[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
  BEYOND THE BELTWAY: SUCCESSFUL STATE STRATEGIES FOR SMALL BUSINESS 
                                 GROWTH

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             JULY 10, 2013

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 113-029
              Available via the GPO Website: www.fdsys.gov




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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      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.............................................    13

                               WITNESSES

Mr. Pat Costello, Commissioner, Office of Economic Development, 
  State of South Dakota, Pierre, SD..............................     3
Mr. Nick Jordan, Secretary, Department of Revenue, State of 
  Kansas, Topeka, KS.............................................     5
Mr. Aaron Demerson, Executive Director, Office of Economic 
  Development and Tourism, State of Texas, Austin, TX............     7
Hon. Jim Cheng, Secretary of Commerce and Trade, Commonwealth of 
  Virginia, Richmond, VA, testifying on behalf of Hon. Robert 
  McDonnell, Governor, Commonwealth of Virginia, Richmond, VA....    10

                                APPENDIX

Prepared Statements:
    Mr. Pat Costello, Commissioner, Office of Economic 
      Development, State of South Dakota, Pierre, SD.............    24
    Mr. Nick Jordan, Secretary, Department of Revenue, State of 
      Kansas, Topeka, KS.........................................    29
    Mr. Aaron Demerson, Executive Director, Office of Economic 
      Development and Tourism, State of Texas, Austin, TX........    32
    Hon. Jim Cheng, Secretary of Commerce and Trade, Commonwealth 
      of Virginia, Richmond, VA, testifying on behalf of Hon. 
      Robert McDonnell, Governor, Commonwealth of Virginia, 
      Richmond, VA...............................................    40
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Governor's Commission on Economic Development & Job Creation.    47
    Governor's Commission on Higher Education Reform, Innovation 
      and Investment.............................................    87


  BEYOND THE BELTWAY: SUCCESSFUL STATE STRATEGIES FOR SMALL BUSINESS 
                                 GROWTH

                              ----------                              


                        WEDNESDAY, JULY 10, 2013

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360, Rayburn House Office Building. Hon. Sam Graves [chairman 
of the Committee] presiding.
    Present: Representatives Graves, Chabot, Luetkemeyer, 
Mulvaney, Tipton, Herrera Beutler, Hanna, Huelskamp, Rice, 
Velazquez, Schrader, Hahn, Payne, and Meng.
    Chairman GRAVES. We will go ahead and call this hearing to 
order. Ranking Member Velazquez will be just a little bit 
delayed. She had a meeting at the White House that she had to 
attend, so she will be back in just a little bit. But we will 
go ahead and start the hearing. We do have a series of votes 
that will be coming up, so we are going to try to move through 
as quickly as we can.
    But I want to thank all of our witnesses for being here 
today as we examine several innovative ways that states are 
attracting, retaining, and growing businesses, and I appreciate 
again all of you coming in. Some of you come from a good 
distance.
    There is competition raging in our country, and it is not 
competition with the results published on the sports page. It 
is competition that is being played out on the front page and 
on the business page. States are in a fiercey competition to 
create friendly environments to attract new businesses, to keep 
the businesses they have, and grow them to both to boost the 
economy and create jobs.
    Each year, several trade associations, news media outlets, 
and think tanks attempt to rate each state to determine which 
are the best ones for businesses. Just this week, CNBC released 
their 2013 rankings for America's Top States for Businesses. 
Forbes Magazine and Thumbtack.com, along with the Kauffman 
Foundation release similar lists each year.
    While the methodologies for each of these surveys and 
studies slightly differs, they all judge states on criteria 
such as the cost of doing business, regulatory and tax regimes, 
and access to capital. And the states we have represented at 
our hearing today consistently perform in the top 15 of these 
surveys, proving to be the cream of the crop when it comes to 
working for greater business development.
    Although growth has been exceptionally weak following the 
recession nationally, the states represented here have bucked 
that trend and outpaced the national averages, some by 
significant margins. States like Virginia, Texas, Kansas, and 
South Dakota have significantly lower unemployment than the 
national average, and states like Texas, Utah, and Florida, 
have outpaced the national gross domestic product average of 
2.5 percent in 2012. Simply put, some states are making 
excellent headway at attracting businesses to their states and 
growing the economies accordingly.
    These states are not just courting businesses from other 
states but also enticing companies with facilities overseas to 
come back to America. These states are proving that with lower 
taxes, smarter and less burdensome regulatory regimes, and 
access to affordable energy, the United States can and will 
continue to be a place where things are built and entrepreneurs 
can innovate and thrive.
    Again, I want to thank all of our witnesses for being here 
today. Again, Ranking Member Velazquez will not be able to give 
her opening statement but she will submit it for the record.
    And with that, what I will do is turn to Congresswoman Noem 
from South Dakota to introduce our first witness. And welcome, 
by the way, to the Committee.
    Ms. NOEM. Thank you. It is nice to be here, and I 
appreciate the chairman allowing me the opportunity and the 
privilege of introducing a special guest that we have here from 
South Dakota today. I am proud and honored to have the 
opportunity to introduce all of you to Pat Costello. I have 
known Pat for many years, and continue to be impressed by his 
leadership for our state of South Dakota and his desire to grow 
and to sustain a healthy economy for us back home, but also for 
our country.
    As the commissioner of the South Dakota Governor's Office 
of Economic Development, Mr. Costello is a leader in bringing 
high quality jobs to our state and high performing employees as 
well to South Dakota. While we work in Washington to support 
policies that encourage job growth and innovation, Mr. Costello 
is doing the same thing back in South Dakota. We are fortunate 
that in South Dakota our economy has remained strong. We 
continue to have relatively low unemployment, less than half of 
the national average.
    Numerous rankings have shown that South Dakota is one of 
the best states in the country to do business and continues to 
give individuals a great quality of life. In fact, the Small 
Business Survival Index has rated South Dakota's business 
climate as number one in the country for new businesses and 
startups. Mr. Costello knows this firsthand. Since moving to 
South Dakota, he has operated several small businesses in Sioux 
Falls, which is our largest city. Before his appointment to 
Commissioner, Mr. Costello proudly served on our city council 
for the city of Sioux Falls from 2006 to 2010. He was also 
chairman for the year of 2009 through 2010. Beyond creating 
jobs and fathering economic development within our state's 
borders, Mr. Costello also finds time to give back to causes 
that matter the most to him. He currently sits on the board of 
directors for the Children's Care Hospital, which is a 
wonderful facility that cares a lot about children and their 
families and school, and is a member of the Rotary Club. Pat 
knows what it takes to get the job done, and in South Dakota, 
we feel very lucky to have him.
    I am very fortunate to be here. It is great to have him. I 
know that you will enjoy hearing his testimony today, and I 
would like to thank him for taking the time to travel all the 
way to D.C. It is quite a trip. I know it pretty well. And to 
discuss the importance of small business and the growth 
opportunities we have for our country.
    So with that I will yield back, Mr. Chairman.
    Chairman GRAVES. Go ahead.

    STATEMENTS OF PAT COSTELLO, COMMISSIONER, SOUTH DAKOTA 
    GOVERNOR'S OFFICE OF ECONOMIC DEVELOPMENT; NICK JORDAN, 
   SECRETARY, KANSAS DEPARTMENT OF REVENUE; AARON DEMERSON, 
EXECUTIVE DIRECTOR, OFFICE OF ECONOMIC DEVELOPMENT AND TOURISM; 
  JIM CHENG, SECRETARY OF COMMERCE AND TRADE, COMMONWEALTH OF 
                           VIRGINIA.

                   STATEMENT OF PAT COSTELLO

    Mr. COSTELLO. Thank you very much.
    You know, it is always a pleasure to talk about the great 
state of South Dakota. Again, my name is Pat Costello, and I 
serve as the commissioner of the Governor's Office of Economic 
Development.
    I have been in that role for about two and a half years, 
and I have been in small business in South Dakota for about 20 
years.
    I would like to take a few minutes and share with you a 
little bit about our state, and why it is a great place to do 
business and what we, as public servants, are doing to ensure 
that we remain a good place to do business.
    First and foremost, is our tax climate. It is unmatched by 
any other state in the nation. Only in South Dakota do 
businesses enjoy the benefits of no corporate income tax, no 
personal income tax, no business inventory tax, no personal 
property tax, and no inheritance tax.
    This structure leaves money where it belongs--in the 
pockets of our businesses, creating a more favorable 
environment for long-term business growth. As we like to say in 
South Dakota, ``Profit is not a dirty word.''
    I was asked today to testify on why South Dakota is a great 
place to do business. Well, a big part of that is our fiscal 
responsibility and common sense.
    When it comes to fiscal responsibility, you would be hard 
pressed to find a state that would rank higher than South 
Dakota. For the last 123 years, we have consistently balanced 
our budget.
    Two years ago, like most of the country, we were faced with 
some serious budget issues. We buckled down, made the cuts that 
were necessary, and today we are in a better financial 
situation than most other states in the country.
    If we want serious, financially-sound companies operating 
in South Dakota, we need to set the example at the state level.
    I have already mentioned our favorable tax climate, but I 
also want to talk about our favorable regulations and the 
consistency of our business leaders.
    When I started in our office, I read something in one of 
our promotional brochures, ``In South Dakota, our business 
climate does not change with the political winds.'' That 
statement was written back in the 1980s when Citibank moved 
some of its credit card operations to South Dakota when the 
state legislature allowed expansion in compliance with the old 
Federal Bank Holding Act.
    Today, the financial services industry is thriving in South 
Dakota. As a matter of fact, in 2012, South Dakota's total bank 
assets topped $2.6 trillion, which totaled 18 percent of the 
country's bank assets and landed our state as the number one 
ranking according to the Federal Deposit Insurance Corporation.
    So forward-thinking leaders back in the 1980s, followed by 
forward-thinking leaders in the next 30 years, have kept South 
Dakota a leader in economic development with reasonable 
regulation and low taxation. When our governor, Governor Dennis 
Daugaard was elected, one of the first things he did was direct 
all state agencies to identify unnecessary laws and regulations 
and get rid of them. In two years, executive agencies under 
Governor Daugaard have found 374 rules (72,990 words) and 919 
sections of codified law (75,266 words) to be repealed, and the 
process is less than half done.
    That is just good business. And corporate leaders quickly 
took note that this Midwest state was serious about maintaining 
the type of business climate needed for companies to grow and 
prosper.
    Another way South Dakota is able to continue to attract 
national and international companies like Bel Brands and Marmen 
Energy, is by playing to our strengths. With a population of 
830,000, we are one of the least populated states in the 
country. But in business that can be a good thing. Our small 
size affords businesses looking to expand in or relocate to 
South Dakota direct access to government leaders.
    When Governor Daugaard was campaigning, he promised to be 
the state's number one salesperson for economic development, 
and there is no question that he has fulfilled that campaign 
promise. During the last three months alone, Governor Daugaard 
has met with nearly 70 business leaders and site selectors from 
across the country to encourage them to continue to grow their 
businesses in or locate them to South Dakota. That kind of 
personal attention gets noticed.
    Another thing that gets noticed is our collaborative 
efforts for the people of South Dakota. Our business 
development team serves as the liaison with these business 
leaders and site selectors on a multitude of issues from 
financing to permitting. As every business leader knows, 
navigating the permitting process can be time consuming and 
frustrating. In South Dakota, we believe in working with 
businesses not only to make it happen but to make it happen 
faster. As an example, we recently had one company that was 
able to receive an air quality permit from our Department of 
Environment and natural Resources from start to finish in just 
30 days, and we did it without cutting corners. We believe the 
state should be an advocate, not a roadblock to doing business.
    Another way we attract business is by keeping our cost of 
living low, because in the business world a low cost of living 
equals a low cost of doing business. According to a June 2013 
study by the U.S. Commerce Department, South Dakotans pay 87 
percent of the national average for goods and services. 
Additionally, the U.S. Commerce Department just reevaluated the 
numbers for personal income and South Dakota's growth was a 
whopping 10.4 percent--more than any other state in 2012.
    Of course, I would be remiss if I did not take the 
opportunity to let others tell what they think South Dakota is 
doing right as well. The Small Business and Entrepreneur 
Council evaluated 46 different economic factors and ranked 
South Dakota number one for our business policies and 
entrepreneurial friendliness. We are also in their top spot for 
small business survival. Our low debt and lack of unfunded 
pension liabilities and expensive state-funded programs lands 
us in the top of Barron's Best Run States in America. Our state 
ranks in the top for low tax burden, best business climate, and 
one of the highest average credit rankings. And of course, 
there is yesterday's CNBC ranking that puts South Dakota as the 
best run state to do business.
    Thank you again for the opportunity to be here and to 
testify about this important topic, and I look forward to your 
questions.
    Chairman GRAVES. I will next yield to Mr. Huelskamp for the 
next introduction.
    Mr. HUELSKAMP. Thank you, Mr. Chairman.
    It is my pleasure to introduce my friend and former 
colleague, Nick Jordan, to my current colleagues. Nick and I 
served together in the State Senate for 12 of his 13 years, and 
prior to that, Nick spent much of his adult life promoting a 
positive pro-growth business environment in Kansas. He served 
as the founding president in the Overland Park Convention 
Visitors Bureau. And while in the Senate, I know personally 
Nick worked to promote issues that were important to small 
businesses, especially. In 2010, incoming governor Sam 
Brownback tapped Nick to serve in his cabinet as the revenue 
secretary. In that role, Secretary Jordan helped shepherd a tax 
reform package through the legislature and onto the governor's 
desk that will reduce income taxes, especially for small 
businesses, which make up about 97 percent of all Kansas 
businesses, and it will and is already promoting economic 
growth.
    In addition to promoting small business issues, Secretary 
Jordan and his wife, Linda, co-own a small business with their 
daughter Shelly, which is located in Shawnee, Kansas, where the 
Jordans have lived for more than 30 years. He remains active in 
his church and community, serving on the Board of Directors of 
Shawnee Community Services.
    Secretary Jordan, thank you for being here today to share 
your testimony on some pretty exciting news from Kansas. Thank 
you for joining us.

