[Senate Hearing 115-574]
[From the U.S. Government Publishing Office]
S. Hrg. 115-574
EXPANDING OPPORTUNITIES FOR SMALL BUSINESSES THROUGH THE TAX CODE
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
OCTOBER 3, 2018
__________
Printed for the Committee on Small Business and Entrepreneurship
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED FIFTEENTH CONGRESS
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JAMES E. RISCH, Idaho, Chairman
BENJAMIN L. CARDIN, Maryland, Ranking Member
MARCO RUBIO, Florida MARIA CANTWELL, Washington
RAND PAUL, Kentucky JEANNE SHAHEEN, New Hampshire
TIM SCOTT, South Carolina HEIDI HEITKAMP, North Dakota
JONI ERNST, Iowa EDWARD J. MARKEY, Massachusetts
JAMES M. INHOFE, Oklahoma CORY A. BOOKER, New Jersey
TODD YOUNG, Indiana CHRISTOPHER A. COONS, Delaware
MICHAEL B. ENZI, Wyoming MAZIE K. HIRONO, Hawaii
MIKE ROUNDS, South Dakota TAMMY DUCKWORTH, Illinois
JOHN KENNEDY, Louisiana
Skiffington E. Holderness, Republican Staff Director
Sean Moore, Democratic Staff Director
C O N T E N T S
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Opening Statements
Page
Rubio, Hon. Marco, a U.S. Senator from Florida................... 1
Cardin, Hon. Benjamin L., Ranking Member, a U.S. Senator From
Maryland....................................................... 2
Witnesses
Slaughter, Ph.D., Christel, Chair, U.S. Chamber Small Business
Council, Baton Rouge, LA....................................... 5
Lettieri, John, Co-Founder and President, Economic Innovation
Group, Washington, DC.......................................... 12
Arensmeyer, John, Founder and Chief Executive Officer, Small
Business Majority, Washington, DC.............................. 19
Bruckner, Caroline, Managing Director, Kogod Tax Policy Center,
American University, Washington, DC............................ 26
Alphabetical Listing
Arensmeyer, John
Testimony.................................................... 19
Prepared statement........................................... 21
Responses to questions submitted by Senators Risch, Heitkamp,
Hirono, and Duckworth...................................... 68
Bruckner, Caroline
Testimony.................................................... 26
Prepared statement........................................... 29
Responses to questions submitted by Senators Risch, Heitkamp,
Hirono, and Duckworth...................................... 75
Cardin, Hon. Benjamin L.
Opening statement............................................ 2
Lettieri, John
Testimony.................................................... 12
Prepared statement........................................... 14
Responses to questions submitted by Senators Risch, Heitkamp,
and Duckworth.............................................. 65
National Federation of Independent Business
Statement dated October 3, 2018.............................. 80
National Small Business Network
Statement dated October 2018................................. 86
Rubio, Hon. Marco
Opening statement............................................ 1
Slaughter, Ph.D., Christel
Testimony.................................................... 5
Prepared statement........................................... 8
Responses to questions submitted by Senators Risch and
Heitkamp................................................... 62
EXPANDING OPPORTUNITIES FOR SMALL BUSINESSES THROUGH THE TAX CODE
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WEDNESDAY, OCTOBER 3, 2018
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The Committee met, pursuant to notice, at 2:37 p.m., in
Room 428A, Russell Senate Office Building, Hon. Marco Rubio,
presiding.
Present: Senators Risch, Rubio, Ernst, Inhofe, Young, Enzi,
Kennedy, Cardin, Cantwell, Shaheen, Heitkamp, Markey, Booker,
Hirono, and Duckworth.
OPENING STATEMENT OF HON. MARCO RUBIO, A U.S. SENATOR FROM
FLORIDA
Senator Rubio. The hearing will come to order.
Today's hearing of the Senate Committee on Small Business
and Entrepreneurship is about a topic that is quite important,
and it is timely as the full measure of last year's Tax Cuts
and Jobs Act continues to set in midst various other
competitiveness policies, such as confronting China on unfair
economic practices.
In our new global economy, it is not enough to just cut
taxes. You have to also cut the right ones, and the new tax law
passed late last year included a provision called Economic
Opportunity Zones. This law, which was championed by my good
friend Senator Tim Scott of South Carolina, will encourage
investment in economically distressed communities by allowing
investors to defer certain taxes on income if they invest in
low-income communities.
The new global economy has increased the wealth of many
Americans, but it has destabilized entire regions in our
country and left millions of workers behind.
Pushing investment to seek out the largest return,
regardless of which nation or area within the nation, has led
to the desertion of workers in our own back yards.
Parts of Florida have experienced this firsthand. The
disparities are a testament to the uneven prosperity of
globally driven rapid growth.
This is where Economic Opportunity Zones comes in. While
investors in a global economy might seek a better bottom line
by shipping jobs to a foreign country, this provision cuts
taxes on the investments that make jobs here in America.
The global economy is marked by pushing investment to
maximize short-term gain, but Economic Opportunity Zones reduce
that short-sighted incentive by cutting taxes on investments
held for at least 10 years in what are currently lower-income
areas.
This tax provision is not for outside businessmen to make a
quick buck in low-income areas. This provision encourages long-
term gain for the community.
Small businesses like the ones discussed here today are not
just competing in their own local economies. They are competing
in many industries against the world.
This is not a relaxed environment. Day in and day out,
small businesses seek out a competitive edge through hard work,
creativity, and innovation.
If a small business has a great breakthrough, it does not
stay small for long. America's greatest competitive advantage
has always been the ingenuity of our people. Tax cuts should
play to that strength.
And as Congress looks to make some of the provisions of
last year's tax law permanent, we should put full expensing
near the top of that list. Full expensing allows businesses to
immediately deduct their capital investments instead of eating
their cost over a decade at a time.
This means more money to spend on better products,
facilities, and new shops. It removes a barrier to small
business owners putting their ideas into action, making it
easier to pull designs off blueprints and onto shop floor.
Unlike other tax cuts, which cut tax rates without regard
for investment plans or the creation of American jobs, full
expensing rewards the future economy, not the one of the past.
It is the tax cut for the American idea.
The tax law's full expensing provisions for the next 5
years is the greatest thing we can do to remake American high-
wage jobs for the 21st century. I hope we make it permanent.
With that, I recognize the Ranking Member to offer his
opening statement.
OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, RANKING MEMBER, A
U.S. SENATOR FROM MARYLAND
Senator Cardin. Well, thank you, Senator Rubio, and thank
you, Senator Risch, for calling this hearing, an incredibly
important subject, expanding opportunities for small business
through the Tax Code. I can tell you this is an issue I hear
frequently from small businesses as to how the Tax Code
challenges them dealing with running a business. So I very much
appreciate this subject. I think it is extremely important that
this Committee hold this hearing.
I want to thank all of our witnesses. Ms. Bruckner, I want
to also acknowledge you are familiar with our Committee, as I
understand.
Ms. Bruckner. Yes.
Senator Cardin. Your students are here watching you today,
so it is good to have your students in the room, and I welcome
them also to today's hearing.
Because of the impact that the Tax Code has on small
businesses, I was and still am disappointed about the rush
partisan process that ultimately resulted in last year's
Republican tax bill.
As I said before, the rushed and opaque process prevented
our constituents from weighing in in a meaningful way on the
policies that will affect all of them.
It also resulted in a bill that the Joint Committee on
Taxation estimated would add $1.4 trillion to the deficit,
which could put important programs such as Social Security,
Medicare, and Medicaid at risk for severe cuts in the future.
This deficit is unconscionable, and as we are starting to see
projections on the deficit come in now, those projections are
accurate. And that is terribly unfortunate, and it is a burden
we are all going to have to figure out how to deal with, which
will have an impact on our small business community.
One of the biggest concerns I have with last year's tax
bill is that it does not sufficiently target its benefits
towards middle-class taxpayers. I include in middle-class
taxpayers, the entrepreneurs and small businesses that are
growing our economy.
The purpose of the tax bill from the beginning was to help
reduce the C rate because of its international competition
factors. I understand that. That was the purpose of the bill,
and those are the entities that got the lion's share of the tax
relief on a permanent basis.
Some of these businesses, small businesses, will see their
tax bills reduced, while others will actually see tax bill
increases. Regardless of the benefits to each taxpayer, I
believe the tax bill was a missed opportunity for targeting the
Code to small businesses as well as modernizing the Code to
address the challenges these businesses face.
For instance, data on business size and revenues suggest
that very small businesses will only receive a tiny portion of
the revisions that are billed as small business provisions in
the tax bill. Based on available data, this misallocation seems
especially true for small women- and minority-owned businesses.
This is a big issue for Maryland. According to a survey
conducted earlier this year by Paychex, Maryland has the
highest rate of per capita minority- and women-owned businesses
in the United States.
As you know, Mr. Chairman, I held a field hearing last
month at Morgan State University to discuss the challenges
minority-owned businesses face with respect to accessing
capital. Taxation is an important piece of this puzzle. A major
source of capital for expansion of a business is reinvesting
profits, and the amount of tax a business must pay determines
the amount of money available for growth.
However, it appears that the tax benefits of the provisions
most touted as a small business provision, the new Section 199A
pass-through deduction, skews heavily towards wealthy,
established, non-minority-owned businesses. And as I pointed
out, the provisions are not permanent.
In addition, I have heard from businesses of all sizes in
the amount of complexity the bill adds. It adds complexity
because it is not a permanent provision. It adds complexity
because of the way that the calculations need to be made for
eligible income.
Both tax practitioners and small businesses in Maryland
organized as pass-throughs have come to my office with
questions and concerns about how to claim and accurately
compute the Section 199A pass-through deductions. These
questions continue, even following the guidance that the IRS
released in August.
It is my hope that this Committee will serve an important
role in evaluating, correcting these and other issues. We must
help Congress develop more efficient tax policies that are
truly designed to provide a leg up to small business.
It is my hope that this hearing will serve as an
opportunity to develop an agenda for this Committee going
forward on tax policy.
The deeply partisan exercise that was undertaken last year
is against the best traditions of this Committee, which is
broadly known for its bipartisanship. It is the role of our
Committee to advocate on behalf of small businesses. We have
done that consistently on a nonpartisan, bipartisan basis. We
recognize small businesses are the growth engine of our
economy. That is where jobs are created and innovation takes
place, and we need to work together in order to make the proper
recommendations in regards to how the Tax Code affects small
businesses in our community.
I look forward to all the witnesses' testimony, and I look
forward to working with my colleagues on both sides of the
aisle in order to make concrete recommendations on tax issues
for small business.
Senator Rubio. Thank you.
