[Congressional Record Volume 146, Number 114 (Friday, September 22, 2000)]
[Senate]
[Pages S9033-S9036]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS
By Ms. COLLINS (for herself, Mr. Cleland, and Mr. Roth):
S. 3096. A bill to amend the Internal Revenue Code of 1986 to
increase and modify the exclusion relating to qualified small business;
to the Committee on Finance.
encouraging investment in small business act
Ms. COLLINS. Mr. President, I rise today to introduce the Encouraging
Investment in Small Business Act, legislation intended to stimulate
private investment in the entrepreneurs who drive our economy. I am
very pleased to be joined today by my good friend, the Senator from
Georgia, Mr. Cleland, and by the distinguished chairman of the Finance
Committee, Senator Roth, in introducing this important legislation.
Senators Cleland and Roth both understand the importance of small
businesses to our economy and have been tireless advocates on their
behalf.
The bill we are introducing today will encourage long-term investment
in small and emerging businesses by rewarding individuals who risk
investment in such firms. According to the U.S. Small Business
Administration, small firms account for three-quarters of the Nation's
employment growth and almost all of our net new jobs.
Small businesses employ more than 50 percent of all private workers,
provide 51 percent of our private sector output, and are responsible
for a disproportionate share of innovations. Moreover, small businesses
are avenues of opportunity for women and minorities, younger and older
workers, and those making the transition from welfare to work.
At the same time, small businesses face unique financing challenges.
I know this from my experience serving as the New England Administrator
for the Small Business Administration. There are so many small
entrepreneurs who have a wonderful idea for an innovative product but
simply have great difficulty in getting the financing they need to get
that idea off the ground.
Simply put, entrepreneurs need access to more capital to start and
expand their businesses. Small businesses that cannot deliver ``dot-
com'' rates of return are particularly having trouble raising needed
funds. As the Small Business Administration noted earlier this year,
``Adequate financing for rapidly growing firms will be America's
greatest economic policy challenge of the new century.''
A recent report by the National Commission on Entrepreneurship
presented findings of 18 focus groups with more than 250 entrepreneurs
from across the country. According to the report, these entrepreneurs
were ``nearly unanimous in identifying difficulties in obtaining seed
capital investments.'' That is the early stage financing that helps get
a business off the ground.
Moreover, minority-owned small businesses and research-intensive
businesses that may take many years to develop a product find raising
sufficient capital to be particularly difficult. Consider that it
takes, on average, 14 years for a biotechnology company to develop a
new pharmaceutical. This promising and growing sector of our economy
requires patient capital--and lots of it.
[[Page S9034]]
Cheryl Timberlake, the executive director of the Biotechnology
Association in my State, recently wrote to endorse the legislation I am
introducing today and to reinforce the need to stimulate more
investment in biotech firms. Cheryl wrote that:
Many of the Maine biotech companies are still in the
research stage and rely on venture capital to fund their
innovative drug development. Most research-stage biotech
companies do not yet have products on the market. Without a
source of revenue, there are no profits to fund their
business. These companies are dependent on private investors
for most or all of their financial support. [Therefore,
the Biotechnology Association of Maine] believes that the
changes in . . . the Internal Revenue Code [such as you
propose] will enable more small business investment in our
member companies.
I think Cheryl summed up the problem well in Maine. We have a growing
and diverse biotechnology sector, but they are having difficulty in
finding the kind of financial support that they need to grow.
I also received recently a letter of support from the executive
director of the National Commission on Entrepreneurship. He noted that
startup companies are ``struggling to find access to equity investments
[particularly in the range] between $100,000 and $3 million.''
His letter continues:
So the question becomes: how can we motivate more
individuals with investment capital, who may not have
previous experience with entrepreneurial companies, to invest
in such companies at the ``seed'' or ``early-stage'' level?
The Encouraging investment in Small Business Act, by
increasing the incentives provided by Section 1202 of the
Internal Revenue Code, may well provide one important part of
the answer to this question.
Similarly, the National Federation of Independent Business, our
Nation's largest small business group, has also written in support of
the legislation that the Senator from Georgia and I are introducing
today.
Dan Danner wrote:
Unfortunately, while our nation's current prosperity has
brought unprecedented funds to certain sectors of our
economy, small business entrepreneurs still lack access to
valuable capital needed to start and expand their businesses.
Mr. President, I ask unanimous consent that the three letters from
which I quoted this morning be printed in the Record, in their
entirety.