                    STATEMENT OF NICK JORDAN

    Mr. JORDAN. Chairman Graves and Committee members, thank 
you for inviting us in today and allowing Kansas to tell our 
story. I am going to focus a little bit on tax policy, although 
we have had an office of repeal or the governor has done some 
pretty dramatic things with budget and regulations in the state 
of Kansas, but probably now the most notoriety we are getting 
is on the tax policy that we have done in Kansas since Governor 
Brownback came into office.
    The topic is very important to us. Small business, in 
particular, the vast majority, as Congressman Huelskamp said, 
of our private sector employers are small businesses--77 
percent have less than 100 employees; 98 percent of them have 
less than 100 employees. This means for Kansas families to 
flourish economically in the 21st century we must have 
flourishing small businesses.
    With that in mind, Governor Sam Brownback has placed the 
utmost importance on pro-growth tax reform at the state level. 
We started with the clear-eye understanding that the taxes at 
the federal, state, and local levels are a complicated hodge-
podge coupled together over many decades, so to help small 
business it is important to reduce the burden of complying with 
this onerous system while also reducing the overall tax burden.
    So since 2011, Governor Brownback and the Kansas 
legislature have teamed up to make the state's tax code fairer, 
simpler, and flatter for families and small businesses. This 
approach broadens the base and lowers tax rates for the benefit 
of the maximum number of Kansans. The result has been historic 
and innovative tax relief focused on providing a shot of 
adrenaline into the heart of the Kansas economy.
    What makes Kansas's approach unique is how we are 
strategically accelerating tax relief to benefit small 
businesses. While individual income tax rates have been reduced 
14 to 24 percent this year starting January 1st of all Kansas 
taxpayers, they will by 2018 realize another 23 percent 
reduction in tax rates in the state of Kansas. So we have got a 
long-range plan on the individual, but what really is exciting 
is we have even gone further to boost small businesses. 
Starting this year, Kansas began exempting nonwage business 
income from state income tax. This is the type of income earned 
by a majority of small Kansas businesses which typically are 
structured as LLCs, sole proprietorships, and S-corps, commonly 
referred to as pass-through entities since the taxes for those 
business incomes are filed on individual income tax returns 
rather than corporate tax returns. By eliminating the state 
income tax for small businesses, we are sending the message 
that every business, every innovation, and every entrepreneur 
matters when it comes to creating jobs in Kansas. This is in 
addition to programs that we have to assist bioscience, tech, 
Main Street businesses, and entrepreneurs.
    We are encouraging small businesses to grow in other ways 
as well. For example, our tax policy encourages private sector 
investment by allowing companies to immediately expense their 
purchases of equipment software as a state deduction. The small 
businesses capture the full tax value of the money related to 
their investments, and by that they are keeping tens of 
millions of dollars each year which could be reinvested into 
businesses, and we are seeing a tremendous increase in the use 
of those deductions by small businesses in our returns this 
past year.
    Additional tax relief is being targeted to rural 
communities to simulate small business startups in every corner 
of Kansas, not just in our urban centers. This is a pretty 
striking number I think. By keeping an additional $4.1 billion 
in the pockets of Kansas citizens and businesses over the next 
six years, we hope to experience growth rates similar to the 
nine states where zero personal income tax would significantly 
outperform states that have the highest personal income tax 
rates.
    Recently, the tax foundation released a paper titled ``What 
is the evidence on taxes and growth?'' The special report found 
that data consistently point to significant negative effects of 
taxes on economic growth, even after controlling for various 
other factors, such as government spending, business cycle 
conditions, and monetary policy. Every study in the last 15 
years finds a negative effect of taxes on growth. If we intend 
to increase employment, we should lower taxes on workers and 
businesses that hire them. Therefore, in Kansas, we have been 
changing the dynamic that has led to an average economic result 
so more families can achieve a meaningful increase in income 
and opportunity and small businesses can invest in growth and 
new jobs. Models being recognized by our neighboring states, 
including the chairman's home state of Missouri, certainly is 
taking notice of what Kansas is up to, and we hope others in 
the regions will join us so that the Midwest becomes a lot more 
attractive a place to do small business.
    If I can, I will quote your Speaker of the House, Mr. 
Chairman, in the Missouri House of Representatives, Tim Jones. 
He recently wrote in The Kansas City Star, ``Kansas lawmakers 
have accomplished major tax reform and have managed to get the 
state economy back on track. These improvements are great for 
Kansans and challenge neighboring states to compete for 
business and job growth.'' On the other hand, Missouri's 
unemployment rate has plateaued at 6.6 percent. Perhaps most 
troubling for Missouri is the Kauffman Foundation you mentioned 
a moment ago small business climate ranking which gives 
Missouri a C and Kansas an A. Speaker Jones concluded Kansas 
has proven the competitive economic policies promote a business 
friendly environment attracting new companies, and with these 
new companies more jobs. The facts are right in front of us.
    And I might make one little editorial comment if I can 
because the question I am asked most is what is happening to 
your revenue since you made all these cuts. We are six months 
into this new policy and our revenues are up across the board. 
We are above estimates and we are above actuals from last year. 
So the growth is in the short-term, at least at this point, 
paying off for us.
    Thank you, Mr. Chairman.
    Chairman GRAVES. Thank you, Secretary Jordan.
    Our next witness is Aaron Demerson, who is the executive 
director of the Office of Economic Development and Tourism in 
the Office of Texas Governor, Rick Berry. The Office of 
Economic Development and Tourism is responsible for making the 
state of Texas a premier destination for business and travel. 
Prior to serving as executive director, Aaron was the district 
director of Texas Business Development responsible for domestic 
business expansion and recruitment, research, and international 
business recruitment. Aaron received a B.A. from Texas A&M and 
a banking diploma from the American Institute of Banking.
    Thank you for being with us today, and I appreciate you 
coming in.

                  STATEMENT OF AARON DEMERSON

    Mr. DEMERSON. Thank you, Mr. Chairman.
    Chairman Graves, Ranking Member Velazquez, and members of 
the Committee, my name is Aaron Demerson and I have the 
pleasure of serving as the executive director of Economic 
Development and Tourism Division for the Office of the Governor 
in the great state of Texas.
    Thank you for the work your Committee continues to do for 
small businesses and for the invitation to participate on this 
panel. It is indeed a privilege and a pleasure to do so.
    Over the course of the past two years and throughout the 
years, this Committee has heard from some of the most notable 
representatives associated with small business. That is as it 
should be and not surprising given the importance of small 
businesses to the U.S. economy, and in my case, the Texas 
economy.
    As we speak here today, somewhere in Texas, someone is 
coming up with the next big idea, a better way of doing 
business, a better way of doing something that has never been 
done before.
    Fostering these types of innovations is vital to keeping 
Texas at the forefront of the national economy and when these 
innovators are ready to go to market, our hope is that the 
efforts of this committee, in collaboration with the efforts at 
the state-level, will make it easy for them to succeed and 
thrive.
    We all know that big companies tend to draw the biggest 
headlines, and they do, in fact, have a very important role to 
play, but we also know the drivers of job creation in Texas and 
our nation are the small business men and women. These are bold 
entrepreneurs who take real risk pursuing their dreams of 
owning their own business. As a matter of fact, these represent 
the true vibrancy of the Texas economy and their contribution 
to the positive economic climate is a large part of what has 
helped attract employers of all sizes to the Lone Star state.
    The Committee is seeking information on why certain states 
are attractive to businesses. We have found the continued 
attractiveness to Texas over the years is based on a number of 
reasons, with a major portion of this success associated with 
the leadership and emphasis placed on job creation that has 
been championed by Governor Perry and our collective statewide 
elected delegation.
    We know that our second to none business-friendly climate 
has continued to help us attract new employees and create jobs. 
In this past legislative session (just as we have done in the 
past) we took the necessary steps to preserve the business 
climate that has made all of that possible.
    In some cases, these businesses were fleeing over-taxation 
and over-regulation in other states as they sought to expand or 
relocate to a place where they are free to succeed. It is our 
thought that we can expect more of them heading our way as long 
as we remain committed to the principles that have helped make 
us the best state in the country to do business.
    One of the most important steps for attracting business to 
Texas is centered on keeping our taxes low because dollars do 
far more to create jobs and prosperity when kept in the 
business owner's hands.
    To that end, we have continued to enact legislation that 
has a positive impact on small business. This year we were able 
to make permanent the small business tax relief that was passed 
in 2009, which makes permanent the $1 million small business 
tax exemption. This important bill provides significant tax 
relief to over 140,000 Texas small businesses.
    We have worked hard also to keep a fair and predictable 
regulatory climate so that a company will know what to expect 
six months down the line. The CEOs and CFOs understand this and 
continue to find it a very attractive alternative when 
considering expansion and/or relocation.
    We also have been at the forefront of the legal system to 
make it even harder to file frivolous lawsuits in Texas and 
approve ``loser pay'' legislation which requires those who file 
a frivolous lawsuit and lose to pay the potential court costs 
and legal expenses of those they sued.
    For us in Texas, economic development begins at the local 
level, and it is important that we have effective relationships 
at the local level to take advantage of the small business 
opportunities. To say that our communities are very aggressive 
and serious about small business and job creation is an 
understatement. We recently passed legislation creating a small 
business advisory committee that will help us align even closer 
with the communities on small business initiatives and issues.
    In Texas, as depicted in the handouts that I have passed to 
you, we have a state-by-state comparison document and a 
``brag'' document as well. As Governor Perry quite often says, 
``In Texas, it ain't braggin' if it's true.'' The fact of the 
matter is our unemployment rate has consistently been lower 
than the national average, and we have continued to lead the 
nation in job creation over the years. And we also have the 
nation's best business climate and continue to be the number 
one export 11 years running and continue to have the highest 
number of expansion and relocation projects. All of this 
creates a great deal of attention and continues to be of great 
interest to a number of small business owners in the United 
States and internationally looking to expand or relocate their 
business.
    It did not happen by accident; it happened because over the 
last decade, Texas leaders have made principled, thoughtful 
decisions by not over-taxing, over-regulating, or over-
litigating our citizens.
    In Texas, we have an obligation, responsibility, and goal 
to taxpayers to take the necessary steps to make government 
more efficient and streamlined while reducing spending without 
raising taxes.
    And lastly, only by keeping our families and small 
businesses strong can we continue the type of prosperity we 
have enjoyed in Texas over this past decade. So how do we 
continue to create new opportunities for Texas families and 
small businesses? We do this in Texas by continuing to apply a 
laser-like focus on small business retention and recruitment 
while showcasing the best of what Texas has to offer. In 
addition, we will continue to ensure for small businesses a 
climate at the state level that is conducive to making a 
profit, creating jobs, and enjoying success.
    Our hope, Mr. Chairman and Committee members, is that the 
same or similar approach is viewed at the federal level. I 
sincerely appreciate the opportunity, I welcome you to visit 
our great state, and look forward to the discussion and 
answering any questions that you might have. Thank you.
    Chairman GRAVES. Our next witness is Mr. Jim Cheng, who is 
the Secretary of Commerce and Trade for the Commonwealth of 
Virginia. In this capacity, he manages the jobs and opportunity 
agenda for Virginia and oversees 13 state agencies focused on 
promoting the growth of Virginia's business community and 
attracting new investment into Virginia's economy. Secretary 
Cheng holds a B.S. in computer science from Old Dominion 
University, an MBA from Colgate Darden Graduate School of 
Business at the University of Virginia, and a J.D. from 
Georgetown University Law Center. Thank you for being with us. 
I appreciate you coming in.

