[Senate Hearing 111-1127]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 111-1127
 
     WHAT IS WORKING: TAX INCENTIVES TO AID SMALL BUSINESS RECOVERY

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

                               ROUNDTABLE

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 3, 2009

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                     ONE HUNDRED ELEVENTH CONGRESS

                              ----------                              
                   MARY L. LANDRIEU, Louisiana, Chair
                OLYMPIA J. SNOWE, Maine, Ranking Member
JOHN F. KERRY, Massachusetts         CHRISTOPHER S. BOND, Missouri
CARL LEVIN, Michigan                 DAVID VITTER, Louisiana
TOM HARKIN, Iowa                     JOHN THUNE, South Dakota
JOSEPH I. LIEBERMAN, Connecticut     MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHNNY ISAKSON, Georgia
EVAN BAYH, Indiana                   ROGER WICKER, Mississippi
MARK L. PRYOR, Arkansas              JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland
JEANNE SHAHEEN, New Hampshire
KAY HAGAN, North Carolina
           Donald R. Cravins, Jr., Democratic Staff Director
              Wallace K. Hsueh, Republican Staff Director


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Cravins, Donald, Democratic Staff Director and Chief Counsel, 
  Senate Committee on Small Business.............................     1

                               Witnesses

Brumfield, Krystal, Democratic Tax Counsel, Senate Committee on 
  Small Business.................................................     1
Hall, Keith, National Tax Advisor, National Association for the 
  Self-Employed..................................................     1
Rys, Bill, Tax Counsel, National Federation of Independent 
  Business.......................................................     1
Stewart, Nikki, President, Capital Management Advisors, Inc., CMA 
  Solutions and CMA Accounting Solutions, on behalf of Women 
  Impacting Public Policy........................................     2
Villalobos, Jose, Senior Vice President, Telacu, Inc., on behalf 
  of the New Markets Tax Credit Coalition........................     2
Koenig, David, Director, Tax and Profitability, National 
  Restaurant Association.........................................     2
Fletcher, Jeff, Corporate Controller, Appleton Papers, on behalf 
  of Appleton Paper, the S Corporation Association and the 
  Employee-Owned S Corporations of America.......................     2
Greenblatt, Drew, President, Marlin Steel Wire Products, LLC, on 
  behalf of the National Association of Manufacturers............     2
Berger, Matthew, Republican Economist and Press Secretary, Senate 
  Committee on Small Business....................................     2
Black, Kathleen, Republican Tax and Finance Advisor, Senate 
  Committee on Small Business....................................     2
Calimafde, Paula, Chair, Small Business Council of America.......     2

          Alphabetical Listing and Appendix Material Submitted

Associated Builders and Contractors, Inc.
    Letter.......................................................    59
Berger, Matthew
    Testimony....................................................     2
Black, Kathleen
    Testimony....................................................     2
Brumfield, Krystal
    Testimony....................................................     1
Calimafde, Paula
    Testimony....................................................     2
Cravins, Donald
    Testimony....................................................     1
Fletcher, Jeff
    Testimony....................................................     2
    Prepared statement...........................................    42
Greenblatt, Drew
    Testimony....................................................     2
Hall, Keith
    .............................................................     1
Koenig, Dave
    Testimony....................................................     2
    Prepared statement...........................................    48
Landrieu, Hon. Mary L.
    Prepared statement...........................................    38
Rys, Bill
    Testimony....................................................     1
Stewart, Nikki
    Testimony....................................................     2
Villalobos, Jose
    Testimony....................................................     2
    Prepared statement...........................................    55


     WHAT IS WORKING: TAX INCENTIVES TO AID SMALL BUSINESS RECOVERY

                              ----------                              


                       THURSDAY, DECEMBER 3, 2009

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:07 a.m., in 
Room 418, Russell Senate Office Building, Hon. Mary L. Landrieu 
(chair of the committee) presiding.
    Present: Senator Landrieu.

OPENING STATEMENT OF DONALD CRAVINS, DEMOCRATIC STAFF DIRECTOR 
     AND CHIEF COUNSEL, SENATE COMMITTEE ON SMALL BUSINESS

