's first experience with a 
Federal project. Through the QBS process, our firm was chosen 
and awarded a contract to design a new Job Corps Center for the 
Department of Labor in St. Petersburg, Florida.
    This was a small business award, and we are very happy and 
proud to be selected. We started fee negotiations in June of 
2006. We received our first payment for services approximately 
220 days from the start of fee negotiations. I mention this 
because our firm, as a small business, has to staff and plan 
for large projects such as this. This resulted in our firm 
incurring costs and expenses for salaries and overhead for 220 
days without compensation. We were forced to borrow money to 
maintain our salaries and expenses. When compensation was 
received, 10 percent was withheld, further impacting our cash 
flow. We understand that the intent of the 10 percent retainage 
is to protect the interests of the government and the taxpayers 
and to help ensure they receive services equal to or greater 
for what they paid.
    However, this is already addressed under the system in 
which architects and engineers provide services. The Department 
of Labor contract we signed includes a handbook and detailed 
description of services and deliverables required for payment. 
We are required to submit progress documentation of our work at 
four key milestones. In each case, professionals hired by the 
Department of Labor review our work in great detail for 
compliance with submittal requirements, as well as the design 
program intent. Only after our submittal is reviewed and 
approved is our invoice for services accepted and processed for 
payment.
    The 10 percent retainage of our fees was held in increasing 
amounts over the entire period of our design services. It 
should be noted that 10 percent is not retained from the 
contractor's pay requests during construction. We were told we 
could write a letter requesting the Department of Labor release 
our retainage for design services. We received our 10 percent 
retainage approximately 500 days after our contract notice to 
proceed. As the Small Business Committee is dedicated to 
opening the Federal marketplace to small businesses, we 
strongly encourage it to support eliminating the retainage. 
This will ensure that small A/E firms are able to design the 
buildings that represent the Federal Government without placing 
their solvency in jeopardy.
    Thank you, Mr. Chairman, and members of the subcommittee 
for giving me the opportunity to testify today. I would be 
pleased to answer any questions you may have.
    Chairman Gonzalez.  Thank you very much, Mr. Renker.
    [The statement of Mr. Renker can be found in the appendix 
at page 77.]
    Chairman Gonzalez.  The next witness is Mr. Pete Van De 
Putte. Mr. Pete Van De Putte is President and CEO of the Dixie 
Flag Manufacturing Company in San Antonio, Texas. I have known 
Pete and his family for a number of years. He is my 
constituent. And he will be voting on November 4th. I have no 
idea, and I don't want to influence at this time. He currently 
serves on the NFIB Texas Leadership Council. Mr. Van De Putte 
is here to testify on behalf of NFIB. Founded in 1943, NFIB 
represents small businesses in Washington and in all 50 State 
capitals. And I do want to point out that Mr. Van De Putte is 
married to my wonderful state senator, Leticia Van De Putte. 
Welcome, Pete.


                 STATEMENT OF PETE VAN DE PUTTE

    Mr. Van de Putte.  Good morning, Chairman Gonzalez, Ranking 
Member Westmoreland. I am Pete Van De Putte from San Antonio, 
and I really appreciate the opportunity to be here today. As a 
member of the NFIB since 1980, I am pleased to offer my 
testimony. My business, Dixie Flag Manufacturing Company, is a 
small family business in San Antonio. This year we are proud to 
be celebrating our 50th year in business. In that 50 years, we 
have had the privilege to provide jobs to some terrific men and 
women, and to be the first employment experience for a number 
of our employees' children.
    I come here today not only representing small business 
owners, but the millions of people who depend on small 
businesses for their livelihood. At the outset, I want to 
commend the committee for holding this hearing on the Office of 
Advocacy's Regulatory, Review and Reform Initiative, or r3, an 
effort to identify outdated and ineffective Federal 
regulations. The complexities of Federal regulations are 
especially onerous to small businesses, so I appreciate the 
committee's interests in addressing this important topic. 
NFIB's national membership spans a wide range of small business 
operations, from one-person enterprises to firms with hundreds 
of employees.
    While there is no one definition of small business, all 
NFIB members have one thing in common: Their businesses are 
independently owned. Clearly, we are talking about the truly 
small businesses in America, businesses whose priorities and 
abilities to handle regulatory challenges are greatly different 
from their larger counterparts. Earlier this year, the SBA 
Office of Advocacy released the 2008 top 10 rules for review 
and reform. The r3 program strikes right at the heart of one of 
the major burdens facing America's small business, the 
cumulative Federal regulatory burden.
    Being a small business owner means more times than not you 
are responsible for everything from ordering inventory to 
cleaning the toilets and hiring employees to dealing with 
mandates imposed by Federal, State, and local governments. That 
is why government regulations and the paperwork they generate 
should be as simple as possible. The less time a small business 
spends with government overhead, the more they can spend 
improving their business, employing more people, and growing 
the American economy. Unreasonable government regulation, 
especially paperwork burdens, continues to be a top concern for 
small business owners like me.
