[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                       FULL COMMITTEE HEARING ON 
                    ECONOMIC RECOVERY: TAX STIMULUS 
                      ITEMS THAT BENEFITTED SMALL 
                       BUSINESS WITH A LOOK AHEAD 

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             JULY 15, 2009

                               __________

                [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                               

            Small Business Committee Document Number 111-036
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

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                        PARKER GRIFFITH, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

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

                                  (ii)

  


                         STANDING SUBCOMMITTEES

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon                TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama

                                 ______

                    Subcommittee on Finance and Tax

                    KURT SCHRADER, Oregon, Chairman


DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
MELISSA BEAN, Illinois               TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, Pennsylvania, Chairman


HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas
PARKER GRIFFITH, Alabama

                                 (iii)

  


               Subcommittee on Regulations and Healthcare

               KATHY DAHLKEMPER, Pennsylvania, Chairwoman


DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia, 
PARKER GRIFFITH, Alabama             Ranking
MELISSA BEAN, Illinois               STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             GLENN THOMPSON, Pennsylvania
BOBBY BRIGHT, Alabama                MIKE COFFMAN, Colorado

                                 ______

     Subcommittee on Rural Development, Entrepreneurship and Trade

                  HEATH SHULER, Pennsylvania, Chairman


MICHAEL MICHAUD, Maine               BLAINE LUETKEMEYER, Missouri, 
BOBBY BRIGHT, Alabama                Ranking
KATHY DAHLKEMPER, Pennsylvania       STEVE KING, Iowa
ANN KIRKPATRICK, Arizona             AARON SCHOCK, Illinois
YVETTE CLARKE, New York              GLENN THOMPSON, Pennsylvania

                                  (iv)

  













                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Graves, Hon. Sam.................................................     2

                               WITNESSES

Johnson, Mr. Stan, Stan's Heating and Air Conditioning, 
  Arlington, VA. On behalf of Air Conditioning Contractors of 
  America........................................................     3
McMillan, Mr.Charles, Director of Realty Relations & Broker of 
  Record, Coldwell Banker Residential Brokerage; President, 
  National Association of Realtors, Dallas, TX...................     6
Woods, Mr. Douglas, President, The Association for Manufacturing 
  Technology, McLean, VA.........................................     7
Hederman, Mr. Rea, Senior Policy Analyst & Assistant Director, 
  Center for Data Analysis, The Heritage Foundation..............     9
Merski, Mr. Paul, Senior Vice President & Chief Economist, 
  Independent Community Bankers of America.......................    11

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    25
Graves, Hon. Sam.................................................    27
Johnson, Mr. Stan, Stan's Heating and Air Conditioning, 
  Arlington, VA. On behalf of Air Conditioning Contractors of 
  America........................................................    29
McMillan, Mr.Charles, Director of Realty Relations & Broker of 
  Record, Coldwell Banker Residential Brokerage; President, 
  National Association of Realtors, Dallas, TX...................    35
Merski, Mr. Paul, Senior Vice President & Chief Economist, 
  Independent Community Bankers of America.......................    46
Woods, Mr. Douglas, President, The Association for Manufacturing 
  Technology, McLean, VA.........................................    56
Hederman, Mr. Rea, Senior Policy Analyst & Assistant Director, 
  Center for Data Analysis, The Heritage Foundation..............    63

Statements for the Record:
The Associated General Contractors of America....................    68
Computer Technology Industry Association.........................    74

                                  (v)

  


                       FULL COMMITTEE HEARING ON
                    ECONOMIC RECOVERY: TAX STIMULUS
                      ITEMS THAT BENEFITTED SMALL
                       BUSINESS WITH A LOOK AHEAD

                              ----------                              


                        Wednesday, July 15, 2009

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Moore, Dahlkemper, 
Kilpatrick, Ellsworth, Graves, Luetkemeyer and Coffman.
    Chairwoman Velazquez. I call this hearing of the House 
Small Business Committee to order.
    This past February, Congress approved landmark legislation 
to revive our struggling economy. In passing the American 
Recovery and Reinvestment Act, Congress laid the groundwork for 
long-term, sustainable growth. That bill contained several 
small business provisions, and I am pleased to say many of them 
are already working for entrepreneurs.
    Six months after the Recovery Act was signed into law, the 
clouds are starting to clear. To begin, loans from the SBA are 
up dramatically. As of June, the agency has supported more than 
$6 billion in lending. Just as importantly, small business 
credit markets are coming back to life. Loan volumes in the 
secondary market jumped from under $100 million in December to 
$360 million last month.
    So things are looking up. Still, small firms continue to 
face challenges in accessing capital, and it would be wrong to 
say that we are out of the woods just yet.
    While we are still only one quarter of the way into a 
sweeping two-year plan, this is a good time to stop and check 
our bearings.
    Today, we are going to evaluate the progress made thus far. 
Witnesses and Committee members will discuss the Recovery Act's 
small business tax provisions. In doing so, we can hopefully 
pinpoint where we have made headway and identify areas in which 
there are still strides to be made.
    Regardless of the economic climate, tax policy is a 
critical tool for growth. So in drafting the Recovery Act, it 
only makes sense to include relief for entrepreneurs. Already 
provisions for increased expensing limits and bonus 
depreciation are helping small firms expand. They are also 
creating new avenues for growth.
    Some of the most important provisions in the Recovery Act 
are those that invest in new industries. Small firms are 
already leading the Green Revolution. Increases in clean energy 
tax credits are helping that process along and generating 
tremendous opportunity for small firms.
    In a recent survey by the Air Conditioning Contractors of 
America, 75 percent of respondents said that they have seen 
improved sales. Because the efficiency sector is dominated by 
entrepreneurs, good news for green businesses is good news for 
small businesses.
    Clearly, we have come a long way since February. The 
Recovery Act is not just growing new industries like renewable 
energy. It is also reinvesting in old ones, like construction 
and manufacturing. In May, orders for manufactured goods, the 
kind that the Recovery Act lets firms depreciate, show up $2.8 
billion.
    Meanwhile, entrepreneurs in the construction business stand 
to win billions of dollars in infrastructure contracts. That is 
thanks largely to the Recovery Act's Build America bonds. As of 
early June, those tax exempt bonds helped finance $12 billion 
in new projects.
    I think we can all agree that these are promising bright 
spots, but signs of recovery should not be cause for 
complacency. In seeing the recovery process through, we will 
need to be patient, and we will need to be sure all 
opportunities are on the table.
    In terms of success provisions, it makes sense to consider 
increases or extensions. At the same time there are a number of 
suggested measures that hold very real potential and are worth 
a second look.
    In moving forward, it is important to remember one thing. 
These are exceptional times. They cannot be met with 
apprehension. They cannot be addressed with inaction. We need 
to confirm them head on within innovative solutions. That is 
why it's so important that our policies invest in small firms. 
They are the ones offering fresh solutions, and they are the 
ones leading the way back to prosperity.
    I would like to thank the witnesses in advance for their 
testimony, and I'm glad that they were able to make the trip to 
Washington to be with us this afternoon and look forward to 
hearing from them.
    So with that I yield to the Ranking Member, Mr. Graves for 
his opening statement.
    Mr. Graves. Thank you, Madam Chair, and thank you for 
calling this hearing on the nation's economic recovery and the 
tax provisions in the stimulus package. Thank you to all of our 
witnesses for being here today to share your testimony.
    We are all concerned about the economy, but small firms 
with thin margins and lack of capital are particularly 
struggling. The stimulus was signed into law on February 17th, 
2009, with pledges of job creation and help for small 
businesses. Although the overall package's hefty price tag was 
$800 billion, only a fraction, less than one percent of it, was 
devoted to helping small businesses recover. Unfortunately, the 
promised jobs have not been created and the economic recovery 
has not materialized.
    Instead, the June national unemployment rate was 9.5 
percent, the worst in 26 years. We were told that it could rise 
to ten percent in the coming months, despite promises in 
January that it would not top eight percent if the stimulus 
package was signed into law.
    The May unemployment rate in Missouri was nine percent, the 
highest on record, and is even higher in some other states. All 
of the spending in the stimulus has consequences. According to 
the nonpartisan Congressional Budget Office, the federal 
deficit will reach a staggering 1.8 trillion in 2009 and 9.1 
trillion by 2019, increasing the national debt to 82 percent of 
GDP.
    We must do better. America's small business need our help 
to create jobs and turn the economy around. Unfortunately, the 
stimulus' tax provisions are simply operating at the edges of 
the economy. Although the stimulus' tax provisions can be 
helpful, the broader, long-term answer to small businesses' 
economic recovery is income tax rate reductions.
    In addition, small companies need predictability in the tax 
code. We need to extend tax relief for more than a single year 
so these firms can budget and plan for investment.
    Small businesses need to keep more of what they earn. Tax 
rate reductions would help them to invest in their companies so 
that they can expand higher workers and get our economy moving 
again. Any new taxes to pay for health care reform, such as the 
proposed surtax on those with incomes over $280,000 will 
devastate the many small business owners who pay business taxes 
on their individual returns.
    I support temporary tax relief, but we need to go further. 
Making the 2001-2003 tax benefits permanent would give small 
firms the confidence to purchase new equipment and hire more 
workers. That is why I introduced legislation to permanently 
extend the 2001-2003 provisions, and I hope Congress will act 
to provide this predictability to our nation's businesses.
    Again, Madam Chairman, thank you for calling this important 
hearing today, and I look forward to hearing the testimony from 
our witnesses.
    Chairwoman Velazquez. Thank you, Mr. Graves.
    And it is my pleasure to introduce our first witness, Mr. 
Stan Johnson, Jr. He is the president of Stan's Heating and Air 
Conditioning located in Austin Texas. This company was founded 
in 1954 to fulfill the need for a high quality HVAC service 
company in central Texas.
    Mr. Johnson is testifying on behalf of the Air Conditioning 
Contractors of America. The ACCA is a group of over 4,000 air 
conditioning contractors.
    Welcome, sir. You will have five minutes to make your 
remarks.

