[Senate Hearing 111-1171]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1171
ASSESSING THE REGULATORY
AND ADMINISTRATIVE BURDENS ON AMERICA'S SMALL BUSINESSES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 18, 2010
__________
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 F. WICKER, Mississippi
MARK L. PRYOR, Arkansas JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland
JEANNE SHAHEEN, New Hampshire
KAY R. HAGAN, North Carolina
Donald R. Cravins, Jr., Democratic Staff Director and Chief Counsel
Wallace K. Hsueh, Republican Staff Director
C O N T E N T S
----------
Opening Statements
Page
Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana. 1
Snowe, Hon. Olympia J., a U.S. Senator from Maine................ 3
Hagan, Hon. Kay R., a U.S. Senator from North Carolina........... 7
Shaheen, Hon. Jeanne, a U.S. Senator from New Hampshire.......... 7
Pryor, Hon. Mark L., a U.S. Senator from Arkansas................ 8
Witnesses
Panel 1
Sargeant, Hon. Winslow, Chief Counsel for Advocacy, U.S. Small
Business Administration........................................ 8
White, James R., Director, Tax Issues, U.S. Government
Accountability Office.......................................... 18
Panel 2
Harris, Roger, President and COO, Padgett Business Services/
SmallBizPros, Inc.............................................. 54
Nannis, Lawrence S., CPA, Chair, National Small Business
Association.................................................... 63
Langer, Andrew, President, The Institute for Liberty............. 76
Gattuso, James, Senior Research Fellow, Regulatory Policy, The
Heritage Foundation............................................ 97
Alphabetical Listing and Appendix Material Submitted
Gattuso, James
Testimony.................................................... 97
Prepared statement........................................... 99
Hagan, Hon. Kay R.
Opening statement............................................ 7
Harris, Roger
Testimony.................................................... 54
Prepared statement........................................... 57
Landrieu, Hon. Mary L.
Opening statement............................................ 1
Langer, Andrew
Testimony.................................................... 76
Prepared statement........................................... 79
Nannis, Lawrence S.
Testimony.................................................... 63
Prepared statement........................................... 66
Pryor, Hon. Mark L.
Opening statement............................................ 8
Sargeant, Hon. Winslow
Testimony.................................................... 8
Prepared statement........................................... 10
Shaheen, Hon. Jeanne
Opening statement............................................ 7
Snowe, Hon. Olympia
Opening statement............................................ 3
White, James R.
Testimony.................................................... 18
Prepared statement........................................... 20
ASSESSING THE REGULATORY AND ADMINISTRATIVE BURDENS ON AMERICA'S SMALL
BUSINESSES
----------
THURSDAY, NOVEMBER 18, 2010
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
Room 428A, Russell Senate Office Building, Hon. Mary L.
Landrieu, Chairman of the Committee, presiding.
Present: Senators Landrieu, Pryor, Shaheen, Hagan, Snowe,
and Risch.
Staff Present: David Gillers, Chris Lucas, and Matt Walker.
OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, AND A U.S.
SENATOR FROM LOUISIANA
Chair Landrieu. Good morning, everyone, and welcome to our
hearing on Regulatory and Administrative Burdens on America's
Small Business. The Small Business Meeting will come to order.
To begin, let me say that I want to be very clear that the
intention of holding this hearing is not to attack the
Americans With Disabilities Act and I want to thank you all for
being here. I want to apologize that it was singled out among
all the Acts of the Federal Government, it was not brought to
my attention until a few minutes go, but I appreciate you all
being here.
This hearing is about general rules and regulations of
which yours may be one of hundreds that can, you know,
unnecessarily, sometimes, affect the operations of very small
businesses in our country. So, that is what our committee is
examining today, and I want to thank you all for being here.
I also want to say that this hearing is about identifying
the obstacles that small businesses face in complying with
federal rules in their day-to-day operations and working to
find meaningful alternatives or ways that agency rules can
achieve their intended purposes, many of which are for the
public good, and all of which have the intention of being for
the public good, while mitigating the economic harm to small
business.
Nearly two months ago, Congress passed the Small Business
Jobs Act of 2010. This committee led that effort, and it
provides much needed relief to small businesses through the SBA
lending programs, provides immediate tax cuts, up to $12
billion for small business in America, and establishes
strategic partnerships with community banks, a first of its
kind innovative approach to provide greater access to capital
for small firms everywhere, and we understand that it is
working as those rules are being put into place as we speak.
With that being said, our nation's smallest entrepreneurs
are still facing significant obstacles when they try to grow
their business. Our job here is not done, it is only beginning,
and I am committed, and the members, at least on the Democratic
side and I hope the Republican side as well, to reducing
unnecessary administrative and regulatory burdens that small
businesses face every day in their fight to get our economy
back on track. That is why this past Monday I cosponsored the
Bipartisan Small Business Paperwork Relief Act, which Finance
Committee Chairman Max Baucus is leading, a bill that repeals
the expanded Form 1099 requirement put into effect by the
healthcare reform legislation signed into law last year.
For months I have heard from small businesses all over the
country that the expanded Form 1099 reporting requirements just
did not make sense and would unreasonably burden small
business. We have responded, we are going to try to repeal that
piece of the healthcare law which will not affect healthcare
policy at all, which is important, it will just affect the way
the money is raised to pay for that policy, and that was the
wrong thing to do, as I have said, and I am glad we will have a
chance to change it.
As it is now according to the testimony we will hear today,
the cost of tax compliance for small business is over 300
percent greater per employee than the cost to large companies.
Just yesterday in this room we had a roundtable with banks from
around the country. We had a banker, Steve David sitting in
that third chair, from New Roads, a small town in Louisiana,
only $150 million bank. He said that his FDIC insurance had
gone up over 300 percent just in the last couple of years. I am
going to submit the actual dollar amount for the record, but it
is just unconscionable that fees and administrative burdens for
small businesses have gone up so substantially, not just in the
last several years, but it has been a trend now over a decade
or more.
There was a report released just last week, the Crain
Report, I am going to get a copy of it in a minute, I hope that
Mr. Sargeant, Dr. Sargeant, you will be speaking on that this
morning and also Mr. White, that goes into greater detail about
the administrative burdens on small business and we are looking
forward to hearing some of that testimony today.
Today's hearing is the next step in a process that will
serve to build a solid record of current regulatory obstacles
small businesses face. This way we can tailor smart solutions
that will maximize the public benefit, while streamlining
unnecessary requirements on our nation's small businesses. We
know these regulatory hurtles translate into real cost for
them. Without question, federal, administrative, and regulatory
burden on businesses large and small continue to grow every
year.
According to a recent report, which is the one that I have
called your attention to, regulations in the United States have
increased more than--to $1.75 trillion. If you broke that down
by cost per U.S. household, each family would be responsible
for more than $15,000 of the annual cost. However, the
distribution of these regulatory costs is uneven and will
disproportionately affect small business. Advocacy, which is
the office before us today, estimates that the average per
business was approximately $8,000 per employee in 2008.
Think about that, people stand up and cheer around here if
we can find $1,000 tax cut per employee. I mean, would not that
be extraordinary to provide a $1,000 tax cut per employee? But
on the same time, our combination of rules and regulations is
basically attaching to each employee an $8,000 burden. If we
could life $500 of that or $600 of that or $1,000 of that, it
would be cause for real celebration in this nation.
The regulatory cost, as I said, per employee for small
business was $10,585 compared to $7,454 for medium-sized firms,
and $7,755 for large firms. There is a chart that breaks that
down and I think it is important to understand the burden that
is falling disproportionately on small business, and the
opportunity to continue, I think, to meet the goals of all of
our agencies, whether it is Health or Labor or OSHA or other
agencies without being disproportionately heavy to the smallest
and sometimes newest businesses, that if we give them a chance
to get started, would be more than happy and more than able to
comply with the rules and regulations that we are requiring of
them.
When Federal Government regulations do not account for the
unique challenges that small business owners, and I should say
entrepreneurial start-up companies, are facing, I think we all
suffer. Small businesses employ approximately 50 percent of the
U.S. workforce, but the start-up businesses, the new
businesses, are what is going to account for the jobs created
to end this recession.
So, we want to make their load as light as possible, not
heavy, light, so that they can be nimble and agile and be
created and grow, and that is to our benefit.
Today we will hear from our Chief Regulatory Relief
Officer. That is what this office is. It is referred to today
as the Office of Advocacy. The name does not exactly imply what
it is. Your job, as you know Dr. Sargeant, is to advocate for
regulatory relief to small businesses, it was why this office
was created some years ago, its primary mission for existing,
and we are looking forward to some of your either suggestions
or observations today.
And Mr. White, we are happy that you are here from the
Government Accounting Administrative Office that is done
reports, the GAO, on this subject, any number of reports. We
are looking forward to some of your observations today.
Before we get to our panel I would like to turn it over to
my Ranking Member for her opening statements and thank her for
joining me today----
Senator Snowe. Thank you, Chair Landrieu.
Chair Landrieu [continuing]. For this very important
hearing and recognize that Senator Kay Hagan is with us as
well.
OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, A U.S. SENATOR FROM
MAINE
Senator Snowe. Thank you, Chair Landrieu. And you are
absolutely right, it is a critical issue and I want to commend
you for holding this hearing because without a doubt,
undeniably, the regulatory burden is disproportionate on small
businesses throughout this country and it is inhibiting job
creation potential and undermining their ability to compete.
I welcome our witnesses here today, most especially Dr.
Sargeant, for joining us in his first appearance before this
committee since becoming Chief Counsel for the Small Business
Administration's Office of Advocacy, and Mr. White, thank you
as well from GAO for providing such invaluable data as we make
decisions in some of these critical issues and what we need to
do in the future.
I do not know how to say it any clearer: excessive
regulations are suffocating the entrepreneurial spirit of
America's almost 30 million small businesses. The Heritage
Foundation, I know, will be citing chapter and verse the number
of regulations that will be promulgated, the 43 new major
regulations that will be implemented in Fiscal Year 2010,
imposing $26.5 billion in new regulatory compliance costs, and
that is in addition, as Chair Landrieu indicated, to the $1.75
trillion in annual regulatory compliance costs that the Office
of Advocacy recently reported.
This is a regulatory rampage stampeding over small
businesses. So, Dr. Sargeant, as the Chief Counsel for
Advocacy, you are the singular person within the entire Federal
Government whose primary statutory mission is to ensure that
small business economic impact is considered during the federal
rulemaking process. As you well know, I and some of my
colleagues here, had concerns about your nomination and
subsequent recess appointment largely due to the fact that you
failed to identify reducing the small business regulatory
burden and administering the Regulatory Flexibility Act as the
central mission of your office.
I sincerely hope that you will prove us wrong, Dr.
Sargeant, because we expect you, as a chief counsel, not just
to be a regulatory watchdog, but to be a bulldog for small
business, driving small business regulatory reform issues
within the highest levels and standing up against other
agencies during the rulemaking process. You must act
independently from the Administration and the SBA and match,
and even exceed, the $11 billion in annual regulatory
compliance savings the Office of Advocacy achieved under the
last chief counsel. This is not a suggestion, it is a
fundamental obligation.
In my leadership capacity on this committee I have long
been concerned about the mounting regulatory burden that the
Federal Government is imposing on American business.
Regrettably, small firms with fewer than 20 employees, and the
Chair has already mentioned this, has born the disproportionate
burden of complying with federal regulations with the annual
regulatory costs exceeding $10,585 per employee for those firms
with less than 20 employees. Those daunting figures are from
2008, as a matter of fact, so imagine where we stand today.
