[Senate Report 105-63]
[From the U.S. Government Publishing Office]
105th Congress Report
SENATE
1st Session 105-63
_______________________________________________________________________
REPORT OF LEGISLATIVE AND OVERSIGHT ACTIVITIES
DURING THE 104TH CONGRESS
UNITED STATES SENATE
COMMITTEE ON SMALL BUSINESS
August 19, 1997.--Ordered to be printed
Filed, under authority of the order of the Senate of July 31, 1997.
COMMITTEE ON SMALL BUSINESS
CHRISTOPHER S. BOND, Missouri, Chairman
LARRY PRESSLER, South Dakota DALE BUMPERS, Arkansas
CONRAD R. BURNS, Montana SAM NUNN, Georgia
PAUL COVERDELL, Georgia CARL LEVIN, Michigan
DIRK KEMPTHORNE, Idaho TOM HARKIN, Iowa
ROBERT F. BENNETT, Utah JOHN F. KERRY, Massachusetts
KAY BAILEY HUTCHISON, Texas JOSEPH I. LIEBERMAN, Connecticut
JOHN WARNER, Virginia PAUL D. WELLSTONE, Minnesota
WILLIAM H. FRIST, Tennessee HOWELL HEFLIN, Alabama
OLYMPIA J. SNOWE, Maine FRANK R. LAUTENBERG, New Jersey
Louis Taylor, Staff Director and Chief Counsel
John W. Ball III, Democratic Staff Director and Chief Counsel
C O N T E N T S
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Page
I. Chairman's Summary of Committee Activity for the 104th
Congress............................................. 1
A. Regulatory Fairness................................... 1
B. Small Business Tax Issues............................. 2
C. Workplace Issues...................................... 4
D. Access to Capital: Small Business Administration
Programs............................................. 6
E. Health Care Issues.................................... 7
F. Banking and Financial Institutions.................... 7
G. Securities Laws....................................... 8
H. Telecommunications.................................... 8
I. Product Liability Reform.............................. 9
II. Regulatory Fairness......................................... 9
A. Small Business Regulatory Reform...................... 9
B. Comprehensive Regulatory Reform....................... 14
C. Regulatory Accounting Requirements.................... 15
D. Superfund............................................. 16
E. Paperwork Reduction................................... 18
F. SBREFA Demonstration Project.......................... 18
III. Small Business Tax Issues................................... 19
A. Independent Contractor................................ 19
B. Self-Employed Health Insurance........................ 20
C. Estate Taxes.......................................... 20
D. Home-Office Deduction................................. 21
E. Equipment Expensing................................... 21
F. Pension Simplification................................ 23
G. Capital Gains......................................... 23
H. Taxpayer Bill of Rights 2............................. 24
I. Meals and Entertainment............................... 24
J. Payroll Tax Relief.................................... 25
K. S Corporation Reform.................................. 25
L. Tax Reform Debate..................................... 26
M. The Consumer and Main Street Protection Act........... 26
N. Electronic Tax Payment Requirement.................... 27
O. Extension of Expiring Provisions...................... 27
IV. Workplace Issues............................................ 27
A. OSHA Reform........................................... 27
1. Legislative Reform................................ 27
2. Workplace Violence Guidelines..................... 28
3. Ergonomics........................................ 28
4. Hazard Communications............................. 28
B. Labor-Management Relations............................ 28
1. Union Salting..................................... 28
2. Single Facility Bargaining Units.................. 30
C. Fair Labor Standards Act.............................. 32
1. Compensatory Time Off............................. 32
2. Inside Sales...................................... 33
3. Minimum Wage...................................... 33
D. TEAM Act.............................................. 34
E. Davis-Bacon Act....................................... 35
F. Family and Medical Leave Act.......................... 36
V. Access to Capital: Small Business Administration Programs... 37
A. 7(a) Guaranteed Business Loan Program................. 37
B. 504 Certified Development Company Program............. 38
C. Small Business Investment Company Program............. 39
D. Expanded Export Opportunities for Small Business...... 41
E. Revitalizing America's Rural and Urban Communities.... 41
F. Women Business Ownership.............................. 42
G. Small Business Research and Development............... 42
VI. Health Care................................................. 43
VII. Banking and Financial Institutions.......................... 43
VIII.Securities Laws............................................. 44
IX. Telecommunications.......................................... 44
A. Telecommunications Deregulation Act................... 44
B. Small Cable Television Concerns....................... 46
X. Product Liability Reform.................................... 47
XI. Hearings of the Committee................................... 47
February 10, 1995: Exploring the Future of the Small
Business Administration.............................. 47
February 16, 1995: Small Business Owners Perspective on
the Small Business Administration.................... 48
February 20, 1995: ``Entrepreneurship in America:''
Excessive Governmental Burdens on Small Business--
Albuquerque, New Mexico.............................. 49
March 8, 1995: S. 350, Regulatory Flexibility Amendments
Act of 1995.......................................... 51
March 11, 1995: ``Entrepreneurship in America:'' Final
OSHA Logging Regulations--Kalispell, Montana......... 52
April 4, 1995: The Small Business Administration's 8(a)
Minority Business Development Program................ 54
April 12, 1995: ``Entrepreneurship in America:'' Reducing
Governmental Burdens on Small Business--Kansas City,
Missouri............................................. 56
April 12, 1995: ``Entrepreneurship in America:'' Focus on
Capital Formation--St. Louis, Missouri............... 57
April 13, 1995: ``Entrepreneurship in America:'' Federal
Government Burdens on Agribusiness--Cape Giradeau,
Missouri............................................. 59
April 13, 1995: ``Entrepreneurship in America:''
Loosening the Government Noose on Small Business--
Memphis, Tennessee................................... 60
May 18, 1995: The Small Business Administration's 7(a)
Business Loan Program................................ 62
July 13, 1995: The Small Business Investment Company
Program.............................................. 63
August 16, 1995: ``Entrepreneurship in America:''
Overview of SBA Programs in Alaska--Anchorage Alaska. 65
August 17, 1995: ``Entrepreneurship in America:''
Alaska's Small Business Environment--Ketchikan,
Alaska............................................... 66
September 19 and 20, 1995: Tax Issues Impacting Small
Business............................................. 68
October 19, 1995: Revitalizing America's Rural and Urban
Communities.......................................... 73
October 31, 1995: The Cost of Regulations on Small
Business............................................. 75
November 8, 1995: The Impact of Rail Mergers on Small
Shippers............................................. 77
December 6, 1995: Small Business and OSHA Reform......... 79
December 12, 1995: Proposals to Strengthen the Small
Business Investment Company Program.................. 81
February 28, 1996: S. 917 and S. 942: Implementing the
White House Conference on Small Business
Recommendations on Regulations and Paperwork......... 82
March 21, 1996: S. 1574, The HUBZone Act of 1996:
Revitalizing Inner Cities and Rural America.......... 83
April 18, 1996: Small Business and Employee Involvement:
the TEAM Act Proposal................................ 85
April 23, 1996: Issues Affecting Home-Based Business
Owners............................................... 86
May 1, 1996: Nomination of Ginger Ehn Lew to be Deputy
Administrator of the United States Small Business
Administration and the United States Small Business
Administration's Fiscal Year 1997 Budget............. 89
May 10, 1996: Small Business Investment Company Reform
Legislation.......................................... 90
June 5, 1996: Implementation of the Small Business Agenda 91
July 24, 1996: Implementation of the Small Business
Regulatory Enforcement Fairness Act of 1996.......... 95
I. CHAIRMAN'S SUMMARY OF COMMITTEE ACTIVITY FOR THE 104th CONGRESS
As Chairman of the U.S. Senate Committee on Small Business
during the 104th Congress, I organized the Committee's agenda
so we could focus on the highest priority recommendations from
the 1995 White House Conference on Small Business and respond
to the input and concerns expressed by small business owners
across the nation during the Committee's ``Entrepreneurship in
America'' hearings. This report summarizes the legislative and
oversight activities of the Committee on these key issues of
concern and interest to small businesses.
A. Regulatory Fairness
One of the primary concerns of small business owners across
the nation is the disproportionate burden they bear in
complying with an overwhelming and ever-increasing number of
complex federal regulations. Antiquated federal rule-making
procedures--generally designed for larger firms that have more
resources to deal with the resulting compliance costs--have
long been a serious concern to smaller entrepreneurs and were a
constant theme at both the White House Conference and at
Committee field hearings. As Committee Chairman, I made
regulatory fairness for small businesses one of our highest
priorities during the 104th Congress. I authored the Small
Business Regulatory Enforcement Fairness Act (SBREFA) that
passed Congress on March 29, 1996 and became effective on July
1, 1996. The measure, when fully implemented, will provide
small business owners with a level regulatory playing field
both at the front end of the rule-making process when agencies
first propose regulations, as well as at the enforcement phase,
where, all to often, small businesses are treated exactly the
same as large corporations and federal agencies are not held
accountable for their actions.
The SBREFA law contains some important, innovative
provisions. It adds judicial teeth to the Regulatory
Flexibility Act, a 1980 law requiring federal agencies to
consider ways to reduce the economic impact of new regulations
on small businesses and local governments. The original Reg-
Flex Act, although well intentioned, has been routinely ignored
by agencies because it lacked statutory teeth. A centerpiece of
the SBREFA law is language permitting small entities to seek
judicial review of agency compliance with the Reg-Flex Act so
that small businesses and other small entities, such as local
governments, can take federal agencies to court if they
continue to ignore the Act's requirements. SBREFA also includes
the following important items:
It requires agencies to prepare ``Plain English''
compliance guides that will allow small business owners
to comply with federal regulations without having to
hire a team of lawyers to interpret them;
It requires federal agencies to establish policies or
programs providing for waivers or reductions in civil
penalties for non-serious infractions that do not
involve willful violations, criminal conduct, or
violations that pose serious threats to health, safety
and the environment;
It sets up an independent Ombudsman at the Small
Business Administration to receive confidential
complaints and comments from small businesses about
their dealings with federal regulators and establishes
regional citizen review boards to ``rate the
regulators'' based on these comments and publish their
findings in a ``report card'' for each agency;
It makes it easier for small businesses to recover
attorneys fees when agencies make demands for fines and
penalties that are not sustainable in court; and
It allows Congress to review and disapprove new
regulations written by federal agencies within a 60 day
window.
Another important law passed by this Congress, the 1995
Paperwork Reduction Act, should help reduce the regulatory and
paperwork burden currently faced by small businesses. During
the 104th Congress, the Committee held hearings to ensure that
federal agencies comply with this important legislation. At our
hearing on the implementation of this law, testimony from the
General Accounting Office (GAO) indicated that federal agencies
had failed to reach their obligation under the Act to reduce
paperwork by 10% in the first year following enactment. In
fact, using the Office of Management and Budget's own numbers,
GAO concluded that the actual reduction achieved was less than
1% in 1996. Clearly, that is unacceptable. As Committee
Chairman in the 105th Congress, I will follow this issue
closely, and I will continue my efforts to make certain that
federal agencies comply with the laws passed by Congress.
