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



 
                   EXAMINING EXPIRING TAX INCENTIVES
                    AND THE NEEDS OF SMALL BUSINESS

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

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 11, 2008

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 110-111
Available via the GPO Website: http://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

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  


           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida

                                 ______

            Subcommittee on Rural and Urban Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLES GONZALEZ, Texas              MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES

Feraci, Mr. Manning, Vice President, National Biodiesel Board....     4
Clements, Mr. Joseph E., Clements Management, LLC, on behalf of 
  the National Restaurant Association............................     6
Kilduff, Mr. Larry, The Kilduff Company, Milwaukee, WI, on behalf 
  of the International Council of Shopping Centers...............     8
 Berlinghieri, Mr. Leo, CEO, MKS Instruments, Inc., Andover, MA, 
  on behalf of the Semiconductor Equipment and Materials 
  International..................................................    10
Shephard, Mr. Tom Shepherd, Chairman and CEO, The Shepherd Co., 
  Norwood, OH....................................................    12

                                APPENDIX


PREPARED STATEMENTS:
Velazquez, Hon. Nydia M..........................................    29
Chabot, Hon. Steve...............................................    31
Feraci, Mr. Manning, Vice President, National Biodiesel Board....    33
Clements, Mr. Joseph E., Clements Management, LLC, on behalf of 
  the National Restaurant Association............................    37
Kilduff, Mr. Larry, The Kilduff Company, Milwaukee, WI, on behalf 
  of the International Council of Shopping Centers...............    42
 Berlinghieri, Mr. Leo, CEO, MKS Instruments, Inc., Andover, MA, 
  on behalf of the Semiconductor Equipment and Materials 
  International..................................................    51
Shephard, Mr. Tom Shepherd, Chairman and CEO, The Shepherd Co., 
  Norwood, OH....................................................    56

STATEMENTS FOR THE RECORD:
Ernst and Young..................................................    60
National Association of Manufacturers............................    75
Altmire, Hon. Jason..............................................    79

                                  (v)

  


    EXAMINING EXPIRINGTAX INCENTIVES AND THE NEEDS OF SMALL BUSINESS

                              ----------                              


                      Thursday, September 11, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:05 a.m., inRoom 
1539, Longworth House Office Building, Hon. Nydia M. Velazquez 
[Chair of the Committee] Presiding.
    Present: Representatives Velazquez, Cuellar, Altmire, 
Clarke, Ellsworth, Hirono, Chabot, Akin, and Gohmert.
    Chairwoman Velazquez. Good morning. This hearing of the 
Small Business Committee is now called to order.
    Entrepreneurs play a host of unique and integral roles in 
the American business world. They are economists for 
innovation, they are engines of job growth and, perhaps most 
importantly, they are agents of economic turnaround. During the 
past recessions, small businesses have led the charge towards 
financial recovery.
    Today, in the face of soaring inflation and stagnating 
salaries, we clearly need their help to bring the market back 
on track. But in order for this to happen, entrepreneurs must 
have the tools necessary for growth. Targeted tax relief is an 
important means for encouraging small business development. By 
promoting investment and research, it sparks entrepreneurial 
expansion and economy progress.
    In today's hearing, we are going to look at a number of 
specific incentives that do just that. Many of the incentives 
we will examine today were included as part of the Economic 
Growth and Tax Relief Reconciliation Act of 2001. To make room 
for all the tax measures that benefited large corporations, 
these were enacted on a temporary basis. In order to further 
small business growth, they will have to be extended. In moving 
forward with this task, it is important to focus on those tax 
breaks that galvanize the job market and bolster emerging 
industries.
    Incentives for tech startups will accomplish that goal. 
After all, innovation has long been a springboard to economic 
recovery. For example, the dot.com boom of the mid-1990s pulled 
us out of decline and breathed new life into the American 
marketplace. Today we need to tap that same spirit of 
innovation. Tax breaks that incentivize tech startups will 
drive millions of dollars into the economy and create hundreds 
of thousands of new jobs. With unemployment at its highest 
point in 5 years, we could use that kind of boost to the 
workforce.
    Flexible depreciation schedules present another crucial 
incentive for entrepreneurs. These provisions encourage small 
firms to invest in their own growth and development. If 
business owners are willing to make popular investments, it 
only makes sense to provide them with the innovation to do so. 
This particular impetus not only bolsters small firms, but also 
puts cash back into the economy. Every small business purchase 
of a good or service gives an added life to the industry that 
provides it.
    Targeted relief does more than advance entrepreneurial 
development. It also promotes investment in our communities. 
The benefits of incentives that encourage financiers to put 
money into small firms in low-income neighborhoods are twofold. 
These provisions both open up new markets and revitalize 
struggling regions. Tax breaks that bring jobs and capital to 
low-income communities will be a tremendous boom to the small 
business world and the economy as a whole.
    These kind of incentives, coupled with a number of other 
items we will look at, present an important means for 
revitalizing the marketplace. Small firms are the engine that 
drive the American commerce. When they do well, we all do well. 
Extending the provisions discussed today will give them the 
security they need in order to grow and the certainty they need 
in order to help strengthen and expand our economy.
    [The prepared statement of the Chairwoman can be found in 
the appendix at page 29.]
    With that, I would like to thank all of the witnesses for 
taking time off your busy, busy schedule to be here with us 
today. And I yield to the Ranking Member, Mr. Chabot, for his 
opening statement.
    Mr. Chabot. Thank you, Madam Chairwoman, for yielding. And 
before I turn to the subject of taxes, I want to pause to note 
the significance of this day, the seventh anniversary of the 
2001 terrorist attacks on our Nation. The Chairwoman, I know, 
lost many constituents and friends on that day. And our 
thoughts and prayers are with those who lost their lives and 
were so affected by that tragic event, and with their families 
and our brave servicemen and -women who are serving our Nation 
both in this country and around the world.
    Now, Madam Chairwoman, I want to say that I do appreciate 
your holding this important hearing on extending the temporary 
tax provisions commonly known as tax extenders. We have an 
outstanding panel of experts to advise us today, and I look 
forward to all of their testimony. And a special welcome to Tom 
Shepherd, who is from my district in Cincinnati, Ohio, whom I 
will introduce later.
    Small businesses as well as working families are 
experiencing difficult times. Gas prices are high, food prices 
are rising and people, unfortunately, are losing their homes. 
Tax relief is absolutely critical to small businesses, 
particularly in times of economic uncertainty.
    According to a recent NFIB survey, small businesses ranked 
Federal tax on business income as one of their top five 
concerns. There are many steps that Congress can take to 
alleviate the tax burden, including eliminating the current Tax 
Code and starting over. Our 61,000 page Tax Code, which has not 
had a substantial revision since 1986, should in my view be 
terminated. The Code's complexity is staggering. For small 
businesses, most of them which do not have the resources to 
hire technical tax experts, it can prove difficult to navigate. 
According to the Small Businesses Administration Office of 
Advocacy, small businesses with fewer than 20 employees spend 
over $1,200 per employee to comply with tax paperwork, 
recordkeeping and reporting requirements.
    Until we terminate the Code and start over, which doesn't 
seem to be on the near-term horizon, unfortunately, Congress 
must act every year to renew the temporary tax provisions that 
expire or--that they are renewed from year to year is the way 
we have been handling them up here. This year, Congress must 
again take up legislation to renew these provisions. This is, 
in my view, a very poor tax policy and makes it extremely 
difficult for any business, especially a small one, to budget 
and plan for the future.
    However, these temporary tax credits are critical for small 
firms to grow and create the jobs that help to strengthen our 
economy. These are the incentives the companies use to develop 
new technologies, hire new workers, and invest in their 
communities. Particularly in a time of slowing economic growth, 
small companies simply cannot absorb tax increases.
    Renewing the temporary tax provisions is important, but we 
must also make the 2001 and 2003 tax cuts permanent. They are 
scheduled to sunset in 2010, so not far down the road. And if 
they do, on January 1, 2011, the American people will face the 
largest tax increase in history, a $683 billion increase. 
According to the Joint Committee on Taxation, failing to extend 
these cuts would cause 31 million families with children to pay 
an average tax increase of $1,025 because of the reduction in 
the value of the child tax credit from 1,000 down to 500. 
Almost 30 million married couples will have to pay an average 
tax increase of $686 resulting from the return of the marriage 
penalty; 91 million taxpayers will have to pay an average of 
$498, so almost $500 more because of the loss of the 10 percent 
tax bracket which is lower than most.
    5.5 million taxpayers who were benefiting from the 
deduction for student loan interest and employer educational 
benefits would have to pay an average of $286 more in their 
taxes.
    Two million families who adopt a child will pay an average 
of $156 more in taxes; 28 million savers and investors will pay 
an average of $1,800 more in taxes due to the end of lower tax 
rates on long-term capital gains and dividends.
    The 2001 and 2003 tax cuts included an across-the-board cut 
for all working Americans, which is vital since 85 percent of 
small businesses file as individuals. According to the Heritage 
Foundation study, the failure to renew these cuts would cost 
the Cincinnati area, my community, the economy there, 
approximately $200 million annually in economic growth, 
including 1,900 lost jobs and a tax increase of $1,300 per 
taxpayer per year.
    At one of our Committee hearings, the issue of flow-through 
income, when business owners include company revenues on their 
individual income tax returns, was raised. As one small 
business owner testified, quote, many folks in Congress think 
they are raising taxes only on the wealthy, but I am here to 
tell you that these rate increases will strike at the heart of 
small businesses, unquote.
    One final point. For the overall health of the economy, 
Congress must curtail wasteful Federal spending. Cutting 
spending and working towards a balanced budget is critical not 
only for our economic security but also for our national 
security. These steps would help small businesses through our 
current economic challenges. I look forward to hearing the 
recommendations of our distinguished panel of experts here this 
morning.
    And, Madam Chairwoman, I again want to thank you for 
holding this important hearing and I yield back the balance of 
our time.
    [The prepared statement of Mr. Chabot can be found in the 
appendix at page 31.]
    Chairwoman Velazquez. Thank you. And it is my pleasure to 
welcome our first witness, Mr. Feraci. Mr. Manning Feraci is 
the Vice President of Federal Affairs to the National Biodiesel 
Board. Prior to work for NBB, Mr. Manning served as the chief 
of staff to Congressman Kenny Hulshof. Founded in 1992, the 
National Biodiesel Board is the national trade association 
representing the biodiesel industry as the coordinating body 
for research and development in the United States. Mr. Feraci, 
you will have 5 minutes.