Consider that according to the U.S. Chamber of Commerce, health
reform alone mandates 41 separate rulemakings, at least 100
additional regulatory guidance documents and 129 reports.
So, we should waste no time in cutting the regulatory red
tape that is strangulating America's small businesses, they are
hidden taxes, another layer of uncertainty to bottom line
operating costs and is stifling job creation, hampering
innovation, and postponing investment in the economy.
In my numerous, recent street tours and meetings in Maine,
aside from taxes, small businesses complained the most about
onerous regulations emanating from every agency, every sphere
of Washington, D.C. So, Dr. Sargeant, it is absolutely critical
that you take immediate action to appoint your ten regional
advocates who will be your eyes and ears on the street as to
what issues are most pressing to small firms, and I would like
to discuss that with you further in the question and answer
period as to why that has not happened.
It is absolutely critical to help you in performing the
mission of your office. That is why earlier this year I joined
my good friend and colleague on this committee, Senator Pryor,
to introduce the Job Impact Analysis Act, and am pleased that
several of those provisions were included in the recent jobs
bill. It is absolutely vital that we take this step forward. I
hope that you take full advantage of the additional influence
this provision provides by setting a record for comments filed
by the Chief Counsel for Advocacy.
There is much more that Congress can and must do. I will
continue to advocate for an aggressive regulatory reform agenda
that requires the Federal Government to fully consider small
business economic impact during the rulemaking process. For
instance, it is about time that we in Congress receive job
impact statements from the nonpartisan CBO that estimates
potential job creation and job loss from regulatory
requirements and major legislation.
It is long overdue that we require the Federal Government
to finally consider the indirect economic costs in addition to
direct economic costs of Federal rules and regulations. And
agencies must periodically review their existing regulations
for small business impact so that agencies unnecessary and
duplicative regulations can be stricken, and there has to be
more than a few of those in the more than 163,000 pages of the
Federal Code.
Finally, I added a requirement to the Wall Street Reform
Bill that before the new Consumer Financial Protection Bureau
can even publish a rule, it must convene a small business panel
to scrutinize it. Dr. Sargeant, I appreciate that your office
will be holding a stakeholders' panel this afternoon on the
small business review panels. I expect Advocacy to play a
driving role in establishing them within this bureau.
Those panels have worked exceptionally well at EPA and OSHA
since 1996, so why not apply this requirement to every federal
agency so small businesses are considered first, not as an
afterthought, and it is a very critical point because I know
that in my battle to get this done within the Financial
Regulatory Reform Bill, there was one issue, everybody was
saying, ``well, you know, let the rules, take effect, and then
if they are a problem we will fix it later.'' Well, no, no, no.
Not in this economy. Not now. Not for small businesses.
We need to have small business effects fully examined
before rules are ever promulgated, so that is why we have
panels at OSHA, EPA, and now at the Consumer Financial
Protection Bureau. Frankly, we should have panels at every
agency.
The same is true on the 1099 issue, I know we will have
further discussions, so I will not get into details in my
opening statement, but I do believe you need to be front and
center on this issue. I must have heard it 1,000 times on my
street tours, small businesses are extremely concerned about
the implications and the effects of the 1099 requirement and on
their ability to comply with it.
It is going to be extremely onerous, without question, in
addition to everything else that is coming their way from every
other agency. So, I would hope that you would be front and
center of that and I think frankly, more than just having
confidential or private conversations with the IRS and
Treasury, I think you should submit public comments on this
very question to the Department, because it is vital. It is
that crucial to the well being of small businesses throughout
this country.
Finally, I am deeply troubled by OSHA's several recent
actions that could undermine the collaborative approach to
enforcement that has worked so well since the Clinton
Administration. OSHA recently boosted penalties and reduced the
penalty mitigation structure for small firms with fewer than 25
workers without first convening a small business review panel
to consider the economic impact, and that is why earlier this
week I joined Senator Enzi, the Ranking Member of the HELP
Committee, in sending an oversight letter to the Labor
Secretary probing OSHA's action and commitment to a
collaborative approach that has always been the case. It
concerns me that OSHA is undermining the cooperative
relationship by taking these steps that are going to be
additionally onerous to small business, not only increasing
their penalties, but reducing the mitigation of penalties that
have been in current law.
So, with that, Madam Chair, I will submit the rest of my
statement but there is a lot to discuss, obviously, with
respect to these issues. Thank you.
Chair Landrieu. Thank you. I really appreciate the
leadership over many years of the ranking member. I would point
out, and I am sure she is aware, that the regulatory burden of
the United States could not possibly be the fault of Dr.
Sargeant who just took office three months ago. Having said
that, the rampage started prior to this Administration coming
in, might have picked up a little bit of speed, but it started
a long time ago and so I think in fairness to the witness who
has just been in his job about three months.
Senator Hagan.
Senator Snowe. Can I just make a point?
Chair Landrieu. Go ahead.
Senator Snowe. Madam Chair, I was not suggesting that it
was his fault. We have passed legislation that includes all
that rulemaking. That is the point. Hopefully Dr. Sargeant will
be an advocate to address many of these issues as they come
along, because so many rules are coming down as a result of
legislative enactment that will really pose a significant
burden.
Chair Landrieu. Thank you.
Senator Snowe. So, that is why he is going to have an
enormous responsibility to address all those issues as they
come to the forefront, because of the magnitude and dimension
and breadth of all these regulations.
Chair Landrieu. Thank you, Senator Hagan.
OPENING STATEMENT OF HON. KAY R. HAGAN, A U.S. SENATOR FROM
NORTH CAROLINA
Senator Hagan. I just wanted to say thank you, Chairman
Landrieu, for calling this hearing and to members of both of
the panels joining us to discuss the regulatory burdens on
small business. We have got to do something about this. I know
I am not alone when I say that jobs are my number one priority
and the key to a true economic recovery is enabling our
nation's small businesses to expand and create jobs.
In North Carolina, too many small businesses are still
struggling to make payroll, families are struggling to put food
on the table and pay bills, and also, like Senator Snowe,
having spent the past year and a half talking to small
businesses and owners in every corner of the state, I have seen
first hand the power of their determination and innovation, and
what is clear to me is that North Carolina's small business
owners want a fair shot to compete and to get back to work, and
to help them do so, we have got to work to create a better
environment for businesses to grow these jobs, and that is why
it was so important that we pass the Small Business Jobs Act in
September, which included critical provisions to get capital
flowing to small businesses and to support the SBA's ability to
support the small businesses and the lending nationwide.
Finally, it is why I think today's hearing is so important.
As the witnesses have highlighted, small businesses often face
a disproportionate regulatory burden and the 1099 regulatory
requirement that I know we will be discussing today, is a
perfect example of an unintentional consequence of legislation
that truly presents significant challenges for small business,
and I am committed to working with my colleagues to protect
small business owners from this burden before it goes into
effect in 2012, and at this point, every job is critical and it
is essential that we ensure that our small businesses do not
have to decide between hiring a new employee and complying with
local, state, and federal regulations that present an undue
burden.
So, Madam Chairman, thank you for holding this hearing and
I look forward to the witnesses testimony.
Chair Landrieu. Thank you.
Senator Shaheen.
OPENING STATEMENT OF HON. JEANNE SHAHEEN, A U.S. SENATOR FROM
NEW HAMPSHIRE
Senator Shaheen. I just want to thank you and the ranking
member for holding the hearing this morning, and I look forward
to hearing from our panelists.
Chair Landrieu. Senator Pryor.
OPENING STATEMENT OF HON. MARK L. PRYOR, A U.S. SENATOR FROM
ARKANSAS
Senator Pryor. Thank you, Madam Chairman. Thank you for
having this hearing and ranking member, Snowe, thank you for
your leadership on small business issues as well.
We all know that small business is the driving force in our
economy so this important hearing, I am glad we are having it,
and look forward to hearing from the witnesses. Thank you.
Chair Landrieu. Thank you. Dr. Sargeant, why do not you
begin and let me just give you a very brief introduction. I
know you are well known to this committee but to those that are
observing. Dr. Sargeant, this past August, was appointed Chief
Counsel of the Office of Advocacy by President Obama. He comes
from an entrepreneurial background himself, previously working
as program manager in electronics for the National Science
Foundation's Small Business Innovative Research Program, and
has been a cofounder of a semiconductor circuit design company.
I want to thank you for asking me to speak at the 30th
Annual Regulatory Flexibility Conference that was here last
September. I enjoyed meeting many of the members that were in
attendance and as a result of that will be having a lunch with
the former advocates and yourself later today to talk with
them, both those that have served in Republican and Democratic
administrations to get some good ideas from them.
Next, I want to welcome Mr. James White from the U.S.
Government Accountability Office. Mr. White is the Director of
Tax Issues with the GAO and has held that position since 1998.
Previously he was an associate professor at Hamilton College
where he taught public finance. We welcome you, Jim, this
morning.
Let us start with Dr. Sargeant.
STATEMENT OF HON. WINSLOW SARGEANT, Ph.D., CHIEF COUNSEL FOR
ADVOCACY, U.S. SMALL BUSINESS ADMINISTRATION
Mr. Sargeant. Chair Landrieu, Ranking Member Snowe, members
of the committee, good morning and thank you for the
opportunity to appear before you today. I am Winslow Sargeant,
Chief Counsel for Advocacy at the U.S. Small Business
Administration.
In the interest of time I will summarize my prepared
testimony and ask that my full statement be included in the
record.
The Office of Advocacy is an independent office within SBA.
The views and my testimony do not necessarily reflect the views
of the Administration or the SBA, this statement was not
cleared by the Office of Management and Budget.
As Chief Counsel for Advocacy, it is my top priority to
ensure that small businesses are not unfairly burdened by
regulations. My office does this in large part through
monitoring federal agencies' compliance with the Regulatory
Flexibility Act, that is why I am honored to be here today.
I have been on the job for almost three months and Advocacy
has been very busy during that time. Advocacy held a symposium
celebrating the 30th anniversary of the passage of the RFA. I
would like to personally thank Chair Landrieu for her
participation. Advocacy also hosted a symposium on job creation
by high impact firms. We have held nine small business
roundtables on issues including the environment,
transportation, labor, safety, and health, and tax. One of
those roundtables covered the expanded Form 1099 reporting
requirement.
During my short time at Advocacy, I have signed 13 public
regulatory comment letters including ones in environmental,
education, and medical privacy and Medicare rules. At the
recent RFA symposium, we released a new study authored by Dr.
Mark Crain on the cost of federal regulatory burden on small
businesses. Dr. Crain found that the total regulatory burden on
small firms is larger than ever. As indicated on this chart,
the smallest business, those with fewer than 20 employees, pay
$10,585 per employee, on average, to comply with federal
regulations. The federal regulatory burden is 36 percent
greater on these small firms than on their large counterpart
creating a staggering competitive disadvantage.
Compliance with IRS tax regulations is one area where small
business is at a severe cost disadvantage to large firms. The
Crain study also found that the cost to small businesses of tax
compliance is over 300 percent greater per employee than the
cost to large companies. In September, Advocacy held a
roundtable on the IRS Form 1099 expanded reporting requirement
where we heard directly from over 30 small business owners and
representatives. Participants spoke to the significant
paperwork burden of the requirement as well as the internal
data controls that would need to be implemented. The small
business owners and representatives called for a legislative
fix.
