[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON
BONUS DEPRECIATION:
WHAT IT MEANS FOR SMALL BUSINESS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JULY 14, 2010
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 111-072
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
MARK CRITZ, Pennsylvania
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
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
MARK CRITZ, Pennsylvania
______
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
(iii)
Subcommittee on Regulations and Healthcare
KATHY DAHLKEMPER, Pennsylvania, Chairwoman
DAN LIPINSKI, Illinois LYNN WESTMORELAND, Georgia,
MELISSA BEAN, Illinois Ranking
JASON ALTMIRE, Pennsylvania STEVE KING, Iowa
JOE SESTAK, Pennsylvania VERN BUCHANAN, Florida
BOBBY BRIGHT, Alabama GLENN THOMPSON, Pennsylvania
MARK CRITZ, Pennsylvania 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
----------
OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Graves, Hon. Sam................................................. 2
WITNESSES
Sandford, Mr. Jack, President, Faulconer Construction Co.,
Charlottesville, VA. On behalf of American Road and
Transportation Builders Association............................ 3
Fesler, Mr. Daniel, CEO, Lampert Yards, St. Paul, MN. On behalf
of National Lumber and Building Materials Dealers Association.. 5
Vander Molen, Mr. Dennis, President, Vermeer MidSouth, Inc.,
Jackson, MS. On behalf of Associated Equipment Distributors.... 7
Ring, Mr. Robert, President, Meyer & Depew Company, Inc.,
Kenilworth, NJ. On behalf of Air Conditioning Contractors of
American....................................................... 9
Budington, Mr. Jon, Global Printing, Alexandria, VA. On behalf of
Printing Industries of America................................. 12
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 26
Graves, Hon. Sam................................................. 28
Sandford, Mr. Jack, President, Faulconer Construction Co.,
Charlottesville, VA. On behalf of American Road and
Transportation Builders Association............................ 30
Fesler, Mr. Daniel, CEO, Lampert Yards, St. Paul, MN. On behalf
of National Lumber and Building Materials Dealers Association.. 36
Vander Molen, Mr. Dennis, President, Vermeer MidSouth, Inc.,
Jackson, MS. On behalf of Associated Equipment Distributors.... 41
Ring, Mr. Robert, President, Meyer & Depew Company, Inc.,
Kenilworth, NJ. On behalf of Air Conditioning Contractors of
American....................................................... 51
Budington, Mr. Jon, Global Printing, Alexandria, VA. On behalf of
Printing Industries of America................................. 55
Statements for the Record:
Nye, Hon. Glenn.................................................. 59
Associated Builders and Contractors, Inc......................... 60
Association of Equipment Manufacturers........................... 61
The Associated General Contractors of America.................... 62
American Truck Dealers........................................... 67
Capitol Hill Advocates, Inc...................................... 68
North American Equipment Dealers Association..................... 70
Skyline Solar.................................................... 72
(v)
FULL COMMITTEE HEARING ON
BONUS DEPRECIATION:
WHAT IT MEANS FOR SMALL BUSINESS
----------
Wednesday, July 14, 2010
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:50 a.m., in Room
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez
[Chair of the Committee] presiding.
Present: Representatives Velazquez, Moore, Dahlkemper,
Kirkpatrick, Graves, and Bartlett.
Chairwoman Velazquez. The Committee hearing is called to
order.
Today's hearing comes at a critical time for the U.S.
economy. June marked the sixth month in a row that private
sector jobs increased. Also, GDP has risen over three straight
quarters after shrinking for six consecutive quarters. Despite
these positive signs, unemployment remains unacceptably high.
Small businesses will be critical to putting Americans back
to work. With business activity picking up, we need to continue
finding ways to promote entrepreneurship and investment. Last
month, the House passed legislation aimed at steering tax
relief to small businesses and promoting the flow of capital to
our Nation's entrepreneurs. The Senate is expected to consider
its own small business jobs bill shortly.
As Congress completes a final package, there will be a lot
of debate on which policies will best create jobs. One of those
issues will be extending bonus depreciation. The Senate bill
contains an extension of the 50 percent bonus depreciation tax
deduction, while the House version does not.
Bonus depreciation allows a business to take a 50 percent
deduction for investments in new manufacturing equipment,
office equipment, and other capital expenditures. This policy
lapsed at the end of 2009.
Today's hearing will focus on the impact of bonus
depreciation on small businesses. We all know that bonus
depreciation can help boost economic activity. However, it is
also important to recognize what it means for smaller firms.
The witnesses appearing today are small businesses in a
range of sectors. They will offer insight on how bonus
depreciation affects them and their industries.
To many of the businesses here, bonus depreciation has an
enormous impact. It increases cash flow and encourages
investment while spurring expansion. Bonus depreciation also
yields indirect economic benefits for small businesses. While
small firms may not always purchase million-dollar machines,
they see new opportunities when corporations make investments.
Small businesses often sell, manufacture, ship or service big-
ticket items that large companies purchase using bonus
depreciation.
This is the kind of economic activity we need to foster
widespread job creation. As noted in the 2010 Economic Report
of the President, a true recovery from the current recession
will be driven by business investment. This just underscores
why bonus depreciation is necessary and why it has generated
$10 billion to $20 billion in purchases while helping sustain
or create between 100,000 to 200,000 jobs.
Today's hearing will give Committee members the chance to
consider all of these benefits. It will provide the perspective
of small businesses and what bonus depreciation means for their
industries.
I would like to thank today's witnesses for taking time out
of your busy schedules to offer your testimony at this hearing.
Your testimony will be an invaluable part of the process as we
move tax legislation with the ultimate goal of creating more
jobs.
I will now yield to the ranking member for his opening
statement.
[The information is included in the appendix.]
Mr. Graves. Thank you, Madam Chair, and thank you for
holding this hearing on bonus depreciation. A special thanks to
all of our witnesses for being here. I know many of you
traveled a long way, and I appreciate you taking time away from
your companies to be with us.
Bonus depreciation is an important tax incentive for
businesses. It helps owners more quickly recover the costs of
qualified purchases, freeing up capital to invest in their
companies. What is not helpful, however, is Congress' pattern
of temporarily extending or not extending tax provisions. This
indefinite situation makes it extremely difficult for
businesses, especially small businesses, to plan for the
future.
Making things more difficult for small businesses is the
atmosphere of uncertainty caused by Washington's antibusiness
agenda. New taxes, mandates, and regulations and countless new
laws, including the health care law, threaten to strangle our
Nation's entrepreneurs. More taxes are looming, thanks to the
proposed climate change legislation and the financial
regulatory reform bill, the potential expiration of the 2001
and 2003 tax relief packages, and the return of the estate tax.
A prevailing feeling of uncertainty about what lies ahead
has made a lot of employers hesitant about creating new jobs
because they aren't able to accurately predict costs and
revenues.
Washington has spent a record $3.6 trillion this year
alone. Because of runaway Federal spending on the stimulus and
countless other initiatives, the Federal deficit recently
topped $1 trillion in the first 9 months of this fiscal year.
Relying on unsustainable borrowing and spending is not going to
provide small businesses with the stability they need and may
put added pressure on interest rates and capital supplies.
Washington has a spending problem. It doesn't have a
revenue problem. We have got to curb unsustainable spending and
encourage a return to fiscal sanity. At the same time, tax
relief, including bonus depreciation, is critical. However,
these days the benefit of a temporary tax relief is far
outweighed by the coming thicket of additional taxes, mandates,
and regulations that entrepreneurs face. Instead of more
temporary extensions of important tax incentives, I think we
should make those provisions permanent as a part of a
responsible overall tax policy.
Remember, we are depending on small businesses to create
jobs, hire workers, and get our economy moving. They need
policies that encourage expansion and job growth such as lower
taxes, less government spending, and fewer unnecessary
government mandates and regulations.
