[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
      THE TAX OUTLOOK FOR SMALL BUSINESSES: WHAT'S ON THE HORIZON?

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             APRIL 18, 2012

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 112-063
              Available via the GPO Website: www.fdsys.gov



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
                       ROBERT SCHILLING, Illinois

                NYDIA VELAZQUEZ, New York Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                         YVETTE CLARK, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                        JANICE HAHN, California
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hon. Sam Graves..................................................     1
Hon. Nydia Velazquez.............................................     1

                               WITNESSES

Aparna Mathur, Ph.D., Resident Scholar, American Enterprise 
  Institute, Washington, DC......................................     3
Leonard Steinberg, Principal, Steinberg Enterprises, LLC, West 
  Windsor, NJ....................................................     4
Margot Dorfman, CEO, U.S. Women's Chamber of Commerce, 
  Washington, DC.................................................     6
Martin J. Mitchell, Vice CEO, Mitchell & Best Homebuilders LLC, 
  Rockville, MD..................................................     8

                                APPENDIX

Prepared Statements:
    Aparna Mathur, Ph.D., Resident Scholar, American Enterprise 
      Institute, Washington, DC..................................    18
    Leonard Steinberg, Principal, Steinberg Enterprises, LLC, 
      West Windsor, NJ...........................................    31
    Margot Dorfman, CEO, U.S. Women's Chamber of Commerce, 
      Washington, DC.............................................    39
    Martin J. Mitchell, Vice CEO, Mitchell & Best Homebuilders 
      LLC, Rockville, MD.........................................    41

Additional Materials for the Record:
    Associated Builders and Contractors, Inc. Letter for the 
      Record.....................................................    48
    Statement of the National Grocers Association................    49
    Comments from the Small Business Committee ``Open Mic'' 
      Website....................................................    53


      THE TAX OUTLOOK FOR SMALL BUSINESSES: WHAT'S ON THE HORIZON?

                              ----------                              


                       WEDNESDAY, APRIL 18, 2012

                  House of Representatives,
                       Committee on Small Business,
                                            Washington, DC.
    The Committee met, pursuant to call, at 1 p.m., in room 
2360, Rayburn House Office Building. Hon. Sam Graves (chairman 
of the Committee) presiding.
    Present: Representatives Graves, Mulvaney, West, Landry, 
Schilling, Velazquez, Schrader, Cicilline.
    Chairman Graves. Good afternoon, everybody. And we will 
call this hearing to order. I want to thank our witnesses for 
being here today and I will look forward to everybody's 
testimony.
    This week, as small business owners across the country are 
filing their taxes, we consider the tax burden on them. 
According to the National Federation of Independent Business, 
federal taxes consistently rank among the top five problems 
that small business owners face. And a Small Business 
Administration study found costs small and medium-sized 
businesses 36 percent more per employee to comply with the 
regulations than larger businesses.
    Small business owners face other obstacles, too. Many will 
be hit with new taxes and tax increases in the health care law, 
such as the increase in the Medicare payroll tax and an 
unprecedented Medicare tax on nonpayroll income. And if the 
2001 and 2003 tax policies are not extended, many small 
business owners may see their tax bills increase. Already 
facing rising energy costs and scarce capital, they do not need 
tax increases in this struggling economy, too.
    We should be fostering an environment where people are 
rewarded for investment, and that is why we encourage 
investment in entrepreneurship. But if we are going to penalize 
those investments by raising taxes on them, then our small 
businesses will find it even more difficult to access capital. 
I agree with the Ways and Means Committee chairman, Dave Camp, 
that we need comprehensive tax reform. In the meantime, we must 
do all we can to create an environment in which small 
businesses can thrive.
    And again I want to thank all of our witnesses for being 
here and for your participation. Some of you have come a long 
way. And I now yield to Ranking Member Velazquez.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman. Welcome 
everyone.
    In recent months, our economy has shown steady signs of 
recovery. In the last quarter of 2011, gross domestic product 
grew at an annual rate of 3 percent. Consumer spending is on 
the rebound, increasing by the most in seven months in February 
despite stagnant wages and rising gas prices. Most importantly, 
the U.S. economy is adding jobs--245,000 a month between 
December and February.
    While this news is promising, the recovery remains fragile, 
making it vital that our tax policy promote small business job 
growth and does not hinder it. Now more than ever, small firms 
need stability and incentives to grow. But after filing taxes 
yesterday, the challenge is created by the current tax code and 
the uncertainties that lie ahead are on the minds of every 
small business owner. Tax law has been used to encourage 
business investment through the use of deductions, credits, and 
favorable tax rates. Yet, as this Committee is well aware, it 
has become riddled with unnecessary complexities which have 
created additional burden on small firms. With many expiration 
dates looming and ACA tax provisions going into effect in the 
coming years, these complications are compounded for millions 
of firms.
    In that vein, it is my hope that today's hearing will offer 
insight on both current and future tax obstacles while also 
generating potential solutions. In doing so, we will seek ways 
to ensure effective tax efforts are maintained and ineffective 
ones are either allowed to expire or modified to encourage 
growth and competition. Failure to take any action, however, 
could create greater uncertainty in the marketplace and dampen 
the recovery for small businesses.
    At a time when the economy is starting to exhibit sustained 
job creation, small firms cannot have new obstacles to 
expansion. Tax policies can disadvantage small businesses as 
they seek to compete both domestically and abroad. Small firms 
now spend up to 67 percent more on tax compliance than their 
corporate competitors and face constant changes to the tax code 
creating further confusion and hindering job creation. A fitter 
and simpler tax code can encourage entrepreneurship, promote 
investment, and yield hiring. After all, as we look at policies 
to promote growth, tax reform should be a top priority.
    Given that the last major reform of the code took place in 
1986, it is clear changes are long overdue and that we cannot 
go forward without input from small business owners and 
entrepreneurs. Yet, comprehensive tax reform poses its own 
challenges. However, many discussions have focused on a 
corporate-only approach which disregards the importance of 
individual tax rates. Devoting reform efforts on a complete 
overhaul of the code supports our nation's job creators by 
allowing them to continue hiring and expanding without worrying 
about tax increases. Comprehensive reform will have immediate 
benefits for small businesses while also serving our nation's 
economic objectives of promoting job growth policies.
    With that I look forward to today's testimony and thank the 
witnesses for your participation. Thank you, Mr. Chairman.
    Chairman Graves. Thank you. Unfortunately, it looks like we 
are going to have a series of votes that are coming up within 
the half hour. So what we will do is at that point in time we 
will recess and go vote and then we will come back. I apologize 
for that. Ms. Velazquez and I do not get to make the schedule. 
If we did, we would do it a little bit different unfortunately.
    But we are going to start out with our first witness and 
you each have five minutes. And please try to adhere to that if 
you possibly can.