There being no objection, the letter were ordered to be printed in
the Record, as follows:
Biotechnology Association
of Maine,
Augusta, ME, August 28, 2000.
Hon. Susan M. Collins,
U.S. Senate, Russell Building,
Washington, DC.
Dear Senator Collins: On behalf of the Biotechnology
Association of Maine (BAM), a trade organization representing
Maine's biotechnology companies, our affiliated educational
institutions, and the not for profit research organizations.
I am writing to endorse the Encouraging Small Business Act.
In an industry survey conducted by our sister organization
the Center for Innovation in Biotechnology (CIB), the first
most critical challenge to the success of biotechnology firms
in Maine is financing. The incredible pace of new
technological developments create unceasing demands for new
and established companies to remain competitive and grow. All
efforts to stay competitive require investment. Businesses in
Maine involved in biotechnology and life sciences look for
any opportunity to increase their financial footing.
Many of the Maine biotech companies are still in the
research stage and rely on venture capital to fund their
innovative drug development. Most research-stage biotech
companies do not yet have products in the market. Without a
source of revenue, there are no profits to fund their
business. These companies are dependent on private investors
for most or all of their financial support.
BAM believes the changes in Section 1202 of the Internal
Revenue Code, as proposed will enable more small business
investment in our member companies. The changes will enable
private investors to use the Code, as it was intended and
eliminate the duplication and unnecessary provisions that
complicate the process. The key is to encourage investment,
in whatever means possible. It should be recognized that the
Section 1202 has proven useful to small and large companies,
but it frequently burdensome, with difficult accounting
procedures and other unrelated hurdles.
On behalf of the Biotechnology Association of Maine, I
appreciate your continued leadership and thank you for
proposing the Encouraging Investment in Small Business Act.
We look forward to working with you on passage of this
important piece bill. Thank you.
Sincerely yours,
Cheryl C. Timberlake,
Executive Director.
____
National Commission
on Entrepreneurship,
Washington, DC, September 15, 2000.
Hon. Susan M. Collins,
Russell Senate Office Building, U.S. Senate,
Washington, DC.
Dear Senator Collins: I congratulate you on your
introduction of The Encouraging Investment in Small Business
Act of 2000. The bill represents one way that tax policy can
help address the current ``capital gap'' facing emerging
high-growth companies throughout the country, especially in
regions just beginning to build entrepreneurial economies.
The National Commission on Entrepreneurship has just
completed 18 focus groups with 250 entrepreneurs around the
country. We asked these entrepreneurs to tell us what key
external constraints face the start-up and growth of their
companies. Finding qualified people--from entry level to
technical to management employees--was their number one
concern. But also very high on their lists was a growing
``seed capital'' or ``early-stage capital'' gap.
Entrepreneurial companies are struggling to find access to
equity investments roughly between $100,000 and $3,000,000.
In brief, the ``early stage capital'' problem is this.
Entrepreneurs can cobble together the equity they need up to
about $100,000 through the use of credit cards, second
mortgages, and cash investments from friends and family. And
if they are building a company, say in ``hot'' sectors like
the Internet or biotech, where the dynamics of the industry
require extraordinary amounts of cash early in a firm's life,
they can find venture capital firms to invest a minimum of
three to five million dollars. But if they need less than
$3,000,000 for the near future, investors at that funding
level are very hard to find.
Highly developed entrepreneurial regions provide this
``early-stage capital'' typically in the form of organized
``angel'' investor networks. ``Angels'' are usually
previously successful entrepreneurs and other wealthy
investors connected with the entrepreneurial economy in their
regions who regularly and systematically review potential
investments. They then serve either as board members or
mentors to their new investee companies, and prepare them for
a round of venture capital investment or acquisition by
another company or an initial public offering.
Unfortunately, regions just beginning to build
entrepreneurial economies do not yet have these ``angel
networks'' in place. So the question becomes: how can we
motivate more individuals with investment capital, who may
not have previous experience with entrepreneurial companies,
to invest in such companies at the ``seed'' or ``early-
stage'' level?
The Encouraging Investment in Small Business Act, by
increasing the incentives provided by Section 1202 of the
Internal Revenue Code, may well provide one important part of
the answer to this question. While we have not reviewed in
detail all the provisions of your legislation, your bill
takes two important steps in this direction.