I want to recognize Senator Kennedy to present our first
witness, and we have a distinguished panel. We will get to the
others in a moment.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
We do have a distinguished panel today, and it is my
pleasure to introduce to the Committee, Dr. Christel Slaughter.
She is here today representing the U.S. Chamber Small Business
Council. Dr. Slaughter is the CEO of SSA Consultants. That is a
well-known entity in Louisiana. It is a woman-owned management
consulting and organizational development firm, which she
joined in the early 1980s. Dr. Slaughter's expertise is in
organizational design and development, specializing in areas
such as strategic planning and performance improvement.
To give you an example of some of her recent work, it
includes leading an ongoing organizational development design
and build-out of something very important in my State, the
Louisiana Emergency Response Network, and also designing
integration strategies for the State of Louisiana's
multibillion-dollar coastal protection and restoration efforts,
also something of paramount importance to Louisiana.
Dr. Slaughter serves on the board of the U.S. Chamber of
Commerce. She is the chair of the U.S. Chamber Small Business
Council. She became the very first woman chairman of the Baton
Rouge Chamber of Commerce way back in 1986. She serves on the
State Chamber board of directors as well as the executive
committee.
She holds a bachelor's degree in marketing. Her doctorate
is in systems management and organizational design. Both of
them are from the Louisiana State University, and I am looking
forward to hearing Dr. Slaughter's testimony today, as I am
looking forward to hearing the testimony of all of our
witnesses.
Welcome, Doc.
Senator Rubio. Thank you, Senator Kennedy.
In addition, we want to welcome Mr. Lettieri. Lettieri is
the co-founder and president of the Economic Innovation Group.
In this role, he leads their policy development, economic
research, and legislative affairs efforts to study and address
regional inequality across the United States.
He has worked with members of this Committee on a policy
provision that we have discussed, the Opportunity Zones, was
included and passed in the Tax Cuts and Jobs Act.
Mr. Arensmeyer is the founder and CEO of Small Business
Majority. He has started numerous businesses and held
leadership roles in which he worked on issues of importance to
small businesses ranging from health care to access to capital
to taxes.
Ms. Caroline Bruckner is the managing director of--is it
Kogod?
Ms. Bruckner. Kogod.
Senator Rubio. Kogod Tax Policy Center at American
University. Prior to this role, she served as a tax counsel in
the Senate, where she worked on both this Committee and the
Senate Energy Committee. Ms. Bruckner focuses her research on
tax issues specific to small businesses and entrepreneurs.
And we will begin with Dr. Slaughter. Thank you, you are
recognized for your opening comment.
STATEMENT OF CHRISTEL SLAUGHTER, Ph.D., CHAIR, U.S. CHAMBER
SMALL BUSINESS COUNCIL, BATON ROUGE, LA
Ms. Slaughter. Thank you, Senator Rubio. Thank you,
distinguished members of the Committee. I am very honored to be
here on behalf of the Small Business Council. My name is
Christel Slaughter, as you heard. I am the CEO of SSA
Consultants, based in Baton Rouge, Louisiana, and the chair of
the U.S. Chamber of Commerce's Small Business Council.
The Chamber is the world's largest business federation. It
represents the interests of over 3 million businesses of all
sizes, sectors, and regions, as well as State and local
chambers and industry associations.
Ninety-six percent of Chamber member companies have fewer
than 100 employees, and 75 percent have fewer than 10
employees. The Small Business Council works to ensure that the
views of small business are considered as part of the Chamber's
policymaking process.
I am here today to give you a few examples of positive
impacts from tax cuts. The U.S. Chamber of Commerce produces a
quarterly small business index in partnership with MetLife, and
the most recent survey shows small business confidence at an
all-time high. The findings of our quarterly survey show a
great deal of confidence in the direction of the national
economy and shows that 69.7, almost 70 percent of small
business owners have a positive outlook about their company and
the small business environment in the United States.
Early this year and for the purposes of this hearing, small
business owners were surveyed, and they were twice as likely to
think that tax reform would help their business rather than
those who thought that it would hurt.
At a meeting earlier this year, several of my fellow Small
Business Council members discussed their plans to reinvest
savings realized from the Tax Cuts and Jobs Act.
Melissa Bercier, who is the founder of Couch Clarity, which
is a private psychotherapy practice near Chicago, explained how
tax cuts are giving her an opportunity to provide team building
and professional development for her staff of 10. Melissa calls
her reinvestment strategy, ``helping the helper.'' The strategy
has a positive domino effect because Couch Clarity's two
locations help people in the community, and a happy Couch
Clarity staff means a happy community.
David Mahoney is the president and CEO of Noble Gas
Solutions in Albany, New York, a gas distribution and welding
supply company with 33 full-time and 3 part-time employees.
David explained how difficult it was getting through the
Recession, with Noble Gas Solutions experiencing a 15 percent
decline in revenue and an 8-year business drought without
experiencing any additional sales in Upstate New York. He told
me that last year, the economy in the Northeast finally seemed
to rebound, and his sales came up 10 percent. The tax cuts
allowed David to raise wages and prompted him to plan for
hiring new staff, a luxury he could not afford for the past
several years.
Melissa is here in Washington, D.C., this week to join
several hundred other small businesses for the U.S. Chamber of
Commerce's fourth annual Small Business Summit. Many of us were
here on Capitol Hill yesterday meeting with our Senators to
help explain how we are putting tax reform savings to work by
reinvesting in our employees, our businesses, and our
communities. These examples of how we are reinvesting tax cut
savings to provide higher salaries and increased benefits for
our employees are echoed by small businesses throughout the
United States.
In my small business, our employees are taking home more of
their earnings, and many of our clients are benefiting from the
Tax Cuts and Jobs Act.
One of those clients, Roy O. Martin, announced the opening
of a new state-of-the-art Oriented Strand Board, or OSB plant,
in Corrigan Texas, this past year. At full capacity, the plant
will ship enough product to provide OSB for approximately
70,000 U.S. homes per year. Roy O. Martin's investment in the
new plant created 165 direct jobs and more than 470 indirect
jobs in construction.
Another example from one of our clients is ExxonMobil, who
announced that it is reinvesting $50 billion in U.S. operations
because of tax cuts. That was music to the ears of my client,
which are the locations of ExxonMobil in Baton Rouge. These
locations employ more than 6,500 people in our State.
As a practical matter, my job as an organizational
consultant is less difficult when employees are taking home
more pay and the company they work for is committed to
reinvestment and growth. The tax cuts will allow them to make
additional investments in operation and staffing.
This example shows the positive ripple effect of business
confidence and optimism due in part to tax reform.
Our organizational consulting firm has seen an increase in
business this year. Our clients are doing well. They want to
remain competitive by working with us on strategic plans and
making sure that they retain their talented employees in this
increasingly tight labor market.
We do see some improvements that would be needed for tax
reform to have an even greater positive impact, and finally, we
would like to work with the Committee and your colleagues on
the Finance Committee to make the small business tax cuts
permanent.
Many of us want to plan ahead, whether it is to grow our
businesses, sell our businesses, or pass on what we have to our
children or employees. The expiration of several tax benefits
in 2025 will limit our ability to implement expansion or
transition plans for our businesses.
We look forward to working with you on ways to improve the
Tax Code through legislative action, and we appreciate your
attention to the ongoing benefits of the Tax Cuts and Jobs Act
for the small business community by holding this hearing.
Thank you so much.
[The prepared statement of Ms. Slaughter follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Senator Rubio. Thank you, Dr. Slaughter.
Mr. Lettieri.
STATEMENT OF JOHN LETTIERI, CO-FOUNDER AND PRESIDENT, ECONOMIC
INNOVATION GROUP, WASHINGTON, DC
Mr. Lettieri. Well, good afternoon, Senator Rubio, Ranking
Member Cardin, and members of the Committee.
My name is John Lettieri. I am the president and CEO of the
Economic Innovation Group, a bipartisan research and advocacy
organization. Thanks for inviting me to testify today regarding
Opportunity Zones.
Opportunity Zones are the most innovative and ambitious
Federal attempt to encourage private investment in low-income
communities in at least a generation. While this incentive was
designed to support a wide variety of needs, its central
purpose was to drive investment into operating businesses in
underserved areas, particularly new ventures and existing
small- to medium-sized businesses poised for growth. This
fundamental goal must now be reflected in the rulemaking
process in order for Opportunity Zones to meet its full dynamic
potential.
Before going further, I want to briefly address the issue
that prompted the development of Opportunity Zones in the first
place, namely the uneven economic recovery from the Great
Recession.
While there is much to celebrate regarding the strength and
resilience of the U.S. economy today, far too many communities
are still being left on the sidelines. The geographic
distribution of jobs, businesses, and wage gains during the
recovery has been highly concentrated.
One finding from a forthcoming EIG report helps to
illustrate this point. As of the end of 2016, less than one-
quarter of U.S. counties have recovered the businesses lost to
the Recession. Regional inequality is a growing challenge, and
Opportunity Zones is the first major Federal effort since the
Recession to address it.
The first phase of implementation was the selection of the
Opportunity Zones themselves, the areas where certain
investments would be eligible for the tax benefit. Congress set
a national framework for eligibility and tasked governors with
selecting and submitting their nominations to Treasury based on
local input and priorities.
Meeting the tight deadline in a thoughtful manner required
a Herculean effort on behalf of governors, their staffs, their
local partners, as well as officials within the Treasury
Department, and all parties involved rose to the challenge.
Governors selected significantly higher-need places on average
than the law required but worked hard to strike the appropriate
balance between local need and market opportunity.
The following statistics are from EIG's analysis of the
nearly 8,700 Opportunity Zones nationwide. First, the poverty
rate in the average Opportunity Zone tract is 31 percent, and
the median household income is only 59 percent of its State or
regional median. Approximately 10 percent of the U.S.
population now lives in an Opportunity Zone, and minorities
make up 56 percent of that population.
Governors were intentional about including rural areas and
nominated a proportional number of rural Census tracts in terms
of what was eligible.
According to data from the Urban Institute, fewer than 4
percent of the designated tracts have experienced rapid
socioeconomic change since the year 2000, and three-quarters of
the zones are located in ZIP codes that have seen at least some
level of post-Recession employment growth. These findings
demonstrate the dimensions of economic need in the average
Opportunity Zone as well as the opportunity itself.
The success of the first phase of implementation helped to
accelerate the grassroots momentum and interest we see around
the country today. I have spent the last 10 months traveling to
audiences around the country, meeting with various stakeholders
in the private sector, the public sector, the philanthropic
sector, and I can say there is tremendous excitement.