    STATEMENTS OF APARNA MATHUR, RESIDENT SCHOLAR, AMERICAN 
 ENTERPRISE INSTITUTE; LEONARD STEINBERG, PRINCIPAL, STEINBERG 
     ENTERPRISES, LLC, ON BEHALF OF THE SMALL BUSINESS AND 
  ENTREPRENEURSHIP COUNCIL; MARGOT DORFMAN, CEO, U.S. WOMEN'S 
CHAMBER OF COMMERCE; MARTIN J. MITCHELL, VICE CEO, MITCHELL AND 
    BEST HOMEBUILDERS, TESTIFYING ON BEHALF OF THE NATIONAL 
                  ASSOCIATION OF HOMEBUILDERS

    Chairman Graves. Our first witness is Aparna Mathur, a 
resident scholar with the Economic Policy Study Team at the 
American Enterprise Institute here in Washington, D.C.
    Dr. Mathur specializes in microeconomics, international 
finance, and econometrics. Her work has been cited in The Wall 
Street Journal, the Financial Times, and the Economist. She 
received her Ph.D. in Economics from the University of 
Maryland. And welcome, Dr. Mathur. I appreciate you being here.

                   STATEMENT OF APARNA MATHUR

    Ms. Mathur. Thank you for having me. Chairman Graves, 
Ranking Member Velazquez, and members of the Committee, I am 
honored to be invited to testify on the topic of small 
businesses and tax policy. This testimony documents the impact 
of new and higher tax rates and policy uncertainty on 
entrepreneurs and small businesses.
    Research suggests that young small businesses are the 
biggest job creators. According to the Census Bureau, small 
firms account for about half of all private sector employment 
and represent more than 99 percent of all employer firms. 
Moreover, they pay approximately 43 percent of all private 
wages and salaries. However, in the current recession, small 
business hiring, investment, and employment is down. The start-
up rate has fallen to levels below that in the 1990s and the 
start-ups being created are smaller than they were at that 
time. In other words, they are creating fewer jobs. Hence, this 
recession has been particularly bad for small employer firms.
    Future tax increases and new taxes are likely to make the 
business environment even tougher for small businesses. In his 
budget proposal for 2013, President Obama has proposed raising 
the top margin income tax rates on individuals earning more 
than 200,000 and couples earning more than 250,000. A 2011 
report from the Department of the Treasury shows that 
approximately 4 percent of all small businesses face the two 
top rates of 33 and 35 percent, but this accounts for nearly 32 
percent of small business income. For employer businesses in 
particular within small businesses, 10 percent of business 
owners and 38 percent of business income was subject to the 
high margin rates of 33 and 35 percent. Hence, the tax 
increases are likely to affect a large share of small business 
income, particularly for employer firms.
    In addition, the Affordable Care Act will impose new taxes 
on small business earnings. The Medicare payroll tax and self-
employment earnings in excess of 250,000 will rise from 2.9 to 
3.8 percent. The Affordable Care Act also imposes a 3.8 
percentage point hospital insurance tax on investment income 
over 250,000 starting in 2013.
    In addition, there are excise tax increases on businesses 
that fail to provide qualifying health insurance and another 
tax of 2.5 percent of gross income on self-employed people 
failing to buy qualifying health insurance.
    How will these tax increases affect small businesses? 
Economic research suggests that raising taxes on small firms 
has a significant negative impact on business activity. Higher 
taxes lower the ability of small firms to hire workers. It also 
lowers their ability to make wage payments to these workers. 
Further, an increase in marginal tax rates reduces the gross 
receipts of these businesses, reduces the proportion of 
entrepreneurs who make new capital investments, and decreases 
the average level of these capital investments. These effects 
are more pronounced for high income small businesses which are 
the job creators. A paper co-authored by Glenn Hubbard of 
Columbia University also found that increasing the 
progressivity of the tax code by raising the top marginal rates 
discourages entrepreneurs from starting new businesses.
    Finally, all the talk about future tax hikes and new 
regulations has created a climate of uncertainty for small 
businesses which makes it hard for them to make long-term 
decisions about hiring and investment. New research shows that 
an increase in policy uncertainty, such as about taxes or 
government spending or other policy matters leads to large and 
persistent declines in aggregate outcomes such as declines in 
real GDP, private investment, and aggregate employment. A 
recent Gallup poll and also a Chamber of Commerce survey found 
that more than 48 percent of small businesses are not hiring 
because of the potential costs of health care, and more than 46 
percent are not hiring because of concerns over government 
regulations.
    The above evidence clearly suggests that the proposal to 
raise taxes and hire entrepreneurs is exactly the wrong policy 
prescription for this time. To encourage job creation we need a 
future with lower taxes, not higher. Thank you.
    Chairman Graves. Thank you, Dr. Mathur.
    Our next witness is Leonard Steinberg, principal of 
Steinberg Enterprises, LLC in West Windsor, New Jersey. He is a 
federally licensed enrolled agent and certified management 
consultant. His tax practice specializes in comprehensive tax 
services for small businesses, including tax preparation 
planning and problem solving. So welcome, Mr. Steinberg. We 
appreciate you being here.