Advocacy commends Senator Baucus, Senator Landrieu, and
Senator Shaheen, on the introduction of the Small Business
Paperwork Relief Act that would repeal the expanded Form 1099
reporting requirement.
As Chief Counsel for Advocacy, I fully support the repeal
of this reporting requirement.
Small businesses are also greatly concerned about the
impact of regulations in the environmental area. Advocacy is
currently working closely on EPA's Small Business Advocacy
Review panels, on wood heaters, stone mortar discharge, and
emissions from small electric utilities. An additional area I
am focused on is the newly created Consumer Financial
Protection Bureau, CFPB. We are working to help the bureau
build compliance with the RFA, and especially the SBREFA panel
process.
I met earlier this week with the leadership of the CFPB to
discuss implementation of the SBREFA panel process into their
rulemaking plans. This afternoon, Advocacy will host a
roundtable that will bring together small businesses from the
banking and finance sector to discuss the SBREFA process at
this new agency.
I commend this committee on your commitment to my office
and reducing the regulatory burden on small businesses.
Addressing these concerns will help foster an atmosphere of
certainty and fairness for small business, allowing America's
greatest engine of economic growth and job creation to drive
our economy forward.
I look forward to continue to closely with you. I would be
happy to answer any questions you might have.
[The prepared statement of Mr. Sargeant follows:]
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Chair Landrieu. Thank you so much.
Mr. White.
STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX ISSUES, U.S.
GOVERNMENT ACCOUNTABILITY OFFICE
Mr. White. Madam Chair and members of the committee, I am
pleased to be here to discuss the burden on small businesses of
filing third party information returns with IRS about certain
payments they make. The payments are labeled miscellaneous
income and reported on Form 1099 MISC. You can see the form on
page four of my statement.
As the form shows, there are many categories of
miscellaneous income, most relevant for today is non-employee
compensation in box seven where businesses must currently
report payments over $600 for services provided by contractors
who are not incorporated. The Patient Protection and Affordable
Care Act expands this reporting to include both payments to
corporations and payments for goods. IRS uses third party
reporting of payments to verify that the payment recipients
include them on their tax returns.
I want to make three points. First, third party information
is a powerful tool for ensuring taxpayers pay the tax they owe.
Second, reporting such information imposes a cost on the third
parties. Third, options are available to Congress and IRS that
could mitigate those costs.
Regarding the benefits, third party information reporting
increases voluntary tax compliance because taxpayers know that
IRS knows their income. The process is shown on page six of my
statement where a kite shop hires a contractor for $600. Both
are small businesses. The kite shop files a 1099 MISC reporting
the payment to IRS and the contractor gets a copy. IRS then
matches the 1099 with the contractor's tax return to make sure
the payments are included in income.
The chart on page seven shows that where there is
information reporting and/or withholding, taxpayers' compliance
rates are high. For example, for wages and salaries, taxpayers
misreported about one percent of their income. By contrast,
sole proprietors, whose income is often not subject to
information reporting, misreported 54 percent of their income.
Information reporting has other benefits. It reduces the cost
and intrusiveness of IRS's compliance efforts because computer-
matching substitutes for audits of taxpayers. It may also
reduce small businesses costs of preparing their returns
because they get summaries of payments received.
My second point is that third parties incur costs to file
information returns. It is difficult to estimate how large
these costs are because businesses do not track them
separately. In nine case studies we conducted in 2007, filers
of information returns told us the costs were relatively low,
but not zero, for example, one organization with a few thousand
employees said filing a couple hundred information forms was a
minimal additional cost. A small business told us that spending
three to five hours per year preparing information returns
manually. Two venders charge between 80 cents and $10 per form
depending on the number of forms. We did not study the costs on
third parties of expanding reporting to include payments for
goods.
My third point is that businesses trying to file 1099 MISC
forms face impediments. For example, some businesses are not
aware that they have a filing requirement. Better IRS guidance
is one obvious solution, but it ignores the fact that many
small businesses pay tax preparers or accountants to do their
taxes and never look at IRS guidance. More effective, perhaps,
would be requiring preparers to ask whether 1099s have been
filed, or waiving penalties for late submission by first-time
filers. Another impediment is that some businesses are confused
about the 1099 requirements. Options here include standardizing
the dollar threshold for reporting or increasing the dollar
threshold to limit the number of small businesses having to
report.
Another impediment is determining whether the payee is
incorporated. We were told that some businesses routinely file
1099 MISCs for all their contractors rather than going to the
effort of determining who is incorporated. We have suggested
that reporting be extended to incorporated payees, but not
payments for goods.
IRS has already taken one step to reduce the costs of
reporting by exempting payments paid by credit card. Other
options include grandfathering existing business relationships,
and exempting certain types of payments or businesses.
Finally, the 1099 MISC filing process is not convenient.
Payers must get tax I.D. numbers from payees, paper submissions
must be on specially printed forms, and IRS does not have an
online portal for electronic filing. Solutions include guidance
to new companies about providing tax I.D. numbers on invoices,
allowing submission of downloaded forms, and building an online
portal.
In summary, our tax system shifts some of the costs of tax
administration to third parties in order to increase
compliance, however, those costs could be reduced and still
maintain the compliance benefits. This concludes my statement,
I would be happy to answer questions.
[The prepared statement of Mr. White follows:]
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Chair Landrieu. Thank you. Mr. White, let me start with you
on this 1099 because this is an issue that has really gotten
everybody's attention, and I want to start with, the
legislative history, I understand, of this provision--and I
appreciate your testimony about the need for tax compliance. It
is important when taxes are levied, for people to pay them, and
it is important for the government to design systems to make
sure that people are paying their rightful share of taxes.
The question is, where that burden of compliance should
fall, and my understanding of this particular provision, and I
want you to comment, is it was established--the threshold--in
1954. The history of the information reporting requirement,
Congress intended the threshold amount for triggering
informational reporting to correspond to the personal
independent exemption level in the Internal Revenue Code.
In 1954, that exemption was $600. Today your threshold
stays at $600, but the dependent exemption has risen to $3,650.
So, my question is, not the intent, but how did it stay so low
for so long, and why wasn't it raised? Why didn't someone
suggest that it be raised to a more reasonable threshold?
Mr. White. There is no automatic adjustment for inflation,
which is part of the problem, and that would be in our table
where we suggest some mitigations. That is one of the options.
Chair Landrieu. But in all the reports ever requested by
any member of Congress on this subject or related, do you know
if the IRS ever suggested this would be something that might
make sense? And Dr. Sargeant, I know you have only been on the
job three months, but in any of the reports that you have had a
chance to review yet in your office, was there ever a report
submitted that it might just be a good idea to raise the
threshold on 1099s commensurate with inflation?
Mr. White. We suggested it in the 2009 report. I am not
aware of what IRS has done on this question.
Chair Landrieu. Okay.
Mr. Sargeant. With regard to the reports that I have read,
I have not seen any mention with regard to the need to raise--
--
Chair Landrieu. Okay, well, I would like to go ask both of
you to go back and just review any of the reports that your
individual agencies submitted, to let this committee know if
this was ever flagged or brought to anyone's attention, because
if not, what it tells me is there is a systematic malfunction
somewhere in this government where there is really no entity
kind of looking out for how to just sort of automatically
adjust these requirements, and if it is going to take an Act of
Congress to adjust every single one of them, we are going to be
spending an awful lot of time and creating an awful lot of
havoc when something could be done quite more efficiently in an
administrative way.
Now, we are going to repeal 1099, but the time and effort
it takes to do this could have been avoided in some way had
there been some sort of system of just, you know, regular
review. And I think, Dr. Sargeant, it leads me to the--
hopefully the purpose of your office is exactly this, to be
exploring and evaluating new proposed regulations and how they
might effect small business, reviewing long time regulations.
In fact, I think in the law, you know, and I am on a little
bit of a learning curve here, but I think that in the law there
is something like every ten years the Office of Advocacy
conducts a detailed examination of the cost of federal
regulation. There is a time frame, if the staff could--there is
a specific time frame for reviewing. I think if a law is ten
years old--are you following what I am saying?
Mr. Sargeant. Yes.
Chair Landrieu. Is not that part of your portfolio of
responsibilities?
Mr. Sargeant. Senator, under the RFA Section 610 calls for
a periodic review of rules, but that is done by the Agency, and
so we will continue to work with the Agency to review those
rules----
Chair Landrieu. But what role do you have as that Agency
reviews its ten-year-old rules and regulations? Do they call
you in or your office in to do that review with them? Do they
do a first draft and submit it to you for review?
Explain a little bit about how that works.
Mr. Sargeant. What has happened in the past is that small
businesses would reach out to us to make their comments known
about various rules that are on the books, and so we would
reach out to these agencies to review these rules, and by law,
under 610, they have to review these rules every ten years.
Rules that are on the books more than ten years, they have to
be reviewed to see whether these rules are necessary. So, we
continue to reach out to these agencies to make sure that they
are doing this review.
Chair Landrieu. Okay. Let me ask you this. Your office has
been involved, as you said, on behalf of several small
businesses. I understand that your office can do your most
effective work when you are able to coordinate with agencies
early in their rulemaking process. I really need you to try to
give me one or two specific examples, since you have been in
your office, about how that process has worked and with what
specific agencies, let us say in just the last couple of
months, that they have called you in early on when they are
thinking about rules, whether it is Fisheries, or OSHA, or any
other agency out there.
Mr. Sargeant. Well, Senator, we have held nine roundtables
since I have been in office, and what we do is that we work
with small businesses and we also----
Chair Landrieu. But nine roundtables where? In the country?
Mr. Sargeant. Roundtables in D.C. itself.
Chair Landrieu. In D.C. with small businesses?
Mr. Sargeant. With small businesses, but also with
representatives from the various agencies. We held a roundtable
with Labor because there was a concern with what we call the H-
2B rule. This would have a significant impact on small
businesses, and so what we did is that we brought together
those that would be impacted by this rule, but also we made
sure that Labor, those who were writing the rules, were in this
room and we assured Labor that this would not--that we would
make sure that it will be a good dialogue in terms of small
businesses would be able to voice their concern and those who
are writing the rules would be able to respond as to why they
think these rules are necessary.
So, that is one example that we played very early on.
Chair Landrieu. So, you are using a roundtable model
specifically called on a specific regulation. You bring the
department that is either writing or renewing the regulation
with small business. Those are public meetings. You have had
nine of them in Washington.
Mr. Sargeant. Yes.
Chair Landrieu. You can submit a list to us of what they
were and what topics and your recommendations from each----
Mr. Sargeant. Yes.
Chair Landrieu. I am assuming?
Mr. Sargeant. Yes, yes. Yes, Senator.
Chair Landrieu. Okay. Mr. White, my last question I will
turn it over to Ranking Member Snowe, do you have any other
suggestions in terms of the latest one or two reports that GAO
has issued about specific action this committee could take to
either increase our investment in this area or give more
support to this office or a process that could be put into
place that would help us to identify more quickly rules and
regulations that are having, you know, a detrimental effect on
small business and making the appropriate or necessary changes?
Mr. White. I think with respect to taxes, which is what I
know about, one thing to watch is the new credit card reporting
requirements that have been put in place, and IRS has already
said, the Commissioner has already stated, that IRS will
rescind the 1099 reporting requirements for businesses that
make their payments by credit cards because those payments are
going to be recorded in the future to IRS.