    Regulatory costs per employees are the highest for small 
firms, and our members consistently rank those costs as one of 
their most important issues. The r3 program plays an important 
role in regulatory reform, urging agencies to write regulations 
that are easy to read and understand, and to review the impact 
each regulation has on small business. For its part, Congress 
plays an important oversight role by looking at both new 
Federal regulations and changing those already on the books.
    To keep up with the changing environment, regular 
evaluation is imperative to find outdated, ineffective, and 
onerous regulations. With respect to the specific 
recommendations of the r3 program, one particular provision of 
particular interest to NFIB members is the standard home office 
deduction. This issue is of particular interest to me, because 
my parents started Dixie Flag Manufacturing Company in my 
bedroom in 1958. Dixie Flag now employs 45 people, but then it 
was just my dad, my mom, and my grandmother. While the rate of 
new home-based businesses continues to grow, the existing home 
office deduction remains burdensome and complicated. It 
requires a small business owner to determine how much of their 
house is used for business, and to keep detailed records that 
substantiate that deduction.
    The complicated recordkeeping now required by the IRS to 
qualify for a home office deduction is a barrier to many who 
would qualify, but do not have the time and the staff to do the 
paperwork. That barrier would be removed if a standard 
deduction for home-based businesses was allowed. NFIB members 
believe that small home-based businesses should have the option 
of either a standard home office deduction or using the current 
system. The standard deduction would allow business owners to 
claim a deduction he or she is entitled to, reduce the filing 
burden, and ultimately improve tax compliance.
    In conclusion, I appreciate the opportunity to comment on 
the r3 program and the impact of Federal regulations on small 
businesses. Along with the other small, independent business 
owners who make up the membership of the NFIB, I hope that 
Congress will continue to take significant steps to reduce this 
burden, and that Federal agencies will adopt the r3 
recommendations suggested by SBA's Office of Advocacy. Thank 
you again for the opportunity to testify. I look forward to 
answering any questions you might have.
    Chairman Gonzalez.  Thank you very much, Mr. Van de Putte.
    [The statement of Mr. Van de Putte can be found in the 
appendix at page 86.]
    Chairman Gonzalez.  Our next witness is Mr. Scott Scribner. 
Mr. Scribner is a realtor from Plano, Texas. He is currently 
affiliated with Keller Williams Realty. Mr. Scribner is here to 
testify on behalf of the National Association for the Self-
Employed. The NASE represents hundreds of thousands of 
entrepreneurs and micro-businesses, and it is the largest 
nonprofit, nonpartisan association of its kind in the United 
States. And welcome, Mr. Scribner.


                  STATEMENT OF SCOTT SCRIBNER

    Mr. Scribner.  Thank you. Chairman Gonzalez, Ranking Member 
Westmoreland, and members of the subcommittee, I would like to 
thank you for giving me a chance to speak to you this morning. 
I applaud the time and energy you spend helping small 
businesses around the country. Your efforts are appreciated. My 
name is Scott Scribner, and I have been a member of the 
National Association for the Self-Employed for a number of 
years. Along with my wife Barbara, I own a real estate sales 
business in Plano, Texas. We have operated the business, 
primarily from home, for almost 14 years. Before that, I was a 
commercial banker and president of a small East Texas bank. Our 
business currently has one full-time employee, but we plan to 
expand our team in the near future.
    My purpose today is to comment on the IRS home office 
deduction. Since we run the business from our home, we are 
allowed to deduct expenses related to our home office. The 
problem we face is the time and complexity in figuring the 
deduction. And I know that we are not alone. I have talked with 
many of my peers about this issue, and most everyone agrees 
either they don't understand the deduction or are afraid that 
if they take it they increase their chances of an audit.
    By way of illustration, this is the home office deduction 
form 8829. It is only one page, and it looks simple enough 
until you actually read it. There are 43 line items required 
just to complete the form. Most of the information needed 
requires time-consuming effort to complete. For example, line 
30 says carryover of casualty losses, while line 32 says 
allowable excess casualty losses. So I have to know the 
difference between carryover, excess, and allowable. And I am 
not even sure I have any casualty losses. There is more, but I 
think you get the point. I am told on the form 14 different 
times to see instructions.
    Now my wife would be shocked to hear this, but even I read 
instructions occasionally. And believe me, there are plenty of 
instructions for the home office deduction. In fact, these are 
the instructions, all 31 pages worth. So it seems to me that I 
face a choice. One, spend hundreds of dollars and lost time 
collecting data, reading 31 pages of instructions and 
completing the form; two, pay a CPA hundreds of dollars to do 
it for me; or three, forego the deduction altogether. In my 
case, I wanted to make sure that my CPA had a great vacation in 
Hawaii last year, so I chose option two.
    Unfortunately, the majority of my fellow self-employed 
business owners prepare their taxes without professional help. 
Thus, the time burden and complexity of the home office 
deduction causes many of them to choose option three and not 
utilize this tax benefit at all. Like most business owners, I 
would rather be providing good service to my clients, growing 
my business, and creating new jobs, not spending time trying to 
comprehend tax forms and instructions. On the other hand, it 
seems unfair not to deduct home office expenses. It seems to me 
there should be a better way. Small business should have a 
choice. If time and resources allow, let home-based businesses 
take the traditional deduction, or, if they prefer, how about a 
standard home office deduction. This provides a way for small 
business owners to take the home office deduction without 
negatively impacting their business.