                 STATEMENT OF LEONARD STEINBERG

    Mr. Steinberg. Thank you very much. Chairman Graves, 
Ranking Member Velazquez, and members of the House Committee on 
Small Business.
    Thank you for the invitation to participate in today's 
hearing to examine the significant impact our tax system is 
having and will have on small businesses and individuals with 
regard to the Affordable Care Act, the expiration of the Bush 
administration tax cuts, the complexity in the tax system, and 
the issues affecting compliance.
    As a practitioner, I am responsible for the consequences of 
all the laws that Congress passes and helping my clients 
fulfill their obligations in filing their taxes. I am a member 
of the New Jersey IRS Practitioner Liaison Committee 
representing over 200 enrolled agents in the state and all of 
our respective clients. Since 2005, I have also represented the 
Small Business and Entrepreneurship Council as a member of the 
Small Business Advisory Committee through the Financial 
Accounting and Standards Board, also known as FASB. And from 
2001 through 2004, I was a member of the Taxpayer Advocacy 
Panel and chair of the Small Business Self-employed Payroll Tax 
Committee.
    The issues of complexity have been outlined in my written 
testimony and due to the time factor a lot of this will now be 
part of the written record. But the tax complexity deals with 
many, many issues, some of which I outlined, regarding 
depreciation, Section 179, which allows a write-off of 
approximately $500,000 in expenses and again, if it is due to 
be repealed and go back to a much lower rate which in effect 
becomes an automatic tax increase. I am also a member of the 
FASB Small Business Advisory Committee and we have the issue of 
the International Financial Reporting System that is currently 
being considered. Under the IFRS structure, small businesses 
would not be allowed to use the last in, first out method of 
inventory evaluation. The only method that is available under 
IFRS is FIFO, first in, first out. That, too, would be an 
automatic huge tax increase because of the reserves that would 
be automatically taxable during the first year.
    The complexity of the tax law also affects employers at the 
state level. While this Committee is involved with federal 
issues only, many, if not most states follow the federal rules 
and regulations which all add to the cost of doing business. 
Many business clients have stated that the tax code is so 
complex and cumbersome and filled with so-called loopholes or 
special circumstances which make it inherently unfair. Business 
people sign the returns stating they are correct but they 
really do not know what they are signing. Many have no idea 
what the accountants are actually doing but pay them and the 
lawyers plenty of money to properly comply and find ways to 
reduce the tax burden. It seems that those with more money or 
more political influence can get more tax breaks. As an 
example, in 2010, Congress made 579 changes to the tax code 
which now numbers 3.8 million words and it has been written up 
in the press that it is now four times the length of William 
Shakespeare's works.
    Nina Olson, the national taxpayer advocate, has testified 
before Congress and written in her annual report that the tax 
code has gotten too complex for reasonable people and even 
trained professionals to understand, including members of the 
IRS. The tax courts have ruled that IRS publications are not 
authoritative sources. In our representation work we must use 
IRS revenue rulings, prestigious tax law, and other cases to 
boost our representation for our clients. This uncertainty and 
all of the other complexity takes money out of the workers' 
pockets, reduces job creation, and will lead to a decline in 
the overall economy since there will be fewer dollars available 
for disposable income and less risk-taking overall.
    I would like to conclude by saying that every large 
businesses started as a small business. It is the dream of 
every small business owner to become the next large business. 
When money is taken out of the economy it also affects 
charitable giving. Many small businesses support local causes 
which are adversely affected by any decrease in the financial 
support that they would receive. And let the example of the 
Reagan era tax overhaul be a guide for future discussions, when 
the tax code was simplified in 1986--I apologize. The result 
was the longest continuous period of economic boom in this 
country's history and more jobs were created than at any other 
time.
    The members of this important Committee have the influence 
in their respective congressional districts, their state 
delegations, and with fellow congressional members to 
significantly impact and reignite the most successful economic 
engine in the free world. That is the U.S. small business 
community. I respectfully request that you make the necessary 
changes for the future economic growth of our great nation and 
as part of your public service legacy. Thank you.
    Chairman Graves. Thank you, Mr. Steinberg.
    We are going to recess for three votes. It will not be too 
long and then we will come back and we will start with you, Ms. 
Dorfman. But with that we will stand in recess until right 
after the last vote.
    [Recess.]
    Chairman Graves. Thanks everybody for bearing with us on 
the vote series. I will now turn to Ranking Member Velazquez 
for an introduction.
    Ms. Velazquez. Thank you, Mr. Chairman. It is my pleasure 
to introduce Ms. Margot Dorfman. Ms. Dorfman is the founder and 
CEO of the U.S. Women's Chamber of Commerce. The Women's 
Chamber of Commerce represents 500,000 members, three-quarters 
of whom are small business owners and federal contractors. 
Through her leadership, this organization has championed 
opportunities to increase women business and career and 
leadership advancement. Additionally, Ms. Dorfman has an 
extensive background in business, including over 10 years in 
executive positions with General Mills and other Fortune 500 
firms. Welcome.