    Mr. Cravins. Good morning, ladies and gentlemen. We are 
going to go ahead and get started. I think we are still waiting 
on a few witnesses who are going to be coming in. My name is 
Donald Cravins, and I have the pleasure of serving as the 
Majority Staff Director for the Senate Small Business 
Committee.
    Senator Landrieu is going to be here in about 15 minutes, 
but she did want us to get started because she knows some of 
you have traveled and probably have flights and plans to get 
back. She wanted us to get started so we wouldn't keep you 
around later than we had to. Thank you all for agreeing to 
participate.
    At this time, I am going to turn it over to our committee's 
Tax Counsel, Ms. Krystal Brumfield. I also want to thank my 
colleagues on Senator Snowe's staff who are here this morning. 
It is always good when you can work with people across the 
aisle and we do that very well on our committee.
    Krystal.
    Ms. Brumfield. Good morning, everyone. Thank you again for 
joining us today to discuss these very important expiring tax 
provisions. We would first like to start by allowing you to 
introduce yourselves, so if we could just go around the room 
and just have a few words from you.
    Please, Keith.
    Mr. Hall. Thank you. My name is Keith Hall. I am with the 
National Association for the Self-Employed. We represent about 
250,000 of the smallest small businesses, micro businesses, and 
I am really happy to be here.
    Ms. Brumfield. Sure.
    Mr. Rys. Hi. I am Bill Rys, Tax Counsel with the National 
Federation of Independent Business. We represent about 350,000 
small business owners, not just the micro businesses but all 
small businesses, and thanks for inviting us.
    Ms. Stewart. Hi. Nikki Stewart from Sarasota, Florida, 
representing Women Impacting Public Policy. I am also a CPA. I 
am looking forward to this. Thank you for inviting us.
    Mr. Villalobos. Jose Villalobos with Telacu, a nonprofit 
Community Development Corporation based in East Los Angeles, 
and I am also an Executive Committee member of the New Markets 
Tax Credit Coalition, which represents over 150 Community 
Development entities involved in New Markets Tax Credit across 
the country.
    Mr. Koenig. Good morning. I am Dave Koenig, Director of Tax 
and Profitability at the National Restaurant Association. We 
represent 945,000 restaurant and food service outlets in the 
country. Seven out of ten restaurants are single-unit 
operators, which means that the restaurant industry is really, 
for the most part, an industry of small businesses, and we 
really thank you for the opportunity to be here today.
    Mr. Fletcher. Good morning. I am Jeff Fletcher. I am with 
Appleton Papers. I am the Controller for the country. We are an 
employee-owned S Corporation. We appreciate the opportunity to 
be here.
    Mr. Greenblatt. Hi. I am Drew Greenblatt. I am the owner of 
Marlin Steel Wire. We make wire baskets in Baltimore City. We 
make 100 percent in the USA and we export all over the world. 
We have 29 employees and we are growing.
    Mr. Berger. I am Matthew Berger. I am the Economist for 
Senator Snowe.
    Ms. Black. I am Kathleen Black. I work for Senator Snowe on 
the Republican Staff of the Small Business Committee and I am 
her tax and finance advisor.
    Ms. Brumfield. And we have Paula, who just stepped in.
    Ms. Calimafde. I am Paula Calimafde, Chair of the Small 
Business Council of America, and we represent the more stable, 
successful small business sector of the economy and we are 
thrilled to have on our advisory board some of the leading tax 
advisors, insurance folks, actuaries, and accountants in the 
country.
    Ms. Brumfield. Well, welcome, everyone. We have a nice-
sized group. I will briefly explain the format of the 
roundtable. If you seek to be recognized, please stand up your 
name card in such manner so that we will get around to 
everyone. I am looking forward to a very thought-provoking 
discussion, so let us get started with questions.
    [Pause.]
    Okay. We will start off with a very general question, and 
whoever would like to respond may. The first question would be 
with regards to the Alternative Minimum Tax (AMT). What would 
be the consequence of allowing the increase in AMT exemption 
amount to sunset? What impact would that have on small business 
owners? Anyone?
    Mr. Greenblatt.
    Mr. Greenblatt. The AMT, the whole concept of it is not 
good because we have to figure out our taxes not once, but 
twice, which doubles the cost for tax preparation. I pay about 
30-plus grand a year--I am a little company--30-plus grand a 
year just to figure out my taxes. I do nothing fancy. I could 
instead hire an unemployed Baltimore City welder rather than 
figuring out taxes. It should be on a little postcard. Having a 
second tax system is very burdensome on us and wasteful. And 
then to increase the threshold is going to only add more taxes, 
and again, so we hire less people.
    Ms. Brumfield. Okay. Bill? And we will work our way around.
    Mr. Rys. I don't want to just keep hogging the time. Mr. 
Greenblatt is right, but I would like to add to that. Not only 
is it the increased amount of tax you are going to pay, but it 
is also the complexity issue. Small business owners face a 
heavy burden in terms of tax compliance. The cost of complying 
with taxes is 66 percent higher, on average, for a small 
business than it is for a large business. Tax complexity is a 
major problem.
    Every other year, we do a problems and priorities survey, 
and for the first time in the 2008 survey, we added tax 
complexity to a list of 75 possible issues. It ranked third. So 
this is a big problem for small business owners.
    I would also like to note, the AMT is not indexed for 
inflation, and that is a problem. But I would just warn that 
there are a number of bills moving through Congress right now 
that are also not indexed for inflation. So I would hope that 
we don't fill the tax code with AMT time bombs--the estate tax, 
health care, payroll taxes. I would keep that in mind as you 
are moving other legislation along, as well.
    Ms. Brumfield. Sure.
    Keith.
    Mr. Hall. I also agree. I think for particularly the 
smallest businesses, the micro businesses, complexity is a 
problem. I think just keeping up with the tax code, having AMT 
implications, having complications in even filling out the home 
office deduction form, makes it difficult for the smallest guy 
to even do the forms. And I think one of the things they end up 
doing is foregoing some of the deductions that they would 
normally have or be eligible for, like the home office 
deduction.
    And as AMT comes into play, they may not even recognize it 
is due. It puts them in a position of filing a tax return 
without the AMT calculations. It puts them in a position of 
getting the nice little letter from the IRS that they don't 
like a year and a half later. So that causes additional 
problems.
    I think it also exacerbates those that are already in a 
tough situation, because the typical smallest person, the 
individual who is going to be affected by the AMT, is someone 
who has higher than average mortgage interest cost, or higher 
than average state income tax, for example. Those are some of 
the things that get left out of the AMT calculation. So 
somebody who may be in New York or California, already paying a 
bunch of state income tax, those are also the places that their 
houses are typically bigger, so they have more mortgage 
interest. So the people who get hit by it are those already 
being hit by higher taxes, also. So it is just not only the 
complexity, it is those that are affected by it just seems even 
more unfair.
    Ms. Brumfield. Sure.
    Paula.
    Ms. Calimafde. Well, I think it hits small business harder 
than anybody, really, because many small business entities are 
what is referred to as pass-through entities, which means the 
business income is part of the owner's income, and AMT, in 
effect, is sort of a system that takes away all the deductions 
and says, figure out your tax and here is the rate. If that is 
higher than what you would have had to pay otherwise, well, go 
to it. You get the higher tax rate.
    So it is hitting the small businesses much harder than, for 
instance, a regular C Corporation with a larger business. So it 
is, in some senses, a very hard-hitting issue for small 
business, as is the increased tax rates that are supposed to 
hit next year. It is the same issue because of the pass-through 
entity.
    Ms. Brumfield. Jose.
    Mr. Villalobos. The AMT puts the New Markets Tax Credit at 
a competitive disadvantage with other tax credits because the 
New Markets Tax Credit is not exempt from the AMT. And in last 
year's economic recovery bill, the Low-Income Housing Tax 
Credit and the Historic Tax Credit received exemptions from the 
AMT. So now as we go into the marketplace to try to attract 
investors for the New Markets, we have to compete against 
others that have an exemption. The New Markets Tax Credit has 
been critical in terms of getting capital into underserved low-
income communities. A lot of that is targeted directly to the 
benefit of small businesses in underserved communities.
    We would propose that the New Markets Tax Credit actually 
be exempted from the AMT, similar to the LIHTC and the Historic 
Tax Credit, and such an exemption actually was included in last 
year's recovery bill, economic recovery bill, in the Senate 
bill, but was dropped in conference.
    Ms. Brumfield. Keith, response?
    Mr. Hall. I don't know if I get to say twice. I will use 
Jeff's, since he isn't here yet.
    [Laughter.]
    Ms. Brumfield. Just this time.
    Mr. Hall. We are not actually talking here about getting 
rid of the AMT or having everyone who is currently affected by 
the AMT exempted from the AMT. This is just the exemption 
amount changing. So the people that are going to be affected by 
allowing this provision to sunset are only going to be the 
smallest people anyway, the people who have that level of 
exemption. The richest people, the people that the AMT was 
targeted at to begin with, won't be affected by this sunset 
provision. It is only the smaller people with the lower level 
of earnings that are even going to be affected by allowing this 
provision to sunset anyway.
    Ms. Black. To follow up on that, and Paula started the 
conversation on pass-throughs and tax rates in general. Today, 
the President is holding a Jobs Summit on a lot of important 
questions Congress will ultimately have to consider. Small 
businesses will in 13 months have to contend with another major 
set of expiring provisions, including individual tax rates. As 
pass-through entities, small businesses will be subject to 
higher tax rates 13 months from now. I would like to get an 
idea from representatives of the business community or small 
business owners about your planning cycle. Looking at this wall 
of new taxes that you are going to be facing, a year from now, 
I'd like to know what that means to you for planning and what 
that means to you for retained earnings and the ability to 
reinvest in your businesses.
    We will start with Nikki. She has got the first one up.
    Ms. Stewart. Yes. Hi. I guess as a general comment with 
this issue, the question that you just raised as well as the 
AMT and going into the estate tax issue, as a financial 
planner, my world gets very complicated because it seems like 
there are continually changing amounts that we have to worry 
about for our clients.
    For instance, the estate tax. As we all know, next year it 
is repealed and then it goes back to $1 million. There are so 
many planning issues that we have to deal with. It would be so 
nice, in a perfect world, to have consistent values for us, 
because--and again, it goes to the tax rates, as you mentioned, 
and a year or so from now--most of the complaints I get from my 
clients--again, they are all small businesses. They pay a lot 
of money to get their taxes done. I think a lot of that 
complexity could be changed if we could just come up with 
something that we all know we can plan on year after year.
    Mr. Greenblatt. This is really important. We export to 27 
countries. I compete with factories in Germany, France, Taiwan. 
These countries have lower taxes than I do. You are putting us 
at a massive disadvantage with our current taxes, because what 
is happening is when I compete against Germany, if I lose, I 
have less work for my guys, so I need to hire less people. If I 
win jobs, I hire more guys. Baltimore City unemployment will be 
impacted by your decision here.
    If you lower my taxes, I will win more jobs. And if you 
raise my taxes, I will lose more jobs. So I recommend making 
our tax rates very competitive with our competitors, like lower 
taxes than France. We should also have lower taxes than 
Germany, and we do not now. We have higher tax rates than 
socialized countries, and this is really hurting us.
    Mr. Rys. Mr. Greenblatt, again, is exactly right. Seventy-
five percent of small business owners are pass-through 
businesses. This means they are paying their tax at the 
individual level. Those expiring tax rates--the individual 
rates, the estate tax, Section 179--are a concern.
    We do a monthly small business economic trend survey. We 
ask small business owners in the survey--and I will say that 
the survey is at some of its historic lows, especially in terms 
of lost sales, which is the biggest problem. There is just no 
business. But we asked the question, is this a good time to 
invest in your business, and the overwhelming answer was no. 
The number one reason given for the last--economic conditions.
    For the last four months, the number two reason, and it has 
been in double digits, hovering between 15 and ten percent, is 
the political climate. Small business owners don't know what 
the rules of the game are next year. They don't know what their 
health care costs are going to be. They don't know what their 
energy costs are going to be. They don't know what their tax 
costs are going to be.
    And they are not seeing a tax increase at the end of next 
year. They are seeing a tax increase today, because 
unemployment taxes are going up. The State of Hawaii increased 
their unemployment taxes by 1,000 percent. That is not an 
environment to increase job creation.
    Ms. Black. What was the number on the unemployment tax 
increase? I mean, was it some fraction that went up?
    Mr. Rys. Well, Hawaii is kind of an odd state because they 
have had some changes in their unemployment system, but the 
percent overall is somewhere around 100 percent. But we have 
seen Maryland announce that they are going to increase their 
taxes. Maryland is on a schedule. They go from a Schedule A to 
a Schedule F. They were on Schedule B this year. They are going 
to move to Schedule F next year to try to replenish their trust 
fund.
    We have got to figure out a way to try to deal with it. I 
mean, we have got to make sure these unemployment benefits are 
available, but the people that are paying those benefits are 
small business owners. So the same people we are saying create 
a job are the people that are paying for these benefits. So, 
somehow, we have got to come up with a system that is going to 
work to address that issue, especially when we are going 
through such a rough economic patch.
    But in terms of the individual rates, it is very important 
that those are extended and done quickly, being that they 