    STATEMENT OF STAN JOHNSON, JR., STAN'S HEATING AND AIR 
  CONDITIONING, ON BEHALF OF AIR CONDITIONING CONTRACTORS OF 
                            AMERICA

    Mr. Johnson. Thank you for the opportunity to provide 
testimony on behalf of the small business service contractors 
that make up the heating, ventilation, air conditioning and 
refrigeration industry.
    My name is Stan Johnson, Jr. I am president of Stan's 
Heating and Air Conditioning, a heating, cooling, and indoor 
air quality company located in Austin, Texas metropolitan area. 
My company has been serving residential and commercial 
customers for over 55 years. We have gone from humble 
beginnings and now employ more than 40 workers. I come before 
you as Chairman of the Board of ACCA, as you have heard.
    Every day more than 4,000 ACCA member companies across the 
nation help homeowners, small business owners, and building 
managers realize the comfort and cost benefits of efficient 
HVACR equipment. Eighty-one percent of ACCA's member companies 
have less than 50 employs, and 50 percent have less than 20 
employs. My comments this afternoon summarize my written 
submission and focus on some of the expanded energy tax 
incentives passed as part of a stimulus bill, and their impact 
on the residential and small business commercial clients of 
ACCA members. I hope that my testimony will help to inform 
future policy decisions that further assist small businesses in 
these trying economic times.
    ACCA believes that tax credits are the best way to 
encourage homeowners and building owners to reach and obtain 
higher efficiency HVACR equipment. Tax credits help soften the 
blow of the new equipment investment cost and shorten the 
payback period. I can attest that three-fourths, but not all of 
our member companies have seen positive proof that tax credits 
in the stimulus package are working.
    The stimulus bill includes several important changes and 
modifications to existing tax credits for homeowners found 
under Sections 25(c) and 25(d) of the Internal Revenue Code. 
Under the old Section 25(c) tax credits, homeowners could only 
claim up to $300 for installing qualified HVAC or hot water 
equipment in 2009. The stimulus bill boosted the value of the 
25(c) tax credits to 30 percent of the installed cost up to a 
$1,500 cap and extended the credit through 2010.
    Under the old Section 25(d) of the tax code, a homeowner 
who installed a qualified geothermal heat pump through 2016 
could claim a $2,000 tax credit. Geothermal systems require 
higher initial investment cost, but run with dramatically lower 
operating costs. The stimulus bill removed the $2,000 cap and 
boosted the geothermal tax credit to 30 percent of the 
installed cost with no cap.
    In a survey conducted in May, 50 percent of ACCA member 
companies saw a small increase and 25 percent saw a significant 
increase in the sales of qualified, high efficiency HVAC 
equipment. One ACCA member commented that without the $1,500 
tax credit, we would have had massive temporary and some 
permanent layoffs. Instead, we have been able to keep steady 
work during a traditionally slow time.
    Another member recently commented that the credits provided 
a big boost to their sales, leading to a 20 percent increase in 
replacements over the last year. Indeed, the higher value tax 
credits are helping the homeowners elect to replace equipment 
instead of repair as long as they can get credit.
    And the boost to the geothermal system tax credits has been 
a real home run. Interest in sales of geothermal equipment has 
seen a tremendous spike. My own company has seen a geothermal 
business go from zero percent of our business in June of 2008 
to over 30 percent of our business in June of 2009.
    But the gains as a result of the tax code changes in the 
stimulus bill have not been without unintended consequences. A 
seemingly small increase in the minimum SEER and EER, energy 
efficiency qualifying standards that was made late in the 
legislative process has created a lot of confusion for 
manufacturers, distributors, contractors, and homeowners.
    As a result, consumer choices for some homes have become 
limited, making it difficult for homeowners to take advantage 
of the tax credits in some situations. There is no doubt the 
tax credits and stimulus bill have made high efficiency HVAC 
equipment more affordable for homeowners. However, the stimulus 
lacked a companion incentive for commercial and small business 
building owners. The committee's report last year on seven ways 
to stimulate the economy by letting the Internal Revenue Code 
showcase the disparity of how commercial; HVACR equipment may 
only be depreciated over 39 years, but because the expected 
life span of properly maintained HVACR equipment is only 15 to 
20 years, commercial building owners have little or no 
incentive to upgrade to newer, more efficiency, energy 
efficient equipment. The industry replaces a larger percentage 
of old systems in residential applications compared to old 
systems in commercial applications.
    ACCA supports passage of H.R. 2198 introduced by 
Representatives Melissa Bean and Peter Hoekstra to correct this 
disparity and reduce the holding period to a more realistic 20 
years for HVACR equipment that is ten percent more efficient 
than the federal minimum standards, and a 25 year schedule for 
all other new HVACR equipment.
    ACCA also endorses the idea of allowing small businesses to 
expense the purchase of HVACR equipment or allowing bonus 
depreciation of 50 percent of the installed cost in the year 
the equipment was placed into service.
    Still another option would be to extend the residential tax 
credits to qualified small businesses. Many small businesses 
from professional offices located in condo townhouse projects 
to small shopping centers utilize the same HVAC equipment found 
in residential homes, but because this equipment is installed 
in commercial property, it cannot qualify for a tax credit.
    With that I will conclude my comments and I will be happy 
to answer any questions you may have.
    Thank you, again, for this opportunity to testify before 
you.
    [The prepared statement of Mr. Johnson is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Mr. Johnson.
    Our next witness is Mr. Charles McMillan. he is the 
Director of Realty Relations and Broker of Record for Coldwell 
Banker Residential Broker in Dallas, Texas. He currently serves 
as president of the National Association of Realtors, NAR is 
America's largest trade association representing 1.3 million 
members involved in all aspects of the residential and 
commercial real estate industries.
    Welcome, sir.

