[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON
EXPIRING TAX INCENTIVES:
EXAMINING THEIR IMPORTANCE
FOR SMALL BUSINESSES ON THE
ROAD TO AN ECONOMIC RECOVERY
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
SEPTEMBER 30, 2009
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 111-048
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 W. 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 W. 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, North Carolina, 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
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Graves, Hon. Sam................................................. 2
WITNESSES
Bernstein, Ms. Rachel, Vice President and Tax Counsel, National
Retail Federation.............................................. 3
Dwyer-Owens, Ms. Dina, Chairwoman and CEO, The Dwyer Group,
Chairwoman of the Board, International Franchise Association,
Waco, Texas.................................................... 5
Feraci, Mr. Manning, Vice President, Federal Affairs, National
Biodiesel Board................................................ 8
Frenz, Mr. John, Owner, Frenz & Schmidtknect, Incorporated, On
behalf of The National Restaurant Association.................. 10
Hall, Mr. Keith, National Tax Advisor, National Association for
the Self-Employed.............................................. 12
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 24
Graves, Hon. Sam................................................. 26
Bernstein, Ms. Rachel, Vice President and Tax Counsel, National
Retail Federation.............................................. 28
Dwyer-Owens, Ms. Dina, Chairwoman and CEO, The Dwyer Group,
Chairwoman of the Board, International Franchise Association,
Waco, Texas.................................................... 34
Feraci, Mr. Manning, Vice President, Federal Affairs, National
Biodiesel Board................................................ 41
Frenz, Mr. John, Owner, Frenz & Schmidtknect, Incorporated, On
behalf of The National Restaurant Association.................. 47
Hall, Mr. Keith, National Tax Advisor, National Association for
the Self-Employed.............................................. 55
Statements for the Record:
Clarke, Hon. Yvette D............................................ 60
Associated Builders and Contractors, Inc......................... 62
International Franchise Association.............................. 63
(v)
FULL COMMITTEE HEARING ON
EXPIRING TAX INCENTIVES:
EXAMINING THEIR IMPORTANCE
FOR SMALL BUSINESSES ON THE
ROAD TO AN ECONOMIC RECOVERY
----------
Wednesday, September 30, 2009
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:07 a.m., in Room
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez
[Chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Dahlkemper, Schrader,
Ellsworth, Graves, and Fallin.
Chairwoman Velazquez good morning, everyone. This hearing
is now called to order.
Part of the tax relief has played a key role in our
Nation's recovery efforts. Since February, we have worked to
deliver $15 billion in credits and deductions to entrepreneurs.
These measures are ensuring every small firm has the tools it
needs to grow from within. When coupled with existing
incentives like tax extenders, Recovery Act tax relief has
created real momentum. But with expiration dates looming, many
of these provisions will soon run out, putting the brakes on
much of our progress thus far.
In roughly 2 months' time, a wide range of tax provisions,
from R&D credits to clean energy incentives, will sunset for
small firms. In today's hearing we will examine those measures.
In doing so, we will look for ways to ensure effective efforts
are continued and ineffective ones are either allowed to sunset
or enhanced to spark growth.
Whether we are talking about home office deductions or
bonus depreciation for equipment purchases, entrepreneurs rely
on tax measures to expand their ventures. This is the case in
both bad times and good times, but rings particularly true in
today's economy.
For small firms facing tightening credit and shrinking
capital, incentives can make all the difference. In some
instances, they are a deciding factor for things like hiring
workers and making investments. That is why targeted relief is
so important, and that is why we need to be reauthorizing
measures that work for small firms.
There are a number of valuable, soon-to-expire tax
extenders. Perhaps the best example is the R&D credit, an
incentive that has been reauthorized 13 times since 1981. This
provision yields $2 in research for every $1 in investment, and
helps create high-wage jobs for workers like engineers and
scientists. Yet, despite its obvious economic benefits, the R&D
credit is slated to expire in December, leaving countless small
firms in the lurch.
The R&D credit is just one example of an expected but
endangered tax provision. Reauthorizing this credit could ease
the anxiety associated with last-minute extensions. It could
also provide small firms with the stability they need to plan
budgets and attract investments. In that same vein, extending
certain recurring incentives could also go a long way in
stimulating small businesses.
While not considered extenders in the traditional sense,
Recovery Act tax breaks are also set to expire. These
incentives were designed to boost consumer spending and spur
investment. Credits for first-time home buyers, for example,
are sparking growth in the real estate and construction
industries. The $8,000 incentive has already contributed to a
rebound in the housing market, one that some experts say could
drive an additional 400,000 home sales this year. Reauthorizing
this particular provision will undoubtedly stimulate future
growth. Failure to do so, however, could create greater
uncertainty in the marketplace and dampen recovery for small
businesses.
Entrepreneurship is an inherently high-risk, high-reward
endeavor, one that is often characterized by uncertainty. Since
the beginning of the downturn, that uncertainty has been
compounded. Now, more than ever, small firms need stability and
incentives to grow. But, unfortunately, the lack of finality in
our tax policy may be undermining these very goals.
As we look for ways to strengthen small businesses, we need
to be focused on the tools that are already sparking progress.
By extended and expanding these measures, we can give small
firms the certainty they need to make new investments and the
encouragement they need to help grow our economy.
I would like to take this opportunity to thank all the
witnesses for coming here today to shed some light on how these
tax credits have helped businesses and especially the small
businesses that you represent. I would like to thank the
witnesses in advance for their testimony, and I will now yield
to Ranking Member Graves for his opening statement.
[The statement of Chairwoman Velazquez is included in the
appendix.]
Mr. Graves. Thank you, Madam Chair. And I too would like to
thank the witnesses for coming in today for this very important
hearing.
Year after year, taxes rank as a top concern for small
businesses. According to the IRS National Taxpayer Advocate,
small firms must deal with a particularly complex array of
laws, such as depreciation, employment taxes, and independent
contractor rules. It is even more difficult for companies to
operate when tax provisions are temporary, because they cannot
effectively budget or plan for the long term. Small businesses
pay more per employee to comply with the Internal Revenue Code
and often can't afford to hire tax experts to help them.
For small businesses, these are difficult times.
Unemployment is rising, credit is tight and energy prices
remain steep. Every expense is an added burden and can make the
difference between whether a firm stays open or is forced to
close.
The tax provisions we are considering today are critically
important to entrepreneurs. Because small businesses are
constantly squeezed by ever-growing costs, tax relief is
essential. I would prefer that Congress pass permanent tax rate
reductions rather than narrower, temporary provisions that must
be renewed by Congress year after year.
I am particularly concerned that we extend the 2001 and
2003 tax cuts. Although not the topic of this hearing, these
provisions are scheduled to expire in 2010; if they do expire,
working families will see their taxes increase and their
prospects for employment decline. For entrepreneurs, these
provisions are a necessary incentive to keep our economy
moving.
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. I hope Congress will act to
provide this predictability for our Nation's small businesses.
Finally, a word about the alternative minimum tax, which
has been called the most serious problem faced by taxpayers.
The AMT hits many small business owners very hard. It reduces
business deductions, is needlessly complex, and increases tax
uncertainty. I would prefer that we repeal it, but failing
that, we should at least extend AMT relief.
