[Congressional Record (Bound Edition), Volume 155 (2009), Part 7]
[Senate]
[Pages 9508-9510]
[From the U.S. Government Publishing Office, www.gpo.gov]




                      DEFICIT-NEUTRAL RESERVE FUND

  Ms. SNOWE. Mr. President, I plan to offer an amendment tomorrow that 
I would like to discuss this evening very briefly because I do think it 
is an important matter as we consider the economic climate in which we 
find ourselves.
  My amendment would create a deficit-neutral reserve fund that would 
extend the 2001 tax cut rates for small business owners so this tax 
increase does not subtract from the pool of capital that is going to be 
available to small business. As the Ranking Member of the Small 
Business Committee

[[Page 9509]]

and senior member of the Finance Committee, I rise on this critical 
issue of taxation because I am deeply concerned about how proposed tax 
rate increases will harm small business capital formation.
  There has been a significant debate about the effect on small 
business of raising tax rates on those making over $250,000. I do not 
disagree with some of those efforts, but I do have a deep concern about 
the impact and the implications that it will have on small businesses 
and their ability to access affordable capital in this current economic 
downturn.
  The expiration of these tax cuts enacted in 2001 and 2003 for couples 
making over $250,000 will directly and indisputably affect small 
businesses. Hiking taxes from 33 to 36 percent and from 35 to 39.6 
percent results in a 9-percent tax increase for either tax rate. So if 
the Government is subtracting 9 percent from small business owners, 
obviously, that suggests fewer resources will be available to reinvest 
in business.
  As we know, access to capital is a constant struggle for America's 
small businesses, particularly at this time of a continuing credit 
crisis. We have seen the credit crunch that has had a direct effect on 
small businesses. Lines of credit have been denied. Access to capital 
is simply not available. Time and time again, we have heard from small 
businesses, and certainly that was true at a hearing we held recently 
in the Small Business Committee, because small business owners are 
saying repeatedly they have had considerable difficulty in being able 
to access credit from banks.
  So we have a serious crisis because if we depend on small businesses 
to generate the jobs, which they do--70 percent of all the net new jobs 
in this country; half of all the private-sector employers, 70 percent 
of the nonfarm gross domestic product--then clearly we have to be 
concerned about the response of small businesses when we are raising 
the tax rates for those making over $250,000.
  We simply cannot increase taxes by 9 percent on small businesses and 
not expect that this tax hike will have an immediate effect on the 
amount of capital they re-invest in their business. I fear that in lieu 
of investing their own funds, small businesses will have to, obviously, 
turn to the frozen credit markets which clearly has impeded any ability 
of small businesses to secure capital.
  Most recently, a Federal Reserve study demonstrated that 70 percent 
of banks have tightened loans to small businesses. Well, Chairman 
Landrieu of the Small Business Committee and I have been working to 
free up lending for small business owners. Recently, the President 
conducted a small business summit at the White House, and we heard 
directly from small business owners who said their lines of credit have 
simply dried up.
  I know some of the banks have said, some of the TARP recipients said: 
Well, we are lending money. But the truth is, it is simply not 
happening. So there are numerous provisions in the stimulus package 
that I and Chair Landrieu had worked to insert because we thought it 
was important to make sure we took the steps to ensure a Main Street 
recovery, some of which were in the flagship SBA programs, the 7(a) and 
504 programs, to reduce or eliminate the lenders' and borrowers' fees 
which are going to be instrumental to allowing banks to more freely 
loan money to small businesses because these are the key lending 
programs. We also provided for a 90-percent guarantee under the 7(a) 
program for any of the loans that are issued. In the stimulus package, 
I was able to secure a provision that will allow small businesses to 
make quarterly estimate tax payments of 90 percent of their 2008 tax 
liability rather than 110 percent estimated tax payments. That is 