    For me, I would choose to take the standard deduction and 
then get back to work in my business. I am sure many other 
people feel the same way. The NASE is supporting the Home 
Office Deduction Simplification Act, H.R. 6214, which would 
provide a $1,500 standard deduction option for home-based 
businesses. In addition, House Small Business Committee 
Chairwoman Velazquez is preparing legislation that would also 
include a standard home office deduction.
    I encourage Congress to support these bills and help the 52 
percent of small businesses who work from their home. Again, I 
appreciate the chance to be here and to speak about this 
important topic. Thank you for the passion and energy you put 
into helping small businesses.
    Chairman Gonzalez.  Thank you very much, Mr. Scribner.
    [The statement of Mr. Scribner can be found in the appendix 
at page 90.]
    Chairman Gonzalez.  And our next witness, and I hope I get 
this last name right, is Lon D. Santis. Is that correct? Mr. 
Santis is Manager of Technical Services of the Institute of 
Makers of Explosives. He interacts with Federal agencies on 
issues involving commercial explosives and oversees IME's 
safety library. The IME was founded in 1913 to provide accurate 
information and comprehensive recommendations concerning 
commercial explosive materials. And welcome, Mr. Santis.

                   STATEMENT OF LON D. SANTIS

    Mr. Santis.  Thank you, Chairman Gonzalez and Ranking 
Member Westmoreland, for the opportunity to appear before you 
today. Your interest in MSHA's regulation of explosives is 
greatly appreciated. MSHA's explosives regulations are 
inconsistent with national consensus standards and other 
agencies' regulations. This exposes miners to undue risk and 
wastes the resources of mining operators and contractors, the 
vast majority of whom are small businesses.
    87 percent of the United States' commercial explosives are 
consumed in mines, 65 percent in surface coal mines alone. Yet 
MSHA's surface coal regulations have never been updated since 
their inception in 1971. In comparison, the National Fire 
Protection Association's national consensus standard on 
explosive safety, NFPA 495, has been updated 10 times since 
1971. In the last 10 years, I have been in many meetings and 
discussions with MSHA officials, labor representatives, and 
mine operators regarding updating these regulations. Despite 
universal agreement that the regulations need to be updated, 
MSHA has not been able to get this done.
    For the remainder of my testimony, I will touch on the most 
significant vulnerabilities and burdens created by MSHA's lack 
of attention to explosives in recent years. First, many of 
MSHA's explosives regulations are inconsistent with current 
best practices. Even MSHA's own regulations for coal and metal/
nonmetal mines are inconsistent with each other. For example, 
the surface coal regulations are inconsistent with nearly every 
other standard with regard to the fundamental concepts of blast 
site and blast area. These terms should be crystal clear. The 
blast site is the immediate area around the explosives, where 
only authorized personnel and equipment should be present 
during the loading process. Failure to clear the blast area 
when a blast occurs causes half of the explosive accidents in 
mines according to MSHA.
    Second, MSHA explosive regulations contain outdated and 
inappropriate references. The definitions for explosives in 
their regulations are incredibly flawed. The metal/nonmetal 
regulations refer to nonexistent sections of the U.S. 
Department of Transportation's DOT regulatory code for 
definitions of critical terms like detonator, blasting agent 
and explosive. Likewise, the surface coal regulations refer to 
different definitions of these terms than DOT. All of MSHA's 
regulations still use the explosives classification system, 
class A, B, and C, that was abandoned by DOT in 1992. The 
regulations also refer to nonexistent sections of the Bureau of 
Alcohol, Tobacco, Firearms and Explosives (ATF) regulations. 
They refer to technical standards for blasting agents that were 
written in 1963.
    Third, MSHA's explosives regulations are a barrier to 
improved technologies, technologies like electronic detonators. 
Electronic detonators actually represent the second revolution 
of initiation technology that was missed by the surface coal 
regulations. To legally and safely use electronic detonators in 
mines, manufacturers must get MSHA to exempt their brand name 
product from the regulations. This is a cumbersome process that 
can take months even for the next generation of a previously 
approved system. Such a process disadvantages small businesses 
from entering the electronic detonator market.
    Fourth, MSHA's explosives regulations and policy create 
security vulnerabilities. Through a memorandum of understanding 
with the ATF, MSHA agrees to enforce Federal explosives laws in 
underground mines. MSHA's regulations for underground mines 
have significant security gaps. And to the best of my 
knowledge, MSHA is not enforcing more stringent ATF rules like 
those ensuring that only personnel with ATF background checks 
have possession of explosives underground.
    Finally, and very briefly, MSHA has lost its ability to 
ensure a safe supply of explosives for the Nation's underground 
coal miners. Mining coal with explosives has become an 
exclusive niche for small businesses in the underground coal 
mine community. This loss adversely affects MSHA's ability to 
conduct accident investigations, field audit quality control 
testing, and approvals of new and improved explosives. While I 
have only been able to scratch the surface of the problems with 
MSHA's explosives regulations here, my written statement and 
the Small Business Administration's r3 nomination describe to a 
greater extent each of the points above.