So again, thank you, Madam Chairwoman, for holding this
hearing. I look forward to the testimony.
[The statement of Mr. Graves is included in the appendix.]
Chairwoman Velazquez. Thank you.
Chairwoman Velazquez. And I welcome Ms. Rachel Bernstein.
She is the Vice President and Tax Counsel for the National
Retail Federation. Ms. Bernstein joined the organization 13
years ago and specializes in tax matters facing the retail
industry.
NRF represents an industry with more than 1.6 million U.S.
retail establishments and more than 24 million employees.
Welcome. You have 5 minutes to make your statement.
STATEMENT OF RACHEL BERNSTEIN
Ms. Bernstein. Thank you, Chairwoman Velazquez, for the
opportunity to provide testimony to evaluate the impact tax
provisions scheduled to expire at the end of 2009 and other
stimulus measures.
I am Rachelle Bernstein, Vice President and Tax Counsel for
the National Retail Federation which represents 1.6 million
U.S. retail establishments, about one in the five American
workers, and had 2008 sales of $4.6 trillion. Most retailers,
as you know, are small businesses.
In 2008, retailers' holiday sales, which typically
represent 25 to 50 percent of their annual sales, declined by
2.8 percent. During the past year, consumer confidence hit its
lowest level since records have been kept. For the first time
in its long history, NRF is forecasting a decline in annual
retail sales for 2009. Retailers lost 835,000 jobs since the
beginning of 2008. Retail sales for the past 3 months continue
to show sharp year-over-year declines.
The tax proposal that would provide the most immediate and
beneficial help to retailers that are struggling to survive is
the 5-year net operating loss carry-back. In our current
recession where access to credit is so severely limited, the
NOL carry-back will provide an important source of capital to
finance ongoing operations and retain employees.
An NOL can be used to obtain a refund for taxes paid in the
past and/or carried forward to offset tax obligations that
arise in the future. Under current law, taxpayers may carry
losses back 2 years and forward 20 years.
Although both the House and Senate versions of the 2009
economic stimulus legislation would have permitted all
businesses except those that have received TARP funds to carry
their losses back for 5 years, the final version of that
legislation permitted only businesses with less than $15
million in gross receipts to carry back their 2008 losses for 5
years. This provision needs to be expanded so that the size of
business is not a factor in limiting the benefit of the carry-
back. It also should be extended to cover losses incurred in
2009, because it appears that the sales decline for 2009 will
be worse than it was in 2008.
NRF strongly supports H.R. 2452, bipartisan legislation
introduced by Representatives Richard Neal and Pat Tiberi, the
chairman and ranking member of the Select Revenue Measures
Subcommittee of the House Ways and Means Committee, which would
permit businesses to carry back losses from 2008 and 2009 for 5
years. President Obama included a similar proposal in his
fiscal year 2010 budget.
Because current law allows taxpayers to carry losses
forward for as many as 20 years to reduce future tax liability,
allowing for this longer carry-back period is merely an advance
on a tax refund that would be due to them in the future. This
advance of a future tax refund provides a much-needed source of
cash for operations, as businesses are struggling through this
recession.
This problem can be illustrated with the stories of two of
our smaller chain retail members. These retailers are too large
to be able to qualify for loans from the Small Business
Administration, too small to have been able to negotiate large
enough lines of credit to carry them through this recession,
not creditworthy enough to qualify for TALF, and too large to
be eligible for the NOL carry-back permitted to only small
businesses earlier this year. In both of these situations, the
retailers are struggling to find ways to finance their
inventory for the holiday season, which is their greatest
opportunity for revenue this year.
In the first case, a retailer in business for 45 years
suffered its first-ever loss in 2008. For them, the ability to
use a modest 2008 NOL carry-back to finance inventory worth
five times that carry-back could mean the difference in staying
in business for its 2,000 permanent employees and 6,000
additional seasonal employees.
In a second situation, a regional specialty chain operating
in four Western states predicts that it will close one-third of
its remaining stores if it does not get a cash influx from its
2008 NOL carry-back. That will result in a loss of 800 jobs.
For businesses that are not on the brink of survival, the
NOL carry-back will allow them to make some new investments,
like improvements to their stores, for which there is no
capital to finance in this current environment.
Another provision that will help create jobs is the
extension of the 15-year depreciable life for improvements made
to retail stores, restaurants, and leaseholds. If this
provision is not extended, the depreciable life of these
improvements will revert to 39 years, which will drive up costs
and hurt investments and jobs.
Both the NOL carry-back and the extension of the 15-year
life for improvements to retail, restaurant, and leasehold
property will have a direct and positive impact on employment
in the current economy. It is not only important for Congress
to extend these provisions, but also it is important that these
extensions be enacted soon. Delaying action will impact
thousands of jobs. We urge the Small Business committee to lend
its support to extension of these important tax provisions.
Thank you for the opportunity to participate in this
important hearing.
Chairwoman Velazquez. Thank you, Ms. Bernstein.
[The statement of Ms. Bernstein is included in the
appendix.]
Chairwoman Velazquez. Our next witness is Ms. Dina Dwyer-
Owens. She is the chairwoman and CEO of the Dwyer Group. The
Dwyer Group is a family-owned business that has grown into a
holding company of service-based franchise companies.
Ms. Dwyer-Owens is also chairwoman of the board for the
International Franchise Association. With more than 10,000
members, IFA represents all aspects of the franchise community.
Welcome.
STATEMENT OF DINA DWYER-OWENS
Ms. Dwyer-Owens. Good morning, Chairwoman Velazquez,
Ranking Member Graves, and all the committee members. My name
is Dina Dwyer-Owens, and I am grateful to have the opportunity
to speak before you today. And during my statement, I have
three key points that I would like to make.
Number one, extending certain elements of the American
Recovery and Reinvestment Act of 2009 and the Emergency
Economic Stabilization Act of 2008, which are helping to
strengthen the foundation of our economic recovery;
Number two, enacting legislation to put veterans returning
from service overseas into business for themselves; and
Three, bolstering the ability of franchisees to obtain the
capital necessary to expand their operations thereby creating
more sustainable jobs for the economy.
I am the chairwoman and CEO of the Dwyer Group, franchisor
of six service industry concepts, including Rainbow
International, Mr. Rooter, Air Service, Mr. Electric, Mr.
Appliance, and Glass Doctor.
Across these brands, the Dwyer Group provides support and
opportunity to 1,200 franchisees in the United States and
Canada and additional franchisees in seven other countries. My
father founded the Dwyer Group in 1981 with the intent to build
a system of related businesses that would provide high-quality
residential and light commercial services; and through the
systems, we have enabled thousands of entrepreneurs to own
their own small businesses.
I also have the privilege of serving as the chairwoman of
the International Franchise Association. The IFA represents
more than 85 industries, including more than 11,000
franchisees, 1,200 franchisors, and 600 supplier members. This
is nationwide.
According to the 2008 study conducted by the IFA
Educational Foundation, there are more than 900,000 franchise
establishments in the U.S., creating 21 million American jobs
and generating $2.3 trillion in economic output.