STATEMENT OF MANNING FERACI, VICE PRESIDENT OF FEDERAL AFFAIRS, 
                    NATIONAL BIODIESEL BOARD

    Mr. Feraci. Chairwoman Velazquez, Ranking Member Chabot, 
members of the Committee, the National Biodiesel Board, and 
many small businesses that make up our trade association, 
appreciate the opportunity to be here today to tell you about 
the importance of the biodiesel tax incentive to our industry.
    The National Biodiesel Board is, as I alluded to, the trade 
association for the U.S. biodiesel industry and we represent 
the breadth of the entire industry. You have everything from 
the producers who are actually making the fuel, the fuel 
marketers, the feedstock providers who are providing the 
material from which we are making the fuel. So we have a pretty 
good perspective in terms of what is going on in the biodiesel 
industry.
    Biodiesel itself is a diesel replacement fuel. It is 
produced typically from animal fats or vegetable oil. Soybean 
oil is typically the feedstock that is used in the United 
States. However, over time, you have seen an increased 
diversification in the feedstock that is used. And you 
basically react the animal fat or the vegetable oil with 
alcohol, remove the glycerin and refine it until you hit a fuel 
specification that is determined by an international consensus 
body known as ASTM.
    We take very seriously fuel quality efforts. We vigorously 
test our fuel. We encourage our members to engage in our fuel 
quality program because consumers have to be confident that we 
are putting a quality fuel into the marketplace. And we feel 
confident that we are.
    In the marketplace, our fuel is typically blended with 
conventional diesel fuel. Usually it blends at 20 percent or 
below in the marketplace. And typically what you have are 
"below the rack" jobbers who are buying the fuel from our plant 
and blending it below the rack. We have penetration at about 42 
fuel terminals right now.
    And just to give you some perspective, there are 1,500 fuel 
terminals nationwide. Ethanol is at about half of those 
terminals. We are at 42. Now, we expect that number to go up 
over time, and we certainly want to see that happen because our 
goal is to get greater penetration into fuel infrastructure so 
that we get to more consumers with our fuel.
    The tax incentive that I want to visit on here briefly was 
initially enacted in 2004, as part of the American Jobs 
Creation Act, subsequently extended as part of the Energy 
Policy Act of 2005, and it expires at the end of this year. It 
is a dollar-per-gallon blenders' excise tax credit that you get 
if you make the fuel from virgin vegetable oils or animal fat. 
Whereas it is 50 cents per gallon if you make it from second-
use oils such as yellow grease or restaurant grease. The fuel 
has to meet ASTM D6751, which is the fuel specification, and 
section 211 requirements of the Clean Air Act to qualify for 
the tax incentive. And the credit is claimed at the point that 
the biodiesel is blended with conventional diesel fuel. And 
everyone who claims it has to register with the IRS to claim 
that credit.
    The one commentary that you can make on the existing 
biodiesel tax incentive is that it is working and all you have 
to do is look back. In 2004 when the credit was enacted, you 
had 25 million gallons of production in the United States. In 
2007, we had 500 million gallons of production in the U.S. So 
if the idea is to increase the production and use of biodiesel, 
there is a pretty compelling case to be made that the biodiesel 
tax incentive is working. And not only is it working, there is 
a very compelling public policy rationale to be made for why we 
should encourage the production and use of biodiesel in the 
United States.
    The first and most obvious is it is going to reduce our 
dependence on foreign oil. The 500 million gallons of biodiesel 
produced in the United States represents displacing 20 million 
barrels of oil. Ours is an extremely efficient fuel. We have a 
3.5 to 1 energy balance. So that means for every unit of energy 
it takes to make a gallon of biodiesel, you get 3.5 units of 
energy out of it. And those are numbers that come from NREL, so 
they are extremely credible.
    So we are an efficient fuel that is going to help reduce 
our dependence on foreign oil. We are extremely good for the 
environment. The USDA/DOE model has us as reducing greenhouse 
gas emissions by 78 percent. And most importantly, we are 
creating good green jobs in rural America. We support over 
21,000 jobs, added $4 billion to the U.S. economy in 2007 
alone. The most important thing, though, is that all these 
benefits that we get are all in jeopardy if the tax incentive 
is not extended, because it ends at the end of this current 
year, on December 31st. Absent that credit, because of the way 
it functions, is to make biodiesel price competitive with 
petroleum diesel fuel. Absent that tax incentive--and I'm not 
trying to be dramatic-- our guys are just not going to produce 
fuel.
    So, Madam Chairwoman, Ranking Member Chabot, I appreciate 
you having this hearing. It is absolutely vital to our industry 
that this tax incentive be extended. I would be willing to take 
any questions you may have.
    Chairwoman Velazquez. Thank you, Mr. Feraci.
    [The prepared statement of Mr. Feraci can be found in the 
appendix at page 33.]
    Chairwoman Velazquez. Our next witness is Mr. Joseph E. 
Clements. He is a restaurateur from Baton Rouge, Louisiana. Mr. 
Clements is also a certified public accountant by training and 
his company, Clements Management, currently operates nine 
Burger King restaurants in central Louisiana. Mr. Clements is 
here to testify on behalf of the National Restaurant 
Association founded in 1919. The association is the leading 
business association for the restaurant industry. Welcome, sir.

    STATEMENT OF JOSEPH E. CLEMENTS, RESTAURATEUR, CLEMENTS 
   MANAGEMENT, LLC, BATON ROUGE, LOUISIANA, ON BEHALF OF THE 
                NATIONAL RESTAURANT ASSOCIATION

    Mr. Clements. Thank you, Madam Chairwoman, Mr. Chabot. I 
would like to thank the members of the Committee for the 
invitation to offer testimony today on behalf of the National 
Restaurant Association about ways in which to update the Tax 
Code and help stimulate the economy.
    As stated, I have been in the restaurant business for 13 
years and I currently own and operate NINE Burger King 
franchise restaurants in Louisiana, and I employ approximately 
300 people. Prior to my entry into the restaurant business, I 
practiced public accounting for almost 19 years, where my firm 
provided services to small businesses just like the one I own 
today.
    I am here today to discuss the need for reforms and the 
depreciation schedules, specifically to shorten the lives of 
the write-off of the restaurant buildings and improvements to 
15-year lives. This would create an immediate economic activity 
within the industry, which in turn would reverberate throughout 
the economy.
    There is currently legislation pending in the 110th 
Congress which addresses accelerated depreciation. H.R. 3622, 
championed by Congressmen Kendrick Meek of Florida and Patrick 
Tiberi of Ohio, would make permanent a 15-year depreciable life 
for newly constructed restaurants, as well as for improvements 
on restaurants. The bill currently enjoys bipartisan support 
with over 160 cosponsors, including 18 members of this 
Committee.
    There is no question that restaurant depreciation schedules 
are outdated. According to the Tax Code, restaurant buildings 
have a useful life of 39-1/2 years over which they can be 
written off. To suggest that a restaurant building's useful 
life is 39-1/2 years is just ludicrous. The wear and tear on 
restaurant buildings is probably greater on this type of 
building than on any other type of building. Indeed, this is 
evidenced by the frequency by which restaurant buildings are 
remodeled, renovated or even rebuilt.
    Over the years, Congress has made many changes to the 
depreciation schedules. There have been changes that have split 
the industry between leased properties and owner-occupied 
properties, and there have been changes to specific industries 
which are competitors to the restaurants, such as convenience 
stores and gas stations. And there have been changes allowing 
faster write-offs for improvements but not for new 
construction, placing certain businesses in an economic 
disadvantaged position. I maintain, however, that the Tax Code 
should not pick winners and losers in the restaurant industry, 
but it should allow a level playing field on which all can 
play.
    Finally, it is widely recognized that the restaurant 
business is one of the more risky ventures that one can 
undertake in our economy. Opening a restaurant requires an 
enormous investment in capital, most of which is spent on the 
building or the improvements. Most restaurateurs finance their 
buildings or improvements over a 12- to 15-year term. Adjusting 
the appreciable lives to match these terms more closely 
reflects the actual cash expenditures of the asset.
    The purpose of this hearing is not to discuss the merits of 
this issue but rather, more importantly, whether this tax 
provision will help small businesses and hence spur growth in a 
struggling economy. We believe these changes will have a 
dramatic and immediate effect, given that the average cost of 
an update or remodel of a restaurant ranges from $250,000 to 
$400,000 according to the NRA. Or in my personal case, a new 
Burger King restaurant costs $800,000.
    This year alone, the restaurant industry is expected to 
spend in excess of $5.5 billion on capital expenditures for 
building construction and renovations. These are dollars that 
will be spent in the construction industry and will further 
grow the economy.
    And finally, if there is any question as to whether this 
provision would immediately spur activity, look at what 
happened when Congress enacted the provision to provide 
restaurants with a 15-year schedule on improvements made to 
restaurants from the 2004 bill. The following year, in 2005, 
the year that the provision went into effect, the restaurant 
industry spent more than $7.4 billion on new structures and 
improvements, a 42 percent increase over the 5.2 spent in 2004, 
according to the Census Bureau. Additional spending fueled by a 
shorter depreciation schedule created thousands of jobs in the 
construction-related industries across the country.
    With a more predictable schedule, we anticipate that these 
spending numbers will grow as restaurateurs have the ability to 
plan new construction and improvements farther out than 1 or 2 
years.
    All of this information is addressed in my written 
testimony, as well as a detailed explanation of the issues. In 
respect for everyone's time, I will not read the rest of them 
today, but I would ask that you look at them in the written 
testimony.
    We urge the members of this Committee to consider this 
information as evidence of the need to help the restaurant 
industry keep strong in order to keep the Nation's economy 
overall strong.
    Again, I would like to thank you on behalf of the National 
Restaurant Association for the opportunity to provide this 
testimony. And I thank those members of the Committee who have 
cosponsored this legislation, and we appreciate your support. I 
will be happy to answer any questions that you may have on this 
information.
    Chairwoman Velazquez. Thank you, Mr. Clements.
    [The prepared statement of Mr. Clements can be found in the 
appendix at page 37.]
    Chairwoman Velazquez. Our next witness is Mr. Larry 
Kilduff. Larry Kilduff is the president and management member 
of the Kilduff Company based in Milwaukee, Wisconsin. The 
Kilduff Company is a privately held real estate development 
company. Mr. Kilduff has over 22 years of involvement in retail 
and other commercial development projects across the country. 
He is here to testify on behalf of the International Council of 
Shopping Centers. With over 75,000 members, ICSC is the leading 
trade association of the retail development community. Welcome.