First, the bill accounts for post-1993 changes in tax rates
for capital gains of all kinds, by increasing the capital
gains exclusion for investments in small businesses from 50%
to 75%. And second, the bill excludes the gains from these
investments from calculations under the Alternative Minimum
Tax (AMT) provisions of the Code. Combined with the other
provisions of your bill that simplify the use of Section
1202, the tax incentives could well motivate many more
investors to allocate more of their investment dollars to
high-growth entrepreneurial companies. Typically, the
combined investments of several individuals in one such
company would amount to meeting the critical ``seed'' or
``early stage'' capital needs of that company.
We look forward to working with you as your legislation
moves forward and would be delighted to provide any
additional information about ``angel'' investing and the
growing ``early-stage'' capital gap. To that end, I have
taken the liberty of attaching a copy of one of our bi-weekly
columns that addresses the topic.
Sincerely,
Patrick Von Bargen,
Executive Director.
____
NFIB, The Voice of Small Business
Washington, DC.
Hon. Susan Collins,
U.S. Senate,
Washington, DC.
Dear Senator Collins: On behalf of the 600,000 members of
the National Federation of Independent Business (NFIB), I
want to express our support for the Encouraging Investment in
Small Business Act, which you will be introducing in
September.
As you are aware, small businesses are the engines driving
our economy. They constitute 98 percent of all businesses in
America, and they employ almost 60 percent of the workforce.
Additionally, small businesses have created roughly two-
thirds of the net new jobs in the American economy since the
early 1970's.
Unfortunately, while our nation's current prosperity has
brought unprecedented funds to certain sectors of our
economy, small business entrepreneurs still lack the access
to valuable capital needed to start and expand their
businesses.
Your legislation goes along way towards addressing this
problem. By reforming and improving Section 1202 of the
Internal Revenue Code, investors will now have a true
incentive to invest in small businesses. Under current law,
Section 1202 is no longer a viable option in many of the
circumstances it
[[Page S9035]]
was originally intended to address. Moreover, Section 1202's
impact will continue to be diluted by a scheduled decrease in
long-term capital gains rates applicable to most stock
purchased after 2000 and the probability that still more
taxpayers will be subject to the extremely complicated and
cumbersome Alternative Minimum Tax. The Encouraging
Investment in Small Business Act would eliminate unnecessary
complexity in Section 1202 and make it a more robust engine
of capital formation for small businesses.
Senator Collins, thank you for your continued support of
small businesses. We look forward to working with you to get
the Encouraging Investment in Small Business Act enacted into
law.
Sincerely,
Dan Danner,
Senior Vice President,
Federal Public Policy.
Ms. COLLINS. Mr. President, if we want to remain the world's most
entrepreneurial country, which is certainly the strength of this
Nation, where small businesses generate the ideas and create the jobs
that fuel our economy, we must continue to create an environment that
nurtures and supports entrepreneurs. Our bill would help to create such
an environment, not by establishing a new Federal program or adding a
complicated new section to our Tax Code but, rather, by simplifying and
improving a provision that is already there.
By way of background, section 1202 was added to the Internal Revenue
Code in 1993 in order to encourage investment in small business. The
bill that created this section was introduced by senator Dale Bumpers
and enjoyed widespread bipartisan support. Similarly, the legislation
we introduce today will improve upon the 1993 legislation.
In brief, section 1202 of the Internal Revenue Code permits
noncorporate taxpayers to exclude from gross income 50 percent of the
gain from the sale or exchange of qualified small business stock, known
as QSB stock, held for more than 5 years. The concept is a sound one.
In practice, however, this section has proven to be cumbersome to use
and less advantageous than originally intended.
As an article in the December 1998 edition of the Tax Adviser noted:
Section 1202 places numerous and complex requirements on
both the qualified small business and the shareholder.
The article went on to note that the provision ``is no longer the
deal it seemed to be.''
The Encouraging investment in Small Business Act would amend section
1202 to eliminate unnecessary complexity and to make it a more robust
engine of capital formation for small business. As it stands now, that
engine needs some fine-tuning. Given the reductions in capital gains
rates subsequent to section 1202's enactment and the fact that more and
more taxpayers are now subject to the alternative minimum tax, section
1202 is no longer a viable option in many circumstances. Moreover, its
impact will continue to be diluted by a scheduled decrease in long-term
capital gains rates applicable to most stock purchased after the year
2000, as well as the probability that still more taxpayers will be
subject to the AMT.