Since the economy went into recession, Congress has enacted
numerous provisions designed to help small business. The Nation
is only now starting to see signs of recovery, and those
fragile businesses that operate in your communities need these
programs to continue. Bonus depreciation and a shortened,
straight-line cost recovery for qualified leasehold
improvements, qualified restaurants, buildings and
improvements, and qualified retail improvements provide
valuable benefits to franchise businesses.
In addition, the Recovery Act added a 15-year schedule for
new construction and improvements placed in service in 2009. It
is clear that our recovery will not be fully under way in this
tax year, and these provisions must be extended beyond 2009.
Extending these provisions will entice franchise business
owners to reinvest and expand their businesses. This will
create a tremendous spillover effect on other industries.
Madam Chair and members of the committee, I sincerely hope
that Congress can also address the upcoming expiration of the
important estate, or death, tax that is set to expire in 2010.
The estate tax has long cost our economy more than the revenue
it generates for the Federal Government. The IFA has advocated
for a permanent solution to the estate tax, and I urge Congress
to address the situation now before the tax returns to its pre-
2001 level.
There is another policy objective that I would like to
discuss, and that idea was inspired by a provision in the
Recovery and Reinvestment Act, but not included in the bill.
The Recovery Act included a provision providing a tax
credit to employers to hire qualified military veterans. Taking
this concept and expanding it to the entrepreneurial level,
Congressmen Leonard Boswell and Aaron Schock proposed a bill
that creates an incentive to not only give our veterans jobs,
but to give them the keys to the front door.
H.R. 2672, the Help Veterans Own Franchises Act,
establishes a tax credit for franchise businesses that choose
to offer qualified veterans a discounted initial franchise fee.
The tax credit would amount to 50 percent of the total
franchise fee discount offered by the franchisor to the
franchisee and would be capped at $25,000 per unit. More
importantly, the bill would also provide a tax credit to the
veteran who chooses to purchase a franchise and open a business
in their local community equal to 25 percent of the remaining
fee.
So just to kind of net it out for you, in our business, for
example, we give approximately a $6,000 discount on the initial
franchise fee to the veteran. So we are asking for a 50 percent
credit back to one of our brands for giving that discount to
the veteran, and then the veteran would pick up another $4,500
tax credit. So, basically, he is buying the franchise for about
$14,000.
Given the current economic climate, many franchise
businesses are finding it harder to access the capital they
need to open new stores and recruit investors. In order to
encourage economic growth and to make it easier for veterans to
own their own businesses, the IFA supports enactment of this
tax credit for the franchise systems that choose to offer
qualified veterans a discounted franchise fee.
Assisting the transition of military veterans from active
service to civilian life holds a special place for me, since it
was my father, Don Dwyer, Sr., who helped launch a program with
the IFA nearly 2 decades ago as the United States was in the
midst of the first Gulf War. At that time, nearly 100 members
of the IFA stepped up to show their gratitude to our men and
women in the military, to provide financial incentives and aid
them in acquiring their own franchises.
We relaunched that program in 2002, and to date, there have
been 1,500 veterans who have become franchisees through these
generous franchisors that have given discounts. The Dwyer Group
of companies alone are responsible for 170 of those veterans
becoming franchisees.
The same leadership qualities and adherence to established
structures of operation that make our military the finest in
the world translate perfectly into the successful operation of
franchise businesses. I thank Representative Schock for his
leadership in introducing this bill together with
Representative Boswell, and I ask you to help support the Help
Veterans Own Franchises Act.
Before I close, I cannot pass the opportunity to impress
upon you ongoing concerns of the franchise community that we
have with access to capital. Credit is the lifeblood of small
business, as you know. Beyond the daily credit needed to keep a
small business afloat, franchise investors need access to
capital to expand their brands and create jobs.
Unlike many jobs created by the Federal infrastructure
spending, we firmly believe that franchise jobs are
sustainable. They will be here when the asphalt dries. As
tourism recovers, franchise jobs will provide services at
hotels and restaurants, at rental car counters and travel
agencies. When Americans resume buying and fixing up their
homes, franchise jobs will be there to broker the sale, remodel
the kitchen; they will also be there to paint the house and
beautify the yard.
A recent study of the IFA Foundation revealed that for
every $1 billion in lending to franchise businesses, 34,100
jobs--sustainable jobs--are created, which will help our
economy recover faster.
And I am just about out of time here. But while Congress
and the administration have taken important steps to address
the challenges of small businesses in assessing credit,
franchise businesses and prospective franchise investors with
strong credit histories continue to have loan applications
denied or delayed. In fact, according to the 2009 Senior Loan
Officer Survey conducted by the Federal Reserve, more than one-
third of these bankers reported tightening terms for small
business loans, while one reported easing terms. These tight
standards continue to keep capable and willing franchise
business owners on the sidelines.
Chairwoman Velazquez. Time has expired, so you will have an
opportunity during the question-and-answer period to expand on
any idea that you feel hasn't been covered. Thank you.
[The statement of Ms. Dwyer-Owens is included in the
appendix.]
Chairwoman Velazquez. Our next witness is Mr. Manning
Feraci. He is the Vice President of Federal Affairs for the
National Biodiesel Board. Before joining NBB, Mr. Feraci had
more than 14 years of experience working for Members of the
U.S. House of Representatives.
The NBB is the national trade association representing the
biodiesel industry.
Welcome.
STATEMENT OF MANNING FERACI
Mr. Feraci. Chairwoman Velazquez, Ranking Member Graves,
members of the committee, I appreciate having the opportunity
to testify this morning. I am here today on behalf of the
National Biodiesel Board, the national trade association for
the U.S. Biodiesel industry. Our membership produces a
renewable, high-quality diesel replacement fuel that is readily
accepted in the marketplace. The U.S. biodiesel industry is the
only game in town when it comes to the commercial-scale
production of biomass-based diesel as defined in the renewable
fuel standard.
The production and use of biodiesel is consistent with an
energy policy that values the displacement of petroleum diesel
fuel; and there are significant energy, security,
environmental, and economic public policy benefits associated
with biodiesel use. In this regard, the biodiesel tax incentive
has achieved its desired goal of promoting the domestic
production and use of biodiesel. In 2004, the U.S. produced 25
million gallons of fuel; last year, that number rose to 690
million gallons.
The biodiesel tax incentive is primarily structured as a $1
per gallon blenders' credit that is triggered when biodiesel is
blended with petroleum diesel fuel. The incentive can be used
to offset excise tax liability and is refundable to the degree
that the credit exceeds an excise tax owed by a taxpayer. The
liquidity of this structure is designed to make biodiesel price
competitive in the marketplace with diesel fuel.
Biodiesel must meet both the ASTM B6751 fuel specification
and the EPA's Clean Air Act registration requirements to
qualify for the incentive. Last year's tax extender package
provided a 1-year extension of the credit, and thus the
incentive is currently set to expire at the end of this year.
Due to volatile commodity prices, unfavorable market
conditions, difficulty accessing operating capital, and
uncertainty regarding Federal policy, the U.S. biodiesel
industry is facing severe economic challenges. The industry's
viability and the Nation's ability to reap the policy benefits
associated with domestic biodiesel production will be seriously
compromised if the biodiesel tax incentive is allowed to lapse
at the end of the year.