  STATEMENT OF LARRY KILDUFF, THE KILDUFF COMPANY, MILWAUKEE, 
 WISCONSIN, ON BEHALF OF THE INTERNATIONAL COUNCIL OF SHOPPING 
                            CENTERS

    Mr. Kilduff. As mentioned, my name is Larry Kilduff. I am 
the chairman of the Environmental Policy Committee and recent 
past Central Division Government Relations Co-Chair for ICSC. I 
am also the founder--to supplement that volunteer work--of the 
Kilduff Company in Mequon, Wisconsin.
    The Kilduff Company participates in development and 
consulting projects in retail marketplaces around the country ; 
however, our passion and specialty is urban redevelopment and 
revitalization. We have made an indelible mark in neighborhoods 
throughout the United States by applying unique talents and 
philosophies to assist communities and individual developers in 
their economic renovation efforts.
    I am here today representing our trade association, the 
International Council of Shopping Centers, which was founded in 
1957 and is currently more than 75,000 members strong in over 
90 countries, including shopping center owners, developers, 
managers, marketing specialists, investors, lenders, retailers 
and all other professional endeavors that participate in our 
industry, including academics and public officials.
    I am here today specifically because of the concern over 
the so-called tax extender legislation and that it continues to 
languish. This legislation contains a number of tax provisions 
that expired at the end of 2007 or are set to expire in 2008. 
In particular, ICSC supports the immediate extension of the 15-
year depreciation for leasehold improvements, brownfields 
expensing, a new market tax credit and a number of energy tax 
incentive provisions.
    One of the most important obligations of a shopping center 
owner is to provide modern, efficient and environmentally sound 
retail space for tenants and the public. Owners must 
periodically refurbish or replace, usually every 5 to 10 years, 
many components of their buildings. Sometimes these 
requirements are in the lease and they are required to be. They 
are paid for by landlords or paid for in part by landlords 
through incentives back to the tenants. The 5- to 10-year lease 
period is fairly common in our industry. These improvements can 
be fairly substantial. They can include HVAC. They can include 
interior walls, plumbing, electrical, things that have to 
comply with ever-changing codes for building construction and 
also for environmental improvements. The 15-year depreciation 
period for such leasehold improvements more closely reflects, 
although it doesn't perfectly match, but it does more closely 
reflect the active life of these improvements and the market 
practices of today's environment.
    In Alaska, a friend of ours who owns a family shopping 
center--they have owned it for many, many years and developed 
it in Anchorage--and as it has continued to grow, it has become 
a major shopping center in that area and yet is still a family-
owned business. It is faced with the dilemma of having to try 
and make a decision as to whether to make a substantial 
renovation of the property. With a 15-year depreciation 
schedule and with a shopping center that size, notwithstanding 
the size of the shopping center, the owner is small. The 
margins are very thin, and the decision to go forward may or 
may not be completely reliant on the possibility of the 
depreciation schedule being 15 years and being made permanent.
    Brownfields remediation expensing is also very important to 
small developers. As a small developer who focuses on urban 
projects, I wrestle with my share of environmentally 
contaminated properties and developed a good deal of experience 
with these properties, both with the clean-up of brownfields 
and assisting others in that endeavor. Just as my Alaska 
example shows, with the leasehold depreciation schedule, this 
program for remediation expensing is vital.
    I am currently involved in a project in the early due 
diligence stages in Kenosha, Wisconsin. It is a 40-acre mixed-
use development adjacent to retail and commercial that consists 
primarily of senior housing and multifamily residential. This 
is an infield project that will ultimately, upon completion, 
generate a tax increment of over $80 million. And while my 
company is small, the group of people that we have put together 
to do a project of this magnitude is looking forward to doing 
it. It is adjacent to a landfill that has been active for over 
30 years. This landfill is part of the project. Without the 
cleanup of that landfill, this project can't go forward. The 
property is owned by the same people. The city is afraid to 
test it. The landowner doesn't want to test it. Nobody wants to 
know what is in it until they know how they are going to pay 
for cleaning it up. And this could very well affect our ability 
to go forward.
    When we measure risk profile for a project like this, if we 
look at it and say we don't know what it is going to cost to 
clean it up, we won't know what it is going to cost to clean it 
up until we test. Once we test we may have to acknowledge what 
is in there, and somebody in this picture is going to be 
responsible for it. We have to look very, very hard at whether 
or not we can even make that effort. Knowing that you could at 
least appreciate the expense of that cleanup can have a major 
impact on that.
    With urban projects, it is also very important to mention 
that anything that can measure or level the playing field with 
risk can be very, very important.
    And I would urge you also to consider the bill that was 
forwarded by Mike Turner and Stephanie Tubbs Jones. I realize 
there is no time for Congress to pass H.R. 3080 this year, the 
Brownfields Cleanup Act, but Representative Tubbs Jones 
understood that making the transferable tax credit available to 
small businesses could tip the balance in that very decision-
making.
    We also do support new market tax credits. The process is 
cumbersome and sometimes doesn't do as good a job as it could, 
but it also falls into that category of things that help 
balance the imbalance in urban redevelopment.
    And then lastly, we would also look at your support for 
commercial building tax deductions. And carried interest--we 
believe that the carried interest problem is significant as it 
relates to the small businesses in this country. And I would 
love to entertain questions on that if you have any interest.
    At this time, I think I would just like to thank you, Madam 
Chairwoman, for your prompt enactment of the tax extenders 
legislation. It is necessary for economic growth, job creation 
and capital investment and energy security. And ICSC looks 
forward to working with you and the entire Congress on doing 
so. Thank you very much.
    Chairwoman Velazquez. Thank you, Mr. Kilduff.
    [The prepared statement of Mr. Kilduff can be found in the 
appendix at page 42.]
    Chairwoman Velazquez. Our next witness is Mr. Leo 
Berlinghieri. Mr. Berlinghieri is the Chief Executive Officer 
and President of MKS Instruments in Andover, Massachusetts. MKS 
Instruments is a global provider of process control solutions 
for advanced manufacturing processes. He is here to testify on 
behalf of Semiconductor Equipment and Materials International, 
or SEMI. SEMI is the global representative of the 
microelectronic ecosystem industry. Welcome.