STATEMENT OF CHARLES McMILLAN, DIRECTOR OF REALTY RELATIONS AND 
  BROKER OF RECORD, COLDWELL BANKER RESIDENTIAL BROKERAGE, ON 
         BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS

    Mr. McMillan. Thank you, Chairwoman Velazquez, 
distinguished members of the Committee.
    I am Charles McMillan, 2009 president of the National 
Association of Realtors and a broker from Dallas, Texas. I am 
here today on behalf of more than 1.1 million members of the 
National Association who deeply appreciate Congress' efforts to 
help small businesses recover and prosper during the current 
economic crisis. It is our belief that the 2009 stimulus 
legislation has provided helpful relief to America's small 
business owners, including the Realtors, by helping to 
stabilize the housing market and stimulate the economy.
    I want to focus my remarks today on three solutions in 
particular and provide some comments as you have requested on 
what more can be done. First, Realtors appreciate actions take 
by Congress to provide tax incentives that would stimulate 
housing investment, especially among new home buyers. Early in 
2008, NAR advocated for a tax credit for purchases of a 
principal residence. Initially Congress created a $7,500 
refundable credit for first time buyers, which was in effect 
from April 2008 through June 30, 2009.
    Because buyers were required to repay the amount, the 
credit was more like an interest free loan, and few consumers 
took advantage of it.
    The 2009 stimulus increased the amount of the credit to 
$8,000. It eliminated the repayment requirement, and extended 
the credit from June 30th, 2009, to December 1st, 2009.
    With these improvements, it appears that the 2009 tax 
credit is being used. Realtors continue to receive many calls 
seeking information on the credit and our Website has received 
a steady volume of hits, and according to market data, during 
the first quarter of 2009, first time home buyers accounted for 
more than half of the purchases in 134 of the 152 metropolitan 
markets that we track. That is a significant increase from the 
average 30 to 40 percent of home buyers.
    NAR's research department is working to compile additional 
information about first-time buyers, and we will be pleased to 
share those profiles with you as we gather that information. 
Today we ask that Congress take additional steps to insure that 
the tax credit continues to support America's housing and 
economic recovery.
    One, we ask that you eliminate the repayment requirement 
for 2008 purchasers. It is unfair that some buyers will be 
penalized simply for buying a few months before the 2009 
improvements to the 2008 credit were passed.
    Two, we urge Congress to extend the tax credit's December 
1st expiration date through next year.
    Three, we ask that Congress make the credit available to 
all purchasers and at least consider increasing the amount of 
the credit.
    The second provision I want to touch on briefly is the 
action taken by Congress in 2007 to provide relief from the 
mortgage cancellation tax. This provision has proven invaluable 
to many sellers and has made the time consuming burden of 
completing a short sale simpler. Congress recently extended 
this tax relief through 2012. We greatly appreciate those 
efforts, Madam Chairman.
    However, Realtors ask that you consider making this relief 
a permanent part of the tax code.
    Finally, the stimulus bill also provided fee waivers for 
some Small Business Administration programs, raises the 
guarantee on another, and created a new loan program. Again, we 
applaud those efforts.
    In conclusion, real estate is small business at its best. 
By enacting provisions that stabilize America's real estate 
markets, you are helping small businesses and America's 
communities thrive and prosper.
    Once again, we thank you for your efforts today. America's 
Realtors stand ready to work with you on the additional 
measures that I have spoken of and on other solutions that will 
help the real estate industry lead our nation into a new era of 
economic strength.
    Thank you, again, for inviting me to share our views, and I 
will be happy to answer any questions from the members.
    [The prepared statement of Mr. McMillan is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Mr. McMillan.
    Our next witness is Mr. Douglas Woods. He is the president 
of the Association for Manufacturing Technology. Prior to 
joining AMT, Mr. Woods worked at everything from small tool and 
die shops up to multi-billion dollar machine tool corporations. 
AMT was founded in 1902 to represent and promote the interests 
of American providers of manufacturing machinery and equipment.
    Welcome.

   STATEMENT OF DOUGLAS WOODS, PRESIDENT, THE ASSOCIATION OF 
                    MANUFACTURING TECHNOLOGY

    Mr. Woods. Thank you, Madam Chairwoman, and I also want to 
thank all of the members of the Committee. I certainly 
appreciate the efforts that you have already put out on behalf 
of small business--in particular, manufacturing.
    AMT represents over 400 companies that are involved in 
making all of the equipment that is essentially used in 
manufacturing all of the products used within the United States 
and around the world. We make the equipment that everybody else 
uses to make the products that you see every day all around 
you.
    We have about 310,000 skilled employees involved in our 
industry--engineers, mechanics, electricians, tool makers, and 
the managers and owners of the businesses--and a lot of our 
businesses are small businesses, earning ten million or less. 
Essentially 60 percent of our members would qualify as a small 
business, and 83 percent of the manufacturing industry as a 
whole would represent small businesses.
    While we are a small industry by numbers, we are actually 
quite enormously important from the standpoint of what it is 
that we provide. We are the fundamental backbone for any 
progress that would be made in alternative energy programs, 
health care initiatives, defense industry strength. It is a 
tremendously important industry but at the same time, we are 
seeing the devastation of this recession on our industry like 
all the other industries are, and maybe even a little bit more 
so because of being capital intensive.
    Essentially, we were the first ones into the recession, and 
unfortunately we are going to be the last ones out, and so we 
certainly appreciate the attention of this Committee to the 
important needs of our members.
    Some of the impact of the recession can be evidenced by the 
fact that, from last year, t sales declined 60 percent for our 
average members from 2008 to 2009. In addition to that, we did 
for President Obama's Automotive Task Force a recent survey of 
our members, and 30 percent of them are saying that within six 
months they will be out of business if something does not 
change with the credit industry and/or the current economic 
situation. So obviously this is critically important.
    Our focus at AMT is in the next six months. If we cannot 
help our members survive the next six months, some of these 
discussions may be somewhat irrelevant. The number one issue we 
are faced with is the credit issue--while all others things tie 
together, the credit issue is a major point.
    The provisions that the Committee has done in the 
reinvestment act have been great. The 90 percent loan guarantee 
and the waiving of the fees have been phenomenal but 
unfortunately, if you still cannot get the credit, the fact 
that there is a guarantee does not really help, and it has been 
a problem.
    The bonus depreciation and the enhanced Section 179 
expensing are great things, as well. We really appreciate that. 
Unfortunately, if companies are not making a profit, it is very 
difficult to use those. So they are not meeting the need of our 
members right now.
    The net operating loss carryback that is fantastic and can 
be used, but we certainly need to have that brought forward in 
2009-2010 because fortunately for our industry at the beginning 
of 2008, we were actually making some money. So we cannot take 
advantage of them until we really get into 2009 and 2010 where 
we really do have problems.
    As for the energy-related tax incentives you provided, some 
of our members are taking advantage of those, but there is some 
ambiguity in some of the definitions and rules so its diffucult 
to figure out which ventures actually qualify. So not a large 
number of people actually may take an advantage of those.
    Obviously, we are as concerned, as Representative Graves 
pointed out in the beginning, that only $200 billion of ARRA's 
787 billion are actually being provided in funds and being 
committed, and with the lack of credit, again, that still is 
the number one issue for us.
    So, I would like to offer some suggestions that might be of 
immediate help that we certainly could use from a small 
business standpoint, and I say that as a recent small business 
person; I just took over this position as an association one 
would be to try to get maybe a temporary reprieve on the 
federal business taxes like FICA, which Representative Schock 
and Nye from this Committee have talked about, which would be 
very important.
    Also, easing some of the risk requirements on banks who 
that making credits to small business in the manufacturing area 
and possibly offering a temporary stay on certain covenant 
violations on loans that lenders would be actually providing to 
small businesses, maybe take a look at loosening the rope. Do 
not let it go. It might seem counter intuitive to actually 
increase what are the guidelines for somebody that might be in 
violation, but I think it is critically important to look at 
maybe secondary items like backlogs, employment records, other 
things that would measure the performance to pay back that loan 
besides just cash, which right now everybody would probably be 
in violation of.
    Longer term, some things such as tax credits for exporting 
products in 2009 would help trade balance issues and get people 
exporting their products. As I talked about extending bonus 
depreciation and enhanced Sec. 179 expensing through 2010 and 
beyond would be very helpful. The 5-year net operating loss 
carryback, if we can get 2009 and 2010 included, and possibly 
look at some companies with revenues over the $15 million so 
that more of our customers could also be included in that 
because they are the ones buying the equipment.
    And in some of the legislation that has already been put 
out there, the "IMPACT" Act and The Build Manufacturing Act, 
two good proposals that already are out there, if aspects of 
those bills could be included, that would be fantastic.
    So the most important thing with all of those said, all of 
those would be for naught if we start imposing any other new 
programs that put taxes onto businesses. So I implore the 
Committee to do the best they can to avoid any burden on these 
taxpayers going forward.
    And with that I would like to submit if I could a request 
to have my written testimony submitted to the Committee hearing 
record if that is possible.
    Chairwoman Velazquez. Without objection.
    Mr. Woods. Thank you.
    [The prepared statement of Mr. Woods is included in the 
appendix.]