Again, Madam Chairwoman, I appreciate you having this
hearing. This is a very good hearing for businesses and I look
forward to what our witnesses have to say.
[The information is included in the appendix.][2 p.m.]
Chairwoman Velazquez. Our first witness is Mr. Jack
Sanford. He is the President of Faulconer Construction Company,
headquartered in Charlottesville, Virginia. Faulconer
Construction is a multidisciplined site and road contractor
founded in 1946. Mr. Sanford is testifying on behalf of the
American Road & Transportation Builders Association, with over
5,000 members.
You will have 5 minutes to make your opening statement.
STATEMENT OF JACK SANFORD, PRESIDENT, FAULCONER CONSTRUCTION
COMPANY, CHARLOTTESVILLE, VA; ON BEHALF OF AMERICAN ROAD &
TRANSPORTATION BUILDERS ASSOCIATION
Mr. Sanford. Thank you, Madam Chairman.
Madam Chairman and members of the Committee, I am Jack
Sanford, President of Faulconer Construction Company, based in
Charlottesville, Virginia. I am here today representing the
American Road & Transportation Builders Association. I am the
third generation in my family to own and manage Faulconer. We
currently have around 260 employees, and we perform site
development and heavy highway construction primarily in
Virginia and North Carolina.
According to the latest economic census conducted by the
U.S. Bureau of the Census, there are just over 11,000 business
establishments involved in transportation construction. Most
are small businesses. More than 90 percent have less than 100
employees, and the average is less than 40. My industry is
basically made up of small businesses. The improvements we
deliver are also very important to the broad range of small
businesses to move people and products around town and
throughout the country.
It is no secret, Madam Chairman, the construction industry
has been extremely hard hit by the Nation's recent economic
difficulties. Even with the robust transportation and
infrastructure investments provided by the American Recovery
and Reinvestment Act, unemployment in our sector still exceeds
20 percent, which is more than twice the national average.
The Recovery Act's transportation investments have met
their intended goals of supporting employment and generating
economic activity. One cannot, however, overlook the concurrent
State budget difficulties and decline in private sector
construction activities that have somewhat diluted the benefits
of these investments. The Recovery Act also included a critical
1-year extension of the 50 percent depreciation bonus enacted
in 2008. ARTBA member firms have demonstrated how this
provision allowed firms to strengthen their operations and also
to boost the overall economy.
The General Contractors Association of New York reports one
transportation construction company chose to purchase $10
million of heavy construction equipment in 2009 because of the
tax benefits coming from bonus depreciation. Another smaller
New York firm purchased two pieces of equipment in 2009 from
their local Caterpillar dealer, and cited bonus depreciation
provisions as the reason.
The Virginia Transportation Construction Alliance, the
statewide industry association to which my company belongs,
reports a bridge-building contract to purchase a $1.1 million
crane because of the combination of low interest rates and
bonus depreciation that was in effect. A second Virginia
construction firm reports it purchased nearly $650,000 of
equipment in 2008 and 2009 because of the tax benefits.
These real-world examples demonstrate the effectiveness of
the bonus depreciation for stimulating economic activity. As
such, we strongly support efforts to extend this depreciation
benefit for 2010.
One modest improvement that would broaden the use of the
depreciation bonus is extending its application to firms
leasing new equipment if they choose to purchase that
equipment. This is allowed under the current regulations for
purchase decisions made within 3 months. However, allowing a
lessee of new equipment who converts to a purchase, regardless
of the inception date of the lease, to take advantage of this
provision would greatly expand the applicability and benefits
of bonus depreciation.
Madam Chairman, earlier I mentioned the array of challenges
facing the U.S. transportation construction industry. I would
be remiss in not pointing out the most meaningful action
Congress could take for our sector and its thousands of small
businesses--the enactment of a multiyear reauthorization for
Federal highway and public transportation programs.
I recognize the focus of today's hearing is bonus
depreciation, but members need to understand the
interrelationship between this tax benefit and the lack of
action on the multiyear surface transportation bill.
As a business owner, the lack of certainty about Federal
transportation programs directly influences my decisions to
make capital purchases. This creates a situation where two
factors are working at cross purposes. The depreciation bonus
is an excellent incentive to purchase new equipment, but the
lack of a reauthorization bill is an equally powerful
disincentive. We ask that you urge the congressional leadership
of both parties to make passing an extension of the
depreciation bonus and a multiyear highway public
transportation bill a priority in 2010. Such actions would
produce immediate and long-term economic benefits.
Thank you for having me and for the opportunity to appear
before you today. I would be happy to answer any questions from
the Committee.
Chairwoman Velazquez. Thank you, Mr. Sanford.
[The statement of Mr. Sanford is included in the appendix.]
Chairwoman Velqazquez. Our next witness is Mr. Daniel
Fesler. He is the CEO of Lampert Yards in St. Paul, Minnesota.
Lampert Yards is a Midwest regional lumber company, and Mr.
Fesler is the fourth generation of his family to hold the
president's job. Mr. Fesler is testifying on behalf of the
National Lumber and Building Material Dealers Association,
which has over 6,000 members.
Welcome.
Mr. Fesler. Thank you.
STATEMENT OF DANIEL FESLER, CEO, LAMPERT YARDS, ST. PAUL, MN;
ON BEHALF OF NATIONAL LUMBER AND BUILDING MATERIALS DEALERS
ASSOCIATION
Mr. Fesler. Chairwoman Velazquez, Ranking Member Graves,
and members of the Committee, on behalf of the National Lumber
and Building Material Dealers Association, thank you for
allowing me the opportunity to testify today. I am grateful to
be here to discuss these critical business issues.
My name is Dan Fesler, and I am the chief executive officer
of Lampert Yards in St. Paul, Minnesota, and am chairman of the
National Lumber and Building Material Dealers Association.
Lampert Yards began in 1887, and it continues to be a family-
owned business with 24 operating lumber yards in five States--
Minnesota, Wisconsin, Iowa, South Dakota, and North Dakota. I
am a fourth generation, and we employ right now, currently, 395
employees.
Founded in 1917, the NLBMDA is the voice of the lumber and
building material industry. The Association has over 6,000
members, and it operates in all 50 States, operating single and
multiple lumber yards, component plants, servicing
homebuilders, contractors, consumers, and new construction,
repair and remodeling, residential and light commercial
buildings. Most of the members are family-owned businesses like
myself, and the vast majority of them are second- or third-
generation businesses.
As you know, the U.S. economy and housing market is still
in the midst of one of the greatest downturns in the history of
our Nation. As reminded almost daily in the media, the housing
crisis still plagues our economy. Our Nation's lumber and
building material dealers are on the front lines of this
crisis, and many, unfortunately, have had to permanently shut
their doors as a result.
With respect to my own company, since the decline of the
housing market, we have closed seven facilities. We have had to
lay off or terminate 418 employees. We have seen numerous
lumber yards, builders, distributors, manufacturers, go out of
business. In addition, the costs of operating our business have
significantly increased at significant rates due to government
regulation, such as IRS rules changes, loss of deductions, new
EPA regulations, and increased OSHA oversight and regulations.
Health-care costs continue to grow steadily, as they have
for the last 10 years. While costs have been up sharply, sales
have been declining over the last 4 years. We have seen our
margins and profitability erode and decline. The average lumber
yard lost $1.5 million in 2009. We have been forced to suspend
investments in new or needed equipment.
One way to help lumber and building material dealers and
many businesses out of their current economic difficulties
would be to extend the bonus depreciation for 1 year, as
recommended by President Obama in his 2011 budget. While the
HIRE Act, signed by President Obama in March, renewed the
increased section 179 expensing levels for this year, the
temporary 50 percent bonus depreciation lapsed at the end of
2009, and it has not been restored.