    MSHA's failure to update their regulations creates risk 
where none need exist, and wastes the resources of small 
businesses. Thank you for this opportunity, and I look forward 
to answering your questions.
    Chairman Gonzalez.  Thank you very much, Mr. Santis.
    [The statement of Mr. Santis can be found in the appendix 
at page 95:]
    Chairman Gonzalez.  You are the beneficiary of that 
initiative, obviously, by Mr. Sullivan. It gave you a vehicle 
in which to voice those concerns. Mr. Renker, I am going to 
start off with the questions, obviously, in the order of the 
witnesses as you all testified. Why the difference on the 
retainage? And I will tell you now my Association of Building 
Contractors always complain about, you know, the 5 percent and 
such. I can only imagine if it was 10 percent. But they are a 
pretty vocal group. What is the reason for the difference, 
doubling it?
    Mr. Renker.  I wish I knew. I have been an architect for 34 
years, and this is the first contract I have ever had retainage 
on my fees. In every other case we present a product, that 
product is reviewed and approved, and then we invoice for our 
services. So, you know, to have a 10 percent retainage was a 
big surprise to me.
    Chairman Gonzalez.  And I am sure it has been asked, I am 
sure there is an answer out there. What we will do is we will 
pose the question for you and see if we get a response. Now you 
would be surprised, we are Members of Congress, right, Mr. 
Westmoreland, but many times it is the old thing about, you 
know, they don't wait you out, they will wear you out. So we 
are familiar with some of that, but we will try to get that 
response. I just was wondering why the difference. I do want to 
talk to you about something you may not have touched on 
completely, and that is the reverse auction, and the fact that 
it might conflict with the qualifications-based selection 
process. Can you give me some information from your 
perspective?
    Mr. Renker.  Well, from my perspective, architects and 
engineers are selected on the QBS system, where we submit our 
qualifications and the agencies review in depth our 
qualifications as past performance and select us on the basis 
of who they feel can do the best job. And at that point we 
negotiate our fees. The reverse auction process is contrary to 
that Brooks Act in that they are asking for fees up front, I 
understand, and then they post them, and whoever is the last 
one to, you know, the one who is willing to go the lowest, I 
guess, gets the contract. But I honestly am not personally 
familiar completely with the reverse auction system.
    Chairman Gonzalez.  I think that bears looking into. You 
know, at what cost? I understand the motivation on a reverse 
auction. It kind of makes sense in the most simplest of 
concepts. But in practice, you may not end up accomplishing 
what you really want to accomplish. There is a lot more than 
everybody racing to see who is the lowest bidder on this thing.
    Mr. Renker.  From an architect/engineer's standpoint, where 
we provide services that involve health, safety, and welfare of 
individuals, going on--and I think that is the reason for the 
QBS system--going on the low price and trying to remove 
services on that basis just doesn't seem wise.
    Chairman Gonzalez.  I sure do thank you, Mr. Renker. Mr. 
Van De Putte, I know you are going to be in total agreement 
with Mr. Scribner here regarding the home office deduction and 
what that means. And I think we have legislation out there that 
is addressing it. We may have some other legislation that may 
be spearheaded by the Chair of this full committee, which is, 
of course, Nydia Velazquez, to whom I referred earlier, and I 
can tell you you don't have a stronger advocate for small 
businesses than Chairwoman Velazquez.
    And so that is a good sign. And I am hoping that we are 
going to be able to do something, especially with the 
tremendous support that we have from Mr. Sullivan's office. Can 
you think of any other regulation that impacts you that you 
would say, well, this is on my mind, I think there is ways of 
streamlining it? And what is the best vehicle for you to make 
your opinion known as to what is detrimental to you in the 
operation of your business that is not truly necessary in any 
regulatory scheme?
    Mr. Van De Putte.  Yeah, I think there is probably more 
than we would have time to talk about. I think one of the 
things that I have come upon, it seems that when you are 
looking at Federal wage and hour, when you look under the 
reality of how business operates today and what goes on, their 
definitions of what is exempt employee, nonexempt employee I 
don't think necessarily reflects reality.
    I once had a run-in with them where I had five employees 
doing the same thing, and they said because one of those 
employees had a degree they were a professional, the other four 
weren't. Which doesn't make an awful lot of sense to me under 
all sorts of concepts of fairness and equal pay and equal this 
and that. The fact that the Federal Government would 
discriminate against somebody because they did or didn't have a 
degree was surprise to me. But I was told that is the way the 
regulations run.
    And I think that would be one area where the rules are very 
complicated. And when you are a business owner trying to do 
things right, and trying to be careful when you are employing 
people, and you are being fair, again, as a small business 
owner, when every time I want to do something, the first call I 
have to make is to the attorney, my attorney, to interpret this 
rule, and of course, as soon as they pick up the phone the 
meter starts running. And as small businesses, we don't have 
staff attorneys. We don't have staff accountants. We have to go 
out into the marketplace and pay retail.