It is difficult for small businesses and investors to make
long-term business decisions based on year-to-year extensions
of the biodiesel tax incentive. A multiple-year extension of
the incentive is absolutely necessary to provide the certainty
and stability that is needed in the marketplace.
NBB also supports a structural reform of the tax incentive.
Restructuring the current blenders' credit with a production
excise tax credit of equal value will streamline administration
of the credit and promote tax compliance while preserving the
liquidity of the existing incentive. This reform proposal is
encompassed in S. 1589, the Biodiesel Tax Incentive Reform and
Extension Act of 2009, which has been introduced in the Senate
by Senators Cantwell and Grassley. Representative Pomeroy will
be introducing the House version as legislation in the near
future.
There are several shortcomings associated with the current
blenders' credit that will be remedied by restructuring the
incentives of production credit. Since biodiesel blending can
occur at multiple stages in the distribution chain, it can be
difficult to ensure that only qualifying fuel receives a
credit.
This also makes it difficult for both taxpayers and the IRS
to determine when a fuel becomes subject to the Federal 24.3-
cent-per-gallon diesel fuel excise tax. The IRS is currently
pursuing several courses of action designed to collect this
excise tax liability, and what they are pondering would be
particularly burdensome and onerous on small business. A change
to a production credit in tandem with treating biodiesel as
regular diesel fuel for tax purposes would remove the need for
these regulatory burdens while improving tax compliance. A
change to a production credit would also stop abusive
transshipment schemes.
With NBB's full support, Congress last year closed the so-
called "splash and dash" loophole that had previously allowed
foreign-produced fuel to enter the United States, claim the
biodiesel tax incentive, and then be sent to a third country
for end use. Now, if you think about that, there is clearly no
energy or tax policy justification for these sorts of
transactions.
With that said, the current blenders' credit could still
inadvertently allow for other potential abuses associated with
the transshipment of foreign fuel through the U.S., and a
change to a production excise tax credit would remedy this
problem in a WTO-consistent manner.
In conclusion, the biodiesel tax incentive has helped
achieve the desired goal of increasing domestic production and
use of biodiesel. These benefits, however, will be lost if the
biodiesel tax incentive is allowed to lapse at the end of the
year. The NBB, on behalf of the U.S. Biodiesel industry, urges
Congress to provide a multiyear extension of the reformed
incentive.
Again, Chairwoman Velazquez, Ranking Member Graves, members
of the committee, I really appreciate having the opportunity to
testify this morning.
Chairwoman Velazquez. Thank you, Mr. Feraci.
[The statement of Mr. Feraci is included in the appendix.]
Chairwoman Velazquez. And the Chair recognizes Mr.
Ellsworth for the purpose of introducing our next witness.
Mr. Ellsworth. Thank you, Madam Chair. It is a pleasant
surprise for me this morning to welcome Mr. John Frenz. He is
not only a constituent, but he is a very good friend of mine
from Indiana.
Mr. Frenz is owner of Frenz & Schmidtknect, Incorporated,
which includes two Montana Mike's family restaurants. The
restaurants are located both in Illinois and Indiana. Mr. Frenz
today, though, is testifying on behalf of the National
Restaurant Association, which represents more than 380,000
member-restaurant establishments.
John also sits on my small business advisory committee, so
we are in close contact all the time. And if you are ever in
Indiana, I can recommend Montana Mike's with the highest--it is
a four-star in my book.
And, John, when you go home, tell them I was at work today,
if you don't mind telling the folks in Knox County.
But I would offer Mr. John Frenz.
STATEMENT OF JOHN FRENZ
Mr. Frenz. Thank you.
Chairwoman Velazquez, Ranking Member Graves, Congressman
Ellsworth, and other members of the Small Business Committee,
thank you very much for this opportunity to testify before you
today for the National Restaurant Association. As Brad has
said, my name is John Frenz and am part owner of Frenz &
Schmidtknect, Incorporated.
My business partner of 28 years now, Greg, and I, we
operate two Montana Mike's Steakhouses in Vincennes, Indiana,
and Danville, Illinois. I am here today to strongly urge this
committee and Congress to extend certain expiring tax
provisions before the end of this year.
The 15-year depreciation schedule for leasehold
improvements, restaurant improvements, and new construction is
stimulative and creates jobs. It should be extended and is the
tax revision on which I will focus my comments today. However,
I just want to touch on a couple other areas that are also very
important. One is about the deduction for charitable donations
of food.
At the end of the night, you have got food left over. We
have got to throw it away. If we go and extend this on, it goes
and allows the small business the same deduction that the C
Corp already gets. It is extended already for them, but for the
small business it is the same whether we throw it in the trash
or whether we give it to charity. It is the same unless we
extend this, and that helps out.
Second of all is about, as she had touched on, about the
net operating loss carry-back 5 years and two. When we get in
trouble in economic times, you get those years. Business is
down, dollars didn't come in like you expected. If you can
carry that back, you can still make the payroll, you can still
make the withholding deposits on time, and you can make it
through. That cash flow matters, and especially in these times.
And then--I have been in the restaurant business many
years, but 28 in business myself. I still remember back when
businessmen visited, we got--they could take a 100 percent
deduction of that business expense. I remember when it went to
80 and then it went to 50, and you saw it drop off more. That
three-martini lunch doesn't exist anymore. Maybe it did exist
30 years ago.
That doesn't exist anymore. If a businessman can bring
another businessman to close a sale, to potentially find new
customers, if they can go and deduct that meal as a business
expense, it brings in business to the restaurant industry,
generates dollars, generates jobs, generates income tax.
And the main thing that hits me is the extension of the 15-
year rather than the 39-year depreciation schedule, and there
are further details on that stuff on my written form that I had
turned in. But for restaurateurs, this provision has made
significant capital available for expenditures with the tax
savings that result. Those capital expenditures for expansion
and remodeling translate into jobs in the rest of the economy,
as well as increased sales and employment at the restaurant,
all of which are really needed right now.
When restaurants invest in construction and renovations,
the impact spreads throughout the economy. Before the economic
downturn, the restaurant industry spent more than $10 billion
in 2007 on construction of restaurant buildings. According to
the Bureau of Economic Analysis, every dollar spent in the
construction industry generates an additional $2.39 in spending
in the rest of the economy, and every $1 million spent in the
construction industry generates another 28 more jobs in this
economy. That means the restaurant industry construction
spending created 280,000 jobs in 2007.
In fact, Congress has frequently enacted shorter
depreciation schedules to stimulate the economy and create
jobs. As far back as the 107th Congress, shorter depreciation
schedules for different pieces of this entire provision for
leasehold improvements, restaurant and construction have been
included in various economic stimulus bills.
Even during those difficult economic times, some business
owners are in the position to expand. In fact, 42 percent of
restaurateurs like me and my business partner are planning to
make a capital expenditure for equipment over the next 6
months. In our business, Montana Mike's in Vincennes, right now
we are planning to put on an addition. We have those times--on
Friday nights, Saturday nights, and Sunday at lunchtime, we
have people waiting for 20 minutes to 30 minutes. Well, when we
have got those customers, we have got to expand and take care
of those customers.