Bonus depreciation allows businesses to recover the costs
of certain capital expenditures more quickly than under
ordinary tax depreciation schedules. Businesses can use bonus
depreciation to immediately write off 50 percent of the cost of
depreciated property. Bringing back bonus depreciation will
encourage companies of all sizes to invest in newer, more
efficient and more environmentally friendly equipment, which
will help both large and small businesses alike.
In a fragile economic recovery, extending bonus
depreciation for capital investments will help promote
continued investment. It will stimulate sales of business
capital investments, such as machinery and equipment, by
helping customers who have buying needs and suppliers who have
products to sell. A bonus depreciation extension will help
lower the cost of such purchases at a time when economic
uncertainty and high unemployment are thwarting business
capital investment.
Bonus depreciation to me is somewhat of a misnomer. It
sounds like you are getting a bonus or a greater benefit when,
in actuality, what it does for us is it has depreciation
matched to the true life cycle of the product. For Lampert's,
we have 235 computer terminals in our operation. We have 197
printers in use in the company every day. On average, that
equipment lasts for 3 years, partially because they run 10
hours a day, 6 days a week, and also because we operate in a
harsh environment that often causes the equipment to get dirty
and dusty.
Under the normal IRS depreciation rules, these must be
written off over 5 years, which is much longer than their true
life cycle. Bonus depreciation allows us to write these off
over a faster period of time, but also in line with their true
life cycle. Without bonus depreciation, we hold and use
equipment longer, and we delay the cost of investment in newer
and better equipment. Giving a company the ability to write
these things off in a more timely manner would be much more
beneficial.
Taking all of this data and support into account for bonus
depreciation, we certainly hope the House will seriously
consider passing a bonus depreciation extension, which we know
will help our economy to get back on track.
The NLBMDA appreciates the opportunity to testify on this
critical issue. We look forward to working with the Committee
and Congress on this and on other steps that will help us
emerge from the current crisis.
I will be glad to answer any questions.
Chairwoman Velazquez. Thank you.
[The statement of Mr. Fesler is included in the appendix.]
Chairwoman Velazquez. The chair recognizes the ranking
member.
Mr. Graves. Thanks, Madam Chair.
Madam Chair, I am pleased to introduce Dennis Vander Molen,
who is the president of Vermeer MidSouth, a full-service
equipment dealer based in Jackson, Mississippi, which
specializes in sales, leasing, training, and in the servicing
of Vermeer horizontal drilling machines, rock trenchers and
trench compactors.
Mr. Vander Molen is the 2010 chairman of the Associated
Equipment Distributors. Born in Iowa, Mr. Vander Molen has been
with the Vermeer company for his entire career, working his way
up through the company in service, engineering and sales. In
1987, he left Vermeer to co-found Vermeer MidSouth, which is a
distributor. The company has grown to seven locations. It
serves four States and employs 60 people.
Thanks for being here, and I appreciate your coming all
this way.
STATEMENT OF DENNIS VANDER MOLEN, PRESIDENT, VERMEER MIDSOUTH,
INC., JACKSON, MS; ON BEHALF OF ASSOCIATED EQUIPMENT
DISTRIBUTORS
Mr. Vander Molen. Good afternoon, Chairwoman Velazquez and
Ranking Member Graves. Thank you for that introduction. It is
my pleasure to appear before you today both as a small business
owner and in my capacity as the 2010 chairman of Associated
Equipment Distributors.
AED is an international trade association, representing
independent, authorized construction mining, forestry and
agricultural equipment dealers throughout the country and
around the world.
As you have heard, I am the president and general manager
of Vermeer MidSouth, a family-owned company since 1987, and our
company does employ a good many people throughout that four-
State area of Mississippi, Arkansas, Louisiana, and Tennessee.
I appreciate the opportunity to be with you today to
discuss how installing the depreciation bonus will help small
companies like mine recover from the great recession. I would
like to use my time to highlight three key areas.
First, the construction equipment industry has been
affected as much as any other in this economic downturn. For us
this recession has been nothing short of a depression. A study
conducted last year by Global Insight for AED and the
Association of Equipment Manufacturers painted a grim picture.
The study found that, from 2007 to 2009, spending on
construction equipment fell 50 percent; and that, over the last
3 years, manufacturers, distributors and maintenance providers
shed 257,000 jobs, representing a stunning 37 percent of the
industry workforce.
The effects of the equipment industry downturn have been
felt well beyond the dealer yards and manufacturing plants.
Global Insight estimated that the equipment industry depression
has cost an additional 274,000 jobs in the broader economy. In
total, the downturn in the equipment industry has cost 550,000
jobs nationwide since 2006.
My second point is that the depreciation bonus is a
powerful and proven economic stimulus tool. It was first
employed in 2002 when the Nation was in the grips of another
milder economic downturn. A survey of National Utility
Contractors Association members, conducted by AED in 2003,
found that 67 percent of the contractors who were aware of the
loss said that it prompted them and their companies to invest
in new equipment in the prior 12 months.
Because of the success of the depreciation bonus in the
early part of the decade, Congress included it in the 2008
Economic Stimulus Act. A survey of NUCA members conducted in
2008 found that, despite the fact that the depreciation bonus
had been only in effect for just a few months, approximately
one-third of survey respondents said that they had already
purchased equipment in the first half of 2008 to take advantage
of that law.
More recently, a survey of our own members, conducted this
spring, found that the capital investment incentives in the ESA
and in the American Recovery and Reinvestment Act had done more
to stimulate new equipment sales than even the ARRA's
additional infrastructure movement.
In that same survey, equipment distributors were asked to
rate the beneficial impact of the various policy solutions our
industry is advocating to help the industry recover. The only
priorities that ranked higher than reinstating the depreciation
bonus were reenacting the multiyear highway and water
infrastructure reauthorization bills and then passing
legislation to free up credit for small businesses.
While the depreciation bonus alone would be helpful,
simultaneous congressional action in all of these areas would
be mutually reinforcing. Multiyear highway and water
infrastructure investment bills would address critical national
needs while giving contractors a reason to start buying
equipment again. The depreciation bonus would give them an
additional incentive to do so, and the small business credit
legislation would ensure that they have the means to make a
purchase.
My third and final point is that the benefits of the
depreciation bonus will be felt way beyond the equipment
industry. Distributors and contractors who buy equipment and
take advantage of the depreciation bonus will get a tax cut
this year, which will free up resources and allow them to take
additional investments and hire new workers.
Because the depreciation bonus applies only to new
equipment, the machines contractors buy will be cleaner and
more fuel-efficient than the ones that they owned previously.
Upstream, manufacturing plants idled by the recession will
again be receiving orders, which will put laid-off workers back
to work. Large and small companies that supply equipment
manufacturers will see business pick up as well.
The scenario will be repeated in all sectors, which is why
more than 80 organizations representing a broad cross-section
of the economy are working with AED in an ad hoc coalition and
are urging Congress to reinstate the depreciation bonus.
To sum it up, recent government data shows that the
national economic situation is very volatile and underscores
the importance of additional recovery legislation. Whatever the
true state of the U.S. economy is, the depreciation bonus will
help. If things are going better, the depreciation bonus will
strengthen the recovery and help it take hold. If the economy
is once again deteriorating, the depreciation bonus will
encourage business purchasing, thereby stimulating economic
activity and, hopefully, helping hold away another economic
downturn.
Thank you for allowing me the opportunity to share with
you, and I would be glad to answer any questions.
Chairwoman Velazquez. Thank you, Mr. Vander Molen.
[The statement of Mr. Vander Molen is included in the
appendix.]
Chairwoman Velazquez. Our next witness is Mr. Robert Ring.
He is the president of Meyer & Depew Company, located in
Kenilworth, New Jersey. Meyer & Depew serves the mid-Atlantic
region, and it is one of the area's leading residential and
commercial HVAC contractors. Mr. Ring is testifying on behalf
of Air Conditioning Contractors of America, which has over
4,000 members.
Welcome.