                  STATEMENT OF MARGOT DORFMAN

    Ms. Dorfman. Ranking Member Velazquez, Chairman Graves, and 
Small Business Committee members, thank you very much for the 
opportunity to speak today on behalf of the U.S. Women's 
Chamber of Commerce's 500,000 members, three-quarters of whom 
are American small business owners, regarding the tax outlook 
for small business.
    In preparation for today's hearing, I listened to the views 
of our many small business members, and I can tell you there is 
a great deal of frustration amongst small business owners 
surrounding small and individual tax policies, revenues lost, 
and compliance.
    This frustration centers around a few broad issues--
complexity, constant change and uncertainty, the costs 
associated with managing the ever growing and changing 
complexity, the lack of fairness and resulting anti-competitive 
outcomes, and the challenge of simply being a good employer and 
provider for one's family and community.
    Already in today's hearing we have heard a bountiful number 
of references to the growing complexity of the U.S. tax code 
and how these changes have a great impact not only on business 
tax policies but also on individual taxes due to the high 
number of small businesses that are structured as pass-through 
entities.
    The outcome of these challenges has been magnified by the 
recession. While large businesses employ armies of accountants, 
attorneys, and complex tax evasion strategies to avoid paying 
their fair share of taxes, Congress continues to pass press 
release ready legislation instead of taking the action needed 
to truly level the playing field to invigorate America's Main 
Street businesses.
    Our small business members tell me the endless and 
unrelenting lack of fairness and changing landscape of business 
and individual taxation takes away from their focus on the 
things that matter to them--securing and keeping good 
employees, increasing business competitiveness and 
profitability, and investing in future business growth.
    Our small business members who are active as federal 
contractors tell us they are doubly burdened as they must also 
deal with the complexities of the FAR, the EPA regulations, and 
state and local issues. It is not feasible or affordable for 
small business to employ someone to deal with the spiraling 
complexity Congress has created.
    When our small business members see how the tax system is 
skewed against them and how big business gets away with schemes 
to avoid taxes when as a small business they cannot even access 
nor use many of the supposedly targeted tax break for small 
businesses, they become outraged. And worse, the unfair tax 
advantage big businesses have over small businesses decreases 
small business competitiveness as well as their ability to hire 
and retain employees and to provide good benefits.
    We hear endless stories of how tax breaks cannot be used by 
our small businesses because of some feature or restriction 
that renders it impossible for many small businesses to comply 
with. Yet congressional leaders still manage to find a nice 
headline proclaiming their love and concern for small business.
    For example, tax breaks for investments and equipment are 
nice as long as your firm needs equipment and has the cash flow 
up front to invest. As most of the smaller, financially 
challenged firms do not have cash flows available, they find 
this approach simply emboldens their larger competitors while 
discriminating against them.
    Additionally, an overwhelming majority of small business 
members told us they very much want to provide health insurance 
for their employees and take advantage of incentive tax 
credits. Small business owners are close to their employees who 
are their neighbors and often their family members.
    Many of our members told us they believe as the provisions 
of the Affordable Care Act continue to be implemented, that 
they will be better able to provide health care for their 
employees and to be better competitors when seeking to secure 
and retain employees.
    I call upon Congress to end the piecemeal approach you have 
taken to tax policy and the grossly unfair tax provisions and 
loopholes that can only be employed by larger firms. Small 
business owners want to pay their fair share of taxes and they 
understand the need of the U.S. government to raise revenues to 
provide a quality and secure environment for businesses and 
families.
    But today we do not have a level playing field. More 
legislation aimed at grabbing headlines will not help. What 
will help is real leadership in Congress, leaders who come 
together to truly work on behalf of small businesses. We know 
that small businesses are the job creators. It is imperative 
that we simplify tax policy and the complex codes and skew 
policies that benefit big business and allow business owners to 
focus on the important work they have as revenue generators, 
job creators, and community leaders. Thank you.
    Chairman Graves. Thank you, Ms. Dorfman.
    Our final witness is Martin J. Mitchell. He is the vice CEO 
of Mitchell and Best Homebuilders in Rockville, Maryland, where 
he works with his father and three siblings. In 2011, Mr. 
Mitchell was president of the Maryland National Capital 
Building Industry Association. He received his MBA from the 
University of Maryland and is testifying on behalf of the 
National Association of Homebuilders. Thanks for being here, 
Mr. Mitchell.