So what will it take to turn market interests into investor
action and community benefit? While there are many factors in
play, realizing the potential of Opportunity Zones hinges first
and foremost upon timely and effective regulatory rulemaking,
and the rules themselves must be from the outset geared to
facilitate investment in operating businesses, not simply real
estate.
To that end, Treasury must address the following threshold
issues. First, we need definitional clarity. The statute gives
Treasury broad latitude to define a number of important
requirements and tests, including issues related to the
eligibility of an Opportunity Zone business and the nature of a
qualifying investment. These rules must be designed with
practical considerations and basic market flexibility in mind.
Second, timing clarity. Qualified Opportunity Funds, the
vehicles through which all Opportunity Zone investment must be
made, need adequate time to raise capital, conduct due
diligence, and build their portfolios.
And, third, clarity about the benefit. The Opportunity Fund
structure is one of the most important features of this
incentive precisely because it is the key to facilitating
investment in businesses. Investors have a number of questions
regarding how fund-level activity, including the sale of a
portfolio asset, impacts the tax benefit.
These issues are central to the success of Opportunity
Zones and must be addressed before the market can move its
scale.
My primary hope for this policy, one shared by State and
local officials, community organizations, and investors alike,
is that it will succeed where other policies and programs have
fallen short, namely by providing a true lifeline to
entrepreneurs in underserved and overlooked communities
nationwide. I firmly believe this goal is within grasp.
So thank you for holding this hearing, and I look forward
to answering your questions.
[The prepared statement of Mr. Lettieri follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Senator Rubio. Thank you.
Mr. Arensmeyer.
STATEMENT OF JOHN ARENSMEYER, FOUNDER AND CHIEF EXECUTIVE
OFFICER, SMALL BUSINESS MAJORITY, WASHINGTON, DC
Mr. Arensmeyer. Senator Rubio, Ranking Member Cardin, and
fellow members of the Committee, thank you very much for
inviting me to speak with you today.
I was a long-time small business owner prior to founding
Small Business Majority 13 years ago. With our network of
58,000 small business owners across the country and eight
regional offices, we actively support public policy solutions
and deliver resources to entrepreneurs in order to drive a
strong, inclusive, small business-centric job-creating economy.
Because Congress is considering making the tax cuts that
were in the tax law permanent, I think it is important to take
a look at where we are and what the tax law does and does not
do.
As the Ranking Member has stated, the law was a missed
opportunity to foster entrepreneurship primarily benefiting
large corporations and wealthy individuals, not Main Street
small businesses, while dramatically increasing the deficit by
$1.5 trillion.
First, a top priority of this legislation was to slash
corporate tax rates from 35 percent to 21 percent, even though
only 5 percent of small businesses pay corporate taxes.
Second, the law's treatment of pass-through income gives
the bulk of the benefits to the wealthiest pass-through
entities rather than to Main Street. Let us remember that less
than 2 percent, exactly 1.7 percent of all pass-through
businesses, with average profits of three-quarters of a million
dollars account for the majority of all pass-through income.
Data from the Joint Committee on Taxation reveals a
whopping 44 percent of the new pass-through deductions; $17.8
billion will benefit approximately 200 individuals making $1
million or more. By 2024, this skewed benefit will almost
double to $31.6 billion.
Moreover, according to the JCT report, the majority of the
2018 tax reduction benefit will go to the top 2.3 percent of
pass-through firms, and by 2024, that percentage drops to 1
percent.
Clifton Broumand, owner of Man & Machine, a medical
keyboard and mouse manufacturer in Landover, Maryland, echoes
these facts, noting that the tax bill was designed for
businesses at the top of the food chain, not businesses like
him.
Jessica Jolly, a solo-entrepreneur, digital skills coach in
Evanston, Illinois, concurs saying the tax law has not done
anything to help incentivize small business growth or
retention.
Recent polling from ZipBooks found 88 percent of small
business owners say the new tax cuts have had no impact on
their hiring decisions.
This is why last year we proposed a different solution that
would have benefited small businesses from the bottom up by
allowing businesses to deduct their first $25,000 in business
income with a phase-out at higher income levels. This would
have ensured a significant direct benefit to true Main Street
businesses as opposed to large businesses, hedge funds, and the
very wealthy.
Our proposal appealed to Nancy Clark, owner of Drive Brand
Studio, a 10-person marketing and PR firm in North Conway, New
Hampshire. She noted that the 2017 tax cuts have not done
anything for her, and that a bottom-up approach would have
helped small businesses by allowing them to truly reinvest in
their businesses.
Third, the complexity of the new deduction means that any
savings will likely go toward tax professionals to help
entrepreneurs navigate the new law. Indeed, the National Small
Business Association found in a survey earlier this year that a
mere 7 percent say they think filing taxes will become easier
under the new law.
And, finally, a Tax Code with a large gap between top
individual rates and to pass-through rates will encourage some
wealthy individuals to game the system by simply declaring
themselves pass-through business entities.
But given what the law is, what can we do going forward? We
have some recommendations.
To echo what John has said, we need to ensure that
Opportunity Zone guidelines are designed to benefit Main Street
small business owners rather than focusing on incentivizing
real estate development.
We need to make the new markets tax credit permanent. It is
expiring next year.
We need to align form 1099 reporting thresholds and
streamline income reporting for independent workers.
We need to identify and fix tax issues unique to micro-
enterprises and freelancers, such as burdensome quarterly tax
filings.
We need to establish a standard business deduction for
independent entrepreneurs.
And, finally, we need to finally pass health care tax
equity for the self-employed so that freelancers can deduct
their health care expenses from their FICA tax obligations,
just like other business entities.
I am happy to discuss these recommendations in more detail
with the Committee.
Thank you.
[The prepared statement of Mr. Arensmeyer follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Senator Rubio. Thank you.
And, finally, Ms. Bruckner.
STATEMENT OF CAROLINE BRUCKNER, MANAGING DIRECTOR, KOGOD TAX
POLICY CENTER, AMERICAN UNIVERSITY, WASHINGTON, DC
Ms. Bruckner. Committee members and staff, my name is
Caroline Bruckner, and I am a tax professor on the faculty at
American University's Kogod School of Business. I also serve as
the managing director of the Kogod Tax Policy Center, which
conducts non-partisan policy research on tax and compliance
issues specific to small businesses and entrepreneurs. We have
two key areas of expertise--gig economy and 1099 workers--their
tax compliance issues as well as women business owners and the
Tax Code.
Thank you for inviting me, and by extension, the AU
undergraduate students in my Federal Income Taxation class, who
are here with us today, to talk about expanding opportunities
for small businesses through the Tax Code.
I am going to speak quickly because I have a lot to say.
This Committee has a long history of dating back to its
days as a Senate select committee in the 1950s of working on
behalf of America's small businesses on tax issues and has held
more than 40 hearings over the years on tax-related concerns of
small businesses.
I should know. Prior to joining AU's faculty, I served on
the staff of this Committee from 2009 to 2014, ultimately as
Chief Counsel. My work on this Committee led me to conduct
groundbreaking research published in 2017 in a report entitled
``Billion Dollar Blind Spot--How the U.S. Tax Code's Small
Business Tax Expenditures Impact Women Business Owners.'' There
is no question that taxation plays a key role in the survival
and growth of small businesses, primarily through its effect on
equity infusion. In fact, it is also a fact that 99 percent of
women-owned firms are small businesses.
Existing research generally and by this Committee in
particular, specifically Senator Shaheen, has consistently
found out that--has consistently found that women business
owners struggle to access capital to grow and scale their
businesses. This is a common complaint among smaller firms. It
is not unique to women-owned firms, just more acute.
In ``Billion Dollar Blind Spot,'' we detail the legislative
history and congressional intent to provide access to capital
and opportunities for growth to small businesses with four tax
expenditures: first, Section 1202, 100 percent exclusion of
capital gains tax for investment in qualified small business
stock; Section 1244, ordinary loss treatment for investments in
qualified small business stock; Section 179, accelerated
depreciation for small businesses; and Section 195, which is
the $5,000 deduction for qualified startup costs.
This research is particularly relevant in today's economy
because although the 12 million women business owners operating
today account for 40 percent of all U.S. firms, they remain
small businesses, primarily operating as service firms, and
continue to have challenges accessing capital.
Women of color are leading this charge. These firms grew at
a rate of 163 percent during the last 10 years, and today,
women of color own 64 percent of the new women-owned businesses
launched each day.
Yet despite this extraordinary growth, our report is the
first to assess how more than $275 billion of tax expenditures
targeted to help small businesses access capital and grow
impact women-owned firms, and we found that three of the four
small business tax expenditures we studied are so limited in
design that they either explicitly exclude service firms--and
by extension, the majority of women-owned firms--or could
effectively bypass women-owned firms who are not incorporated
or who are service firms with few capital-intensive equipment
investments altogether.
Our survey data of over 500 women business owners
corroborates these findings and nevertheless suggest that when
women-owned firms can take advantage of tax breaks, they do.
Our research also suggests the immediate need for Congress
to conduct oversight into a formal accounting as to how tax
expenditures create opportunities for women-owned businesses to
access capital.
Our research shows that Congress and stakeholders have a
billion-dollar blind spot when it comes to understanding how
effective small business tax expenditures are with respect to
women-owned firms.
In addition, Congress may have doubled down on its billion-
dollar blind spot as part of tax reform. Two key provisions of
the bill reflect additional taxpayer-funded investments that
our research suggests are less favorable to women business
owners.
For example, according to JCT, more than 90 percent of the
$415 billion revenue loss generated from Internal Revenue Code
Section 199A will flow to firms with income of more than
$100,000 in 2018. However, 88 percent of women business owners
generate revenues less than $100,000.
This inequitable distribution is even more pronounced when
considered at higher income levels. Only 1.7 of women business
owners have receipts of $1 million or more, but 44 percent of
the revenue loss will flow to businesses with $1 million or
more of income. And those women business owners with revenues
of $1 million or more are more likely to be in services and
excluded altogether.
This Committee should be congratulated on holding this
hearing and immediately set to work to develop the needed
research to understand how and whether existing tax incentives
create opportunities for women-owned firms to access capital.
As next steps, we recommend the Committee employ the
following strategies to develop the necessary research on these
issues, including requesting the congressional tax-writing
committees hold joint hearings together with this Committee on
the small business tax issues identified in our research and in
this testimony and, two, requesting the Joint Committee on Tax
develop estimates on how small business expenditures impact
women-owned firms in terms of the revenue loss distribution.
In addition, we are so pleased to see our recommendations
to align the 1099 filing recommendations be supported by small
business majority. Hopefully, with their support, we can get
this finally done over the finish line.
We stand ready to aid the Committee in this important work
on behalf of millions of small businesses impacted by these
issues.