STATEMENT OF LEO BERLINGHIERI, MKS INSTRUMENTS, INC., ANDOVER, 
    MASSACHUSETTS, ON BEHALF OF SEMICONDUCTOR EQUIPMENT AND 
                 MATERIALS INTERNATIONAL (SEMI)

    Mr. Berlinghieri. Good morning. Thank you, Madam Chairwoman 
and Ranking Member Chabot and the Committee, for having me here 
today to speak. As Madam Chairwoman noted, I am the CEO and 
President of MKS Instruments, so part of the interest is 
personal to MKS Instruments. But also I will be the chairman on 
the North American Advisory Board of SEMI beginning next year. 
And we represent about 800 companies involved in the 
semiconductor, photovoltaics, and display industry, which about 
80 percent of those companies are small businesses. So I am 
speaking on behalf of both organizations.
    We provide products to equipment makers involved in 
semiconductor manufacturing, displays, in photovoltaics and 
other advanced technologies.
    Today I would like to talk about two components of the tax 
extenders bills that are of great importance to MKS and the 
other semiconductor companies and SEMI members. These issues 
are the R&D tax credit and the commercial investment tax credit 
for solar energy.
    In terms of the R&D tax credit, MKS Instruments employs 
about 500 engineering professionals. We expect to spend about 
$80 million in R&D this year. That is about 10 percent of our 
revenues. And that is fairly common for the industries that we 
represent. R&D spending goes towards the salaries for our 
engineering people, engineering consulting, and towards the 
cost of materials for R&D and for the tools that we use. 
Initial R&D investment of $1 million, or slightly more than 
that, recurring each year generates about 11 to $12 million of 
revenue each year. And with over 5 to 7 years of a product life 
cycle, that would be somewhere between 50 and 75 million in 
revenue over that life cycle. So the R&D tax credit is an 
important incentive to locate this value-added investment in 
the United States.
    In addition to these jobs, there is really a direct benefit 
to the U.S. Government. And I did a couple of quick back-of-
the-envelope calculations. We estimate that the typical R&D 
credit for us gives us about $2 million of credit. As a 
conservative estimate, if you look at about a 15 percent profit 
level, pretax profit level, on that 50 million in revenue 
resulting from the R&D projects, that would give us a profit of 
about 7-1/2 million. We assume that the tax rate at 36 percent 
for business would provide a return in the corporation taxes to 
the government of about $2.7 million. And that excludes the 
additional tax benefits from hiring people in the R&D area, so 
their actual personal incomes, as well as all of the supply 
chain that would be either providing materials or services for 
us as well.
    The R&D tax credit has a long history of strong bipartisan 
bicameral support. It is unfortunate it expired 8 months ago. 
Growth of the American economy is closely tied to the ability 
of our companies to make sustained commitment to long-term 
investment in R&D. The credit provides a critical, effective, 
and proven incentive for companies like MKS to increase our R&D 
spending in the United States. It is a stimulus for U.S. 
investment, innovation, wage growth, consumption and exports.
    While the R&D tax credit is expired, many countries such as 
Ireland, Canada, and China have more attractive R&D incentives 
luring research jobs away from the United States. The United 
States used to have the best R&D tax credit, and now we have 
moved way down the ladder in that list of countries. They have 
made it a priority and we have not. I urge Congress, before 
adjournment, to enact a seamless multiyear extension of a 
strengthened R&D tax credit .
    The second issue is the commercial investment tax credit 
for solar energy. Solar energy is a new market for MKS 
instruments and many of the other SEMI companies as well. The 
materials and equipment used in the semiconductor industry are 
very similar to what is to be used in the solar energy 
industry. At the time when America's energy independence is 
more crucial than ever, solar energy and other means of 
alternative energies are expected to boom. The commercial 
investment tax credit for solar energy expires at the end of 
this year.
    Unfortunately, due to the uncertainty of an ITC extension, 
solar projects in the United States have already been put on 
hold. The commercial ITC for solar energy is a critical 
incentive for companies to locate their solar energy 
manufacturing facilities and projects within the United States. 
Again, just like the R&D tax credit, these investments produce 
jobs. According to a Navigant Consulting study, if extended, 
the solar energy ITC is expected to create almost 40,000 more 
jobs and about $8 billion in investments. If it is not 
extended, those jobs and investments will go elsewhere.
    Other nations have very generous incentive packages for 
solar energy and are leading in the investment in this area. If 
Congress fails to extend the credits, it will cause America to 
fall further behind and ensure that these investments are made 
overseas.
    There is no doubt that our country will be a user of solar 
energy. The question is whether we will be a producer of the 
equipment and the panels and the installation kits.
    I urge Congress, before adjournment, to approve an 8-year 
extension of the commercial investment tax credit for solar 
energy.
    In closing, let me reiterate what is at stake here is 
American jobs and investments in crucial technologies. Tax 
policies are a key factor for companies when they are deciding 
to invest, and we are faced with some stiff competition abroad. 
This is a very limited window of opportunity to extend the 
credits this year. I urge Congress to make this a top priority, 
ensure that the R&D tax credit and a commercial investment tax 
credit for solar energy are extended before Congress adjourns. 
We cannot afford to wait.
    I thank you and I look forward to any questions that I can 
answer.
    Chairwoman Velazquez. Thank you, Mr. Berlinghieri.
    [The prepared statement of Mr. Berlinghieri can be found in 
the appendix at page 51.]
    Chairwoman Velazquez. Now the Chair recognizes the Ranking 
Member for the purpose of introducing our next witness.
    Mr. Chabot. Thank you very much, Madam Chair. And I am 
pleased to introduce Tom Shepherd, who is Chairman and CEO of 
the Shepherd Chemical Company, which is based in Norwood, Ohio, 
which is in the First Congressional District, the district that 
I have the honor to represent. And he also has the Shepherd 
Color Company. Both companies are family-owned small businesses 
with over 400 employees. Shepherd Chemical was established back 
in 1916, and Mr. Shepherd is the fourth-generation Shepherd to 
run the family businesses.
    Mr. Shepherd serves on the Executive Committee of the 
American Chemistry Council and chairs its Small Business 
Council. He is also a member of the Executive Committee of the 
Cobalt Institute. He received a B.A. In biology from Princeton 
University and a master's degree in management from 
Northwestern University. We are pleased to have you here today, 
Tom, and we look forward to your testimony.