                STATEMENT OF MARTIN J. MITCHELL

    Mr. Mitchell. Thank you for having me. Chairman Graves, 
Ranking Member Velazquez, members of the Committee. Thank you 
for the opportunity to testify today.
    My homebuilding company, Mitchell and Best, is a family 
owned company and has been in operation for 37 years. After a 
very tough five years of the worst housing market downturn in 
our lifetimes, in 2012 we expect to build 25 homes, thereby 
creating at least 75 full-time jobs. We used to build close to 
100 homes per year.
    Small businesses are the heart of the residential 
construction sector. In 2012, nearly 80 percent of the NAHB 
builder members had less than 10 employees. About half had less 
than $1 million in gross revenues. Three-quarters built 10 or 
fewer homes. And 80 percent of homebuilders are organized as 
pass-throughs, S corporations, and LLCs. As pass-through 
entities, homebuilders and all other small businesses report 
and pay taxes at the individual rate. For this reason, NAHB 
strongly supports extending the 2001, 2003 income tax cuts now 
scheduled to expire at the end of this year.
    In addition to the marginal rate cuts, it is important that 
the 15 percent rate on capital gains and dividends also be 
extended. As many homebuilding companies are family-owned like 
mine, the present law on the estate tax rate rules must also be 
extended or ideally the tax itself eliminated.
    Another issue for small businesses organized as pass-
through entities is the Alternative Minimum Tax. The AMT 
complicates business planning and has grown from a tax that 
affected a few tax payers to one that could hit more than 30 
million taxpayers this year absent a congressional fix.
    Also, next year, several new taxes will come into force 
that will negatively affect small businesses. One standing from 
the 2010 health care reform legislation is a 3.8 percent tax on 
certain capital gains that will have a harmful effect on multi-
family apartment developers. Further, there is a pervasive 
rumor that this new 3.8 percent tax will take the form of a 
sales tax on homes. This incorrect information, which NAHB is 
fighting via educational efforts, is having a chilling effect 
in some housing markets.
    Ultimately, a complicated federal tax system is a burden 
and a hindrance on small businesses. Traditionally, the job 
creators. For this reason, NAHB supports simplifying the tax 
code as part of a deliberative and thoughtful comprehensive 
reform effort. Such an effort should include a public process 
that examines necessary changes, studies transition rules, and 
considers economic impacts. For homebuilders, homeowners, and 
prospective homebuyers, a critical element of the tax code is 
the mortgage interest deduction, the MID.
    The MID has been part of the tax system since 1913 and 
helps facilitate homeownership. Its beneficiaries are primarily 
the middle class, and in particular younger homebuyers who in 
the early years of mortgage are primarily paying interest. 
Weakening or eliminating the MID today would be economically 
disastrous.
    It is also worth noting that any tax reform effort that 
would lower corporate but leave individual rates the same or 
even higher would have a negative impact on small businesses. 
Homebuilders also face a number of other tax issues, including 
business debt mitigation and the phantom income tax. What is 
hopefully clear from my testimony is how uncertain the current 
tax environment is for businesses. The current uncertainty and 
tax policy makes it difficult for businesses to plan for years 
ahead which may further stall economic growth. In my industry, 
we cannot afford further stalled growth. Homebuilding has led 
the economy out of almost every recession. Housing provides the 
momentum behind an economic recovery because the homebuilding 
industry employs such a wide range of workers. Housing is a key 
engine of job growth. It is also a key component of consumer 
confidence.
    In terms of jobs, if we were at normal production levels 
for the housing industry, 3 million more people would be 
employed at this point in time. As Congress moves forward on 
the consideration of tax issues, Homebuilders want it to be a 
constructive partner with you in creating a better tax code. I 
thank you for the opportunity to testify today and look forward 
to your questions.
    Chairman Graves. Thank you, Mr. Mitchell.
    Mr. Mitchell's testimony expressing concern about the 
pending tax increases is echoed by many small business owners 
across the country and they are making their views very well 
known on the Small Business Committee's website portal. It is 
called Small Business Open Mic and I would ask unanimous 
consent that these comments be admitted as part of today's 
hearing record. Without objection, that is so ordered.
    We are going to start questions with Mr. West.
    Mr. West. Thank you, Mr. Chairman. Also, Ranking Member. 
And thanks to each and every one of the members of the panel 
for being here. You know, we just came off of two weeks being 
back in our districts, and again, the recurring theme when you 
go out and you talk to everyone, the three top issues--access 
to capital, regulatory environment, and tax policy. And as you 
know, we just passed a budget out of House here that said we 
would look at personal income tax rate, condensing those six 
tax brackets down to two--25 percent and 10 percent. And of 
course, the Ways and Means Committee will look at that cut 
line.
    But my question to you, because as you know, if we are 
talking about lowering tax rates that means we have to get rid 
of deductions and eliminate loopholes and things of that nature 
and for subchapter S LLCs using the personal income tax rate. 
My question to you then, if we take it down to 25 percent or 
maybe 22, 23 percent, what are the three deductions that you 
see that still need to be retained for small business owners 
and for that personal income tax rate? Do you want me to play 
the Jeopardy music?
    Mr. Steinberg. Number one, charitable donations. That is 
probably one of the best tax deductions. But I would also like 
to say as a practitioner, a lot of people think that when they 
get a deduction it is a dollar for dollar deduction on their 
tax. It is not. It is a reduction based upon your marginal 
rate. So as an example, if you give $100 in charity but you are 
in the 25 percent tax bracket, you only get a $25 deduction off 
your taxes. While it is important, a lot of people are under 
the misconception that that deduction is a dollar for dollar.
    The other aspect which I personally take umbrage with is 
the term ``loophole.'' Congress passes the laws. There are no 
loopholes. Everything is in law. What a loophole is is the 
unintended consequences of the law that gets passed. So if you 
want loopholes, there are plenty of unintended consequences 
that are built into the tax code that I and my fellow 
practitioners really have to deal with on a year-to-year basis 
every time Congress passes new tax codes or updates the tax 
code. And as people say when they say to me, well, if you go to 
a flat tax you are going to put the accountants out of 
business. And my answer to that is every time Congress passes a 
tax act it should be subtitled ``The Accountants Full 
Employment Act'' for that particular reason, because we then 
have to implement and make sure all of these aspects are 
enforced.
    So as far as the three, I would leave the charitable 
donations. I understand the issue of mortgage interest. I also 
understand the issue of real estate taxes, which is really a 
state issue as well as a federal issue. And, of course, that is 