STATEMENT OF ROBERT RING, PRESIDENT, MEYER & DEPEW COMPANY,
INC., KENILWORTH, NJ; ON BEHALF OF AIR CONDITIONING CONTRACTORS
OF AMERICA
Mr. Ring. Thank you very much.
Chairwoman Velazquez, Ranking Member Graves, Dr. Bartlett,
and Mr. Moore, thank you for allowing me this opportunity to
provide testimony on behalf of the small business service
contractors of the heating, ventilation, air conditioning, and
refrigeration, or HVACR, industry.
My name is Bobby Ring, and I am the president of Meyer &
Depew Company, a 57-year-old family-owned business, located in
central New Jersey. Meyer & Depew offers maintenance, repair
and installation services for heating, cooling and indoor air
quality equipment to residential and commercial clients
throughout central and northern New Jersey.
Like a lot of family small businesses in the HVACR
industry, I began working there when my father hired me, back
in 1981. Today, I am the majority owner. Incidentally, my 20-
year-old son has recently joined our firm, and may one day
become the third generation to own and operate our business.
I come before you this afternoon as a proud member of the
Air Conditioning Contractors of America, ACCA, where I serve as
Secretary of the Board of Directors and as chairman of the
Government Relations Committee. Every day, more than 4,000 ACCA
member companies across the Nation help homeowners, small
business owners, and property managers realize the comfort,
convenience and cost benefits of energy-efficient HVACR
equipment. Eighty-four percent of ACCA members have fewer than
50 employees, and 60 percent have fewer than 20 employees, so
we truly are representative of small business.
It is an honor to present testimony before you today, and I
want to commend the Committee for its leadership and its
efforts to protect the interests of the great economic engine
known as America's small businesses.
My comments today will focus on the small business
investment incentives permitted through Internal Revenue Code
section 179 and on bonus depreciation. I can attest that these
tax incentives not only benefit the small businesses of the
HVACR industry, but they also have a ripple effect through the
economy to all of the businesses that we purchase equipment and
goods from. I hope that my testimony will influence future
policy decisions that further assist our economic recovery.
As you are well aware, small businesses of all types
struggle with cash-flow issues, access to credit and dealing
with the various tax and regulatory burdens from both the
Federal and State as well as from local governments. In a very
real way, expensing allowances and the ability to use bonus
depreciation help a small business like mine by lowering tax
liability, freeing up more money to hire new employees and
encouraging the purchase of new equipment, such as trucks,
computers, office machinery, and furniture. Knowing that I can
write off half of the purchase price of a qualified vehicle or
office equipment in the year I place it into service gives me
the economic justification to invest in my company. Robust
section 179 expensing allowances and bonus depreciation help
small companies like mine to get off the sidelines and spend
money.
On several occasions since 2002, Congress has approved
short-term expansions of section 179 expensing and bonus
depreciation as a way to stimulate the economy. In those years,
our company has used these incentives to purchase new trucks
for our service technicians and computers and equipment for our
office staff. The stimulus bill extended the expansion of the
section 179 expensing limits and the ability to write off half
of selected investments through bonus depreciation in 2009. The
passage of the HIRE Act in March of this year extended the
section 179 expensing limits retroactively for 2010. Now
Congress must take the next step and extend bonus depreciation,
and it must do so quickly.
Small business needs certainty in today's uncertain times.
I have to tell you the uncertainty of not knowing where we are
going, what the law is going to be, what the tax regulations
are going to be, really puts a lot of us in the position where
we don't know what to do, and that stifles small business and
economic growth. A business owner will not spend precious
financial resources in the hopes that the bonus depreciation
will pass someday and be applied retroactively.
HVACR contractors are not the only small business group
calling for bonus depreciation. In April, ACCA was part of a
coalition of 82 small businesses that urged Congress to
reinstate bonus depreciation. Delaying the reinstatement now
during this fragile economic recovery sends a negative signal
to small businesses, especially when surveys have shown that
bonus depreciation prompts small businesses to take advantage
of investment opportunities.
In order to increase the economic benefits of section 179,
I would also like to recommend that, as Congress considers an
extension of bonus depreciation, that it also expands the
qualifying property under section 179. Under depreciation
rules, property with a recovery schedule of more than 20 years,
known as section 1250 property, does not qualify for section
179 expensing or bonus depreciation. In fact, HVACR equipment
must be depreciated over 39-1/2 years, which, according to the
American Society of Heating, Refrigeration and Air Conditioning
Engineers, is more than twice the expected life of properly
installed and maintained HVACR systems.
ACCA applauds Chairwoman Velazquez for the introduction of
H.R. 4841, the Small Business Tax Relief and Job Growth Act of
2010. H.R. 4841 would remedy this problem by expanding the
definition of a "qualified structural improvement" under
section 179 property made in 2010 and 2011 to include any
improvement to a building or its structural components,
including improvements to the roof, drainage, plumbing,
electrical components, heating, ventilating, air conditioning,
insulation, and fire protection, intended to improve or to make
such a building ready for use in a trade or business.
Not only would this change in the Tax Code help many small
firms that are located in commercial properties, like
professional townhouse suites, doctors' offices and strip
malls, to be able to afford energy-saving HVACR retrofits, but
it would also allow these improvements to qualify for bonus
depreciation. Without any incentive to replace aging HVACR
equipment, small businesses will continue to maintain and
repair old, inefficient furnaces, air conditioners, chillers,
and boilers.
According to the 2005 Residential Energy Consumption
Survey, since 1990 only 30 percent of the commercial buildings
have had their main heating equipment replaced, and only 37
percent have had their main cooling equipment replaced. Some
may argue that expanding the definition of section 179
qualified property would cost too much in lost revenue, but
those losses would be more than made up for in increased
economic activity, lower utility costs and fewer greenhouse gas
emissions, as well as in job creation.
My fellow ACCA members and I are very concerned about the
status of our Nation's economic recovery. Economic indicators
point in different directions over the next few months and
years. America's small business needs to see positive signs
from Washington to allay fears that a double-dip recession may
be occurring. The passage of bonus depreciation will send the
right message that Congress is interested in helping promote
job creation and a revitalization of the economy.
With that, I conclude my comments, and I would be happy to
answer any questions you may have. Thank you again for giving
me this opportunity to provide this testimony.
Chairwoman Velazquez. Thank you, Mr. Ring.
[The statement of Mr. Ring is included in the appendix.]
Chairwoman Velazquez. Our next witness is Mr. Jon
Budington. He is the CEO of Global Printing in Alexandria,
Virginia. Global Printing provides printing distribution and
marketing support services to organizations. Mr. Budington is
here to testify on behalf of the Printing Industries of
America. PIA is the world's largest graphic arts trade
association, representing an industry with approximately 1
million employees.
STATEMENT OF JON BUDINGTON, CEO, GLOBAL PRINTING, ALEXANDRIA,
VA; ON BEHALF OF PRINTING INDUSTRIES OF AMERICA
Mr. Budington. Chairwoman Velazquez, Ranking Member Graves,
members of the Committee, on behalf of Printing Industries of
America, I want to thank you for allowing me to testify today.
My name is Jon Budington, and I am president now and CEO of
Global Printing, a manufacturing and marketing services firm
based in Alexandria, Virginia.
Global first opened its doors in 1978. Over the past 30
years, it has grown to employ over 90 employees, and it
generates revenue annually of around $11 million.
In talking a little bit about the printing industry at the
macro level, printing is one of America's oldest and largest
manufacturing industries. At the start of 2008, the industry
employed 1 million workers in a uniquely domestic industry.
Almost all print consumed in America is produced in America,
providing jobs in every State and district. In total, printing
comprises approximately 1.2 percent of total annual economic
output in the United States.
Unfortunately, the recent recession has shrunk print's
economic footprints by historic proportions. The number of U.S.
printing plants declined 8 percent in 2008. Total shipments,
not adjusted for price changes, in 2009 were down 15.6 percent
industry-wide, and employment declined by 6.9 percent.