expire at the end of next year, for planning purposes. This 
should just be across the board. You know, we have heard this 
$250,000 number. We have done some surveys. We have done some 
research on this. We have asked business owners, how much money 
do you make, and when we ask business owners with 20 to 250 
employees, more than 30 percent of those business owners made 
$250,000. Those businesses account for more than one-quarter of 
the American workforce, 28 percent. Between 2001 and 2006, 
those businesses created two million jobs. If you want to 
create jobs, make sure those tax rates stay low.
    Ms. Brumfield. Well, we will take a moment. Senator 
Landrieu has just arrived and we would like to have her opening 
statement.
    Chair Landrieu. Were you in the middle of anything?
    Ms. Brumfield. We were just----
    Chair Landrieu. Go ahead and continue.
    Ms. Brumfield. Okay. I think, Keith, you were next.
    Mr. Hall. Thank you. I do agree with these guys, and I know 
it is very complicated. With all due respect to France and 
Germany, I would not trade places where I live. Obviously, it 
is expensive and it is complicated to maintain all the services 
that this country provides for us, and I am proud, and I know 
we all have to pay our fair share.
    I guess that is the point I want to make as it relates to 
small businesses, because the individual tax rates--we are 
talking about pass-throughs--most small businesses, 
particularly the micro business owners, pay their tax at the 
individual level. Allowing those provisions to sunset, to go 
back to a different set of rates, represents a tax increase on 
small businesses because that is where they pay their taxes.
    And I think the idea for small business, the request is, 
just let small business be on the same playing field with big 
businesses. Allowing most of these provisions to sunset--we 
talked about that AMT provision sunsetting. That is only going 
to affect the smallest people, not the richer people. The 
access to the Section 179 deduction, bonus depreciation, all 
those things provide timing for cash flow investments into 
small business. The people who have the most difficulty with 
their cash flow management and determining whether or not to 
invest in their business are the smallest businesses. Access to 
capital, decreasing some of the hurdles to getting new capital. 
Most of those things affect the bigger businesses, not the 
small businesses.
    So allowing all of these things to expire really just 
continues to be an inequity as it relates to small business 
compared to big business, and I think that is the key to the 
individual rates, because that is where we pay our taxes.
    Ms. Brumfield. We have a--I am sorry.
    Mr. Koenig. As I mentioned at the outset, representing the 
restaurant industries, seven out of ten restaurants are single-
unit operators, which means we clearly are an industry of small 
businesses. To the issue that Kathleen asked about, individual 
rates, clearly, we are hearing from our restaurateurs and 
entrepreneurs about the uncertainty with regard to the 
expiration of the individual rates. But again, that almost 
looks like a long-term problem for them vis-a-vis the expiring 
tax provisions coming up by the end of the month.
    Things of importance for the restaurant industry, which I 
see we will talk about later, include Section 179, and even 
more significant than that, a provision on 15-year depreciation 
for restaurants, retail, and leasehold improvements. If that is 
allowed to expire at the end of December, we revert back to a 
39-year schedule, which in reality just does not measure the 
economic benefits of putting up a new restaurant. So the rates 
are very important and we hear about that from our members from 
a planning standpoint. Obviously, if we can get through being 
able to extend some of these important provisions that are 
expiring at the end of 2009, hopefully, we will be able to do 
the same on the rates in 2010.
    Ms. Black. Matthew has a follow-up before we move on.
    Mr. Berger. I just wanted to ask about the House's proposal 
to raise the top marginal tax rate by 5.4 percent to pay for 
their version of health care legislation. Combined with the 
expiration of the 2001 tax cuts, that would take the top 
marginal rate up by 28.7 percent, from the current 35 percent 
to 45 percent. While it is not clear that this will occur, 
because there are miles to go before we get to a conference 
report on the health care legislation, with a 10.2 percent 
unemployment rate and unemployment expected to be very high for 
at least the next couple years, what would that do to job 
creation? Put another way, how would that affect a business on 
the ground? Drew. Bill.
    Mr. Greenblatt. It is very bad. We compete with----
    [Laughter.]
    Germany and France and their tax rates are lower than my 
tax rate. So when I export to Europe or when I export to Asia, 
I am competing against very ruthless competition who has very 
low prices. So when you raise my taxes high, I win less jobs. 
When you cut my taxes, I win more jobs. I have a factory in 
Baltimore City. I make everything in Baltimore City. If you 
help me be more competitive, I am going to hire more people in 
Baltimore City and unemployment will go down and the economy 
will get stronger. By raising the burden for me, it is very 
challenging for me to beat the Germans or to beat the Japanese, 
and I want to.
    [Laughter.]
    Ms. Calimafde. Could you be a little clearer for us?
    [Laughter.]
    Mr. Berger. Bill.
    Mr. Rys. I am going to take a little different position 
than what Mr. Greenblatt did. It is very, very bad, because it 
isn't just----
    [Laughter.]
    It is not just the Federal rate and it is not just that 5.4 
percent surtax. It is your state taxes. It is your local taxes. 
It is your property taxes. It is the payroll taxes, the 
unemployment insurance. You start stacking those and we are 
starting to talk about an effective tax rate on a pass-through 
business that is pushing towards 60 percent. That is 
confiscatory. That is not good tax policy.
    And to get to the point of international competition, as 
well, we have heard this about the--especially in regards to 
the lower corporate tax rate, reducing it to 25 percent to be 
more on par with other countries, you know, the second-highest 
corporate tax rate in the country--but think about what kind of 
disparity you create if you have a 25 percent corporate rate 
and a 40 percent or higher individual rate. You are basically 
telling the successful pass-through business that you are going 
to pay ten percent more--or more when you start stacking on 
state taxes and payroll taxes--than what a C Corporation is 
going to pay. That puts those small businesses in an unfair 
advantage.
    There has been tremendous growth in things like S 
Corporations and pass-through businesses. In 1978, there were a 
half-a-million S Corporations and partnerships. There are now 
three million. We tax more business income at the individual 
level than we do at the corporate level. A lot of businesses 
run through those corporate levels.
    If you had that kind of disparity in the rates, you are 
also creating a new planning nightmare, just as we talked about 
complexity. There was a provision in the code called 341(e), a 
collapsible corporation. When we talk about complexity, there 
was a sentence in Section 341(e) that was twice as long as the 
Gettysburg Address.
    [Laughter.]
    If you have tax rates that are that disparate between the 
two, you are going to go back to having to come up and plan 
that way and come up with 341(e) again to make sure that we 
don't have that type of planning, dumping the money into a 
corporation to avoid the higher individual rates. We don't need 
a tax provision twice as long as the Gettysburg Address.
    Mr. Hall. We may be overbudget on the ``very''s in front of 
bad, so I won't use it, but obviously, increasing tax rates 
make it more difficult to invest in your business. It obviously 
takes cash flow out from other options, whether that be new 
infrastructure, new business, or new jobs. So of course, 
increasing tax rates like that are going to make it more 
difficult to create jobs, except maybe with the IRS enforcement 
staff. They could have more jobs there.
    The thing that I want to keep reiterating, though, again, I 
recognize that it is a tough job you guys have in allocating 
what we are going to pay for and then how to pay for it. That 
is extremely complicated. Nobody is going to stand up and say, 
I am for a 45 percent marginal tax rate. But there are choices 
out there that we are going to have to make and figure out how 
to pay for it.
    The NASE always points out that let us do what we need to 
do and let us pay for it, but let us make sure that it is fair. 
One of the things we like to talk about is the equity for our 
small business--I forget the name of it, but it is S. 725, 
which basically allows the small guy to deduct their health 
insurance premiums. Expanding the definition of employee under 
HRA plans. If we are going to put this health care out there, 
basically mandate that people have the coverage, the request 
is, at least let everyone have the opportunity to pay for their 
premiums pretax, and I think that goes back to if we are going 
to have to increase taxes, if we are going to have to pay for 
things, let us at least have the level playing field for small 
business so that we can have the same opportunity as big 
businesses do.
    Ms. Calimafde. Well, when Keith just said, allowing small 
business owners to be treated as employees, I couldn't let it 
go without bringing up the cafeteria plan proposal, where in 
cafeteria plans, right now, small business owners, whether they 
are LLC members, partners, Sub-S stock holders, are not allowed 
to participate in a cafeteria plan, which means that only the 
larger entities get to provide these really good benefits. A 
cafeteria plan in the government, you all know what it does. 
Everybody gets to have one but small business. The smallest of 
the small businesses does not get to have a cafeteria plan. It 
makes no sense, particularly when a lot of the state laws are 
now mandating companies to have cafeteria plans. So I just 
wanted to jump on what you were saying, and it goes all the way 
to cafeteria plans, as well.
    Ms. Black. And that is one thing that we have begun to 
address in the Senate health care bill. There are a couple of 
glitches that we are still working through on technical 
drafting with respect to this issue, but it is something that I 
know Senator Snowe has worked on at the Senate Finance 
Committee, and we, as staff, are continuing to work on as we 
move forward with the health care reform bill.
    Ms. Calimafde. I think Senator Snowe has done such a 
tremendous job in this area, but as you know, there seems to be 
this thought that small business owners are somehow going to 
treat a cafeteria plan different than everyone else, which is 
just--you know, to keep running into this kind of--it is almost 
discrimination against small business owners, I think, in the 
tax code, and I don't understand it.
    Chair Landrieu. Let me just say, that is why we are here, 
to try to fix as much as we can. We are making great efforts in 
the health care bill on the table with the help of Senator 
Snowe to provide robust exchanges and tax credits for health 
care, because it is one of the issues besides high taxes.
    Please explain a little bit more to me about the cafeteria 
plans and why this has not come up in any of the health care 
discussions--and maybe it has. Maybe the staff can clarify it. 
You are talking about health care benefits for small business. 
There is a tax provision in this for the smallest of 
businesses, 25 employees or less. That would be the very small 
businesses. They are going to get 35 percent off the top in 
addition to your deduction cost against any health care cost 
that you would provide. Is that not covering your concern?
    Ms. Calimafde. No. Do you want me to answer, Kathleen, or--
--
    Ms. Black. Yes, go ahead.
    Ms. Calimafde. Okay. You know, the cafeteria plan, I don't 
know what it is called in the government. What is the name of 
it? It is the plan where you are allowed to pick and choose 
between benefits. So if you need more disability, you pick that 
up. If you need more life insurance, you pick that up. There is 
usually a Flexible Health Care Spending Account. There may be a 
Dependent Care Account. So that is under this umbrella 
cafeteria plan.
    Ms. Black. At the Federal level, we have got the Federal 
Thrift Savings Plan, but it is a la carte. It is not really a 
cafeteria plan in that sense.
    Ms. Calimafde. Right. Okay.
    Chair Landrieu. We don't have a cafeteria. I mean, I am 
sitting here thinking----
    Ms. Black. Correct.
    Chair Landrieu [continuing]. Do I have one----
    Ms. Black. No.
    Chair Landrieu [continuing]. And not know about it?
    [Laughter.]
    I don't think we do.
    Ms. Black. No.
    Chair Landrieu. That is what I am saying. I mean, we have a 
health insurance plan, which is called the Federal Employees 
Health Benefit Plan.
    Ms. Black. Yes.
    Chair Landrieu. And Federal employees in every state have 
choices, which is what we are trying to accomplish in this 
health care bill, to provide every small business in America 
with those same choices, is the idea of this bill. I do know 
that New York has the most choices, of 34 plans, and Rhode 
Island has the least number of choices at 14 plans.
    So our vision on this health care bill, which looks likely 
to pass before Christmas, is going to hopefully provide that 
same sort of opportunity in every state. And if you are a small 
business of 25 people or less, which is the smallest of the 
small, we are working right now with Senator Snowe to 
substantially increase the credit that came out of the Finance 
Committee on the Senate side. Whether we can achieve that or 
not, I don't know.
    Ms. Calimafde. Senator, what you are talking about----
    Chair Landrieu. So tell me about----
    Ms. Calimafde [continuing]. Is like the huge part of the 
health care bill and is critically important, and having 
choices for small business with different insurance companies, 
insurance reform is critical. The SBCA, for instance, is not in 
favor of the public option. There are certain things in that 
bill that get us incredibly nervous.
    But we are talking about a piece of that bill. For 
instance, as a Federal employee, if you don't--does the 
government pay for the entire health insurance premium?
    Ms. Black. No.
    Chair Landrieu. No.
    Ms. Calimafde. So the portion that you pay, is that pretax?
    Ms. Black. Sure.
    Ms. Calimafde. Well, then that is your cafeteria plan, and 
it is that piece that is--for a small business owner, it is not 
allowed----
    Chair Landrieu. Paying that piece pretax is what the equity 
would be?
    Ms. Calimafde. That is part of the cafeteria plan and 
owners are not allowed to----
    Chair Landrieu. I am going to ask the staff, since this 
bill is still open. I am going to ask the staff to gather--the 
joint staff here to help present an idea to Senator Snowe and I 
that we could get that fixed potentially in this health care 
bill.
    Ms. Calimafde. That would be great.
    Chair Landrieu. We would like to do that, if we can, 
because once this bill closes--not that there won't be other 