B. Small Business Tax Issues
The lack of a level playing field with regard to taxation
and tax compliance is a major concern for small business owners
who, once again, bear a disproportionate burden in complying
with a U.S. tax code that has not kept pace with the changing
economy and the dramatic expansion of small businesses. In
hearing after hearing during this Congress, small business
owners have expressed to me their deep concerns--not only with
the level of taxes that must be paid to Washington--but with
the enormous time and costs involved just trying to understand
the litany of red tape promulgated by the Internal Revenue
Service. Time and money spent trying to understand complicated
tax procedures and arcane tax law results in time not available
for running the business and money not available for expansion,
investment and new jobs. Issues of taxation elicited the most
concern from delegates at the White House Conference, resulting
in some of their highest priority recommendations for
legislative action. The delegates' recommendations included
clarifying the definition of an independent contractor, raising
the deductibility of health-care costs for the self-employed to
100%, restoring a meaningful home-office deduction, increasing
the expensing deduction for new equipment purchases, and
expanding small business pension plans.
As Committee Chairman, I authored legislation to clarify
the definition of an independent contractor--this was voted the
most important small business issue at the White House
Conference. That is because the IRS uses a complex and highly
subjective 20-factor, common-lawtest to determine whether a
worker is an employee or independent contractor. This test has created
fear and confusion for entrepreneurs who are subject to worker
reclassifications and collection of back taxes if they get it wrong.
Recent evidence has demonstrated that the IRS has resolved too many
cases in favor of an employment relationship at the expense of bona
fide independent-contractor arrangements. I introduced a bill during
the 104th Congress, the Independent Contractor Tax Simplification Act,
S. 1610, that would replace the 20-factor test with three simple
questions. By the end of the 104th Congress, the bill had 32 co-
sponsors in the Senate, and I will re-introduce legislation on this
issue in the 105th Congress.
Meanwhile, small businesses received some important tax
changes in the Small Business Job Protection Act that was
enacted in 1996:
Although not as comprehensive as my Senate bill, some
changes were made to the Revenue Act of 1978 that will reduce
some of the confusion surrounding worker classification and
independent contractors.
Senator Bob Dole's `SIMPLE' plan was enacted, making it
easier for small employers to establish retirement-savings
plans for their employees.
The amount a small business can deduct for new equipment
purchases will be raised gradually, from its current level of
$17,500 to $25,000 in 2003.
The Act makes it easier to form subchapter S corporations,
raising the number of shareholders who can organize as S
corporations from 35 to 75. That will result in more risk-
sharing and, consequently, more investment in small businesses.
Small business owners who perform their work outside of
their home, but whose office is their home, should be allowed
to claim a home-office deduction without fear of an IRS audit.
This is very important to the self-employed and to those
parents raising children while working at home. As the number
of home-based businesses increases, the importance of the
deduction mounts. In excess of some nine million Americans now
operate home-based businesses and that number continues to grow
rapidly. Women have a significant stake in the market, owning
70% of these businesses. Accordingly to the Small Business
Administration, 300,000 women start home-based businesses every
year.
I co-sponsored a measure in the Senate, the Home Office
Deduction Act of 1995, S. 327, that would have expanded the use
of the home-office deduction and leveled the playing field for
self-employed business owners who work at home. The legislation
would have overturned the 1993 Commissioner v. Soliman Supreme
Court decision. In that case, Dr. Solimon, a practicing
physician based out of his residence, was not permitted by the
IRS to deduct his home-office expenses because much of his
work, such as visiting patients and practicing medicine at
several facilities, was done outside the home. S. 327 would
have overturned the Supreme Court ruling with language that
states that the home office deduction may be utilized when the
majority of essential day-to-day administrative functions of
the office are performed in the home and when there is no other
principal place of business to expedite those functions.
Unfortunately, the measure did not reach the Senate floor
during the 104th Congress.
Under the current tax system, corporations can deduct 100%
of their share of an employee's health-insurance costs, but the
self-employed farmer, child-care provider, or truck driver can
only deduct 30%. It comes as no surprise, then, that nearly 25%
of the self-employed do not have health insurance, which
results in 4 million families headed by a self-employed worker
not having access to health insurance coverage. That is unfair,
and I have been trying to raise the deduction amount for the
self-employed to 100%. The Health Insurance Reform Act that was
enacted into law during this Congress will raise the amount,
incrementally, to 80% by the year 2006. It is not perfect, but
it is the best we could get at the time. A measure that would
have raised the deductible amount to 55% immediately failed
when President Clinton vetoed the Balanced Budget Act of 1995.
Under the current tax system, family-owned enterprises that
are passed from one generation to the next often must be sold
off just to pay the estate or inheritance tax. Clearly, that is
counter-productive for the economy and unfair to American
families. The family-owned small business is a cornerstone of
American entrepreneurship, and I believe Congress should modify
the estate tax, helping family-owned small businesses remain in
the family. During the 104th Congress, I co-sponsored the
American Family Owned Business Act of 1995, which would have
raised the tax exclusion on family-owned businesses from
$600,000 to $1,000,000, eliminated the tax on the first $1.5
million of the business' value, and reduced by 50% the tax on
business assets over $1.5 million.
C. Workplace Issues
For the smallest of small businesses, a mandatory increase
in the minimum wage is a job killer. That is why I offered a
common sense small business exemption to the wage hike enacted
during the 104th Congress. The amendment failed by a very
narrow margin. My exemption would have protected businesses
grossing less than $500,000 per year from what amounts to a 20%
mandatory increase in their labor costs.
One of the agencies most frequently cited by small business
owners as heavy handed when it comes to federal regulation of
the workplace is the Occupational Safety and Health
Administration (OSHA). In spite of the many complaints from
small businesses leveled against OSHA and the widely held
perception that it operates with a `gotcha' mentality, OSHA
continues to issue heavy fines on small business owners for
minor paperwork and posting violations that often have no
bearing on employee health and safety. At the same time, the
agency has not offered sufficient assistance to many employers
who are seeking genuine voluntary compliance with federal
rules. The simple fact is that the overwhelming majority of
employers care about their employees and know safe workplaces
save money through high productivity and lower workers'
compensation expenses.
In 1996, I co-sponsored the OSHA Reform and Reinvention
Act, S. 1423, that would have made real progress toward
providing relief to small businesses by replacing OSHA's
``gotcha'' mentality with a common sense approach that
redefines the agency's mission as a cooperative partnership
with small business. Under this legislation, OSHA would
continue to be there when the employer is making no effort to
comply voluntarily with health and safety standards. But
employers who take positive, reasonable steps to maintain safe
workplaces would no longer have to fear OSHA for technical
violations that have little to do with worker safety. The long-
term result of sensible OSHA reform would be improved worker
safety, more private sector growth, more jobs, and less red
tape for small businesses. Unfortunately, President Clinton
threatened to veto this measure and the bill was never reported
out of the Senate Labor Committee.
The inability of employees who work in non-union companies
to have a say in their workplace environment was also a
significant issue during the 104th Congress. As Chairman of the
Small Business Committee, I co-sponsored the Teamwork for
Employees and Management (TEAM) Act, S. 295, that would have
provided non-union employees of small businesses a greater say
in workplace issues by removing the barriers to employee
involvement programs and worker-management committees that are
contained in the antiquated 1935 National Labor Relations Act.
The TEAM Act amends this law to allow employees and managers at
non-union companies to resolve workplace issues such as
scheduling, safety and health, and even things like free coffee
and company softball teams. The legislation would not have
allowed employee teams to act as unions since they could not
engage in collective bargaining or act as exclusive
representatives of employees. This measure passed the Senate
late in the second session but was vetoed by President Clinton.
The virtually unlimited punitive damage awards allowable
under current law has enormous consequences for small business
owners. Even when lawsuits are frivolous, the high cost of
retaining an attorney and the risk of catastrophic loss often
means that a small business owner must settle the case out of
court, regardless of the merits involved. Unlike large
corporations that have more resources to fight frivolous
lawsuits, small business owners are often destroyed by them. As
Chairman of the Small Business Committee, I co-sponsored and
voted for the Product Liability Fairness Act of 1995, S. 565, a
bipartisan measure that would have decreased frivolous lawsuits
against small businesses while still allowing wide latitude for
plaintiffs to bring lawsuits, including the imposition of
punitive damages to deter egregious behavior. The measure
requires ``clear and convincing evidence'' that the defendant
in a lawsuit acted with ``conscious, flagrant disregard'' of
the plaintiff's rights or safety before large punitive damage
awards can be made. The legislation passed the Senate with more
than 60 votes, but was vetoed by President Clinton.
D. Access to Capital: Small Business Administration Programs
Legislation produced by the Committee in the 104th Congress
to strengthen SBA's finance programs has led to an enormous
expansion in the availability of bank loans and investment
capital for small business borrowers, while reducing the cost
of these programs to taxpayers. For small business owners, who
often have difficulty securing capital from traditional lending
sources such as commercial banks, the strength and availability
of SBA loan and loan guarantee programs is a critical issue.
In 1995, Congress enacted the Small Business Lending
Enhancement Act, a bill I wrote to provide a major increase in
program availability for SBA's 7(a) guaranteed business loan
program. The legislation restructured the program to provide
over $10 billion in loans to meet the growing demand of small
businesses through fiscal year (FY) 1996. The measure shored up
the 7(a) program by lowering the credit subsidy rate from 2.74%
to 1.06%, a 61% reduction in the subsidy rate. This change has
a significant impact on the volume of loans that can be made to
small businesses because when the subsidy rate is lowered, the
total loan authorization amount can increase even with a
smaller appropriation of taxpayer money. Taxpayers and small
business owners alike have benefited from this program
expansion. In FY 1995, $214 million was needed to support a
loan program of $7.8 billion. Under S. 895, in FY 1996, the
Senate appropriation of only $133 million will support $12.5
billion in loan guarantees.
In 1996, Congress approved a comprehensive bill reported by
the Committee to overhaul the Small Business Investment Company
(SBIC) program, which provides SBA-guaranteed risk capital for
investment by venture capital firms in small businesses. The
Act strengthens the SBIC program while limiting the risk of
loss to the federal government that had plagued the program in
the past. The Act expands by 80% the amount of investment
capital available to small business owners--from $373 million
to $620 million--while reducing the taxpayer cost of the
program by 46%.
Historically, women have had more difficulty than men in
securing capital and that is something that must change. In
addition to the benefits women entrepreneurs will receive with
the expansion of the 7(a) program, the SBA's Women's Business
Ownership Demonstration Project, a program that the Committee
authorized during the 104th Congress, has been successful in
helping to address this problem. When the SBA re-authorization
bill comes up next year in the 105th Congress, I will sponsor a
three-year extension of this important women's program.
One of our greatest challenges in America today is to bring
jobs and economic opportunity to those without hope in the
inner cities and the depressed rural areas of our country.
There is a way we can do this, and I am excited about the
prospects. In 1996, I introduced a bill creating HUBZones
(Historically Underutilized Business Zones). If passed and
signed into law, the HUBZones legislation would provide
government contracting preferences and set-asides to any small
business located in and hiring employees from economically
distressed urban and rural areas across the country.