                     STATEMENT OF JIM CHENG

    Mr. CHENG. Thank you, Mr. Chairman.
    Chairman Graves, Ranking Member Velazquez, and other 
distinguished members of the Committee, again, I am Jim Cheng, 
secretary of Commerce and Trade for Virginia.
    Let me begin by conveying Governor Bob McDonald's regrets 
that he could not be here today to testify before you, but also 
on behalf of the governor and the Commonwealth, I thank you for 
allowing me to testify today instead.
    Small businesses are the backbone of our economy. Across 
Virginia and throughout the United States, small businesses are 
creating jobs and opportunity. In Virginia, we have been 
focused on job creation and economic development with special 
attention to the important role of small businesses in our 
economy. Last year, the governor announced 2012 as the ``Year 
of the Entrepreneur.'' Throughout the year, among other things, 
the governor held monthly office hours to small business 
owners, conferences and roundtables across the state, and 
featured profiles in entrepreneurship. And we continued our 
efforts at job creation in 2013 through efforts like our Rural 
Jobs Council. The council's recommendations made it clear that 
there are new challenges facing small businesses in today's 
global economy. They recommended that we invest in workforce 
development, infrastructure, and broadband. The council also 
recommended that we create a Governor's School for 
Entrepreneurship to encourage middle school students to 
consider entrepreneurship as an option.
    In Virginia, we continue to focus on things that matter to 
entrepreneurs--access to capital, workforce development, and 
predictable and accountable government.
    Virginia's small businesses need to know that they will 
have ready access to capital. In 2012, we enacted a bipartisan 
solution to encourage long-term investments in Virginia's small 
businesses. The Virginia Small Business Investment Grant 
encourages private investment by providing a grant equal to 10 
percent of a qualified investment for an eligible investor.
    We have also invested in our Virginia Small Business 
Financing Authority. The authority aids Virginia's financial 
institutions in offering business loans that they may not be 
able to offer without the authority's assistance.
    Agriculture and forestry continues to be Virginia's largest 
industries, generating a combined $79 billion annually and 
creating more than 500,000 jobs across the state, mostly by 
small businesses. So we passed legislation to establish the 
governor's agricultural and forestry industry's development 
fund, targeting those industries that have been largely 
overlooked in the state's traditional economic incentive 
programs.
    Of great importance to the Commonwealth and the nation is 
our ability to compete in technology innovation. With high-
tech, high-growth startups creating more than 30 percent of all 
new jobs, our administration has invested in an environment 
that encourages the formation and growth of these companies. We 
created incentives to recruit and attract angel and venture-
capital investment, and since 2010, our C stage investment 
programs have created over 75 new high-tech companies that have 
attracted private capital at a rate of $17 for every $1 of 
public funds invested.
    A key to entrepreneurial growth at the local level is to 
support regional capacity building. We launched a grant program 
called ``Building Collaborative Communities.'' The program 
promotes regional economic collaboration in economically 
distressed areas to stimulate job creation, economic 
development, and build community capacity and leadership.
    One of the most important issues for a small business is 
workforce development and quality of education. Small 
businesses thrive because of their ability to recruit, train, 
and retain qualified employees. In our past legislative 
sessions, the governor has passed numerous innovative and bold 
K-12 and higher ed reforms that will keep Virginia's workforce 
at world-class levels.
    Small businesses need predictability and efficiency. Last 
year, the governor launched a regulatory reform initiative to 
reduce the number of burdensome regulations placed on small 
businesses. We asked industry and small business for ideas, and 
specific sections of code that were overly burdensome. As a 
result, since September 2012, 562 sections of the Code of 
Virginia have been identified, and 157 sections have already 
been repealed.
    But ultimately, it is not what the federal or state 
government can do for small business that matters, but how 
government can ensure it does not erect unnecessary barriers to 
job creation. We must ensure an environment conducive to 
economic vitality and guard against extinguishing the 
entrepreneurial spirit with overly burdensome laws and 
regulations.
    Our work has gotten results. When the governor took office, 
unemployment in Virginia stood at 7.3 percent, but now it 
stands at 5.3 percent, our lowest unemployment rate in over 
four years. Since the beginning of our administration, Virginia 
has added 171,000 net new jobs, 153,000 of which are from the 
private sector. And the number of unemployed Virginians had 
decreased by a total of 80,000 or about 36 percent. And simply 
put, more Virginians are working today.
    So thank you again for inviting us to speak, and I look 
forward to your questions.
    Chairman GRAVES. Thank you very much. Thank you to all of 
you.
    I am going to turn to Mr. Huelskamp to start questions. I 
have got to tell you it is exciting to hear the success that 
your states are having. And obviously, I have watched what 
Kansas is doing, just right across the border, and seeing 
businesses leave the state of Missouri for Kansas, 
unfortunately. But regardless, with that I am going to turn to 
Mr. Huelskamp for first questions.
    Mr. HUELSKAMP. Thank you, Mr. Chairman. It really is a 
shame that those businesses are moving to Kansas. We will 
follow up with that.
    But a question for Secretary Jordan, if I might. With a 
pretty big, massive comprehensive tax reform package, it did a 
lot on the individual side but not much, if anything on the 
corporate side. Can you give me directions of what happens at 
the state level when you are trying to do comprehensive tax 
reform and what happens with those players? And I think it 
would be of great interest.
    Mr. JORDAN. The Congressman knows when I was in the Senate 
I wrote a lot of economic development incentive programs, and 
we had a lot of discussions about that while we were serving 
together.
    We, like all states, have a significant package of 
incentives and tax credits to offer to C corps to come to our 
state and are probably as competitive as any state, obviously, 
in those packages.
    We actually, the governor's desire was to lower corporate 
income tax to zero. And when we started having those meetings, 
we actually found that some of our C corps, some of our 
corporations would rather be incentive and tax credit members, 
rather than a zero tax credit at this time, and we had a hard 
time doing it. So we actually did not lower the corporate 
income tax rating--Kansas, at this time. We would still like to 
work on that. We would still like to work with the corporate 
community to make that happen. Right now, 59.6 percent of our C 
corps pay no income tax in Kansas because of the incentive and 
tax credit programs.
    And again, my statistics, when 98 percent of your 
businesses are 100 employees or less, 77 percent of them are 10 
employees or less, and by all statistics, whether some say two-
thirds of your job creation comes out of small business, some 
say 75 percent come out of small business, we decided to swing 
very quickly over to the small business, who many times cannot 
take advantage of the incentive and tax credit programs because 
the thresholds are so high it is hard for them to take 
advantage of. So we swung and decided we would work what we can 
to help small business grow in the state of Kansas.
    Mr. HUELSKAMP. Thank you, Mr. Secretary.
    Question for Secretary Cheng, as well. What do you hear 
from small businesses in particular as their biggest complaint 
about the federal government and federal policies and 
regulations? If you can give us a little insight there.
    Mr. CHENG. Mr. Congressman, I think the main thing they say 
is there is too much--too much of everything. Too much 
regulation, too many things coming down the line, and the 
uncertainty. Being from Virginia, we have a very large military 
presence, very large U.S. government, civil service sector two, 
so worries of sequestration and what follows are very 
concerning. So we hear that, especially from our small business 
community who are the most affected by little shifts in 
policies and spending. So all the regulation, perhaps even 
uncertainty in health care, taxation, and government spending 
all are a big part of it. So if they knew what was coming down 
the line, they could adjust. But since they do not know, they 
are all very worried.
    Mr. HUELSKAMP. The gentlemen from Texas and South Dakota, 
any comment?
    Mr. DEMERSON. I would echo the comments. Uncertainty is 
huge. That is why in Texas we have made that a focal point to 
make sure that things are not changing but that certain efforts 
at the federal level have a certain impact on the small 
businesses in Texas.
    Mr. COSTELLO. Yeah. I would agree. I think in the business 
world people just want to understand what the rules of the game 
are, but when the rules keep changing it is challenging for 
them. So to know that the regulatory process is going to be 
consistent, the tax policy was going to be consistent, that 
there was a fiscal balanced budget from a federal level would 
be very helpful. All those things weigh into it.
    Mr. HUELSKAMP. All right. Well, I appreciate that. I yield 
back. Thank you, Mr. Chairman.
    Chairman GRAVES. Ranking Member Velazquez.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman. I am sorry that I 
was late but I was at the White House meeting with the 
president.
    Secretary Cheng, I am so glad to hear that unemployment 
rate is so low in Virginia; right?
    Mr. CHENG. Yes, ma'am.
    Ms. VELAZQUEZ. Yes. And I guess that in some ways a lot of 
that has to do with the federal government presence in 
Virginia, whether it is federal spending or federal contractors 
because you have one of the highest numbers of federal 
contractors in the nation.
    My question to you is, regulations of course, heavily 
impact small businesses, but I would like to hear have you done 
any--and I will ask the question to any of the other members of 
the panel--have you done any type of analysis in terms of 
regulations that are duplicative--federal regulations as well 
as at the state level? Have you ever done analysis that lead to 
recommendations either to the state where you come from or the 
federal government?
    Mr. CHENG. Yes, ma'am. If I just can give you a quick 
answer, the answer is yes. We have set up commissions to look 
at the federal regulations that we think may be burdensome or 
maybe affected by certain changes. I do not have all that 
information now but we certainly can get more information for 
you. And yes, Virginia is very fortunate to have the federal 
spending, but then again, we have a lot of federal spending 
contract wise, but in terms of other types----
    Ms. VELAZQUEZ. But my question is have you ever done any 
analysis in terms of state regulations that are duplicative 
with federal regulations?
    Mr. CHENG. Oh, duplicating----
    Ms. VELAZQUEZ. What federal regulations are in place?
    Mr. CHENG. I will have to look at that.
    Ms. VELAZQUEZ. Because that will be a great way to help us.
    Mr. CHENG. Yes, ma'am.
    Ms. VELAZQUEZ. Or for the state government to say that it 
does not make sense; that if we have them on the books in terms 
of federal regulations, why have the same type of regulation at 
the state level?
    Mr. CHENG. I will check on that.
    Ms. VELAZQUEZ. You have over 2,000 civilian defense workers 
in Virginia----
    Mr. CHENG. Yes, we do.
    Ms. VELAZQUEZ.--that are going to be and are impacted by 
the sequester.
    Mr. CHENG. Yes.
    Ms. VELAZQUEZ. What impact will this have on the state of 
the economy, particularly in Northern Virginia where so many of 
these jobs are located?
    Mr. CHENG. Well, ma'am, I believe that that is the question 
that needs to be answered. So far, our unemployment rate has 
held steady and actually, as you mentioned, it has come down. 
But now with some furloughs coming up that may affect us. And 
we are hanging on and waiting. So far our budgets have been 
fine, but we believe that there will have to be some effect. 
And of course, the long-term effect is we understand there must 
be changes in spending habits of the federal government, and we 
are prepared for those. Our companies, I think, are just 
waiting for the direction on which way to go.
    Ms. VELAZQUEZ. Recently, Jonathan Greenert, the chief of 
Naval Operations, addressed Hampton Roads business leaders and 
told them that he is preparing for 2014 to be much like this 
year. That means cuts in military operations, ship 
construction, and more civilian furloughs. What impact will 
these cuts have on Virginia if they are sustained over the next 
few years?
    Mr. CHENG. Ma'am, if I can answer that, I think there are a 
couple of thoughts there. One is the original sequester was 
very, very, I guess, stilted and a lot of our people told us 
that they could not make any judgment calls. I think there have 
been some changes to make to make it a little better so they 
can prioritize. I think that is a big plus. But I think our 
concern is mostly for the small businesses that we are talking 
about today because we believe they will be the first ones 
impacted on any cutbacks.
    Ms. VELAZQUEZ. Sure. Uncertainty. Right? They will not be 
able to plan.
    Mr. CHENG. Absolutely.
    Ms. VELAZQUEZ. There will be 72,000 civilians that will 
have less money to spend as consumers.
    Mr. CHENG. Absolutely. Right. And it all will have a big 
effect. We do not know what it is.
    Ms. VELAZQUEZ. So it is our job in Washington for the good 
of the economy to address the issue of sequestration.