health care bills that will allow us to address it--but while 
we are at it, if you all think this is a big issue, maybe we 
can take care of this now.
    Let us go to Ms. Stewart.
    Ms. Stewart. Yes, and in addition to that, too, one thing 
that you probably should look at in the health care, when it 
talks about tax credits, as an S Corporation, there are 
different rules there and when you can take a dollar-for-dollar 
tax credit versus a C Corporation. And so it may look like if 
they--with the bill, it may look like it is going to be good 
for us to be mandated to have these health care plans, but as 
an S Corporation, I may not get the same benefit as the C 
Corporations do. So I think that is something that you need to 
look into, as well.
    And again, that goes to the parity issue. As a planner, I 
have to take a lot of time with my clients to decide if we want 
to be an S Corporation, if we want to be a C Corporation. We 
have always gone the S Corporation route because it has been 
easier for us from a tax perspective. Obviously, if the tax 
rate is going up, that is not going to be the case. So what 
that means is they go back to being a C Corporation, which 
means double tax returns and more expense. Yes, there are good 
things about the S Corporations because of the benefits that we 
can get, but if we could have that available to the S 
Corporations, I think that would solve a whole lot of problems 
for us as small businesses.
    Chair Landrieu. The one thing, and then I would like to go 
to this side for the next question, is the concept of, or part 
of what is driving this health care bill is based on the 
testimony of small businesses, is not to put an employer 
mandate, but to have in its stead an individual responsibility 
for individuals in the country to have health insurance, 
because if we don't get more people into the pool, those 
businesses that do provide insurance just keep paying more and 
more and more. So the idea is to push as many people into 
insurance and try to make it as affordable as possible for 
individuals and small businesses so that you are not out there 
in a dog-eat-dog market, which is what you are right now, kind 
of on your own as a small business, trying to find quality 
plans that are out of reach and very expensive. That is sort of 
the concept.
    But I am going to ask the staff to look at the differences 
based on that between S Corporations and C Corporations and see 
if in some of the amendments that we are filing we couldn't 
sharpen that up a little bit.
    Was it your turn for questions?
    Ms. Brumfield. Sure. In the interest of time, we would like 
to move on to another topic. I think everyone who just spoke in 
this round mentioned something about planning. So we would like 
to talk about estate planning and the effects of extending the 
current rates and exemptions temporarily versus permanently and 
what effect that would have on small businesses.
    Chair Landrieu. Nikki, we will get you first.
    Ms. Stewart. Again, as I said earlier, as a planner, and I 
have been doing this for 25-plus years, it is not easy to try 
to plan for estates with my clients, high-net-worth 
individuals, because we never--at least for now, we don't know 
what that rate is going to be. Do we get life insurance to 
cover it? Do we do all kinds of trusts? What do we do?
    I think that, in general, for us as a planning community, 
it would be a lot easier if we decided to make it a $3.5 
million exemption. Then let us make it that and let us leave it 
at that, because that way, we can plan for 5-, 10-, 15-year 
dynasties with the families. Otherwise, there is no way that we 
can decide every year how much life insurance to buy, what kind 
of trusts. It gets into a lot more complex issues.
    So, personally, I don't think--repealing it would be great. 
I don't think that is going to happen. I do think that we 
should come to a level that we can all agree on and let us 
leave it at that and have some consistency.
    Chair Landrieu. Does anybody else agree or disagree? Go 
ahead.
    Ms. Calimafde. The SBCA largely agrees with that. We had 
hoped that we could deliver the 30-second sound bite, ``repeal 
estate taxes,'' which sounds good, and it is much sexier when 
you get to ``kill the death tax.'' That is really great.
    Unfortunately, we have about 100 experts in our 
organization that actually read tax laws and read tax 
regulations which causes us not to be able to say the 30-second 
sound bite, and the reason why is that, when we discovered that 
carryover basis came into the fore when you repeal estate tax 
and you lost step-up in basis, and the amount of carryover 
basis and step-up basis that came in with repeal, we found 
that, in our estimation, many, many small businesses were 
better off under the 2009 estate tax law than they would be 
under repeal. And I think the numbers have now come out to 
about 70,000 small businesses fall in that category.
    Unless you know what a step-up in basis is and a carryover 
basis and what the estate tax exemption means, it is just 
mumbo-jumbo. If you know that, you can hone in on it, and what 
it really means is if a small business owner today has $3.5 
million of assets when he or she dies, there is no estate tax 
and the heirs receive that entire $3.5 million of assets with a 
step-up basis, which means they get it valued as of date of 
death. If there is a spouse, that number--if there is proper 
estate planning, that number comes up to $7 million.
    So you would say, well, repeal should be repealed, except 
it was written so that carryover basis came in, which meant 
when an heir received the assets, they received the assets at 
the value that the owner, the cedent, actually had those 
assets. So if you are dealing with an 85-year-old, let us say, 
gentleman who has a dry cleaning store and he has owned it for 
50 or 60 years, now somebody has to figure out, well, what did 
he pay for that dry cleaning store?
    And assuming anybody could even find those records--and by 
the way, this repeal of step-up happened a long time ago and 
never even came into law because estate planners throughout the 
country were saying, this is impossible. So by 1980, it was 
already repealed. So we have gone down this road. We know it 
doesn't work, but here we are again.
    Chair Landrieu. I don't think we are going to propose that.
    Ms. Calimafde. Good. Good.
    [Laughter.]
    So it----
    Ms. Black. Those who don't remember the past are condemned 
to repeat it.
    Ms. Calimafde. Yes----
    Chair Landrieu. Kent Conrad reminds us enough, so it is not 
going anywhere.
    Ms. Calimafde. Good. Well, I actually have some comments 
out on the table and it really sets out that a single person 
with assets of more than $1.3 million and less than $3.5 
million is actually better off with extending the 2009 estate 
tax law permanently. And in the case of a couple, it would be 
those with assets of up to $4.3 million and less than $7 
million do better with the 2009 estate tax law. And those 
numbers encompass a huge amount of small business owners.
    So that is why, when we actually went to the law and read 
it and were actually shocked to find out what had happened with 
the carryover basis and the step-up in basis, we are definitely 
in favor of 2009 extending permanently. But if we had our 
druthers, that is what we would want this year. Next year, we 
would want to come back and say, let us bring that $3.5 million 
and index it. Let us put in portability. Let us strengthen 
6166. Let us reunify gift and estate tax. There is a lot more 
to do, but it is not going to be done on December 3.
    If nothing is done, we end up with repeal and then a 
horrible situation in 2011 with a $1 million exemption. And if 
you do a one-year extension, we are back to the problem Nikki 
is talking about where planning--everybody--all these small 
business owners have to keep this cadre of estate planning 
attorneys going on, which is just a waste of resources.
    Chair Landrieu. First of all, let me just comment. I think 
we are going to be able to work through this over the next year 
or year and a half. Our problem is we have to come up with 
something pretty quickly, before the end of this year.
    So if you all can--all these comments are wonderful and I 
really do want to get Bill and Drew to comment on this, but as 
simply as we could fix it for the next year and then we could 
come back and try to do a permanent, very simple, clear fix, so 
everybody can forward for the next several years or decades 
understanding what the liability is going to be.
    Bill.
    Mr. Rys. Well, you know, at NFIB, we have always supported 
full repeal as the best solution. But short of that, we have 
supported something along the lines of the Lincoln-Kyl 
Amendment that was in the budget last year, which was a $5 
million exemption and a 35 percent rate. We think that is 
fairly generous, provides a substantial amount of protection.
    But in terms of permanency or certainty, that is a very 
important thing to keep in mind with this because of the 
constant need to plan, and as Paula said, the issue of stepped-
up versus carryover basis is very important, and I will spare 
the history lesson, which was 1976. It was repealed in 1978, 
before it ever got put in place.
    But when you think about business, we have a member who I 
talked to yesterday. They own a farming business out in 
California. They bought another business in 1971 and that 
business was started in 1852. There have been a few 
transactions in the last 157 years. I would assume that it 
would be difficult to track the basis of those assets, so 
carryover basis does become difficult, especially when you get 
to an older business like that.
    Chair Landrieu. Drew.
    Mr. Greenblatt. This tax is not right. Every year, we pay 
35 percent, year in, year out. If I own the company for 20 or 
30 years, I will be paying 35 percent year in, year out. And 
then, when I die, my family has to pay whatever the number is, 
40, 50 percent. This is patently wrong. We shouldn't have this 
tax.
    So how do we handle it? We have it now. How do we handle 
it? Well, we pay premiums. We hire an insurance company. We 
make an insurance company rich because I don't want to give my 
wife a $1 million or $2 million tax bill the day I die. I mean, 
the day I die, hopefully, that will be the biggest issue. But 
the second biggest issue----
    [Laughter.]
    Chair Landrieu. She might miss you, you know. Might.
    Mr. Greenblatt. So to defend my wife, I have to pay 
premiums, and I am making an insurance company rich. I am not 
hiring people in Baltimore City. So this is counterproductive. 
It is not good for our economy.
    Chair Landrieu. Okay. Can I take this moment to turn this 
over to this team for the next question, but to thank you all 
very much. I am sorry I was a little bit delayed. I had a 
meeting that went a little over and then a blockage out on the 
street, which happens occasionally around here. But anyway, I 
have got to slip out for another meeting, but this will 
continue until 11:30.
    I am very pleased, as the Chair of the committee, to 
continue, I think, the tradition that Senator Snowe and Senator 
Kerry both used, to have these informal roundtables to really 
provide voice for small business. That does really get 
overlooked, I think, in many instances, sometimes intentionally 
and sometimes not.
    We want to give voice to small business, so as we move to 
the end of this year for the tax extension, we can give as much 
relief as possible. And as we look forward to building out of 
this recession, we can develop policies that really support and 
honor the entrepreneurial spirit of these small businesses, of 
all of you and the people that you represent, the people that 
we represent, as well.
    So I am going to slip out and leave you in the good hands 
of these very able staffers, and I thank all of you very much.
    Ms. Black. We will do one more final wrap-up on estate tax 
and then we will perhaps move on, unless anybody else wants to 
keep going on estate tax for a little bit.
    Ms. Calimafde. Well, I just wanted to mention, Drew, if it 
is any consolation, you get $7 million under the 2009 estate 
tax law free of any estate tax. So you might get hit with state 
estate tax, but at least you get $7 million off the top before 
you get hit with a dollar of estate tax.
    But what I wanted to say was if the choice which I think 
this year this choice is, a permanent extension of 2009 or a 
one-year extension of 2009, the permanent extension is only 
about 8,000-trillion times better than a one-year extension. 
The one-year extension just sets us up for another fight next 
year. It sets us up for the 2011 $1 million, 55 percent tax 
rate with a little five percent bubble sitting in there, so you 
actually get to 60 percent at some point.
    I mean, to me, it is like if there is anything that you all 
can do to help us get a permanent 2009 estate tax level this 
year, it would be fabulous, and then let us put in the good 
fight next year, but at least start with the 3.5 and the 45 
percent tax rate rather than running into 2011, where we are 
going to be fighting against a $1 million, 55 percent tax rate.
    Ms. Black. Dave.
    Mr. Koenig. I would just say briefly that, as we know, the 
House is going to take up permanent extension of the estate tax 
today and likely pass with the parameters of the $3.5 million 
exemption and a 45 percent rate. While we all agree that a 
permanent solution is necessary, I know from our organization's 
standpoint, and I know there is a lot of support in the Senate 
and even among some members of the House, I would argue that if 
you are going to do either a permanent or one-year extension, 
that a better alternative would be the 35 percent rate and the 
$5 million exemption that has been discussed.
    Ms. Stewart. Just one more last comment. Something that 
Paula said that I didn't speak to, which is very key, is the 
step-up versus carryover. I can tell you, with my experience, 
it was an absolute nightmare to go back and try to find what 
cost basis is on all kinds of things. So just for what that is 
worth.
    And also, I do also agree with her that I think it should 
be a permanent $3.5 million exemption rather than going to a 
one-year and then having to start all over again.
    Ms. Black. And just so that we have this on the record, 
which then gives us ammunition as we are going out and 
discussing these issues with our colleagues and our bosses are 
working with their colleagues, for the nightmare that is a 
carryover basis situation, if you can't prove what your basis 
is in a business, what ends up happening? What basis does the 
inheritor of a business receive?
    Ms. Calimafde. Zero.
    Ms. Black. And you get taxed on the entire amount.
    Ms. Stewart. And that is just not fair. I mean, that 
absolutely--so, yes, you are correct. It would be a zero.
    Ms. Black. And it is----
    Mr. Greenblatt. And high legal fees.
    Ms. Black. And huge legal and accounting fees for doing 
some sort of forensic accounting of what this was worth so that 
you can try to prove the price for which dear old Granddad 
bought the business.
    Ms. Stewart. And that is a very good point, because what 
happens is you end up spending so much time and paying so many 
people to go back through and find all this stuff, and all the 
legal fees and everything else, the government and everybody 