Lower print demand relative to supply caused printing
prices to decline by 6.5 percent in 2009. Printers' profits
have declined by approximately half over the past 2 years.
Access to capital remains an issue for the printing industry
with almost one in four printers reporting problems in
obtaining credit in the first quarter of 2010.
I can attest to that myself. I became CEO of Global
Printing during the 2001 recession. In that year, Global lost
30 percent of its revenue, and we were bleeding cash terribly.
We understood in order to remain viable in today's online
world, our print-focused business model needed to change. We
invested heavily in new technology that integrated print with
the Internet. This new technology created new jobs and allowed
Global to provide cutting-edge, creative ideas to our
established print clients. Those investments made in 2001 are
what basically got us through that recession.
In the current economic climate, many businesses have
closed or slashed payroll. At Global, in seeing this coming, we
took proactive measures to suspend 401(k) contributions,
administer across-the-board pay cuts and initiate a hiring
freeze. We avoided using our line of credit for fear that it
may not be renewed, and opted not to seek any equipment
financing. All of these very difficult business decisions
allowed Global to weather the current economic storm. However,
in order to continue to grow--and as you know, all small
businesses must grow--investments must be made, and incentives
for those investments are necessary.
Bonus depreciation is a winning proposition that our Nation
needs for economic recovery. By allowing companies like Global
to depreciate 50 percent of capital investments in the coming
tax year, Congress reduces the upfront costs of those
investments. As a result, bonus depreciation leaves Global with
more cash resources for both more investments and new jobs.
The benefits of bonus depreciation aren't theoretical.
Multiple studies from academic experts, private analysts, and
the Treasury Department found that past cycles of bonus
depreciation, from 2002 to 2004, drove substantial economic
growth, with up to $9 of GDP growth for every $1 of tax
benefit. More importantly, during the same period, bonus
depreciation helped create or save between 100,000 and 200,000
jobs.
At Global, our efforts to preserve capital and find new
business has paid off. By making new investments and changing
our business model yet again, Global has more than doubled its
revenues and added 30 employees from the 2001-2008 period. This
past January, I hired 15 new employees from a competing printer
who decided to close its doors, and, as a result, it has
expanded our ability in looking at new clients and new markets.
Global is uniquely poised for significant growth in 2011,
but this will only become a reality if the company can make
significant equipment investments to produce this new revenue.
The investment in new technology will add over $500,000 of debt
to our balance sheet, and I will say that is a very
conservative investment, because small printing companies like
mine can make seven-figure investments on a regular basis.
Accelerated depreciation is a major cash-flow incentive for
Global to make these investments, and I therefore urge Congress
to extend bonus depreciation, section 179 expensing and other
pro-growth incentives to help companies like ours weather the
storm.
Again, thank you for holding today's hearing and for
inviting me to testify, and I look forward to answering any
questions you may have.
Chairwoman Velazquez. Thank you, Mr. Budington.
[The statement of Mr. Budington is included in the
appendix.]
Chairwoman Velazquez. Mr. Sanford, last year businesses had
access to increased section 179 expensing and bonus
depreciation. The Committee has heard many times how important
section 179 expensing limits are for small firms.
Can you explain how the two provisions work together and
how bonus depreciation provides an additional benefit for small
firms? There might be some Members of Congress who do not see
the direct benefit of bonus depreciation for small firms. Can
you please explain that?
Mr. Sanford. Yes, ma'am.
Well, as you have heard from almost every member, we are in
a distressed market, and the bonus depreciation extension would
enable us to invest into equipment--new, greener, cleaner, more
efficient equipment. Getting that ability to have that
accelerated depreciation means we will have other revenues to
reinvest in the company in other ways, most especially in the
area of jobs. If we can grow our business, grow our revenue, it
flows to all capacities of the business.
I don't know if I answered your question.
Chairwoman Velazquez. Yes, you did.
Mr. Ring, small firms benefit not only as purchasers of
business equipment but also indirectly as manufacturers and
distributors or as sellers of such investments.
Can you explain how small firms benefit from larger
companies making investment that might be spurred by bonus
depreciation?
Mr. Ring. Absolutely. I am very glad that you asked me
that.
Our customers, our commercial customers, have HVACR
equipment on the roofs of their buildings or serving their
buildings that, right now, is required to be depreciated over
39-1/2 years. That is a very old standard that may have applied
to how heating systems were manufactured and installed many
years ago when that law was first written. Right now, the
average life expectancy of a commercial package heating and
cooling unit is about 15 years. There is absolutely no tax
incentive whatsoever for anyone to replace a piece of equipment
that is not 39-1/2 years old.
We have suggested--and our association has worked with
Members of Congress in the past, including yourself--to help
introduce a piece of legislation we call the Cool and Efficient
Buildings Act that would encourage commercial property owners
to replace outdated HVACR equipment with high-efficiency
equipment and entitle them to an accelerated depreciation. This
would have a tremendous impact on our global warming potential,
our carbon footprint. It would meet many policy objectives of
this and many other administrations of reducing our energy
consumption. At the same time, it would stimulate the economy.
We currently have a $1,500 Federal tax credit in place for
our residential clients that is resulting in increased sales
for us right now. Any type of incentive to our commercial
clients to replace systems through an accelerated depreciation
would be phenomenal to our business. Our residential small
business is up 8 percent right now. Our commercial business is
down 30 percent.
Chairwoman Velazquez. And that is related to the $1,500?
Mr. Ring. Absolutely.
Chairwoman Velazquez. Thank you.
Mr. Budington, one issue facing small firms--and you
mentioned it--is the lack of affordable credit. If a firm is
going to spend $300,000, for example, on a piece of equipment,
they would likely need to arrange for some sort of financing.
So how has the lack of credit affected you or those in your
industry from taking advantage of bonus depreciation?
Mr. Budington. That is an excellent question. I am glad you
asked.
It is interesting because we missed out on the boat to use
the credit previously because our business cycle--we spent a
great deal of time, when this recession first started, aligning
our business, making sure our costs were in line, getting
everybody on board to, you know, like I said, take pay cuts and
the 401(k) contribution cuts. We were not in a position to be
thinking about investing in the company at that point. After
putting all those pieces in place and realigning our business
with what our clients needed, we suddenly found ourselves ready
to grow, but then realized that some of the credits had
expired.
So what is interesting is, when we look at how this bill is
put together, the time frame that we give companies the
availability to use it might not always sync up with our time
frame of how and when we can use it. All companies need to be,
in this case, profitable right now, and we need to watch our
covenants very closely, which we have, and we are in a position
where we can begin to borrow money again; but obviously, the
last year and a half was a very difficult time for anybody in
the printing industry to be going to the bank and financing
equipment.
Chairwoman Velazquez. Okay. Thank you, Mr. Budington.
Mr. Fesler, to claim bonus depreciation, a business must
have not only purchased equipment but must also place it in
service by the end of the year.
Have you seen any instances where a company has lost the
tax benefit because of prolonged production schedules or other
delays?
Mr. Fesler. That is a good question, Madam Chairman.
I think for us there is availability of product to
purchase, so I don't really see delays. But we often
consciously make the decision not to purchase equipment if it
is not affordable to us, and in a declining industry and
business where profits and margins are shrinking, it is
difficult to spend money for such things, but we do have to
replace a certain amount of our equipment every year.
We are going to replace 30 computers this year. A desktop
computer is $800, but a blade server is $20,000. We will spend
$200,000 in computer equipment. We will spend $600,000 in
trucks, but because of the cost of these things, we will
replace less this year than we have in the last 10 years. Bonus
depreciation would lessen that cost over a shorter period of
time and allow us to purchase more.
Chairwoman Velazquez. Okay.
I will come back for a second round of questions, and I
will have my first question addressed to Mr. Vander Molen.