   STATEMENT OF TOM SHEPHERD, CHAIRMAN AND CEO, THE SHEPHERD 
                CHEMICAL COMPANY, NORWOOD, OHIO

    Mr. Shepherd. Thank you Congressman Chabot. Thank you, 
Chairwoman Velazquez and members of the Committee. I represent 
only Shepherd Chemical and Shepherd Color. We are custom and 
specialty metal-based chemicals manufacturers that make life 
better, safer, and healthier. Our core purpose is to have a 
positive impact on people's lives, specifically our employees, 
our customers, our communities and our shareholders.
    Central to our strategy is the development of engineered 
products and innovative technology. This is what we like to do 
and this is what allows us to compete successfully around the 
world. R&D, as you know, can be expensive. We rely on dozens of 
chemists and engineers, and millions of dollars in technical 
assets to create new and novel materials for a wide variety of 
uses.
    Recent developments include additives for high-pressure 
lubricants, gas generants for air bags, infrared reflective 
pigments for cool-roof technology, cathode materials for 
lithium-ion batteries, additives for biodegradeable plastics, 
and catalysts for sealants for energy-efficient windows.
    My company takes full advantage of the research and 
development tax credit, but I need to tell you that I am quite 
conflicted about this program. On one hand, it brings welcome 
relief from our onerous tax burden. I believe our government is 
wise to let my companies keep more of the money we have earned, 
and we are happy to do so. I assure you that we invest that 
money wisely. Also, of all the things that our government does 
with the taxes we pay, investing in businesses and activities 
that create value and jobs is one of the best. When business is 
encouraged and not discouraged, lots of good things happen.
    On the other hand, I believe businesses should invest in 
research and experimentation because it is good for that 
business. To invest for other reasons, such as gaining a tax 
credit, seems to be a bad idea. So if the purpose of the tax 
credit is to stimulate and reward investments and research and 
experimentation, I might urge you to consider what is assuredly 
a more effective and efficient way. My suggestion is to reduce 
the income tax in general, and especially if small business 
performance is the target, to eliminate the estate tax which is 
especially detrimental to small businesses.
    If our government were to lower taxes, the reward for 
creating value would increase. If the reward for creating value 
were to increase, more people would try harder to do so. And if 
more people would try harder to do so, more would succeed and 
more value would be created and more jobs would be created and 
more people would be self-sufficient and fewer people would be 
in need of assistance and more people would have the means to 
take care of those that are, so government would have to spend 
less. And if government had to spend less, they could tax us 
less, and the whole cycle could play out again. I really 
believe it is that simple.
    Unfortunately, over the years we have made it complex. 
However, in the likely event that taxes continue to be levied 
as they are today, and if we are intent on spending them for 
the betterment of America, I believe doing so in support of 
businesses and activities that create value and new jobs is a 
good investment with a strong pay-off. If this is the case, 
then I am strongly in favor of the R&D tax credit.
    I do have one caveat. My understanding is that the R&D tax 
credit saves my companies about 15 percent of our yearly 
increase in research and experimentation expenditures. While I 
do not turn up my nose at this kind of money, it is not nearly 
enough to influence how I invest in R&D. I invest in R&D 
because it makes sense for my business, not because of the R&D 
tax credit. If given the opportunity, I would love to talk 
about the estate tax. Thank you.
    Chairwoman Velazquez. Thank you. Mr. Shepherd.
    [The prepared statement of Mr. Shepherd can be found in the 
appendix at page 60.]
    Chairwoman Velazquez. I would like to address my first 
question to Mr. Feraci. For small communities, the biodiesel 
tax incentive has been the linchpin of small business 
development and investment, especially in rural America. Can 
you explain the link between the tax credit and rural 
communities?
    Mr. Feraci. Absolutely. You are absolutely correct. What 
you saw at the beginning of the biodiesel industry when it was 
in its infancy, and even as it has continued to grow, is that 
given the opportunity to add value to their agriculture 
products, you had soybean farmers who would come together and 
form cooperatives and then hence to buy biodiesel production 
facilities. The industry has matured beyond then, but if you 
take a look at where we are located and where we are producing 
jobs, it is largely in rural communities. So not only do you 
have the jobs that you are getting in the plants, but you have 
everything in the fuel distribution chain, you have everything 
that you are getting from the agriculture community as well, 
and then various feedstock providers adding value to their 
products. So I think in terms of job creation in rural 
communities, we add a lot.
    Chairwoman Velazquez. You mentioned in 2004, when it was 
the first year that the biodiesel tax incentive was in effect, 
we had an output of only 25 million gallons of fuel and then 
today the output is up to 500 million. Do you have any data 
that shows how many jobs were created as a result of that?
    Mr. Feraci. Sure. And a study that we had commissioned 
internally to get a good handle on that. Right now in 2007, we 
have supported over 21,000 jobs, added over $4 billion to the 
overall economy from our industry. And if you go out to these 
biodiesel plants and you see them, typically they are smaller 
producers and they are small businesses for the most part.
    Just to give you some perspective the larger side of our 
facilities are going to be 100 million gallon production. That 
is as big as it gets. But your typical plant is going to be a 
15 million gallon plant or smaller. And it will be a small 
number of employees, but they are doing good paying jobs, good 
green jobs, that are obviously of benefit to the local 
community.
    Chairwoman Velazquez. And if the tax incentives will 
continue, will be extended, do you have any numbers as to how 
many jobs will be created in the future?
    Mr. Feraci. Sure. Again, the same analysis that we had done 
of--what we would anticipate to have in the industry would 
happen if the tax incentive is extended, we would expect to 
create a projected--a little over 38,000 jobs, add another $26 
billion to the economy between now and 2012.
    But you touch on a great point. The extension of the tax 
incentive is extremely vital to that. Because the way that that 
functions is it makes our fuel price competitive with petroleum 
diesel in the marketplace. And there is a compelling public 
policy reason to do that from an energy security standpoint, 
obviously the job creation standpoint, the environmental 
standpoint. But the way the credit itself functions is if it 
goes away, all of the sudden our fuel is a lot less 
competitive. And right now, obviously, where fuel prices are, 
consumers are very sensitive to that. And I think that you 
would see production in the industry all but halt or be 
severely curtailed at the least.
    Chairwoman Velazquez. Thank you.
    Mr. Clements, in your testimony you focus on the importance 
on the 15-year depreciation schedule for qualified restaurant 
improvements, and this credit expires on December 31, 2007. 
Given that we are 9 months into the year and it has yet to be 
extended, have you seen any projects either delayed or 
terminated because of the fact that it expired and it has not 
been extended?
    Mr. Clements. I have not seen that personally, but I do 
have a situation where people in 2007 saw an opportunity to 
develop a new restaurant. I know specifically of one fellow 
franchisee of mine that began the process in 2007 based on the 
understanding and expectation that these extenders would be 
passed. He started the project. He is now almost complete with 
the project. And he is sitting in a very different financial 
situation today than he was when he started the project because 
the extenders have not been put together and passed. So that 
situation could have affected that building project. I can't 
say for certain it did or did not. But certainly the fact that 
you can match the cash flow of the tax depreciation and the 
taxes to the payment of the building, the cost of the building, 
or the improvements, certainly allows for an accelerated 
interest in the project.
    Chairwoman Velazquez. Thank you.
    Mr. Berlinghieri, a recent study revealed that over 25 
percent of companies claiming R&D credits have assets of less 
than $1 million. Those are small businesses.
    Can you talk to us about the importance of the credit for 
small businesses making significant investment in research and 
how does it create opportunities for future expansion?
    Mr. Berlinghieri. I think one of the key things in the 
industry that I am involved with and representing SEMI in is 
that our industry is very dynamic and things change very 
quickly. And so in order to be a leader in producing either 
semiconductor chips or solar panels, it is required that on a 
regular basis we change the technology and bring lower costs to 
be able to produce products.
    In the supply chain that we have--as I mentioned, many of 
them are small businesses and also with SEMI itself, 80 percent 
of the members are small businesses--that investment allows 
us--as I mentioned that back-of-the-envelope calculation, we 
are often able to get about 10 times the revenue per that 
investment. And so what that does is provides manufacturing 
jobs for all of those companies, their suppliers in producing 
materials or machines parts or services. So it has a cascading 
effect completely down our supply chain in terms of creating 
employment and revenue, I think, for the government as well.
    Chairwoman Velazquez. Very good. Thank you.
    Mr. Kilduff, the tax extender that allowed for a 15-year 
write-off on this whole improvement, I know that is critical to 
your industry. This Committee has held hearings on the Tax Code 
and we have heard from many entrepreneurs about the need to 
modernize the Tax Code. Can you discuss the economic effect 
that outdated provisions can have on small businesses?
    Mr. Kilduff. Yes, ma'am, I can, with particular regard to 
the leasehold depreciation portion of this. Most shopping 
centers--and our industry is made up of a vast number of 
different types of people. The larger developers tend to make 
all the headlines and make the biggest projects. But there are 
an enormous number of smaller developers.
    My company, I have four people in my office. And we are 
able with a small office to put together a coalition of capital 
partners and others to make big projects go. The reality is 
that most of those shopping center owners are owning shopping 
centers that are 75- to 80,000 square feet, might have a 
majority of that space be leased to small tenants. Those 
tenants turn over on leases every 5 years. And if you have got 
a Subway Sandwich shop in a particular space and they move out 
in 5 years. And somebody wants to put in a dental office, you 
literally have to tear out all of that work. And you can be 
four or five tenants down the road on a 39-year depreciation 
schedule, still amortizing that first tenant. And so it is a 
significant impact. Significant impact.
    Chairwoman Velazquez. Thank you.
    Now I recognize Mr. Chabot, and then I will have other 
questions for the second round.
    Mr. Chabot. Thank you, Madam Chair.
    Mr. Feraci, I will begin with you, if I can. Back in April, 
I toured one of the companies in my congressional district, it 
was the Peter Kramer North American Company. It is a full-line 
oil/chemical supplier. And during my visit, one of the folks 
there, his name is Michael Dow, he was one of their account 
executives, stressed that if the production tax credits were 
not extended, it would be almost impossible for them to make a 
profit.
    Is that unique to them, or do you think that that is the 
case in a lot of businesses across the country?
    Mr. Feraci. Peter Kramer is a member of ours, and I am glad 
you were out to see their facility. I am sure it was 
impressive. The experience that you heard there at your plant 
visit would be the exact same thing that you would hear at 
pretty much every other biodiesel plant that you went to: 
large, small, multi-feedstocks. It really wouldn't matter. They 
would tell you the same thing, given the important role that 