important to ensure there is available capital for small businesses, to 
ease the credit flow for small businesses so they can survive in this 
very serious economic downturn.
  So we have done a number of things that are going to be so essential 
for the preservation and survival of small business in this very 
serious recession, which is the worst since the Great Depression.
  We included a stabilization loan fund that will provide up to $35,000 
for small businesses that otherwise have been viable businesses but are 
having difficulty making their payments. So we want to ease the flow of 
capital on a monthly basis. So it gives them a life line, a bridge 
until they will be able to find a better economic climate in which to 
do business.
  The fact is, credit is essential. Small businesses are vital because 
they are the job generators in America. Our economy is wholly dependent 
on the well-being and the health of small businesses. That is why the 
President--and I recommended and endorsed this idea--is going to use 
some of the TARP funds to buy small business loans in the secondary 
market, again, freeing up the capital, easing the pressures on many of 
the banks, so they can issue those loans in the secondary markets. And 
up to $15 billion in TARP funds would be used. So again, it is another 
way of easing the credit restraints, but also to provide more liquidity 
in the markets so that small businesses are able to go about and 
continue to do their business.
  We have to avert not only job losses in this economy, but primarily 
to make sure if we are going to do so, that we prevent small business 
owners from shutting their doors on Main Streets all across America.
  The vast majority of businesses in this country are known as ``flow-
through'' or ``pass-through'' businesses, meaning that the income from 
a business is taxable to the individual owner and is not taxed at the 
business unit level. The forms of ownership that fall into the 
definition of flow-through businesses are sole proprietorships, 
partnerships, and S corporations. According to the Small Business 
Administration, flow-through businesses represented 93 percent of all 
small businesses in 2004. And specifically, there were 19.2 million 
sole proprietorships, representing 72 percent of all businesses; 2.3 
million partnerships, representing 9 percent of businesses; and 3.3 
million S corporations, representing 12 percent of businesses. And we 
consider this to be an incomplete snapshot of all small businesses 
because there are roughly another 2 million small C corporations, 
representing 7 percent of small businesses, that pay taxes both at the 
business level and individual level when profits are distributed.
  The point is, that small businesses are critical. They pay the 
individual tax rate. That is the problem with allowing the tax rates to 
expire from the 2001 and 2003 tax bills, for those small businesses 
that are earning more than $250,000.
  The data provided earlier this week from the Joint Committee on 
Taxation shows that 6.5 percent of business owners--as defined by 
individuals receiving flow-through income, as I mentioned earlier, who 
pay the individual tax rate--will see their taxes increased as a result 
of this major tax hike. This is in stark contrast to those critics who 
have said it is only going to be 2.2 percent of taxpayers who will be 
affected by this tax increase. But yet Joint Tax shows it is almost 
three times what they indicated. But more importantly, it is the amount 
of income that these small businesses generate in our Nation's economy.
  The Joint Committee on Taxation data reinforces a 2007 Treasury study 
that demonstrated among taxpayers whose flow-through income amounted to 
at least 50 percent of their wages--clearly indicating the primary 
business owner--that 9 percent earned 69 percent of total flow-through 
income but paid 81 percent of the taxes on it. So 9 percent earned 69 
percent of this small business income and they paid 81 percent of the 
taxes on it. That is the problem because we are going to directly 
increase taxes on those small businesses that generate the 
preponderance of the income from small businesses in America.
  Now, I drew on this Treasury study to help craft my amendment which 
targets not the passive investor in small business but the individual 
who is really earning their keep from small businesses. My amendment 
uses the definition of ``small business'' as determined by the Small 
Business Administration.