Thank you so much, and I am happy to answer any questions
that you might have.
[Then prepared statement of Ms. Bruckner follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Senator Rubio. That was incredibly impressive.
[Laughter.]
We are going to have a vote in a few minutes. I am not
going to leave. We are going to keep this train running.
So let me defer to the Ranking Member so he can go vote,
and then we will figure it out from there.
Senator Cardin. We apologize about a vote being scheduled
at 3:15. We do not apologize for the vote because it is opioid
legislation, which is strongly supported on a bipartisan basis,
but we will have to go out to vote and come back.
Senator Rubio. Actually, I am still waiting for my alert on
this phone. I did not get it on this phone.
[Laughter.]
So if anyone is listening, it malfunctioned on this one.
Senator Cardin. I do not think it started yet, the vote. It
did? The alert? It came down.
Senator Rubio. I did not mean to throw us off track. I
apologize.
Senator Cardin. Again, thank all of you for your testimony.
I think I want to start on the targeting of the tax bill.
The numbers that you have given us on the $415 billion in
regards to the 199A--I know there are other provisions that
affect small businesses that are in the bill, but that was the
largest single-dollar number, was the pass-through deduction,
Section 199A.
And it is kind of shocking, the numbers that you are giving
us, as to the number of women-owned businesses, minority-owned
businesses. The amount of the $415 billion received by those
businesses is going to be kind of small.
So if you have $415 billion in the Tax Code, where is the
best place for us to use it to really reach those small
businesses that need attention in our system?
Ms. Bruckner. I think that the first thing that you need to
consider when you are assessing effectiveness of tax
expenditures to give access to capital to small businesses is
that you cannot limit it by industry or by income.
So when you design tax incentives that are specific to
manufacturing or construction or capital-intensive expensing,
what you are doing is bypassing the majority of women-owned
firms who are in services that do not have those expenses that
are underrepresented in those industries, and the fact is women
business owners are where the growth is with respect to small
businesses in general. They have grown at a rate of over 58
percent, which is well in excess of the average over the last
10 years.
Senator Cardin. Yes, sir.
Mr. Arensmeyer. Senator, I think if you are deciding how to
spend $415 billion, that is a lot of money. I mean, we were not
actually in favor of an unpaid-for cut, to begin with, just
because we have a fairly robust economy, and it weakens the
ability of the Government to take steps when we do not have as
robust an economy.
That said----
Senator Cardin. Let me put this in a different way, so you
understand. I think that was added to try to develop some
degree of justification that smaller companies have tools in
this bill.
I agree completely with you that it should not have been
unpaid for. The whole bill should have been paid for.
But if we had that amount of relief coming to small
businesses, how can we better target?
Mr. Arensmeyer. Well, I mean, right now, the numbers speak
for themselves. You can just do the math. The combination of
the amount of income of the very small number of large pass-
through entities and the marginal rate being much higher means
you get a very skewed distribution that does not really impact
Main Street businesses.
So we have proposed--and, again, our proposal is just an
idea--flip it around. Do it from the bottom up. Give the
biggest tax break to the people at the bottom, and you do that
by giving kind of a fixed amount. Phase it out at a certain
point. We are not wedded to that. There are other ways to do
it.
I think you have to look at where is the money going, who
is benefiting from the money, and figure out is that really
where you want to put the biggest bang for the buck.
Senator Cardin. Thank you.
Mr. Lettieri, I want to talk about Opportunity Zones. I
support Opportunity Zones, so let me just qualify that. And I
thank Senator Scott and Senator Booker for their leadership in
getting that into the tax bill.
But I am concerned as we look at well-intended tax
provisions, Puerto Rico, for example, in which I think most of
us would say that we could have done a better job in the tax
break we had in Puerto Rico. The benefactors of the tax break
are going to be investors. We want the investors to invest in
underserved areas and in longer-term investments. I get that,
but the profits could very well be taken out of the community
and invested anywhere the investor wants to invest it.
What lessons have we learned from the past so that as we
implement these Opportunity Zones, we really get permanent
commitments to underserved communities?
Mr. Lettieri. Well, Senator, thanks for the question.
It is important to understand that Opportunity Zones are an
equity incentive, and so there is an exchange of wealth
happening as part of that investment to a business owner.
Unlike a debt investment, which satisfies a different set of
needs, equity is key to growth for growth businesses. It is
also important to the business owner in terms of what it
provides them as a wealth event in addition to a chance to grow
their business. So----
Senator Cardin. But I understand that the tax incentive is
lower tax rates on the----
Mr. Lettieri. It is. It is a capital gains incentive to the
investor as to effectuate a change in behavior, but what they
have to do in order to get that incentive is to invest equity
in a business or business property within the target areas. And
by definition within the statute, the incentive skews very
heavily towards small and new businesses, ones that are poised
for growth.
So I think that alone helps to address some of the scoping
concerns because of the way it is designed. There is not the
same type of potential for either misdirected incentive dollars
or the kind of leakage that you see going to larger
corporations that have maybe a toe in the designated area but
not truly are of those areas.
Senator Cardin. I would just underscore if we do not get it
right from the beginning, there is going to be a missed
opportunity for the full benefit.
I thought your testimony was pretty clear about that, and I
appreciate your testimony. I would just urge all of us to stay
focused on how this is implemented to make sure we do not end
up, 10 or 15 years from now, in the same situation and wonder
where the money went.
Mr. Lettieri. I agree.
If I could just add one other thing to that, I think
Opportunity Zones reflect a lot of the concerns about the
limitations of policies of the past, and that was baked into
the design, both in the long-term nature but also to Ms.
Bruckner's point, the intended flexibility of the incentive,
not dividing it by sector, because complexity is subsidy to
larger interests when it comes to the Tax Code. So the more
simple and straightforward you can make it, the easier the
uptake is going to be among smaller and newer businesses.
And that is one of the things we have seen as a failure in
previous programs, where the business owners themselves said
the complexity was a factor in whether or not they used it.
Senator Cardin. There is no question. Complexity for small
businesses is critical. They do not have staff to handle
complexity, and I would just urge we get back one more time to
199A.
I have heard real complaints from small companies as to the
complexity of the 199A calculations, let alone the fact that it
is not permanent.
So I think you are absolutely right, and I am glad it is
broader in that scope.
Thank you, Mr. Chairman.
Senator Rubio. Thank you.
I am going to defer my time.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman and Ranking Member. I
appreciate this opportunity.
I used to have a retail shoe store, which was a small
business, and so have had a focus on small businesses. Also, I
try to get back to Wyoming pretty much every weekend, and when
I am traveling, I like to get into some businesses, usually
businesses that I am not familiar with, because one of the
things that I have found is that any business that I am not
familiar with looks pretty simple until I see what kind of
decisions they have to make--how do they get their employees,
how do they train their employees, how do they advertise, how
do they get their customers, how do they treat their customers.
Small business definitely has a tough road because they
cannot afford the expertise that the big companies can afford.
The tax bill, of course, was focused on economic
opportunity, and some of the biggest opportunities are with
some of the biggest companies, and a lot of that was
repatriating money from overseas so that it could be invested
in the United States. And I am hoping that some of that will be
invested in small companies.
I would report, though, that in spite of the tax cut,
revenues this year are up $19 billion over last year, which is
above the year before, and that is without the September
estimated taxes, which is usually the biggest tax receipt
month, other than April. That would be the biggest tax month
resulting from this.
And when we talk about a hundred--a trillion-and-a-half
deficit, you have got to remember that that was specified that
it would be static scoring. Static scoring means that the CBO
when they were evaluating this had to ignore any effect that
the bill would have. Then economists told us that if we could
have at least 2.4 percent GDP, this would be paid off over a
10-year period.
Now, I mentioned the $19 billion ahead in expenditures this
year were $240 billion ahead. So the deficit does not just come
from the tax cut. In fact, the tax cut is doing pretty well,
but it is still spending.
Now, Ms. Slaughter, the NFIB recently--the National
Federation of Independent Business--showed that a majority of
small businesses are optimistic about the effects of the tax
reform.
Let me mention some of their findings. Eighty-seven percent
of the member businesses--these are independent businesses,
small businesses. Eighty-seven percent of the member businesses
believe the new tax law will have a positive effect on the
economy. Seventy-five percent believe it will positively affect
their business, and 70 percent anticipate the new tax law will
positively affect their personal tax situation.
Given the broad range of small businesses represented by
the U.S. Chamber Small Business Council, what are you hearing
from members about being easier to invest, to hire, to grow
after the tax reform? Are there particular elements of the tax
reform, whether for individual owners or businesses, that have
helped the most?
Ms. Slaughter. Thank you very much, Senator.
Let me try and address some of your questions.
Yes, I think that there are a number of examples that are
both general in nature and specific in nature.
The most frequent comment that I heard from my clients in
preparing for this hearing today was that the reinvestment was
put into wages and employee benefits. Now, that is not a
scientific data point at all. That is strictly anecdotal from
my experience.
Everything from the employer paying more of the proportion
of the employee health care cost to adding additional
benefits--Roy O. Martin, for example, has added benefits,
paying more of the employee cost, and has also put a pharmacist
on their staff to help reduce the cost of prescriptions.
Senator Enzi. Thank you.
Ms. Slaughter. So we are hearing a lot of those things.
Senator Enzi. My time is pretty limited. So I will ask in
writing for each of you to answer that question.
But I want to ask one question on Opportunity Zones. Mr.
Lettieri, can you mention some ways that we can evaluate and
track the success of Opportunity Zones?
We have got 32 of those zones in Wyoming, and it is largely
rural, but I do not know what metrics to use to do that in
populated or unpopulated areas.
And, again, I would be interested in all of your answers,
but in 20 seconds, I am going to be out of time.
Mr. Lettieri. Senator, thank you.
I think we are a data-driven organization, so more is
better when it comes to analysis from our standpoint.
There are a few things that we can do. One is we have a
great natural experiment. Only 25 percent of the eligible areas
were chosen as Opportunity Zones, so we should look at their
performance over a long period of time versus those that were
not chosen and see what type of trajectory change we see as a
result of the Opportunity Zone designation.
Opportunity Zones are going to have a different effect in
different places based on local conditions. It is a very
localized, decentralized incentive policy, and so we also have
to look at what are the local communities doing in terms of
their local policy and regulatory efforts and their practical
support to administer Opportunity Zones and enhance the value
of the capital coming in for those who actually live in the
community.
I think with those two measures, looking broadly at the
performance of the selected zones versus those that were
eligible and not selected, taking a careful look at best
practices at the local level to understand what has worked and
not worked as well in terms of the State and local side of
this.