that tax incentive plays in making us price-competitive in the 
marketplace.
    Mr. Chabot. Thank you. And you had also mentioned in your 
testimony about the efficiency of biodiesel, and I think you 
mentioned that it was about for every--the input being 1, the 
output is like 3-1/2 times the output. How does that compare 
with ethanol? Could you comment on that?
    Mr. Feraci. I am not sure--I have seen different numbers 
for ethanol. Ethanol has a positive energy balance. I believe 
ours is higher. 3.5 to 1 is an extremely efficient fuel.
    Mr. Chabot. The numbers that I remember are pretty close, 
actually. Not to yours, but I think you got as much energy out 
almost as you put in. So there was a real concern about that 
especially, arguably, if you are driving up food costs and 
other things at the same time. So it sounds like you all are 
quite efficient, and I think it is something that bears looking 
into.
    Mr. Clements, if I could go to you next. Restaurants are 
often open long hours and experience high customer traffic and 
renovate frequently. Could you expand a little bit on the 
importance of the 15-year depreciation schedule? And I know you 
mentioned that Pat Tiberi--and we have a lot of bills. That is 
something that after this meeting I am going to go back and 
look at very closely, because I know philosophically over the 
years we have been in favor of that, and I am inclined to go on 
that bill as well myself. So if you could just talk about that 
briefly.
    Mr. Clements. I would be glad to. Perhaps the best way to 
approach it is to let you hear an example in my own situation. 
I am a Burger King franchisee. I sign a franchise agreement for 
every location that I operate and it is a 20-year agreement. 
Within that 20 years, I am required to do a pretty substantial 
remodel at 10 years. Obviously, I have to maintain the facility 
and keep all the repairs and maintenance up and keep up with 
the cosmetics and decor of the day.
    At the end of 20 years, assuming I want to renew that--and 
in most cases I would--then I have got to do beyond a 
substantial--it is almost in a lot of cases what we would call 
a "scrape and rebuild" where I tear the facility down and I 
just completely rebuild it, or I go down to the concrete and 
four walls and put a new roof on it, put new air conditioners 
on it, put new interior walls, new plumbing, new electrical. So 
I have just about rebuilt the entire building, and yet I am 
only halfway through the life of the 39-1/2 years. So from an 
economic standpoint, I am sitting there still trying to figure 
out how to write off the rest of the building from the first 
round, and I am incurring just about as much in cost on the 
second round. So I hope that helps explain the scenario.
    Mr. Chabot. Yes. Thank you.
    Mr. Shepherd, let me go to you next, if I can. You had, I 
think, concluded in your testimony by saying--and I quote, I 
believe--if given the opportunity, I would love to talk about 
the estate tax. So I would like to give you that opportunity.
    Mr. Shepherd. Thank you very much. For my company and many 
small businesses, we are privately held and we are an S 
corporation, so all the profit from our company flows through 
to the owners, and we pay taxes not on our salary but on the 
entire profit of the company. Every year, almost 50 percent of 
that income is taxed. And that will be so for my entire working 
life.
    I am fourth generation, as Mr. Chabot mentioned. I have a 
strong desire to pass along to my kids who are looking like 
they will be capable of handling this. When I die, depending on 
what the law is at the time, maybe 50 percent of the 
accumulated wealth will then be taxed again. So 50 percent on 
income throughout my life and then another 50 percent on the 
accumulation when I die. We, of course, are preparing for that. 
We expect it to happen. I would love for it to not happen 
because it is an incredible waste.
    Every year, my salary, which is typical for my position in 
the marketplace, is more than completely consumed by taxes on 
that salary and premiums to pay for life insurance that 
hopefully will be sufficient to pay the tax when I die.
    And we also spend a fair amount of time just figuring out 
how to plan our estate for that transition, and a lot of 
money--I just paid an $8,000 check to a lawyer to help figure 
all this out.
    So how do my family and I live if all my salary is going 
elsewhere? We have to pull equity out of the company and that 
is equity that would otherwise be invested towards more 
chemists, more laboratory equipment, more capacity, any number 
of things. But my preference, as I stated, is that rather than 
an R&D tax credit, which I love by the way, because it offsets 
this stuff a bit, I would much rather just be able to keep the 
money that we make through hard work and manufacturing. We have 
proven that we are a good investment and I think we would be a 
good investment going forward.
    Mr. Chabot. One quick follow-up question. When you said you 
could invest the money back in the company, would that perhaps 
allow the company to grow and potentially hire more employees 
as well, so other people are benefiting in the community?
    Mr. Shepherd. Yes. Let me elaborate on that. Twenty-five 
years ago, we had about 150 employees. Now we have about 450. 
We grow.
    Mr. Chabot. Thank you very much. Madam Chair, rather than 
ask questions, I think I would like to defer to my colleagues. 
And if you are doing another round, I will come back and get 
these gentlemen the next round. Thank you, yield back.
    Chairwoman Velazquez. Ms. Hirono.
    Ms. Hirono. Thank you, Madam Chair. I am particularly 
interested in the biodiesel industry and I visited with 
specific biodiesel--I hope they are members of your 
organization.
    Mr. Feraci. They are not members, but we deal with them.
    Ms. Hirono. Good. They should become members, probably. And 
the great thing about biodiesel is that it uses products. And 
in the case of specific biodiesel, you use hotel and restaurant 
oil which otherwise would have to be disposed of with expense 
to those businesses.
    So, Madam Chair, I just wanted to mention to you that when 
I visited with them, that one of the first questions they asked 
is whether we were going to extend the biodiesel tax. And this 
was a real-life example of how the tax policies that we adopt 
here have an impact. And members of the industries, most of 
whom are small businesses as you mentioned, they pay attention 
to what we are doing. So thank you for that.
    And, Mr. Clements, I just also wanted to mention that this 
Committee has focused on the 15-year provision before, and so I 
want to thank you for coming and reiterating the importance of 
that time frame for restaurant renovations.
    Mr. Clements. We appreciate your work. Thank you very much.
    Ms. Hirono. Thank you, Madam Chair.
    Chairwoman Velazquez. Mr. Gohmert.
    Mr. Gohmert. Thank you, Madam Chair. And I really 
appreciate you having this hearing. I think this is terrific. I 
appreciate you all being here and the testimony. It is the kind 
of things people in Congress need to be reminded of, 
apparently, constantly. Apparently there is not a long-term 
memory here, and so we need that encouragement on a regular 
basis.
    Mr. Shepherd, one of the last things you said is that if 
you had to pay tax twice on the same income, you said it would 
be, a quote, waste, unquote. And I would submit to you that it 
would only be a waste if you feel like you might happen to be 
able to spend money better than the wonderful people here in 
Washington. But otherwise, you know, somebody may need another 
monument to themselves up here or something like that.
    Chairwoman Velazquez. Bridge to nowhere.
    Mr. Gohmert. We had a small business congressional 
delegation trip to China 3 years ago, and one of the things we 
did was talk to CEOs, people that had moved businesses to 
China. And I went with the impression--I am from East Texas. I 
went with the impression that probably they were just moving 
over there for cheap labor. And that was what we were told, a 
small part of the reason. But the driving force for most of 
them was the dramatic decrease in taxes. And that China was 
even flexible, if it was a big enough business, on negotiating 
income tax; and that when they looked at a corporate tax, half 
of what we have here in the U.S., and the advantages that they 
were able to have, even though they had better quality control 
in the United States, they like being in the United States, 
they just couldn't turn down that kind of tax break.
    And then since I have been here, I have come to know John 
Bruton, who took over as Prime Minister in Ireland when they 
had one of the worst economies in the world. And now, as I 
understand it, they may be one of the top five fastest growing 
economies. And as best I can read and see, it sounds like the 
sole reason they turned that whole nation around from being one 
of the worst to one of the best as far as the economies was 
they dramatically dropped the business tax, and now businesses 
are moving in there, people have jobs again, the kids are not 
rushing to get out of Ireland. And then, of course, they turned 
things around there, they did, by dropping their taxes. And now 
the European Union has John Bruton as their Ambassador to the 
U.S. They wanted his input on how we turn Europe around, and 
now I understand that much of the European Union is looking at 
dropping taxes and following that lead. And we seem to be the 
only advanced Nation in the world that is talking about 
increasing our taxes instead of decreasing them.
    And as far as the discussion about the death tax, there 
have been some good points made about that. But I can't forget 
this gentleman in my district in East Texas, he is a small 
business owner. They are in the timber business and they have a 
bunch of land. And they are land-rich and money-poor, but he 
approached me and he said, "You have got to do something about 
the death tax." I am sure you are aware in 2010 there will be 
no death tax, right?
    Mr. Shepherd. For a moment.
    Mr. Gohmert. For that year. And then in 2011, it kicks back 
to the 55 percent that basically--a socialist notion that the 
government needs half--over half of the estate that has been 
accumulated is by taxes having been paid on all of that. And he 
said, "My children are all grown. They are in the business, and 
they got together and hired an accountant who has advised them 
that if I die in 2010, they keep all of the estate, but if I 
have the indecency to make it to January 1 of 2011, they are 
going to lose half of the estate. And they are kind of 
encouraging me that," you know, not to take care of himself. 
And he said, I am beginning to get a little worried if I make 
it to December of that year, if you guys in Washington haven't 
done something--
    He was kind of kidding, but you could see there was concern 
in his eyes.
    So anyway, I appreciate, Madam Chair, your having this 
hearing. I think everybody in Washington needs to be reminded 
we are hurting our country by overly taxing the people that are 
providing the jobs. We thank you.
    Chairwoman Velazquez. Thank you, Mr. Gohmert. 
    Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Madam Chair.
    I just made a note to myself, don't build any monuments to 
myself, and if I build a bridge in Indiana, it should go 
somewhere. I also was going to give Mr. Shepherd a chance to 
elaborate. So thank you, Mr. Chabot. Mr. Kilduff, you are going 
to benefit from Mr. Chabot recognizing Mr. Shepherd.
    You said you would like to address the carried interest. 
Sometimes in Washington--as you know, we implemented PAYGO, and 
you caught that as a pay-for. Would you elaborate? I will give 
you my 5 minutes to elaborate on that unintended consequence. 
It is something that happens to us quite a bit up here, and 
obviously that is something we don't like. But please elaborate 
on that. Help us understand better how that affects you.
    Mr. Kilduff. Sure. I would love to.
    I think in my notes somewhere I have the exact year. I 
think it is 2006. The last numbers we have, somewhere near 50 
percent, around 46 percent of all partnership tax returns that 
were filed in the United States were filed on real estate. And 
the typical form of ownership of real estate--and, frankly, my 
own company, my operating company, is an LLC, which is taxed as 
a partnership.
    When a small business developer puts together a project, 
like a shopping center project, you would go out and you would 
solicit the lease possibility from a food store. You would run 
the feasibility on the property. You would analyze all the 
costs. You would put all of that together, and then you would 