This measure would benefit entire communities by creating
meaningful incentives for small businesses to operate and
provide employment within America's most disadvantaged inner-
city neighborhoods and rural areas. For these distressed areas,
HUBZones would result inthe immediate infusion of sorely needed
capital as more and more businesses--both start-ups and existing
enterprises--relocate into HUBZone areas in order to improve their
changes of receiving federal contract awards. The net result would be
meaningful job creation and community development in areas of perennial
high unemployment and low income. Most importantly, HUBZones would help
to accomplish an important objective of welfare reform--providing jobs
for individuals who want to move from welfare to work.
I believe we should place greater emphasis on programs that
encourage small businesses to provide jobs and economic
development where they are needed most. The HUBZones
legislation would accomplish that objective and help break the
cycle of poverty that has isolated distressed areas of our
country. My bill, which was not reported out of the Small
Business Committee, will be re-introduced in the next Congress.
E. Health Care Issues
Health care continued to be one of the top issues of
concern for small businesses during the 104th Congress. During
the Committee's ``Entrepreneurship in America'' series of
hearings, we heard from a number of small businesses concerning
the difficulties they face in obtaining and maintaining health-
care coverage. In response to these calls for assistance, I co-
sponsored the Health Insurance Portability and Accountability
Act of 1996, which included a number of the health-care
recommendations adopted by the White House Conference on Small
Business delegates.
The Act includes several provisions specifically designed
to assist small businesses, including a pilot program for
Medical Savings Accounts available to self-employed individuals
and businesses with less than 50 employees. The Act also
increases the deductibility of health-insurance costs by self-
employed individuals incrementally from the 1996 level of 30%
to 80% by the year 2006. While this increase is a step in the
right direction, I will introduce legislation in the 105th
Congress to accelerate the deduction to 100% and fully level
the playing field for small businesses.
F. Banking and Financial Institutions
In connection with its overall efforts to provide
regulatory reform for small businesses, the Committee also
focused on regulatory relief for small banks. Towards that
goal, I joined a number of Senators in co-sponsoring the
Economic Growth and Regulatory Paperwork Reduction Act, S. 650,
which was incorporated into the 1997 Omnibus Appropriations Act
and will provide regulatory and paperwork relief for small
banks across the nation.
I also promoted several other reforms that would assist
small financial institutions including extension of federal
examination cycles for certain banks with strong capitalization
and management; expansion of the exemptions from home-mortgage-
data-reporting requirements; and changes to the Truth-in-
Lending Act, the environmental liabilities laws and bank
application processes. Each of these changes will mean reduced
administrative costs for all financial institutions, including
small banks.
G. Securities Laws
Small businesses were the beneficiaries of two securities-
related laws enacted by the 104th Congress. The Private
Securities Litigation Reform Act of 1995 makes broad
modifications to the rules governing private securities
litigation and class action suits. As an advocate of these
revisions, I believe they will assist small enterprises that
are just beginning their businesses, as well as those small
firms that are expanding their operations by helping them
obtain important capital financing.
The Capital Markets Efficiency Act of 1996 will also
benefit small businesses by streamlining the regulatory
compliance rules applicable to small investment advisors who
operate in several states. This legislation's uniform federal
de minimis registration exemption for small investment advisors
and its uniform books and records requirements for small
investment advisors will go a long way towards alleviating the
paperwork and regulatory burdens imposed on small firms in the
investment industry.
H. Telecommunications
The 104th Congress made significant headway in overhauling
the nation's telecommunications laws, which will enable small
telecommunications firms more opportunities to compete in this
dynamic and growing industry. The Telecommunications Act of
1996, S. 652, ends 40 years of excessive government regulation
by opening the local telephone marketplace. While I supported
these changes, as Committee Chairman I also recognized the risk
that small firms could be subject to discrimination and other
entry barriers. As a result, I undertook efforts to ensure that
this legislation included safeguards to protect small
businesses' opportunity to compete in this market. I also
encouraged the Federal Communications Commission to utilize the
Market Entry Barriers Proceeding provisions of the bill to the
fullest extent to eliminate market barriers to small businesses
participation in the telecommunications industry.
On a related issue, the availability of cable programming
at fair and competitive prices continued to be a concern during
the 104th Congress. In response to the proposed merger between
Time-Warner Inc. and Turner Broadcasting System, I contacted
each of the five commissioners of the Federal Trade Commission
(FTC) to call their attention to the risk of price
discrimination against small cable carriers, which could result
if the FTC approved the merger. The final FTC consent decree
addressed these concerns by requiring Time-Warner to adhere to
nondiscriminatory pricing policies. The decree also restricted
Time-Warner from bundling services and engaging in practices
that would reduce the opportunity of small cable operators to
compete in this market place.
I. Product Liability Reform
The business community, and in particular small business,
has long called for reform of the country's product liability
system. As Chairman of the Committee, I strongly supported
legislation introduced by Senator Gorton and Rockefeller that
included uniform statutes of limitations and repose, limited
liability for sellers that are not manufacturers, and several
liability for non-economic damages. I also advocated that the
legislation include a reasonable limit on punitive damage
awards of $250,000 or twice the economic damage award for
businesses with fewer than 25 full-time employees. This
provision was included in the final bill, and the legislation
was approved by both the Senate and the House. Despite the
strong endorsement from the small business community, President
Clinton vetoed the bill.
As the foregoing sections demonstrate, the Committee's
activities on issues important to American small businesses
have been diverse and far reaching. While we made significant
progress on a number of our priorities, further steps certainly
will be required. I am committed to taking those steps in the
105th Congress as we work to put small businesses and family-
owned enterprises on a level playing field with their larger
competitors.
II. REGULATORY FAIRNESS
A. Small Business Regulatory Reform
Background
In June 1995 nearly 2,000 delegates to the White House
Conference on Small Business came to Washington to vote on an
agenda of the top concerns of small business. The Washington
meeting completed a year-long grass-roots effort in which over
20,000 small business people sifted through more than 3,000
policy recommendations in 59 state conferences and six regional
meetings.
Over 400 of the most important policy recommendations were
voted on by the delegates to the Washington meeting. The top 60
recommendations were published by the Conference last September
as a report to the President and Congress entitled Foundation
for a New Century. Not surprisingly, the White House Conference
echoed the findings from many of the Committee's hearings in
its series on ``Entrepreneurship in America.'' Three of the top
recommendations, set out in full below, call for reforms in the
way government regulations are developed, in the way they are
enforced, and in reducing government paperwork requirements:
The Regulatory Flexibility Act (Agenda #183)
Congress should amend the Regulatory Flexibility Act,
making it applicable to all federal agencies including
the Internal Revenue Service and the Department of
Defense, to include the following:
Require cost-benefit analysis, scientific-
benefit analysis and risk assessment on all new
regulations and Internal Revenue Service
interpretations;
Grant judicial review of regulations,
providing courts the ability to stay harmful
and costly regulations and to require agencies
to rewrite them;
Require small-business representation on
policy-making commissions, federal advisory and
other federal commissions or boards, whose
recommendations impact small business. Input
from small business representatives should be
required in any future legislation, policy
development, and regulation making affecting
small businesses; and
With respect to all regulations involving
small business, require negotiated rulemaking
proceedings for adoption of all rules, with
small business representing 50 percent of the
negotiating panel.
Regulatory Compliance/Agency Enforcement Reform (Agency
#194)
Congress shall enact legislation and appropriate
enforcement to include all of the following:
Require that all agencies provide a
cooperative/consulting regulatory environment
that follows due process procedures and that
the agencies be less punitive and more
solution-oriented in dealing with unintentional
regulatory violations;
Require that fines take into account the
severity of the infraction, size and type of
company, the past safety record and the
frequency and severity of the violations;
Allow proposed fines to be used toward
correcting violations;
Prohibit fines either for violations
identified during a consulting visit requested
by the company, or by an agency investigator
and brought to the attention of the employer
for the first-time specific violation. If the
company is found to be in substantial
compliance; the employer and inspector should
negotiate a reasonable timetable for
compliance, and fines should be levied only for
failure to comply with that timetable;
Allow small business the option of binding
arbitration to resolve any dispute with any
federal agency;
Require that regulatory agencies to put the
fines that they impose and collect into the
general treasury fund toward retiring the
national debt; said agencies should be
prohibited from receiving credit or usage of
such monies;
Require that the liability of the employer
and the employee be relative to their
respective culpability; and
Require enforcement actions to comply with
American due process concepts; adequate notice
and opportunity to be heard, a presumption of
innocence until proven guilty, and the issuance
of an impartial judgment.
Paperwork Reduction/Paperwork and Regulatory Reform
(Agency #188)
Congress shall enact legislation and appropriate
enforcement provision to include all of the following:
Require all agencies to simplify language and
forms required for use by small business and
that only the English language be required;
Require all agencies to sunset and reevaluate
all regulations every five years, using the
same standards required for new regulations,
with the goal of reducing total paperwork
burden by at least 5 percent each year for the
next five years;
Require agencies to assemble information
through a single source on all small-business
related government programs, regulations,
reporting requirements, and key federal
contacts' names and phone numbers, with as much
as is feasibly available by online computer
access; and
Eliminate duplicate regulations from multiple
government agencies.
The common theme of all three recommendations is the need
to change the culture of government agencies. In his address to
the White House Conference, the Vice President expressed a
number of similar concerns with government regulations and the
need for cultural change within government agencies, saying:
The old way was for government to treat business like
a suspect and the goal seemed to be to catch you red
handed. That was yesterday's government. The new way,
one of the things we found out is something that you've
long since learned. You get what you measure. You focus
on what you keep track of and if the people on the
front line are evaluated and rewarded on the basis of
how many fines they issue and how many citations they
hand out, then they are going to concentrate on
increasing the number of fines and citations.
The new way is for government to treat business like
a partner sharing a common goal and the goal is this. A
growing business that works in a safe and healthy
environment. That is what reinventing government is all
about. And we're making progress, it's working. We said
when we started this that it would take 8-10 years to
change the culture of the federal government and to
make all of the changes that are necessary. But already
there are a lot of results.
Well, the old OSHA used to look at their inspections
to see if that poster was up and if the poster wasn't
up that was an automatic $400 fine. And it was a hefty
percentage for what the fines were. Here's what the new
OSHA will do if they find out that you don't have the
poster up. Instead of giving you a $400 fine, they give
you a poster.
Legislation
As a result of the recommendations of the White House
Conference and based ontestimony taken at the Committee's
``Entrepreneurship in America'' field hearings, Chairman Bond
introduced the Small Business Regulatory Fairness Act of 1995, S. 942.
In addition, Senator Domenici introduced the Small Business Advocacy
Act of 1995, S. 917, drawing on the White House Conference
recommendation and on testimony received at the Committee's field
hearing, ``Entrepreneurship in America: Excessive Governmental Burdens
on Small Business,'' held in Albuquerque, New Mexico, on February 20,
1995 [See Hearings of the Committee]. Both bills were referred to the
Small Business Committee, and together with S. 350, became the basis
for the Small Business Regulatory Enforcement Fairness Act of 1996
(``SBREFA'').