This 15-year depreciation expires at the end of this year,
so we have a short period of time to get the financing
arranged, get the building built and put into use. Depreciation
doesn't start until the project is actually put into use. So if
it doesn't get done until January 1, first time used, then we
will be on the 39-year depreciation schedule.
What does that mean? Over that 15 years on, say, it was--I
will just take a figure of $150,000 to add that addition on--
that will allow us to have an additional $6,154 in depreciation
a year now for those first 15 years.
It all equals out. You pay less taxes now, but you pay more
taxes later. The same amount of taxes will be paid over that
period of time. It is just so when you start out, that is when
the cash flow is needed.
And, once again, I want to thank you for the opportunity to
testify before you today regarding these important tax
provisions in the restaurant industry. I strongly urge Congress
to extend and, in some cases, expand these benefits before the
end of this year. Doing so will give small business owners like
me--certainly when it comes to those tax provisions, that will
not only help my business's employees, but will also help
create jobs in construction and stimulate the overall economy.
Thank you very much.
And, when it is appropriate, I will be open for questions.
Thank you very much.
Chairwoman Velazquez. Thank you, Mr. Frenz.
[The statement of Mr. Frenz is included in the appendix.]
Chairwoman Velazquez. Our next witness is Mr. Keith Hall.
He is the National Tax Advisor for the National Association for
the Self-Employed. Mr. Hall is the primary consultant available
to the self-employed of microbusiness owners.
NASE was founded in 1991, and represents hundreds of
thousands of entrepreneurs in microbusinesses.
Welcome.
STATEMENT OF KEITH HALL
Mr. Hall. Thank you. Madam Chair, Ranking Member Graves,
members of the committee, thank you for the opportunity to be
here. My name is Keith Hall, and I am a small business owner.
That is what I do, and I am very proud of that.
On behalf of the National Association for the Self-Employed
and the 250,000 microbusiness owners it represents, I would
like to say thank you, guys, for your commitment to small
business owners everywhere. You guys really do make a
difference.
I don't want to be overly dramatic today, but I want to
talk about commitment. I have been fortunate enough through my
association with the NASE to see the commitment of thousands of
small and microbusiness owners--both to their families and to
their businesses.
I have also been extremely lucky to be able to see the
commitment to those same families and those same small
businesses from this committee, from you guys. Today, I am here
to ask you to continue that commitment. I know you guys have a
tough job with lots of challenges trying to help people, trying
to help the economy, trying to find new ways to meet the needs
of so many people, and then trying to figure out some way to
pay for it all. I know that is not easy.
The Tax Code has always been an effective tool in helping
you guys to meet those goals, not just funding the government,
but encouraging or discouraging activities and actions; and I
believe Congress has used that tool well. But a number of those
tools are scheduled to expire, as we talked about. Bonus
depreciation options, increased expensing under Section 179,
accelerated recovery periods, as Mr. Franz has talked about;
all of those things have been extremely effective at creating
jobs for small business and have contributed greatly to the
economic recovery that I believe is under way. These tax
incentives show a commitment to small business that shouldn't
come to an end.
So the real question today that we need to evaluate is
whether or not we want to continue that commitment to small
business. The country finally seems to be seeing a light at the
end of the tunnel. Taking away these incentives that clearly
are making a difference seems to be the wrong signal at the
wrong time.
Now, I could spend my whole 5 minutes talking about any one
of those areas, but I would like to concentrate on just one,
and that is the Alternative Minimum Tax exemption amount. I
want to talk about this one in particular, because I think at
the end of the day this cost really is levied almost
exclusively on the small business guy.
The original idea behind the AMT was to prohibit the
taxpayers with the most resources at their disposal, the
wealthiest of Americans, from taking advantage of loopholes in
order to avoid paying any tax at all. However, the effects of
inflation, the growth of earnings and expenses weren't taken
into account.
Now, Congress has recognized this over time and adjusted
the exemption amount to keep track with inflation, but now that
adjustment is scheduled to end. If we allow that adjustment to
end, then the tax burden for many Americans who had no increase
in earnings year over year will be paying more tax
immediately--the same level of earnings, but more tax. A
penalty.
And why? Many would pay the extra tax simply because they
live in a State with a higher-than-average State income tax.
Others would pay more simply because they have a larger-than-
average family. Clearly, that was not the intent of the AMT
when it began so many years ago; and ending that provision now
would punish the people that the original AMT provision set out
to protect.
Here is the real kicker: Even if the AMT system does not
result in any additional tax, it still has to be calculated.
Allowing this provision to end would force many Americans to do
the math even if they don't meet the test and end up paying any
tax. So the AMT requires a completely different set of rules.
Now, this committee, particularly, has continually promoted
the need for simplification in the Tax Code; yet, here is the
single topic that results in a completely new tax return, a
second tax return, a second set of records, a second tax
liability, and a second set of headaches. The instructions for
the AMT form actually say, and I quote: "Therefore, you need to
refigure items for the AMT that you have already figured for
the regular tax. In some cases, you may wish to do this by
completing the applicable tax form a second time." Really, two
times?
Now, the very concept of having a second set of records, a
second set of tax forms, a second set of calculations goes to
the very heart of the need for simplification. Again, even if
no tax results from the AMT, a system that requires two
calculations is a tax in itself. And, worse, it is a tax that
doesn't even generate any money for the Treasury. And without
this increased exemption, many more small businesses will be
stuck in this trap.
So getting rid of the AMT altogether would be my first
choice, but that may not be an option. At a very minimum, the
exemption amount that is included should be indexed to
inflation, and this fallback should not be allowed.
Now, my most concerted point here is that the wealthiest of
taxpayers will still be affected by the AMT, regardless of this
exemption amount. But those taxpayers who have had no real
increase in earnings, no other resources to call upon, those
are the small businesses and the individuals who will pay this
price. And I know that wasn't the intent of the AMT, and
certainly not the intent as we consider these expiring tax
incentives.
The bottom line: Keep these incentives, keep the
commitment.
Thanks again for the chance to be here. And, more
importantly, thank you guys for your commitment to small
business.
Chairwoman Velazquez. Thank you, Mr. Hall.
[The statement of Mr. Hall is included in the appendix.]
Chairwoman Velazquez. And if I may, I would like to address
my first question to Ms. Bernstein.
For the first time, the 15-year depreciation schedule also
applies to qualified retail improvements. What impact has this
change had on your industry? And even in the current economic
climate, are more retailers undertaking construction projects?
Ms. Bernstein. That is a good question.
It has had a positive impact. I actually was recently
talking with a small business member in Montana who is putting
in a $1.5 million dollar improvement to the retail store that
they own as a result of this provision, and actually looking to
maybe improve--they have got a total of three stores--their
other two stores down the line.
Unfortunately--that would probably be something they would
have to do in 2010--and cost is going to be a factor; and if
the cost goes back up to 39 years, that is going to be very
difficult to do in these times.
I will tell you, though, that when I talk to the vast
majority of our retail members, they have cancelled whatever
plans they could cancel for projects in 2009 because of their
very slim earnings or loss situations.