    Chairwoman Velazquez. Thank you so much, Mr. Woods.
    Our next witness is Mr. Rea Hederman. Mr. Hederman is a 
Senior Policy Analyst and Assistant Director for the Center for 
Data Analysis in the Heritage Foundation. Me. Hederman joined 
the Heritage in 1995. The foundation is a broadly supported 
public policy research institute is Washington, D.C.
    Welcome.

   STATEMENT OF REA HEDERMAN, JR., SENIOR POLICY ANALYST AND 
  ASSISTANT DIRECTOR, CENTER FOR DATA ANALYSIS, THE HERITAGE 
                           FOUNDATION

    Mr. Hederman. Thank you.
    Chairwoman Velazquez, Ranking Member Graves and other 
distinguished members of the Committee, thank you for having me 
to speak on the important topic of the 2009 stimulus impact on 
small business and entrepreneurial activity.
    The American Recovery and Reinvestment Act contained a 
number of provisions aimed at boosting the economic output of 
small businesses either through tax incentives, loan 
guarantees, or some other government initiatives. These 
provisions included an increase in bonus expensing, bonus 
depreciation of qualified investment expenses.
    Bonus depreciation and expensing provisions are important 
and proper tax policy tools for stimulating economic activity. 
This is why these provisions have been included in previous tax 
and stimulus bills.
    Specifically, these tools encourage companies to increase 
investment output and expand activity in the short run. 
Basically what the federal government is saying is that we are 
having a fire sale on capital, and if you act now, you will be 
able to expand quickly and more efficiently.
    Unfortunately, the effectiveness of these proposals may be 
limited. Since these provisions have expiration dates, small 
businesses may have difficulty expanding before the calendar 
year and taking advantage of these. And current evidence 
suggests that small businesses have not been able to respond to 
the latest stimulus proposals.
    For example, a recent survey of small business owners 
indicated they have the same level of capital expenditure and 
growth in their business plans today as they did prior to the 
expansion of the bonus depreciation. Even worse, the number of 
small business owners planning an expansion over the next year 
is declining, and we see these numbers showing up in the macro 
economic indicators as nonresidential fixed investment has been 
declining over the last three quarters.
    As many Americans are painfully aware, unemployment has 
climbed steadily, reaching 9.5 percent by the end of this year 
despite projections from the administration's economic team 
that the unemployment rate would not pass eight percent. Few of 
the benefits touted by some of the stimulus proposals have been 
seen to date.
    While bonus depreciation expenses were an appropriate 
policy move earlier this year, small business requires Congress 
to take bold action now. Small businesses are some of the 
strongest pillars of employment in the economy. Research shows 
that job creation from small businesses and start-up companies 
have helped limit previous recessions. In fact, over 50 percent 
of Fortune 500 companies were either founded in a recession or 
bear market economy. While this may seem counter intuitive, 
this is an example of the economic cycle at work and how new 
companies arising that employ more and more people help in 
ending a recession.
    Pro growth tax policies can boost small businesses and 
entrepreneurs, as small businesses expand and hire new 
employees, offsetting job losses from larger, more established 
firms. Good economic policies reward these successful companies 
instead of penalizing their success through higher taxes.
    It is never too late to enact good economic policies. This 
Congress can establish a foundation for strong economic growth 
by enacting strong, good tax policy. First, Congress should 
make permanent the small business tax relief that was enacted 
in 2001-2003 and the bonus depreciation bills that were enacted 
earlier in this year. Entrepreneurs saw a decline in the 
marginal tax rates thanks to JGTRRA and EGTRRA in 2001 and 
2003. Small businesses benefited from lower capital cost as 
capital gains and dividend taxes were reduced. Lower capital 
cost means that more small businesses can be created, as the 
risk premium for business start-ups decline.
    Unfortunately, capital gains and marginal tax rates are 
scheduled to quickly increase. These higher taxes are already 
being calculated by many businesses as they plan for future 
investment and expansion. These higher tax rates will offset 
the smaller provisions in the stimulus bill and hinder future 
investment.
    Small businesses are also very, very labor intensive. 
Unfortunately, right now wages are flatter, declining in the 
last quarter and work hours have been shrinking. With the 
minimum wage expanded to increase over ten percent, companies 
will have limited capability to pass on these wage increases to 
their employers. Historically, a minimum wage increase of this 
magnitude results in employment losses for small business of 
one percent. So I would like to urge Congress and the Committee 
to think about delaying the minimum wage increase until the 
economy is more stable. This impact will be detrimental to many 
small businesses who are already short staffed.
    Finally, House Ways and Means Chairman Charlie Rangel 
announced this tax plan that establishes a surtax on many 
successful companies. The number of people affected by this tax 
increase, about 20 percent of them will have a half of their 
income from small business type associations in income. A tax 
increase of this magnitude will continue to result in job 
losses and slow economic growth.
    I would like to thank the Committee for giving me this 
time. I would like to answer any questions, and if I could 
submit my testimony to the record.
    Chairwoman Velazquez. Without objection.
    Mr. Hederman. Thank you
    [The prepared statement of Mr. Hederman is included in the 
appendix.]

    Chairwoman Velazquez. And out next witness is Mr. Paul 
Merski. He is the Senior Vice President and Chief Economist for 
the Independent Community Bankers of America. Mr. Merski has 
more than 25 years of government relations experience in the 
public and private sector. ICBA represents 5,000 community 
banks of all sizes and charter types throughout the United 
States.
    Welcome.