As enacted into law, SBREFA contains a number of important
provisions to implement recommendations of the White House
Conference on Small Business:
Compliance Guides. SBREFA requires agencies to publish an
easily understood guide to assist small business in complying
with regulations which undergo a required Regulatory
Flexibility analysis. Courts will not second guess the adequacy
of the guides, but the guide and the agency's claim that the
guide provided ``plain English'' assistance will be available
as evidence of the reasonableness of any proposed fine on the
small entity.
Informal Small Entity Guidance. SBREFA directs agencies to
answer inquiries of small entities concerning information on
and advice about regulatory compliance. The agency's advice
need not be binding and dispositive as to the legal effects of
a small entity's actions, but will be available as evidence of
the reasonableness of any subsequently proposed fine on the
small entity.
Services of Small Business Development Centers. SBREFA
allows Small Business Development Centers to provide small
businesses information on complying with regulatory
requirements. This is not an exclusive grant of authority, but
is in addition to programs such as the state-run stationary
source technical assistance programs developed under section
507 of the Clean Air Act Amendment of 1990.
Small Business and Agriculture Enforcement Ombudsman and
Regional Boards. SBREFA creates a Small Business and
Agriculture Enforcement Ombudsman at SBA to provide a
confidential means for small businesses to comment on agency
enforcement actions and to develop an annual ``customer
satisfaction'' rating of the responsiveness to small businesses
of agencies and agency offices. SBREFA also creates Regional
Small Business Regulatory Fairness Boards at SBA which
coordinate with the Ombudsman to provide small businesses with
a greater opportunity to track agency enforcement policy and
practice and to provide that information to Congress.
Small Business Enforcement Policies and Programs. SBREFA
requires federal agencies to develop programs to waive or
reduce civil penalties for violation by small businesses, and
to consider a small business' ability to pay when assessing
penalties. The agencies will establish appropriate conditions
and exceptions from the policy, such as for serious threats to
public health, safety, or the environment.
Leveling the Playing Field. SBREFA assists small businesses
in recovering their attorney's fees if they have been subject
to excessive and unsustainable proposed penalties or other
enforcement actions. The Equal Access to Justice Act (EAJA) has
proven to be a limited value in leveling the playing field
between small businesses and the federal government. SBREFA
amends the EAJA to create a new avenue allowing small entities
who have not willfully violated the law and otherwise acted in
good faith to recover their attorney's fees necessary to fight
excessive government demands in enforcement actions. Under the
new provision, the test for recovering attorney's fees is
whether the agency demand in an enforcement action (whether a
fine, injunctive relief or damages) is substantially in excess
of the final outcome in the case so as to be unreasonable as
compared to the final outcome. SBREFA also increases the
maximum hourly rate for attorney's fees under the EAJA from $75
to $125.
Regulatory Flexibility Act. SBREFA clarifies the
requirements of the Regulatory Flexibility Act (RFA) to apply
unambiguously to IRS regulations and interpretive rules and
subjects final agency action under the RFA to judicial review.
It does not change or in any way affect the legal standards of
the underlying statute. However, the agency must consider ways
to minimize the effects of the rule on small entities. If the
court finds that the agency action under the RFA was arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with the law, the court may set aside the rule and
order the agency to take corrective action.
Early Small Business Involvement. SBREFA amends the
existing requirements of RFA section 609 for small business
participation in the rulemaking process at the Environmental
Protection Agency (EPA) and the Occupational Safety and Health
Administration (OSHA) by incorporating a modified version of S.
917 (the Small Business Advocacy Act, introduced by Senator
Domenici) to provide early input from small business. For
proposed rules with a significant impact on a substantial
number of small entities, EPA and OSHA must collect advice and
recommendations from small business to provide better
information for the agency's initial regulatory flexibility
analysis on the potential effects of the proposed rule. The
findings of the Panel and the comments of small business
representatives will be made public as part of the rulemaking
record.
Congressional Review. SBREFA establishes a 60-day review
period following the issuance of any federal agency final rule
during which Congress could enact a ``joint resolution of
disapproval.'' The joint resolution would be considered by
Congress under a ``fast track'' procedure not subject to
filibuster in the Senate. If the resolution is passed by
Congress and signed by the President or the President's veto is
overridden, the regulation would be null and avoid.
Committee Action
During the Fall and Winter of 1995, Committee staff worked
to combine provisions from S. 350, S. 917 and S. 942 into a
single legislative package. This package reflected comments
received by the Committee since the introduction of these
bills. The provisions of S. 350 in particular had been subject
to significant modification during and after the debate on the
Comprehensive Regulatory Reform Act of 1995, S. 343.
A discussion draft of the combined bill, S. 942, was
circulated in February 1996 and was the subject of a hearing
held by the Committee on February 28, 1996 [See Hearings of the
Committee]. The Committee held a markup of S. 942 on March 6,
1996, at which Chairman Bond offered an amendment in the nature
of a substitute to S. 942 incorporating the text of the
discussion draft as well as numerous comments received at the
hearing. This amendment was adopted by voice vote as was an
amendment by Senator Lieberman, directing Manufacturing
Technology Centers to provide technical assistance to small
businesses on how to comply with federal regulations. S. 942 as
amended, the Small Business Regulatory Enforcement Fairness Act
of 1996, was ordered reported by a unanimous vote of the
Committee. Due to a desire on the part of the Senate to take up
this important legislation promptly prior to pending debate on
extending the debt ceiling, the Committee reported S. 942
without a written report. However, Chairman Bond and Senator
Bumpers submitted a joint statement of explanation of the
Committee-reported legislation on March 7, 1996.
Initial objections to proceeding with consideration of S.
942 prevented the Senate from taking up the bill immediately.
However, when the Senate took up S. 942 on March 15, Chairman
Bond and Senator Bumpers offered a manager's amendment, which
reflected changes sought by the Administration during intensive
discussions following the Committee markup. The manager's
amendment was agreed to by voice vote, as was an amendment
offered by Senators Nickles, Reid and Stevens to allow for a
60-day period for congressional review of new regulations. On
March 19, the Senate Passed S. 942 as amended by a vote of 100-
0.
In the House, a version of the SBREFA with language nearly
identical to the Senate-passed version of S. 942 was
incorporated into an amendment offered by Congressman Hyde to
the Contract With America Advancement Act, H.R. 3136. The Hyde
amendment was subsequently incorporated into H.R. 3136 as Title
III, which passed the House on March 28, 1996 by a vote of 328
to 121. H.R. 3136 also passed the Senate by unanimous consent
on March 28. On March 29, Chairman Bond and Senator Bumpers
submitted a joint statement of explanation of the final text of
the bill as passed by the House and Senate. Senators Nickles,
Reid and Stevens made a joint statement on their amendment to
S. 942 on April, 18. On March 29, 1996, the President signed
H.R. 3136 into law as Public Law 104-121. Note that in the
Public Law, SBREFA is Title II, instead of Title III as in the
House-passed version of H.R. 3136 because Title II of H.R. 3136
as passed by the House, dealing with the line item veto, had
already passed the Senate and was separately enrolled into law.
Thus, SBREFA became Title II of Public Law 104-121.
The Committee held an oversight hearing on July 24, 1996 in
Washington, D.C. on the implementation of SBREFA, particularly
by EPA and OSHA [See Hearings of the Committee]. In addition,
the Committee asked many of the important federal regulatory
agencies to provide written descriptions of their SBREFA
implementation activities, including the requirement under
section 610 of Reg Flex that agencies have a plan to review
periodically their existing regulations that effect small
entities.
B. Comprehensive Regulatory Reform
Background
The White House Conference on Small Business identified
regulatory reform as one of the most important issues for small
business in the 104th Congress. From the perspective of small
business, regulatory reform involves a number of related, but
distinct, initiatives. These include benefit-cost analysis,
scientific risk assessment, periodic review of regulations, and
reforming the enforcement of regulations.
Legislation
In the Senate, the primary legislative vehicle for
regulatory reform was the Comprehensive Regulatory Reform Act
of 1995, S. 343, and the substitute offered by Senators Dole
and Johnston. This legislation contained provisions that
directly addressed many of the reforms identified by the White
House Conference, including the language of S. 350 providing
judicial review of the Regulatory Flexibility Act (RFA), cost-
benefit analysis of regulations, scientific risk assessment of
hazards that agencies propose to regulate, and periodic review
of existing regulations. Throughout the debate on S. 343 and
during the development of the Dole/Johnston substitute, the
Committee played a crucial role in redrafting numerous
provisions to reflect the small business agenda, including the
provisions on judicial review of the RFA, cost-benefit
analysis, risk assessment, and periodic review of regulations.
Chairman Bond and Senator Domenici offered an amendment to
S. 343, which expanded the scope of regulation reform to
include provisions requiring early small business input on
proposed EPA and OSHA regulations, and reforms to the
enforcement of regulations. Building on provisions in S. 917
and S. 942, the amendment also established small business
Ombudsmen and Regulatory Fairness Boards in the SBA regional
offices to make government inspectors more accountable for
their actions. This amendment was adopted by voice vote.
Another amendment to S. 343, offered by Chairman Bond and
Senator Robb sought to allow an industrial facility, or groups
of small businesses or small cities, to develop an alternative
means of achieving the results required by current
environmental regulation. Building in part on the
recommendations of the National Academy of Public
Administration report, this alternative compliance amendment
would allow small businesses or groups of small businesses to
solve environmental problems creatively without being
constrained by regulations that mandate the useof a specific
technology or by the current division of environmental law into media-
specific requirements. The resulting alternative compliance agreements
would result in a better environment, and a reduced burden on industry,
compared with the EPA's current command-and-control approach. S. 343
was withdrawn from consideration before the Senate could vote on this
amendment.
C. Regulatory Accounting Requirements
Background
The overall effort for regulatory reform has been hampered
by a lack of good data on the true costs and effects of federal
regulations. While numerous studies have taken periodic looks
at regulatory costs, the federal government does not regularly
publish an accounting of the various costs it imposes on
individuals and businesses through the regulatory process.
Legislation
Committee staff worked with Senator Stevens to include
language in the 1997 omnibus appropriations bill to provide for
an annual accounting of the cost and benefits of federal
regulation. This amendment implements further the number three
recommendation of the White House Conference on Small Business
to require cost-benefit analysis of all new regulations.
The regulatory accounting amendment requires the Office of
Management and Budget (OMB) to prepare an annual report
estimating the costs and benefits of each major rule costing
over $100 million (currently this is performed on a rule-by-
rule basis). OMB is directed to include an estimate of the
cumulative annual quantitative and non-quantitative costs and
benefits of all federal rules (including minor rules). OMB is
also directed to assess separately the effects of federal rules
on the private sector, state and local government, and the
federal government. Finally, OMB must provide Congress with a
summary of significant public comments and recommendations to
reform regulatory programs or program elements that are
wasteful or outdated. OMB must provide the public with notice
and an opportunity to comment on the draft report before it is
submitted to Congress on September 30, 1997. The amendment was
supported by a unanimous voice vote in the Appropriations
Committee and on the Senate floor.