IRS is in the process of implementing that process, and so
this may be a mechanism to reduce the burden of 1099 reporting
if this credit card reporting turns out to be an effective
substitute for that, so I would watch the effectiveness of that
and what the impact is, specifically, on 1099 filing of that
program.
IRS also, in recent years, has undertaken a lot of
additional research on the causes of noncompliance by
businesses, particularly small businesses, and as the results
of that research come forward, I think there will be more
information about the burden on small businesses of complying
with certain requirements. We had recommended that IRS, as part
of that research process, focus specifically on the 1099 issue
and they had agreed to do so.
Chair Landrieu. Thank you.
Senator Snowe.
Senator Snowe. The more we discuss these issues, it
underscores that we ought not pass regulations without knowing
the effects before their implementation or enactment. The
bottom line is, today, small businesses disproportionately bear
the weight of what is happening. Dr. Sargeant, I recommend that
you take Main Street tours before the reality becomes pretty
clear and stark about what is happening. The cause and effect
of actions here affecting Main Street is pretty evident. We
have to reorganize this whole regulatory process, and in the
meantime aggressive advocacy is necessary on your part, and
rigorous examination of all of these potential regulations
coming down.
Wall Street reform resulted in 553 new regulations. In 2010
the Administration promulgated 43 major new regulations from
various agencies. There were 41 separate rulemakings in the
healthcare reform in addition to another 100 additional
regulatory guidance requirements within the healthcare reform
law that was enacted this year.
So, all of this is going to require a major burden in your
office, and that is why I would like to know exactly what plan
you have developed to respond to all of these rules that will
be coming to the forefront that are going to have enormous
implications on small businesses across this country?
Mr. Sargeant. Senator, with regard to the CFPB, and thank
you, Senator, for being--for your commitment to the office. We
now have oversight with regard to CFPB via the SBREFA Panel
process. We have met with the staff at CFPB. They have also
come over to the Office of Advocacy, and so it pays to work
very early on. You know, what is good about this new agency is
that it is a new agency and so it does not have some of the
histories of not in compliance, so we are working with them and
we have training in terms of, you know, this is the RFA.
We have done about 40 panels with EPA and another 12 with
OSHA, so we have a lot of examples of running the SBREFA
Panels, and so there is a roadmap, there is a flow chart that
we can share with CFPB to make sure that they are in
compliance, kind of the best practices, and so we have
encouraged them to work with us very early on to avoid some of
the holes, some of the pitfalls, that could result in not being
in compliance because the SBREFA process really works, and it
results in better rules because it brings small business in
very early and so we know that small businesses have--they
agree that SBREFA works, so does the Agency, so that is why it
is very important for us to work with CFPB to make sure they
buy in.
Senator Snowe. Well, in that instance, because of the
requirements in the law--now, is the panel going to be up and
running and that process underway before the bureau is
established? The point is, we do not want to have the bureau
established and they go running forward with all these
regulations and eventually we get around to setting up the
Small Business Review Panel.
How is that going to work?
Mr. Sargeant. Well, under 609(a), there is a process and a
timeframe that has been laid out in terms of what you need to
do, what type of notification that must be given for the SBREFA
Panel process. Now, I have met with the staff at CFPB and they
are not--they do not have enough staff yet. They are very early
on but we continue to work with them to make sure that they do
not get ahead of themselves in writing rules.
Senator Snowe. Are you taking steps overall to triage all
these new regulations that are going to be coming to the
forefront among the various newly enacted legislation and all
the other regulations? Do you have a plan to implement all that
and to respond to that because there is a breadth of
regulations?
Mr. Sargeant. Well, Senator, I am pleased to have a staff
of very talented lawyers who work with the various agencies to
make sure that they are ahead of the process and they have very
good contacts with these agencies to make sure that any rules
that are in process that we can make sure that they follow the
RFA process.
Senator Snowe. Exactly why is it that you felt it was
necessary to deal more confidentially with the Treasury
Department, on the implementation of the 1099 requirement? I
mean, they call for a public formal response. Why is it that
your office did not do that on this critical issue?
Mr. Sargeant. Senator, before I joined the Office of
Advocacy, the Office was, very early on, involved with the 1099
back in June, and so they were contacted by small businesses,
because this 1099 provision is burdensome. As someone who comes
from small business and who has to respond to the paperwork,
you know, anyone who came from small business would have never
advocated side to provision, but once I got into the office,
what we did is that we held roundtables with both small
businesses and also the trade associations as well, and what
came out of this meeting is that this was a reporting
requirement. This was not a fix; this was a, how to report
1099s, just like James said, with regard to credit cards.
Credit cards would be exempt.
What we found is, you know, many small businesses do not
use credit cards, they use cash, and credit cards have fees,
and so once again, that was not good for small businesses, but
what came out of the panel is that they said, you know, this
still does not solve the problem of the 1099 reporting
requirement. What you need is a legislative fix, and so
immediately after the panel I contacted the IRS chief counsel
to have a meeting to share with him the concerns that small
businesses have. With regard to the interagency confidential
process, that was instituted by Executive Order 13272 by our
previous president, and that has worked well in terms of making
sure that rules would not even--rules would not come to the
fore, that they will be less burdensome.
So, it is a process that has been used, and my predecessor,
Tom Sullivan, also used it very well, as well, and so I thought
that it was worthwhile to use it.
Senator Snowe. I have other questions, Mr. White, but I
will wait during my second round. Thank you.
Chair Landrieu. Okay.
Senator Shaheen.
Senator Shaheen. Thank you, Madam Chair. Mr. White, you
provided us with a very, I think, good list of ways to address
the 1099 reporting requirements. Now, I certainly agree with
the Chair and Ranking Member that we are going to repeal that
requirement through legislation, but it is an interesting list,
I think, with respect to other reporting requirements that
exist for small businesses.
So, how many of these things can be done with that
legislative action and how many are being contemplated by your
office as you think about other reporting requirements for
small business?
Mr. White. Most of them could be implemented by IRS, some
of them might require legislative action, and most of them also
have pros and cons, so what we have done with IRS is, in some
cases, make recommendations that IRS gather more information,
for example, so that there is better data about exactly what
those pros and cons are. Part of the problem with the new
requirement for information reporting on goods is there is no
information out there about the number of firms that would have
to do such reporting, how many reports each firm would have to
file or what the cost of filing those kinds of reports would
be. That is the sort of information you would like.
Some of the options are thinking creatively about the
problem and ways to address it at lower cost. For example, many
small businesses either are unaware that they have got a 1099
filing requirement, the current--under current law, the current
requirement.
Senator Shaheen. Okay, but I do not want to talk about 1099
because I think that is going away. So, talk to me about other
regulations that small businesses have that--and you said you
have made recommendations to the IRS relative to many of these
items. Do you know what the status of their review of your
recommendations are and what the status is? And whether they
are moving forward on this?
Mr. White. They have been very responsive in our moving
forward with some of our key recommendations, so there are
current--there are information reporting requirements under
current law that would stay in place and as I said a minute
ago, we recommended that IRS, as part of their ongoing research
efforts, make that a special focus.
In the past, information reporting was not a focus of IRS
research. We asked them to include them in their research plans
going forward. It is a very systematic, sophisticated research
effort that they have got underway and they have incorporated
information reporting into that.
Senator Shaheen. Do you think that this committee could get
the list of recommendations that you have made to the IRS and
perhaps we could get a report on where they are in looking at
those?
Mr. White. Yes. Absolutely.
Senator Shaheen. Thank you.
Dr. Sargeant, one of the things that you and Mr. White
actually both have alluded to is the importance of leveraging
our existing support structure for small businesses to help
them learn about what their regulations are and appropriate
compliance. Can you talk a little more about what you are doing
in that respect, about how you envision using part of the SBA
apparatus, for example, like the Small Business Development
Centers, to help do that? Or is that part of what you are
thinking?
Mr. Sargeant. Senator Shaheen, the small businesses need to
know how to comply with regulation, but they also need to have
a mechanism to have their voice heard, and so that is what the
Office of Advocacy does.
With regard to the SBDCs, they are SBA, and although we are
independent from SBA, we sometimes work with SBDCs to make sure
that there is a forum or there is an avenue for those
businesses to seek training and to know more about some of the
programs that are available for small business.
With regard to outreach, outreach is very important and
that is why we are very aggressive in making sure that we bring
on the ten regional advocates. You know, it has been almost two
years not having regional advocates and they are our eyes and
ears on the ground, and that is the direct contact where small
businesses in each region because we recognize this is not a
one size fits all. What goes on in Iowa may be different than
what goes on in D.C., and so it is very important to have
someone on the ground, a contact, so that a business who may
have some concerns or they may--they are not sure what is
coming out of D.C., that they would be able to contact that
person so that their voice is heard.
My focus is to make sure that the voice of small business
is heard at all levels of government.
Senator Shaheen. And can I just ask one final question,
Madam Chair?
Chair Landrieu. Go ahead.
Senator Shaheen. When you said you have ten regional
advocates, can you tell me where the Regional Advocate for the
northeast is located?
Mr. Sargeant. The Regional Advocate for the northeast? Oh,
the Regional Advocate of the northeast is located in Boston and
we are in the process right now of bringing them on. We have
identified a few, but once we have identified the advocate,
there is the process that you have to go through to get them
in, in government, the background checks, but we hope to have
all ten by the first of the year.
Senator Shaheen. So, we do not actually have somebody hired
for the position right now to serve the state of New Hampshire?
Mr. Sargeant. Well, we have the person and they are going
through the process right now. They have been identified, it is
just dotting the i's and crossing the t's in terms of becoming
a federal employee.
Senator Shaheen. And that person--those folks do not need
approval by Congress, Senate approval, do they?
Mr. Sargeant. Those folks do not need Senate approval, but
they still need to go through the government process.
Senator Shaheen. Thank goodness. Thank you.
Chair Landrieu. Dr. Sargeant, let me clarify something and
then I will recognize Senator Snowe for one more question and
then I would like to move to the second panel. I appreciate
Senator Risch being with us.
Let me ask you this. How long have those regional offices
been vacant? I am aware that they are vacant now, I just
assumed that was a recent occurrence, but you said they have
been vacant for a while?
Mr. Sargeant. They have been vacant almost--I would say
almost going on two years.
Chair Landrieu. Two, okay.
Mr. Sargeant. It has been a while.
Chair Landrieu. So, they were all full in the last
administration?
Mr. Sargeant. Yes.
Chair Landrieu. And then with the change, they just--those
positions just have not been filled because your position was
not filled until three months ago, right?
Mr. Sargeant. That is correct. Yes.
Chair Landrieu. And you are still on only a recess
appointment because of some opposition. Is that correct?
Mr. Sargeant. That is correct.
Chair Landrieu. Okay, so it is very important, I believe,
and I am going to ask my colleagues to carefully think through
the importance of establishing this director permanently,
getting this office staffed up. It is crucial, as our office,
to mitigate against unnecessary and burdensome rules. If we do
not give them the tools they need and the employees they need,
we cannot then expect them to do the kind of work we are
requiring them to do.
So, I am asking my colleagues that are here and not here,
to consider the importance of this, and I most certainly will
commit to you to work closely with your office over the next
several weeks to identify, you know, really good, aggressive
people.
On that goal, let me just say this. In addition, Senator
Snowe, I think we have to think about if this office is
actually strong enough, even when fully staffed, this is the
organizational staff I just received. There are ten attorneys
in the country--slots for ten attorneys and nine advocates. It
has 19 people on one side, and the entire federal bureaucracy
on the other. So, I think we have to be reasonable in what we
expect this office to be able to do in this circumstance.