else is a lot better off just taking it as a step-up, because 
it is a lot easier to track from there forward.
    Ms. Calimafde. The burden is on the taxpayer to prove 
basis, and that is why, when repeal went through, it sounded 
terrific, and it wasn't until folks really read the law that 
they realized that carryover had taken the place of the step-
up.
    Ms. Black. Right.
    Mr. Hall. And obviously, it is complicated. I mean, 
regardless of where you go, it is still complicated. And to 
Drew's point, I think the main issue here is providing a 
permanent answer so that people can plan. If you are covering 
your potential liability with a health insurance policy and 
then we wake up one year with dramatically different levels, 
then do you have to go back and change what your whole plan is? 
Are we going to have to redo that every year? So providing--
regardless of 45 or 35, $5 million or $3.5 million, I think the 
key is a solution that puts people in a position to be able to 
plan.
    Ms. Black. Thank you. It is fabulous to have all of that 
out there on record, because I don't know that we have had this 
examination of what is carryover versus stepped-up and it is 
really important for us to have had this on record.
    Mr. Berger. The only other question I had as we consider 
the estate tax pertains to marriage and the exemption level. We 
had a hearing in the Finance Committee not that long ago, and 
one of the issues that was discussed is what about just making 
it a straight-up $7 million exemption or a straight-up $10 
million exemption so that people don't have to go through the 
rigmarole of when one spouse dies, then you get the next $3.5 
or the next $5 million, down the line. Is that something that 
is important as you plan, or are other things more critical?
    Ms. Brumfield. Paula?
    Ms. Calimafde. I just wanted to give someone else a chance. 
Are you talking about the portability provision----
    Mr. Berger. Yes.
    Ms. Calimafde [continuing]. Which is really a great 
provision. The portability provision would--let us use $3.5 
million, but I am hoping one day it will be $5 million, but let 
us say it is $3.5 million. Each spouse has their own $3.5 
million, and if the first spouse doesn't use up all their $3.5 
million, the surviving spouse gets to keep whatever they didn't 
use and apply it to the estate tax assets.
    What it really means is that you don't have to have proper 
estate tax planning, and it means that, if you didn't end up 
with an exemption trust or a bypass trust in your will, you 
didn't lose the entire tax credit exemption amount on the first 
spouse's death. So it is a terrific provision. I was surprised 
to hear that it has not been deemed much of a revenue loser. I 
don't know how we got to those numbers, but I was glad to hear 
that. A terrific provision.
    By the way, reunifying gift and estate tax system is really 
important, as well, because right now, in anticipation of 
repeal, they pushed the systems apart and you can only make a 
gift up to $1 million during lifetime, even though you can give 
away $3.5 million at death, and a lot of small business owners 
like to give the business away to children during their 
lifetime rather than waiting until death. So it is an 
artificial provision and it really is not needed if you don't 
go to repeal.
    Ms. Black. Or--and I would love to hear from Mr. Fletcher 
on this point--it is not just the owner who might give it to 
children, but an owner giving it to the employees.
    Ms. Calimafde. That is absolutely right.
    Ms. Black. Can you speak to that issue?
    Mr. Fletcher. Yes, I can try.
    Ms. Black. Okay.
    Mr. Fletcher. Right now, an owner can sell his business to 
an ESOP and get some tax benefits. But if he is an S 
Corporation owner, he can't do that, and so that is a problem. 
There is a bill that has been introduced to fix that, I 
believe, that would be helpful in that regard.
    But what I wanted to speak about was really the consistency 
part of it and simplicity, because a lot of these small 
business owners are tied up trying to make a buck. By the time 
they get down the road that estate planning becomes an issue, 
they have got a real problem to deal with and they have to do a 
lot of structuring costs around rearranging the ownership and 
so forth to try to accommodate that. So if you can make it 
simpler, it would be a lot easier for them.
    Ms. Black. Okay.
    Mr. Rys. Real quick, I mean, one other thing to keep in 
mind in this is that the assets that the business is talking 
about, too, aren't liquid assets. So you are talking about the 
assets of the business. And when we are talking about the 
exemption and we are talking about what those rates are and how 
you plan around it, I mean, if you still get hit with it, it is 
on the value of the business. So something has to give to pay 
the tax then. So some of this is an issue of lost productivity 
when you get to the point of the tax. So we do need to make 
sure that protection is there.
    You know, with the House considering this bill today, it is 
not indexed for inflation, again, another little AMT time bomb. 
That is something that ought to be looked at as it is coming 
back to the Senate, because if this gets tied up next year, and 
as policy, I think next year we want to definitely push for 
something more along the lines--I know at least for us, more 
along the lines of a Lincoln-Kyl type proposal, which does 
provide more relief and more protection and a bigger exemption 
and a lower rate. But short of that, if we have got some time 
on our hands--I mean, it is not really a permanent solution. It 
is not tied for inflation, because it is changing every year 
because inflation is going to change. Who knows where inflation 
is in a year.
    Mr. Berger. Bill, you actually make a great point on the 
illiquid assets piece. The current tax code allows certain 
small businesses to stretch out their payment period. Are those 
rules something we should look at, too, as we consider the 
estate tax, or is the panel comfortable with the way those 
rules are currently constituted?
    Ms. Calimafde. I think you are referring to 6166 there----
    Mr. Berger. Yes.
    Ms. Calimafde [continuing]. And they need to be 
straightened up and strengthened, as well. And I think--
actually, I believe the Senate Finance Committee had hearings 
on----
    Mr. Berger. We did.
    Ms. Calimafde [continuing]. And I think the 6166 issue was 
dealt with really well at those hearings, if I recall 
correctly. But definitely something to look at.
    You all may remember the thing called the QFOB, or the 
Qualified Family-Owned Business. That was an attempt to try to 
allow small business assets to be exempt from estate tax. But 
the thing was so complicated, and it suffered, in our opinion, 
from one huge flaw, which was you didn't know if you made it 
until you died, which is a terrible way to plan.
    So actually John Satagaj, who is over at the Small Business 
Legislative Counsel, and myself and I know a number of us in 
the room have tried to come up with some kind of exemption for 
small business and we just have not been able to do it. So our 
idea is get the exemption level high enough that you have 
effectively repealed estate taxes for small business.
    Mr. Rys. If I could--I am sorry. It is a business 
continuity issue, as well. I mean, we want that business. If 
the son is working in the business, we want that business to 
stay in the family. We want that to be passed on. That is a 
smart and resourceful use of resources in this country, and we 
do it at the corporate level on reorganizations of 
corporations. We have a whole system set up. They are much more 
complicated.
    I am not suggesting that at all for small business. But 
making sure that the estate--I mean, the estate tax is sort of 
the similar side to this. If I decide I want to acquire a 
larger corporation, I can do that in any number--I can do that, 
I think, seven different ways and it is a tax-free 
reorganization. But if I pass the business on to my son, you 
know, that is not the same situation. So we need to make sure 
that we have a high enough exemption and we make these planning 
issues as simple as possible. Short of the tax going away, and 
I understand the basis issues there, if there is going to be a 
tax, it shouldn't be something that small business owners have 
to stay up at night worrying about.
    Ms. Stewart. And one more comment on that, as well. The 
6166, as everyone is talking about, as well, I do believe that 
it needs to be strengthened. In addition, small business 
owners, a lot of all of our assets are in our business. So, 
again, if it is illiquid and that is what we own, then we need 
to have some kind of a provision to stretch that out, and 6166, 
I know, exists, but it does need to be strengthened.
    Mr. Berger. Okay.
    Ms. Black. Move on to cash flow?
    Ms. Brumfield. Sure.
    Ms. Black. Do you want to start with cash flow?
    Mr. Berger. I just wanted to start the cash flow discussion 
with Section 179 expensing. On Tuesday, Senator Snowe and 
Senator Landrieu introduced legislation to extend the Section 
179 expensing rules at the $250,000 level permanently, because 
people need certainty with how much they can expense rather 
than depreciate.
    So my first question to the panel is, do we think that 
$250,000 is an appropriate level and that it should be made 
permanent? And part two is, wouldn't levels of investment be 
lower than they otherwise might be if we let Section 179 fall 
to $134,000 next year and $25,000 in 2011? And what would the 
impact of job creation and the overall investment be?
    Ms. Brumfield. Any questions?
    Mr. Hall. Well, certainly, it would have an impact. This is 
similar to increase in tax rates we talked about before and it 
is a cash flow issue. Particularly for small business, it is 
timing. We are not talking about changing the deduction for an 
investment in total. We are just moving that investment up to 
the year of purchase. It is true matching of the investment 
with the tax benefits which provides financing.
    And particularly when you are a small business, even today 
more than ever, access to capital, financing options are 
difficult. And if you have a less amount of tax incentive to 
provide that cash investment, then you are going to have to 
borrow more money to be able to make that investment in your 
business, hopefully which increases the number of jobs you 
have. So decreasing that provision certainly is going to affect 
somebody's ability to manage the cash flow for an investment, 
therefore, manage the growth of their jobs.
    And back to the same thing we have talked about before, 
providing some certainty to people so they can plan where they 
are going, I think is critical. So I think it is definitely a 
mistake to allow these things to go back to previous levels, 
and the only thing that can happen is more difficult decisions 
in investing in the business and lower jobs.
    Ms. Black. Drew.
    Mr. Greenblatt. This is an important issue because it makes 
us more efficient. I compete with China, where they pay 30 
cents an hour. My guys get paid $20 an hour with health care, 
401(k). So the only way I can beat China is if we are more 
efficient, and the way we get more efficient is if we buy more 
robots. We have about 15, 17 robots in our factory and the 
quarter-million dollar expensing is about one robot. So it is 
not a lot of money. If it could be a half-million or a million 
bucks, we could invest in more robots and we could fight the 
Chinese better.
    So it is very good for us to have very high expensing so 
that we can invest more so that our guys are protected, because 
when we are efficient, we are more viable and we have a better 
chance of being prosperous and hiring people.
    Ms. Black. Bill.
    Mr. Rys. It is important to extend this and make it 
permanent, and again, that certainty is an issue. And 
especially right now, we have seen business owners really sort 
of sit on the sidelines, as I mentioned in our surveys. One of 
the issues we do ask about our capital expenditures, and again, 
they are at or near historic lows. So business owners are 
standing back and waiting to see what the playing field looks 
like. If this goes away, that is clearly a lost incentive to 
invest. And again, it is a cash flow problem. One in five small 
business owners have a regular cash flow problem. That is how 
they finance their businesses.
    So making sure these are extended--and Matthew, to your 
question about would this reduce investment, it is sort of hard 
to say. These provisions have only been in place for a while 
and the tax data sort of lags, but if you look at after Section 
179 was first put in place in 2003, if you look at the 
statistics of income data for sole proprietors for 2003, or for 
2004, that was the largest increase in depreciation deductions 
since 1986. So clearly, something happened there, moving that 
from $25,000 to $100,000. So similarly, if you start to scale 
that back, I think you are going to see a retrenchment. I mean, 
the only thing that may be a positive on that is because 
business has pulled back so far, they may have to make those 
investments. But making sure that is available, I think is 
definitely very important.
    One other suggestion I would throw out to take a look at is 
it is qualified equipment. So we are talking, you know, 
refrigerators, robots--I would like to have a robot in the 
office----
    [Laughter.]
    But it doesn't include real property. And I think as maybe 
a short-term, a one-year thing, looking at how do we give some 
additional incentives on real property, whether it is the 15-
year depreciation schedule or even maybe something along the 
lines of Section 179 for real property, as one of our members 
said to me, he said, I am equipment-ed out. He said, I have all 
I need, but I would like to replace a roof on our office, and 
he has to depreciate that. So let us find a way where we can 
shorten those time schedules, as well.
    Ms. Black. Mr. Fletcher.
    Mr. Fletcher. This is important for two reasons. One, 
because it is an important source of capital for businesses 
that are not liquid and they can't get access to money from the 
bank. So this is very important because it helps reduce that 
up-front investment. But it is also important from a planning 
perspective because everybody that makes an investment looks at 
paying out dollars today versus the future dollars and they are 
measuring, they are discounting those. And the larger that up-
front investment, the more disinclined they are to make the 
investment. So this helps reduce that up-front cost so it 
improves the investment returns and so it facilitates that 
investment decision and allows them to make the investments to 
hire more people.
    Ms. Black. David.
    Mr. Koenig. I would agree with what everyone has said, that 
clearly, we don't want to go back to pre-$250,000 expensing. So 
we would certainly support a permanent extension, as you 
mentioned in the legislation that is introduced for Section 
179.
    But again, as Bill pointed out, that applies to machinery 
and equipment as opposed to real property, and certainly from 
the restaurant industry perspective, the issue of depreciation 
is critical, and I know that is on our discussion list and we 
can talk about it now or if you want to wait on that----
    Ms. Black. Yes, why don't you keep going.
    Mr. Koenig. Okay.