This ``truth in regulating amendment'' will inform small
businesses and Congress about the benefits and burdens of
federal regulations, and provide a mechanism to judge the
efficacy of regulatory programs. Unlike on-budget government
spending, regulatory programs impose costs that now are
accounted for in government budget figures--about $600 billion
annually. These costs are passed on to the American consumer
and taxpayer in one form or another, including higher prices,
lower wages, higher taxes, and reduced government services. The
tab is about $6,000 per year for the average American
household--about half the federal tax burden faced by most
families. Yet until the adoption of this amendment, there has
been no centralized accounting of the benefits and costs of
regulatory programs.
D. Superfund
Background
The number five recommendation of the White House
Conference on Small Business was comprehensive reform of the
Superfund program, including repeal of retroactive liability,
reliance on sound science using realistic risk assessment and
cost-benefit analysis in assessing health risks and selecting
cleanup remedies at Superfund sites, making greater use of de
minimis exemptions to Superfund liability, and eliminating the
liability of fiduciaries and lenders on property held primarily
as security for a loan.
Legislation
Most of the Superfund recommendations of the White House
Conference were included in S. 1285, the Superfund
reauthorization bill introduced by Senator Smith in September
1995. This bill was the subject of lengthy discussions among
all of the various stakeholder groups. Despite the progress
made as the result of these discussions, S. 1285 was not marked
up by the Senate Environment and Public Works Committee.
Nonetheless, members of the Small Business Committee played an
active role in the Superfund reform debate and worked with
Senator Smith to refine S. 1285 in keeping with the small
business agenda. In particular, members of the Committee were
active in finding ways to protect the environment from
hazardous waste sites faster and for less money, thus reducing
the effects on small businesses involved in Superfund sites.
Committee action
Chairman Bond asked the General Accounting Office (GAO) to
examine whether opportunities exist to reduce the costs of
Superfund cleanups--and the cost to small businesses--while
maintaining protection of health and the environment. The GAO
report, published in July 1995, indicated that much of the
health risk associated with Superfund sites would occur only if
there was a change in land use at the Superfund site. It showed
that there are two very different kinds of risks at Superfund
sites: the ``risk'' to your health from being exposed to
pollution, and the ``risk'' that something might happen in the
future at a Superfund site that could trigger exposure.
Too often, the EPA obscures the difference between these
types of risks by talking about Superfund risks as if they were
all the same. In the first case, however, the Superfund site
could be making people sick today, while in the second case,
the Superfund site is definitely not making people sick today,
but events in the future may create conditions that could
affect people's health. Unfortunately, once a Superfund site
enters the remedial action program, EPA has made little effort
to coordinate its efforts at Superfund sites with current
health risks. As a result, EPA resources often go to sites
where the only risk is based on some hypothetical event in the
future, while other sites languished where real exposures are
having real effects on real people's health.
In a follow-up report issued in April, 1996, the GAO
analyzed the results of so-called non-time-critical (``NTC'')
removals conducted under EPA's Superfund Accelerated Cleanup
Model initiated by the Bush Administration in 1992. This report
points out that significant time and money can be saved through
the NTC removal process. GAO found that EPA can save 15-20
percent and two years of clean up time when it conducts NTC
removals as an alternative to the traditional remedial action
process at all but the most complex types of cleanups. GAO has
shown that NTC removals use the same types of treatment and
cleanup standards as remedial actions, but they do it faster
and cheaper. Together, these reports show that greater use of
NTC removals could allow EPA to provide the same degree of
protection for public health at less cost to small business and
others, and complete the cleanup in significantly less time.
Alternatively, with equivalent resources, EPA could clean up
more sites through a greater use of NTC removals.
E. Paperwork Reduction
Background
Government paperwork remains one of the biggest burdens for
small business. One of the primary recommendations of the White
House Conference of Small Business was to require federal
agencies to achieve a reduction of the government's total
paperwork burden by five percent each year for the next five
years.
Legislation
The Paperwork Reduction Act of 1995 (PRA) went beyond the
White House Conference recommendation of a five percent annual
reduction and called for a 10 percent reduction in 1996 and
1997 and a five percent reduction in each of the following four
years. Members of the Committee were very active in the debate
and passage of the PRA. Following its enactment, the Committee
took an active role in overseeing the implementation of the
PRA.
Committee action
The Committee held an oversight hearing on June 5, 1996 in
Washington, D.C. on the implementation of the Small Business
Agenda, which highlighted PRA activities [See Hearings of the
Committee].
F. SBREFA Demonstration Project
Background
Section 215 of SBREFA directs federal agencies to cooperate
with states to develop joint small entity guidance that
combines state and federal requirements. This section was
designed to move federal agencies further down the road towards
providing simplified and comprehensive guidance to small
entities on their obligation under federal and state
regulations.
Legislation
The Committee had language included in the FY 1997 VA, HUD
and Independent Agencies Appropriations bill directing EPA to
undertake a $1 million demonstration project to develop
integrated compliance assistance packets as a means of further
implementing section 215 of SBREFA. The key innovation of this
demonstration is to look at all of the federal and state
environmental regulations affecting a particular industry. The
purpose of the demonstration project is for states and federal
regulators to work together to develop an instructional packet
describing proper reporting techniques and what a small
business should do to comply with state and federal
environmental laws, a video describing compliant and non-
compliant situations, and simplified permits or substitute
permits for a specific industry sector. The final product will
provide small businesses in a selected industry sector with a
single resource to consult in order to determine what the small
business must do to comply with state and federal environmental
laws. Selection of projects for this demonstration is to be
carried out by the EPA in cooperation with state environmental
regulatory officials and small business associations.
III. SMALL BUSINESS TAX ISSUES
A. Independent Contractor
Background
The delegates to the White House Conference on Small
Business as their top priority urged Congress to clarify the
definition of an independent contractor. According to the
delegates it is the most important issue plaguing small
business today. The crux of the problem is that employers have
a difficult time using a 20-factor common-law test for
determining whether a worker is an employee or an independent
contractor. Employers argue that the test is ambiguous,
subjective and unpredictable. Meanwhile, the examining agents
are resolving many of the cases in favor of employee status and
are levying heavy penalties against the business owner.
Legislation
On March 13, 1996, Senator Bond, joined by Senator Nickles,
introduced the Independent Contractor Tax Simplification Act,
S. 1610. The purpose of the legislation was to set out a short
list of simple, clear, and objective standards for determining
who is an employee and who is an independent contractor. The
bill was introduced because the small business community made
it clear that the longstanding ambiguity in the current law was
making it extremely difficult for owners to determine worker
status and in some cases was stifling business expansion.
The bill sets out three questions to be asked in
determining worker status. First, is there a written agreement
between the parties? Second, does it appear the worker has made
some investment such as incurring substantial unreimbursed
expenses or being paid primarily on a commission basis? Third,
does the worker appear to have some independence such as having
his own place of business? In other words, if there is a
written agreement between the parties and if basic investment
and independence criteria are met, then the worker is an
independent contractor. In addition, as under current law, the
parties must properly report payments above $600, which ensures
that all taxes properly due to the Treasury are collected.
Support for S. 1610 was significant with 31 Republican co-
sponsors. As a result of this legislative effort, grassroots
small business support, and a parallel effort on companion
legislation (H.R. 1972), some improvements were made to the
worker classification rules in the Small Business Job
Protection Act of 1996. These changes, although helpful to some
small business owners were not enough, and continued effort to
change the law likely will occur during the 105th Congress.
Committee action
The Small Business Committee held hearings on the worker-
classification issue on September 19 and 20, 1995 and April 23,
1996 [See Hearings of the Committee].
B. Self-Employed Health Insurance
Background
Another important issue facing small business during the
104th Congress was the deductibility of health-insurance costs
for the self-employed. Beginning on January 1, 1994, the 25%
deduction level expired, and according to the Treasury
Department, this meant some 3.2 million self-employed taxpayers
could not deduct any of their health-insurance premiums.
Legislation
In 1995, Congressional concern about the expiration of the
provision led to passage of legislation making the deduction
permanent and increasing the deduction amount of 30%. Later in
1995, Chairman Bond introduced an amendment to the budget
reconciliation legislation to increase the deduction for the
self-employed to 55% beginning January 1, 1996. The amendment
passed unanimously. In conference, however, the provision was
modified to provide a deduction of 35% in 1998 and 1999, 40% in
2000 and 2001, and 50% in 2002. Subsequently, the President
vetoed that legislation.
The Chairman and Committee Members heard from constituents
throughout the 104th Congress regarding this issue. The lack of
parity, as compared with C corporations, and the rising cost of
insurance made the issue subject to considerable debate. During
the Committee's tax hearings, testimony was heard from small
business owners and their representatives explaining the
further need for change. Finally, near the end of the 104th
Congress, as part of the Health Insurance Portability and
Accountability Act, the deduction was increased, incrementally
to 80% by 2006. Chairman Bond and other Members of the
Committee supported the increase as a step in the right
direction, in terms of leveling the playing field for small
business entrepreneurs. Chairman Bond stated, however, that his
effort to achieve tax parity would continue to be a top
priority in the 105th Congress.
Committee action
The Small Business Committee held hearings on increasing
the health-insurance deduction for the self-employed on
September 19 and 20, 1995 and April 23, 1996 [See Hearings of
the Committee].
C. Estate Taxes
Background
Estate tax relief was identified by many small business
groups, including the National Federation of Independent
Business and the delegates to the White House Conference, as a
vital concern. Small business owners argue that the current law
is forcing some to sell what otherwisewould be a viable family
business just so they can raise cash to pay the estate taxes. And the
surviving family members are not the only ones affected by the tax--
with the terminated business goes valuable jobs in the community. It is
interesting to note that because sophisticated taxpayers often make
charitable gifts and arrange their deductible transactions to reduce
their taxable estates, the estate tax has its most damaging impact in
the small, family business sector, but it raises little net revenue for
the federal government.
Legislation
On July 28, 1995, Senator Dole joined by 31 co-sponsors,
introduced The American Family Owned Business Act, S. 1086. The
bill would eliminate the estate tax for each decedent's
interest in a family-owned business worth up to $1.5 million.
If the decedent's family-owned business assets exceed $1.5
million, then one-half of the excess would be excluded from the
estate. The bill received tremendous praise and grassroots
support from small business owners throughout the country. The
Small Business Committee heard testimony on the importance of
the issue from several witnesses, including the Missouri Farm
Bureau and the National Cattlemen's Association.
A modified version of S. 1086, which would have
significantly reduced the estate-tax when a family-owned
business passes from one generation to the next, was included
in the Balanced Budget Act, which was vetoed by the President.
Some small business owners, including delegates to the White
House Conference have recommended complete repeal of the estate
tax.
Committee action
The Small Business Committee held hearings on estate tax
reform September 19 and 20, 1995 [See Hearings of the
Committee].
D. Home-Office Deduction
Background
An important issue identified by home-based business owners
and by the National Association for the Self-Employed is the
need to restore the existing law concerning the home-office
deduction. A 1993 Supreme Court decision, Commissioner v.