   STATEMENT OF PAUL MERSKI, SENIOR VICE PRESIDENT AND CHIEF 
      ECONOMIST, INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Mr. Merski. Thank you, Madam Chair, Ranking Member Graves, 
and members of the Committee.
    I am very pleased to be here to represent our 5,000 
community banks nationwide.
    Much Monday morning quarterbacking has been taking place 
with the economic stimulus package that was passed back in 
February. Without a doubt, the severe economic recession did 
require a sizable fiscal stimulus, and ICBA was pleased that in 
the $787 billion package many good, positive tax relief 
measures were included.
    While the bulk of the recovery package enacted did focus on 
spending initiative, beneficial tax relief and reform items are 
having a very positive effect. Specifically, tax item we see 
helping the economy include the $8,000 first time home buyer 
tax credit, the extension of the alternative minimum tax that 
prevented 26 million people from being forced into paying 
additional AMT taxes, and there was some beneficial tax relief 
for municipal bonds.
    Additionally, the net operating loss provisions, the 
immediate $250,000 small business expensing, and of course, the 
major SBA loan program enhancements are all helping many small 
businesses survive and preserve capital during this recession.
    However, the difficult credit market and a depressed 
economy continues to weigh very heavily on our nation's small 
businesses. ICBA believes additional target tax actions are 
warranted to boost our long-term economic growth. ICBA 
recommends and supports a broad, five-year net operating loss 
carryback and extended home buyer tax credit, robust SBA 
lending programs, and Subchapter S tax reforms.
    At a minimum during these difficult economic times, the tax 
burden on struggling small business owners should not be 
increased.
    Additionally, for the stimulus measures to be successful, 
the unduly burdensome and overly aggressive bank exams that are 
taking place must be addressed. Community banks need the 
flexibility and the capital to support their small business 
customers on Main Street America.
    One of the largest underlying problems preventing our 
economic recovery is still the housing sector. Millions of 
small businesses are suffering the fallout from the dramatic 
decline in the housing sector because 45 percent of small 
business loans are backed by some type of real estate 
collateral. Financial institutions in general have already 
written down over 600 billion in real estate assets, and that 
continues. Bank regulators are aggressively forcing even 
further write-downs, forcing banks to raise even more capital 
or cut back on their lending.
    This vicious cycle in the housing sector must be stopped. 
The current home buyer tax credit is helping, but we recommend 
it boosted past November and extended to all home buyers, not 
just first time home buyers.
    The Recovery Act did include some positive Subchapter S 
reforms, but more could be done there as well. More than four 
million small businesses are structured as S corporations, 
including one-third of all banks. Given today's tight capital 
markets, attracting capital and funds is critical. Yet the 
limits that are placed on Sub S corporations prevent them from 
raising capital.
    In order to increase the ability for small businesses to 
raise private capital, you should increase the number of 
allowable Sub S shareholders, allow IRA investments in Sub S 
corporations, and permit Sub S corporations to issue preferred 
stock. Given the financial meltdown was caused by asset 
concentration in the largest financial conglomerates, out tax 
policies must preserve a diversified financial system with 
capital available for community banks.
    ICBA supported and expanded NOL provision in the economic 
stimulus package, but more needs to be done there, too, and 
other witnesses have already suggested something we support, 
that is expanding the net operating loss carryback which would 
preserve capital for businesses during this difficult 
recession.
    Today more than half of all small business income earned in 
the United States is earned through pass-through entities, such 
as Sub S corporations that pay the individual income tax. 
Therefore, Congress must be extremely mindful of how increasing 
the income tax rates will impact small businesses.
    In conclusion, the tax and SBA items passed in the Recovery 
Act are helping. ICBA pledges to work with the Small Business 
Committee to ensure our nation's small businesses have the 
capital they need to invest, grow, and provide jobs.
    Thank you.
    [The prepared statement of Mr. Merski is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Mr. Merski.
    Mr. Johnson, if I may, I would like to address my first 
question to you. There has been much discussion in the national 
media about the number of jobs lost since we passed the 
Economic Recovery Act, and you explain in your testimony that 
nearly 75 percent of those surveyed by your organization 
benefited from the tax credit for HVAC equipment. I just would 
like for you to comment as to where would your industry be 
today if that credit had not been enacted into law.
    Mr. Johnson. Madam Chairwoman, there is no doubt that there 
has been a constriction in our industry in the number of jobs. 
There is also no doubt that it would be worse if the tax 
credits had not been out there to encourage homeowners to 
seriously consider the alternative of taking advantage of the 
program, the tax credit program, and moving ahead if needed 
equipment replacement, creating a win-win situation. It created 
jobs, and it saved energy at the same time, helped the 
homeowners cut their utility bills. So it was a win all the way 
around the block.
    Yes, we absolutely created jobs. Within my own company as 
an example, we had about a ten percent layoff of staff, and it 
would have been much worse if we had not had the opportunity to 
increase business.
    Chairwoman Velazquez. Of the tax provisions that were 
included in the Economic Recovery package, can you tell me one 
or two that should either be extended or expanded?
    Mr. Johnson. The provisions that are in there should be 
continued. The $1,500 tax credit, again, if you look at the 
total picture of where we are trying to go with this country, 
the things that the HVACR industry offers are not only job 
creation, but they are also the greenhouse gas issues that we 
look at and everything else. So it is wins on multiple levels. 
So extending the tax credits for residential applications would 
be a tremendous benefit.
    What really needs to be looked at is doing something with 
commercial businesses. Commercial small businesses, commercial 
buildings, we actually do more work on older equipment in 
commercial applications than we do in residential applications 
because there is no incentive whatsoever, including the 
depreciation issues. So there really needs to be some work in 
that area.
    Chairwoman Velazquez. Thank you.
    Mr. Woods, one of the reasons that firms are struggling to 
secure financing is dwindling cash flow, and the net operating 
loss provision in the Recovery Act was designed to permit once 
profitable small businesses to offset current losses, thereby 
reducing the taxes owed.
    Do you believe that the provision has improved the cash 
flow and ability to access credit?
    Mr. Woods. Madam Chairwoman, there is no question that that 
is a good initiative. However, as I was suggested in my 
testimony, in 2008, our companies were making a profit. As we 
go into 2009, now is when our companies are in their most 
desperate situation. If you can carry the provision forward to 
2009 and hopefully into 2010 (because I do not think we are 
going to come out of this fast enough in our industry, as I 
mentioned, with us being first in and last out) it would be 
very beneficial for us.
    Chairwoman Velazquez. So you are telling us that Congress 
should expand it beyond 2009.
    Mr. Woods. Absolutely, absolutely. That is where the net 
benefit will happen.
    Chairwoman Velazquez. Thank you.
    Mr. Johnson, you mentioned how the depreciation schedules 
have not been updated to match the useful life of certain 
property. How does the failure of the tax code to reflect 
business operations affect your company? And can you offer real 
life examples of how it alters the decisions of your customers?
    Mr. Johnson. Well, the existing tax codes for commercial 
customers allows a depreciation schedule on equipment of 39 
years. Equipment only last 15 to 20 years. On top of that, you 
have got to consider that a lot of small businesses are in a 
lease situation. They are leasing a property to run their 
business out of, and the leases are uniformly written where the 
tenant is responsible. So he has got a short, maybe a five-year 
lease. If he has to replace air conditioning equipment, he has 
got a 39 year window to write it down in. There is no incentive 
to do anything but to patch together an old piece of 
inefficient equipment.
    And so we find ourselves going out and patching equipment 
and continuing to keep what is effectively six and seven, eight 
SEER or EER equipment running as opposed to reducing the carbon 
footprint and reducing the utility consumption and helping the 
small businessman.
    Chairwoman Velazquez. Mr. McMillan or maybe Mr. Merski, 
because you make reference to the housing crisis and how 
important is the home buyer's tax credit that has proven to be 
an ineffective means of stimulating our economy or at least the 
housing economy, but its temporary nature is designed to 
encourage home buyers to act now.
    However, there are discussions and, you, Mr. McMillan, 
suggested or recommended that issue be extended. The issue that 
I would like for you to react is that some people are saying 
that since there is discussion going on in Congress about 
extending it and maybe to increase the tax credit, that that 
would discourage buyers from going into the market and 
purchasing those homes now. How would you react to that?