Now, I am happy to say I have just introduced a bill or
will be introducing a bill today looking for cosponsors that
strengthen this office. If there was ever an office that needed
to be strengthened, I would think that this would be one, so
that they can do the things we are asking them to do, which is
to minimize unnecessary burdens on small business so that they
can work. And I will look forward to working with you on that.
But Senator Snowe, let me get to you. But on the record I
want to say one thing. David, a banker from Louisiana in my
opening statement, I wanted to put this in the record,
testified yesterday on our roundtable about additional
regulations. His small bank, $150 million bank, New Roads,
Louisiana, a tiny little, beautiful little town in Louisiana,
$17,000 in 2008, $137,000 in 2009, and $220,000 in 2010. That
is just FDIC insurance increases.
Senator Snowe.
Senator Snowe. Thank you. Your singular mission, Dr.
Sargeant, is on the whole rulemaking process, and making sure
that these regulations are not burdensome to small businesses
and getting ahead of the train, and that is absolutely,
indisputably critical. I hope that is all you are focusing on
because it is undeniable what is happening across the country
in this sphere alone. Many have labeled it as a de facto tax,
it certainly is, and so if you need any other resources, step
forward.
It is too bad about the Regional Advocates, I know in the
northeast we have an outstanding individual, and that those
individuals did not carry over until their replacements came to
the forefront. I believe that would have been a better way to
have done it, but that was not in your sphere of decision-
making because I think otherwise it should have carried some
continuity in this critical area at this perilous economic time
for small businesses and the economy as a whole.
Mr. White, on the issue of 1099, you mentioned
specifically, I wanted to ask you--there has never been a cost
benefit analysis done on 1099s as it would apply to goods, is
that correct?
Mr. White. Not that I am aware of. I have never seen one.
As I said, there is not even an estimate in the number of firms
that would have to file.
Senator Snowe. So, the other dimension to all of this is
the impact that this is going to have because we have no way of
knowing the degree to which it is going to affect small
businesses in complying with this regulation.
The National Small Business Network estimates that 1099
mandates would cost businesses and the IRS at least 100 times
more to administer than the average $1.7 billion it will yield
annually. So, obviously, it is important that we have the
ability to look at this very carefully. Hopefully it does get
repealed soon, and unfortunately it did not happen earlier, but
I hope it does happen now in this Lame Duck because I think it
is going to represent serious consequences. It is one more
aspect to why businesses are not going to invest in the future
when they start adding and calculating the costs of doing
business. And without such an analysis, there is no way to know
exactly how much this will cost small businesses.
I have no doubt it is going to be an inordinate burden on
them. Thank you.
Chair Landrieu. Thank you, Senator. I would like to move to
our next panel, if we could. I appreciate the cooperation of
the members. And thank you all very much.
To save time, as they are coming forward, let me introduce
Mr. Roger Harris, president and chief operating officer of
Padgett Business Services. He brings over 30 years of
experience in accounting and financial experience in the
service and retail industries. He is a resident of Athens,
Georgia. And we welcome him today.
Larry Nannis is a CPA.
[Bangs gavel.]
Chair Landrieu. Thank you for your cooperation. Mr. Nannis
is a CPA, has over 40 years of serving small businesses and is
currently chair of the National Small Business Association. We
welcome Mr. Nannis with us today.
Next, Mr. Andrew Langer, president of the Institute for
Liberty. He came from the Institute from the National
Federation of Independent Business. We thank you for being
here, Andrew.
Finally James Gattuso is a senior research fellow at the
Heritage Foundation specializing in regulatory and
telecommunications issues. I would like to start with Mr.
Harris, if we could, and as you all know, we have asked you to
limit your opening remarks to five minutes. We have reviewed
your testimony, we have highlighted it, we appreciate it. If
you want to summarize it, that would be terrific.
Mr. Harris.
STATEMENT OF ROGER HARRIS, PRESIDENT AND C.O.O., PADGETT
BUSINESS SERVICES/SMALLBIZPROS, INC.
Mr. Harris. Thank you, Senator Landrieu, Ranking Member
Snowe. It is a pleasure to have the opportunity to be back
before the committee again.
Chair Landrieu. Just speak a little bit into your mic; you
have to kind of lean forward.
Mr. Harris. My name is Roger Harris, president of Padgett
Business Services. We have been providing accounting and tax
services to small business owners for over 40 years, and just
to give you an idea of who are client is, it would be
represented by the chart on the left, the less than 20
employees, so the burdens that our clients are seeing in
regulation and compliance is very heavy.
I think what someone once described a small business owner
as, is someone who has the opportunity to do the one thing they
love and the 99 things they hate. And record keeping and
compliance would probably top the list of the 99 things that
they hate, and every minute or every dollar we take from them
from doing the one thing that they love and make them spend it
on one of those things that they hate, it makes them less
productive and have less of an opportunity to help us when we
need them the most at this time to get out of the economic
difficulties that we are in.
There has been a lot of discussion about 1099s and I want
to first of all commend the Chairman for being a sponsor of the
repeal which I think is ultimately what we need in this
process, but I think even if we get repealed, we can still
learn from what we are going through. I think what we see is
that we have made some assumptions and we heard today that
third party reporting does, in fact, help compliance.
That does not necessarily mean that all third party
reporting is good, and when we jump to conclusions that we can
have a system that is currently in place, which deals with the
non-corporate taxpayer and a level at $600, and just advance it
into the corporate world and leave the amount the same, we end
up with a cost benefit analysis. I am not sure if anyone has
done one, but I am not sure it is necessary. I think we all
recognize that the amount of burden that we would place on our
small business owners and the amount of benefit to the system
would not be very great.
And I think that we have to make sure that any time we are
going to assess burden on a small business owner that we look
back and understand the real cost in what that is, and
sometimes, I think, we do not take enough time to examine what
we are doing, we just do it, and let them absorb it. And they
will absorb it. They will complain about it, I can tell you, I
have never heard complaints like I have heard this year about
1099s, and on behalf of our offices and our clients, thank you
for issuing the repeal.
But we need to not make this kind of mistake again. We need
to make sure that as we go forward, we look for ways to
minimize the burden on the small business owner if we expect
them to help us through this recovery. And I think if we just
looked at the pure numbers of small business owners that are
out there, and if we could somehow just empower them to add one
person to their payroll, the impact that we would have in this
country would be tremendous. And we can do that if we are smart
in how we regulate and how we ask them to comply.
I will make two other quick comments and then I will
reserve the time for the others and look forward to your
questions.
The most recent study that I have seen from the IRS said
over 85 percent of all small business owners need the services
of a tax preparer. For me, that is good. For the country, that
is not. We have to address the overall compliance burden and
where more and more people feel like they are qualified to take
care of their own obligations.
Secondly, one of the biggest and this chart is a great
example of that, one of the most onerous parts of any small
business is the cost of dealing with employees and while we
have--at Padgett we are fortunate to have 300 offices in the
United States, we have 100 in Canada.
So we are able to compare and I can tell you, the system
here is vastly more complicated than the system our Canadian
offices have to follow through. We have thousands of taxing
jurisdictions, they have a handful. They have predominantly
annual filings, we have more filings than we can keep up with.
Just last week, because we are in all 50 states and we
provide the regulatory software for our offices, we got 17
changes in one day from 17 different states, and so I think one
of the ways that we have to address, is we have to look at
burden in its total and each of us can justify the rule that we
want to pass or the obligation that we are passing, but we must
recognize that this is also taking place at a state level, at a
local level, at an industry level, and all other places, and
until we address burden in total, I am afraid that we are going
to continue to raise that cost of the most precious asset we
want our business owners to have, which is a new employee.
Again, thank you for the opportunity to be here today, it
is a pleasure, and I look forward to your questions.
[The prepared statement of Mr. Harris follows:]
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Chair Landrieu. Mr. Harris, let me thank you, and I want to
assure you that I, as the Chair of this committee, will be
calling on you regularly with the expertise that you and your
firm have, because I think it is particularly important to have
that breadth that broad view, not just a specific view, as we
really try to make an impact here.
This is not a fly by night effort on this committee's part.
We are going to be at it for as long as I am the Chair and the
Raking Member has been a real leader in this effort as well, so
as long as the two of us stay in the leadership of this
committee, I can promise you this is just the beginning of our
efforts to really get a handle on this and make some
significant changes, and we hope that you will be available to
us as we move forward.
Mr. Harris. Thank you. I would welcome that.
Chair Landrieu. Thank you.
Mr. Nannis.
STATEMENT OF LAWRENCE S. NANNIS CPA, CHAIR, NATIONAL SMALL
BUSINESS ASSOCIATION
Mr. Nannis. Chairwoman Landrieu, Ranking Member Snowe, and
members of the committee, I want to thank you for the
opportunity to testify on ways to reduce the regulatory and
administrative burdens placed on America's small business.
My name is Larry Nannis. I am a certified public accountant
and partner in the firm of Levine, Katz, Nannis and Solomon
located in Needham, Massachusetts. We provide financial
management and tax advise to entrepreneurial firms.
I am also serving as the chairman of the board of the
National Small Business Association.
Small business owners face an overwhelming regulatory
burden in complying with Internal Revenue Service regulations.
The burden is not only a heavy one, but is disproportionate as
well, and as you heard from Dr. Sargeant, the cost of tax
compliance for small firms is 67 percent higher than for their
larger counterparts. For firms with fewer than 20 employees,
the per employee cost of complying with the tax code is $1,304.
Before I go on, though, I would like to thank Chairwoman
Landrieu and Senator Shaheen for your courageous moves
yesterday in cosponsoring the legislation that would repeal the
expanded Form 1099 reporting requirements. Less there are some
who believe that this is not the correct response, permit me to
briefly explain why this repeal is so necessary. Section 906 of
the Patient Protection and Affordable Care Act would mean that
every small business owner, including me, will face an
increased paperwork and administrative burden for each
additional 1099 form prepared.
In fact, LKNS, if the law had applied in 2010, we would
have increased our 1099 production from two to 79, and in
reviewing the records of a lot of my clients, the minimum
impact on the number of forms that would have had to have been
created was threefold.
Additionally, many small businesses, in an attempt to
reduce data collection and paperwork burdens, will simply
reduce venders and refuse to entertain new business dealings.
This will have a disproportional impact on small businesses and
entrepreneurs attempting to get a foot in the door.
Although this could simplify the accounting burden, it
would have a devastating competitive impact on small, local,
independent businesses who now sell the same services or
products to other businesses. NSBA has been adamant that the
only solution to this huge problem posed by the new 1099
reporting provision is full repeal, and Chairwoman Landrieu and
Senator Shaheen, it appears as if you agree.
Unfortunately, perplexing paperwork and an oppressive
federal regulatory regime continue to overburden innumerable
small business owners across the country. SBA research
demonstrates, as the chart shows, that in total companies with
fewer than 20 employees pay more than $10,585 per employee to
comply with federal regulations. For large firms it is 36
percent less.
Despite the efforts of SBA's Office of Advocacy, which
reports that its intervention results in foregone first year
regulatory cost savings of $7 billion in Fiscal Year 2009, the
federal regulatory and paperwork burden continues to balloon
and is now at approximately $1.75 trillion.