Soliman, significantly narrowed the home-office deduction for
entrepreneurs who perform their work outside of their homes,
but whose office are in their homes. For example, those losing
the deduction include plumbers, electricians, homebuilders,
veterinarians, and travel agents.
Legislation
In response to the need for change, Senator Hatch
introduced the Home Office Deduction Act, S. 327, which
provides reform of the home-office deduction in light of the
1993 Supreme Court decision Commissioner v. Soliman. The bill
would restore the deduction to thousands of business owners.
Rather than meeting the narrow criteria set out in the Soliman
decision, the bill would allow the deduction if the home office
is the sole location where essential administrative or
management activities are conducted by the taxpayer on a
regular basis.
Small business owners argue that the Soliman decision is
shortsighted and ignores the way business is done today,
especially in light of the development of new technologies. The
changes provided by S. 327 would benefit certain parents who
are raising children while working at home as well as
individuals laid off as a result of corporate downsizing.
Chairman Bond and Senator Lieberman were the only two Members
of the Small Business Committee to cosponsor S. 327. While the
legislation did not pass during the 104th Congress, it will
remain a top priority for home-based business owners and the
Committee for the 105th Congress.
Committee action
The Small Business Committee held hearings on restoring the
home-office deduction on September 19 and 20, 1995 and April
23, 1996 [See Hearings of the Committee].
E. Equipment Expensing
Background
Throughout the 104th Congress, the small business community
supported an increase in the provision of the tax law that
permits small businesses to expense certain purchases of
equipment. Generally, taxpayers must recover the cost of
business property placed in service over time through
depreciation. The law provides that in lieu of depreciation,
small businesses may deduct up to $17,500 of the cost of
qualifying property placed in service.
Legislation
The Balanced Budget Act of 1995 included a provision to
increase the equipment expensing limitation to $25,000 over a
seven-year period. The President vetoed the legislation, and as
a result, small business lost the chance for improved cash flow
and the opportunity for expansion that this change would have
provided.
In June of 1996, Chairman Bond sent a letter to Senator
Roth, Chairman of the Finance Committee, outlining small
business tax priorities and urging the Finance Committee to
consider, among other things, an increase in the equipment
expensing provisions during the markup of the Small Business
Job Protection Act. Senator Bond wrote that an increased
deduction would improve cash flow and permit the additional
hiring that often accompanies business expansion. In addition,
an increase would help remove some of the complex, annual
depreciation calculations from compliance burdens on small
enterprises.
When the Small Business Job Protection Act was enacted in
the Summer of 1996, it included an increase to the equipment
expensing provision that raises the deduction limitation
incrementally to $25,000 over several years. Some small
business groups contend that this increase is too small and
would have preferred the deduction be raised to $50,000.
Committee action
The Small Business Committee held hearings on the equipment
expensing issue on September 19 and 20, 1995 [See Hearings of
the Committee].
F. Pension Simplification
Background
Historically, the high cost of establishing and maintaining
pension and profit-sharing plans has been a major barrier for
small business. During Committee hearings on the issue John
Galles, President National Small Business United, testified
that the ``complex and costly burdens our pension rules place
on small businesses wishing to offer retirement plans for the
benefit of their employees too often frightens and discourages
those businesses from starting or even maintaining such
plans.''
Legislation
The 104th Congress went a long way towards correcting this
problem with the development of the Savings Incentive Match
Plan for Employees (SIMPLE). SIMPLE plans can be adopted by
employers with 100 or fewer employees who do not maintain
another employer-sponsored retirement plan. Small businesses
like SIMPLE plans because, much of the complexity of
traditional retirement plans is removed, and thus they can
offer retirement plans to employers at a reduced cost. SIMPLE
plans will help encourage people to take responsibility for
their own retirement, making it easier for small businesses to
participate in the process.
In 1995, the President vetoed provisions included in the
Balanced Budget Act, that would have established the SIMPLE
Plan. Eventually, the SIMPLE Plan was enacted in 1996 as part
of the Small Business Job Protection Act. The Act also
contained a number of other changes that simplified the
existing pension laws, which will further encourage and enable
small businesses to offer retirement benefits to their
employees.
Committee action
The Small Business Committee held hearings on pension
reform and simplification on September 19 and 20, 1995 [See
Hearings of the Committee].
G. Capital Gains
Background
Capital gains tax relief was identified as an important
issue to both small and large businesses during the 104th
Congress. Some businesses viewed a reduction in the rate as a
way to unlock built-up asset values and make money available
for new investment. There was also support for a second, lower
rate generated from investments in small businesses as an
incentive to attract newly available capital into the small
business sector. In addition, there was support for the
deferral of taxes on small business capital gains if the gain
is reinvested in another small business to permit successful
entrepreneurs to create a new success story.
Legislation
During the first session of the 104th Congress, Senators
Hatch and Lieberman introduced The Capital Formation Act, S.
959, which embodied this tiered approach. The Senators
testified before the Small Business Committee regarding their
bill, which received significant support with 44 co-sponsors.
Ultimately, the President vetoed provisions, included in the
Balanced Budget Act to reduce the capital-gains tax rate and to
provide for a targeted incentive for investments in small
growth companies. Continued efforts towards capital gains
relief will remain a high priority for the 105th Congress.
Committee action
The Small Business Committee held hearings on the capital-
gains tax on September 19 and 20, 1995 [See Hearings of the
Committee].
H. Taxpayer Bill of Rights 2
By unanimous consent, the Senate passed the Taxpayer Bill
of Rights 2 of July 11, 1996, and it was signed into law by the
President on July 20, 1996 (Pub. L. 104-168), which makes a
number of administrative and statutory changes with respect to
the rights of taxpayers in relation to the IRS. In particular,
the legislation allows certain taxpayers who have prevailed
against the IRS in court to shift the burden of proof to the
IRS when seeking attorney's fees. The legislation also
increases the amount of attorney's fees that taxpayers may
recover from $75 per hour to $110 per hour, and it raises the
amount of actual direct economic damages that a taxpayer may
recover from $100,000 to $1 million.
The Taxpayer Bill of rights 2 also expands the current
interest abatement rules to allow for abatement when IRS
employees cause unreasonable mistakes or delays, for which the
taxpayer should not bear the burden of additional interest. In
addition, the legislation establishes a taxpayer advocate to
replace the existing ombudsman. The new advocate is responsible
for assisting taxpayers in resolving difficulties with the IRS.
The advocate will also help to identifyproblems with the tax
system and assist the congressional tax-writing committees in
correcting them.
Two other changes made by the legislation will help
taxpayers on the administrative front. First, the legislation
prohibits temporary, proposed, or final regulations from being
implemented earlier than the date that adequate notice of the
regulation is given to the public. This bar against retroactive
regulation will prevent taxpayers from burdens imposed by new
regulations before there is adequate notice of the new
requirements. Second, the Taxpayer Bill of Rights 2 allows
taxpayers to use private delivery services for sending tax
documents to the IRS, and it permits taxpayers to rely on the
postmark from the delivery service as evidence that the
document was filed in a timely manner.
I. Meals and Entertainment
Background
The second highest priority of the delegates to the White
House Conference on Small Business was increasing the deduction
for business meal and entertainment expenses. Small businesses
often use the business lunch to help generate new clients or
customers and to maintain relationships with existing
colleagues. Frequently these lunches are in lieu of spending
significant amounts on advertising. The Committee heard
testimony that the deduction should be raised from its current
50% level, especially since advertising is a 100% deductible
expense.
Legislation
Senator Inouye introduced S. 216, which would increase the
meal and entertainment deduction to 80% from the current level
of 50%. Despite the popularity among many small business
groups, the legislation did not receive widespread support and
was not passed during the 104th Congress.
Committee action
The Small Business Committee held hearings on restoring the
meals and entertainment deduction on September 19 and 20, 1995
[See Hearings of the Committee].
J. Payroll Tax Relief
Background
Many small businesses pay more in payroll taxes than they
do in income taxes. In addition, under current law taxpayers
pay income tax on their social security tax, which effectively
is a tax on a tax. The payment of both income and payroll taxes
is especially difficult for the self-employed. The issue was
highlighted during the Committee's home-based business hearing
when Dianne Floyd Sutton testified that ``the self-employed are
double taxed on social security--Paying both the employer's and
the employee's share, 15.3%. And that comes off gross revenue,
too, before even a nickel of deductions for expenses or for
income taxes.''
Legislation
The small business community and Committee staff followed
legislation introduced by Senator Ashcroft, The Working
Americans Wage Restoration Act, S. 1741, which would allow
workers to deduct their payroll taxes. The legislation would
allow both the self-employed and employees to subtract from
their gross income the Social Security tax they pay (6.2% of
their income). The significant burden of payroll taxes were
discussed during the Home-Based Business hearing at which the
Committee was reminded that the 15% that the self-employed have
to pay is substantial. Some believe that the bill's enormous
cost could not be justified as consistent with the overriding
effort to balance the budget. The measure was not considered by
he Senate during the 104th Congress.
Committee action
The Small Business Committee held hearings on payroll tax
relief on April 23, 1996 [See Hearings of the Committee].
K. S Corporation Reform
Background
Throughout the 104th Congress, there was significant
support for S Corporation Reform. S corporations typically are
small businesses and are frequently family owned. These small
business owners indicated that certain restrictions within the
law were hindering an S corporation's ability to raise funds
for growth and the creation of new jobs. Constituents argued
that certain changes in the law could improve business
opportunities for the 1.9 million small businesses operating as
S corporations across America.
Legislation
Senator Hatch introduced the S Corporation Reform Act, S.
758, which would simplify many of the outdated, unnecessary,
and complex tax rules that small businesses must follow. The
bill would expand access to capital in a variety of ways,
including increasing the number of permitted shareholders. In
1995, President Clinton vetoed provisions included in the
Balanced Budget Act that would have provided S Corporation
Reform. In 1996, changes and improvements to the law were made
as part of the Small Business Job Protection Act.
L. Tax Reform Debate
The tax reform debate was an important topic to all
taxpayers during the 104th Congress, including small business.
Many closely followed the National Commission on Economic
Growth and Tax Reform, chaired by former Congressman and
Secretary of Housing and Urban Development Jack Kemp. In
January of 1996, the Commission released its report, which
contained recommendations on reforming the U.S. tax code. Tax
reform will have significant consequences for all sectors of
the economy.
The Small Business Committee spent a great deal of time
during the 104th Congress examining the business and public-
policy issues that will determine how small business can help
stake out our country's path for the future. Tax reform should
drive economic growth, encourage entrepreneurship, and promote
savings while providing relief to small businesses, our
nation's primary source of new jobs and economic growth. The
debate will continue in the 105th and subsequent Congresses,
and the voice of small business will continue to play an
important role.
M. The Consumer and Main Street Protection Act
Senator Bumpers introduced legislation to create a level
playing field between retailers and direct marketers regarding
the collection of sales and use taxes. Currently, direct
marketers are exempt from such tax collection requirements if
they have no physical presence in the state where products are
shipped. Because retail establishments are required to collect
sales taxes as a matter of state law, they are placed at a
competitive disadvantage vis-a-vis mail-order companies.