I will recognize the ranking member.
Mr. Graves. This question is for everybody.
One of the things that we keep hearing in the Committee is
employers are telling us how reluctant they are to expand their
companies or to hire workers until there is some sort of
certainty out there about what the future holds. I am
specifically interested if you have your own company or if you
want to speak on behalf of your association.
Have you frozen your business decisions at this point
because of the uncertainty? If you could, also give me one
thing or two things, government policies, that have you more
concerned about the economic recovery than anything else.
We will start with Mr. Budington.
Mr. Budington. I have been with the same company straight
out of college. I started here in customer service. I was hired
during a recession. It had some times of prosperity. I took
over as CEO during a recession, and now I am the principal
majority owner in a new recession. So my experience is every
recession is different.
It is very hard to put this recession into perspective, but
this one seems very different. It seems longer. It seems to
affect a broader group of our clients that we depend on
grabbing our revenue from. I will say that in 2001, I was
really focused on changing the business model and how we would
invest to make the business model work to that new model. In
this recession, we have a moving surface that we are standing
on.
I mean, in the economy, there is a lot of uncertainty. I
mean, if I look at Yahoo! Finance today, there are going to be
ten different opinions on where the Dow is going to go and how
the economy is going to improve or fall off a cliff. For a
business owner, I do not understand what the answer is to where
we are going, and with that level of uncertainty, it is hard
for me to make decisions. Every piece of debt that I bring into
my company, I personally guarantee with my home, with my
children's college funds, and with my 401(k).
Having a lack of certainty in the business climate is
something that I am used to, but from the government climate,
from where I see the government's approach, there is a lot of
pressure on taxation. There is a lot of pressure on the rules
of how this would work. I mean my investments are under
$800,000 for section 179. Well, what if they go over that?
Depreciation gets extended, but I don't have a long-term plan
on how that depreciation should work in my business and an
understanding of how some assets that we purchase in this new
economy are going to change much faster than the depreciation
schedules allow us to, and we seem to defer those decisions
down the road. That uncertainty, for me, complicates the
uncertainty that I am already navigating through in this
economy.
Mr. Graves. Mr. Ring.
Mr. Ring. Well, Mr. Graves, I would begin by saying I agree
100 percent with your opening remark that we don't have a tax
problem. We do have a spending problem.
Like all of us up here, as small businesses, I believe the
best thing that government can do for any of us is to curb
government spending and to allow us all to keep more of our own
money to spend in the economy. A tax credit to me for hiring a
new employee is not going to prompt me to hire a new employee.
Increased demand for my goods and services will prompt me to
hire employees. That is the only thing that will prompt me to
hire employees.
I have postponed the purchase of vehicles recently because
of the downturn in the economy and the uncertainty as to how
many employees I am going to have. One of the reasons, you
know, I postponed that decision is I reduced the number of
employees, and I parked vehicles that would normally have been
used.
I have a lot of uncertainty about health care. Every day, I
read something else about another provision of the health-care
law that seems to be an unknown to us before it is coming.
I am worried about taxes. I am very worried about estate
taxes. In the death of George Steinbrenner, they pointed out
today that the family there saved $500 million because he died
this year instead of next year or last year. I think that is a
horrible thing for anyone who owns his own business to have to
try and predict how the business will continue in the event of
the majority shareholder's death. What will have to be done?
Will the business have to be sold in order to pay the estate
taxes in 9 months or else? Perhaps that is something that
Congress could look at and give us some flexibility in how the
estate taxes are paid. I still have a hard time understanding
how Congress believes or the government believes that death is
a taxable event.
Like Mr. Budington, I have a lack of confidence right now
in what the government is doing to help small business and help
restore confidence in what is going on. I read, increasingly,
of a lot of taxpayer/voter lack of confidence in the
government's ability to get us out of this. When people read
that, it just reinforces the thought process that they
shouldn't be spending money right now and that maybe they
should hang onto what they have got.
I read something yesterday, excuse me, last week that said
that our stock market performance is mirroring exactly what it
did after the Great Depression when we double-dipped, and I
actually thought about should I take my money out of my 401(k)
and put it into a more secure investment than leaving it in the
stock market, which is exactly what we shouldn't be thinking or
doing, but that is what we are hearing.
Mr. Graves. Mr. Vander Molen.
Mr. Vander Molen. Yes, thank you for the question and for
the opportunity to give you some feedback.
I can echo what these other two guys have said, with the
addition that, you know, fear is a terrible thing. You know,
fear can strangle any kind of movement, whether it is
economically or whether we walk out of the front door in the
morning, and it is with uncertainty that people are not going
to invest.
That is one of the things that--I think what we can do is
look at how do we develop a culture that says you know what, I
am going to invest and I can expect some kind of return on that
investment. The equipment is going to do a task. It is going to
be productive, and there is value there. But when fear makes us
do things, like not buy trucks or not buy equipment or not add
to facilities, whatever that might be, or add jobs, add to
people's work at our places of business, then you know we can't
go forward. Small business has got a strangle on us if we
operate by fear. We need some confidence out here that there
are things that can happen for the greater good, and this bonus
depreciation is one piece of it.
Bonus depreciation, all in itself, will not do us any good.
People still have to make money. Businesses have to make money
so that they can reinvest into equipment and things like that.
So that is why we really need that bonus depreciation along
with some other things like--whether it be highway bills or
water infrastructure, you know, some small business incentives
that can help that.
You know, I think, too, that bonus depreciation can help
with a tangible product. I mean it is something that you can
see. Things are happening.You know, you can put your fingers on
it. You know, if we spend money on things that you can't see,
that doesn't give anybody any confidence that we are going in
the right direction.
Mr. Graves. Mr. Fesler.
Mr. Fesler. Thank you. That is a great question.
For us, we are in the housing industry, and people want
houses. People are trying to get them. People work hard to get
them. The largest holdup to having people move forward at that
today is the availability of credit. The government used to
fund, roughly, 10 to 15 percent of the houses that were built,
through Fannie Mae, Freddie Mac and a few others. Today, they
are 60 percent of the money that is available for housing.
The financial industry has been unwilling to step back into
that industry and to start lending heavily again. A lot of that
is due to the uncertainty of the regulations that are going to
get hammered on them, and they don't want to find themselves in
a bad place, so there is a lot of holding off on the advancing
of credit. That has more to do with the development and growth
of our business than anything else right now.
Until the financial institutions begin to release funding
for the construction business again, construction is going to
move very slowly. There is a pent-up demand for it. People want
it, but they can't afford it. That is going to be directly
related to the job creation we have. We will grow jobs as the
economy recovers and as people begin to move into housing. We
had over 800 employees. Now we have less than 400. Those jobs
will come back slowly over time.
As far as the purchasing of equipment goes, if equipment
were more affordable, either through tax incentives or other
programs, we would purchase more. We need $800,000 in trucking
equipment this year, but our banks will only support us to a
level of 600. That means we spend more money on baling wire and
duct tape, and that is not a very effective way to manage a
business, but that is the environment we are in. It is "hang on
and make things work."
Mr. Graves. Mr. Sanford.
Mr. Sanford. Thank you.
It is unusual. I have never seen these other four
gentlemen, but I believe we are living under the same tent. Our
anxieties about the economy and about the market going forward
and about the uncertainty in the marketplace is just amazing to
me, especially in my business where we take chunks in assets in
millions of dollars' worth of equipment when we make purchases.
Without the enactment of a multiyear reauthorization for
the Federal highway transportation bill extending into the FAA
programs and for transit programs, which we do work in all of
those areas, there is just too much uncertainty, as Mr.
Budington said, to risk the personal guarantee of your home and
your family, as we do day-to-day, to make investments in
equipment. Especially without the bonus depreciation to help in
the small way that it would help for us, it is just making
those decisions--they are almost off the table.