In the written testimony that you have received, we have
outlined many ways that the administrative burden on small
business should be reduced and I urge you to consider them. In
the interest of time I would like to highlight two of them, one
of them brought up by Ranking Member Snowe earlier.
Federal agencies should be required to perform and submit
cost benefit analysis on proposed regulations and paperwork.
This is a routine business practice that federal agencies would
be well served to emulate.
In the tax area, NSBA believes efforts to reduce the
regulatory and administrative burdens on small businesses must
focus on overall simplification, eliminating inequities within
the Tax Code, and enhancing taxpayer education and outreach.
Congress should stop trying to impose more burdens on taxpayers
and replace the current Tax Code altogether with something that
makes more economic sense, such as the Fair Tax. A long time
proponent of the Fair Tax, NSBA believes that now, more than
ever, a sensible, fair method of collecting taxes is needed
contrary to the present system. Perplexed, bothered, and
bewildered American taxpayers spend $265 billion in recent
years just trying to comply with tax laws and regulations.
Now, those willfully disregarding their tax liabilities
should be held accountable, but with the complexity facing many
taxpayers, NSBA believes a key priority should be the
development and implementation of initiatives to improve IRS
guidance. NSBA concludes that the committee should work with
the IRS to conduct more research to better identify
noncompliant taxpayers, enhance taxpayer services to inform
taxpayers of correct tax obligation, and adjust its enforcement
tools to target those who intentionally evade paying taxes.
Adding new burdens and requirements on small businesses already
struggling to do the right thing is simply the wrong answer.
It is my hope that Congress and the Administration can work
together toward the straightforward repeal of the 1099
provision. Now is the time for Congress to support proposals
that are fair and reasonable and that do not hinder the
survival, growth, and innovation of our nation's entrepreneur.
I would like to thank Chairwoman Landrieu for holding this
hearing, bringing this proposal to the forefront, and for the
opportunity to testify. Thank you.
[The prepared statement of Mr. Nannis follows:]
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Chair Landrieu. Thank you, Mr. Nannis. Let me just clarify
for the record, you said the figure was $250 billion annually
for compliance?
Mr. Nannis. Correct.
Chair Landrieu. Could you restate that? Is it $258?
Mr. Nannis. $265 billion.
Chair Landrieu. $265 billion annually.
Mr. Nannis. In recent years, just to try to comply with the
tax laws and regulations.
Chair Landrieu. And that would be tax laws, federal, state,
and local, you think?
Mr. Nannis. Correct.
Chair Landrieu. Okay, federal state and local.
Mr. Nannis. Correct.
Chair Landrieu. So, it would be all.
Mr. Langer.
STATEMENT OF ANDREW LANGER, PRESIDENT, THE INSTITUTE FOR
LIBERTY
Mr. Langer. Thank you. And thank you for having me here,
Madam Chairwoman and Ranking Member Snowe, especially, thank
you as well for inviting me.
My name is Andrew Langer. I am the president of the
Institute for Liberty. We are a 501(c)(4) advocacy organization
based here in Washington, D.C. and we focus on the impacts of
the federal regulatory state on small business. I have been
working on these issues for almost my entire career in D.C.,
first working with an environmental attorney on the impact of
environmental regulations on jobs, and then working for the
National Federation of Independent Business, as you said.
This is a serious problem, and I always get buoyed when I
come before a body such as this and hear advocates like you
really understand, fully understand, what we are facing here.
One of the issues that I have found in the last two years, as
our economy has slipped into the doldrums, is that folks simply
do not understand the role that regulations have played in
where we are today. A couple of weeks ago I debated a
gentleman, a pundit from CNN, who completely dismissed the idea
that the $1.75 trillion regulatory state has any impact
whatsoever on our ability to create jobs. But as you so
adequately said earlier, the fact that, you know, if we offer
some meager tax credit to a small business, it gets dwarfed by
the $11,000, $10,600 cost that is out there.
For a business with ten employees, it is $106,000 every
year that goes out the door.
And we talk about money, and that is important. I also talk
about time, as was referenced earlier on. We have to be
focusing on the issue of time management and the impact that
agencies put on the mandates that agencies put on individuals
in how they deal with things frequently. We can talk about
$1.75 trillion or the $10,600 number, but we also need to be
thinking about the fact that every seven and a half hours that
an agency puts on a small business owner's time is a full day's
worth. And with any, you know, in any business, it is between
200 and 250 days per year that they can get out of their
employees. Every day that is lost is a half percent of that
employee's productive time.
So, when we are talking about tax burdens and we are
talking about three to five hours, that is a half a day of
somebody's time that they are not spending being productive in
their business. And so, it is one of the things that we have
recommended at the Institute for Liberty, and I have
recommended while I was at NFIB, that we need to get the
agencies to start discussing burden, not just in terms of
monetary value, but in terms of time as well. And I will talk
about that more in a moment.
This issue of cutting regulatory costs, as I said, cannot
be ignored. If we cut regulations--regulatory costs by 30
percent, we can save the economy roughly $600 billion, which is
the rough equivalent of the first stimulus package that was
passed by Congress and signed by the President. Without
spending a dime of federal taxpayer money, we inject the
economy with an influx of capital, of time and of energy.
That translates into jobs. You save a business $30,000. If
they are spending $106,000, $30,000 that they save is the
equivalent of hiring one person with benefits, and when you do
the math, saving $600 billion for small businesses means that
we could virtually wipe out the unemployment rate in America
today. We have to take the steps to do that.
One of the things that was discussed in the first panel is
this issue of regulatory budgeting, the role that Congress must
play in dealing with these issues. I think that is absolutely
essential that Congress steps forward and begins to do some
sort of an assessment of the impact of the new mandates that
they are putting out there, because it does start the way--and
you were very right in your introductory remarks, Senator, when
you said that this started, did not start with this
Administration, it was accelerated, it has been accelerated by
a tremendous amount in the last 18 months, but it did start 35
years ago.
We can actually start directly the evisceration of
America's manufacturing sector with the rise of the three great
regulatory regimes in the early part of the 1970s. This is
going to take a long time to undo, but we have to start today.
The fact is, that over the last decade, regulatory costs grew
by about 10 percent every five years or so. That cost
skyrocketed in the last five years to, went up 37 percent from
$7700 per employee per year to $10,600.
One of the things we have to get a handle on, and I will
say this in sort of my conclusory remarks, is that we have to
get a handle on the indirect impact that regulations have. S.
3024 was a great step in the right direction and to build on
that we have to get at this issue of indirect economic costs.
Senator, in your home state of Louisiana, one of the things
that would have been very, very helpful, I think, over the last
year, would be how the--the impact of the off-shore drilling
moratorium did not just impact the oil industry, but impacted
the small businesses in your state, and frankly, small
businesses all around the country, because the fact is that one
of the things that drove this economy under was not just the
burst of the housing bubble, but it was the run up in energy
prices two years ago that small businesses could not face.
The fact is----
Chair Landrieu. You have got to wrap up.
Mr. Langer. I am. I am wrapping up right now.
Chair Landrieu. Good.
Mr. Langer. I just want to say, the bottom line is that
offices like the Office of Advocacy have to be protected by
this body, they do essential work. I think unfortunately that
there are folks in the Administration who simply do not place
an emphasis on the regulatory burden. That needs to stop.
[The prepared statement of Mr. Langer follows:]
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Chair Landrieu. Thank you, Mr. Langer. I appreciate it.
Very articulate.
Jim.
STATEMENT OF JAMES GATTUSO, SENIOR RESEARCH FELLOW, REGULATORY
POLICY, THE HERITAGE FOUNDATION
Mr. Gattuso. Thank you. Madam Chairman, members of the
committee, thank you for the opportunity to testify today on
this important topic.
Every year Americans are reminded of the costs of federal
taxation when they file their income tax returns to the IRS.
Chair Landrieu. Try to speak into your mic a little bit
more.
Mr. Gattuso. I am sorry.
Chair Landrieu. It is okay.
Mr. Gattuso. They see a clear and specific bottom line
telling them how much they paid into Washington. Not so with
the cost of regulation. These costs are hidden, embedded in the
prices of products and services, in reduced innovation, and
lost jobs. And by any reckoning, these costs are substantial.
As you have heard according to the report released by the Small
Business Administration, these costs have been estimated at
$1.75 trillion annually and the regulatory burden falls
disproportionately upon small businesses.
I did not want to be the only witness today not to say that
because I think we have heard that number many times today. But
as important, these costs are increasing. According to a recent
report we completed at the Heritage Foundation, in Fiscal 2010
alone, some 43 major new rules increasing regulatory burdens
were issued by federal agencies. The total costs for these
rules, based on estimates by the regulators themselves, topped
$26.5 billion. That is the highest cost for new regulations
since at least 1981 which is as far back as records go. It was
a record breaking year.
Now, it should be noted that the actual costs of these
regulations was almost certainly much higher than the reported
$26.5 billion. At the first matter, the cost of non-
economically significant rules, those rules deemed lightly not
to have an annual impact of $100 billion--$100 million or more,
is not calculated at all by agencies. Moreover, regulatory
agencies did not quantify costs for 12 of the economically
significant rules adopted in FY2010. So, $26.5 billion is a
record, but I think the number is, in truth, much higher than
that.
Looking ahead, many more rules are in the pipeline. This
year's record for regulatory increases may not stand for long.
We will have a flood of rulemakings coming in the financial
regulations sector--in the financial sector, from the financial
regulation bill that was passed this year, of rulemakings from
the healthcare reform bill that was passed this year, and for
many other agencies, some that we have not heard about in a
while, but the Consumer Product Safety Commission is still
issuing major rules based upon the reform legislation passed in
its are, two or three, I believe three years ago.
And then there are agencies moving forward without specific
Congressional authorization, the Federal Communications
Commission may still be considering rules on the internet,
which arguably, and I believe, would be without Congressional
authorization at all. The Environmental Protection Agency is
also moving ahead without specific Congressional authorization
on greenhouse gas regulation. We may see record-breaking years
next year and into the future.
Now, there are steps that Congress can take to increase the
scrutiny of new and existing rules to ensure that each is
necessary and that costs are minimized. Among these, requiring
a cost analysis of all legislation imposing new regulatory
burdens. Currently, although all proposed legislation must be
scored by the Congressional Budget Office to determine likely
fiscal costs, there is no similar requirement that regulatory
costs be reported. Members should not be asked to vote on
proposals without the best possible estimate of their likely
costs. All bills proposing new or expanded regulations should
undergo a regulatory impact analysis analyzing and quantifying,
where possible, the likely costs and benefits.
This regulatory scoring would ideally be performed by a new
Congressional regulation office similar to the Congressional
Budget Office. Such a step could be taken by Congress on its
own initiative and without Presidential approval.
Secondly, establish a sunset date for new federal
regulations. Once adopted, rules tend to be left in place even
if they have outlived their usefulness. Currently under Section
610 of the Regulatory Flexibility Act, rules that have a
substantial effect on a significant number of small entities
must be reviewed by the agency every ten years. In practice,
however, such review, if it occurs at all, is usually performed
in a cursory manner. To ensure that substantive review occurs,
regulations should automatically expire, if not explicitly
reaffirmed by regulators.
Lastly, consider requiring Congressional approval of major
regulations that place new burdens in the private sector. Under
the 1996 Congressional Review Act, Congress has the ability to
veto new regulations coming from agencies under an expedited
process.