    Mr. CHENG. Absolutely.
    Ms. VELAZQUEZ. Mr. Jordan, like many other states, Kansas 
has been forced to make some difficult spending decisions while 
also ensuring that you raise revenue. How is Kansas balancing 
the need for revenue to fund things like education and 
childcare with the goal of tax simplicity?
    Mr. JORDAN. As I mentioned earlier, our revenues are up 
under this new tax policy. And actually, when the governor 
first took office we were left with I think it was literally 
$800 in the bank, a $500 million hole in our budget, and within 
one year we turned that around to a $500 million surplus in our 
budget by efficiencies. All agencies are looking at 
efficiencies, better ways of operating, and we found several 
savings in doing so and have been able to save quite a bit of 
money in that. The governor said time and time again I am going 
to fund the core responsibilities of government, and I have 
been in the Senate elected position and those debates will 
always be are you funding it enough or are you not funding it 
enough or what kind of funding should we have in there.
    The governor's budget this year proposed funding for 
education. He particularly fought for higher education in his 
budget. Along with the tax plan, we had a plan that funded what 
he wanted to fund. Obviously, went through the legislative 
session. They made some additional cuts but that was not the 
governor's desire in his budget.
    Ms. VELAZQUEZ. I just want to hear your angel investor tax 
credit----
    Mr. JORDAN. Yes.
    Ms. VELAZQUEZ.--it really meant to bring investors----
    Mr. JORDAN. Right.
    Ms. VELAZQUEZ.--to invest in local businesses. Has this 
credit been affected?
    Mr. JORDAN. It has been very effective. We have really 
enjoyed a lot. I actually helped co-author a bioscience 
initiative in Kansas that raised it to the number five in the 
nation in biotechnology. And the venture angel investor tax 
credit was a part of that process and really helped us bring 
the biosciences up in Kansas and startups in bioscience, 
working with our researchers at our universities. It has been 
an extremely successful program. I cannot give you numbers off 
the top of my head but we have kept that tax credit, want to 
keep that tax credit, and that tax credit has brought a lot of 
new money. We are obviously not a big venture capital state. We 
are becoming more and more venture capital because of the 
bioscience growth and some of our tech growth. Google has made 
a big investment in Kansas in some of their high speed cable. 
So in all ways it has been a very good program, very good tax 
credit for us.
    Ms. VELAZQUEZ. Thank you.
    Mr. Demerson, Texas is now a majority-minority state for 
the first time in its history. What sort of policies does it 
have to promote minority business development?
    Mr. DEMERSON. In terms of minority business development, 
the number of the state agencies in Texas, whenever you are 
looking at doing business with the state, their goal is set 
within some of those agencies. And so we are going out 
statewide, promoting the benefits of doing business in Texas 
and those hub or minority-owned businesses are a part of any of 
those activities that are taking place at the state level. So 
we have always been doing that in the past and will continue to 
do even more in the future.
    Ms. VELAZQUEZ. Do you have any metrics to compare to? The 
last five years?
    Mr. JORDAN. Yes. Each of the agencies actually have their 
own set of goals and metrics in-house, and so from the 
Governor's Office standpoint, I do not have the overall view, 
but each agency, if you are dealing with TxDOT, Department of 
Transportation, or any of the other agencies, they all have 
those goals and metrics.
    Ms. VELAZQUEZ. Do you have any oversight to make sure that 
those state agencies are doing what they are supposed to be 
doing?
    Mr. JORDAN. I think from the governor's standpoint, being 
the leader of that state, he has oversight over all of those 
activities and has done a phenomenal job of reaching out to 
make sure that those things are in place.
    Ms. VELAZQUEZ. Okay. Thank you, Mr. Chairman.
    Chairman GRAVES. Mr. Tipton.
    Mr. TIPTON. Thank you, Mr. Chairman. I apologize for being 
late. I was not invited to the White House. I am shocked.
    I appreciate you gentlemen taking the time to be able to be 
here. It is great to be able to hear some of these stories of 
success, the entrepreneurship. I did have a couple of 
questions.
    Mr. Jordan, very interesting story where you had $800 did 
you say in the bank and $500 million surplus now?
    Mr. JORDAN. Right.
    Mr. TIPTON. And you were able to achieve this you noted by 
actually letting American people keep more of their money and 
actually reinvest those dollars rather than handing it over to 
government. But you also noted that you created some 
efficiencies.
    Mr. JORDAN. Yes.
    Mr. TIPTON. Do you think that that is a tale that when we 
look at, say, sequestration, do you think it is palatable for 
the federal government to reduce the rate of increase by two 
percent?
    Mr. JORDAN. From our experience, yes. We found a lot of 
efficiencies in the state of Kansas. The governor has worked 
hard and is looking at better ways of doing things. Yes. We 
have certainly, I think, are proof you can do that. You can go 
into agencies. You can work with state agencies and find a lot 
of efficiencies and savings in those agencies.
    The governor has been real big. We have a statute that 
requires a 7.5 percent ending balance and I think Congressman 
Huelskamp would agree with me. I do not quite remember the last 
time we had a 7.5 percent ending balance in Kansas except for 
when Governor Brownback came in and required us to have a 7.5 
percent ending balance. So in that turnaround to a $500 million 
surplus, we also got the state back on a good footing with a 
good ending balance every year on our budget going forward.
    Mr. TIPTON. Secretary Cheng, we were talking a little bit 
about sequestration. Is it pretty much your sense as well that 
it ought to be the responsibility of the federal government 
maybe to do what the state of Virginia has done--actually show 
some responsibility and innovation not to grow government but 
to reduce its size and empower the American people with their 
own dollars?
    Mr. CHENG. Yes, sir. I think that that is something our 
governor would absolutely commend. It is something that we have 
worked very hard about. We came in three and a half years ago 
with a huge deficit, and for the past--and I do not know if it 
is public soon, but we are hoping that we will have four 
straight years of positive remaining balances in our budget. 
And that comes from cutting back things that we have to cut 
back.
    Mr. TIPTON. I would like to maybe get all of our panel's 
comment on this. I think one of the great challenges that we 
face--I am a small businessman coming out of the state of 
Colorado. A lot of our big worries really are not so much about 
what is coming out of the state of Washington, D.C. with ``one 
size fits all'' regulatory pattern. I believe we have the 
statistics out of this Committee that we are spending $10,685 
per employee in just compliance--following rules and 
regulations. This is not even taking into account yet the full 
impact of the Affordable Care Act and how devastating that is 
going to be to job creation and health care ultimately in this 
country.
    Is it your sense that some of those regulations are left 
best to the state given the differences between Virginia, South 
Dakota, Texas, and Kansas? Let us make some of those rules to 
be able to fit our own particular needs for our own geography 
and our own people?
    Mr. DEMERSON. From the Texas standpoint, we look at it 
quite simply as you do not have what you do not have. If you do 
not have it, you do not spend it. It is a simple equation 
there. We were fortunate and blessed with a $12 billion budget 
surplus in the state and we were able to do some things with 
that this past legislative session that were moving us further 
down the line. So we take pride in doing what we need to do at 
the state level, making sure that there is an impact, and then 
we are looking forward to that on the federal side to match 
wherever we can to make sure that we are moving forward.
    Mr. TIPTON. Great. And Mr. Costello, with South Dakota, you 
talked about a strong banking community there. Are your small 
businesses given the regulations that we are seeing out of 
Dodd-Frank, the threat of further regulations out of Basel III. 
Are your small community banks really worried about their 
ability to be able to deliver loans to their customers?
    Mr. COSTELLO. I think we do hear from our small bankers 
that the increasing regulatory environment is very challenging 
for them. In South Dakota, we have got the largest bank assets 
of any state--$2.6 trillion. I think a lot of that has to do 
with the reasonable regulations that we offer in the state of 
South Dakota and the competent people that we have in our 
division of banking. We hear from banks that have moved their 
charters to the state that they are comfortable with our 
regulators and that they are very knowledgeable, and so I think 
that is important for them to be comfortable. And of course, 
our tax structure as well. No corporate income tax in our fee 
structure for banks as well as very attractive.
    Mr. TIPTON. Okay, thanks. I yield back, Mr. Chairman.
    Chairman GRAVES. Ms. Hahn.
    Ms. HAHN. Thank you, Mr. Chairman.
    Mr. Demerson, I was going through the brag sheet that you 
provided and I am not sure that I agree that if it is true it 
is not bragging. Ask any grandmother.
    And the 2012 CNBC ranking of America's top states for 
business caught my attention. And for the honor of the great 
state of California, I cannot resist pointing out that in the 
CNBC survey that ranked Texas best for business, did still rate 
the quality of life in California a full 15 places ahead of 
Texas.
    Okay, so with the dig aside, I actually want to focus on 
another category of the CNBC ranking, Texas ranks first 
overall. The only individual category measured that Texas ranks 
first in is infrastructure and transportation. Texas has held 
onto that first place ranking in infrastructure in the 2013 
rankings as well.
    I wanted you to maybe expand and tell this Committee what 
you think the importance of world-class infrastructure is to 
the success and health of small businesses.
    Mr. DEMERSON. It has been something that has been very 
important to the state from a logistics standpoint to have the 
infrastructure in place. I am going to read over an 
infrastructure fast facts sheet that we have here. So in Texas, 
two logistics complexes--Fort Worth Alliance and San Antonio's 
port. Serious logistics complexes that are driving business to 
our state. Forty-seven freight railroads, 624 miles of 
coastline, number one install of wind capacity, 26 commercial 
airports, 10 interstate highways, 16 port-o-calls, and 4.8 
million barrels of oil that is coming in. The infrastructure 
has been in place and now even to this day we are in a special 
session in Texas with our legislative session. They are 
addressing transportation needs even to this day where we are 
looking at what does the future hold for us and how we are 
going to impact that. All of that has an important impact on 
small businesses. If we get the logistics right, then they are 
in a position to grow even more so. The Panama Canal 
expansions, all those things that are there, we are trying to 
position ourselves in Texas to be in a position to take 
advantage of those opportunities and small businesses benefit 
if we make the right decisions in our state in regards to that.
    Ms. HAHN. Thank you. I am glad you said that. And I hope 
Congress hears that and I hope we really do invest in the 
infrastructure in this country, particularly our ports. And I 
was interested in Governor McDonald's written testimony when he 
pointed out the importance of helping small businesses find new 
markets across the seas.
    And one of the things I have done back here with my good 
friend, Ted Poe, from Texas--we both attended the same 
university in Abilene--we founded the Ports Caucus back here 
because we would love to raise the level of awareness of our 
colleagues in the importance of the ports.
    So Secretary Cheng, if you could follow up on what he said. 
I think one of the biggest growth possibilities for small 
businesses is exporting. And I think if we could really teach, 
train, educate, help, handhold small businesses to understand 
that their goods and services actually are very valuable and 
are marketable overseas, but only if our ports have been 
maintained and dredged and improved and modernized to really 
help this aspect.
    Secretary Cheng, could you just expand on what you see as 
the importance of exporting and how ports could play a role in 
that for small businesses?
    Mr. CHENG. Yes, Congresswoman. Ports are very, very 
important. The governor has made at least eight trips in his 
three and a half years as governor overseas to Asia, to Europe, 
all over the world, and one of the first things that we talk 
about is logistics in ports and access. And with the widening 
of the Panama Canal coming up in 2015, it will be even more 
important for the Asian countries to be able to access the East 
Coast of the United States and all our East Coast ports, and of 
course, the West Coast ports will benefit from all that 
additional commerce.
    And if I can just add also about exporting. We have a 
program in Virginia called the VLET program. It is the 
Virginia's Leaders in Export Trade. And what that is is a two-
year program that we bring in qualified businesses, mostly 
small- and medium-size, that are ready to export. We put them 
through a two-year program. It is rigorous. It is not every day 
but it is rigorous, and they teach them everything from banking 
to lines of credit to how to market and how to approach 
companies overseas, and they end with a delegation overseas to 
a suitable place. And a lot of great stories have come out of 
that. It is an award-winning program and I hope that it could 
be a benefit to some others, too.