    Chairman Gonzalez.  And again, thank you very much. Mr. 
Scribner, you have come out with basically, and I wanted to 
make sure that I touched on this, because we have been able to 
identify, obviously, problem areas that have come up to the 
forefront, again, because of what Mr. Sullivan was able to 
initiate in his own office. The big thing is this thing about 
this home office deduction. And like I said, just in my over-
dinner discussion with a tax judge, he seemed to agree. I mean, 
you are truly at risk. So we have legislation out there. And I 
can ask Mr. Van De Putte, too, and I think you also agree in 
your testimony, Pete, that maybe it would just be a standard 
deduction. Maybe cut through all this. And if you are audited 
you are audited, I mean, there is not much anybody can do about 
things like that. But nevertheless, rather than the strictness 
of it, that just basically disallows you.
    Mr. Scribner.  Mr. Chairman, I can speak for myself. I am 
in a very, what I call a perpetual business, constantly in 
motion with buyers and sellers and contracts and accounting and 
legal aspects. And the biggest challenge that I face as a small 
business person is the ability to try to hold it all together, 
so to speak. In other words, to have the time to address all of 
the issues and concerns I need to address to run my business. 
And that, I think, is the big issue and would be the advantage 
of the standardized home office deduction. It just is very 
unwieldy and very time-consuming for me as a small business 
person to keep up with tracking the various home office 
expenses and trying to understand those rules. So I think that 
is the perfect advantage of the standard home office deduction.
    And I think that--it is my understanding that 27 percent--
only 27 percent of small businesses actually take the 
deduction. And I think that is because of, you know, a few of 
the things that I addressed in my comments, the fears that they 
have about IRS audit and just the overall complication and the 
time involved in taking the deduction.
    Chairman Gonzalez.  The other thing that may not be related 
to today's hearing, but I wanted to touch on it quickly because 
of your own background, before you were with Keller Williams, 
you said you were--was it with a community bank?
    Mr. Scribner.  Yes, I was in commercial banking for 12 
years. I was the CEO of a small East Texas bank.
    Chairman Gonzalez.  Because Mr. Westmoreland and I, for a 
future hearing, we were considering actually bringing in our 
independent community bankers and seeing what is going on out 
there in the credit markets, the impact of the regulatory 
scheme. Because first and foremost, we always think that they 
truly represent the access to capital within the community.
    So again your own experience, we may draw on that, we may 
call you back and just--there is a reason that you are in real 
estate today, and I am not saying that you weren't happy as a 
banker.
    Mr. Scribner.  I welcome the opportunity.
    Chairman Gonzalez.  Mr. Santis, it is very interesting, 
because you are talking about, obviously, an activity that is 
very specific to different areas of the country when we are 
talking about the explosives, the use of them and such. And it 
is amazing, though, that you pointed out that you haven't had 
any real updates on regulations and such for a period in excess 
of 30 years. And technology does move forward. Practices, best 
practices change and such. What would be the reason for this 
inactivity? It seems like--and I know there is always staffing. 
There is always budgetary constraints and such.
    But why haven't we moved forward? And the reason for that 
is that, you know, I believe in regulation. I think we all 
understand for safety reasons and leveling playing field and 
all that and standards, reasonable, effective regulation. And 
these are outdated that we are talking about, these are 
burdensome, onerous and such. But why do you believe you would 
have in your particular field such neglect over such an 
extended period of time?
    Mr. Santis.  Well, I think only MSHA could really give you 
a full answer. My opinion is that in some respects, we are a 
victim of our own success in the explosives industry. We have 
improved technology and products immensely over the years. And 
explosives accidents are a fairly rare occurrence in mining. 
But I think as recent experience in mining has shown us, we can 
go a long period of time without accidents and fatalities, and 
then suffer mine inundations, mine explosions, massive failures 
of the mine roof, and then scramble about with how are we going 
to deal now with this problem that has been thrust in front of 
us.
    And I feel that the explosives area is another potential 
catastrophe waiting to happen. And the Agency just doesn't seem 
to recognize that. I think that the Agency may not have as much 
technical expertise in house to comprehend the problems. And 
hopefully, the r3 initiative will provide some impetus for the 
Agency to address this critical issue.
    Chairman Gonzalez.  Because as Mr. Sullivan pointed out, 
the follow through with r3, of course, is the response from 
that particular agency or department. And then looking at it. 
Again, it is the credibility and legitimacy of the response. 
Again, thank all the witnesses, and at this time I am going to 
recognize the ranking member for his questions.
    Mr. Westmoreland.  Thank you, Mr. Chairman. This is a 
target rich environment. Mr. Renker, talk about the 10 percent 
retainage. You know, the P word up here sometimes to some 
people is a bad word. And that would be profit. With the 10 
percent retainage, it almost causes not so much of a 
competitiveness with bidding because when you are bidding and 
you understand that they are going to have a 10 percent 
retainage, and I know in a lot of jobs that I have had people 
that I know that bid, you know, they make three, four, five 
percent on some of these government contracts. And having a 10 
percent retainage, as you spoke before, you know, just kind 
of--it really hurts your cash flow. And really and truly, it 
really keeps some people in small businesses from being able to 
bid on some of these Federal contracts that they would like to 
bid on, but they cannot suffer that kind of cash flow shortage. 