To-date, however, that authority has only been used
successfully once. To improve Congress's ability to oversee
rulemaking and to increase accountability in Congress for rules
that are adopted, the presumption of the Congressional Review
Act should be reversed and rules should not take effect until
approval is granted by Congress. Such a system should be
seriously considered.
However, in doing so, Congress should be careful to avoid
two dangers. I will finish up quickly.
First, the process should apply only to the imposition of
new burdens on consumers in the economy. It should not be
required in order to lift such burdens. And secondly, it should
be clear that Congressional approval, under the process, is
conditional upon a prior grant of regulatory authority to the
agency by Congress and that the Congressional review process
does not, itself, constitute a grant of authority.
That concludes my remarks and I would be happy to take any
questions.
[The prepared statement of Mr. Gattuso follows:]
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Chair Landrieu. Thank you. We do have several. Let me begin
with asking all the panel, starting with you, Mr. Harris. You
know, when I consider the testimony that I am hearing, I almost
do not know where to start. I mean, it is quite overwhelming,
honestly, and while both Senator Snowe and I and others of the
committee have introduced, and actually passed, you know,
legislation recently to begin addressing this, it just seems
that it is just a huge endeavor.
One simple approach that comes to me, and I want to ask all
of your views on it, and do not hold back, if you do not think
this has any, has limited merit, what would you all think of a
blanket exemption of all rules and regulations for businesses
at least below 10 employees or 25 employees to start, and then
work our way up from there? Is there any, can you think off the
top of your head, which you have to right now, for the benefits
or disadvantages of such--just a blanket exemption? Mr. Harris.
Mr. Harris. Well, I think we have certain exemptions in
place now where we recognize we need to give a start up
business a chance to get off the ground before we impose the
heavy rules and regulations.
Chair Landrieu. Can you give an example of something like
that?
Mr. Harris. Well, I think in any legislation, if you look
at the healthcare bill, the exemption for the credit below--I
mean, we apply credits and benefits to smaller businesses to
try to help them get through their start up phase, and
sometimes I think we ignore opportunities to do that as well,
so as a general rule, I think that is a terrific idea. I think,
even in my testimony, I talked about exempting smaller
businesses from the 1099 rules before repealing them.
Chair Landrieu. And when you say smaller, what is it that
comes to your mind? Is it 10, 25, 50? In your experience, you
know, as we try to say creating, allowing that room for
entrepreneurship, it would seem to me clear that it would be a
business of 10 or less, and potentially 25 or less, not that it
is easy for businesses with 35 employees to comply, I am not
suggesting that, but just to sort of take a step at a time as
we approach this regulatory nightmarish situation that we are
seeing.
Mr. Langer. The tipping point.
Chair Landrieu. The tipping point. How do we begin chipping
away? So, you would think that as some kind of blanket
exemption might be helpful?
Mr. Harris. I think personally I would like to see the
exemption be based on a revenue as opposed to an employee
count. I hate to see burden increase by hiring one more person,
so I would start with, I would say, if we are going to create
an exemption, let us do it on an annual revenue basis. So, I
think all people would be happy to see their revenues go up in
accepting additional burden, but I am not sure we should hold
back employment.
And again, I cannot speak to the impact it could have on
compliance, you know, I am not sure of that impact, but from
the small business standpoint, I think it would be very welcome
to say, we are going to let you grow to a certain point
before--and then we will gradually increase your burden, and I
think that would be welcome and it would encourage some people.
I just cannot speak to the regulatory compliance side of that.
Chair Landrieu. Mr. Nannis.
Mr. Nannis. I think one of the things, and to Mr. Harris'
point, I think to have a blanket exemption, be it on a revenue
model or an employment model, I think would go a long way to
simplifying just a whole lot of issues with regards to small
business, not the least of which is the definition of what a
small business is.
If you look at the size standard regulations, and I know we
are not talking about that, it varies depending on what
industry you are in. If you look at the tax regulations, if you
look at the tax laws, there are certain places where it is
under 25, there are certain places where it is over a million
or under a million, that tax laws is impact. I think that to
come up with a standard, and I agree, I am not sure that the
employment number would be the right one, but probably a
revenue number, would go a long way to simplifying a whole lot
of stuff relative to regulatory and legislative issues as they
pertain to small business.
Chair Landrieu. Mr. Langer.
Mr. Langer. Well, here is what we know. We know that for
small businesses, you know, the 20 employee number is, in terms
of regulatory burden, seems to be what changes things. That you
get above 20 employees, the regulatory costs drop by about a
third to 50 percent depending on what industry you are in and
what you are doing. We know that most businesses hire their
first full time regulatory professional at about 35 employees
and that generally has to do with employee benefits, HR rules
that are out there. And again, this changes depending on the
industry you are in.
From an environmental health and safety standpoint, which
is where you are going to run into your biggest push back on a
blanket employee-size model, you have a number of environmental
regulations which do not get triggered until you hit above 10
employees, so you might be able to get covered in terms of that
if you wanted to do a blanket prohibition.
You know, it is one of these things where we have to
recognize that there may have to be a sliding scale given the
economic state of the nation, that when unemployment rises
above a certain level and economic growth drops below a certain
level; we need to relax the rules that impact small businesses.
Wealthier nations are able to better protect their
environmental and safety, and as nations grow less wealthy,
they have to prioritize jobs over the environment. I think we
have to recognize that is a fundamental economic truth.
In principle, I think it is a very interesting idea. I
think the implementation is where the devil's going to be in
the details.
Chair Landrieu. Mr. Gatt----
Mr. Gattuso. Gattuso.
Chair Landrieu. Gattuso.
Mr. Gattuso. I do have some concerns about an approach like
that in three main areas. First, I think it would cause
distortions. You would be in effect giving an advantage to
small businesses which are valuable, contribute usually to the
economy, but should be competing on a level playing field. I
usually hate to use that term, but a level playing field with
large businesses. Remember, larger businesses tend to be small
businesses that were successful. Think of Apple Computer, think
of Amazon.com, and it is better overall for the consumer if the
most efficient firm be allowed to produce its good and services
for the economy. That is also good for small businesses because
remember, small businesses are also consumers of goods, so I
think on the whole that would help small business. You do not
want these distortions.
Secondly, there is a bad incentive effect. Again, as I
said, large businesses tend to be small businesses that grew. I
think you would be creating an incentive to stay small despite
the success of a company that decreases the incentive to work
your business to--into new fields. It creates an incentive to
remain small which really we want these companies to grow, we
want the successful ones to advance, to hire more people.
And lastly, I think that there is a probability of huge
gaming of such a system. I think suddenly we would see numbers
of small businesses in form would skyrocket. Suddenly you would
see all sorts of businesses that claim to be small, claim to
only have so many employees, but in truth are arms of larger
businesses, so I think even the effect would not be to help
small business.
Chair Landrieu. Okay, so the survey is, three of you are
for it, one of you is against it. I would like all of you to
think more about it in the next, you know, few weeks, maybe
submit a little bit more detail about your thoughts on that too
because I am going to seriously consider something like that to
this committee.
Last question, I will turn it over to Senator Snowe, all of
you, if you had to pick not 1099, because we have already
skinned that cat, what are your two most aggravating other
rules and regulations, if you could pick two, I know, out of
the hundreds that aggravate you, but Mr. Harris, are there two
that continue to be sort of, two or three, that people just
clamor, it does not make sense to them, it is not cost-
effective? Could you suggest a couple to us?
Mr. Harris. Well, and I am not sure if this is one or 100,
but I think if we looked at today's discussion of 1099 rules
and tried to take the current set of rules for employee
reporting, W-2s, withholding, multiple filing; I cannot imagine
if we were trying to introduce that process today what the
testimony would be like, if we were going to say, not only are
you going to have to keep up with how much you pay your
employee, we are going to make you agents of the state,
federal, and local governments and withhold that money and you
are responsible for submitting that money to the government,
and multiple forms to back up those payments, and if you are
late or do not make a payment on time, you, the business owner,
are going to be penalized.
Given the discussion we had with 1099s, I would love to try
to see that process being sold. So, I am concerned that we have
just accepted that because it is the way we have always done
it, without any examination of everything we are doing as it
relates to hiring an employee and tracking their wages and
tracking their payments. Is it just the way that we are doing
it now, or could it be done better?
Chair Landrieu. Well, let me ask you this, though, when you
are a business owner, do not you have to know how much you are
paying people?
Mr. Harris. Oh, sure. Sure, you do. That is what I am
saying.
Chair Landrieu. You have to track that right.
Mr. Harris. You have to track it. And I am not saying--but,
it is a very complicated redundance. We found multiple forms to
different agencies reporting the same information that again we
have just let this system kind of grow and let everybody have
their piece of it. We let the states have their piece of it,
the federal have their----
Chair Landrieu. So, if it could be one simplified form
about employees that just gets circulated among all the various
agencies, that in itself would be a significant help?
Mr. Harris. I think that would, I think there are multiple
forms that you file for the same thing.
Chair Landrieu. Mr. Nannis, anything come to your mind?
Mr. Nannis. I think in general, and again, this may be one
of those that it is one or it is 100, is the whole issue of
explanation of what it is that you are submitting to the
government. I know there is a Plain Language Act that was
recently passed and I believe that it is really important that
the language of describing how a form gets prepared. I mean, in
my business I am a tax return preparer, and I have four people
on my staff alone to help me understand what some of these
rules are, and I think that in many issues, certainly in the--
within the Internal Revenue Code, there are sentences there
that are the most amazingly long sentences that take forever to
just get through. I believe strongly that implementation,
complete implementation of plain language all the way through
to the Internal Revenue Code.
Chair Landrieu. Well, let me ask you since I am going to
prepare a floor speech on this, if you would send me a few of
those sentences it might help. I will put them in charts, put
them up on the Senate floor. We will have a little fun with
that.
Go ahead, Mr. Langer.
Mr. Langer. Yeah, you know, one of the things that I have
always heard a lot about was when the Department of Commerce
puts out their economic census forms, which is sort of a
restatement of, you know, what your business is up to. It goes
along with the authority that Commerce has to collect the
census data.
Most business owners do not understand why they are having
to fill out this stuff that they have already filled out before
when they fill out their tax forms, especially now that the
mandates are increasing. So, that is one that hits a lot of
different industries. The problem has always been that there is
not a silver bullet, that it is all the little mandates that
add up to very, very big things, which is why we have been so
outspoken about getting the agencies to stat burden, both in
dollar terms and in time terms, and maybe setting some
restrictions on the agencies in terms of their ability to add
further burden without taking burden away elsewhere.
Chair Landrieu. Thank you.
Mr. Gattuso.
Mr. Gattuso. The first one I mentioned is sort of the
general field of mandates for employee benefits such as in the
new healthcare bill, but there is plenty of other mandates. I
think that gets to the heart of the jobs issue, it most
directly hinders job growth and is--if you had to start in one
place, I think you would start there.
As a second one, this might not be the most--certainly not
mentioned the most often and might not be the largest, but
maybe the most neglected and that would be the rules being
applied by the Consumer Product Safety Commission on toys and
other consumer goods. I think the bill passed three years ago
on this issue was done under, with good intentions, but I think
it was so sweeping that it is driving a lot of small businesses
out of business to providing very little if any safety
advantage for the public.
Chair Landrieu. Senator Snowe.
Senator Snowe. Thank you, Madam Chair. I want to thank you
all for your outstanding suggestions and input here today. It
is critical. Unquestionably we are facing what I describe as a
regulatory stampede. I mean it truly feels that way. On my Main
Street tours, it is just staggering, the disconnect, between
the reality of what we do here and what actually occurs on Main
Street. We have got to turn it around.