    Ms. HAHN. Thank you. I appreciate that. And our ports in 
LA-Long Beach, we have a program called Trade Connect, and we 
are working, particularly with minority- and women-owned 
businesses. And again, if the small businesses can understand 
that it actually is viable, it is doable, and it could really 
be the difference in them really growing and being successful, 
I think that is where I would love to see us all focus.
    I yield back the time that I do not have anymore.
    Chairman GRAVES. Mr. Luetkemeyer.
    Mr. LUETKEMEYER. Thank you, Mr. Chair.
    I certainly enjoy the conversation this afternoon. You 
gentlemen have really brought a breath of fresh air to the 
discussion of small business and the impact that state 
government can have.
    So my question I guess is twofold. I would like to ask each 
one of you what is the number one thing--if you had one thing 
to point out, one reform--I mean, you guys have got a regular 
package of things that each of you have talked about which is 
great, but if you had to talk about one thing that state 
government can do to improve small business and the small 
business environment in your state, and one thing that the 
federal government could do to improve the small business 
environment in your state, I would sure appreciate it. I will 
start with Mr. Costello.
    Mr. COSTELLO. Thank you, Mr. Chair and Congressman.
    I think from a state perspective the one Achilles heel and 
challenge that we have is workforce. We are a small state, 
830,000 people and for large corporations that are looking to 
locate into the state, sometimes that is a challenge. Our 
unemployment is four percent, and we try to focus more on the 
number of jobs we have in South Dakota, and we now have 
exceeded the number of jobs in the previous peak back in 2008 
before the recession. So the economy is very strong. 
Unemployment is low. Our number of jobs is high. Our employed 
people are high. So that is the challenge from a state level is 
the workforce capacity--building that workforce capacity.
    On the federal level, I think what we hear from small 
business is just a desire to have some sort of fiscal policy. I 
think our business community has lost faith in the federal 
government and its ability to control spending, its ability to 
manage the affairs and regulatory environment, and I think a 
more stable federal environment would be very helpful for small 
business.
    Mr. LUETKEMEYER. Secretary Jordan.
    Mr. JORDAN. Thank you, Mr. Congressman.
    I think one of the things we heard over and over from small 
business was capital flow. And that is why we have really 
focused on tax policy at this point. Coming out of a recession, 
a lot of small businesses were really struggling and the 
capital flow was not there to be able to grow the business, to 
make the investments, to hire the people, and so tax policy is 
important both at the federal and state level for small 
business. So I would echo the workforce development.
    I think one of our challenges is entrepreneurship in rural 
Kansas--how do we get more people involved in entrepreneurship? 
When we first came in in this administration we had 22 counties 
that had double-digit population decline in Kansas, and we sat 
down and tried to figure out--if I can promote another program 
we have--we sit down to try to figure out how to reverse that 
trend and we came up with what we call rural opportunity zones. 
And what that meant is if you moved to Kansas from out-of-state 
to one of those counties, it is now up to 73 counties, by the 
way. The legislature has taken it and expanded it. If you move 
into one of those countries from out-of-state, you get five 
years no income tax. That has been pretty successful. We just 
had our first round of tax returns to kind of know where we are 
at on that.
    But the part that has really been exciting is we offered 
students graduating from college--whether it was instate or 
out-of-state--if you moved to one of those counties, we would 
pay up to $15,000 of your student loans over a five-year 
period. We have had over 800 students apply for that. Now, you 
would say, okay, great, all the Kansas students and Missouri 
students and everybody--it has come from 32 states. And the top 
three degrees are law, engineering, and health care degrees. So 
they are professional young people looking back into rural 
areas.
    So when we talk about workforce development, we have been 
concerned about the rural areas and the entrepreneurship there 
and the businesses growing in the rural areas as well as our 
areas that are successful.
    Mr. LUETKEMEYER. Okay. Mr. Demerson?
    Mr. DEMERSON. At the state level I think what we can do is 
continue to educate. I think we have some fine examples in 
Texas. If you look at UTSA, they have a small business 
development center that is doing some phenomenal things on the 
statewide level that they have even gone international, and so 
I think duplicating a lot of those efforts and/or sharing those 
successes statewide is what we are going to look at trying to 
accomplish at the state level.
    From the federal standpoint, it goes back to what has been 
mentioned time and time out--just the uncertainty, you know, 
regulations. Those type of issues are out there and we hear 
those concerns. And so I think if that is addressed or as that 
is being addressed you have things that are taking place at the 
state level, things that are taking place at the federal level, 
and it will give small businesses more opportunities to succeed 
at that point.
    Mr. LUETKEMEYER. Secretary Cheng.
    Mr. CHENG. Yes. Well, I think my colleagues here have made 
some really great points, and I echo all of them. If I can add 
on to one thing on the federal side, obviously we talked about 
predictability, stability, and regulations as very important. 
But one thing about workforce I think is that we get funding 
for workforce from so many different sources it is difficult 
for a state to grasp it and get a hold of it. So somehow a 
little clarity because there is a lot of workforce money out 
there, but who we control it, as Virginia, we try to do our 
best and we have a great workforce, but we could do better. And 
part of it is how we handle it with the federal funds coming 
in.
    For small business, from a state point of view, what we 
could be doing better, and perhaps other states, too, is 
getting our large cities with the venture capital, angel 
capital, and sources of funding closer to the rural parts of 
our state because I heard some mention of rural before. That is 
also a concern in Virginia and I am sure many other states, 
too.
    Thank you, again.
    Mr. LUETKEMEYER. Very good. I yield back. Thank you, Mr. 
Chairman.
    Chairman GRAVES. Ms. Meng.
    Ms. MENG. Thank you, Mr. Chairman. Thank you, Ranking 
Member. And thank you to our witnesses for being here today.
    I want to follow up on a little bit of what Congresswoman 
Hahn started a conversation about in terms of infrastructure 
and how the federal government could be more helpful. I 
represent a pretty urban area in Queens, New York City, as so 
does Ranking Member Velazquez. And just trying to see how the 
federal government can be more helpful in terms of 
infrastructure in relation to mass transit, whether it is 
trains, subways, or buses, perhaps more relevant in some of 
your areas.
    Mr. CHENG. Well, Congresswoman, transportation is something 
I have been trying to avoid all my career. Sorry about that. I 
just had to say that.
    Infrastructure is so very important, and the funding is so 
complex. I could not begin to discuss it, but I will say that I 
have gone on all the trips with our governor and he is our best 
salesperson overseas to talk about bringing in business to 
Virginia, whether it be exports or direct investment or all 
this. What usually we hear the most of are what are your 
logistics--your airports, your roads, your ports are so 
important to us and they are our number one sales point. Our 
location and how convenient it is for our rail system, for our 
roads to get cargo from our ports to wherever in the country or 
across the Atlantic or through the Pacific. So we absolutely 
rely on our infrastructure. In fact, the CNBC rankings talk 
about infrastructure all the time, and I think it is a very 
good point. And our governor saw that along with all the other 
feedback he has gotten and he worked hard to come up in a 
bipartisan manner, with a legislator come up with a new 
transportation bill that many of you all will see in the 
Committee in the Virginia area that I know will benefit the 
whole region and bring more businesses and attract more 
relocations and opportunities.
    Mr. DEMERSON. I think from our standpoint you hear the 
ports talking about dredging opportunities. They are all 
talking about that and the need for those type of activities to 
take place.
    In Texas, I have a document here, ``Texas, by Air, Land, 
and Sea.'' We are very proud of the infrastructure that we have 
in place but we are not complacent with it, and so we want to 
do even more so and that is being addressed right now. Texas is 
a state that you are driving 3, 6, 9, 13 hours and you are 
still in Texas. And so we need to make sure that we are on top 
of it in terms of the logistics opportunities, and we have been 
fortunate to do that but we are not resting on our laurels. We 
want to do more at the federal level. Wherever you guys can be 
impactful to the state or the communities, it is going to aid 
in our small businesses in our state.
    Mr. JORDAN. Infrastructure is important. I think we have 
the third or fourth largest number of highway miles in the 
country in Kansas believe it or not, and so the legislature has 
always been fairly good about funding our infrastructure 
program in Kansas. About every five to six years the 
legislature appropriates billions of dollars to make sure that 
infrastructure is kept up, but I would say the federal and 
state partnership is extremely important to get that done.
    We have a huge intermodal facility being constructed by 
Burlington Northern. It is going to be very important to us in 
shifting products around the country. Wichita, by the way, is 
one of the top exporting cities in the country. Of course, the 
aviation industry is there but a lot of entrepreneurs are 
there. So it is very important to us and that partnership is 
important to us, but we try to pull our load.
    Ms. VELAZQUEZ. Would the gentle lady yield for a second?
    Ms. MENG. Yes. Yes.
    Ms. VELAZQUEZ. So I guess, Mr. Demerson and Jordan, you 
recognize the importance for the U.S. Congress to reauthorize 
legislation such as the highway bill and water--water and 
resources--because that will provide resources that you need in 
order to keep transportation and infrastructure to the level 
that would allow for the states to continue to grow; do you 
not? Thank you.
    Mr. COSTELLO. I would just like to add, too.
    Ms. VELAZQUEZ. Yes.
    Mr. COSTELLO. You know, businesses are not going to expand 
or are not going to grow without adequate infrastructure. I 
think that is just the fundamental premise of it. South Dakota, 
for us, our challenges are roads and rail. Some air travel, but 
water as well. We are an agricultural state. Our products have 
to travel by rail to get to a port to get exported. So to 
continue to invest in those infrastructures is just 
fundamental.
    Ms. VELAZQUEZ. Mr. Chairman, please let the record show 
that all the witnesses here support the reauthorization of the 
highway bill and WRDA.
    Chairman GRAVES. We would love to get the Senate to comply.
    Mr. Rice, real quick.
    Mr. RICE. Quickly, I really appreciate your being here and 
I have enjoyed hearing your success stories. They all center on 
a business friendly environment, lower taxes, lower regulation, 
good logistics.
    Let us say that you were the highest taxed state in the 
country. Would that help or hurt your competitiveness? Because 
that is where we are as a country.
    Mr. JORDAN. I do not know which one but I have spent the 
last two years learning economics from a lot of economists. And 
I think if you look at the tax foundation, your question is 
what high tax are you talking about.
    Mr. RICE. You were the highest. Let us say you were the 
highest.
    Mr. JORDAN. Income? Sales? Property?
    Mr. RICE. Income.
    Mr. JORDAN. Income tax, I think it hurts your growth. I 
think more and more studies are showing income tax hinders your 
growth the most of all taxes. And so that would be the answer 
here is income taxes is significant.
    Mr. RICE. And let us say that the cost of the regulatory 
burden in your state was the highest among the 50, would that 
help or hurt your competitiveness? Because that is where we are 
as a country. And let us say that our infrastructure was 
crumbling relative to the other 50 and you had very little 
investment because that is where we are as a country. Would 
that help or hurt your competitiveness?
    Mr. JORDAN. It definitely would hurt our competitiveness.
    Mr. RICE. Shame on us because that is exactly where I spent 
the last two days going around this capital with a Harvard 
professor, Michael Porter, who is an export in international 
competitiveness, and we have a lot of work to do. Thank you 
very much.
    Chairman GRAVES. Thank you all very much. And please, 
Secretary Jordan, tell Governor Brownback hello, and Mr. 
Demerson, please tell Governor Perry hello. Both are very good 
friends of mine.
    With that, again, I want to thank all of our witnesses for 
making the trip here to the Committee. The United States is 
experiencing a very weak economy and economists are predicting 
that it is going to continue that way throughout 2013.
    With that, I do not want to keep you all through an hour's 
worth of votes, but I do appreciate the bright, encouraging, 
and optimistic view that you all have and what your states are 
doing is very, very impressive.
    And with that I would ask unanimous consent that all 
members have five legislative days to submit statements and 
supporting materials for the record. Without objection, so 
ordered. And with that the hearing is adjourned.
    [Whereupon, at 2:07 p.m., the Committee was adjourned.]
                            A P P E N D I X