Would you say that is a true statement?
    Mr. Renker.  Yes, sir.
    Mr. Westmoreland.  Are you aware that I believe starting in 
2011, there is going to be an additional 3 percent retainage on 
Federal contracts?
    Mr. Renker.  No, sir, I am not aware of that.
    Mr. Westmoreland.  There is going to be an additional 3 
percent withholding for your Federal taxes that will be done on 
Federal contracts. And so we are only complicating our 
situation by this. There is several people in the House, I 
believe Mr. Meek, Mr. Kendrick Meek and myself and others are 
on a bill to repeal that, to make that not go into effect. And 
I would hope that the chairman, at some point in time, when we 
are looking at some regulations, we can look at what that will 
really do to the cost of how the Federal Government does 
business.
    Also having dealt with architects for a long time, 
typically on a retainage issue, my experience has been, 
especially on a government contract, that you cannot get your 
draw until the architect has actually gone out and inspected 
and made sure that what he had intended to go in place had 
actually gone in place, and that the right materials, grades, 
and so forth were put into place. Is that typically your 
experience?
    Mr. Renker.  Yes, to some degree. In a sense as architects 
we are not providing the construction product. We provide the 
design product. And in each case, the Agency that we work for 
reviews our product, and in great depth and in detail, and only 
after they review and approve our product, then we are allowed 
to invoice. And usually with the Federal Government they have 
been good, once they accept our invoice, they pay us 
electronically in 30 days. But it is getting that invoice 
accepted and doing all the work that creates the time lag for 
us.
    Mr. Westmoreland.  Sure. That is kind of like Mr. Scribner 
had the instructions for the home deduction.
    Mr. Renker.  Yes.
    Mr. Westmoreland.  Mr. Van De Putte, I know Mr. Santis 
handling explosives is probably under tremendous government 
regulations. You are in the flag business. How many regulations 
do you find that are on a flag business? And I am assuming that 
you make flags. And what type of regulations do you have that 
causes you the most trouble other than the home deduction?
    Mr. Van De Putte.  Well, because we purposely don't use 
chemicals, we are a sewing operation, we have actually kind of 
constructed our business so we are not having to deal with some 
of this. Because the people that I know that are in the 
business of doing printing, for example, have got all sorts of 
these EPA hoops they have got to jump through to make that 
happen.
    In our case, it is just the normal course of a business 
doing business. It is dealing with OSHA and dealing with EPA. 
Even though we don't use any chemicals, we still have to spend 
time filling out forms to report the fact that we don't use any 
chemicals. And wage and hour and IRS. It is just the cumulative 
burden of everything. I have got one of my highest paid people 
on my staff spends most of his time dealing with not how to 
make my business run better, but how to make sure that we are 
filling out all the forms and doing all of the reporting to the 
Federal Government just in the normal course of doing business. 
Whereas the smartest financial guy I have got in my building, 
if I could turn him loose on helping me to be a more successful 
business in making and selling flags, we would be a more 
successful business. But I go in and talk to him about that and 
he is busy because he has a form he has got to turn in.
    Mr. Westmoreland.  So what you are saying is basically out 
of fear of more regulations, you haven't expanded your business 
into some other areas--
    Mr. Van De Putte.  Absolutely.
    Mr. Westmoreland.  --that might require you to do chemicals 
and so forth?
    Mr. Van De Putte.  Absolutely.
    Mr. Westmoreland.  And that is pitiful. But the other thing 
is I notice you have 45 employees.
    Mr. Van De Putte.  Uh-huh.
    Mr. Westmoreland.  Don't get to 50.
    Mr. Van De Putte.  I am actively working not to.
    Mr. Westmoreland.  If you get to 50 you are going to be 
under that Family Medical Leave Act, and you are going to have 
start keeping up with the minutes that your employees take off. 
So that is a shame that we limit you, because it sounds like 
starting with your grandmother that business has been very 
successful. And you certainly have the opportunity to employ 
more people in San Antonio, Texas, but unfortunately, because 
of your fear of the regulations and stuff, you are just not 
going to expand that business. So my apologies to you that we 
have that kind of effect. Mr. Scribner, you are way too common 
sense. But Mr. Chairman, I would like unanimous consent that 
Mr. Scribner be able to submit that IRS form and those 37 pages 
of instruction--
    Chairman Gonzalez.  Without objection.
    Mr. Westmoreland.  --into the record, if you wouldn't mind 
doing that, because I would like a copy of it. I think I can 
use that at some later time.
    [The information can be found in the appendix at pages 101 
and 102.]
    Mr. Westmoreland.  So thank you for coming and for 
testifying and for standing up for all the self-employed 
people. Because I think it is in all of us that we all want to 
be entrepreneurs and want to be self-employed. But one other 
question I wanted to ask you, you talked about your banking 
experience and being with a small community bank. And as I go 
back and look at regulations that this body has passed with 
unintended consequences, I think Sarbanes-Oxley is one of those 
unintended consequences about the amount of money that it has 
cost small banks that are owned by community stockholders that 
are already audited by the State banking agencies and Federal 
banking agencies, and yet they have to pay for a third 
independent completely outside audit.