And then, third, we already know today the number of
businesses and jobs that exist in Opportunity Zones as a
starting point. That is a very easy benchmark to say over time
how well do these places do over the next 10 to 15 years of
adding to those two measures.
Senator Enzi. Thanks.
Again, I hope we can submit questions for everybody to
answer.
Senator Rubio. Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman.
Thank you all for being here.
This question is really for every one of you. Last June,
the Committee held a hearing on tax reform, and during that
hearing, I read a statement from New Hampshire's 2017 Small
Businessperson of the Year, who also happens to be the CEO of a
company called Celdara Medical, which is a biomedical company
in Lebanon, New Hampshire.
And what Jake said in that statement is that he wanted tax
reform to help simplify the tax-filing process, and he said
this is not about paying less taxes. This is about spending
less time and energy on taxes and knowing that we are doing
them right.
Now, in the last couple of weeks, we have heard from Jake
again who says that tax compliance results in large amounts of
distraction expense and wasted time, and that the tax law has
not addressed his concern. And he says time is the most
important resource that a small business has.
So what steps can we take in Congress, now that that tax
law has already passed, on a bipartisan basis that can help
make the tax-filing process simpler and less painful for small
businesses? Because the tax bill did not do that.
So, Ms. Bruckner, do you want to go first?
Ms. Bruckner. So, Senator Shaheen, one of the key proposals
that was included in the original Senate Finance Committee bill
was a proposal to align the 1099-K, 1099-MISC filing
requirements, and the way it stands now under current law is
that most gig workers and independent contractors that are paid
electronically, they do not hit the filing thresholds of
$20,000 and 200 transactions to actually get the forms they
need to file their taxes.
I did a survey on this and found only 32 percent of the
people I surveyed got any 1099 at all. How in the world are you
supposed to file your taxes if you are not getting any kind of
form from the Government or notification that the IRS knows
what you are up to? And that is a huge problem.
I am coming out with new research that actually estimates
how much it costs in terms of Social Security, and my numbers
are jaw-dropping. I will be happy to submit that to the
Committee later.
Senator Shaheen. That would be helpful.
Mr. Arensmeyer.
Mr. Arensmeyer. Yeah. I mean, I just want to quote from the
bipartisan--I am sorry Senator Cardin is not here--Portman-
Cardin Act that has a number of provisions in it that I believe
have bipartisan support, a safe harbor for employer-only tip
audits if the business fits certain educational and fits
certain requirements, clarification on reporting requests about
tip income, streamlining the S corporation process,
establishment process, release of Federal tax liens on
businesses if they have economic hardship, and other things
like that.
I cannot believe these do not have bipartisan support.
Plus, what Caroline talked about on the alignment, also
there is burdensome quarterly tax filings for freelance
employees. We may be able to go to annual on that.
Establishing a standard business deduction for independent
workers, this is a little bit more out there, but there is a
lot of talk about just the way we do for individuals, set a
standard business deduction. You do not have to take it. If you
want to get all those receipts in a shoe box and count them up,
you can do that, but in fact, if you do not want to, you just
kind of--we come up with a number, and we allow them to do
standard deduction.
So there are a number of things that can be done, none of
which--all of the ones that Caroline and I talked about, I
cannot believe would not be fairly bipartisan.
Senator Shaheen. Mr. Lettieri.
Mr. Lettieri. I guess I would add one new category of
things we should think about because the compliance burden
question is an important one.
We should be thinking about new businesses as a distinct
subgroup of small businesses and think about how we can build a
tax compliance regime for new businesses that allows an easier
on ramp to viability.
Those first few years are incredibly challenging, and that
is when businesses are most vulnerable. That is when that
precious time resource is the scarcest, and so if we think
about the Tax Code even outside of the dollars and cents,
incentivizing entrepreneurship by easing the on ramp to
compliance, I think that would be a really effective thing for
this Committee to take on.
Senator Shaheen. Thank you.
Dr. Slaughter.
Ms. Slaughter. Thank you, Senator.
I would echo what your Small Business Award winner said.
Time is a great challenge to a small business owner, especially
very small businesses.
I think that one of my clients has 200 CPAs. They are
trying desperately to get information out to their small
business clients. They find that whether it is sent in an email
or a newsletter or whether they are holding seminars to try and
educate them, there is too much noise out there. So small
business owners, we do not think have even realized the
possibilities and the extent of how they might benefit from the
tax cuts, and they will not until they go through this first
cycle since the IRS guidelines are still sort of coming out in
some areas.
So I think anything that Congress can do to help get
information out, communicate and simplify, would be wonderful.
Senator Shaheen. So you are not actually suggesting a
simplification. You are suggesting that what we need to do is
ask the SBA to provide information about tax filing?
Ms. Slaughter. I think both would be tremendously helpful.
All simplification is good. I would echo what the panel has
said. It is very, very important.
Senator Shaheen. Thank you.
Thank you, Mr. Chairman.
Senator Rubio. Thank you.
Senator Young.
Senator Young. Well, thank you, Mr. Chairman. This is a
timely hearing.
As I travel around the State of Indiana, I just encounter
countless businesses that are enjoying the impact of tax reform
in a very positive way, and it is important, however, that we
continue to optimize the Tax Code. My hope would be that we do
not wait another 31 years before we fix whatever, moving
forward, are deficiencies in the Code.
In Indiana, we are really excited, as I know some of the
other States are, about this Opportunity Zone designation, and
I commend you, Mr. Lettieri, as well as your organization, on
conceiving of the concept and working with Senator Scott to
help champion it and get it into law.
We have 156 Census tracts that have been designated and
certified as Opportunity Zones. I would associate myself with
everything Mr. Enzi asked about with respect to reporting
requirements and tracking. If there is anything we can do
statutorily or need to do moving forward, I hope you will work
with this Committee, members of this Committee on that. I am
very interested in measuring success, as I know you are.
What recommendations do you have, Mr. Lettieri, for
localities and States to maximize investments in these
designated zones?
Mr. Lettieri. Thanks for that question, Senator Young.
I think it is important to start with the recognition that
an Opportunity Zone designation is not a guarantee. This is not
a grant program. It is not a tax credit allocation.
And that on the community side, one of the things we have
tried to work very hard at educating folks on is they have to
do something to prepare. This is not just going to happen to
them by default. So what does that mean? That means that on the
local level, you need to be proactive at working with the
different stakeholder groups that can build a strategy for what
these Opportunity Zones in a given community are going to look
like. There is not a national answer to that question. There is
a local answer to that question, though, so taking a proactive
approach.
I thought Indiana did a fantastic job with their selection
process, which really sets up the next step. They involved a
lot of local stakeholders. They did it in a fairly transparent
way. The governor has his selections reviewed by an outside
board of stakeholders. That was impressive to us, and I think
it shows a real forward-leaning momentum.
But this should be deployed as part of a broader strategy.
Capital is one of the challenges these communities face. It is
not the only challenge. So this will be a much more effective
incentive tool if it is part of a broader framework that
includes workforce training and all kinds of other issues.
Senator Young. Thank you.
I have launched an agenda, as I travel around the State of
Indiana. We call it our Fair Shot Agenda, making sure that
every Hoosier and really every American has a fair shot of
success, and we leave it up to the individual person to define
success. We just want to remove barriers, and where
appropriate, make sure that Government is a catalyst so that
people can realize their dreams.
One centerpiece of that overall agenda focuses on
addressing heat gaps in workforce training, including through
apprenticeship programs and career and technical education.
How in your mind might Opportunity Zones be integrated in
broader efforts that aim to address barriers to upward mobility
and specifically perhaps integrated with respect to some of
these workforce training issues?
Mr. Lettieri. Well, I think, again, to the earlier
question, having a workforce-focused approach that runs in
parallel to the capital-focused approach of Opportunity Zones
is really critical.
One of the things we see as we do research about distressed
areas nationwide, it is one of the strongest and clearest fault
lines between prosper in communities and those that are not, is
an education and training gap. So we have to equalize that
playing field in a better way for the capital and the
opportunity to flow.
One smart approach locally is going to integrate workforce
training oriented towards the types of businesses and
investments that you are likely to see through Opportunity
Zones, so that local residents can actually benefit from this
and be integrated in as new opportunities open up.
Senator Young. Can you discuss what steps must be taken to
facilitate the greatest amount of investment in Opportunity
Zones across Indiana and the U.S.? Maybe you have something to
add to what you have already said which--and I think you have
been really clear, and it is my sense of the construct here. It
is really up to the localities to ensure that they are as
fertile ground as they can be, as attractive investments as
they can be for would-be investors--you have just changed the
hurdle rate for given investments, you meaning your
organization working with Congress and this President in
establishing these Opportunity Zones.
But are there other steps that we can take to facilitate a
maximum amount of investment in Opportunity Zones?
Mr. Lettieri. Both in terms of amount and type, I think we
are at half time right now. Half time was getting the bill
passed and seeing that first phase of implementation and the
zone designation.
It is not a guarantee that the implementation process, the
regulatory rulemaking will follow through to the full
potential, and I do not say that in an ominous way. I say that
is an open question. We know, based on past precedent, that
most Federal policies aimed at these very same types of
outcomes have fallen short in the rearview mirror of the types
of goals that we all would hope to see.
So the rulemaking has to be very intentional to avoid those
same missteps, particularly in the space of operating business
investment. That is the core, the beating heart of Opportunity
Zones, if it is going to succeed. It is because it draws
capital into new and small businesses that are poised for
growth.
So if the rules are oriented in that direction, the capital
is not going to be a problem. There is tremendous interest.
There is tremendous potential, and I think we are falling well
below our potential as a country in terms of matching capital
to opportunity around the country.
But the rulemaking is going to be key. That is the first
question every investor is asking. It is the question that is
going to be determinative of which businesses qualify. If we do
not get that right on the front end, I think to Senator
Cardin's point earlier, it is very hard for a local community
to do everything right. They may still be stymied at the end.
Senator Young. Well, we will be watching implementation
closely and helping however we can, I know in a bipartisan way,
so thank you.
Senator Rubio. Thank you.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
I want to just talk a little bit about the new economy and
about the challenges you have. I just want to remark that a
1099 is not a Government form. It is authorized and mandated by
the Government. But to go back and take a look at the
Affordable Care Act, actually expanded 1099 requirements, and
it was an abysmal failure because, all of a sudden, no one
knew. People who were legitimate businesses were having to file
so many of these things that it added burden onto those small
businesses. So I think we are challenged.
I am intrigued by some kind of standard deduction. The
Schedule C-EZ has a mechanism for like a standard deduction.
Can someone comment on that? Does not the Schedule C-EZ
basically give us a vehicle to do a standard deduction for
small business?