The Encouraging Investment in Small Business Act makes a number of
improvements to this section of the code. First, the bill increases the
amount of qualified small business stock gain that an individual can
exclude from gross income from 50 percent to 75 percent. Second, the
legislation strikes the section of the Tax Code that makes a portion of
the section 1202 exclusion a preference item under the alternative
minimum tax. These two changes rejuvenate the section and make it the
potent generator of small business capital that it was intended to be.
Currently, an individual who invested in QSB stock, sold it, and
found her or himself subject to the AMT, would face an effective
capital gains rate of 19.9 percent or just .1 percent less than the
existing rate on long-term capital gains. When we consider that the
number of taxpayers subject to the AMT is predicted to triple over the
next 5 years, it becomes crystal clear that a fix is needed now. The
legislation would take additional steps to make section 1202 more
attractive to small businesses and investors.
The legislation may sound complicated and, indeed, revising tax law
is always a challenge, but the bottom line is that our legislation
makes a number of common sense changes that are all designed to
encourage more investment in small businesses, the engine of our
economy.
These changes have been endorsed by the leading small business
organizations. They are changes recommended by a recent Securities and
Exchange Commission forum on small business capital formation, and they
are the changes needed to accommodate and, indeed, to foster the
capital-raising needs of small business, the foundation of our national
economy.
I thank the Chair and yield the floor.
The PRESIDING OFFICER. The Senator from Georgia.
Mr. CLELAND. Mr. President, I applaud the distinguished Senator from
Maine, Ms. Collins, for her gargantuan effort to tackle the Byzantine
aspects of the U.S. Tax Code to see if there is some way we can assist
our venture capitalists to help our small businesses, particularly our
high-tech small business more.
It is a pleasure to work with Senator Collins, not only in this
endeavor but in other endeavors. We serve together on the Government
Affairs Committee. One of our responsibilities is oversight of the
Securities and Exchange Commission which looks at the world of
investments in businesses in this country. I applaud her for her
insight, for her innovation in this area, she is right on target. I am
pleased to associate myself with her remarks today and pleased to
cosponsor the legislation of which she speaks.
On that point, in terms of being relevant to what is driving the
American economy, not only in my home State of Georgia, particularly in
Atlanta, where more and more high-tech businesses are located, but in
Silicon Valley, where I just got back from a tour in early August, it
is obvious that we are generating a lot of talented young minds in
America with great ideas and that those young minds can form together,
and with the right capital at the right time can generate businesses
that literally were unknown or unheard of just months ago. We see those
kind of successes now driving the American economy. Information
technology economies now provide the leading edge for American economic
growth and our prosperity. I couldn't agree more with the Senator from
Maine. We will do everything in our power to assist this legislation
and move it forward.
______
By Mr. DORGAN:
S. 3098. A bill to amend the Internal Revenue Code of 1986 to phase
in a full estate tax deduction for family-owned business interests; to
the Committee on Finance.
estate tax deduction for family-owned business interests
Mr. DORGAN. Mr. President, one of the things Americans like least
about Congress is the way we wrangle over things we don't agree about
instead of acting on things we can agree about.
The estate tax is a case in point. There is wide agreement in the
Senate that we should act to eliminate the burden of the estate tax on
family farms and businesses. We could accomplish that this year--this
week in fact--with little fuss or ado.
I propose that we do just that, and save for later the parts of the
estate tax that we don't agree on. We should not hold the family farms
and businesses of this nation hostage to the heirs of multi-billion-
dollar investment fortunes. We can address that problem right now so
let's do it.
We often forget in this country that a family is an economic unit as
well as a social unit. This nation was built upon an economy of family-
based farms and businesses. That is why the values of family--a
commitment to community, a loyalty to place, a sense of tradition
passing through the generations--were an important part of the economy
in the formative days of our republic.
Those values weakened as the economy became national and corporate.
They have weakened further still as the economy has become global, and
the cold calculus of the global marketplace has displaced
considerations of family and community in our economic life.
In this setting it is crucial that we strive to keep the family farms
and businesses that we have, and to encourage new ones. Family-based
enterprise
[[Page S9036]]
provides a counterweight to the centrifugal forces of the global
economy. It can help to anchor the market in values and concerns that
the large impersonal corporation does not share, and we should
encourage this form of enterprise whenever we can.
Certainly the Federal Government never should force the sale of such
an enterprise just to pay an estate tax. That does not happen often
today. But not often is still too often. It should never happen, and
that is why I am introducing a bill today to make sure it doesn't.