I want to mention the access to credit. Access to credit
now seems tougher in our industry as we go forward in trying to
finance jobs than it has ever been. I am watching, daily,
friends and colleagues in our industry go out of business, good
businesses that have been in business for 30 and 40 years,
because of just doing foolish things--trying to cash flow their
businesses by bidding in increments below their costs, feeling
that they are just going to be able to continue their business
by cash flowing because they say they have got a contract. That
is not happening. What they are doing is working themselves
directly out of business.
So that is why I mentioned in my remarks earlier the
reauthorization and depreciation. All of these things are like
one leg to the three-legged stool. They all have got to go in
conjunction with each other.
Mr. Graves. Thank you.
Chairwoman Velazquez. I know that I need to recognize the
gentleman, and I will.
Would you yield for a second?
Mr. Moore. Sure.
Chairwoman Velazquez. Mr. Sanford, where would your
industry be today if it was not for the stimulus package?
Mr. Sanford. Well, I regret to tell you, for the work I
have in Virginia, we have not received any stimulus money. We
have been fortunate that we are multidisciplined. We do airport
work, and I do have a project down at a fairly large airport.
We are working for some military contracts with the Navy and
the Marine Corps in North Carolina at some military bases. So,
to the respect that they have gotten stimulus money for that
spending, it is keeping me going right now.
Chairwoman Velazquez. But you call for the reauthorization
of a multiyear in government investment--
Mr. Sanford. And multiyear for highway projects for the
Highway Reinvestment Act.
Chairwoman Velazquez. Yes. So in a way, it is the
recognition that investment is netted coming from the
government in terms of the multiyear highway bill?
Mr. Sanford. Yes. Yes.
Chairwoman Velazquez. Mr. Moore.
Mr. Moore. Thank you.
This is a question I want to pose to any of you who care to
answer this. The theory behind bonus depreciation is to reduce
business tax liabilities so that the business will have
increased cash flow and thereby will help the business make
more investments.
In your experience, do you have an example of when your
business elected to take a bonus depreciation deduction and
such a deduction resulted in a specific investment being made
in the business? If so, could you share that with our Committee
here? Anybody.
Mr. Budington. You know, what is interesting is our
accounting firm would regularly come to us at the end of the
year to say we have a credit that is expiring, and do you have
the need to spend X number of dollars to take advantage of the
depreciation.
What is unfortunate is that making decisions on purchasing
equipment in my industry takes a long time. I travel. We learn
about things. We understand it. So I would have to say, no, we
have not used it to make a decision. What is interesting is
that, in this case that we are in now, it is time to start
investing in the company again, and it would be nice to have
the availability of this advanced depreciation.
Mr. Moore. Mr. Ring, any comments?
Mr. Ring. Yes, Mr. Moore.
We have done that in the past with regard to the purchase
of vehicles. Typically, we would like to purchase four or five
vehicles at $100,000 to $125,000 a year. Similarly, my
accountant has come to me and said that we have an opportunity
to do this if it makes sense. If this is something that you
might want to do in the next 6 months, let's do it now and take
advantage of this. We have done that.
On a somewhat related note in testimony of the benefit of
government incentives, our company last year did in the middle
of this recession spend $375,000 to put 240 solar panels on our
roof. That was in large part due to the incentives that were
offered by the Federal Government and the State of New Jersey,
and it made that a very wise business decision with a payback
of less than 5 years.
Mr. Moore. Very good.
Mr. Ring. Yes.
Mr. Moore. Does anybody else have a comment?
Mr. Vander Molen.
Mr. Vander Molen. Yes. We have used it for investment in
our rental fleet, and that enables us to utilize those dollars
somewhere else; but I would say, even more importantly, our
customers have used it, and they will make purchase decisions
prior to the end of the calendar year so that they can utilize
those tax savings and know that those sales that happened at
the end of the fiscal year, in December, were very welcomed in
our company.
Mr. Moore. Thank you, sir.
Mr. Fesler and Mr. Sanford.
Mr. Fesler. I would echo those same things.
Typically speaking, when you have either a rebate available
to you or a deduction available to you, your accounting staff
or marketing people, whoever is available or whoever is aware
of those events, come and they say, you know, this is a good
time to do this. We then look at our company. What are our
needs? We know we are going to replace so much equipment each
year, but it will cause us to accelerate on an earlier basis
the replacement of some of the equipment that will give us more
efficient equipment and that will operate better and longer.
There is also some environmental impact when you go to a more
energy-efficient product. So we will consciously make that
decision based on the availability of incentives.
Mr. Moore. Very good.
Mr. Sanford, any comments, sir?
Mr. Sanford. Just one comment.
In my remarks, I mentioned being able to reach back further
than 3 months, which would be very important in the
construction industry, to expand that window for a lessee to go
back. Sometimes we will lease equipment for 6 to 9 months on a
long-term purchase option agreement depending on the work you
have got going forward and looking forward. You feel
comfortable enough, and you have the credit availability to
take that equipment and take it down and put a mortgage on it
and purchase it. It was new equipment when you took it out. So
I think expanding that window further than the 3 months would
be very, very helpful in our industry.
Mr. Moore. Any recommendations for how long to expand?
Mr. Sanford. Well, I don't know what you all would agree
to, but 6 to 9 months would certainly help. It gets you from
one year to the next year.
Mr. Moore. Thank you, sir.
My time is just about up. I yield back, Madam Chair.
Chairwoman Velazquez. Mr. Bartlett.
Mr. Bartlett. Thank you very much.
I would just like to note, first of all, that I think there
is a fundamental difference between Highway Trust Fund money
and stimulus money.
Highway Trust Fund money is money that was taken from the
taxpayer through taxes on the fuel you used and put in trust
for you to be available when you needed to build roads and
bridges. The stimulus money was either printed or it was
borrowed from our kids. It was ultimately borrowed from our
kids. If you borrowed it from some sheikh or Bank of Russia or
China or someplace, our kids have to pay it back, right? So we
have borrowed it from our kids.
I think there is a fundamental difference between those two
pots of money. Am I wrong?
Mr. Sanford. I hope I didn't misspeak. I understand what
you are saying.
Mr. Bartlett. Okay. Thank you, sir.
You know, if you had a bonus depreciation of 1 year, that
is the same thing as expensing it the year you bought it, isn't
it?
Mr. Sanford. Correct.
Mr. Bartlett. Okay. You know, when I sit back and look at
this thing, I am wondering, like the old farmer said, if the
juice is worth the squeezing.
What we have are these very complex depreciation schedules
which cost you a lot of money for bookkeeping. It costs the
government a lot of money to make sure you have kept your books
in accordance with the law, and at the end of the day, it is
exactly the same as if you had expensing the year you bought
it, is it not? You get it all back in terms of depreciation and
salvage value, and the government gets that much less in taxes
because you ultimately got it all back except they spread it
out over a number of years. When you first start, there is a
temporary benefit to the government because the government gets
a bit more taxes until you depreciate the thing, but at the end
of the day, if you are looking at it over a lifetime or over a
decade, it comes out exactly the same.
I am wondering why we do this, because I doubt that the
increased cost of capital to the government, the benefit of
that, comes anywhere close to the bookkeeping cost to the
government, to say nothing of the bookkeeping cost that you
have.
I was in the small business world in a former life, and I
know those stupid depreciation schedules and how difficult they
are to maintain--different for this and different for that. Why
don't we just expense things the year we bought them? Because
at the end of the day, it comes out exactly the same for both
the taxpayer and the government.
Why do we want to pay in ourselves for these depreciation
schedules? Am I missing something?
Mr. Budington. Amen.
Mr. Bartlett. Everybody is a loser here. I understand win-
win. I do not understand lose-lose, and everybody loses here. I
think the taxpayer loses and the government loses. The taxpayer
loses in two ways. He loses because his government is less
efficient with all of the bookkeeping they have to do to make
sure you have followed these silly laws, and you have huge
investments and all the bookkeeping to keep track of and the
stuff in it. At the end of the day, it comes out exactly the
same.