    Ms. Black. Cash flow, bring it on.
    Mr. Koenig. Sure. Well, in that case, a critical issue for 
the restaurant industry, the biggest tax issue that we are 
fighting right now is the short-term extension of the 15-year 
depreciation provision, and that provision is for restaurant 
improvements and new construction in addition to leasehold 
improvements and retail improvements. You know, just from a 
realistic standpoint, if you look at the foot traffic in the 
restaurants in this country, it definitely warrants much less 
of a depreciation schedule than 39 years. I think everyone 
would agree to that. And Congress in the last few sessions have 
made some inroads there and we are at the point where we have 
got an expiring provision for 15 years for such depreciation.
    Just to read a couple of figures to you on how this really 
impacts cash flow, which I think is really the bottom line 
here--and I have got this in a statement that I submitted for 
the record, as well--if you look at the average cost to 
renovate a so-called quick-serve restaurant, i.e., McDonald's, 
it is approximately $250,000, and for a full-serve, more fine 
dining restaurant, it is $500,000. Just using a 24 percent 
effective marginal tax rate for argument purposes, on the 
$250,000 expenditure, the annual difference in tax savings 
between the 15-year and the 39-year schedule is approximately 
$2,500 per year. For the $500,000 renovation, it is about 
double that, $5,000. And that is just for renovation.
    If you look at costs for new construction or rebuilding, 
the average costs become $700,000 in the quick-serve category 
and $1.5 million in fine dining. Those numbers are 
approximately annual savings of about--and this is cash--$7,000 
for the quick-serve and about $15,000 for full-service. And 
again, it is a time value of money, given the 15-year versus 
39-year.
    Mr. Berger. So, David, have you done any modeling in terms 
of job creation or overall levels of investment? Put another 
way, if we let this lapse, what happens to your industry?
    Mr. Koenig. Well, in 2007, prior to the onset of the 
recession, the restaurant industry spent about $10 billion in 
construction of buildings, and that is the most recent figures 
that we have. Clearly, with the state of the economy in the 
last two years, those numbers are down. But if you look at 
Bureau of Economic Analysis statistics, every dollar that is 
spent in the construction industry generates an additional 
$2.39 in spending in the rest of the economy. A million dollars 
spent in the construction industry creates more than 28 jobs in 
the overall economy.
    So if you translate that into the $10 billion spent by 
restaurants in 2007, that translates into 280,000 jobs. And 
again, those are 2007 figures. Clearly, the situation now is 
markedly different than 2007, which I think really necessitates 
the need to move forward on extending the 15-year depreciation.
    Ms. Black. One thing I have always wondered about with 
restaurants or retail space, but more about restaurants, is 
with a 39-year depreciation period for renovating either the 
customer space or, frankly, the back kitchen space. How many 
restaurants could pass a health code inspection if you didn't 
update your space every 39 plus years?
    Mr. Koenig. Well, that is a great point, and obviously, 
fear not, whether it is the 39 years or 15 years, restaurants 
are not waiting 39 years to renovate.
    Ms. Black. I am glad to hear that.
    Mr. Koenig. Our research at the NRA shows that most 
restaurants remodel and update their buildings every six to 
eight years, regardless of what the tax treatment is, and that 
is pretty consistent along all segments of the industry.
    Ms. Calimafde. Well, I think that is exactly the problem, 
is that the depreciation schedule doesn't match up with 
reality. So you are not allowed to take the proper depreciation 
based on what is really going on. You know, instead of 39 
years, it is really eight years. So the real depreciation 
schedule should have been eight years, not 39.
    Mr. Koenig. That is right, and with this six- to eight-year 
renovation--and there is a lot of intricacies, as well, between 
if you are a franchisee, you may--in your contract, it may be 
required that you have to make renovations even more frequently 
than this six- to eight-year period. So this is all going on in 
the context of, as Paula just stated, a totally unrealistic 
period of 39 years to write off the costs.
    So for us, clearly, as we have talked about the estate tax, 
we have talked about obviously the rates, and those are 
critical issues, but at least in the short term, before the end 
of the year, we certainly hope that Congress will not only 
extend this provision on depreciation, but extend it 
seamlessly, because clearly, for planning purposes, we don't 
want to go beyond 2009 and going into January, February, March, 
saying, well, we think it is going to be extended but we can't 
be sure.
    Ms. Black. And one of the things that in the last couple of 
years has finally come together for restaurant and retail 
depreciation issues has been a bit of a conundrum over whether 
it was a leasehold or an owner-owned restaurant. Can you 
explain that this is now unified?
    Mr. Koenig. That is correct. This provision for 15-year 
depreciation, as I said, it is not only for restaurant 
improvements and new construction, but it is also for leasehold 
improvements and for retail improvements. Its history goes 
back, I believe to the 107th Congress, where it was just put in 
place for leasehold improvements and restaurant improvements, 
and subsequently, it was extended, as these provisions often 
are, for a short period. Last year, in 2008, the provision was 
extended to include not only those improvements, but restaurant 
construction as well as retail improvements. So it is now under 
an umbrella. It is going forward as hopefully one expiring 
provision.
    NRA leads a coalition of interests that has expanded beyond 
the restaurant industry to include, you know, the shopping 
centers, the construction trades, NFIB, the Real Estate Round 
Table. So we are unified in the approach of we need to extend 
this for everybody.
    Ms. Black. And with respect to leaseholds, for how long do 
restaurateurs sign their leases? How long are national chain 
restaurant leases or leases for a pad in a shopping center?
    Mr. Koenig. You know, I don't have the specifics on that. I 
can certainly get back to you. But I imagine it varies. But I 
think the point is if they are long-term, you have got to be 
able to factor in over this period of time--whether long-term 
be three years, five years, ten years--you have got to factor 
in what your cash flow is going to be during this period. 
Without the certainty of provisions like the depreciation 
provision, you can't do that.
    Ms. Brumfield. To follow up with that, and Dave, this will 
actually cross over into what Jose is here to talk about, the 
New Markets Tax Credit, let us talk about the up-front barrier, 
the current financial crisis and the inability to access credit 
before even deciding to purchase something for the restaurant. 
Let us talk about the ability to access the credit to make 
those purchases and, as well, for Jose to have those 
investments in a New Markets Tax Credit.
    Mr. Koenig. I am happy to address the access to credit 
issue. I will let Jose handle the New Markets Tax Credit.
    We had a witness appear yesterday before the Democratic 
Policy Committee, and they held a hearing on the issue of 
access to credit and we had a restaurateur from Chicago, 
Illinois, Ivan Matsunaga, who owns two Connie's Pizza 
establishments in Chicago, and he is a very successful 
businessman. The long and short of it is, he has been mandated 
under his agreement at one of his properties to make the kind 
of improvements that we are talking about and he is having a 
very difficult time in securing financing for the renovations. 
He is not unique. We hear that at the Restaurant Association 
every single day. That issue is as significant to us right now 
as this depreciation issue, maybe even more so from a long-term 
standpoint.
    Clearly, your committee has done a lot. There has been 
legislation out there to increase the amount of SBA guarantees 
up to, I believe, $5 million. That is helpful. There has been 
some talk. I believe Senator Warner had sent a letter to the 
President not too long ago with about 30 or 33 Senators, asking 
for possible use of excess TARP funds, about $40 or $50 billion 
to be pooled together to utilize for small business loans. We 
are grappling with this as an organization and from our 
members, and clearly, we are not the only segment of the 
industry that is.
    So I don't know what the simple solution is. I don't think 
there is one. But until our members feel that they have access 
to capital, expansion or even holding on to properties is going 
to be difficult.
    Mr. Villalobos. And following up on that, the New Markets 
Tax Credit has been a very effective tool and has been a credit 
that has been quickly deployed. Prior to the economic crisis 
and the credit freeze, the New Markets Tax Credit would quite 
often partner with traditional financing in a junior position. 
But since the credit freeze, now the New Markets Tax Credit 
quite frequently is the sole financing source for the 
qualifying business in a low-income community.
    I mean, to date, over $14.3 billion has been invested in 
over 2,000 businesses across the country, both urban and rural, 
and as a result of that $14.3 billion, you are talking about--
has been used to rehabilitate over 68 million square feet of 
real estate projects, create 210,000 construction jobs, and 
create or maintain over 45,000 full-time jobs.
    So the New Markets Tax Credit really has been a critical 
piece in the current crisis, as I said, because now it really 
has become one of the few sources of capital available to low-
income communities. I know we always talk about how the small 
business really drives the economic engine of the U.S., and in 
the communities we serve with the tax credit, it quite often is 
the only engine. So it really has been critical to try and 
address the current crisis.
    Like I said, it has been quickly deployed over its short 
history. The Treasury Department through the CD5 Fund has made 
available $26 billion in credit authority, and you have 
applications totaling in excess of $200 billion. So it is a 
credit that is in high demand, and because of the competitive 
nature, it is quickly deployed. And even though we are seeing 
the deployment slow down a little in the current economy, it is 
still being very quickly deployed and, again, a critical source 
of capital to low-income communities, and at the end of the 
day, really having a big impact on small business, either by 
providing direct financing to them or through creating 
opportunities, if it is a real estate development where there 
is space at competitive lease rates, it allows a small business 
to come in and operate at a profit.
    Mr. Berger. Well, obviously, Jose, we couldn't agree more, 
which is why Senator Rockefeller and Senator Snowe have 
introduced legislation to make the credit effective for five 
more years at a rate of $5 billion per year, as well as solve 
your AMT problem, and we are very grateful that Senator 
Landrieu just this week decided to cosponsor, as well, and we 
hope to get that into an extenders package.
    But my question is, often around here, you think you can 
just wait until the last minute to extend expiring tax 
provisions, and lots of times the incentives actually expire 
and we extend them retroactively. How does that impact what you 
are trying to do on the ground and getting a deal done? And how 
long of an extension are you looking for to give people some 
certainty that the New Markets Credit is going to endure?
    Mr. Villalobos. Well, I mean, from our perspective, we 
would love a permanent--but the longer the period for the tax 
credit, the better in terms of authority, because that allows 
the organization's community development entities to plan and 
work with the investor market to know that this credit is going 
to be around for an extended period of time so that everybody 
can plan accordingly.
    Again, the tax credit is such that there is a competitive 
application process annually and the CD5 Fund has to be able to 
prepare for that. The organizations, the community development 
entities, also have to be able to prepare, build a pipeline, 
and we are talking about projects that oftentimes take a year 
or more to come to fruition. So you just can't have these 
things kind of hanging in limbo, waiting to see whether or not 
the authority is going to be extended.
    So, I mean, we fully support Senators Snowe and Rockefeller 
to do a $5 billion, and currently, at least in the legislation, 
there is $3.5 billion. We would fully recommend that it be at 
minimum $5 billion, which would be the current level. And 
again, when you are talking about a credit that you have year 
in and year out and ask of $20 to $30 billion for what is $5 
billion, a $5 billion authority is more than reasonable.
    Ms. Black. Since we represent the Small Business Committee, 
I would like to draw out a little more information about the 
New Markets Credit and an aspect that you had already touched 
on, which is that these projects create a place where small 
businesses can find a home to find space. In communities 
struggling to create jobs, does the New Markets Credit 
Coalition, or Telacu, have information about jobs created in 
places where there is not so much opportunity, either in the 
initial construction of places or once businesses do find a 
home in these projects?
    Mr. Villalobos. Well, like I said, the tax credit, because 
of its competitive nature, you really--one of the keys to being 
competitive and receiving an allocation authority is to be able 
to measure your community impacts. So those are being measured 
not only before the project, but also over the life of the 
project or the loan, and we are talking financing, if it is 
debt, seven year interest-only at interest rates that are 
roughly--you can find easily at two percent in the marketplace 
right now or other nonconforming terms. It really is 
nontraditional, nonconforming, below-market interest.
    And so you want to track the jobs. You want to track the 
wages that the individuals are being--and is the employment 
coming from the low-income community. So you really look to 
measure the community impacts, not only the economic, but also 
the social. What type of service is being provided by the 
project that is being funded? Is it a health center? Is it a 
charter school? So it is really across the board in terms of 
the many needs that an underserved community needs.
    Ms. Black. A follow-on to that? Mr. Fletcher.
    Mr. Fletcher. My comments really aren't around the New Jobs 
Credit or the New Markets Credit, but it does have to do with 
access to credit. And since you brought it up, I would like to 
interject here, if I could, and it has to do with my company is 
owned by its employees and it has been that way for about seven 
or eight years.
    One of the issues that we have around access to credit, 
particularly in these times, is we have got assets that we used 
to use, but we don't use now. But when we converted to an S 
Corporation seven or eight years ago, they were appreciated in 