As you know, with all businesses, but especially retail,
sales have been down so much that the businesses really are
cutting back everything that is not essential. Now, that builds
up more pent-up demand for improvements that must be made and
that they are trying very hard to be able to make in 2010, at
least to put some more of those projects on the line; cost is
going to be critical. And if the cost is--if they can only
depreciate 1/39th of the cost per year, which is virtually
nothing, then it is going to make a big difference.
Chairwoman Velazquez. Let me ask you, has this provision
been used in concert with bonus depreciation and 179 expensing?
Ms. Bernstein. I don't think that--you can't use the 179
expensing, I don't think, for the same, exact property. I don't
think you can double--that would be a double benefit.
So I do believe that the leasehold improvement did qualify
for bonus depreciation, though.
Chairwoman Velazquez. Thank you.
Mr. Frenz, IRS Commissioner Shulman recently said that he
expects to see a record number of tax refund requests, and this
jump can be attributed to the Recovery Act provisions that
allow small firms to carry back losses.
Have restaurants been taking advantage of that provision,
and has it helped them survive for the last 12 months?
Mr. Frenz. Yes, especially in these economic times.
You can be operating for many years--the restaurant
industry, you have heard before, our median bottom line or
median percentage is 3 to 5 percent. It is very low compared to
other industries because there is so much competition.
You can be doing fine for years. You get in tough economic
times, the manufacturing facility in your area gets shut down
or laid off, and all of a sudden your business drops down. And
you are on such a thin margin, all of a sudden, boom. You are
in that provision--or in that situation where you have got to
decide whether to talk to the employees.
Either you need to reduce hours so you have to--everyone,
do you want to just take a little reduction in hours or are we
going to have to lay some people off? What do you want to do?
You work with them on that.
But then the bottom line comes negative. And if you have
got that, where you can carry back--this is what they are
talking about the carry-back, that is, taxes you paid on
income; you can't get any more than that, than what you have
already paid. It is just allowing that credit or that deficit
to be carried back.
And, yes, it is very important, especially in these
economic times. You can't operate in the red all the time or
you are out of business. In these situations when business gets
tough, if you have that possibility, it really helps them. And
it is used.
Chairwoman Velazquez. Ms. Dwyer-Owens, this committee has
always been very concerned about helping those returning
veterans from the Iraq and Afghanistan wars, including
provisions on the small business lending programs under SBA
that we specifically instructed to be in place for returning
veterans.
Can you talk to us about what is so unique about returning
veterans, that helps them succeed in becoming small business
owners?
Ms. Dwyer-Owens. Especially as it relates to franchising.
Franchising is a set of systems, so--in the military they
are trained to follow systems, so it is a perfect fit. And they
are also disciplined. So we find that franchisees who come into
our businesses, that have that strong discipline to follow
systems, do very well in business.
So they have got strong ethics. They have been trained to
have strong ethics in business, so it is a perfect fit for
franchising.
And I have not heard of many of them getting benefits from
the SBA.
Chairwoman Velazquez. Well--
Ms. Dwyer-Owens. I should only speak for my franchisees; I
shouldn't speak for others. My own franchisees are having a
terrible time, even those that are veterans, getting help.
Chairwoman Velazquez. I don't know if any person here is
from SBA, but that is the story that we hear not only for
veterans but other small businesses. And we are working very
hard to make sure that the sensitivity is there. So this is the
time to make sure that the system is provided.
As we look at moving a tax bill, one revenue offset that
some have talked about is changing the taxation rules for
carried interest. How would changing the tax rate for such
interest impact private equity investment in your industry; and
how would this impact private equity investment?
Ms. Dwyer-Owens. I think it would be a big challenge.
Entrepreneurs are the ones really driving the economy, from
my perspective. And in my own personal situation--I am a
private equity owner, and I will tell you with certainty that
today we would not be where we are as an organization without
the help of the private equity owner because we finance our
franchisees. So we will have a record year in new unit sales
for our franchise companies because we finance in house, and we
would not be doing that without the support of our private
equity partner.
So this is not the time, from my perspective, to make that
kind of a change.
Chairwoman Velazquez. Mr. Feraci, in your statement you
stated that if the biodiesel tax incentive is not extended,
production in the U.S. will stop completely.
Have you made any analysis as to how many jobs we stand to
lose if we don't extend the tax credit?
Mr. Feraci. Thanks for the question, because that really
does kind of highlight the importance of extending the tax
incentive and not having there--letting there be a lapse.
Right now, the U.S. biodiesel industry supports, directly
and indirectly, approximately 52,000 jobs in the United States.
And if you look and think about how the tax incentive is
structured, what it does is, it makes the fuel price
competitive with diesel fuel. So absent that incentive, the
fuel is selling at a premium to diesel fuel.
And the fuels business, in general, is a very high-volume,
low-margin business. So if you have that much of a disparity in
the price, it is going to be hard to move any product in the
marketplace and get contracts. You know, you put that in tandem
with the fact that there is not--the renewable fuel standards
not yet in place, I don't think it is being alarmist to say
that you would see production in the United States come to a
screeching halt.
Chairwoman Velazquez. In order to give your industry
certainty, the extension should be how for how long? Two years?
Five years?
Mr. Feraci. What you see in the legislation that I
mentioned in my testimony is calling for a 5-year extension.
And if you look back to the Recovery Act, you had similar-
length-duration extensions for wind and other section 45 tax
incentives. And the idea is the same; you want to provide that
certainty and reliability to businesses so they can make
planning decisions; to the investment community so you can have
capital come in to continue to grow the business.
Chairwoman Velazquez. Mr. Hall, I heard you make your case
on AMT, but I would like to ask you what other tax policy
should we be looking at to encourage entrepreneurship among the
self-employed?
Mr. Hall. I think, consistent with some of the other
panelists, small business continues to have issues with access
to credit. So whether they are financing restaurant equipment
or they are financing a franchise fee, whatever they are
challenged with, whether they are a veteran or just like me,
still finding access to invest in their new idea, their new
effort, their contribution to the economy is still difficult.
And when I look at the bonus depreciation items, section
179 limits, the recovery periods that Mr. Frenz talked about,
all those things seem to be tax comments or tax issues, but I
view those as credit issues as well. Because, as Mr. Frenz said
also, that I agree with, those issues really are just timing
issues. They don't increase the deduction or the expense of an
item over time; it just puts the small business in the position
of more readily financing their new idea.
And, again, it is my belief that is where the economic
recovery comes from. That is where the jobs come from. And so
having access to those tax incentives helps with the credit
issue as much as having better rates at the bank even.
Chairwoman Velazquez. Thank you.
Now I recognize Mr. Graves.
Mr. Graves. Thank you, Madam Chair.
The estate tax expires next year, goes back to the way it
used to be, with much higher rates and lower exemptions.
I don't know if you, Mr. Feraci, want to comment.
But I would ask each of you--and I would start Ms.
Bernstein--how you feel about that and the state of the estate
tax. Obviously, it doesn't have that much effect on running
your business. But it does if something happens to you and you
pass it on; it has a huge effect. But I would be very curious
about that and including it in the extenders.
Ms. Bernstein. It is very important that something be done
about the estate tax--obviously, you know, for small
businesses. Everybody here represents small businesses; the
businesses are very often family businesses that are passed on
to children, and it is important to be able to pass that on
without having to pay so much in tax that you don't even have
the ability to pass on that business because it all has to go
to the Federal Government.