Can you help me to understand why we do this?
Chairwoman Velazquez. Will the gentleman yield?
Mr. Bartlett. Yes.
Chairwoman Velazquez. So it is a great argument and quite
convincing. Why is it that during the majority Republican-
controlled Congress, you were not able to make that argument?
Mr. Bartlett. I did make that argument, but wisdom doesn't
always prevail. And you may have noted that I broke with the
prior administration very early in their administration. They
spent too much, and they had too many regulations. I broke with
them very early.
Well, I just want to understand why we do this, because we
are just hurting--everybody loses when we do this.
Yes, sir. Why do you think we do it?
Mr. Ring. Obviously, the government saw some benefit. But I
have to say, if we knew that was up for discussion, we would
have talked about that today. We would have probably asked for
that. I guess the government--I would imagine the government is
concerned that businesses would go out and buy stuff to avoid
paying taxes. Imagine that.
Mr. Bartlett. But that is only a very temporary thing. At
the end of the day, you expense everything. With the salvage
value and the expensing, you get it all back, right? The
government loses all the taxes at the end of the day because
you have depreciated the thing, right? So it is exactly the
same as if you had expensed it the year you bought it. So I do
not understand why we are doing this to ourselves.
Mr. Sanford. Well, I think, as counsel mentioned before the
hearing started, it has been since 1986 since the whole
depreciation schedule en masse has even been reviewed. It gets
reviewed from year to year in smaller segments, and I think
that it needs to be en masse.
Mr. Bartlett. I don't want to review it. I just want to do
away with it because I think that it is a lose-lose for
everybody concerned, is it not? Tell me where I am wrong.
Mr. Ring. You are not.
Mr. Bartlett. Thank you, sir. Thank you very much.
I yield back.
Chairwoman Velazquez. Thank you.
Mr. Vander Molen, if bonus depreciation is enacted this
year, we will need to decide whether to make it retroactive or
only effective for the rest of 2010. Some argue against making
it retroactive. Their argument is that it will not encourage
new business activity.
Are they opposed to reasons why purchases made in the first
part of the year should be eligible for relief?
Mr. Vander Molen. I think, if you look at our business,
when you look at the first 6 months of productivity, it hasn't
really been anything to write home about. I don't know as far
as on the revenue side of government. It is probably not going
to make that much difference. For the contractors or the people
that can take advantage of that bonus depreciation, it is still
all about the cash.
When you have tax incentives, you have a cash incentive,
and that cash incentive enables a small business to function
and to perform and sustain itself and to succeed itself; and
that is what we pay taxes on, is income, and if you roll that
thing back to January 1, I think it is a viable option that
needs to be considered.
Chairwoman Velazquez. Okay.
Mr. Budington, bonus depreciation is designed to spur
purchases now rather than at some point in the future. So did
the expiration of bonus depreciation in 2009 prompt you to make
purchases you may not have otherwise made?
Mr. Budington. Well, going back to one of the points I
brought up, I think that is exactly the problem. The situation
that we were dealing with in 2009 was trying to understand what
the situation was, what our business climate was going to
become, and how severe this recession would be.
Every time a recession starts, people talk about there is a
turnaround coming next quarter, maybe next half. As you can
imagine, nobody predicted we were going to be here in the
beginning of 2009. We spent most of 2009 getting costs aligned
with the realities of where our business was and understanding,
once again, how our business was going to have to adapt to this
new environment that we were in.
I think the problem with the way these bills are set up is
that, if we believe that depreciation is going to spur
investment in our businesses and if we believe that investment
in our businesses is going to create jobs, then it should just
be open to say when our business has come up with a model,
understands where our future is going and is ready to make that
investment, that that depreciation is available for us to take
at that time.
It is hard for us to plan all of this and get all of these
stars in alignment in advance of what the rules are for when we
can and when we cannot use it. When my accountant does come in
to yell that it is time to take that depreciation, I am rarely
ready, unfortunately.
Chairwoman Velazquez. Okay. So, if Congress enacts bonus
depreciation this year, with the understanding that this may be
the last time this deduction is offered, will that create an
incentive for you to make an additional purchase before the end
of 2010?
Mr. Budington. Well, as I brought up earlier, we are at a
point where we are ready to make some investments. We see some
opportunities to grow that we are, actually, pretty excited
about. So this will be a big boost and a big help for us.
What is interesting if you think about depreciation, when I
buy a big fixed asset, it is not a linear depreciation for me.
I have huge upfront costs. I have to build the market. I have
to build the sales force around it. In that initial year, year
and a half, I am usually taking a loss on what I am paying into
that; whereas, later on down the road, I am hopefully getting a
return on my investment.
So, yes, I will use that in 2009, but at the same time, I
think it would be unwise for businesses to be making rash
decisions on spending and putting companies in jeopardy. Banks
are very different entities to be dealing with now than they
were in 2007. So, if I get someone who is encouraging me to
take on debt that I don't personally believe that our company
is ready to handle--because that debt might require me to make
decisions that have nothing to do with that equipment--I have
to make sure that our company can make up those payments and
cover the covenants that the bank requires. Again, I don't want
to be making a rash decision based on time frames.
Chairwoman Velazquez. Okay.
Mr. Fesler, your industry is tied to the housing industry--
Mr. Fesler. Correct.
Chairwoman Velazquez. --where unemployment is, roughly,
double the national average.
Why is bonus depreciation so important to the housing
sector, and do you believe that it can assist you?
Mr. Fesler. Well, it does assist us as a lumber supplier.
We have the need to replace a certain amount of equipment each
year because equipment ages; it gets old; it runs out of its
useful life. In fact, with computers, we have already made the
determination that we are going to buy 25 of those this year,
and that is what we need to replace to keep our entire company
up and running at the proper stage.
With bonus depreciation, they become more affordable. If
that were retroactive, we could literally afford 30 instead of
25. The reality is we should be replacing 50, but because of
the economic downturn, we are withholding spending more than
what we need to and are trying to stay within the guidelines of
our banks. But having more dollars available as an incentive to
purchase would encourage us to purchase more. Purchasing
equipment like that helps other industries. It helps us to
manage better, and it should theoretically spur some job
growth.
Chairwoman Velazquez. Okay. Thank you.
Mr. Graves, do you have any other questions?
Mr. Ring, I noticed that you mentioned that the tax credit
of $1,500 helped your industry.
Mr. Ring. Yes, ma'am.
Chairwoman Velazquez. That costs money. Given the
constraints that we are in, the government, this is a very
complex issue to decide whether this and that. I can see, based
on the arguments that I heard, that some people believe that,
yes, we should spend money to encourage investment and to
encourage purchases of new equipment, but we know that that
will have a direct impact on the deficit that we are facing.
So, in terms of the stimulus package, Mr. Sanford, I saw,
when you mentioned here in your testimony how the stimulus--not
maybe for you, personally, but for some others in your
industry--has been a lifeboat for our sector and the State
Department of Transportation, and we would be in a much deeper
hole without the Recovery Act's transportation investment.
So these are difficult choices that we are all facing, and
it is quite a long debate that we are going to be facing and
knowing that it is going to have an impact on the deficit, and
it will have an impact on spurring economic activity that we
need in order to create jobs that will get this economy growing
again.
With that, I want to thank you all. This has been quite
enlightening for us, and we will be sharing some of the things
and the arguments with the leaders that we heard here, who will
be considering small business tax relief for small businesses.
Thank you very much.
I ask unanimous consent that members will have 5 days to
submit a statement and supporting materials for the record.
Without objection, so ordered.
[The information is included in the appendix.]
Chairwoman Velazquez. This meeting is now adjourned.
[Whereupon, at 3:00 p.m., the Committee was adjourned.]
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