I also got a preview of the resistance. I encountered, for
example, in establishing a review panel for the Consumer
Financial Protection Bureau, I could not understand why there
was such strong resistance to the idea of ascertaining what the
effects would be of any potential regulations before they were
promulgated, and I cannot tell you the degree to which that was
opposed and fought even in the conference committee.
So, it makes me wonder what the hidden agenda is, let alone
what is described as a de facto tax, and I could not agree
more.
So, the question is, where do we go from here? Senator
Pryor and I have introduced legislation, one of the provisions
which was incorporated in the jobs bill that passed, and became
law recently which is to require the Advocacy Office to respond
to agencies with respect to rulemaking. But the question is
whether or not to require every agency, every department to
have a review panel. It is clear we have it with OSHA and we
have it at EPA and now it makes me wonder why we never had it
and applied it to every other agency.
Would you agree that that is a step forward? And would that
have an enormous benefit? Secondly, applying it to the indirect
costs as well as to the direct economic cost, because there are
a lot of hidden costs in the indirect effects of regulation?
Mr. Gattuso, what would you say?
Mr. Gattuso. I think that would be an excellent idea. You
know, the analysis of cost is, again, as Andrew said, not a
silver bullet. We will never find out exactly what our
regulatory cost is. You are not going to get down to the penny,
but we should know as much as we possibly can, and I hear
objections to activities like this on the basis of resources
and time. Regulators say we do not have time to do that, we do
not have the resources to do that. Well, if you are imposing
$100 million or $1 billion of cost on the public, you should be
able to spend the time necessary to find out what effect it
will have.
Senator Snowe. Absolutely.
Mr. Langer.
Mr. Langer. Well, to gin on to what James said, that is why
we have also advocated for this issue of comparative risk
assessment, which I know, sort of, folks' eyes glaze over, but
it is a way of prioritizing public policy problems to ensure
that they are actually problems. You know, why would we spend
all of this enormous time and money dealing with something that
is not actually posing a risk to the public, not just on health
and safety, but on other issues as well, financial issues,
consumer products, which as health and safety issue, but, you
know, these are areas where we actually have to sit down and
assess, really, have a look before you leap, as James said,
really understand what we are doing beforehand so that we are
not about to cause $100 billion worth of damage to the economy.
It really is essential, but really the things that you have
laid out, especially for the future and the deference that
needs to be accorded to the Office of Advocacy, that can only
be of enormous benefit to small businesses.
Senator Snowe. Mr. Nannis.
Mr. Nannis. Other than to be redundant, I think that in my
business one of the things that we do as auditors and as CPAs
is we look at internal control, and one of the biggest issues
that we have is trying to convince companies that they ought
not to spend a dollar to save a dime, and I think cost benefit
analysis, I think your suggestion for looking at the indirect
cost benefits, these are the types of things that will go a
long way to ensure that we are not asking small business to do
something that will just undermine their ability to be able to
grow. So, the suggestion makes a lot of sense.
Senator Snowe. Mr. Harris.
Mr. Harris. I am not sure exactly how to do this, but the
experience I have got is, I served on the IRS Advisory Council
for four years and continue to go to some, what they call,
stakeholder meetings where there is the back and forth of what
they are talking about and how it would be impacted in the real
world, as I will call it.
Sometimes it works better than others, particularly the
sooner you can be brought into the discussion and have your
input heard, the better the end product usually becomes, so
anytime you can generate that back and forth of understanding,
I think, again, the 1099 issue, if there had been a one day
give and take between the business community and the people
writing the legislation, we could have saved a lot of these
headaches just in the sense, so I would always advocate the
more you can bring in input from the outside of how is this
going to be felt before it is felt, would be hugely beneficial.
Senator Snowe. On a couple of other issues, I will ask
anybody to respond who cares to, the whole idea that much
regulating is outside of the review process, for example, in
OSHA, regional guidance, documents, and there are hundreds of
similar items in the healthcare reform law. That is why Senator
Enzi and I sent a letter, because of all these increased
penalties on small businesses that are going to go from $1,000
to $3,000. It started in October, and then they reduce the
penalty mitigation structure, I think one of you made reference
to that, maybe it is you, Mr. Langer, in your testimony as
well.
It was a 60 percent reduced penalty that is going down to
40 percent, there is another dimension, and they do not have to
go through a review process. It is outside that purview. So, we
have got that. Secondly, the stampede that I referred to
between financial regulatory reform, healthcare, and all the
other agencies combined, what would you recommend to Dr.
Sargeant about how he ought to be preparing to be an aggressive
advocate on behalf of small business and dealing with that
immediately?
Mr. Langer. First? You want me to go first?
Senator Snowe. Anybody who cares to.
Mr. Langer. Well, I think first of all, just on the issue
of the Office of Advocacy, somebody mentioned earlier this
issue as to whether or not advocacy is fully funded and getting
the resources. I am not entirely certain that they are and I
really think that Small Business Committee needs to make sure
that they are getting their due in terms of being able to do
their jobs and not being undercut by other elements of the
Administration which I have been hearing very, very serious
rumors that other agencies, other personnel, are not giving
them their due and they need to be accorded the deference.
The fact is that yeah, the issue of regulation by guidance
is a very serious one, and I fear that the more we try to
ratchet down on the actual administrative regulatory process
under the EPA, that they are going to turn around and start
doing more regulation by guidance. The Wetlands Manuals over at
the EPA, for instance, which have huge force and affect over
hundreds of millions of acres across the country, huge impact
on businesses and individuals. That is not subject to this. And
as we talk about it with the independent agencies as well,
those need to come under the rubric. These are all things that
need to happen.
I have always been a fan, if we are talking about real,
sort of concrete solutions, I am a big fan of making every
bureaucrat who puts out a new regulation to put their name and
direct dial office phone number on every piece of paper that
comes out.
Senator Snowe. Good idea. I like that.
Mr. Langer. Thank you. Listen, I think if you want to get
at it, you know, you want to get clean language regulations and
these folks do not want to get hassled by folks having to pick
up the phone and call Washington, make somebody put their name
on the regulation they put out there.
Senator Risch. Put the President's cell phone number.
Mr. Langer. I am not advocating for that.
Mr. Gattuso. If I could add too, I associate myself with
what Andrew said, the proliferation of guidelines is a problem,
and if we make the formal review processes for regulations more
effective, there will be more guidelines. It is like pushing on
a balloon. Ultimately there is no other solution, there is no
magic bullet, but I think you have to drive the review process
and the appreciation for cost, down into the agency level. You
cannot do it with 19 people, you cannot do it with 100 people,
you probably cannot do it with 1,000 people on the outside.
This needs to be internalized in every agency. Every agency
should have their own Office of Advocacy internally to watch
out for regulatory excess. Every chairman, every agency
administrator should have staff close to him, looking out for
him, looking out for rules that are not justified, not fully
justified, too expensive. This cannot be completely an outside
pressure looking in. You need that outside pressure, but it
needs to be internalized as well.
Mr. Harris. I would just add one comment to what has
already been said. I do not think you are going to do it
holding panels in Washington, D.C. You need to be out having
panels in the hometowns and talking to the real people that are
being impacted by it, and most small business owners are busy
and they do not get a chance to fly to D.C. and attend a panel,
but they might be able to attend a meeting in their hometown in
the evening to talk to people if they really believe that those
people are there to help them. So, I would say, get out of
Washington and get into the real world.
Chair Landrieu. Senator Risch.
Senator Risch. Thank you very much. First of all, I wanted
to comment on Mr. Nannis' statement about the bravery that the
good Chairman and Senator Shaheen has shown in introducing the
bill to repeal the 1099 problem, and, however, if we are going
to pass out medals, we probably ought to look at the background
a little bit, and the first thing we ought to look at is how
this got there in the first place.
This was buried in a 3,000 page healthcare bill that was
shoved down the throat of the American people on a straight
party line vote. Senator Snowe and I and every single one of
our Republican colleagues on this side of the capital and on
the other side of the capital, voted no against that bill and
that was one of the reasons, one of the many, many reasons,
that the bill was going to strangle small business in America.
Now, if we are also going to examine what size medal the
person should get for the bravery, we should look at what
happened on September 14, 2010. Now, September 14, 2010, the
United States Senate had on the floor the Small Jobs Creation
Act. We had an amendment to that bill which specifically
repealed the mess they made of the 1099 situation in the
healthcare bill. And guess what happened? It failed. It failed
on a 46 to 52 vote.
Again, every single Republican voting to put that amendment
on this bill, which, by the way, is now law and which would
have repealed the 1099 problem. Every single Republican voted
for that amendment and we were joined by some of our colleagues
on the other side of aisle.
If the brave people who introduced this bill to repeal this
had voted with us on September 14, 2010, we would not even be
here talking about this today.
In any event, to add insult to injury, that particular
amendment has been put in the form of a bill, and the
Republicans yesterday, I am told, tried to hotline that bill.
Now, that is a procedure where you can push this thing through
here and get it passed and get it into law, and I am told my
good friends on the other side of the aisle have objected to
the use of the hotline.
So, guess what, the 1099 problem is not going to go away.
My only point is if we are going to pass out medals, we ought
to maybe adjust the size of the medals everybody's going to get
for bravery. We want this done and we are going to continue--we
are going to continue to push this. We are going to try to hang
it on every bill that goes through here and sooner or later the
American people are going to get a hold of their Senators and
Representatives by the throat and say, look, we do not want
this.
And Mr. Harris, with all due respect, you said you wanted
one day, we spent a year shouting from the top of this building
that this is what was going to happen if this healthcare bill
passed. So, it was more than a day, we spent a year at it, but
we could not get it done.
But, I want to promise you this and I want to commit to you
this, we are not done. We are going to continue every day, all
day, to try to get this 1099 problem resolved because as long
as I have been in public service, which is almost all my adult
life, this issue probably rises as high as any other issue I
have ever seen as far as affecting small business and as far as
raising the ire of small businessmen, so thank you very much.
Thank you, Madam Chair.
Chair Landrieu. Thank you, and I will end the meeting. I
would like to comment, though, and I am sorry that it has had
to end on a little bit of an argumentative note here because we
started out, I think, in a very bipartisan fashion but I do
want to respond.
From our perspective, Senator Risch, we did not shove the
bill down your throat, we gave you a year to come up with a way
to provide Americans with healthcare that every other country
in the world, at least developed country, has figured out a way
to cover their people and we have not, and you all declined,
and we ended up having to pass a bill with only Democrats, none
of us passing the bill or voting for it ever said it was
perfect, and we recognize that there are portions that must be
adjusted as we move along and we are prepared to do that.
Secondly, the bill that you all voted for on the floor on
September 14th had an offset that you knew when you introduced
it was totally unacceptable to the Democrats and you did it in
a very partisan, obnoxious way, in my view, and so that is why
we did not vote for it.
And I want this public to be very clear about this, there
were amendments put on the floor, both by Democrats and
Republicans to repeal 1099, but both leaderships put offsets on
that that the other side could not vote for. So, that is why
some of us have been working honestly for the repeal of 1099 to
find an offset both sides could agree to, and that is what this
Chairman has led that effort and I will continue to.
So, I do not want Mr. Nannis to have to debate this with
Senator Risch. I will be happy to debate it here on the floor,
but the meeting is adjourned.
[Whereupon, at 12:01 p.m., the Committee was adjourned.]