value over their cost. That subject, when you convert to an S 
Corporation, that creates what is called a built-in gains tax 
exposure. If you hold the assets for ten years, you can sell 
those assets without any sort of tax penalty. But if you sell 
them within that ten-year period, there is a substantial tax 
penalty on the S Corporation, which really affects the ability 
to access capital and to redeploy assets in a more effective 
and efficient way.
    Earlier this year, there was a short-term fix provided that 
shortened that ten-year holding period to seven years, and that 
is due to expire next year. And so, when you think about access 
to credit, the ability for companies like ours and others to 
redeploy assets--and they can't go out and borrow money, but 
they can sell assets and get funds that way--this is an 
important thing for you to consider and would be helpful.
    Ms. Brumfield. Thank you.
    Ms. Black. Thank you. Mr. Hall.
    Mr. Hall. Kind of the same thing I would add as it relates 
to access to credit for the smallest businesses. In order to 
get a conventional loan, you pretty much have to prove that you 
don't need it, and that is always a difficult thing. So for 
micro businesses, they typically finance their business with 
their own credit cards or their savings or take money out of 
their retirement plans to invest in their business.
    Back to the New Markets Tax Credit, those are typically 
bigger deals that invest in an underserved community, as they 
talked about. The good news in those type of projects is that 
typically then provides other small businesses the opportunity 
for ancillary businesses. The cleaning shop in the same 
neighborhood, a little restaurant in the same neighborhood, a 
sandwich shop, the Starbucks, all of those things grow up 
around that community, which is the whole point for that 
investment.
    Again, the smallest micro businesses, which represents a 
vast majority of the small businesses--95 percent of small 
businesses by count are businesses that are self-employed 
people or under ten employees. So the New Markets Tax Credit 
really doesn't, from a practical standpoint, reach down to 
those people. The small business mom-and-pop shops don't do 
that type of project. But they do do the Starbucks in that 
neighborhood.
    So providing all of these things together, the bonus 
depreciation, 15-year, extending the Section 179, all of that 
goes back to providing access to capital cash flow for the 
small businesses to then also invest in that same community. 
There is also a Small Business Jump Start Act that is pending. 
I think that is S. 1402. A small number--I think we are talking 
about $5 billion here--but this is increasing the deduction for 
start-up costs from $5,000 to $10,000. Those are the type of 
small businesses that are going to support that community 
reinvestment, and I think all of those things together 
translate into access to capital for small business and I think 
it is very important.
    Ms. Black. Thank you.
    Ms. Stewart. On that note, as well, I think that if I can 
throw in a couple of things about women-owned businesses, when 
you talk about access to capital and access to credit, a lot of 
our--even if we are not very, very small businesses, most of us 
as women have had to use our own personal credit lines and 
those types of things to fund our businesses. It is very 
difficult when you go to a bank and the bank asks what your 
husband does to make sure that you can get the loan, and that 
is a very, very frequent--it sounds like it is funny, but it is 
really not.
    So just in a general sense, all of these things with the 
credits, with the 179, all of those things help us 
tremendously. So not that this is the venue for it, but I think 
the access to capital issue should be addressed, as well.
    Ms. Brumfield. Jose.
    Mr. Villalobos. Following up on Keith's comments, the tax 
period, or, I guess, for the New Markets is seven years, so 
from an operating business loan or access to capital 
perspective, it is difficult to make a seven-year interest-only 
loan to a business that needs a line of credit, working 
capital, or purchase machinery or equipment. However, we 
believe, and we have made recommendations to Treasury to create 
a safe harbor for community development entities that want to 
make loans to operating businesses so that if they need to 
repay that loan or make a term that is more in line with the 
use of the money, say, machinery and equipment, or needs and 
should be repaid in five years, that as that principal gets 
repaid, the investor is not at risk of recapture if the money 
is not redeployed within 12 months, which is the current 
requirement. So we do have that recommendation pending before 
Treasury and we believe they have the ability to do that 
without a legislative fix.
    Ms. Brumfield. Bill.
    Mr. Rys. Following up on what Keith said, the start-up 
deduction, I think, would be very beneficial. It is only $5,000 
now. Increasing it to $10,000, as Senator Merkley does, there 
is a bill in the House that Congressman Kratovil has introduced 
that would increase it to $20,000. These are the costs you 
spend before you actually open the doors, the advertising, 
looking for financing, maybe you have a couple of months 
advance rent you have to pay. Technically, those aren't your 
business expenses because you haven't started the business. 
This lets you take those expenses in the first year. If you 
have more than $5,000, you can deduct it over 15 years. So it 
is making it a little bit bigger on the front end. I mean, a 
start-up business needs the money up front, not in the back, so 
it is very important to do that.
    In terms of the credit issue, one issue, and it is 
especially difficult, is housing and the real estate market. We 
have done some surveys and we have found just how many small 
business owners use their mortgages as financing, as part of 
their business financing, and really that shuffling of personal 
assets with the business assets, especially when it comes to 
their homes and how many of those could be underwater right now 
because of what we see in the housing market. Clearly, it is 
having a real impact on the viability of businesses to be able 
to get credit.
    As I said, we have done this monthly survey of business 
owners. Oh, and I should say, on credit, we are actually in the 
process of doing some research on that, so we should have some 
new, interesting stuff soon.
    Ms. Black. Which credit?
    Mr. Rys. Just access to credit. When we do these monthly 
surveys, we ask about the problems of credit, and the one thing 
that is still sticking out is this lost sales. While credit is 
certainly a problem and definitely needs to be addressed, we 
also need to make sure that the balance sheets of these 
businesses are looking stronger, and that is a much bigger 
overall economic issue. But until those balance sheets come 
back, some of these businesses are going to have a harder and 
harder time getting that credit because it is going to be 
harder for the banks who are getting squeezed by the regulators 
to not make a loan that may come back to haunt them later.
    So we are kind of stuck in a vicious cycle here and we need 
to find a way out, and so all these pieces sort of have to fit 
together, and to sort of bring it all back together, the higher 
these tax rates go, the worse those balance sheets are going to 
look, so let us keep that in mind, too.
    Ms. Black. Did you have one more comment?
    Mr. Villalobos. Well, yes. As I said, we found the New 
Markets Tax Credit to be just wildly successful beyond our 
initial dreams and we are part of the, I guess, founding New 
Markets Tax Credit Coalition member and really it was critical 
in terms of how can we get additional long-term capital into 
low-income communities. That really was kind of the concept of 
the New Markets Tax Credit and working with the Hill and the 
White House back in the 1990s to try to get this moving. I am 
definitely very appreciative of everything Senator Snowe has 
done to support the New Markets Tax Credit.
    But given the current economic climate, we definitely want 
to make sure that the New Markets Tax Credit continues to be on 
a level playing field with LIHTC and historic and be able to 
get that AMT relief, but also try to get clarification from the 
IRS on the passive activity issue so that we can attract and 
have a wider pool of investors. Right now, because of the AMT 
and the possible application of the passive losses, we can't go 
out to individuals or smaller businesses to be able to take 
advantage of this tax credit. And like I said, it is huge in 
terms of the impact it has from an economic perspective and 
ultimately the social and underserved communities.
    Ms. Black. Finally, of other specific provisions that are 
going to expire this year including that--for instance, the R&D 
credit is one, and there are some energy incentives.
    Mr. Greenblatt, do you have any experience with the R&D 
credit?
    Mr. Greenblatt. The R&D credit is extremely critical for us 
because we, again, are at a massive disadvantage when we 
compete with China. So the only way we could beat them is if we 
are more productive and we have really slick engineering. And 
the only way you do that is by investing in engineers, 
designers, people that will come up with novel inventions that 
make it beneficial to go with us, because we are never going to 
win on price. We are only going to win on quality or custom or 
some really neat design.
    When you have the R&D tax credit unsure or flopping all 
over the place, we don't have comfort for the investments. And 
this is the only reason why people come to buy from American 
companies, is because we have really great ideas. And we need 
to invest in new research and development all the time, to stay 
cutting edge, because they are always copying us. If you give 
us uncertainty in this aspect of business, then it is hard for 
us to invest in new designers, new software, et cetera.
    Mr. Berger. Drew, apart from the uncertainty, one of the 
things we keep hearing about from companies is that paperwork 
burdens make it very hard to make the credit as effective as it 
could be. Have you guys experienced paperwork issues with the 
credit?
    Mr. Greenblatt. It is very burdensome and it is very 
wasteful. To get our initial R&D tax credit was over $9,000, 
one check for $9,000----
    Ms. Black. And how much compliance cost?
    Mr. Greenblatt. Well, I mean, every year, every year--my 
accountant just bundles it, so it is a little bit hard to 
discern that. My gut is that it is ten percent. It is probably 
two or three grand a year. It is just so wasteful, okay, 
because I could spend that money and buy another software 
station for one of my designers, or I could invest in something 
that will add values that the customer cares about. The 
customer doesn't care how much I spend with my accountant.
    Mr. Berger. How do we fix it?
    Mr. Greenblatt. I mean, the vision is that you make 
everything simpler. I mean, rather than making it--my tax 
return is, like, 80 or 90 pages long. This is very foolish. I 
have a simple company and we are a small company. Things should 
be on a postcard. The way it is done now is a great way to tie 
us up in knots and we should be the opposite. We should be 
simple and elegant and reducing everything to its simplest form 
is critical.
    Mr. Fletcher. Specifically on the cost issue, I can tell 
you that, not at Appleton but at another company, we had an R&D 
credit and I think it amounted to about $1 million. We paid 
over $150,000 to somebody to put together the documentation, 
and I ended up with a notebook, or two or three notebooks, 
actually, about this high of----
    Mr. Greenblatt. It's just a total waste.
    Mr. Fletcher [continuing]. Pictures and diagrams and 
employees' hourly work schedules and the projects that they 
worked on. So that is what we had in terms of documentation. 
But worse, that was just the tip of the iceberg, because all my 
employees had to go out and document what they did every day of 
the week in terms of R&D projects so that we could try to 
account for that appropriately to meet the documentation 
requirements.
    Ms. Black. Thank you.
    Mr. Fletcher. So it is very inefficient.
    Mr. Greenblatt. And nobody reads this.
    Ms. Black. Well, unless you get audited, and I don't wish 
that on anybody.
    Ms. Calimafde. I guess I am speaking on the same point but 
a little bit different, because I definitely agree that the R&D 
credit, what you have to go through to get it is crazy. But 
lots of times, things happen over here, and by the time IRS is 
done with them, they are about 100 times more complicated, and 
I will throw out an example, which is 409(a) that you all 
passed because of huge mega-corporations going out of business 
and the major folks at the top leaving with millions and 
millions of dollars of nonqualified deferred compensation 
plans.
    Well, most people--then it went over to IRS and IRS sort of 
went, oh, boy, we get to write tons and tons of regulations 
about nonqualified deferred compensation plans, and while we 
are at it, let us extend nonqualified deferred compensation to 
mean anything that can possibly ever come out after the 
business closes its doors to an owner, which means that small 
businesses that don't even know that they are hit by 409(a) are 
presently in default of 409(a), and this crazy provision, most 
of the small business advisors don't even know that it applies 
to their clients.
    So there is a smoking gun out there, and I just heard IRS 
is now going to ramp up their audits on small businesses' 
compliance with 409(a), and I can tell you, it is an absolute 
train wreck because I could go around to most small business 
owners and they would look at me and say, I don't have a 
nonqualified deferred compensation. They don't. What they have 
is the ability to get money after they close the doors. That is 
good enough for 409(a).
    So it is the same kind of thing. Even if you do a great job 
doing the credit, somehow, you have got to--and I don't know 
the mechanism here, but do it in such a way that IRS then 
doesn't give us 400 pages of regulations that make it 
impossible to carry out what should be something fairly simple.
    Ms. Brumfield. Yes.
    Bill.
    Mr. Rys. I can't agree with that more, and whether it is 
R&D tax credit or a number of other provisions in the code, I 
think a lot of small business owners may very well be scared 
away from the R&D tax credit when they see how complicated it 
is going to be. You may have some very interesting, very good 
potential out there, but they might walk away from it.
    Again, we survey our members all the time, and this isn't 
just members. This survey was the entire small business 
population. Tax compliance--the paperwork associated with tax 
compliance is the most expensive paperwork burden the Federal 
Government places on small business owners, by far. It is huge. 
And it is only getting worse.
    In the health care bill, we have got this corporate 
reporting provision which will have small business owners 
filling out 1099s all year, constantly going back, constantly 
going forward in terms of trying to figure out, how much did I 
spend on air travel this year? How much did I spend on 
restaurants? How much did I spend on telephone services? 
Business owners are being--and they don't have a finance 
department. So it is the owner doing this, or in most cases, 