[[Page 9510]]

  I want to highlight one form of business ownership in particular, and 
that is the S corporation because this form of ownership represents 
small firms that have graduated past the ``kitchen table'' stage of 
business and have employees. Again, the Joint Committee on Taxation 
data indicates that in 2006, 22 percent of taxpayers who earned income 
from S corporations were making more than $250,000. Furthermore, a new 
study--a very recent study--from the SBA Office of Advocacy 
demonstrated there were roughly 3.3 million S corporation returns filed 
for 2004 and by the industry sector, the most prevalent, were wholesale 
and retail trade.
  So, in essence, these are the Main Street businesses, the retailers, 
the construction firms, the manufacturers, the job generators of this 
economy. We cannot subtract another 9 percent from their income and 
think it is not going to affect--not only them but our Nation's 
economy. We have to do everything we can to nurture and cultivate an 
environment in which small businesses can survive during this economic 
crisis. We need to be fostering that environment, not increasing taxes 
on small businesses at the very time when they need more capital just 
to get by.
  A recent SBA study noted that half of all small business income is 
earned by businesses organized either as a partnership or an S 
corporation, despite the fact that they constitute only about 20 
percent of business units. So it is critical that we evaluate this 
particular provision. When we are talking about allowing the expiration 
of the tax rates in 2001 and 2003, we have to consider and evaluate it 
specifically on how it will affect the health and the well-being of 
small businesses in America's economy.
  Small businesses as job generators have been underappreciated and 
unrecognized. They have been the unsung heroes of our economy, even 
prior to this recession. I think we have to be wholly attentive to the 
role they play in our Nation's economy. After all, there are 27 million 
small businesses in America today. We have to ensure their survival. 
The way we can do it is to consider the policies enacted and how they 
directly have an effect on small businesses, whether it is by 
increasing regulation, diminishing the availability of credit, or by 
raising taxes, all of which have a collective effect on the well-being 
and effectiveness of small business.
  I think it is rather ironic that on one hand we are doing everything 
we can through the stimulus, through the TARP funds to make credit 
available, and then on the other hand we are subtracting from it by 
raising the tax rate. Some say we are only deferring that; it is 2 
years away. But small businesses have to plan for the future. The net 
effect will be that they will constantly retrench in anticipation that 
their tax rates are going to rise, which only stands to reason. It is a 
logical response. It certainly will change their behavior today as a 
result of what they can expect in the future.
  So suggesting that somehow deferring it 2 years out will make it 
better is not an answer. We don't have any prognostications in terms of 
what this economy is going to look like in 2 years, we still will have 
high rates of unemployment. It is going to be a slow path forward 
toward recovery, and we will be depending on small businesses to 
ultimately lead the way out of this recession and to pave the way 
forward toward a recovery. So because we are dependent on small 
businesses, then we have to consider very carefully the impact that 
raising tax rates will have on small businesses in America.
  So when some say that tax increases would not have an impact today, 
but it will in 2 years, I answer that it will have an impact today 
because business owners will just defer investment in a plant. They 
will defer other investments. They will defer hiring. They may lay off, 
given the current climate, to be sure, but also in anticipation of the 
future, knowing that they will have to pay increased taxes.
  A tax increase of this magnitude alters economic behavior. It alters 
capital formation indisputably. So on this issue alone I think it is 
very critical that we be circumspect and cautious in terms of how we 
approach it.
  That is why the amendment I will offer tomorrow will create a 
deficit-neutral fund so we can be sure that we do not have these sorts 
of tax increases that will be directly imposed on small businesses. I 
hope the Senate will support this amendment. It is specific and 
targeted toward small business owners so this tax increase doesn't 
affect them, it doesn't affect their behavior, either now or into the 
future, and ensures that there is a pool of capital so they can 
continue to do business and, hopefully, be able to survive and overcome 
the hurdles this economic climate represents.
  The Small Business and Entrepreneurship Council recently stated the 
higher the marginal tax rate, the higher the relative price for 
additional work and risk taking, and that high tax rates discourage 
economic activity. I know a number of organizations have conducted 
their own surveys, and I think it is illustrative again of the problems 
that will confront small businesses as a direct result of this specific 
tax increase.
  There was a poll conducted by Gallup for the National Federation of 
Independent Businesses, otherwise known as NFIB. When surveyed, 21.7 
percent of small business owners who employ 220 to 249 employees 
responded that the income earned from their businesses would be greater 
than $250,000. That bears reiterating. More than 20 percent of small 
businesses stated that they would have income greater than $250,000. 
This data certainly comports with the data provided by the Joint 
Committee on Taxation regarding partnership income and S corporation 
income.
  Even more striking was the response from other small businesses where 
they indicated it would certainly have a detrimental impact when they 
were asked about their total household income from all sources, and 40 
percent of these entrepreneurs, with 20 to 249 employees, responded 
that their household income would be greater than $250,000. In either 
survey question, this cohort was the largest response group of any 
income group or size of employer and is indicative that successful 
small businesses are precisely the group that is most likely to face 
increased taxes if the top two marginal tax rates again rise to 36 and 
39.6 percent because the net result is they will pay a 9-percent tax 
increase.
  So I hope the Senate will endorse my amendment when I offer it 
tomorrow.
  I yield the floor.

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