    Mr. Scribner.  I think that is exactly right. As a matter 
of fact, both from my banking perspective and even as a 
realtor, I see the effects of some of the concerns with a 
regulation like Sarbanes-Oxley in terms of the requirement to 
actually have people on staff just to deal with regulations, 
which again, I think, takes away from the intent of the 
business, and that is to have as much profit as they possibly 
can, creating jobs, and stimulating the economy. And having 
been a banker, it is interesting, my perspective is I was a 
banker for a long time, and so I saw a lot of small business 
clients, but it is interesting when you change hats and all of 
a sudden instead of being the guy giving the money you are the 
guy trying to make the money. And all of the challenges with 
respect to additional regulation are hard for a small business 
person to keep up with.
    Mr. Westmoreland.  Sure. Absolutely. I am looking forward 
to that hearing that we are going to have on the small banking 
and small business and how banking affects their business. But 
thank you for being here.
    Mr. Scribner.  Thank you.
    Mr. Westmoreland.  Mr. Santis, I know that since I have 
been in Congress, we have had several terrible accidents that 
has involved mining and explosions and other things. And 
sometimes Congress tends to have a knee-jerk reaction rather 
than sitting down and looking at facts and details and talking 
to the people that are involved in the business. Do you know of 
anybody that handles explosives that aren't careful?
    Mr. Santis.  Unfortunately, yes. Aside from accidents that 
are caused by flying material when the button is pushed, the 
second most frequent cause of accidents is misuse of the 
product, someone doing something--
    Mr. Westmoreland.  Would education solve that or more 
regulation?
    Mr. Santis.  Education helps. But education only reaches a 
small proportion of our community. The ones that attend 
seminars and get training are probably not the ones making 
mistakes. What we see, and especially in the small business 
community, is that they rely on the regulation as the ceiling 
of performance. And that is where they feel they need to 
operate. So they reach that level and they feel that they are 
good. Unfortunately, this is not good enough.
    Mr. Westmoreland.  Well, I understand, but I thought you 
mentioned that the regulations didn't really conform with your 
best practices of handling explosives.
    Mr. Santis.  That is true. That is true. And fortunately, 
the vast majority of people in mining operate above the level 
set by the regulations, demanded by the mine operators, the 
suppliers of the products and the employees themselves, because 
there is a considerable self-preservation interest.
    Mr. Westmoreland.  So you are thinking there needs to be 
more regulation on the mining industry?
    Mr. Santis.  We think the regulations need to be 
consistent, not necessarily more. The problem comes about 
through inconsistency and confusion and wasting of resources. 
Citations for things that are simply not an issue. Those should 
go away. Those issues, regulations that were written for the 
use of black powder, for example, which is something we don't 
do today. They are still on the books.
    Mr. Westmoreland.  I am kind of confused about your 
statement that education doesn't get to everybody. I am 
assuming you are saying that regulations do?
    Mr. Santis.  Well, yes.
    Mr. Westmoreland.  And the regulations aren't up to the 
best practices, so I am confused. If they are not up to the 
best practices and your people don't get education, then how do 
they know what the regulations are?
    Mr. Santis.  Oh, the MSHA enforces the regulation. They are 
aware of what the regulation is. MSHA has training 
requirements, for example, that the employees must be trained 
on the regulation. We think that there needs to be consistency 
in the regulation, which would elevate the level of safety in 
those operations that operate right at that ceiling.
    Mr. Westmoreland.  And when you say consistency in the 
regulations, are you talking about the different types of 
explosive businesses, or what are you talking about 
consistency?
    Mr. Santis.  Practices. I am talking about practices, 
differences in practices. For example, a small blasting 
contractor may blast in a construction site one day, a quarry 
the next, and a coal mine the next. All three of those 
performance regulations would be different. And he must adjust 
his practices and procedures at each one of those sites. And 
that is a very difficult process. As you pointed out, we are 
regulated by up to 3,000 entities. And consistency is 
paramount.
    Mr. Westmoreland.  Yes. So what you are saying is the 
inconsistency could bring about confusion?
    Mr. Santis.  That is right.
    Mr. Westmoreland.  And more area for something to happen.
    Mr. Santis.  Right. And leaves gaps. When you let something 
sit since '71, gaps develop.
    Mr. Westmoreland.  Well, Mr. Chairman, that is all the 
questions I have. I want to thank you for doing this. I look 
forward to us having some more of these. And as most small 
businesses, we are result-oriented. And hopefully, these 
hearings will have a result.
    Chairman Gonzalez.  Well, the follow through is important. 
Thank you for your participation, as always, Mr. Westmoreland. 
We are not going to have a regulation-free environment. I think 
we all understand that. And we probably should not for a lot of 
the obvious reasons. The importance is the time, the place, the 
manner of the regulation that doesn't impede, is not a 
detriment to our citizens. And that is the goal that we all 
share, whether they be Republican, Democrat, whatever. But we 
have some really good people that are really invested in this 
particular endeavor, and we are going to need your help.