Mr. Arensmeyer. Well, I think what we are suggesting is you
would have a standard deduction on the business, on the
business income. It would be a different amount than the
standard.
You are talking about the individual standard deduction----
Senator Heitkamp. Right. I am talking about----
Mr. Arensmeyer [continuing]. Instead of taking mortgage or
charitable? This would mean instead of taking business
expenses.
Senator Heitkamp. Well, that is part of the complicating
features, which is that if you are a sole proprietorship, you
are going to file a Schedule C. If you are organized under some
kind of limited partnership or under some kind of Subchapter S,
you are going to have a whole lot more paperwork. And you could
find some mechanism to transfer that C-EZ form into your K-1's,
whatever you want to look at, when you are looking at a
Subchapter S filing.
But one of the complicating features is we are doing
business in different kinds of mechanisms and under different
kinds of business structures. So when we look at this, we can
say, ``Look, why do we require thousands of dollars of
recordkeeping if your tax liability is going to be less than
$2,000?'' It is ridiculous.
So I think we all have an idea of where we would draw that
line and basically say we are going to make it a presumption.
You do not have to keep any records. You do not have to worry
ever about--as long as you have the total gross income right,
you do not ever have to worry about an audit because we have
got your back on this.
And it seems to me that that is attractive, but it also
does not get us in that spot where our small businesses are
really doing the kind of recordkeeping they need to do to
identify how profitable they are. And so those tax mandates
tend to drive that small business person out.
I will give you a ``for instance.'' I used to be the tax
commissioner in North Dakota, and I would find someone who
could take the most crumpled up car and put it back exactly the
way it was, had absolutely no interest in business, but could--
greatest body man in the world, right?
So we have got to figure out how we can provide the tools
for someone who is entrepreneurial like that to actually feel
comfortable filing tax returns, and I think some of these
shortcuts and mechanisms are valuable. And I am very interested
in unique ideas, recognizing that not everybody does business
as a sole proprietor.
Now, with that said, I would also say that I think when
you--for all of the discussion we have had about tax reform, my
small businesses are coming and saying there is no certainty to
this for us. You have given certainty to the C corps, but you
have not given certainty to the S corps. You have not given
certainty to the limited liability partnerships. So how do I
now do long-term planning on investment if I am operating under
that legal structure for my business?
So I think we need to have a real conversation about how do
we provide that certainty going forward to these smaller
businesses that are operating not as C corporations. I mean, it
is a huge percentage of North Dakota businesses are Sub S's or
they are limited liability partnerships or they are even sole
proprietorships. So that is going to come with a price tag.
But it seems to me that the role of this Committee is
really one of advocacy. I mean, a couple members here are on
the Finance Committee, but to me, their job is to make it all
work and to make the system equitable and not be that advocate
for the truly small business that we want to help.
So I want to thank the Chairman and the Ranking Member for
putting this together. I think it is really important that we
have those discussions about where we have failed small
business in terms of predictability under this Tax Code and how
we can expand their opportunities, but I think we also need--
with all due respect, I do not think that this Tax Code
simplified anything.
I mean, if I were writing something, it would not be this
if I wanted to simplify it.
So let us keep believing that we can do a better job with
the Tax Code.
Thank you, Mr. Chairman.
Senator Rubio. Thank you.
So I am going to ask my questions now as I await for my
colleagues to return at some point, and then I will leave and
go vote and come back. But I have questions, and I want to make
sure I ask them because I believe we have exhausted--well,
there is nobody here. So I think we have exhausted the
questions.
[Laughter.]
I know you are here, but you already asked your questions.
So I know you may have a follow-up.
Let me just start. My concern--I am a big fan of the
Opportunity Zone concept, and I believe it gives an
extraordinary opportunity to sort of create, in communities
that have been forgotten in America, some of the same benefits
that have driven investment overseas. People have gone overseas
to make their investments because they have better tax
treatment or they found labor costs or whatever it might be,
and I think we can create the same competitive advantage here
in distressed communities.
The concern is always that in the end, the communities
themselves may be the site of the investment, but not the
beneficiaries of the investment.
So I would just ask everybody on the panel. What needs to
be done, or what are the markers that we need to be looking
for, whether it is through local government or anything we can
do from here, to ensure that the local community, where the
investment is going into, is also the beneficiary of that new
investment? Because you can open up a new facility somewhere
but not necessarily help the people who live in that area and
have been left behind. So what are the sorts of things that
would help ensure that the locations of these investments also
happen to benefit from them?
Ms. Bruckner. One of the things that you can do--and I have
a little bit of experience with comparable instruments because
of the GO Zone, the Gulf Opportunity Zone Act, which was passed
as part of rebuilding Louisiana in the wake of Hurricane
Katrina.
And one of the things that we did not do enough of was
appropriate oversight from Treasury and developing metrics that
communities had to hit in terms of economic activity.
Now, of course, that can be challenging, and it is not like
a one-size-fits-all standard, but aspirational or specific
metrics that are recorded and tracked by Treasury could be one
way that you could have appropriate oversight that is not too
cumbersome and yet still be able to fundamentally identify
whether or not what you are doing is working and if your
investment is really benefiting the community.
Senator Rubio. Anyone else have a suggestion?
Mr. Lettieri. Great question, tough question, because there
is more than a Federal role to play. In fact, I would argue
once the regulations are done, there is mostly a State and
local role to play in ensuring the local benefit. Because this
is a tool, not truly a program, it is not an up-front
allocation. It is not a tax credit, not a distribution of a
scarce resource like a grant or a tax credit. So there is a
fundamentally different construct here that requires the local
community to really opt into a strategy.
And so because of the nature of the investment being a
long-term--it is a long-term incentive tied to capital gains.
It puts the investor on the same side of the equation as the
business they are investing in. If you have equity stake in a
business and you have to wait a very long time to realize any
kind of tax benefit, you also run the risk of losing money on
that investment.
So I think that starts in the right place in terms of
putting the investor on the same side as the business they are
investing in, but it also requires a long-term strategy from
the communities themselves in order to ensure that their
particular local needs and conditions are being accounted for
in the deployment of this specific tool. It is just a tool. It
is not a strategy on its own. I think that is the bottom line.
Ms. Slaughter. If I might add one point----
Chairman Risch [presiding]. Please.
Ms. Slaughter. I know that Senator Rubio had to leave for
the vote, but I think this is very important. And I also, like
Ms. Bruckner, had the opportunity to observe good use of Go
Zone opportunities and things that maybe could have been
rearranged a little bit or better focused.
I do think that local chambers of commerce, just as you
described in Indiana, where the governor went out and worked
with grassroots organizations to define and went through a
process--I think that is what it is going to take. I am not
sure that you can make that happen, but I think that by asking
for metrics and oversight, you ought to get those kinds of
things.
I do think that the U.S. Chamber can play a role in that,
and that would help.
Chairman Risch. Thank you very much.
I want to thank all of you for coming, and in case you have
not noticed, you have got a real Chairman now. So this is going
to go a lot smoother from here on.
[Laughter.]
Senator Ernst.
Senator Ernst. Thank you, Mr. Chair, very much, and thanks
to our witnesses for being here for this hearing.
Last year, Congress passed the Tax Cuts and Jobs Act in
providing long overdue tax relief for individuals and
businesses, and under the leadership of Governor Kim Reynolds,
Iowa has followed suit by passing the largest tax cut in our
State's history.
Tax reform is already providing a huge boost for Iowa small
businesses allowing our job creators to grow and in return
reward their employees, which is really great.
Recently, I talked to a woman who owns a trucking company
and a warehousing company in Pella, Iowa, and because of the
100 percent bonus depreciation, her business will be able to
purchase six new semis and spend millions of dollars upgrading
their facility.
I also heard from the owner of Hamilton Redi-Mix, which is
a family-owned small business in Jefferson, Iowa, and as a
result of tax reform, they are providing $1,500 bonuses to
their employees.
I know in Washington, D.C.-speak, $1,500 is not a lot of
money. In Iowa, $1,500 is a lot of money for our employees.
Surveys show that small business optimism is at an all-time
high, and while a record number of small business owners plan
to create jobs and grow their businesses--and it is wonderful.
I am excited about it. I know our small businesses are
excited about it in Iowa as well.
A question for Dr. Slaughter. While this law is a
significant step in the right direction for our small
businesses, there is still work left to be done. I think a
number of folks have acknowledged that. As you mentioned in
your testimony, we do need to make these tax cuts permanent.
Can you talk more about the importance of making the individual
income tax cuts permanent?
Ms. Slaughter. Yes. Thank you, Senator.
I think that it was even mentioned a moment ago by one of
your fellow Senators----
Senator Ernst. I am sure.
Ms. Slaughter [continuing]. That the certainty or the lack
thereof is really a problem for business planning, and so small
business owners face all the challenges we have talked about--
lack of access to capital--serious challenges in terms of
competing for a talented workforce, et cetera.
To have the opportunity to be able to look forward in what
seems to be an expanding economy and realize that I am willing
to go to my lender, I am willing to try and access more
capital, or I am willing to try and reinvest--we have a young
woman who is up here for the opportunity to win a Dream Big
Award this evening. She runs a child care business in Metairie,
Louisiana, and she recently made a $50,000 loan to expand her
business. And it is very, very hard for her to get settled on
the fact that if one thing goes wrong, she has made a very bad
strategic decision.
Small businesses can be working with millions and millions
of dollars or $50,000, but I do think that when people feel
more of a sense of certainty about what is going to happen
going forward, they will continue to make those investments.
And just like you talked about in the capital equipment
area, we have a client who is a big contractor with the
petrochemical industry, and he is going to upgrade his entire
equipment fleet, which is very significant, lots of heavy
construction equipment.
I think that you will begin to see that. You will see those
vendors and suppliers--the John Deeres, the Caterpillars of the
world--who supply those pieces of equipment. It will trickle
down and benefit everyone.
Senator Ernst. Well, and that is great. And, again, we are
seeing the benefit in Iowa, and I know other States as well.
And, hopefully, we can take that step and make those individual
tax cuts permanent.
Mr. Lettieri, thank you very much for the idea of
Opportunity Zones. I appreciate that very much.
In your testimony, you discussed these Opportunity Zones
provisions, which we did have in the Tax Cuts and Jobs Act that
will encourage investment in distressed communities. This was
based on legislation introduced by Senator Scott, and I
cosponsored that as well. I thought it was a tremendous idea.
Iowa has 62 different Opportunity Zones, and many of those
are in rural communities that have seen stagnant economic
growth, persistently high poverty rates, and a declining
population. How can Opportunity Zones help reverse these trends
that we are seeing in rural America in those distressed
communities?