Senator Bumpers' legislation, The Consumer and Main Street
Protection Act of 1995, S. 545, would resolve this issue by
allowing states to require use tax collection on direct-market
products.
S. 545 is also designed as a consumer protection measure
because consumers remain liable for use taxes, even though
direct marketers may not collect the taxes. In recent years,
thousands of consumers have been assessed after the fact for
unpaid use taxes on goods purchased via direct marketing, and
interest and penalties are often charged in the assessment.
S. 545 was referred to the Senate Finance Committee, but
did not see further action.
N. Electronic Tax Payment Requirement
Chairman Bond and Senator Bumpers sent a joint letter to
Treasury and IRS officials urging a delay in implementation of
the Electronic Federal Tax Payment System (EFTPS) for small
businesses. The letter noted that great confusion existed among
small businesses regarding the new requirements and that more
information was needed before the new system became effective.
IRS Commissioner Margaret Richardson subsequently agreed to
waive penalties for six months on small businesses using EFTPS
and to provide more detailed information about the system.
Following the IRS' penalty waiver announcement, provisions
were added to the Small Business Job Protection Act that delay
the implementation of EFTPS for small businesses until July 1,
1997. This delay was included to give small firms additional
time to learn about the system and to enroll prior to having to
make their tax payments electronically.
O. Extension of Expiring Provisions
As part of the Small Business Job Protection Act several
expiring tax provisions important to small business were
extended. For example, the research and development tax credit,
employer-provided educational assistance program, and
contributions of stock to private foundations were all
extended. Although the Small Business Committee did not hear
witness testimony regarding the extenders, passage of the
legislation was followed with interest and support.
IV. WORKPLACE ISSUES
A. OSHA Reform
1. Legislative Reform
Background
Delegates to the White House Conference on Small Business
recommended legislative changes that encourage a non-
adversarial, supportive relationship between the Occupational
Safety and Health Administration (OSHA) and small businesses.
The delegates suggested legislation that allows OSHA to assist
and cooperate with small employers that are trying to comply
voluntarily with OSHA's regulations.
Legislation
The Senate Regulatory Relief Task Force sent a letter to
Senator Kassebaum, Chairman of the Labor Committee, in October
1995, encouraging her to draft legislation that would replace
OSHA's current system with a cooperative, partnership approach.
The Task Force suggested incentives for voluntary compliance,
more opportunities for consultation between OSHA and employers,
decreased penalties for non-serious violations, and changes in
the way OSHA conducts inspections.
Senators Gregg and Kassebaum introduced the Occupational
Safety and Health Reform and Reinvention Act, S. 1423, in
November, 1995. The Act seeks to refocus OSHA on its primary
mission, improved workplace safety, while simultaneously
leveraging the agency's scarce resources on the most dangerous
work sites. The legislation permits OSHA inspectors to issue
warnings in lieu of citations for non-serious violations and
reduces fines for paperwork and other non-serious citations. In
addition, the bill provides positive incentives for employers
to address occupational safety on their own. Businesses with
effective health and safety programs or those that utilize
certified, third-party safety consultants will be exempt from
regular OSHA inspections and will receive reduced penalties for
citations. The bill also clarifies that employee participation
on company safety committees does not violate the National
Labor Relations Act.
President Clinton threatened to veto S. 1423 before it was
considered by the Labor Committee, but did not offer any
alternative legislation. The Gregg/Kassebaum bill was marked-up
by the Labor Committee in March 1996. The Committee reported
out the legislation, but it was not considered by the full
Senate.
Additional OSHA reform bills introduced in the 104th
Congress included: H.R. 1834 (Rep. Ballenger), H.R. 3234 (Rep.
Ballenger), S. 592 (Sen. Hutchison), S. 526 (Sen. Gregg).
2. Workplace Violence Guidelines
OSHA released proposed guidelines for workplace violence
prevention programs at night retail establishments on April 5,
1996. The Republican members of the Committee sent a letter in
June 1996 to Joseph A. Dear, Assistant Secretary of OSHA,
expressing concern about OSHA's intentions regarding
enforcement of the guidelines. The letter stated that OSHA
often uses its authority under the General Duty Clause of the
Occupational Safety and Health Act to cite employers for
failing to follow guidelines. Because of this pattern, OSHA
guidelines can act as the functional equivalent of regulations
from the perspective of small business owners. The letter also
questioned whether using guidelines to achieve specific
compliance activities reflects the cooperative and consultative
approach to regulating small business described at the White
House Conference on Small Business and included in the Small
Business Regulatory Enforcement Fairness Act (SBREFA). By
issuing a guideline rather than promulgating a rule, OSHA
avoids any analysis of the economic impact of the guideline on
small businesses and is not required to comply with the
Regulatory Flexibility Act.
Assistant Secretary Dear responded to the letter by
assuring the Committee that the guidelines would not be
enforced like traditional regulations. He stated that the
guidelines are intended as a compilation of the ``best
practices'' regarding workplace violence that employers will
not be forced to follow. The letter referenced the Guidelines
for Preventing Workplace Violence for Health Care and Social
Service Workers and the subsequent memorandum sent to OSHA's
Regional Administrators clarifying that the guidelines were for
educational purposes only and that no citations would be issued
based upon them. Secretary Dear stated that OSHA would try to
emphasize in the final version that the guidelines are not
intended to have the force and effect of rules.
3. Ergonomics
The Committee also studied OSHA's development of a rule on
ergonomic injuries. The small business community was concerned
about the potential cost of complying with a broad ergonomics
rule. These organizations and their members argued that OSHA
did not have credible scientific studies to show that ergonomic
injuries are due to workplace activities. These groups also
pointed to the disagreements among scientific experts about the
proper treatment of ergonomic injuries and the cost of a rule.
The FY 1996 appropriations legislation prohibited OSHA from
issuing a proposed or final ergonomics rule. OSHA was given the
authority to continue researching the ergonomics rule and to
conduct peer review activities. The FY 1997 appropriations bill
did not contain a similar prohibition on issuing an ergonomics
rule.
4. Hazard Communication
In May 1995, President Clinton, as part of the government
re-invention process, tasked OSHA to look at four issues
related to OSHA's Hazard Communication Standard. The President
requested the National Advisory Committee for Safety and Health
(NACOSH) to makerecommendations on simplifying material safety
data sheets, reducing the amount of required paperwork, improving the
effectiveness of worker training, and revising enforcement policies to
focus on the most serious hazards. All of these issues have a
significant impact on small business, and, therefore, the Committee has
taken a direct interest in potential policy changes being considered by
the Agency.
The Committee has assisted small business organizations as
well as small business owners in expressing their concerns and
recommendations to the NACOSH group. Additionally, the
Committee has arranged for small business owners to meet with
senior OSHA officials on hazard communication issues.
In September, 1996, NACOSH issued their report with
recommendations to streamline the Hazard Communication
Standards methods of downstream communication and enforcement
policy. This report is considered advisory only, and the NACOSH
recommendations will now be considered by the Agency. The
Committee will continue to monitor the policy considerations of
the Agency to ensure that small business interests are
considered and integrated into final agency action.
B. Labor-Management Relations
1. union salting
Background
The Committee examined statements received from numerous
small contracting businesses that have experienced union
``salting'' campaigns. ``Salting'' is a technique used by
unions in organizational and other types of campaigns typically
involving businesses in the construction industry. Union
agents, or ``salts,'' apply for jobs with non-union employers.
If hired, the salt attempts to convince the employees to join
the union and tries to generate unfair labor practices against
the employer. If the salt is not hired, he or she files an
unfair labor practice complaint with the National Labor
Relations Board (NLRB) alleging that the employer failed to
hire the salt because of union affiliation.
Several small businesses characterized the salting
campaigns they had experienced as unrelated to organizing.
These small employers stated that the unions were often not
interested in organizing and did not file election petitions
with the NLRB, but instead used their salts to generate unfair
labor practices and to call other federal agencies such as OHSA
and the Environmental Protection Agency (EPA) with frivolous
complaints. These businesses believe that the true goal of some
salting campaigns is to destroy non-union businesses to reduce
competition for union contractors. For example, a small
contractor in Missouri said that at the instigation of a union,
the NLRB had filed approximately 120 unfair labor practices
claims against him during a two year period. Of these 120
unfair labor practices, the NLRB found merit in only two cases.
This small employer spent over $55,000 on legal expenses to
defend against the charges. The union did not at any time
during the campaign file a petition for an election.
Legislation
Two bills designed to remedy the salting problem were
introduced. Rep. Fawell introduced the Truth in Employment Act,
H.R. 3211, on March 29, 1996. The bill establishes that an
employer does not have to hire an applicant who is seeking
employment to further the goals of the union. Senator Gorton
introduced the Senate companion bill, S. 1925, in June 1996.
The Gorton bill states that an employer does not have to hire
anyone whose ``primary goal'' is representing the union in an
``organizational struggle.''
The Committee planned a hearing to explore the impact of
salting campaigns on small businesses. The Committee invited
five small businesses to testify about their experiences with
salting and was also to hear from four labor law experts. The
hearing was postponed, and there was insufficient time to
reschedule it prior to the conclusion of the 104th Congress.
2. single facility bargaining units
Background
The NLRB proposed a rule that would change the way the
Board evaluates the appropriateness of collective bargaining
units. Currently, the Board looks at a variety of factors to
determine whether or not employees share a ``community of
interest.'' To be in the same collective bargaining unit,
employees must have similar interests in terms of wages and
benefits so that the union can negotiate a collective
bargaining agreement that is beneficial to all of the employees
in the unit. The ``community of interest'' standard has been
used by the NLRB for over 40 years and allows the bargaining
unit to consist of several facilities operated by the employer
or single facilities.
The NLRB's proposed rule would establish a presumption that
employees at a single location constitute the appropriate
bargaining unit as long as there are 15 or more employees at
the location, no other work site of the employer is within one
mile of the requested locations, and at least one supervisor is
present at the site. The single facility would be rejected as
an appropriate bargaining unit only in ``extraordinary
circumstances.''
The Committee heard from numerous small businesses that
were concerned about the NLRB's proposed rule. Those businesses
argued against another ``one-size-fits-all'' rule that applies
to businesses of all sizes and emphasized that in a business
environment including phones, faxes, and computers, centralized
management of several facilities was increasingly commonplace.
Small businesses expressed concern about the possibility of
having several facilities in one area that would be governed by
different unions and pay scales. For example, a franchise owner
with four locations in the same area would have to show
``extraordinary circumstances'' in order to include employees
from all of the locations in the same bargainingunit. Under the
proposed rule, these employees could be in different bargaining units
even when employment and management policies were centralized.
Legislation
The House and Senate FY 1996 appropriations bills for the
Department of Labor included a provision prohibiting the NLRB
from using appropriations to further develop the single-
facility rule. The provision was also included in the
continuing resolution that provided funding for the Department
of Labor for FY 1997.
Chairman Bond and 37 other Senators, including five other
Committee members, sent a letter to William Gould, Chairman of
the NLRB, in March, 1996 urging the Board to exercise caution
in promulgating the new rule. The letter questioned the need
for the rule given that litigation regarding the
appropriateness of bargaining units has fallen in recent years.