where the states and the federal government go back and forth. 
And those are the three that I would definitely keep.
    Mr. West. Does anyone else want to----
    Mr. Mitchell. I would have to echo the keeping of the 
mortgage interest deduction. Right now that is keeping the 
homebuilding industry going. We would see a devastating effect 
as I indicated in my testimony in that there has been a lot of 
misperceptions about the mortgage interest deduction and who 
gets the advantages to that deduction. But housing production 
would fall off significantly. But what you would also find is 
that not only do we create three jobs for every house that is 
built, there is tens of thousands of dollars that go back into 
the local community, the state, and the federal government from 
the taxes and impact fees that are created for every home that 
is built. So the more we can incentivize home ownership to a 
reasonable level and a sustainable level, we think that is 
appropriate.
    Mr. West. Anyone else? I only got two.
    Ms. Dorfman. I will have to defer to my accountant.
    Mr. West. Last question then. Do we really need to have the 
death tax? Especially when we consider the fact that we are 
about to take from 35 percent up to 55 percent and we are about 
to bring that minimum qualifying amount from 5 million down to 
1 million. Is this something that will absolutely crush the 
small businesses? And if we look into the future--three, five, 
further down the road--do we really need to have the death tax 
when it comes to small businesses?
    Mr. Steinberg. As a practitioner, and I do not mean to 
monopolize the conversation, but this is what I do for a 
living. As a practitioner, the inheritance tax, that money has 
already been taxed twice. It has been taxed once as income and 
it has been taxed also on the dividends and interest that 
result from the investment of that. Now you are going to pass 
that burden onto the next generation and there are tax 
avoidance schemes that are looked at all the time to try and 
avoid paying the estate tax.
    It is interesting that you bring that up at this point in 
time because I am working on an estate right now where the 
estate, the owner had passed away and his wife now may have to 
sell the house in order to pay the state taxes. Where is she 
going to live? What is she going to do? She is 65 years old. 
She cannot work. She does not have any means of employment. She 
was going to use the assets from her inheritance to be able to 
live comfortably for the remainder of her life. You tax that, 
where is she going to go? Where is she going to live? So as far 
as the estate tax is concerned, I think it is confiscatory and 
I think it serves a negative purpose regarding the amount of 
money that is generated to the government.
    Mr. West. So that is a no. Yes or no?
    Ms. Mathur. I think it should be, you know, done away with. 
I think there is a lot of--a lot of businesses will be affected 
negatively by the tax.
    Mr. West. Ms. Dorfman.
    Ms. Dorfman. In even looking I believe there was the 
challenge originally with the farmers and the land that they 
inherited. It was passed down to the generations and the family 
farm having to be sold. You know, it is a small business. So.
    Mr. West. Yes or no?
    Ms. Dorfman. I forget how you crafted the question.
    Mr. West. Should the death tax be, you know, maintained or 
should we do away with it?
    Ms. Dorfman. No tax. No death tax. That is the way to say 
it.
    Mr. Steinberg. We agree. It should be eliminated.
    Mr. West. Thank you, Mr. Chairman. I yield back.
    Ms. Velazquez. How do you balance that with deficit 
reduction and balancing the budget? Mr. Steinberg.
    Mr. Steinberg. Okay, thank you. I appreciate the 
opportunity.
    Well, one of the ways to do it is Congress does not have an 
income problem; Congress has got a spending problem.
    Ms. Velazquez. A revenue problem.
    Mr. Steinberg. No, it is not a revenue problem. There is 
enough revenue coming in. What I suggest is that if Congress 
really wants to get their act in order, why do you not make a 
recommendation that every federal agency cut their budget by 1 
percent? You will have more than enough money to offset all of 
these taxes.
    Ms. Velazquez. Dr. Mathur, the Ryan budget includes 
extending the Bush era tax rate cuts, reducing corporate tax 
rates, and moving to only two tax brackets. Yet, in order to 
ensure the estimated $10 trillion in cuts are paid for, many 
popular tax expenditures must be completely eliminated, 
possibly having a disproportionate impact on small firms. The 
Ryan budget did not include any details on what expenditures 
should be caught. Since we are talking about ways to stimulate 
the economy and control deficits without burdening small firms 
and the middle class, can you please give us specific credits 
or deductions that will make up the trillions in tax cuts 
without imposing such burdens on small businesses?
    Ms. Mathur. I think the assumption that just reducing 
corporate income taxes or reducing personal income taxes will 
actually lead to long-term deficits is wrong. I think there is 
a lot of, you know, the research suggests that if you actually 
cut corporate income taxes or you cut personal income taxes you 
could actually see higher taxable incomes being reported. You 
could actually see more corporate tax revenues coming into the 
system.
    Ms. Velazquez. Let us say that it does not happen the way 
that you are describing it. Can you give me specific tax 
credits that could be--or deductions that will make up for the 
trillions of dollars in tax cuts without burdening small 
businesses?
    Ms. Mathur. I think we will have to go through the list. I 
am not sure, you know, which ones are actually working.
    Ms. Velazquez. Thank you. Mr. Mitchell, in your recent 
testimony you spoke about a Recovery Act tax change that not 
only helped your business but made the system a little fairer 
to small firms with debt. Can you please elaborate a little 
more on the debt exclusion from the stimulus bill and where 
your business would be today if that exclusion had not been 
enacted into law?
    Mr. Mitchell. Yes, I would be happy to.
    Under the Stimulus Act there was a deferral policy where if 
you had forgiveness of debt, cancelation of debt that created 
phantom income, you could defer that out to a period of up to 
10 years. Unfortunately, in an industry such as we are in, we 
turn our product over. We are not like an apartment builder 
where we hold an asset for a long period of time. So even 
though that was beneficial and it allowed us to defer, it 
really only created a deferral for maybe a year or two because 
once you sell the underlying asset that was a part of that debt 
you then have to take that phantom income tax. It has helped us 
to move things forward for another year or two but we had 
situations where Weyerhaeuser Realty Investors was our largest 
mezzanine debt holder. They closed down that operation. The 
value of land dropped significantly. And we have tens of 
millions of dollars of COD which is phantom income. It could be 
devastating to us if there is not an adjustment made to that. 
And we ask Congress to take a serious look at that.
    Ms. Velazquez. So you are telling me that what you are 
describing is how one targeted provision in the tax code could 
be beneficial to small business.
    Mr. Mitchell. I believe it can be for those businesses that 
saw, you know, reductions in the value of their assets over the 
last five or six years during this downturn.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Graves. Mr. Schilling.
    Mr. Schilling. Thank you, Chairman. I would like to thank 