Mr. Lettieri. Thank you, Senator. Thanks for your support
for the Opportunity Zones legislation----
Senator Ernst. You bet.
Mr. Lettieri [continuing]. Authored by Senators Scott and
Booker, and actually, this Committee, quite a few members of
this Committee were early and active supporters of that
legislation.
We are already hearing anecdotally some of the best success
stories coming out of rural America, which I think surprises
some folks. When you think about where there is an opportunity
to do heavier industry, agriculture, some larger-scale
projects, a lot of those are Opportunity Zone Census tracts in
rural communities.
You need to play to your local advantages, though. This
gets back to the earlier question about what is the local role
and how do you develop a template for success.
The capital piece of this gets a lot easier with
Opportunity Zones because you have a group of equity investors
now looking for opportunities in areas they might have
otherwise overlooked, but on the recipient end, you need a
community that is pulling together to really maximize those
assets, those local advantages.
Some of the most dynamic and upwardly mobile places in this
country are still rural America. There is no doubt that rural
America has a lot to offer, but it takes a lot of
intentionality to put this tool to use in the right way.
But, again, even early on, even pre-regulation, we are
seeing some of the early success stories happening in rural
America, particularly in the manufacturing and agriculture
space.
Senator Ernst. Absolutely. And I thank you for that.
Again, aptly named because the opportunity that is being
presented to constituents that I have that would not have had
that opportunity otherwise. So thank you very much for that.
Thank you, Mr. Chair.
Chairman Risch. Thank you, Senator.
Senator Booker.
Senator Booker. Mr. Chairman, thank you very much.
I am really proud of the work. In fact, I think of all the
things I have accomplished in my 5 years, my very short 5 years
in the Senate, the Opportunity Zone legislation I wrote with
Senator Scott and with EIG is probably the most impactful thing
that we have done to deal with the issue, one of the issues
that drove me to run for the United States Senate, which was
dealing with the high-poverty areas, dealing with the
inadequate opportunities for folks who are in low-income areas,
whether they are rural or urban. And I am just really proud and
grateful.
I just was talking to Tim--Senator Scott--on the floor
about some of the technical fixes, which were some of the
issues I want to bring up right now.
As Senator Scott and I were cosponsors on this Committee,
obviously I just want to give a lot of great gratitude to
Senator Ernst and Senator Young for their partnerships.
Our legislative intent was really clear in much, in keeping
with the purpose of today's hearing, which is to bring private
capital off the sidelines into high-impact investments, not
just real estate, but also startups, also small businesses, new
entrepreneurships into stressed communities because the
insanity in our country is that most of the VC dollars, most of
the investment capital in this country only goes to about three
States. It is not equally distributed. But genius exists all
over America. Great ideas exist all over America.
So, John, you laid out in your testimony what needs to
happen on the regulatory side. Is it your view that these
recommendations will help realize, better realize the
legislative intent, to ensure that opportunity fund capital
flows to startups, entrepreneurs, and other small businesses,
not just real estate?
Mr. Lettieri. Thank you, Senator Booker.
Absolutely. I think, again, we should be able to measure
the success over time of Opportunity Zones to the extent it
drives capital to new businesses and supports new business
formation in overlooked areas.
We know the statistics. You mentioned some of them are
dismal, not just in terms of where capital goes, but who
receives that capital. And so we know it matters where you
live, what you look like, who you know, a lot more than it
should in this country. And we can do better using public
policy to close those gaps.
I think that the danger that we are in now in terms of any
time you have a new policy is that the path of least resistance
is to take the most narrow and cautious approach, and that
skews towards real estate-oriented investment for a very simple
reason. Real estate does not get up and walk out of an
Opportunity Zone, and you have a lot more predictability with
where and how you can invest in a real estate project than you
can in a new business or an operating business that is scaling.
If you are not intentional on the front end about designing
a regulatory framework that is particularly inclusive of the
needs of new and growing businesses, you are not going to hit
the mark. You will not do it accidentally. You have to do it
intentionally, and you have to bake that in on the front end.
So that is what we are encouraging the Administration to
really focus on. I think there are definitely things they can
do, and Treasury has wide authority to make sure that the
connective tissue with the regulatory framework is oriented
around your core congressional goal which, as you said, is
business investment.
Senator Booker. I appreciate that.
And that really gives me another point. I know Senator
Risch and I are watching this very closely. We may or may not
retire from the Senate joined together in an entrepreneurial
endeavor.
[Laughter.]
I do not want confirm or deny whether that is true or not.
Chairman Risch. You can bring the capital.
Senator Booker. Yes, sir.
[Laughter.]
But the truth is one element of this that is really, really
important is the data collection element, and Opportunity Zone
markets cannot function efficiently without access to sort of
basic transparent data about Opportunity Zone funds and their
investments. Information about fund size, investment size,
investment type, industry and location are standard and already
collected by fund managers and could be reported at really
little to no cost.
In addition, reporting about job creation and new business
starts and other outcome metrics really was a part of the
original bill. That was the intent of Senator Scott and I.
Most importantly, making the data available will move
capital off the sidelines, but connecting investors about what
is going on out there, connecting them to funds and allow local
stakeholders to align their development strategies because you
and I know how key that is for local leaders to be aligned in
investment strategies and additional incentives with the
opportunity fund capital.
So would Treasury--John, again, for you--would Treasury or
the IRS adopting a set of impact measures to be reported to
help the Opportunity Zone market function--would it help the
Opportunity Zone markets function more efficiently and
effectively?
Mr. Lettieri. I think if effectively designed, then the
answer is yes, and the tension is always between how much you
collect and what kind of burden that places on the recipient
and how much we need to be able to know in real time where
investment is going and what type of scale of impact we are
having.
I think there is a way to strike the right balance. I think
the original bill, as you said, had some very basic measures
that are collected already. If we can make that straightforward
and simple at a Federal level, that is one tier of data
collection that I think would be worth pursuing and
considering.
There is also the State and local, which you all cannot
mandate, but governors that we are talking to, mayors that we
are talking to, we are encouraging them to be as transparent as
possible at creating a platform where either by opting in or by
attaching other types of carrots to the process, they would get
more information and more clarity about what is happening in
their local jurisdictions. That married to some broad Federal
data, I think could be very effective over time.
Senator Booker. Thank you so much.
Mr. Chairman, thank you for the time.
Chairman Risch. Senator Cardin.
Senator Cardin. While I was out, I heard that you talked
about the tax administration provisions that are being
negotiated today between the House and the Senate that I think
could really help small businesses, and I appreciate you
mentioning that.
I would just hope that we would concentrate on that from
now to the end of the year because I think that could get done.
There has been action in the House. There has been action
in the Senate. We just have to come together, and many of those
provisions could be very helpful to small businesses.
I would just urge us all to make that a priority. A lot of
things we are talking about are going to be next-year issues
because we are not going to have a major tax bill until next
Congress.
I know the House has passed ``Tax Reform 2.0,'' and I know
we have pension issues we have to deal with. And, hopefully, in
this Congress, we can get some of that done.
Ms. Slaughter, I want to ask you a question on where you
see the priorities from the Chamber for small businesses. I
have noticed over my 12 years that the frustrations of small
businesses at different times have been different things
ranked, and I would be curious as to what you hear most from
small businesses as their greatest challenge, and how does the
tax issues rate today as far as priority lists among small
businesses?
Ms. Slaughter. Senator, I could not agree with you more
that it is a reactive sort of cycle, and an unmet need becomes
the next top priority.
I will tell you that in these meetings today, we have been
talking quite a lot in the Small Business Summit and Small
Business Council meetings about workforce development issues
and the lack of being able to find trained workers.
I think Tom Donohue opened yesterday with a figure of about
700,000 jobs for which there are no U.S. workers available to
take them.
Small business will really bear the brunt of that. We
cannot compete with the big boys who are able to pay more
money. They absolutely have to have someone with a skilled
craft--master electrician. They will cherry-pick people who
were long-time employees and well trained by small business,
and so I think that that is a rising priority.
In Louisiana, we have a lot of efforts in terms of dual
enrollment and jumpstart. We have a big problem with a stigma
against jobs that do not require a 4-year college degree, and
we have a lack of awareness. We started a program called
Louisiana Calling to try and help deal with just communicating,
marketing, and making parents and students aware of those kinds
of jobs.
So I think the private sector in partnership with public
sector, local and regional, can help with some of those things,
but I do think that you are going to hear a lot of new issues
that come forward.
Senator Cardin. I appreciate that. I hear that a lot also
on workforce development issues. It is a tight market,
particularly for small businesses. So it is something we might
want to take a look at as to how we can help.
Ms. Slaughter. Yes. And I think, actually, we are building
somewhat of a conundrum here because the tax cuts, as I said,
often will fall to the worker, the current workers, but also
new businesses and new jobs. So the problem seems like it may
get worse before it gets better.
Senator Cardin. I want to ask Mr. Arensmeyer the issue. You
have been the most vocal about your concern on the deficit,
which I share, and we have also pointed out that the complexity
issue is made much worse because the temporary nature of the
provisions that relate to small businesses, that relate to the
individual taxpayer as compared to the C rate and some of the
issues that affect higher-income people.
So the advertised deficit is $1.4 trillion. If we extend
these provisions, it just increases the size of the deficit. So
how do you do the tradeoff between the concerns on
predictability by making these provisions permanent,
recognizing this bill already is jeopardizing other programs
because of the deficit and will be made worse if we just make
these programs permanent?
Mr. Arensmeyer. Well, there is continued confusion out
there. I am not sure that the predictability issue is as great
as some people are making it out to be.
You are absolutely right. If Congress is going to consider
making these tax cuts permanent, then Congress needs to really
understand where the benefits are and are not going.
And from a small business point of view and pass-through
point of view, they are dramatically skewed to the very small
number of very well-heeled pass-through entities, some of which
you would not even call a small business.
And so I agree with you. I think you all need to think long
and hard, ``Gee, if we are going to make this permanent, maybe
we ought to take a closer look at what it is doing,'' because
you are just going to--not only are you going to exacerbate the
deficit, but you are going to exacerbate the problem of the
skewed benefits not really going to Main Street.
Senator Cardin. Thank you.
Thank you, Mr. Chairman.
Chairman Risch. Thank you very much.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
Tell me why you think the small business benefits are
skewed to a select few.
Mr. Arensmeyer. Well, Senator, it is simply just looking at
data on how many businesses are pass-through, what their income
is, what their marginal rate is, and all the different numbers
that I gave in my testimony, there are different ways of
slicing and dicing it.
Senator Kennedy. But do not you think most small businesses
in America are pass-throughs?