Under this bill, the estate tax on farms and businesses under active
family management would phase out over 6 years, until by 2006 it would
be gone completely.
This bill is different from the one that passed this Chamber earlier
this year in one key respect: It applies onto family farms and
businesses passed along to the next generation. It does not apply to
the heirs of multi-billion dollar investment fortunes and the like.
There was a strange disconnect in the debate over that earlier bill.
Virtually all the talk from proponents was about family farms and
businesses. Yet the bulk of the actual belief of their bill would have
gone to the heirs of investment fortunes instead.
That is why many of us voted against the bill. The walk didn't match
the talk. And that is why I am proposing today that, for once, we move
forward on what we do agree on instead of wrangling continuously, for
political advantage, over what we don't. Large stock fortunes are not
the same as family farms and businesses. They raise a different set of
questions where the estate tax is concerned, and we ought to deal with
those questions separately and at a later time.
This is not the place to debate the merits of the estate tax as it
applies to large fortunes as opposed to operating farms and businesses.
I will just note briefly a few of the reasons why many of us could not
support the previous bill.
For one thing, the tax was enacted out of the conviction that those
who have benefited most from our democracy in the past ought to
contribute to its security and well-being in the future. That was true
back in 1916 and it is equally true today. To repeal the estate tax
completely would shift the burden of paying for the Federal Government
even more onto the working men and women of this country. That is not
fair.
Second, the estate tax encourages people with large fortunes to make
significant contributions to charity. If we are going to rely less on
government in addressing our social problems, and more on the efforts
of individuals and private nonprofit organizations, then we must not
dry up a prime source of funding for these efforts.
Third, the estate tax encourages the work ethic, as it applies to
estates other than family-based farms and businesses. Those who might
otherwise be able to live on inherited fortunes occasionally have to
some useful work instead.
I know that there is disagreement on these points. They deserve an
honest debate. But as I said, we should not hold family based farms and
businesses hostage to that debate. We can agree that help for these
family based enterprises is the first priority of estate tax reform. We
can agree that no family farm or family business should have to be sold
to pay an estate tax.
So let's do that now and save the rest for another day.
______
By Mr. GRAMS:
S. 3099. A bill to amend the Internal Revenue Code of 1986 to clarify
the exemption from tax for small property and casualty insurance
companies, and for other purposes; to the Committee on Finance.
Small Property and Casualty Insurance Exemption Act
Mr. GRAMS. Mr. President, I rise to introduce a bill to clarify the
tax exemption status for small property and casualty insurance
companies. These small companies are vitally important to provide
needed services for our rural and farming communities.
Under current law, an insurance company with up to $350,000 in
premium is tax-exempt. In addition, companies with premiums that exceed
$350,000 but do not exceed $1,200,000 are allowed to elect to be taxed
on their net investment income.
Investment income or assets are not considered when determining
qualification for either tax-exempt status or investment income
taxation. These companies are allowed to elect to be taxed on their net
investment income.
Early this year, President proposed in his FY 2001 budget to modify
this calculation to include investment and other types of income. The
proposal would also change the tax law to allow companies with premiums
below $350,000 to elect to be taxed on their net investment income.
By including investment income into the calculation, it is the intent
of the administration to prohibit foreign companies and other large
insurers from sheltering income from taxes.
However, by including investment into the calculation, the intended
beneficiaries, small property and casualty insurance companies, will
not be able to qualify for the exemption defeating the intent of
Congress and purpose for the provision.
Mr. President, since 1921, small insurance companies have been exempt
from federal taxation so that all their financial resources could be
used for claims paying.
It has been the public policy goal to maintain small, rural, farm-
oriented insurers so that all Americans would have access to coverage
at a reasonable cost.
While the administration's goal of closing the loophole is admirable,
the current proposal would only serve to harm the small U.S. farm
insurance company that the provision is there to protect.
My legislation would close the loophole by limiting the provision to
only those companies that are directly owned by their policyholders and
the company operates in only one state.
In addition, the legislation would increase the tax exemption level
from $350,000 to $531,000, indexed for inflation every year thereafter,
and it would increase the investment income election from $1.2 million
to $1.8 million, indexed for inflation every year thereafter.
The last time these levels were increased was 1986. Inflation has
eroded the levels to the point of being irrelevant. The increased
levels were calculated by using the CPI to adjust the levels for
inflation.
Mr. President, by making these changes we can ensure that our rural
and farming communities will continue to receive the needed insurance
services. I urge my colleagues to support this legislation.
____________________