[Senate Hearing 115-574]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-574

   EXPANDING OPPORTUNITIES FOR SMALL BUSINESSES THROUGH THE TAX CODE

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

                                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

                              ---------- 
                              
                              
                    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

                              ----------                              

                           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

                              ----------                              


                       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.]

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