                           Written Testimony


                                   Of


                            J. Pat Costello


  Commissioner, South Dakota Governor's Office of Economic Development


  Before the U.S. House of Representatives Committee on Small Business


                             July 10, 2013


    Thank you for the opportunity to be here today. It's always 
a pleasure to talk about the State of South Dakota. My name is 
Pat Costello and I am the commissioner of the Governor's Office 
of Economic Development.

    I've had the privilege of serving as the Commissioner for 
the last two and a half years, in addition to being a small 
business owner in South Dakota myself for more than 20 years.

    I'd like to take the next few minutes to share with you a 
little bit about our state, why it's a great place to do 
business and what we--as public servants--are doing to ensure 
that we remain the top place to do business.

    First and foremost, our tax climate is unmatched by any 
other state in the nation. Only in South Dakota do businesses 
enjoy the benefits of no corporate income tax, no personal 
income tax, no business inventory tax, no personal property tax 
and no inheritance tax.

    This structure leaves the money where it belongs--in the 
pockets of our businesses, creating a more favorable 
environment for long-term business growth. As we like to say in 
South Dakota, ``Profit is not a dirty word.''

    I was asked today to testify on why South Dakota is a great 
place to do business. Well, a big part of that is our fiscal 
responsibility and common sense.

    When it comes to fiscal responsibility, you'd be hard 
pressed to find a state that would rank higher than South 
Dakota. For the last 123 years, we have consistently balanced 
our budget.

    Two years ago, like most of the country, we were faced with 
serious budget issues. We buckled down, made the cuts that 
needed to be made, and today, we are in a better financial 
situation than most other states in the country.

    If we want serious, financially sound companies operating 
in South Dakota, we need to set the example at the state level.

    I've already mentioned our favorable tax climate, but I 
also want to talk about our favorable regulations and the 
consistency of our business leaders.

    When I started in our office, I read something in one of 
our promotional pieces that said, ``In South Dakota, our 
business climate doesn't change with the political winds.''

    That statement was written back in the 1980s when Citibank 
moved some of its credit card operations to South Dakota when 
the state legislature allowed expansion in compliance with the 
old Federal Bank Holding Act.

    Today, the financial services industry is still thriving in 
South Dakota.

    As a matter of fact in 2012, South Dakota's total bank 
assets topped $2.6 trillion, which totaled 18 percent of the 
country's bank assets and landed our state the #1 ranking 
according to the Federal Deposit Insurance Corp.

    So forward-thinking leaders in the 1980s, followed by 
forward-thinking leaders for the next 30 years, have kept South 
Dakota a leader in economic development with reasonable 
regulation and low taxation.

    When our Governor--Dennis Daugaard--was elected, one of the 
first things he did was direct all state agencies to identify 
any unnecessary laws and regulations and get rid of them.

    In two years, executive agencies under Governor Daugaard 
have found 374 rules (72,990 words) and 919 sections of 
codified law (75,266 words) to be repealed, and the process is 
less than half done.

    That's just good business. And corporate leaders quickly 
took note that this Midwest state was serious about maintaining 
the type of business climate needed for companies to grow and 
prosper.

    Another way South Dakota is able to continue to attract 
national and international companies like Bel Brands and Marmen 
Energy, is by playing on our strengths.

    With a population of 830,000, we are one of the least 
populated states in the country.

    But in business, that can be a good thing.

    Our small size affords businesses looking to expand in or 
relocate to South Dakota direct access to government leaders.

    When Governor Daugaard was campaigning, he promised to be 
the state's #1 salesman for economic development. There is no 
question he has fulfilled that campaign promise and then some.

    During the last three months alone, Governor Daugaard met 
with nearly 70 business leaders and site selectors from across 
the country to encourage them to continue to grow their 
businesses in or to locate them to South Dakota.

    That kind of personal attention gets noticed.

    Another thing that gets noticed is the collaborative 
efforts of the people of South Dakota.

    Our business development team serves as the liaison with 
these business leaders and site selectors on a multitude of 
issues from financing to permitting.

    As every business leader knows, navigating the permitting 
process can be time consuming and frustrating.

    In South Dakota, we believe in working with the business to 
not only make it happen, but to make it happen faster. As an 
example, we recently had one company that was able to receive 
its air quality control permit from our Department of 
Environment and Natural Resources from start to finish in just 
30 days.

    And we did it without cutting any corners. We believe the 
state should be an advocate, not a road block, to doing 
business.

    Another way we attract businesses is by keeping our cost of 
living down. Because in the business world a low cost of living 
equals a low cost of business.

    According to a June 2013 study by the US Commerce 
Department, South Dakotans pay 87 percent of the national 
average for goods and services. Additionally, the US Commerce 
Department just re-evaluated its numbers for Real Personal 
Income, and South Dakota's growth was a whopping 10.4 percent--
more than any other state in 2012.

    Of course I would be remiss if I didn't take the 
opportunity to let others tell what they think South Dakota is 
doing right.

    The Small Business and Entrepreneurship Council evaluated 
46 different economic factors and ranked South Dakota number 
one for our business policies and entrepreneurial friendliness. 
We're also in their top spot for small business survival. 
(2012)

    Our low debt and lack of unfunded pension liabilities and 
expensive state-funded programs lands us on the top of Barron's 
Best Run States in America. (2012)

    Our state ranks in the top for lowest tax burdens (Tax 
Foundation, 2012), best business climate (US Chamber of 
Commerce, 2013) and one of the highest average credit ranking 
(CardRating.com, 2012).

    And of course, there is yesterday's CNBC ranking that put 
South Dakota as the Best State to do Business.

    Thank you again for the opportunity to be here today and 
testify on this important topic. I look forward to your 
questions.

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[GRAPHIC] [TIFF OMITTED] T1936.002

[GRAPHIC] [TIFF OMITTED] T1936.003

    Chairman Graves, thank you for inviting me to address your 
committee on the very important work we are doing in Kansas to 
create an environment for small business success.

    This is a topic very dear to us in my state because the 
vast majority of private sector employers there are small 
businesses--77 percent have fewer than 10 employees, and 98 
percent have fewer than 100 employees.

    This means for Kansas families to flourish economically in 
the 21st century, we must have flourishing small businesses.

    With that in mind, Gov. Sam Brownback has placed the utmost 
importance on pro-growth tax reform at the state level.

    We started with a clear-eyed understanding that taxes at 
the federal, state, and local levels are a complicated hodge-
podge cobbled together over many decades. To help small 
businesses, it's important to reduce the burden of complying 
with this onerous system, while also reducing the overall tax 
burden.

    So, since 2011, Gov. Brownback and the Kansas Legislature 
have teamed up to make the state's tax code fairer, flatter, 
and simpler for families and small businesses. This approach 
broadens the base and lowers tax rates for the benefit of the 
maximum number of Kansans.

    The result has been historic and innovative tax relief--
focused on providing a shot of adrenaline into the heart of the 
Kansas economy.

    What makes Kansas' approach unique is how we are 
strategically accelerating tax relief to benefit small 
businesses.

    While individual income tax rates have been reduced 14 to 
24 percent for all Kansas taxpayers, we have gone even further 
to boost small businesses, because those businesses are the 
engine of job creation for our Kansas families. Once the plan 
is fully implemented in 2018, Kansas taxpayers will save an 
additional 23 percent on average.

    Starting this year, Kansas began exempting non-wage 
business income from state income tax. This is the type of 
income earned by the majority of small Kansas businesses, which 
typically are structured as LLCs, sole proprietorships, or S-
corps, commonly referred to as ``flow-throughs'' since the 
taxes for this business income are filed on individual income 
tax returns rather than corporate tax returns.

    By eliminating the state income tax for many small 
businesses, we are sending the message that every business, 
every innovation, and every entrepreneur matters when it comes 
to creating jobs in Kansas.

    This is in addition to programs such as the Kansas 
Bioscience Authority, NetWork Kansas and the state's Angel 
Investor credit which also help foster entrepreneurship.

    We are encouraging small businesses to grow in other ways 
as well. For example, our tax policy encourages private sector 
investment by allowing companies to immediately ``expense'' 
purchases of equipment and software as a state tax deduction. 
As small businesses capture the full tax value of the money 
related to their investments, they are keeping tens of millions 
of dollars each year, which can be reinvested in the 
businesses.

    Additional tax relief is being targeted to rural 
communities to stimulate small business startups in every 
corner of Kansas, not just our urban centers.