    Mr. McMillan. Thank you, Madam Chairman.
    There really are two distinct issues. We have seen instant 
response to the tax credit in terms of the increase in existing 
home sales month after month over the past four months. One 
unintended consequence of the discussion about future actions 
in Congress is that first-time home buyers anticipating those 
things taking place take themselves out of the market and sit 
on the fence and wait, and that's kind of catastrophic right 
now. We have an excitement back into the marketplace brought on 
by the tax credit. We really need to reduce our inventory at 
this point so that it contributes immeasurably in healing the 
economy.
    There is discussion going on in other areas of the Congress 
about increasing the credit. I mentioned it here because we 
cannot encourage it in too many places.
    Chairwoman Velazquez. Mr. Merski, one of the requirements 
to be on this corporation is that it cannot have a nonresident 
alien as a shareholder. This means that some investors cannot 
invest in U.S. firms. With credit at a near standstill, does it 
make sense to have such a limitation on capital options?
    Mr. Merski. Well, that is an excellent observation and 
question, Madam Chair. At a time when small businesses and even 
small community banks that are small businesses as well are 
trying to raise capital, the last thing we should do is have 
these restrictions on private sector individuals that want to 
invest in small businesses, and by restricting shareholder 
investment in a Sub S corporation, you're preventing them from 
attracting the capital that they need.
    So you should really be looking at opportunities to take 
off all the restrictions on capital investment in small 
businesses. On the one hand, you have the federal government 
issuing TARP money, government taxpayer money to small 
businesses yet, on the other hand, restricting private 
investment in small businesses.
    So your point is a good one, and we should take off all the 
restrictions that are preventing small businesses from getting 
shareholder investment.
    Chairwoman Velazquez. Thank you.
    Mr. Graves, I have further questions, and in the second 
round I will come back to other witnesses again.
    Mr. Graves. Thank you, Madam Chair.
    As I mentioned in my opening statement, I have introduced 
legislation to permanently extend the 2001-2003 tax cuts, and 
my question is to all of you, and it will start with Mr. 
Johnson. Do you think this is going to provide businesses with 
some predictability in the tax code which will allow them 
obviously to purchase new equipment, keep their head above 
water, hire more workers, whatever the case may be?
    Mr. Johnson. There is undoubtedly a nervousness in the 
small business community about where are we going next. It is 
the whole program, but certainly there is fear about committing 
to spending money for anything because we do not know where we 
are going. We do not know what we are going to be doing a year 
from now. So that certainly would be a step in the right 
direction to help us get started.
    Mr. Graves. Mr. McMillan?
    Mr. McMillan. I would echo Mr. Johnson's comments. In the 
world of the entrepreneur, which primarily includes most real 
estate practitioners, predictability is extremely important, 
and there is a reticence to expand and extend your resources 
and capabilities without that degree of predictability.
    Mr. Graves. Mr. Merski?
    Mr. Merski. Well, without extending the 2001 and 2003 tax 
cuts, you could see marginal tax rates on small business income 
exceeding 50 percent. The tax that you are talking about 
includes dividends, capital gains, the individual income tax, 
and as we pointed out in our testimony, half of small business 
income would be subject to an increase in the individual income 
tax if those rates would go up. So it would be very important 
to preserve that are on small businesses now and not have that 
fear that tax rates are going to go up and scare off investment 
in small business.
    Mr. Graves. Mr. Woods?
    Mr. Woods. I would say it is an unequivocal yes, and I 
think you could look at it from two different perspectives. As 
somebody who used to run a Subchapter S company, I think the 
important word that you brought up was the predictability. I 
personally would make decisions of having to invest in my 
company, my personal money, depending on what is going on. 
Knowing what was going on from the tax standpoint and what I 
would have available for money to actually put back into my 
company was critical. Not understanding what might happen 
certainly left me at odds as to whether or not I needed to keep 
money on the sidelines, not knowing what would happen next or 
whether I can put it into my company and be more productive. So 
no question.
    Mr. Graves. Mr. Hederman.
    Mr. Hederman. Absolutely. What we have seen in academic 
literature is that permanent tax cuts provide a lot more 
economic growth in temporary tax cuts for some of the reasons 
that my co-panelists have already espoused. Predictability and 
stability are very key for the business sector and for economic 
growth.
    If you are looking forward to whether or not you are going 
to make a decision to invest perhaps, for example, in a small 
business start-up where the small business will expand, being 
able to predict what your tax rate is going to be, how much you 
are going to put at risk in the economy, those are important 
factors that go in economic growth and because investment is so 
far looking at one of the biggest impacts of possible 
expiration of these taxes is going to be to hinder investment.
    Chairwoman Velazquez. The Chair recognizes Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Madam Chair.
    Mr. Merski, as you're probably aware, our offices, 
sometimes Congress becomes the complaint department to the 
United States. I get a lot of calls in my office about the 
unavailability of credit with everything going on, and as a 
representative for the bankers, they call me. People go into 
their banks, places they have been doing business with forever, 
good ratings, never defaulted on a loan. You know the whole 
story.
    Can you go through? You mentioned some of that in your 
testimony, but some of the reasons, just some ABCs on why these 
people feel they are not able to get credit now at the banks 
they have been going to for years so that I can go back and 
have a better idea of what to tell them when they call me? Is 
that a fair question to you?
    Mr. Merski. That is an excellent question, and that is 
something that is a severe problem out there in the economy 
right now, the small business access to credit. The bottom line 
is that banks do not make any money and do not make any profits 
if they are not lending. Community banks want to lend. All 
banks want to lend to help those small businesses. The credit 
environment out there, the risk, what the regulators are doing 
to community banks is preventing the community banks from 
lending as well as they could to small business owners. 
Regulators want them to increase capital. Regulators are 
forcing write-downs on properties that shouldn't be written 
down. The regulatory environment is making it near impossible 
for banks, even banks that have capital to do lending. So banks 
are scared to do lending now.
    Also, the tax environment. If you do not know what the tax 
environment is going to be like a year from now, it is 
difficult to lend. So anything that could be done by Congress 
to have more sensible regulation.
    The community banks did not cause this financial crisis. 
This was caused by exotic products being crafted by Wall Street 
and the risk taken there on Wall Street, but it is having, as 
you point out, a tremendous impact on Main Street and the 
ability for small businesses to get credit.
    Another point I will just say briefly is that the secondary 
market for small business loans and other types of credit is 
still frozen. So more policies need to address the secondary 
market so that loans that are made by financial institutions 
can be sold into the secondary market so they can make fresh 
loans.
    Mr. Ellsworth. Thank you, Mr. Merski.
    Mr. Hederman, you talked about just even today we have 
heard about tax credits for heating and air conditioning, for 
replacement windows, extending the 2001-2003 tax cuts. It seems 
like now Cash for Clunkers, you name it; there is a tax credit 
for just about everything and every industry.
    Can you tell me it seems like if we simplified the tax code 
overall in this country, wouldn't it be easier and would we 
need all of the credits and different tax cuts for specifics? 
Can you tell me what the foundation or even your personal view 
on what our tax code should look like in a perfect world? It 
might do all of this and the tax code would not have to be, you 
know, two feet thick.
    Mr. Hederman. You make an excellent point Congressman. I 
mean, what we see is whenever we enact certain types of tax 
credits, tax subsidies, we create distortions in the tax code, 
which provides distortions in the economic behavior. People 
instead of investing in an item, they might choose to invest in 
Item B simply because that is being subsidized through 
taxpayers.
    I think if we want to look back at the time period and said 
what was good tax policy, we cleaned up the tax code. I think 
we can look back to 1986 where former Chairman Dan 
Rostenkowski, Senator Bradley, President Reagan engaged what I 
think a lot of people think is one of the best public policy 
initiatives enacted in this town where they sat there and they 
said the tax code is simply too confusing. There are too many 
deductions. There are too many credits. People are taking these 
write-offs for things they don't want to buy simply so they can 
pay less taxes. If we get rid of some of these taxes, some of 
these credits, we promote better economic behavior. We 
eliminate a lot of these tax distortions that you point out, 
and you are able to give just about everybody a tax cut by 
lowering the tax rates for all Americans.