    So I would like to end the hearing with giving each of the 
members of the last panel one minute to tell us anything that 
you think we haven't heard, or that you believe we should walk 
away with as maybe this one very important message. What would 
you like us to do? Anything that is on your mind. You have got 
one minute. And we will start with Mr. Renker.
    Mr. Renker.  Okay. I, certainly in my testimony, I 
mentioned a period of time during negotiations with the 
government with regard to our fees. Again, we are selected on 
qualifications and then we negotiate our fees with the 
government. If you noticed, it took us over a hundred days, 
almost 115 days to negotiate our contract with the Federal 
Government, and 200 hours on my part, which are uncompensated 
hours. And the negotiation process is extremely onerous, and 
almost caused me to walk away from the contract, quite frankly. 
They negotiate hourly rates and overhead as if we were a large 
company, you know, the Bechtels or whatever.
    And you know, when we look at my firm, the person who keeps 
the books on a day-to-day basis is me. And during negotiations, 
they asked for accounting information that is just not 
available. And I had to tell them, look, I am sorry, but you 
can't get blood from a stone. And it dragged on the 
negotiations for quite a bit. And it made it very, very 
difficult even to negotiate the contract.
    And I would hope that--and we were talking about this maybe 
for another year or another time, that we look into how the 
Federal Government negotiates with a small business versus a 
large business, and maybe make some allowances for that. Thank 
you very much.
    Chairman Gonzalez.  Thank you. Mr. Van De Putte.
    Mr. Van De Putte.  I think if there is one thing I would 
like you to take away, I would like the committee to take away 
from this is, first of all, something that seems self-evident 
to us, but doesn't seem to be to the government, is that small 
business is different from big business.
    Small business owners, unless their business happens to be 
a law office or an accounting office, are usually not lawyers 
or accountants. They are bakers or they are mechanics or flag 
makers or they are crafts people who have a passion for what 
they do and they want to do it and be able to turn that into 
the ability to make a living and be an entrepreneur.
    Unfortunately, we live in a world where, yes, you need 
regulation, but it is the onerous and the burdensome, redundant 
regulations that end up making those crafts people and these 
people who are artisans and skilled people who want to use 
their hands, use their ability to make a living and employ 
people have to become lawyers and accountants or pay gobs of 
money to lawyers and accountants just to be able to survive. 
And I think that is where I would hope that the government 
would understand big business has an incredible advantage 
because they have, you know, a lineup of lawyers and 
accountants and lobbyists and everything that they have got to 
look out for them that are on salary and they are paying all 
the time. When a small business has to go to this, again, we 
are having to go out and pay full retail. And it is a very 
expensive proposition. And so simple rules that a layman can 
understand would just go a long way. And maybe not 31 pages of 
instructions.
    Chairman Gonzalez.  Thank you very much. Mr. Scribner.
    Mr. Scribner.  I would like to echo what Mr. Van De Putte 
says regarding business size. You know, I think as a business 
gets larger it affords a greater opportunity for specialization 
within the organization. Micro-business tends not to have that 
ability. Give you an example, my Keller Williams office, there 
are 250-plus agents in my office, so there are 250 small 
businesses generating revenue, paying expenses, helping their 
clients. And anything that can be done to support simplifying 
the regulations on these small business people I think is an 
advantage. Because I observe every day--again, I am in a very 
perpetual business. And it is all we can do to keep up. Which, 
you know, we are happy about that.
    We have a good business. But I just see the challenges that 
my colleagues face every day in trying to keep up with 
regulations, keep up with all of the processes that need to 
occur in their business. So I think anything that can be done 
to simplify regulations and help support small business is 
going to be an advantage.
    Chairman Gonzalez.  Mr. Santis.
    Mr. Santis.  Thank you. I would like to commend the Office 
of Advocacy for this r3 initiative, because I don't think that 
without it we would have a prayer in getting MSHA to act on 
this matter. This is a very solvable problem. And one of the 
things that Mr. Sullivan mentioned in the nomination and 
selection process were solvable issues. We are dealing with 
outdated references that could be dealt with in a direct final 
rule. There is no controversy there. We are dealing with 
inconsistency within the Agency itself. Certainly the Agency 
can harmonize within its own departments.
    And finally, we have consensus standards that have been 
established that--the hard work is done. The standards are out 
there. They just simply need to be incorporated into the 
regulation. I would encourage this committee to continue to 
support the Office of Advocacy. And in fact, I think one of the 
weaknesses that they suffer from is enforceability. From my 
understanding, Tom can basically cajole agencies into acting. 
And I hope that we can be successful here, but certainly a 
bigger stick would be helpful for Mr. Sullivan, I am sure.
    Chairman Gonzalez.  Thank you one and all. And I now ask 
unanimous consent that members will have 5 days to submit a 
statement and supporting materials for the record. And without 
objection, it is so ordered. And this hearing is now adjourned.
    [Whereupon, at 12:01 p.m., the subcommittee was adjourned.]

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