    Specifically, Kansas is providing a full state income tax 
rebate to new residents who move from out-of-state into rural 
opportunity zones.

    By keeping an additional $4.1 billion in the pockets of 
Kansas citizens and businesses over the next six years, we hope 
to experience growth rates similar to the nine states with zero 
personal income tax, which significantly outperform states with 
the highest personal income tax rates.

    Recently the Tax Foundation released a paper titled, What 
Is the Evidence on Taxes and Growth? The special report found 
that data ``consistently point to significant negative effects 
of taxes on economic growth even after controlling for various 
other factors such as government spending, business cycle 
conditions, and monetary policy ... Every study in the last 15 
years finds a negative effect of taxes of growth ... If we 
intend to increase employment, we should lower taxes on workers 
and businesses that hire them.''

    Therefore, in Kansas, we have been changing the dynamic 
that has led to average economic results--so more families can 
achieve a meaningful increase in income and opportunity, and 
small businesses can invest in growth and new jobs.

    This is a model being recognized by our neighboring states, 
including Chairman Graves's home state of Missouri, and we hope 
others in the region will join us in reducing taxes on small 
businesses and making the heartland of America the fastest 
growing region in the nation.

    As Missouri Speaker of the House Tim Jones recently wrote 
in The Kansas City Star:

    ``Kansas lawmakers have accomplished major tax reform and 
have managed to get the state economy back on track. These 
improvements are great for Kansans and challenge neighboring 
states to compete for business and job growth ...

    ``On the other hand, Missouri's unemployment rate has 
plateaued at 6.6 percent. Perhaps most troubling for Missouri 
is the Kauffman Foundation's small business climate ranking, 
which gives Missouri a C and Kansas an A ...''

    Speaker Jones concluded, ``Kansas has proven that 
competitive economic policies promote a business-friendly 
environment, attracting new companies and, with those new 
companies, more jobs ... The facts are right in front of us.''

[GRAPHIC] [TIFF OMITTED] T1936.004

    Chairman Graves, Ranking Member Velazquez and members of 
the committee my name is Aaron Demerson and I have the pleasure 
of serving as the Executive Director of the Economic 
Development & Tourism Division for the Governor's Office in the 
great State of Texas.

    Thank you for the work your committee continues to do for 
small businesses and for the invitation to participate on this 
panel as it is indeed an appreciated privilege to do so.

    Over the course of the past two days and throughout the 
years this committee has heard from some of the most notable 
representatives associated with small business.

    That's as it should be and not surprising given the 
importance of small businesses to the US economy and in my case 
the Texas economy.

    Small business owners are making a real difference in 
countless lives, for countless families in Texas....from the 
Panhandle to the Gulf coast.

    And as we speak here today someone, somewhere in Texas is 
coming up with the next big idea, a better way of doing 
something, or doing something that's never been done before.

    Fostering these types of innovations is vital to keeping 
Texas at the forefront of the national economy and when these 
innovators are ready to go to market, our hope is the efforts 
of this committee in collaboration with the efforts at the 
state-level will make it easier for them to succeed and thrive.

    We all know the big companies tend to draw the biggest 
headlines and they do, in fact, have a very important role to 
play.

    But we also know the drivers of job creation in Texas and 
our nation are our small business men and women. As we like to 
say, ``Small business is big business in Texas.'' 98.7 percent 
of Texas employers are small businesses--these are bold 
entrepreneurs who take real risks pursuing their dreams of 
owning their own businesses. As the SBA recently profiled, 
Texan small businesses under 500 people were responsible for 
all of the state's net new jobs over the last five years. 
Consequently, the over 2.3 million Texas small business owners 
represent the true vibrancy of the Texas economy with the 
nearly 4.1 million jobs they create. And their contribution to 
the positive economic climate is a large part of what has 
helped us attract employers of all sizes to the Lone Star 
State.

    The committee is seeking information on why certain states 
are attractive to businesses. We have found the continued 
attractiveness to Texas over the years is based on a number of 
reasons, with a major portion of this success associated with 
the leadership and emphasis placed on job creation that has 
been championed by Governor Rick Perry and our collective 
statewide elected delegation.

    We know that our second to none business-friendly climate/
environment has continued to help us attract new employers and 
create jobs. And this past legislative session (just as we have 
done in the past) we took the necessary steps to preserve the 
business climate that's made all that possible.

    In some cases these businesses were fleeing over-taxation 
and over-regulation in other states as they sought to expand 
our relocate to a place where they're free to succeed.

    And it is our thought that we can expect more of them 
heading our way as long as we remain committed to the 
principles that have helped make us the best state in the 
country to do business.

    One of the most important steps for attracting business to 
Texas is centered on keeping our taxes low because dollars do 
far more to create jobs and prosperity when kept in the 
business owner's hands.

    We have worked hard to keep a fair and predictable 
regulatory climate so that a company will know what to expect a 
quarter, six months or a year down the line. The CEO's and 
CFO's understand this and continue to fid it a very attractive 
alternative when considering expansion and/or relocation.

    To that end, we have continued to enact legislation that 
has a positive impact on small business. This year we were able 
to make permanent the small business tax relief that was passed 
in 2009.

    The recently signed HB500 offers over $700 million in 
business tax relief and makes permanent the $1 million small 
business tax exemption. This important bill provides 
significant tax relief to over 140,000 Texas small businesses 
by establishing that any business making below $1 million in 
revenues will always be free of any franchise tax obligation 
whatsoever, thereby leaving more dollars in their pockets to 
invest in new hires and new equipment. Additionally, the bill 
reduces the margin tax rate on nearly 800,000 businesses in 
Texas, bringing meaningful tax relief to the heart and backbone 
of the mighty Texas economic engine.

    We have also been able to further enhance our legal system 
to make it even harder to file frivolous lawsuits in Texas and 
approved ``loser pay'' legislation which requires those who 
file a frivolous lawsuit and lose to pay the court costs and 
legal expenses of those they sued.

    For us in Texas economic development begins at the local 
level and when you represent a state that has 254 counties and 
when driving for three, six, or even 14 hours you are still in 
that state it becomes very important that you have effective 
relationships at the local level to take advantage of the small 
business opportunities. To say that our communities are very 
aggressive and serious about small business and job creation is 
an understatement. Legislation was recently passed that will 
establish a new small business advisory committee that will 
allow us to align even closer with the communities on small 
business initiatives and issues. We also are close to 
completing our marketing plan for attracting more small 
business to our state.

    ...and lastly in Texas as depicted in the attached state by 
state comparison document and our ``brag'' sheet (the Governor 
states that in Texas--it ain't braggin' if it's true) our 
unemployment rate has consistently been lower than the national 
average and we have continued to lead the nation in job 
creation over the years. We also continue to have the nation's 
best business climate, continue to be the number one exporter 
11 years running and continue to have the highest number of 
expansion and relocation projects.....all of this creates a 
great deal of attention and continues to be of great interest 
to a number of small business owners in the United States 
looking to expand or relocate their business.

    It didn't happen by accident....it happened because, over 
the last decade, Texas leaders have made principled, thoughtful 
decisions by not over-taxing, over-regulation or over-
litigating our citizens.

    In Texas we have an obligation, responsibility, and goal to 
the taxpayers to take the necessary steps to make government 
more efficient and streamlined while reducing spending without 
raising taxes.

    Our statewide elected officials continue to act on the 
tough decisions necessary as they recently thoughtfully made 
their way through the budget-writing process this session which 
should result in additional jobs and opportunity thus leaving 
Texas even more competitive than ever.

    And that same process and challenge associated with tough 
decisions is taking place at small businesses and around 
kitchen tables all across our state and nation.

    Small business owners have continued to find new ways to 
tighten their belts, separating wants from needs and making 
responsible decisions to live within their means.

    Only by keeping our families and small businesses strong 
can we continue the type of prosperity we've enjoyed in Texas 
over this past decade.

    So how do we continue to create new opportunities for Texas 
families and small businesses?

    We do this by continuing to apply a laser-like focus on 
small business retention and recruitment while showcasing the 
best of what Texas has to offer. In addition we will continue 
to ensure for small businesses a climate at the state-level 
that is conducive to making a profit, creating jobs and 
enjoying success.

    Our hope is that the same or a similar approach is viewed 
at the federal level.

    I sincerely appreciate the opportunity, welcome you to 
visit our great state, and look forward to the discussion and 
answering any questions you might have.

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                          Testimony Before The


                   HOUSE COMMITTEE ON SMALL BUSINESS


                               Regarding


 ``Beyond the Beltway: Successful State Strategies for Small Business 
                                Growth''


                             July 10, 2013


              Submitted by: Honorable Robert F. McDonnell


                Governor of the Commonwealth of Virginia


    Chairman Graves, Ranking Member Velazquez and other 
distinguished members of the Committee on Small Business, on 
behalf of the Commonwealth of Virginia, I thank you for 
inviting me to offer testimony today at this important hearing.

    Small businesses are the backbone of our economy. Across 
Virginia and throughout the United States small businesses are 
creating jobs and opportunity. The Small Business 
Administration estimates that small businesses represent 97.8 
percent of all employers in Virginia. Approximately 70 percent 
of all new jobs created are from small business. The work of a 
small business owner is not easy. Increased regulation, taxes 
and other burdens have made it more difficult for small 
businesses to thrive. Small businesses are critical to ensuring 
economic prosperity throughout the United States.

    In Virginia, we've been intensely focused on job creation 
and economic development with special attention to the 
important role of small business in our economy. Last year I 
announced 2012 as ``The Year of the Entrepreneur in Virginia.' 
We highlighted Virginia's colleges and universities activities 
that encourage young Virginians to pursue entrepreneurship as a 
career option. Throughout the year I held monthly office hours 
with small business owners, roundtables across the state and 
featured profiles on entrepreneurship.

    One thing is clear, small businesses need flexibility and 
predictability from government. In Richmond, we are working to 
do our part.

    Fostering an entrepreneurial environment is a team sport in 
Virginia. In my administration, commerce and trade, 
administration, agriculture and forestry, technology and 
veterans affairs work together to create a strong, welcoming 
economic environment for small business.

    During one of my `Year of the Entrepreneur' office hours, I 
met NFIB member Timothy Heydon of Shenandoah Growers, located 
just outside of Harrisonburg, Virginia. Shenandoah Growers was 
founded over two decades ago by entrepreneur farmers with a 
dream of bringing fresh culinary herbs to homes throughout the 
country. Shenandoah Growers has today become a leading provider 
of fresh herbs in the United States, specializing in supplying 
the retail grocer.

    I recently asked Tim to serve on my Rural Jobs Council. 
Through his work and the leadership of my Chief Jobs Creation 
Officer, Lt. Governor Bill Bolling, the Council put forward 
recommendations that make it clear that entrepreneurs need 
leaders to be mindful of the unique challenges facing small 
businesses in today's global economy. The Council recommended 
that we invest in infrastructure and broadband as well as 
targeted workforce development efforts. The Council also 
recommended that we create a Governor's School for 
Entrepreneurship to encourage middle school students to 
consider entrepreneurship as a career option.

    In Virginia, we continue to focus on things that matter to 
entrepreneurs--access to capital, workforce development and a 
predictable and accountable government.

    Access to Capital

    Virginia's small businesses need to know that when the time 
is right to grow their business, the capital they need will be 
readily accessible. In 2012, we worked with members of the 
Virginia General Assembly and stakeholders to enact a bi-
partisan solution that will encourage long-term investments in 
Virginia's small businesses. The Virginia Small Business 
Investment Grant helps encourage private investment for two 
years by providing a grant equal to 10 percent of a qualified 
investment for an eligible investor.