    Instead of trying to sit there and pick winners and losers 
of who deserves a tax credit, you are sitting there cutting 
taxes for everyone. Everybody can benefit, and that is what 
most economists agree will provide the most economic growth 
going forward, and I think that those types of reforms are 
going to be most important as the tax code continues to be more 
complicated as it has been with the addition of all the credits 
since 1986.
    Mr. Ellsworth. My wife and I still do our own taxes, and I 
will give credit mostly to my wife who does it, but again, we 
are of average intelligence, but the book we go through is this 
thick, and it is extremely difficult to go through, and yet we 
still have to fund the highways, our law enforcement, our 
military, all the things, the services that we come to expect 
in this country and we deserve.
    So I appreciate the input, and I think that is where we 
need to start moving towards a reasonable and fair tax code in 
this country that might solve a lot of this.
    thank you, Madam Chair. I yield back.
    Chairwoman Velazquez. Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    I appreciate the opportunities this afternoon to discuss 
this with this panel. They have got a lot of expertise here, 
and I certainly appreciate your comments.
    Mr. Woods, your comments are a great concern to me because 
I have got a lot of tool and die manufacturers in my district. 
They rely on the aircraft industry and the automobile industry, 
which is really struggling in that area. Thirty percent of them 
will be out of business in the next six months. That certainly 
gives me moment for pause.
    I do not know if we can enact anything quickly enough to 
help those industries to get back on their feet, but I 
certainly appreciate your remarks this afternoon. One of the 
things that I want to ask is I know that Mr. Hederman has made 
some comments with regards to tax policy. I know we are in the 
process of obtaining this week some new tax proposals that 
would really impact the private small business guys here with 
regards to health insurance stuff, to be able to pay for this.
    If we allow the 2001-2003 tax cuts to expire and then put 
on top of them additional taxes which are being proposed, we 
are looking at close to 65 percent tax rates for small business 
people who four million of the businesses are S corps which are 
going to pay on those income taxes. That is going to decimate 
in my judgment. I would like for you to address that question 
if you would, please.
    Mr. Woods. Sure. One of the things that always disturbs me 
is when I read the paper about some of the ways to pay for some 
of these programs, which you know, we all agree that we need to 
have programs. Everybody wants to have good health care. 
Everybody wants to have the clean environment. Everybody wants 
to take care of energy independence. All of us, absolutely, but 
the problem is you cannot do all of those things on the backs 
of small business; and you need to be careful about trying to 
do all of those things before the end of the year as if there 
is some magic thing that happens at the end of the year.
    Right now small businesses are in the worst situation they 
have been in probably 80 years, and to enact anything 
additional on top of that right now would be devastating. When 
we collected the information for the automotive task force in 
looking at who was going to be around and who was not going to 
be around, it became clear pretty quickly that the six month 
window was imperative. And trying to find something from the 
standpoint of a program that could come forward now and help 
them was, you know, life and death.
    The thought of having something additional on top of all 
the problems we are already trying to sort through essentially 
puts these businesses into a situation where if they are going 
to put their last gasp of putting their home up if it was not 
already up or borrowing the kid's college fund to try to get 
through just to make it to the other side of this; if they 
thought on top of doing that to make it through this that they 
were then going to have these additional taxes on top, I think 
a lot more are going to throw the towel in because it is a 
self-defeating prophecy. They really cannot get there.
    So I can tell you from my personal experience as a business 
owner, again, I have only been running the association for two 
months. My whole life I have been a business owner. It would be 
devastating.
    Mr. Luetkemeyer. I appreciate your position because you 
guys have been on both sides of the table, which gives you a 
very unique perspective, and I appreciate that.
    Mr. Merski, very quickly, one of the things that has 
concerned me is that community banking folks are the ones that 
really are the glue that holds our economy together, I believe, 
from the standpoint that they make the loans to small 
businesses, which small businesses then hire the people and 
develop the products and make our country go.
    So to me they are the glue that holds it together. Yet they 
are the ones who are struggling with a lot of the stuff that is 
going on, and the regulatory environment that we are in is a 
real problem. I have had some discussions with the FDIC and the 
Federal Reserve folks, and there seems to be a disconnect.
    Have you in your organization or you and your organization; 
have you discussed with the FDIC, the Fed., the Comptroller, 
any of these regulatory groups to come up with some sort of a 
mindset on how to address these problems, how to work with the 
banks?
    Because there is a huge disconnect right now between what 
is going on in the field and what is going on in D.C., and it 
needs to be resolved if we are ever going to get out of this 
mess.
    Mr. Merski. Well, absolutely, Congressman, that is a 
tremendous concern throughout the community banking industry 
from the pressure that the regulators have swung the pendulum 
way too far in the other direction and are stifling the bank's 
ability to do lending, even banks that are well capitalized, 
well run, know their customers, know their small business 
owners and their communities. The over-regulation, the 
excessive examinations are forcing bankers to pull in, and it 
is a very highly regulated industry where the regulator can 
shut you down and bankers that are in fear of these regulators 
are pulling in their lending, and that is a severe problem 
that's causing a downward spiral in the ability for small 
businesses to get the credit that they need.
    So, yes, something needs to be done there. We have been 
working very well with the regulatory agencies to make sure 
that regulation is fair but also regulation is such that it 
does not stifle the ability of banks to lend.
    Chairwoman Velazquez. Would the gentleman yield for a 
second?
    Mr. Luetkemeyer. Yes. Thank you, Madam Chairwoman.
    Chairwoman Velazquez. I hear that there are so many 
regulations then, the regulatory burden on community banks and 
small banks, and that there are too many regulations, but on 
the other hand, what caused the crisis that we are in? It was 
the lack of oversight or too many regulations?
    Mr. Merski. Well, there is a discrepancy in the application 
of regulation, where you had highly regulated, well overseen 
community banks where the regulators are in the bank every year 
examining everything that they do, and then you had a lot of 
gray area, non-bank lenders. You had a lot of Wall Street 
exotic products that were outside of the regulatory oversight. 
So with the financial regulation reform that is being presented 
now, we are trying to make sure that the unregulated sector of 
the financial industry is brought in under that same regulatory 
oversight that is given to community financial institutions.
    So it was the discrepancy in the application of regulation. 
Many financial entities were completely unregulated or beyond 
the scope of what the FDIC and OCC does. So you raise an 
excellent point. The regulation has to be fair across the board 
so you do not have these gaps.
    Chairwoman Velazquez. Thank you for yielding.
    Do you have any more questions?
    Mr. Moore.
    Mr. Moore. Thank you, Madam Chair.
    To Mr. Johnson and Mr. Woods, many economists say that it 
will be at least 18 months and possibly two years or longer 
before the United States returns to strong economic growth 
capable of creating a substantial number of jobs, and many of 
the tax provisions being discussed today are temporary. For 
example, the increased Section 179 expensing ends after tax 
year 2009. The expansion of next operating loss carry-back is 
good for only tax years '08 and '09, and tax break s for 
consumers, such as the first time home buyer credit are also 
limited to just this year.
    In your opinion will your business or other businesses have 
sufficient funds to expand and grow your business should the 
economy begin to recover next year and are these tax changes 
providing you with enough of a boost not just to survive this 
year, but to plan for the future?
    Mr. Johnson. You know, part of the problem, Congressman, is 
that our businesses are so interrelated to other businesses 
that it is a bigger problem than just our problem. For example, 
the air conditioning industry is very tied to the housing 
industry. If the housing industry is doing badly, guess what. 
We are going to be doing poorly also, and we are seeing that. 
That is happening to us right now.
    So as we look at how long it takes the other segments of 
our industries in this country to recover, we are going to have 
to see how long it's going to take us to recover, and we are 
going to be someplace behind them, getting back up to speed.
    Do I think that we have enough? We ]are playing it very 
close to the vest and trying to be as conservative as we can in 
our daily operating methods and what we are doing, how we are 
doing what we are reporting.
    Mr. Moore. Mr. Woods, do you have any comments?
    Mr. Woods. Yes. I would just mention clearly I am not an 
economist, and I am sure I am nowhere near as smart as my 