go to someone else as a capital partner, and you would say, 
look at what we have here. We have this opportunity to do this 
great project, and I am prepared to give you a significant 
portion of the ownership in it if you are prepared to risk your 
capital.
    And they would come back and say, well, we will pay you a 
small fee, which is taxed as ordinary income, for managing this 
project, and we will allow you to keep a carried interest. We 
don't typically call it that. That is a financial term. In real 
estate we usually just call it just an ownership interest. But 
we will allow to you keep a carried interest in this project, 
and when it is ultimately sold or whatever, you will benefit 
for having put this whole thing together, for having used your 
ingenuity, for having risked everything you own, because every 
time I sign a loan at the bank, my home, my children's 
education and everything is at risk, so I had better be right.
    But all I will earn in a project like that until they are 
paid back, until the project is successful and ultimately 
possibly until the project is sold is that small fee, which is 
taxed as ordinary income on a regular basis. My entire interest 
in that project will be taxed as if I were a hedge fund 
operator, and that is a significant issue.
    And there are many, many more small partnerships and small 
projects in real estate investments in small companies like 
mine than there are hedge funds. And without beating up hedge 
funds, I just think there is a distinction there. And I don't 
know that anybody intended to harm the entrepreneur's efforts 
to put together a coalition of investors and partners to build 
something by taking away their incentive at the end of the day.
    Mr. Ellsworth. Thank you very much.
    Madam Chair, I would yield back.
    Chairwoman Velazquez. Thank you.
    Mr. Feraci, right now the United States can import 
biodiesel from another country, capture the tax incentive, and 
we ship that product to another country for their benefits. 
They call this practice splash and dash. Can you discuss this 
issue on what the biodiesel industry's position is on such 
activity? And in what ways do you think we can stop these 
abuses to our Tax Code?
    Mr. Feraci. Sure. I would be happy to talk about it.
    You described what a splash and dash transaction is pretty 
accurately. What you have is a situation where you take 
finished biodiesel produced in a third country, say Argentina, 
and then it will come to the United States. It will be splash-
blended with diesel fuel--because remember, that is the event 
that triggers a tax benefit--and then that fuel will ultimately 
be shipped to a third country for end use.
    Now, if you look at that, there is clearly no sort of 
energy or tax policy justification whatsoever for a transaction 
like that. And the National Biodiesel Board is vehemently 
opposed to splash and dash. We have been working for years to 
try to shut these sort of transactions down. I can tell you it 
was clearly unintended--no one foresaw this when the tax 
incentive was put in place in 2004 that this was going to 
happen.
    Now, the good news is H.R. 6049, the energy and tax 
extender package that passed the House prior to Memorial Day, 
as well as 335, which is the Baucus-Reid bill, and the 
McConnell-Grassley substitute as well all address this in the 
same way. And what it says is that fuel produced outside the 
United States for use outside the United States will not 
qualify for the tax incentives. So if you think of how that 
transaction works, that would shut it down. And furthermore, 
the effective date in all three of those packages is May 15 of 
this year, which was the date of first committee action in the 
Ways and Means Committee when they marked it up. So we are 
fully supportive of that provision. We think it is a good 
provision. These sort of transactions need to end.
    Chairwoman Velazquez. Thank you.
    Mr. Berlinghieri, the investment tax credit, we know, is 
essential to the solar power industry. And the growth of solar 
power has formed new businesses that play a variety of roles in 
manufacturing and installation. Can you talk to us about how 
this technology has presented business opportunity for small 
businesses?
    Mr. Berlinghieri. Yes. In an effort to make solar power 
cost-effective and allow consumers to afford to buy solar 
power, and today it requires, I believe, tax incentives for 
consumers as well to be able to do that, the processes that are 
used to make a more effective solar power are very similar to 
the semiconductor manufacturing processes. And so there is a 
number of companies that have either been in semiconductors 
only that have been able to enter into the solar market and 
design equipment that will help make those tools, which 
obviously are employing people, and then actually make solar 
panels, which are also employing people as well.
    So again, we are able to produce equipment for solar, for 
making solar panels. We are able to produce those. 
Unfortunately, without those incentives, it is likely that the 
control of that will be outside of the United States, which we 
already have issues with in terms of our fuels and other 
resources.
    Chairwoman Velazquez. So if the tax incentives are in 
place, do you have any projections in terms of numbers of jobs?
    Mr. Berlinghieri. Well, I had quoted the study that was 
done that at least over the next--I believe it was the next 
couple of years, that that could provide about 40,000 jobs if 
the incentives were in place so that the equipment companies 
and the producers of those panels, installers could be in the 
United States. That would be at stake as well as about an $8 
billion capital investment.
    Chairwoman Velazquez. Yeah. Mr. Shepherd, as you know, our 
economy is becoming increasingly global. And as a result, 
investors are deciding between putting their capital in U.S. 
firms versus our foreign competitors. If the R&E credit is not 
extended, do you believe investors may be more likely to invest 
their money abroad?
    Mr. Shepherd. I am sure they will. That won't be our 
incentive. We are going to follow our customers where it makes 
sense. We have a couple manufacturing facilities over in 
Europe. We bought them back in the 1990s when our customers 
were going global. We have a lot of business in China. For 
various reasons we have decided not to put a facility there.
    I am sure plenty of people will be influenced by the 
presence or absence of an R&D tax credit. I don't think it is 
going to make any difference to us.
    Chairwoman Velazquez. Thank you.
    Now I recognize Mr. Chabot.
    Mr. Chabot. Thank you, Madam Chair.
    Mr. Kilduff, I will come back to you now, if I can now. The 
redevelopment of idle urban retail centers, some of which are 
affected by brownfields, as you had mentioned, seems to be a 
key to revitalizing struggling neighborhoods. And I have some 
neighborhoods like that in my area in Cincinnati. Could you 
tell us how the expensing incentive has helped your company to 
undertake these new projects?
    Mr. Kilduff. Well, the expensing provision helps because 
the brownfield and the cleanup costs are incurred at the very 
beginning of the project. They are a large unknown. In the real 
estate developing business, everything from the ground up is 
something that you have a pretty good handle on. You know what 
the building is going to cost because you can get estimates. 
You have engineers that can give you costs on many things. But 
the minute you put a shovel in the ground, or, in the case of 
an urban redevelopment, the minute you have to start taking a 
building down and you don't know what is inside it, the risk 
factor goes up extraordinarily. And so looking at a cleanup of 
a brownfield as an exercise and an additional cost to the 
project, not knowing how much it is going to cost, but knowing 
that if you have to incur that cost, at least you will be able 
to expense it and not have to depreciate it as if it were a 
part of the building over a long period of time significantly 
affects your go or no go decision because this is the front 
end. So many projects, you don't even know they didn't--you 
don't even know they didn't happen. You know, they just didn't 
happen. You don't know if anybody ever looked at them or not.
    Mr. Chabot. Okay. Also the New Markets Tax Credit 
encourages private investment in underserved areas, and I also 
have a number of those areas in my district. We have worked 
with new markets and had things actually occur that wouldn't 
otherwise have occurred. Could you discuss new market and how--
    Mr. Kilduff. Sure. You know, I have been involved in the 
New Markets Tax Credits program for a long time in the sense 
that I was involved with two organizations, LISC and the 
Enterprise Foundation, when they originally were trying to come 
up with the program. It was originally--the concept was that it 
was going to be similar to the tax credit housing project type 
of thing where it was going to provide equity, and it was going 
to fill the gap. In many of these redevelopment projects, there 
is a significant gap between risk and return and the risk and 
return in some other project somewhere else that will attract 
the capital instead. So the New Market Tax Credit does serve 
that purpose, and it has worked with some effect.
    I will tell you that for many small developers, it has been 
challenging to use the program because it is complicated. And 
the allocation of the tax credits often go to banks, and those 
banks often have selected or elected to offer the value of that 
credit at slightly below the mortgage rate at the going time 
and retain most of that leverage or most of that additional 
gap-filling possibility for themselves. While we support the 
renewal of that program, I would also urge the Congress to 
looking at streamlining that program and making it more 
targeted toward the actual purpose that it was intended.
    Mr. Chabot. Thank you.
    Mr. Berlinghieri, do you believe that the R&E credit would 
be more effective, especially for small firms, if it could be 
made permanent; you know, if we knew it was going to be in 
existence, we could count on it, depend on it?
    Mr. Berlinghieri. Yes, I would believe so. I think when we 
look at our businesses, and especially in the area of product 
development and R&D, the long-term commitment to activities are 
critical. Most products take multiple years to get to market 
from concept to release and design. So I think that that--that 
is critical to us. That is why we have asked for it to be 
extended beyond this annual type of activity to 8 years so that 
we can make a long-term investment and know that it is not 
going to dry up a year later.
    And so it does--our model and I think the members of SEMI 
who are doing R&D have a long-term commitment to R&D, and they 
need it in order to produce a product. It is not a 6-month 
activity. It is a multiple-year activity.
    Mr. Chabot. Thank you.
    And finally, Mr. Shepherd, we had talked about the death 
tax or the Federal estate tax earlier. I would like to give you 
one opportunity again to go on another issue. We talked just 
briefly about LIFO and the challenges, problems, et cetera. 
Could you tell us what LIFO is and what you think ought to be 
done about that?
    Mr. Shepherd. Certainly. Thank you.
    LIFO is a method by which profits are determined for 
purposes of tax. It stands for "last in, first out." My 
business is very heavily raw material-intensive involving many 
commodities, and the prices on commodities change over time. 
Last in, first out says that when I determine my profit, I am 
looking at my most recent price on a raw material purchase 
rather than my most distant. The profit is calculated based on 
my replacement cost of that raw material rather than what I 
spent to buy the raw material several months ago.
    I understand there are discussions going on to eliminate 
the LIFO provision. That would be disastrous and I think it 
would be wrong-headed. We do a lot of business with a metal 
called cobalt, and included a chart with my written statement 
that shows the volatility in the price of cobalt. As you can 
see it is quite volatile. And if the price started at $10, and 
at the end of the year it is $20, the first in, first out 
method, which is what we would be looking at if LIFO went away, 
would assign profit to our company for the $10 per pound not 
the price of cobalt increased. That is not real profit and it 
is not money that we have available. We have invested all that 
so-called profit back into working capital for our company, to 
pay for the cobalt that is in our inventory.
    So if LIFO were eliminated, and we switched to FIFO, at the 
very time that we are cash-strapped because the price of cobalt 