they just dump it to their accountant and say, give it to me at 
the end of the year and I will sign it and pay it and whatever, 
and they move on and they don't know what exactly the cost is. 
So we really do need to think through those things, especially 
as they come out of IRS.
    Something Paul and I have talked about were the penalties 
dealing with 6707(a), where if you had a listed transaction, 
which in many cases was a retirement plan set up for a sole 
proprietor of a very small, small business, you had to file a 
form to go with that. But the penalty attached both to the 
individual form and to the business information return, it is a 
$100,000 penalty, right, on the individual and $200,000 on the 
business. So for one year, you have got $300,000 in penalties 
and you didn't have anywhere near that much in terms of your 
tax benefit from it. That type of thing needs to be addressed.
    Ms. Calimafde. Bill, that is like $300,000 if you are only 
one member. But, I mean, I have heard of cases where there are, 
like, three or four children who are minors who have also been 
caught up to it. So the family is getting a $1 million penalty 
a year for going into something that they had no idea was a 
listed transaction, and the promoter never told them it was a 
listed transaction. And then IRS comes in and it turns out that 
maybe the tax liability is $5,000--and these are real numbers 
of people out there. And, by the way, this is being targeted to 
small business almost entirely.
    And meanwhile, they have got a $1 million penalty that IRS 
cannot abate because of the way this was written, and IRS is 
not crazy about this. They feel really terrible about this 
situation, because what is happening is you have got small 
business owners out there, and you can call this a tax issue, 
but this one has transcended it because you have people who are 
having heart attacks, families are breaking up because these 
people haven't made $1 million if you put all of their earnings 
together for their entire life, and they thought they were 
doing something that was fine and now they are being held to a 
standard. So it is bankruptcy, it is financial ruin. I mean, it 
is a horrible situation, and anything you can do to help out 
small businesses on 6707(a) is critical.
    Mr. Rys. There is a moratorium on moving forward on those 
penalties until the end of the year, but time is running out, 
and I know we have heard from members about that. Included in 
the statute is really no ability to go to court and litigate 
this without paying the penalty up front, which is just--at $1 
million, you just can't do.
    Ms. Calimafde. Senator Baucus and Grassley have a bill, but 
it really doesn't go far enough. It still treats these people, 
who all they did was didn't disclose something they didn't know 
about, to a standard where they are deemed to be worse than 
fraud in the tax area. So it is crazy. But at least it is a 
start and someone is hearing us.
    That wasn't the comment I wanted to make. There was 
something you had said earlier that really got me, but I forgot 
already, so----
    Ms. Black. Mr. Fletcher, there is a tax credit currently in 
law, an energy provision, and I am wondering if you might chat 
about that a little while. It is something that Senator Snowe 
has been very interested in, and that has helped paper 
companies maintain jobs this year.
    Mr. Fletcher. Thank you for that opportunity. Yes, Appleton 
and a number of other small paper companies, as well as some 
large paper companies, have benefitted this year from an 
alternative fuel mixture credit that was enacted several years 
ago, or a few years ago, anyway, and that is due to expire at 
the end of this year. And there has been a lot of discussion 
around unintended consequences and things of that sort, and yet 
the paper industry is one of the--was one of the earliest 
recycling businesses around and it is one of the earliest 
producers of alternative fuel and continues today to be one of 
the largest producers of alternative fuel used in its business, 
both for heat and for electricity, used in its own facility, so 
they are, like, self-sustaining in the world.
    So as a business model, it is something that we all ought 
to try to support, and yet there are a number of things going 
on around discussions to extend the Alternative Fuel Mixture 
Credit in one form or another or some other credits. Because of 
larger companies that are also able to avail themselves of this 
credit or these types of credits, there is some backlash that 
the smaller companies are inadvertently being made to bear.
    So if there is a way to come up with a structure that 
allows and supports these smaller companies who have problems 
accessing capital, to afford them the ability to continue to 
invest in alternative fuel mechanisms to continue to--so it is 
environmentally friendly, it also makes them to be competitive 
against the Germans, the Japanese, and the Chinese--
increasingly the Chinese sending paper over here--that would be 
appreciated.
    Ms. Brumfield. Jeff, could you speak a little bit about the 
impact on jobs that your industry has?
    Mr. Fletcher. Yes. For smaller companies, in particular, 
the way this fuel comes about is that we take wood chips and we 
soak them in water and chemicals to break the wood apart so 
that we can take the fiber out and make paper out of it. And 
then we try to reclaim the chemicals. But then we are left with 
what is called lignin, and lignin is kind of like glue that 
holds the fibers together in the wood. Well, that lignin, we 
recover the chemicals by burning the lignin and the chemicals 
drop to the bottom of the furnace and the lignin--the heat that 
we produce produces steam that we pump into the paper machine 
and it dries the paper. So it is a very interesting, unique, 
closed-loop process.
    So we have been getting a credit for burning these lignins 
and producing steam, and in some cases, you take the steam and 
further on produce electricity that you can use to power other 
aspects of the mill.
    Ms. Brumfield. Okay.
    Ms. Black. There is a Section 45 tax credit for electricity 
generated from alternative fuels. With that, the credit does 
not currently apply to thermal heat, so that when you create 
steam from burning your alternative fuel, you are not eligible 
for a Section 45 credit.
    But you are also not eligible for the Section 45 credit if 
you use the electricity generated from your alternative energy 
source, if you use the electricity in your own facility, and 
that is an issue that Senator Snowe has been working on with 
Senator Lincoln and Senator Roberts over at the Finance 
Committee. Would being able to use the electricity on site 
rather than having to sell it out into the grid be beneficial 
to your business?
    Mr. Fletcher. Frankly, for us, probably not in terms of--we 
don't have a generator to produce electricity, so all we do is 
produce the steam. So Section 45, you are right, there are two 
aspects of it. One is, in order to qualify for the credit 
today, you have to produce the electricity and sell it to the 
utility. And so most of the companies produce the electricity 
and use it on their own facility and they only sell off the 
surplus stuff. So the credit has limited application unless you 
specifically design something that you can say, I am going to 
sell. But then the returns on that are tough to make.
    So if we could find a way to expand that credit to allow 
for the production of electricity that we use on the site, that 
would be helpful. It would also take away some of the peak 
loads that the utilities are feeling so that we relieve the 
strain on the grid system.
    And then for companies like Appleton that don't have 
generators to produce electricity, just the fact that we 
produce the steam----
    Ms. Black. The thermal heat.
    Mr. Fletcher. The thermal heat, that is right--there is a 
BTU content that otherwise, if we weren't running that pulp 
mill, if we weren't using that boiler system to recover those 
chemicals, we would have to produce the thermal heat in some 
other form or fashion by burning natural gas or coal or 
something like that.
    Ms. Black. Exactly.
    Paula.
    Ms. Calimafde. I just want to take a moment and go back to 
something Bill kind of went over quickly dealing with the 1099. 
This is a--I believe it is revenue raiser sitting inside both, 
I think, both health care bills right now. I think there is a 
sense that it must be okay, because nobody is talking about it. 
But I think it is sort of the opposite. I think small business 
is not aware of what this issue could mean to them, and part of 
this goes into this whole concept of the tax gap and a lot of 
the small businesses aren't reporting their income properly, 
and you can say whatever you want to say about that. But I 
don't think this 1099 thing is going to do anything to help the 
tax gap.
    But basically, what it is going to require is 1099s. I 
think it is for every service and property----
    Mr. Rys. It is every transaction over $600 for both an 
incorporated and unincorporated business. Currently, it is only 
an unincorporated business, but now it will be included to an 
incorporated business. But it will also include not just 
services, which is what it is now, but would also include 
property. So how do you define property? I am assuming it 
doesn't mean inventory, but that raises a whole set of issues, 
because if I am a roofer but I have a storefront and I sell 
shingles as a retail, but I also put those shingles on my 
building, well, part of it is inventory, part of it is not. So 
how do you make those distinctions? Where are you going to draw 
the line?
    And you are going to have to constantly keep up and figure 
out, if I am a landscaper and I buy six bags of dirt at Home 
Depot and that puts me over $600 at the Home Depot, but it was 
just one of my guys who was out at the job for the day and 
said, darn, we need six more bags of dirt, well, did he 
remember to include however much six bags of dirt cost at Home 
Depot that he now has to report when he brings it back, and is 
that going to cause them to fail to report? You know, it is a 
whole--it is a paperwork thing.
    Ms. Calimafde. It sounds to me like the cost of small 
business, and probably any business, of having to deal with the 
paperwork load and administrative burden of this, I can't 
imagine how that wouldn't exceed any possible good that anyone 
could get out of this. So if you would look at that provision, 
because as I said, I think the concept is, well, no one is 
talking about it. I think no one is talking about it like 
409(a), because no one knows about it.
    Ms. Black. And with respect to that, this provision hasn't 
yet taken effect to require that 1099s get sent to taxpayers. 
The provision in the health care bill is to apply to C 
Corporations. It is just not yet effective, correct, for pass-
throughs?
    Mr. Rys. Well, no. I mean, currently, if you are any sort 
of business and you get services from an unincorporated 
business, you report that to the IRS and you report it back to 
the business, and the purpose behind that is, since there is 
not generally withholding on the income that the sole 
proprietor, for example, would hold, that 1099 serves as a 
back-up for the IRS to be able to say, okay, you have reported 
this much income. We have got this many 1099s. We can see where 
your income matches up.
    This would expand that universe to now include transactions 
with corporations. So as today, if I am one of Dave's members 
and I own a restaurant and I have Verizon come in and put in my 
telephone services and Internet access and that sort of thing, 
I don't report that today because Verizon is a C Corporation. 
But I would report that tomorrow. So that is the distinction.
    Ms. Black. Got it.
    Ms. Calimafde. But I think you are right, Kathleen. The 
provision that we are talking about in the health care bill, I 
don't think it becomes effective until 2012. I think there is 
this concept of a ramp-up time, because, in addition, you have 
to get the EIN numbers for all these different vendors, and 
that is the small business' burden to get all those EINs, so--
--
    Mr. Rys. And to add to that, if you don't get the correct 
number, then you have to--or if you don't get the correct 
number or you don't know where to send it, because you have to 
send it to the business that provided the services, if you get 
an incorrect number or you get no number at all or you don't 
know where to hold it, you have to withhold 23 percent on the 
contract. So now you are deputizing the small business owner to 
basically withhold the money.
    It raises $17 billion. My assumption is that the $17 
billion is largely that withholding number as small business 
owners run around trying to figure out, do I have the right 
lottery numbers here or not, or am I sending--and if you have a 
franchise, do I send it to the corporate franchise? Do I send 
it to the owner? Where does it go? So there are a number of 
just little technical questions that are going to come up for 
every business owner that has these transactions.
    Ms. Calimafde. I mean, do you believe that number? I don't 
believe that revenue raiser number. I mean, you know. It 
certainly wasn't offset by the administrative burdens.
    Ms. Black. If Joint Tax chisels it onto a score sheet, I 
can assure you, that is what we live with.
    Ms. Calimafde. Yes.
    Ms. Brumfield. Yes. Sure. Well, we would like to thank 
everyone----
    Ms. Black. I am sorry----
    Ms. Brumfield. I am sorry.
    Dave.
    Mr. Koenig. I am sorry, I will be brief, but there is one 
expiring provision that I would like to mention----
    Ms. Brumfield. Sure.
    Mr. Koenig [continuing]. That hasn't been discussed that is 
of great importance, not only to the restaurant industry, but 
to small businesses and really to society. Since 1976, the tax 
code has allowed traditional C Corporations, and only 
traditional C Corporations, to get under Section 170 of the 
code an enhanced deduction to encourage the charitable donation 
of food inventory. And in 2005, I believe it was, Congress 
wisely extended that provision to cover all taxpayers, 
regardless of business form and entity. Like a lot of the other 
provisions we have talked about earlier, that enhanced 
deduction provision expires for non-C Corporations at the end 
of 2009.
    And certainly, given the state of the economy and given 
shortages that have been in the paper recently at food banks, I 
think it is pretty self-evident that Congress would want to 
extend that provision. Legislation has been introduced in the 
Senate, the Good Samaritan Hunger Relief Tax Incentive 
Extension Act, S. 1313. The lead sponsors are Senators Lincoln, 
Lugar, and Leahy. This would make that provision permanent for 
all taxpayers, regardless of C Corporation status or not.
    Ms. Black. Finishing up on an altruistic end there.
    [Laughter.]
    Ms. Black. Good.
    Ms. Brumfield. There we go.
    Well, this has been a great roundtable. I would like to 
thank everyone for participating and all of the attendees for 
attending. Thank you very much. We will take this information 
back and do as much work as possible before January 1 to have 
the results that you all desire. So thank you.
    Ms. Black. Thank you.
    [Whereupon, at 12:04 p.m., the committee was adjourned.]


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