the panel for being here today.
    I am a small business owner. I have a pizzeria in Moline, 
Illinois. And you know, the one thing that I understand is that 
our business is down. We are off about 35 percent and the gas 
prices continue to just crush our business. And a lot of the 
business folks that I have spoken with recently are very 
concerned about the Bush-Obama tax cuts expiring because as 
this downturn economy is here and then now they take on another 
hit with a 35 percent or, you know, most of the folks I talk to 
are anywhere from 20 to 40 percent off, once those expire, 
basically what is going to happen is it is going to put a lot 
of these companies out of business.
    And I think it is really, really imperative to understand, 
I believe, is that we have to stop spending money that we do 
not have. And that is the thing. Because as we continue to 
spend it, you know, we are $16 billion in debt, it is a huge 
burden on our kids and our grandkids. And, you know, once we 
stop the ridiculous spending--the Tunnels for Turtles and all 
of the other things that we have been doing for years--then we 
can look at revenue increases. But until then we have got to 
really stay focused in on that type of stuff.
    What I would like to do is just, Mr. Steinberg and Mr. 
Mitchell, the new health care law creates much uncertainty for 
our small businesses through mandates, regulations, and tax 
increases that do not take effect until 2014. One specific tax, 
the Small Business Health Insurance Tax, will increase premiums 
by two and a half percent in the year 2016 alone. According to 
the Joint Committee on Taxation is what they are telling us, do 
you think that this tax increase will make it more difficult 
for employers to provide health care which is the overall goal 
of the president's health care law after all and then predict 
health insurance costs in the future by giving us that 
increase? Just kind of a basic.
    Mr. Mitchell. Well, from our aspect, despite maybe what is 
thought about in the public, we are now operating at razor thin 
margins if we are on the black side of the ledger at this point 
in time. So any type of an increase, even a 2.5 percent, which 
may not sound like a significant amount but on your overall 
employee base it will be a significant burden. So right now it 
will be difficult for us. We are an industry that has been hit 
with several code changes in the last 10 changes, significant 
ones that have changed our cost structure. But any additional 
cost item that is placed on us such as that will make it 
difficult for us to continue and survive.
    Mr. Steinberg. There are consequences through having that 
tax passed and number one would be whether the IRS has the 
resources to be able to enforce it. Right now the IRS is 
operating razor thin as it is with their budget. They do not 
have the resources to enforce the current tax law. How are they 
going to have the resources to enforce additional mandates that 
are being passed through the Affordable Care Act? And the other 
aspect is that you are really taking money out of the owners' 
pockets. And I happen to know Ms. Velazquez's district. I grew 
up in Brooklyn so I know--and Queens. And I know the area. 
Sunnyside Avenue. You have got bodegas. You have got 
laundromats. You have got hair salons. You raise the amount of 
tax that they are going to pay, those small businesses are not 
going to be able to employ the local people. So how are they 
going to stay in business if you take more money from them?
    Ms. Velazquez. I do not think they are making over 
$250,000.
    Mr. Steinberg. That is not the issue. That is not the 
issue, Congresswoman. The issue is you are taking money away 
from them that they cannot give to hire somebody else. Or let 
us say a young high school student wants to come in for a job 
after school and is looking for a job and they want to be able 
to give them a job to be able to do it. If they do not have the 
money, that high school kid--I worked high school jobs after 
high school. They want to be able to work. If they do not have 
the money, what is a high school kid supposed to do? Where are 
they going to get the experience and learn how to do it if the 
money is being taken out of the economy and being sent to 
Washington? There is a disconnect there between what is 
happening in Washington and what is happening on Sunnyside 
Avenue.
    Ms. Velazquez. I totally disagree with you.
    Mr. Steinberg. I respectfully accept that.
    Mr. Schilling. Can I reclaim my time? You guys can do this 
later.
    Just one quickly, Mr. Steinberg and Mr. Martin (sic) 
because you guys have experience in this, how much would you 
say your company or members spent preparing and comply with the 
tax code or the regulations each and every year? Because I see 
this as money that we could be expanding and hiring people. But 
can you give me a ballpark of some of your clients and then 
maybe what your business does in complying?
    Mr. Steinberg. The average tax return for an S corporation 
for me takes about three hours. That is just doing the tax 
return. That is not doing all the due diligence behind it. So 
when you factor in all of the work behind it you are looking at 
approximately 6 to 10 hours worth of work before the tax return 
is completed.
    Mr. Schilling. So basically you are able to hire another 
worker to do all of this extra work. Right?
    Mr. Steinberg. But then have to pass that cost on to the 
client.
    Mr. Schilling. That is right. Okay.
    Mr. Steinberg. So the client, in effect, is paying for 
compliance one way or the other. So therefore, I am taking more 
money out of the client's pocket rather than having the client 
be able to put that money back into the business.
    Mr. Schilling. Very good. Thank you.
    Mr. Mitchell. From our standpoint we have never been a 
large enough firm to be required to do audited financial 
statements. We have always done different levels below that. 
The complexity of our tax returns in our type of business going 
back from the downturn of the early 90s is that we basically 
have to put every project into a separate LLC and then we have 
to compile those up and roll those up to one LLC. As a business 
that is not operating profitably for the last couple of years, 
we are still having to put out $30,000 to $40,000 a year to 
have our tax returns done. That is not our financial 
statements. We have our financial statements done internally. 
We get some input and feedback from our accountants but we do 
not have them do that. That does make it even more difficult to 
obtain equity and debt, but it is just one of those things we 
have to look at every penny that we are spending these days. It 
is a significant number for a firm like us.
    Mr. Schilling. Very good. I thank you for your time and 
yield back.
    Chairman Graves. Mr. Schrader.
    Mr. Schrader. Thank you, Mr. Chairman.
    Dr. Mathur, the data I have seen would indicate that our 
tax revenues, federal tax revenues are pretty much at an all-
time low since World War II. Would you agree to that?
    Ms. Mathur. Yes.
    Mr. Schrader. So how would you describe the state of our 
economy right now with our revenues, tax revenues at an all-
time low, taxing of businesses is, you know, at the lowest 
point it has ever been.
    Ms. Mathur. I do not agree with that the taxing of 
businesses is at its lowest point it has ever been. I think, I 
mean, if you look at the corporate tax rate, we have one of the 
highest corporate tax rates now amongst----
    Mr. Schrader. With LLCs. Most of your small business folks 
as I understood, we are talking about LLC.
    Ms. Mathur. A lot of small business folks will also face 