Mr. Arensmeyer. Correct.
Senator Kennedy. All right.
Mr. Arensmeyer. But most of them are--the bulk of the
income and the bulk of the benefit from a tax cut looking at
marginal rates goes to the very small number at the very top.
Senator Kennedy. So you are saying that people who pay more
taxes are getting a bigger tax cut?
Mr. Arensmeyer. Yes.
Senator Kennedy. Or is that unfair?
Mr. Arensmeyer. Well, they are not only getting bigger tax
cut. They are getting a higher percentage tax cut. Somebody
making eight times as much as somebody else is getting 25 times
a bigger tax cut.
Senator Kennedy. And what provision in the Tax Cuts and
Jobs Act is doing that?
Mr. Arensmeyer. The provision of allowing them to deduct 20
percent of their pass-through business income.
Senator Kennedy. I know that, but how is that language in
the Tax Cuts and Jobs Act skewed in favor of somebody who has a
lot of pass-through income as opposed to somebody who has a
little?
Mr. Arensmeyer. Because you are taking 20 percent of not
only more tax because they make more, granted, but they
actually have a much higher marginal rate.
It is just a question of where the dollars are going. You
are talking about $1.5 trillion. It is a question of where is
the benefit going.
Senator Kennedy. Well, no disrespect, but that is nonsense.
I mean, if you are paying more in taxes, you are going to get a
bigger tax cut. What is unfair about that?
Mr. Arensmeyer. Well, I mean, one way to look at it is
unfair, but the other thing is just a fact of where the benefit
is going. The benefit is not going to Main Street. It all
depends on what you----
Senator Kennedy. How do you define Main Street?
Mr. Arensmeyer. Smaller businesses that are in communities
across this country with smaller numbers of employees. Eighty
percent of all small businesses have fewer than 10 employees.
Senator Kennedy. Is there a cutoff where you become a
virtuous small business as opposed to some sort of greedy large
business in your mind?
Mr. Arensmeyer. Well, I mean, if you look at the benefit on
the tax cuts, it gradually goes up, but it goes up
geometrically. It goes up exponentially because of the
combination of the higher income and the marginal rate.
Senator Kennedy. Okay. Let me ask you about the Opportunity
Zones. I forget who asked you, but it was a good question about
the metrics. And I know we have a baseline because we know the
employment and the number of businesses, et cetera, before the
Opportunity Zones kick in.
But how do you know if there is growth that is going to be
a result of the Opportunity Zones? I mean, we keep throwing
money at problems we all want to solve without any metrics,
without solving--understanding whether the money is giving the
effect we want.
Mr. Lettieri. Thank you for the question.
In this case, the incentive only goes to investments that
have been made, A, in a qualifying business or qualifying
properties.
Senator Kennedy. Right.
Mr. Lettieri. We know the constraint. But, B, because of
the design of the incentive, it is not a tax credit, so there
is actually no up-front subsidy. You are not getting any kind
of up-front anything from Government.
Senator Kennedy. Right.
Mr. Lettieri. The incentive is to put----
Senator Kennedy. You get a capital gains break.
Mr. Lettieri. Right.
So you are putting private capital at risk over a long
period of time. Therefore, the benefit only exists if the
investment has been successful. If you have a successful equity
investment in an operating business in a low-income area, in
many ways, by definition, that means that the tax benefit has
had the effect it was intended to have, meaning you have been a
successful part of a successful business in a targeted area.
So we can measure----
Senator Kennedy. How do you know the businesses would not
have gone there, anyway?
Mr. Lettieri. Well, in terms of relocation?
Senator Kennedy. No. How are you going to know whether
the--I am not arguing against it.
Mr. Lettieri. No, no. I understand that.
Senator Kennedy. I have just seen this movie before.
Mr. Lettieri. Sure.
Senator Kennedy. How do you know that the businesses would
not have gone there, anyway?
Mr. Lettieri. Well, the benefit is to the investor in the
business. So it may drive relocation activity. I hope it will
for businesses that are mobile and can opt into an area that
there is higher need.
But the tradeoff here is obviously public expenditure for a
certain type of public good behavior in the private sector, and
so we do not know with perfect certainty--and it is impossible
to know, unfortunately, with perfect certainty----
Senator Kennedy. Let me cut you off because I am going to
get cut off.
Mr. Lettieri. Yeah.
Senator Kennedy. Can I have just another minute?
Chairman Risch. Feel free, Senator.
Senator Kennedy. All right. Let me ask each of you this
question. This is a philosophical question. State, local, and
Federal Government are always spending money, giving tax
breaks, tax expenditures--some call them ``tax expenditures''--
tax credits to try to stimulate the economy. When you do that,
you benefit some people over others. And there are some people
who game the system.
This is a question, not a suggestion. Do you think we would
be better off if State, Federal, and local government all got
together and say, ``We are going to stop trying to buy
business?'' Just get rid of all of these breaks and incentives,
and we are going to work on a Tax Code. And with all of the
money that we saved from trying to bribe businesses to come to
a particular area, to come to a particular State, we can lower
the tax rate.
Now, I know we do not live in La La Land, and that is
probably not going to happen. But would it work?
Professor.
Ms. Bruckner. No. And I also think that there are some tax
incentives in the Code that are great.
The $5,000 deduction for startup cost for businesses can be
really, really helpful. My survey data shows that people take
it, and people like it. And it significantly helps with being
able to offset their costs.
Senator Kennedy. When you give people money, they generally
like it.
Ms. Bruckner. Yeah, yeah, yeah.
I do think--to be fair, I do think that taxes are a really
clumsy way to pump money into the system if you are trying to
spark economic activity. It works eventually, but I think
people think that it is going to work much faster than it
usually does.
Senator Kennedy. Okay. That is fair.
Mr. Arensmeyer. Senator, you are absolutely correct. This
does happen more in the State and local level. Money that is
designated as economic development money is often not targeted
to the communities, and in many cases, it does benefit people
outside the communities or a certain small segment of people in
the communities.
So that said, there is a way to do economic development
that is more focused on benefits for job creation, benefits in
targeted communities, some of what John has talked about, the
Opportunity Zones, having the data, looking at the metrics, and
having some incentives in there for investment in local
businesses and Opportunity Zones.
So I would agree with Caroline. It is a question of how you
do it. If you are just giving out State and local subsidies to
get big corporations to come in, there might be some small
benefit, but again, it is a bang for the buck. And I do not
think it is a cost benefit and the best way to use the money.
Mr. Lettieri. Just to finish the answer earlier, this is
not that. I would totally agree we should get rid of, in my
view, almost every single one of the relocation and State and
local type of poaching benefits, where the benefit is do you
move across arbitrary border into an area?
This is different, again, because the business is not the
recipient of the incentive. It is to motivate something that we
know is not happening now. We already have these data. The
business creation in the target areas that we are talking about
is dismal.
In most cases, there is a higher failure rate than a
startup rate. You are seeing a hollowing out. We will know if
it is working. We will know if the trajectory changes because
the trajectory is not good right now. It is motivating--this is
targeted to a behavior that we know investors are not engaging
in at scale now and certainly not to match the scale of the
need, and we are paying for it because the very types of
communities we are talking about, we just pay on the back end
in terms of social safety net and other types of remedial
programs that are very--speaking of clumsy, do not do much to
open up economic opportunity, but help to address the casualty
of a market that has failed in a local community. And in many
cases, we are talking about decades of decline. So this is not
just a private-sector problem. This is often public-sector
neglect as well, and I think that is why this is more targeted.
Senator Kennedy. Doc.
Ms. Slaughter. Senator Kennedy, that is a very interesting
hypothesis that we could get local, State, and Federal
Government to do that, and I think it would be wonderful if we
could. And we might be smarter and do this in a different way
and better.
I am not sure if I would call it bribery, but performance-
based incentives work, whether you are talking about an
individual worker.
Senator Kennedy. It sounds better.
Ms. Slaughter. It certainly does. It is very diplomatic,
but bribery works. So if we want to create internships and
apprenticeship programs and we offer some sort of benefit to
businesses, large or small, for that, you will begin to see an
increase in that.
I do think that the evidence will prove itself that these
tax cuts are significant. The reinvestments, for example, the
depreciation, nobody has brought that up, but immediately
writing off assets and lowering the cost of capital is very
significant for some of our clients. They are using that money
to really do some marvelous things in their businesses, and
that is a reinvestment that is going to last for many years. I
will take this one.
Thank you.
Senator Kennedy. Listen, you have all four been great.
Thank you very much.
I went way over and----
Chairman Risch. You did.
[Laughter.]
Senator Kennedy. They will get me back, but thank you.
Chairman Risch. Thank you, Senator Kennedy.
Thank you to the witnesses. This has been a really
interesting conversation on a really interesting subject, and
certainly, people have different opinions on this. But people
are smart, and they can listen to these and make a decision as
to which way they want to go with the ideas.
Senator Cardin.
Senator Cardin. And I also want to join in thanking all
four of our witnesses. I think this has been an extremely
helpful presentation.
Senator Kennedy always makes very cogent points. I would
just point out, if I might, that one of our concerns when
targeting, that when you take a look at the lion's share of the
business tax relief, it goes to C corporations. And C
corporations are the larger companies. Very few small companies
get the advantage of the C rate.
So those provisions that are made for the pass-through
entities, where you get the largest number of small businesses,
when you take a look at that pie, the majority of the tax
relief is going to larger businesses, not the smaller business.
I think that is the point that we are trying to make, and I
understand there are multiple reasons for it. And I think you
raised some very important points, but I just think that was
the point that we are trying to make.
And the second point on reducing rates and getting location
of businesses, it is a hypothetical issue because it is hard to
see that translate with State and local governments being
coordinated with the Federal Government, but the challenge is
that tax rates being equal, it is still difficult to locate in
rural areas and in urban areas and in high unemployment areas.
Generally, their tax bases are not as strong. So, generally,
their rates are going to be higher and therefore a disincentive
for a business to locate there.
So for all those reasons, we do need to compensate so that
we can get underserved areas a better return for investors. I
think that is the issue that we deal with, and it is not just
the level of the rate. It is really the inequality in location
that causes us to try to want to find some way to compensate.
I think that is what Senator Scott and Senator Booker were
trying to achieve.
But, again, I thank all of our witnesses, and I thank the
Chairman for his patience.
Chairman Risch. Thank you.
And, again, thanks for taking the time to join us.
I am going to keep the record open 2 weeks from today at
5:00. If anybody else has something for the good of the order,
feel free.
With that, the Committee is adjourned.
[Whereupon, at 4:14 p.m., the Committee was adjourned.]
APPENDIX MATERIAL SUBMITTED
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