    We've also invested in the Virginia Small Business 
Financing Authority. The VSBFA aids Virginia's financial 
institutions to offer business loans that they might not be 
able to offer without the authority's assistance.

    One of the most burdensome taxes in Virginia is the 
Business Professional and Occupational License (BPOL) tax. We 
passed legislation to allow localities to exempt from the BPOL 
tax if they lose money and are unprofitable during the taxable 
year. We also provided localities a choice in how to impose the 
BPOL tax. Commonsense tax policy is key to attracting small 
businesses.

    Agriculture and forestry continues to be Virginia's largest 
industries, generating a combined $79 billion annually and 
creating more than 500,000 jobs across the state, most of these 
agriculture and forestry operations are small businesses. 
During the 2012 General Assembly session, we introduced 
legislation to establish a new economic development tool 
targeted for agriculture and forestry industries, which had 
been largely overlooked in the state's traditional economic 
incentive programs. Created as the Governor's Agriculture and 
Forestry Industries Development Fund (AFID), the legislation 
passed and was funded with unanimous support from the Virginia 
General Assembly.

    The AFID provides incentive grants for projects that 
utilize Virginia grown products in value-added or processing 
facilities. These agriculture and forestry value-added or 
processing facilities can have tremendous impacts on the 
regions in which they locate. Areas where these facilities 
typically locate are rural with higher unemployment. 
Agriculture and forestry are already economic drivers in the 
area, so facilities of this kind can build on the region's 
existing strength. The value-added and processing facilities 
have a greater economic ripple effect as a result of growers in 
the region having a new market in which to sell products. 
Although the program is new and only about a $1 million has 
been allocated thus far in economic development and planning 
grants, we believe that we'll farm revenue increase as a result 
of these facilities, jobs being created on the farm and in the 
facility, greater opportunities to increase farm profitability 
and more farmland preserved, and more economic benefits for the 
region as a whole as a result of revenue generated on the farms 
and at the facility.

    We have also opened up nine agriculture and forestry trade 
offices in Asia, Europe and other regions, resulting in record 
exports in each of the past two years and on the way to a 
third.

    Of great importance to the Commonwealth and the Nation is 
our ability to compete in technology innovation. With greater 
than thirty percent of new job creation originating with high 
growth technology start-up companies, our administration has 
invested in ensuring that Virginia delivers the economic 
environment necessary to start and grow successful high 
technology companies.

    We created targeted incentives to recruit and attract angel 
and venture investment.

           The Angel Investment Tax Credit encourages 
        early-stage investment in technology, biotechnology and 
        energy startups. While Virginia is one of 20 or so 
        states that have an angel credit, ours is among the 
        most competitive with a 50 percent leverage of the 
        first $50,000 an investor puts into a qualified 
        Virginia technology startup.

           Another success story is the Capital Gains 
        Tax Exemption, Entrepreneurs and investors who make 
        qualified investments in early-stage technology, 
        biotechnology and energy startups in Virginia, through 
        June 30, 2015, will be exempt from paying state income 
        tax on their long-term capital gains throughout the 
        life of the investment. If and when investments in 
        these qualified companies are successful over the life 
        of a company, any long-term capital gains attributable 
        to the investment will be exempt from Virginia's income 
        tax, facilitating a growth in the growing share 
        facility market.

           We created a very competitive Virginia 
        market for data centers that turned into real jobs and 
        revenue for Virginians. I signed legislation to expand 
        Virginia's current data center sales tax exemption to 
        also include data center tenants.

           We created the Commonwealth Research 
        Commercialization Fund (CRCF) is aimed at advancing 
        science- and technology-based research, development, 
        and commercialization to drive economic growth in 
        Virginia. The CRCF will encourage emerging ideas and 
        turn them into real world solutions and jobs for 
        Virginians.

           The Center for Innovative Technology GAP 
        Funds have underwritten critical and immediate first 
        financing for tech startups with high potential for 
        achieving rapid growth and generating significant 
        economic return. The GAP Fund's targeted areas include 
        software, telecommunications, semiconductors, media and 
        entertainment, e-commerce, networking and equipment, 
        electronics/instrumentation, industrial/energy, 
        computers and peripherals, biomedical and life science 
        applications.

    During the past three and a half years, our seed stage 
investment programs will have created over 75 new high 
technology companies that have attracted private capital at a 
rate of $17 dollars for every $1 of public funds invested. 
Successful start-ups like Invincea whose cyber security 
software will be deployed on every Dell computer help ensure 
the competitiveness of the Commonwealth and the Nation.

    This type of innovative, market facing approach to economic 
development makes Virginia appealing to entrepreneurs.

    Regional Capacity Building

    A key strategy to support entrepreneurial growth at the 
local level is to support regional capacity building. We 
launched a new grant program called ``Building Collaborative 
Communities.'' The effort is designed to assist regions in 
creating and sustaining new economic opportunities across 
Virginia. The program promotes regional economic collaborations 
in economically-distressed areas to stimulate job creation, 
economic development and build community capacity and 
leadership.

    Regional economic development leadership is key. An 
excellent example is the Southwest Virginia Blueprint for 
Entrepreneurial Growth and Economic Prosperity, a community-
based initiative designed to promote entrepreneurial activity 
in the region. The Blueprint was developed to inspire 
collective action, impact policy, foster regional networks, 
build on the region's assets and to seek new investment.

    Workforce Development

    One of the most important issues to small and growing 
business is workforce development and the quality of education. 
Small businesses thrive because of their ability to recruit, 
train and retain qualified employees. From a small manufacture 
that is able to partner with a local community college to a 
ensure qualified pipeline of workers to a tech start-up that 
works to commercialize and license technology from one of the 
Virginia's public institutions of higher education, human 
capital matters.

    The Virginia Higher Education Opportunity Act of 2011, 
known as the ``Top Jobs Act,'' adopted unanimously by the 2011 
General Assembly demands more access at lower costs to 
Virginia's universities. To reforms make clear link between 
higher education and job creation.

           Provides a roadmap for achieving an 
        additional 100,000 undergraduate (associate and 
        bachelor's) degrees for Virginians over the next 15 
        years by (1) increasing enrollment of Virginia 
        students, (2) improving graduation and retention rates, 
        and (3) incentivizing higher education to lower tuition 
        increases.

           Focuses additional degree attainment in 
        high-demand, high-income fields (e.g., STEM, 
        healthcare) that are keys to top jobs in the 21st 
        Century economy. Incentivizes public-private 
        collaboration on STEM-related and other commercially 
        viable research.

           Higher education's return on investment is 
        proven. The Weldon Cooper Center's study for the 
        Virginia Business Higher Education Council shows that 
        every 1 dollar currently invested in Virginia's public 
        higher education system yields 13 dollars in increased 
        economic output. College graduates on average earn 
        twice as much as those without college degrees.

           Provides for sustained reform-based 
        investment and innovation in delivery of higher 
        education services, as well as extending college degree 
        opportunities to more citizens in creative, cost-
        effective ways. Institutions' must generate six-year 
        plans to address strategies and use of incentives for:

                    Year round use of physical facilities and 
                instructional resources

                    Technology-enhanced instruction and 
                resource-sharing across the higher ed system

                    Innovative and economic degree paths

                    Ongoing restructuring and managerial 
                reforms

           Reverses the dramatic funding reduction 
        cycle to higher education through a new comprehensive 
        funding model framework with four components: basic 
        operations and instruction; enrollment growth funding; 
        need-based financial aid (for low- and middle-income 
        families); and financial incentives to promote 
        innovation and increased research and development;

           Creates a collaborative Higher Education 
        Advisory Committee consisting of executive and 
        legislative branch representatives and representatives 
        of higher education institutions to develop performance 
        criteria for incentives, institution-specific base 
        funding policies, economic opportunity metrics for 
        degree programs, opportunities for additional, cost-
        saving managerial autonomy and efficiency reforms, and 
        other key policies.

           Provides enrollment-based funding to 
        increase access for qualified Virginia students at 
        public and private colleges and universities.

           Enhances long-term affordability through a 
        three-prong strategy; (1) puts in place a model for 
        stable and predictable state funding support, relieving 
        the upward pressure on tuition; (2) provides for 
        development of need-based financial aid options aimed 
        at middle-income as well as low-income families.

    The workforce development pipeline starts in K-12. Virginia 
is competing internationally for job creating businesses. I 
have put forward necessary reforms to ensure our K-12 system is 
preparing the next generation of small business owners and 
entrepreneurs.

    This year, we passed bold and innovative education 
legislation that ensures that every child has great teachers, 
that sets clear and high standards for our schools, and that 
establishes a roadmap to provide choice, accountability and 
opportunity for every student in Virginia. We passed the 
Opportunity Educational Institution to turn around chronically 
underperforming schools. The Teach for America Act, which 
passed unanimously in both chambers, will give difficult to 
staff schools another tool with which to bring in talented and 
motivated teachers. Virginia will soon increase accountability 
and transparency with A-F school grading, giving parents and 
families another tool to advocate for and achieve better 
schools for their communities. With passage of the Educator 
Fairness Act, we have reformed the teacher contract and 
grievance system to ensure that our children have the best 
possible educators.

    Government Reform

    Small businesses need predictability and efficiency. Last 
year, we launched a regulatory reform initiative to reduce the 
number of burdensome regulations placed on small businesses. 
Since September 2012, 562 sections in the VAC have been 
identified: and 157 sections have already been repealed. We 
asked industry and small business for ideas and specific 
sections of the code that were overly burdensome.

    Virginia also offers small business owners a `Business One 
Stop' for business formation. Rather than seeking permits and 
formation documents from a handful of agencies, we offer a 
streamlined one stop shop.

    We worked with the legislature this year to merge small 
business agencies into one to focus on small business. As of 
January 2014, Virginia will have one small business agency--the 
Department of Small Business and Supplier Diversity. The new 
streamlined agency will be laser focused on small business and 
economic development.

    The most important thing government can do is listen to 
industry needs and be responsive. Last year for example, we 
heard from Virginia's craft beer industry that they needed a 
legislative fix to allow retail sales of beer and sampling on 
the premises of Virginia breweries. We worked with stakeholders 
and made the case for legislation. Senate Bill 604 passed and 
as result we've seen more jobs and increased interest in 
Virginia as a tourism and craft beer destination. This 
legislation directly resulted in a major west coast brewery 
deciding to locate its east coast brewery in Virginia. In fact, 
Hardywood Brewery in Richmond launched `Session Beer 604,' 
brewed to commemorate the signing of SB604 into law.

    We have put a special focus on developing new businesses 
where we have unique strengths. Virginia's wine, film 
production and tourism industries are among those with new 
targeted tax incentives and offices to promote development. All 
have grown at a rapid pace.

    In Virginia we are working to keep taxes low, and 
regulation and litigation to a minimum in order to allow our 
entrepreneurs and job creators to grow their businesses and 
create the private sector jobs our economy needs.

    Ultimately, it is not what the federal or state government 
can do for small business that matters, but how government can 
ensure it does not erect unnecessary barriers to job creation. 
We must ensure an environment conducive to economic vitality 
and guard against extinguishing the entrepreneurial spirit with 
overly burdensome laws and regulations.

    Our work has gotten results. When we took office, 
unemployment in Virginia stood at 7.3%. Now, it stands at 5.3%, 
our lowest unemployment rate in over 4 years. Virginia also has 
the lowest unemployment rate in the Southeast, the second-
lowest rate east of the Mississippi River, and an unemployment 
rate that is more than a full point lower than any of our 
neighboring states. Since the beginning of our administration, 
Virginia has added 171,000 net new jobs, 153,000 of which are 
in the private sector, and the number of unemployed Virginians 
has decreased by a total of 80, 164, or 36%. Simply put: More 
Virginians are working today.

    Thank you and I look forward to your questions.

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