high tax rates of 33 and 35 percent.
    Mr. Schrader. But you just testified a minute ago that the 
federal average is at an all-time low. Our taxes----
    Ms. Mathur. The revenues are low because----
    Mr. Schrader. Let me finish my comment, please.
    Ms. Mathur. Sure.
    Mr. Schrader. I will ask you a question; you can answer. 
Okay?
    Ms. Mathur. Okay.
    Mr. Schrader. So what I am saying here is that our revenues 
are at an all-time low. Our taxes are at an all-time low 
overall. I will grant you a point, it depends on what business 
you are in or what part of the world you come from. But they 
are at an all-time low. If taxes alone determine the health of 
our economy, we should be booming right now and we are not 
booming. So while I share everyone's concern on, you know, tax 
policy, I think it is completely inaccurate and hyperbolic to 
say that, you know, low taxes equal great economy. We are not 
seeing that right now in the United States of America.
    Second point, Mr. Steinberg, you are absolutely ill 
informed on the American--or excuse me, the Affordable Care 
Act. Congresswoman Velazquez is absolutely correct. The 
revenues in that bill are for larger businesses. Businesses 50 
employees or under are completely exempt. Those are truly the 
small, small--I am a veterinarian. I am like Representative 
Schilling. I have got a small, small business. And I am very 
appreciative of the fact that that is recognized in the 
Affordable Care Act. Health care right now is totally 
unaffordable. As we have heard testified here today, the 
effects of that act do not occur until 2014 and already 
businesses are shedding, you know, their health care plans. So 
the system now is broken. We have to do something. And I 
respect the fact that the bill is imperfect. Every bill we pass 
is probably imperfect and we have got a long way to go. But I 
would suggest respectfully we do not throw the baby out with 
the bathwater.
    My question, Mr. Chairman, sir, to the panel, you have all 
testified, at least all agreed I think, that our tax code is 
too complex and comprehensive tax reform is probably a good 
idea. There are several proposals out there. Congressman Ryan 
has given an attempt at that and I appreciate that actually. 
There is another one out there that the president put together 
through his Debt Commission, sometimes commonly called the 
Simpson-Bowles Report. And there has been a recognition that 
certain deductions are very, very important. They call out the 
primary interest deduction through the Gang of Six work. They 
talk about the charitable deduction that Mr. Steinberg talked 
about. The real world is, you know, for every junction we save, 
I am a big one to say that, prime interest mortgage deduction, 
that is a big cost. That is one of the bigger deductions we 
have. And that will affect how much we can lower the rate going 
forward.
    But I guess I would just like a general from each of you, 
do you think that the Simpson-Bowles framework of comprehensive 
tax reform with certain critical tax deductions to make sure 
our economy, and the housing industry in particular, recovers 
is maybe a decent template at least for this Congress to work 
off of? There were 38 members of Congress that agreed to that. 
I am curious where you all stand.
    Mr. Mitchell. Well, I have to admit I do not know all the 
details of the Simpson-Bowles, but we are supportive of a 
reform of the tax code and supportive of the simplification as 
you talked about and we think that it was mentioned here 
earlier, if you go back to 1986 when some of the reforms were 
made, there were certain protections for important items such 
as the mortgage interest deduction and other housing. But there 
were other housing changes that made severe impacts that were 
negative to the housing industry. So I think that, you know, 
while we support the overall goals, I cannot get into the 
details. I apologize. I can go back and talk about that.
    Mr. Schrader. Ms. Dorfman.
    Ms. Dorfman. I would have to say I am not familiar with all 
the details either but our members definitely would like to 
have a simplified code. We also think that the unfair tax 
advantages that the large corporations are enjoying should be 
re-examined and perhaps removed so that there is a level 
playing field. Trying to compete as a small business when the 
corporations, obviously the large corporations have that 
advantage, it is hard to go ahead and, you know, grow in a 
market space with that competitive disadvantage.
    Mr. Schrader. Mr. Steinberg.
    Mr. Steinberg. Any framework that the Congress can begin to 
look at that is going to significantly improve the tax 
structure is definitely welcome. And, of course, with the CBO 
and the other panels, the American Enterprise Institute and 
some of the other think tanks in the city, as they do the 
analysis of it as you begin to progress, it is a start. It took 
us 40 to 50 years to get to this point. We are not going to 
solve it in one or two years. It has got to be a phased 
implementation. And each Congress can change it as they 
change--as the Congress changes every two years, then they can 
do away with what the previous Congress has done. What you need 
to do is you need to codify it and say this is permanent so 
that businesses have a way to plan. They have certain 
certainty. Right now there is no certainty among the small 
business owners. You know that. And Mr. Schilling knows that. 
There is no certainty in the tax code. So once you have that 
certainty, if you are going to use Simpson-Bowles, that is a 
good framework to start. And just let the statistics tell you 
where it goes from year to year.
    Mr. Schrader. Good.
    Ms. Mathur. I agree that we need tax simplification. We 
need a process where, you know, if you are thinking of cutting 
down rates then, you know, we also care about effective rates. 
I think what matters when we think about actually getting 
revenues, that was the point I was trying to make earlier. You 
can have high rates but that does not always translate into 
high revenue. We know that with the corporate tax rate. We have 
one of the highest rates and we have one of the lowest revenue 
collections in all of the Western countries. So we should aim 
for simplification but I think we need to care about where we 
stand in terms of the effective rates as well.
    Mr. Schrader. I am actually over my time. Mr. Chairman, 
thank you very much. I just want to say I appreciate the 
comments particularly on the last question and ask you to do a 
little more homework if possible and give me a little more 
feedback based on Simpson-Bowles, Gang of Six type of changes 
because it is the only bipartisan game we have in town. It is 
not perfect but at least it is a starting point for finally a 
productive discussion that I think America is craving right 
now. Thank you. And I yield back, sir.
    Chairman Graves. Mr. Mulvaney.
    Mr. Mulvaney. I am all right.
    Chairman Graves. Are you sure?
    Mr. Mulvaney. Yes. I yield back.
    Chairman Graves. I want to thank you all for participating 
today. And I think we should all be concerned about the burden 
of taxation on our nation's small businesses, the effect of 
these pending tax increases, the fact that the administration 
seems to be willing to let that happen, and the impact that is 
going to have on our economic recovery.
    I would ask unanimous consent that members have five 
legislative days to submit statements and supporting materials 
for the record. Without objection that is so ordered. This 
hearing is adjourned.
    [Whereupon, at 2:35 p.m., the Committee was adjourned.]

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