There also is some certainty that is needed here. The
situation that we are in right now is one where the tax would
be repealed completely for next year and then go back up to
pre-2001 levels, which is obviously an absurd thing and
something needs to be done before that happens.
We are very hopeful that this is something that Congress
will put on the fast track and deal with the permanent
solution, so that people can plan on something that clearly is
not as onerous as the levels that we remember, pre-2001, which
were really confiscatory.
Ms. Dwyer-Owens. I had a personal experience.
My father died of a sudden heart attack at the age of 60 in
1994. And thank goodness my mother survived, because our family
would have lost probably almost everything that he worked so
hard to build in our organization. So we would have lost
employees; our family members wouldn't have had anything to go
forward with. And our franchisees would have been very upset in
that whole process as well.
So I agree. I think we just have to find a permanent
solution to this. And going back to this is not the solution.
Mr. Feraci. Your average biodiesel plant has an average of
about 15 million gallons of production and less than 20
employees, which is a way of saying they are small businesses.
So to the degree that you could have an impact on estate
planning and the costs associated with that, and then not being
ready for that if you do get hit with the estate tax, it would
have an impact on some of these businesses in our industry.
Mr. Frenz. Very good question.
In the restaurant industry, seven out of ten restaurants
are single-unit, family-owned/operated restaurants, and that
has a huge effect on the estate tax in its current form.
And I fully agree with you, something needs to be done.
Mr. Hall. And it is complicated, because it is a revenue
issue. It certainly speaks straight to budget issues, and it is
very complicated for most small businesses, I think--the
uncertainty--and that may be the same thing with so many tax
issues, not being able to plan, not knowing exactly what is
going to happen.
Finding some permanent exemption amount, whether that is $5
million--our microbusiness base, that seems to be the right
amount that I think the NASE would support.
But the key point there is finding some remedy that is
permanent so that people could then actually plan and then know
what they are facing so that they can make the appropriate
decisions.
Mr. Graves. Thank you.
Chairwoman Velazquez. Mr. Schrader.
Mr. Schrader. Thank you, Madam Chair.
I guess I would like to open with a general question here.
I mean, one of the things that has concerned me--I like a lot
of what I have heard, and I appreciate the succinctness of the
testimony from all the witnesses; it has been very, very good
and on point, and hopefully our committee will have an
opportunity to deal with some of these.
But all of these cost money. And when I go back to the
district, I keep getting hit up on, How much money are you all
spending? And then I also get hit up on, How come you are not
doing anything for small business? And I would suggest that, in
the Recovery Act, we did a lot of the things, at least during
this past year, that are good for small business.
And how do we--and I guess I would ask, how do you get the
message out to your Members that this Congress has stepped up,
at least in the very near term of the Recover Act, and done a
lot of these things already, to make sure they didn't expire
this year so they can continue on and, hopefully, during this
year at least, be all right?
And I guess my question: If we extend some of these things,
like we already talked about doing the estate tax, we are
already talking about doing the AMT, we are talking--I think
there is some discussion about the net operating loss issue,
particularly for smaller businesses. If we do go down that
road, how do you and we communicate that successfully to small
business so that they realize this Congress has helped them?
Because we have not done that so far. I need your help, and
I would ask each of the members of the panel here, maybe
starting with Mr. Hall, and go the other way.
Mr. Hall. Well, I still would use--I am not a PR person, so
I apologize for that.
Mr. Schrader. But you are still a businessman.
Mr. Hall. I would still use the word "commitment." That is
one of the things I talked about in my oral comments, and I
think that is the word small business wants to hear.
And I think it is easy to say that word, but when you pass
things extending these types of things for investment in
property, for useful lives of equipment, for the AMT
exemption--and, again, that represents a situation that only
the people caught in that middle bracket are going to be
affected by if it is not extended.
Passing those type of things, I think, says commitment to
small business. And I think that is the way to communicate it
to small business. I think--I am sitting here in this chair and
that is what I hear; I hear a commitment to that.
Mr. Schrader. But do you communicate back to your
membership that Congress has done X, and this should help you;
please take advantage of it?
Mr. Hall. Absolutely. In fact, I would love to selfishly
say, because of our testimony, some things happened to promote
small business. But absolutely we communicate procedures like
that, and we communicate again back. We communicate that the
commitment to this committee, to small business, is very
important.
Mr. Schrader. Thank you.
Mr. Frenz. It is real easy with the restaurant industry,
because for every dollar spent in the restaurant industry it is
another $2.34 that expands out. And the issue with accelerated
depreciation, the same amount of taxes does need to be paid, it
is just paid later. More cash flow early on when you need it,
and then you pay it later. So there is no loss of tax dollars,
it is just when it is paid on that speed-up of depreciation.
On the other issues, when you save a business on the block,
especially the family-operated restaurant, you are saving a lot
in that neighborhood, a lot of that in the economy. And those
are jobs that are saved.
Mr. Schrader. Well, I agree with all that. But my problem
is, I don't think we have communicated that successfully to our
restaurants on the street. They don't realize we have already
done some stuff. And if we do more stuff, if we have already
failed in communicating the first part, what is the--
Mr. Frenz. I am a restaurant operator and I am--I have a
very big smile when my restaurant is full and the dollars are
being spent and the employment is up and dollars going out. As
far as the actual taxation dollars, I don't know.
Mr. Schrader. Talk to some of your buddies, if you wouldn't
mind. Thank you, though.
Mr. Feraci. The biodiesel tax incentive plays such a
critical role for the industry. Our membership is keenly aware
in terms of what is going on with the incentive, when it is
going to expire. You just have to check my voice mail to see
that they are very aware of what is going on with that.
They have been very appreciative of what this committee has
done in providing a forum to discuss renewables and talk about
the benefits that come from displacing petroleum with renewable
fuels, and in terms of communicating to--you know, good policy
will trickle down and our membership will understand and
benefit and country at large will benefit if you have a longer-
term extension and continue to get the benefits of displacing
petroleum with renewables.
Ms. Dwyer-Owens. I was here just 2 weeks ago with about 450
other franchisors and franchisees on the Hill, and one of the
big messages we pushed at is, we need to thank our
representatives, especially the Small Business Committee, for
all the good work they are doing for us. So we recognize.
And it is constantly pushed. We have a government relations
side, of course, on our franchise association Web site, and we
are pushing the positives as well as where we need help. But I
would say that we try to keep a lot of balance there; and on
the Hill, we have probably said as many thank-yous as we have
said, "We need more."
Ms. Bernstein. I can tell you that when Congress enacted
the NOL carry-back, 5-year, for the businesses with less than
$15 million in gross receipts, the IRS put out some very quick
advice on how to go for a quick refund on that. We put that
material into our newsletter on our Web site, so that our small
retailers could figure out how to take advantage. Because, as
was pointed out, they don't have the advisers who are right
there to say, Let's go right away and apply.
And I did get phone calls with people asking how to use it,
and we tried to help them through it. So we certainly do that.