has gone from $10 to $20, the government, under FIFO rules, 
would be looking for dramatically increased taxes. And then on 
the other hand, when the price of cobalt retreats from $20 back 
to $10, FIFO rules recognize negative profits (and therefore 
minimal taxes) at the very time the decrease in our inventory 
investment makes taxes more affordable. So it would create 
tremendous complexity in our cash management and great 
inefficiencies, because when it is time to invest, we wouldn't 
have the cash, and at other times we would just be flush with 
cash.
    Mr. Chabot. Okay. Thank you.
    I don't want to open it up too much, but the other 
gentlemen here, do you all agree that also would be a 
significant problem in various other industries and something 
that we ought to be advised of and take into consideration in 
our tax policies? Is that a concern or--is there anybody that 
disagrees with that point of view?
    Mr. Clements. I want to speak as a CPA. He is absolutely 
correct in what he is saying.
    Chairwoman Velazquez. Would you please be brief since we 
are going to recess at 11:45?
    Mr. Clements. In my business it is not very significant 
because we have a small investment in inventory. I am sure he 
has got a significant investment. It is exactly like he said.
    Mr. Shepherd. One last comment. Right now, because over 
time the price of our raw materials have gone up more than they 
have come down, we have about a $40 million LIFO reserve. If 
suddenly that went away, and that $40 million was recognized as 
income, we would have $20 million tax bill to pay. We don't 
have that kind of cash hanging around. That could put us out of 
business.
    Mr. Chabot. Thank you very much. Yield back.
    Chairwoman Velazquez. Ms. Clarke.
    Ms. Clarke. Thank you, Madam Chair and Ranking Member 
Chabot.
    I am sorry, gentlemen, I didn't get a chance to really hear 
as much of your testimony as I would have liked. I had another 
hearing simultaneously. But I did want to get here to ask some 
questions because I am concerned about the expiration of these 
tax credits.
    My first question is to Mr. Feraci and Mr. Shepherd. Due to 
a research and development tax credit expiring last year, 
thousands of jobs were at risk, according to the Information 
Technology Association of America. These jobs stimulate more 
spending, business growth, which creates even more jobs. Now 
many companies no longer can rely on this credit. How did this 
R&D tax credit impact your business in your industry? Can you 
tell us just briefly?
    Mr. Feraci. A lot of our members aren't taking the R&E 
credits as much, but I can speak to the biodiesel tax incentive 
and the impact it is having. With the tax incentive, we are 
going to continue growing. We are going to continue creating 
jobs and adding+ to the overall economy. And we are going to 
continue being a part of our answer to our energy security 
issues, be part of answering the issues in terms of addressing 
climate change.
    Ms. Clarke. Uh-huh.
    Mr. Feraci. If the tax incentive expires, because of the 
way we are structured, because of the impact it has in terms of 
being very fungible to make our fuel price competitive, those 
jobs are going to dry up. So a lapse would be pretty 
devastating to our industry.
    Ms. Clarke. Mr. Shepherd.
    Mr. Shepherd. Yes. Thanks for the opportunity.
    I really can't speak for our industry. I don't intend to.
    As for our companies, the R&D tax credit is really not so 
big an amount of money that it drives much of anything. We are 
happy to get it. My real message here was taxes in general are 
very onerous, and if the way to reduce my taxes is to get an 
R&D tax credit, I am happy to have it. But really other taxes 
play a much bigger role.
    Ms. Clarke. You think if it were made more meaningful in 
terms of how it impacts on your business--in other words, if it 
were to give you the type of cushioning you need to move 
forward with new innovation, it would be something desirable?
    Mr. Shepherd. We are a very innovative and technically 
driven company. If it were bigger and more meaningful, it would 
absolutely influence us.
    Ms. Clarke. Mr. Kilduff, how has the New Markets Tax Credit 
been a powerful tool to spur small business development in low-
income communities throughout the United States, from your 
perspective? And does this credit stimulate investments in 
businesses such as neighborhoods, retail stores and inner-city 
shopping centers? And would you agree that the New Markets Tax 
Credit has created jobs in economically distressed 
neighborhoods? If so, do you have evidence supporting that 
claim?
    Mr. Kilduff. Yes, ma'am. Actually that is an area that I 
participated in, not exclusively, but a great deal of my 
business is in underserved markets. There is always an equity 
gap in an underserved market project. There is a gap between 
the potential return and the costs based on the opportunity to 
do things in other markets would be easier. And New Market Tax 
Credits, brownfield expensing--brownfield tax credits, if we 
could get a bill passed to do that, those things all add tools 
to the chest to allow us to even consider those projects. They 
have worked significantly. The tax credit program is a little 
cumbersome, and I would urge some review of how those credits 
are allocated to the organizations that pass them out, but it 
is significant. It is significant.
    Ms. Clarke. And then just in closing, Mr. Shepherd, do you 
believe that there should be a repeal of the deduction for 
expenses related to domestic energy production under the 
American Jobs Creation Act of 2004?
    Mr. Shepherd. I don't know. I am not very familiar with the 
American Jobs Creation Act.
    Ms. Clarke. Okay. Madam Chair, thank you very much.
    Chairwoman Velazquez. Mr. Akin?
    Mr. Akin. I am sorry that I haven't had a chance to join 
you because we have multiple committees at the same time. But I 
did note yesterday--I guess it was yesterday's Wall Street 
Journal that they were saying something about a tremendous 
oversupply of strip malls and malls in general, everything like 
that. Does that mean that we don't need the tax credits, we 
have already overbuilt? Or what do you think about that?
    Mr. Kilduff. You know, my dear friend Gar Herring was 
quoted in that article. And we are going to have a talk, he and 
I. I am not so sure that everybody would agree with the entire 
article in terms of the overbuilding.
    I think, having been in the real estate business as long as 
I have, since before the 1986 tax change, and watched capital 
structures change, I think retail is suffering some of the 
consequences of weakness in other parts of the economy. But 
frankly, we are much better as an industry now about building 
things that are preleased and building things that are 
necessary at the time and are substantially reviewed. That does 
not mean, though, that if everybody starts losing their homes, 
and other businesses start closing, and people stop shopping, 
that it is not going to look like we have too much retail, or 
that some retailers aren't then going to have to retrench, 
close doors, potentially even declare bankruptcy, which then 
fulfills that cycle and puts us in that position. I would 
submit to you that it is not quite like that.
    Having said all that, even through all of these endeavors 
in what is primarily a suburban development business that has 
taken place in the last 10 years, many of the projects in the 
urban markets still haven't been done, and they haven't been 
done in part because those were easier to do. And the reason 
they are easier to do is because when you measure them under 
the same time frame and same parameters as those urban deals, 
the suburban deals always came out on top. So things that could 
be used to help manage that and put the projects where many 
people are living, which have been abandoned for some 30, 40 
years, could be of significant value.
    Mr. Akin. Thank you for answering that question. It does 
obviously depend on your assumptions and parameters and where 
the economy is going and all that.
    One other quick question. I don't know that this was 
something that you had addressed specifically or not. As a guy 
who has been here now 8 years, when we did the dividend capital 
gains tax cut, which was politically a pretty unpopular thing 
to do, it appeared that almost immediately after that there 
were three charts that I have in my office and there was a 
tremendous effect on the economy.
    The first thing was we were running at losing about 140,000 
jobs a month rate. And almost instantaneously, first quarter of 
2003, when we did dividends capital gains, we turned around and 
saw a fairly steady increase in jobs, at about 160,000 jobs 
gained per month. Very big turnaround.
    The gross domestic product had been very erratic, up and 
down, for the first number of the--because I came in with the 
President, so the 2001, 2002 were very up and down for 
quarterly gross domestic product. That jumped up about--from 
about 1.4 average, but it was erratic, to about up into the 
fours.
    And the third thing was that government revenues also 
jumped up significantly. Even though we did a tax cut, the 
result was you had enough business stimulation from dividends 
capital gains apparently that you had a tremendous increase in 
Federal revenues. Now, I am making the assumption that there 
was a causal relationship between the dividends capital gains 
tax cut and what happened to the economy. That may or may not 
be true.
    Is it your opinion that that tax cut is very important to 
business in general, or do you think there is other tax cuts 
you think are far more valuable?
    Mr. Kilduff. Well, in my business as a real estate 
developer, it is probably the single most important thing that 
we look at in terms of whether we build something, how long we 
hold it, what we do with it, how we structure the capital. So 
capital gains taxes would be significant for us, and increases 
there would be more devastating than many other things.
    The capital--the carried interest issue is also of 
significant importance for that very same reason, because most 
mall developers own things that they don't profit from until it 
is ultimately sold at the end of the day because everybody else 
has to be paid back first. We are in the risk position. So 
those things combined could be devastating to small businesses.
    Mr. Akin. Other members of the panel, is that an important 
tax cut, dividends capital gains, relative to your businesses?
    Mr. Berlinghieri. Well, I think the way I would comment on 
it is we are expected to make a significant return on 
investments that we make. When I get a personal tax cut, I 
probably get a one-for-one return, and sometimes I may not even 
do that. But as a responsibility for our business, I have got 
to make a bigger return on it. So I think that investment does 
look for a larger return that creates more jobs and a healthier 
economy. So I absolutely believe that is the case.
    Mr. Akin. Okay.
    Mr. Shepherd. I would just say that anything that reduces 
the capital gains tax helps markets be more efficient, which 
allows money to go towards the best opportunity rather than 
being constrained by some artificial barrier.
    Mr. Akin. So you are saying the dividend capital gains tax 
cut, from your point of view, is very important to the strength 
of the economy?
    Mr. Shepherd. I think it is very important. I think it 
should be cut further.
    Mr. Akin. Okay. Thank you, Madam Chair. I would vote for 
that, too, by the way.
    Chairwoman Velazquez. Unfortunately we don't live in the 
perfect world, right? Okay.
    Mr. Chabot. We are trying to make it such, though.
    Chairwoman Velazquez. Well, you have tried for 12 years. 
Okay.
    Thank you so very much for your insights and great 
discussion that we had in this hearing. Let me just say that as 
the 110th Congress comes to an end, this Committee will 
continue to work with the leadership and our colleagues in the 
Ways and Means Committee to make sure that some of these 
extenders are signed into law, are passed. Some of these 
provisions have already passed the House. So we need to get the 
Senate to act. And we will continue to highlight with our 
leadership the important consequences of these tax extenders 
when it comes to small businesses in this country.
    Thank you very much. And with that, I ask unanimous consent 
that Members will have 5 days to submit a statement and 
supporting materials for the record. Without objection, so 
ordered.
    Chairwoman Velazquez. This hearing is now adjourned.
    [Whereupon, at 11:35 a.m., the committee was adjourned.]

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