fellow panelists are on economic matters, but what I do know 
for sure is that we as an industry, a manufacturing industry, 
are not going to be coming out of this in 2009, and that is a 
fact. Six months ago when we first started getting into this, 
we might have thought that actually by 2010 it would be a good 
year and things would be going well again for our industry, and 
with the data information and clear evidence of companies that 
are disappearing and in deep trouble and what we see on the 
horizon, we doubt that to be the case in 2010.
    So to answer your question, programs obviously need to be 
somewhat elastic to what is currently going on in the economy, 
but it would be safe to say that for 2009 and 2010, they will 
clearly need those break opportunities, and if they have losses 
in those years, then your programs that actually allow you to 
take advantage of the losses need to be then harvested or 
utilized as you get past 2010.
    Mr. Moore. Thanks to the panel, I yield back, Madam Chair.
    Chairwoman Velazquez. Ms. Dahlkemper.
    Ms. Dahlkemper. Thank you. Thank you, Madam Chair.
    I wanted to ask you a question since this is fresh, what we 
are looking at right now, in terms of the health care. This 
kind of relates back into taxes, but eight percent that is 
being proposed for small businesses to cover health care costs 
if they do not provide health care for their employees, I mean, 
I come out of a small business. My husband is still running 
that business, and we were talking about this payroll, eight 
percent of your payroll, and actually what we pay for our 
health care now, that actually would be a pretty good deal for 
us.
    So I guess I just want your opinion. Mr. Woods, I have a 
lot of small, you know, manufacturers in my district in 
Pennsylvania, and, Mr. Johnson, my company is design-build. But 
I am just curious how that would affect those in your 
association.
    Mr. Woods. You actually have a fantastic region in Erie, 
Pennsylvania for our members. There is a number of great ones 
there, including our past chairman. Yes, while that may seem 
like one facet of that overall bill which I did not get a 
chance to read all 1,018 pages, there are certainly elements 
that may be beneficial, and I am sure there could be 300 of the 
1,000 that are great programs. The eight percent by itself 
would certainly seem to be a nice, viable number compared to 
other costs.
    I think the concern gets to be just any additive cost, any 
additive tax at this point, and the unknowns of all of the 
other potential costs that go along with it. So that by itself 
seemingly may be good if you weren't doing some other program 
already as a percentage of payroll.
    I think the bigger issue gets to be all of the other 
potential costs to get associated with that as you unravel the 
implementation of the full program.
    Ms. Dahlkemper. Right now, what would you say percentage-
wise is your association providing health care? Do you have any 
idea what that is?
    Mr. Woods. I could not tell you what the number is. I can 
tell you that the whole time that I was in business in 
Rochester, New York up the throughway from your neighborhood, 
almost all the companies in Rochester that were in the tool and 
die and manufacturing industry, almost everybody I knew was in 
it, but I could not give you an actual statistic for our 
association.
    I would be happy to get back to you with that.
    Ms. Dahlkemper. I would appreciate that if you could. I am 
trying to get some sense on this.
    Mr. Johnson.
    Mr. Johnson. And I thank you for the question. Let me tell 
you that in February we had a national meeting in Fort Worth, 
Texas, and we had a town hall meeting at that national 
convention that focused on health care, and we voted in the 
room. There were 500 or so people probably in that room, and we 
voted. About 60 or 70 percent of our membership were in support 
of what President Obama had on the table at that time. That 
support has evaporated. They are taking too much money. There 
were suggestions being made on how to do this that did not 
sound nearly as expensive as what we are seeing today, and 
small business cannot support.
    Ms. Dahlkemper. Can you elaborate on that a little bit 
about what specifics you are talking about?
    Mr. Johnson. Well, I wish I could, and like Mr. Woods, I 
had not read the entire package, but the dollar amount that is 
attached to it and the hit that we are going to take for it are 
not proper or correct.
    We provide insurance at my company. We provide insurance 
for our employees. We pay a great deal of the cost ourselves, 
and we want to continue that program, but I think within our 
industry we recognized there was some need for reform 
nationally, and there are things that need to be done.
    But the dollar amount that is being put on the package is 
going to hurt small business tremendously, and the support that 
we showed in February is not there today.
    Ms. Dahlkemper. Mr. McMillan, did you want to comment?
    Mr. McMillan. I would. Thank you, ma'am.
    Even though you did not direct the question at me, there is 
a crisis in health care in the Realtor family. We have 1.1 
million Realtors, and health care is not available to us, 
period, as a small business structure. We have more than 
300,000 Realtors who have no access to health care at all. When 
we couple that with the average age being around between 50 to 
52, it is a high risk problem.
    The other Realtors who do have health care have it through 
a spouse being employed in another industry. So thank you for 
letting me contribute that.
    Ms. Dahlkemper. Thank you. I yield back.
    Chairwoman Velazquez. Mr. Graves, do you have any other 
questions?
    Okay. I do have a question for Mr. Johnson. Based on the 
fair question that Ms. Dahlkemper approached before, and that 
is what percentage of your payroll represents the health care 
insurance that you provide to your workers?
    Mr. Johnson. What percentage do we pay?
    Chairwoman Velazquez. Yes.
    Mr. Johnson. I believe that we pay 80 percent. I would have 
to go back and check, but we pay about 80 percent of the 
premiums for the employees.
    Chairwoman Velazquez. And that represents what percentage 
of your entire payroll or your expenses?
    Mr. Johnson. I am sorry. I do not know exactly the answer 
to that. It is probably two percent, a pretty small number.
    Chairwoman Velazquez. Okay. Mr. McMillan, FHA approved 
lenders recently approved a bridge loan program that allows 
first time buyers to use their federal tax credit to cover 
closing costs or a downpayment. Have you seen more taxpayers 
taking advantage of this program to get more people into homes?
    Mr. McMillan. Madam Chairman, there is a pent up demand for 
this, and we are grateful that FHA permitted that, but there 
are only 11 states that have the capability to offer the FHA 
program, and they do so by having a nonprofit housing entity at 
the state level that is a pass-through similar to one of the 
taxing entities. When you file your taxes, you can get a bridge 
loan at closing.
    In the other states, the National Association of Realtors 
has tried to provide information to members so that those who 
do not have that state program, can create similar programs in 
their states, but it is an excellent program. There is great 
demand throughout the nation for money tied to the tax credit 
at closing as opposed to waiting to file, but it is not 
available in all states.
    Chairwoman Velazquez. Great. Right now the credit is 
$8,000. Is there a number that you propose that will help the 
housing market?
    Mr. McMillan. Madam Chair, any increase to the $8,000 will 
be helpful. The numbers that I have seen thrown out there is 
almost a doubling, an increase to $15,000. We think it would be 
awfully helpful if the tax credit could be extended beyond 
being available only to first time home buyers, to all home 
buyers because there is a tremendous amount of inventory that 
must be absorbed before we can get back on track.
    Chairwoman Velazquez. Okay. Do any of the members here have 
any other questions to the witnesses?
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Just a quick question. Mr. McMillan, your group does not 
have a group health policy that all of your membership could 
participate in?
    Mr. McMillan. Congressman, we do not. My limited 
understanding of that is the type of organization that we have, 
we are prohibited from having such. I do not understand the 
complexities of the insurance industry, but there are groups, 
small businesses of our size who are involved with unions who 
certainly could have health care with shops of four to five, 20 
people, but we do not qualify under that.
    Mr. Luetkemeyer. Well, my thought process was that there 
are a lot of proposals out there, but one is to allow small 
businesses to be able to pool together, and I think your group 
is a perfect group to look at from the standpoint that you 
could pull together as a state or as a total organization or as 
a region to be able to find a way to provide that kind of 
coverage for your group and be able then to find a way to lower 
your cost.
    So I appreciate your comments.
    That is all I have, Madam Chairman.
    Mr. McMillan. Thank you, sir.
    Chairwoman Velazquez. Thank you very much.
    And we will continue to have discussions regarding the tax 
provisions in the stimulus package since there are discussions 
about extending or expanding some of those tax credits and have 
discussion with the Ways and Means Committee to share with them 
our concerns regarding those provisions that are having a 
positive impact on small businesses.
    With that, I just want to take this opportunity to really 
thank all of you for coming before our Committee today, and I 
ask unanimous consent that members will have five days to 
submit a statement and supporting materials for the record.
    Without objection, so ordered.
    This hearing is now adjourned.
    Thank you.
    [Whereupon, at 2:20 p.m., the Committee meeting was 
concluded.]

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