But I do want to stress that in this economy, from the
retail side, obviously what all of our small business and large
business members need is more consumer spending. It is 70
percent of GDP. Until the consumer comes back, the economy
can't come back. And what probably is going to help the most
with that, we all know the answer: It is more employment. The
employment numbers are making people who have good jobs afraid
to go out and spend in the retail stores, in the restaurants
that are represented at this table and with your members. So we
need to give them the confidence. We need to do that through
employment. So, with that, I urge you also to support expanding
that NOL carry-back for larger than $15 million in gross
receipts.
I have talked about some not very big businesses today
because of the slim margins in the retail industry. You would
be surprised how little money it is that some of these
companies need for their NOL carry-back. But they have got a
lot of employees, and I think that we wouldn't want to see more
of those jobs cut.
And I think it is an important issue across the board, and
I urge your support.
Mr. Schrader. Thank you.
I yield back.
Chairwoman Velazquez. Ms. Dahlkemper.
Ms. Dahlkemper. Thank you, Madam Chair. And thank you. I
apologize for coming in late. I had a hearing in another
committee to go to first. So I hope I am not actually repeating
questions that were already asked.
But, Mr. Hall, as part of the Recovery Act, Congress
increased the AMT exemption to spare nearly 20 million
taxpayers from the AMT liability. And if we are unable to reach
a deal on AMT, how would it slow the recovery process?
Mr. Hall. Well, again, I think the key issue there is,
depending on estimates, the original AMT impacted about 1
percent of taxpayers. And that was 1 percent by definition of
the more wealthy taxpayers, and I think that was its intent.
Recent estimates, particularly in States like New York, New
Jersey, California, who have a higher State income tax, as many
as 8 to 10 percent of taxpayers are affected by AMT.
Ms. Dahlkemper. And how many of those are small business
owners?
Mr. Hall. Again, back to one of my original comments, the
thing that scares me most about the impact of this exemption on
small business is, all of them have to do the calculation
anyway. Even if it doesn't have a revenue impact to the
Treasury, it still causes a drain on the small business because
they are having to go through the process.
But estimates have been as many as 10 percent of small
businesses will be affected by AMT, and overall, one out of
five, 20 percent, would be affected by AMT.
And, again, the biggest concern there for me, back to your
original question: Is that is going to be tax out of their
pocket? That is money that they would be using to finance
business investment. And whether that is dollar for dollar, or
that kind of changes that their perception or their optimism on
their future, the uncertainty involved, all those things put an
optimism strain on small business, which then translates back
into lower investment.
So that is my real concern, uncertainty.
But then also having just the exemption amount being the
only thing that is changed, it is only going to capture people
in the lower-income levels, anyway, which again wasn't the
original intent of AMT to begin with.
Ms. Dahlkemper. Thank you.
Mr. Feraci, the biodiesel industry is clearly facing
challenges in the current economy. But despite these obstacles,
I know you are very aware of the producer in my district, Lake
Erie Biofuels, who has actually now changed their name. But
they are finding a way to thrive in these really tough business
conditions.
Can you maybe elaborate on the role of tax incentives in
the successes of firms such as Lake Erie Biodiesel?
Mr. Feraci. Sure.
They have done a fantastic job. And when you talk to them,
they have a business model that is utilizing some feedstock
that other providers own, and that is a huge component of the
input cost. And they make a quality fuel.
The State of Pennsylvania, as well, has done some good
things at the State level to promote biodiesel use, which is
building a market there. And we have several other biodiesel
producers in the State who are weathering what is a pretty
difficult storm for the industry right now.
All that said, the tax incentive still plays a key role
because it is performing that role in the marketplace of making
biodiesel price competitive with conventional diesel fuel. And
you have to have that, especially in the absence of the RFS
being in place right now, to have consumers purchase the fuel
and actually use it in the marketplace.
So absent that tax incentive, I think that any biodiesel
producer in the country is going to have--would have a
difficult time making ends meet.
Ms. Dahlkemper. Do you think any of them would be able to
survive in the long term if there was not the short-term tax
credit?
Mr. Feraci. I think you would see people--to the degree
that you couldn't claim the incentive, I think you would see
people start to mothball their production facilities, waiting
to see if the incentive were to come back.
But if it were to disappear for a long period of time,
that--you would see the production cease, and then you would
start to lose the production capacity in the country that we
have built up since 2004 when we put the incentive in place.
And that would be a real shame, because we do have the capacity
now.
We have commercial-scale production of low-carbon, clean-
burning diesel replacement fuel. We are going to be able to
meet the RFS standards in terms of making volume and displacing
petroleum. And if that tax incentive goes away, you are just
not going to be able to do it.
Ms. Dahlkemper. Thank you.
I yield back.
Chairwoman Velazquez. Ms. Dwyer-Owens, the committee has
conducted so many hearings regarding access to capital and the
condition, the climate, the downturn in our economy. And the
biggest issue that small businesses are facing right now is
access to credit, tightening standards by lenders, and so on.
So I am interested to hear, what are the advantages of the
franchise business model in a bad economy? And how can
franchisors help franchisees weather the storm?
Ms. Dwyer-Owens. There are numerous benefits, but just to
hit on a few of them: In franchising, you are in business for
yourself but not by yourself. So if you think about somebody
starting a business from scratch and trying to figure it out
along the way, there are going to be a lot of costly mistakes.
And if somebody becomes part of a franchise organization, a lot
of those mistakes have already been made. So, again, if you
follow the system, you should find success in a franchise
organization.
There are other things, too, like buying power. So when you
become part of a franchise organization, there are pooled
buying dollars. You know, whether you are buying vehicles--in
our business, we have a lot of vehicles out on the road, and we
get much better prices for our franchisees because we are
buying those vehicles together versus independently.
So those are two of the top things that I would focus on.
Chairwoman Velazquez. Mr. Frenz, we know how important
consumer spending and consumer confidence is to getting this
economy turned around, and we hear reports that the retail
spending has increased.
My question to you is, can you say the same with the
restaurant industry, food traffic has increased?
Mr. Frenz. I wish I could. We are currently on the--at the
location in Indiana, it is riding about--I am trying to
remember, because I ran those figures for last month last week.
And it is right around 12 percent, down, sales from last year,
the same period of time.
And in the store in Illinois, it is down 5 percent.
The price of fuel is much lower this year than last year,
so that has helped on some of the expenses. And the price of
the beef is much lower this year, and part of that is the fuel
cost.
So the bottom line is approximately the same as last year,
but the sales are currently down.
Last weekend--this last weekend, we were packed. And
whether it was the cooling-off or whatever that the people,
less people went out to the park to eat and came in and ate at
the restaurant, or less people ate on the patio at home, I
don't know.
But last weekend sales were up, and I hope with--the
government reports that the recession is over. I hope that word
gets out to the people and they back them up on it.
Thank you very much for that question.
Chairwoman Velazquez. Thank you.
Well, let me take this opportunity to thank all of you for
being here today. And when it comes to tax policies, especially
in Ways and Means, small businesses are an afterthought. So we
will be there to remind them as to the importance of this
provision when it comes to small businesses.
I intend to send a letter to Ways and Means, and especially
to the chairman, about keeping and extending and expanding some
of these provisions.
So, 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. Thank
you.
[Whereupon, at 11:15 a.m., the committee was adjourned.]
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