In addition, the letter pointed out the Board had only three
members confirmed by the U.S. Senate and one recess appointee
serving at the time of the proposed rule.
Chairman Gould answered the letter on April 1, 1996,
stating that litigation on the appropriateness of bargaining
units had remained steady rather than declining. Chairman Gould
explained that a finding that a single facility is appropriate
has always been available under the law and that the proposed
rule simply sets forth the decisive factors for finding that
single location units are appropriate. Chairman Gould concluded
by emphasizing the exceptions from the single facility rule are
provided in ``extraordinary circumstances'' and that the
proposed rule is an attempt to address the need for
flexibility.
C. Fair Labor Standards Act
1. compensatory time off
Background
The Committee heard from small businesses and employees
about increased flexibility in working conditions. Employers
and employees expressed interest in flexible schedules that
would allow them to spend more time with their families and to
have more compensation options.
Several bills were offered during the 104th Congress that
would allow employees to choose compensatory time off rather
than overtime pay. Currently, the Fair Labor Standards Act
(FLSA) requires employers to pay eligible employees at an
hourly rate of 1.5 times their regular pay for any hours over
40 worked in a week. As a result, employers are unable to
permit employees to work extra hours during one week and take
the time off in another week. For example, an employer would be
unlikely to allow an employee to work 48 hours one week so that
he or she could take a day off the following week because the
employer would have to pay eight hours of overtime for this
first week.
Legislation
Senator Ashcroft introduced the Work and Family Integration
Act, S. 1129, in August 1995. Representative Ballenger
introduced the Compensatory Time for All Workers Act, H.R.
2391, in September 1995. The legislation allows employers to
offer comp-time programs. Employees could choose to participate
in the program and receive time off rather than overtime pay.
Both bills allows employees to accrue up to 240 hours of
compensatory time off and to cash out any accrued time with 30
days notice. Employees may use earned compensatory time for any
purpose with reasonable notice to the employer. Requested use
of compensatory time can be denied by the employer only if the
employee's absence is unduly disruptive to the workplace. Both
bills are based on the compensatory time-off programs programs
that have been available to federal government employees since
1945 and to state and local government employees since 1985.
The Ballenger legislation passed the House on July 26, 1996
by a vote of 225-195. The Senate did not consider the Ashcroft
bill. President Clinton characterized the Ballenger bill as a
``poison pill'' when it was discussed as an attachment to the
legislation increasing the minimum wage and Secretary of Labor
Robert Reich recommended that President Clinton veto the
Ashcroft and Ballenger bills. President Clinton announced his
own proposal for ``employee choice flex time,'' which would
allow employees to accrue up to 80 hours of compensatory time
and allow a cash out with two weeks notice regardless of any
disruption to the workplace. Part-time, seasonal, and temporary
workers would not be permitted to participate in the program,
and the Secretary of Labor could exclude other groups of
workers. The Clinton proposal would sunset in five years.
Committee action
The Committee studied the comments received from many small
businesses interested in offering their employees compensatory
time off. These employers explained that small businesses are
often unable to offer their employees the benefit packages
larger businesses are able to offer, but they can offer
flexibility. That flexibility is, however, limited by the
current restrictions of the FLSA.
2. inside sales
Background
The Fair Labor Standards Act provide an exemption from
overtime pay for outside salespeople. The FLSA also provides an
overtime exemption for inside salespeople in the retail
industry if they are paid more than 1.5 times the minimum wage
and more than half of their compensation is paid in
commissions.
Legislation
In March, 1995, Rep. Fawell introduced H.R. 1226, a bill
that would allow all businesses to use the exemption for inside
salespeople. The Senate companion bill, S. 2026, was introduced
by Sen. Faircloth in August 1996. Neither bill was considered
by the House or Senate.
Committee action
The Committee received correspondence from several small
businesses interested in the FLSA's inside-sales provision.
Small wholesalers told the Committee that they were at a
competitive disadvantage relative to retail establishments that
could utilize the exemption for inside salespeople. In
addition, small businesses explained that the distinction
between inside and outside salespeople was more difficult to
define today than it was in 1938 when the FLSA was passed
because of computers, phones, and faxes. One business owner
illustrated the problem by saying that he could save money by
putting his inside salespeople on a bus and driving them around
so that they would be outside salespeople and that his inside
and outside salespeople essentially performed the same jobs.
Small employers also explained that their sales employees want
to be exempt from overtime provisions because they want to be
able to offer their customers excellent service and increase
their sales quotas.
3. minimum wage
As Congress began considering a federal minimum wage
increase, the Committee gave serious consideration to the
potential impact of such an increase on America's small
businesses. Chairman Bond wrote in a Dear Colleague letter on
May 21, 1996, that the vast majority of new jobs created during
the past decade were due to small businesses and that
protection from federal mandates would be necessary to maintain
this growth.
Exemptions from the federal minimum wage had been utilized
in the past for small businesses. Prior to 1989, retail and
service establishments grossing under $362,500 were completely
exempt from the federal minimum wage and overtime provisions.
When Congress raised the minimum wage in 1989, the exemption
was raised to $500,000 and applied to all types of businesses
rather than only retail and service establishments.
Unfortunately, Congress failed in the 1989 amendments to amend
a portion of the minimum wage law that covers individual
employees. As a result, no business with employees engaged in
interstate commerce is exempt despite Congress' clear
intentions to do so in 1989.
In 1990 and 1991, Senator Bumpers, the ranking member on
the Committee, introduced legislation that would have
effectuated Congress' intent by exempting small businesses
grossing less than $500,000 from the 1989 increase. The bill
had 48 co-sponsors, 26 Republicans and 22 Democrats, but it was
never passed.
Philip Lader, Administrator of the Small Business
Administration, suggested to Secretary of Labor Robert Reich in
March 1995, that America's smallest businesses be exempted from
any minimum wage increase. Mr. Lader stated that an exemption
would help alleviate the need for firms at the margin to fire
workers and would compensate small employers for the costs they
incur by hiring unskilled workers. In the letter, Mr. Lader
explained that a two-tiered minimum wage system serves two
important public policy goals--promoting small businesses and
preserving jobs.
Chairman Bond sent a letter to President Clinton in June
1996, asking the President to support an exemption from the
proposed increase for small businesses grossing under $500,000.
Chairman Bond reviewed the legislative history of the small
business exemption and cited statements made during the 1989
debates expressing Congress' intent to exempt small businesses
from the increase. Chairman Bond explained that the provision
would exempt small businesses grossing under $500,000 from the
increase in the minimum wage, thereby maintaining the status
quo for small business. President Clinton responded with a
letter to Majority Leader Lott characterizing a small business
exemption as a ``poison pill'' that would guarantee a veto.
Chairman Bond offered an amendment on August 6, 1996 to
H.R. 3448, the minimum wage bill passed by the House, which
provided for an increase in the minimum wage to $4.75 beginning
January 1, 1997 and another increase to $5.15 beginning January
1, 1998. Under Chairman Bond's amendment, small businesses
grossing under $500,00 would have been exempt from the increase
and would have continued to pay $4.25.
The Bond amendment failed by a vote of 46 to 52. As a
result, businesses of all sizes began paying the increased rate
of $4.75 on October 1, 1996 and will begin paying $5.15 on
September 1, 1997.
D. TEAM Act
Background
The Teamwork for Employees and Management Act of 1995, S.
295, was introduced by Senator Kassebaum on January 10, 1995.
The TEAM Act amended Section 8(a)(2) of the National Labor
Relations Act (NLRA), which prohibits employer-dominated labor
organizations. The NLRA defines a labor organization as a group
of employees that discusses terms or conditions of employment
with management. The National Labor Relations Board (NLRB) and
courts have interpreted ``terms and conditions of employment''
to include nearly all aspects of employment. Thus, efforts by
non-union employers to involve teams of employees in such areas
as safety, productivity, quality, and working conditions have
increasingly been found to be illegal labor practices. The
NLRB's interpretation has also deterred other employers from
using or expanding employee involvement initiatives.
The TEAM Act would allow employee involvement so long as
the employees involveddo not have the power to enter into or
negotiate collective bargaining agreements. The Act establishes that it
is not an unfair labor practice for employers and employees to
participate in a group that addresses ``matters of mutual interest'' as
long as the group does not have the power to negotiate a collective
bargaining agreement. Thus, employers and employees would be able to
form teams or other types of entities to talk about issues like safety,
productivity, and quality that may implicate terms and conditions of
employment.
The Committee heard from many small business owners that
wanted to use employee involvement entities, but felt
constrained by section 8(a)(2) as interpreted by the NLRB and
the courts. These employers explained that in a small business,
the delineation between manager and employee is not always
clear because of smaller staffs and overlapping
responsibilities. For example, the owner of a small business is
more likely to turn work scheduling over to a team of employees
because resources for a personnel director are not available.
Small business owners also explained that they did not have the
resources to consult a labor law expert each time they wanted
to try something new. Unless the small business owner had read
each case decided by the NLRB, he or she would be unable to
determine whether or not employee teams for specific issues are
permissible.
Legislation
The TEAM Act, introduced in the House as H.R. 743 passed by
a vote of 221-202 on September 27, 1995. The Senate version of
the bill, S. 295, was reported favorably out of the Senate
Labor and Human Resources Committee on April 14, 1996. The
Senate ultimately considered and passed the House version, H.R.
743, by a vote of 53-46 on July 10, 1995. President Clinton
vetoed the Act on July 30, 1996.
E. Davis-Bacon Act
Background
The Davis-Bacon Act governs all construction contracts
between business owners and the federal government. The Act
requires that employers pay the ``prevailing wage'' in the area
to employees working on federal contracts. The prevailing wage
is calculated through data collected from employers and
typically approaches the wage earned by union workers.
Small business representatives recommended repeal of the
Davis-Bacon Act at the White House Conference on Small
Business. The Act put small and minority firms at a
disadvantage because they cannot afford to pay the higher wages
and because of complicated federal contracting procedures. The
Act discourages employment of inexperienced workers because the
payment of high wages encourages employers to hire the most
skilled workers even if their skills are not necessary for each
job. In addition, the Act results in government waste. The
Congressional Budget Office estimated in 1983 that repealing
the Act would save $75 million to $1 billion in federal
construction expenses each year.
Legislation
The Committee monitored legislation concerning the Davis-
Bacon Act because of its importance to the small business
community. Senator Kassebaum introduced the Davis-Bacon Repeal
Act, S. 141, in January 1995. The Labor Committee held a
hearing on the repeal bill, but it was not marked-up or
considered on the Senate floor. Senator Hatfield introduced the
Davis-Bacon Reform Amendments of 1995, S. 1183, in August 1995.
The Hatfield bill raised the threshold for Davis-Bacon coverage
and clarified provisions on leased facilities, trainees and
helpers, and contract splitting. The Hatfield bill was not
considered by the Labor Committee or the Senate. President
Clinton has promised to veto any bill that repeals the Act.
F. Family and Medical Leave Act
Background
The Family and Medical Leave Act (FMLA) was enacted on
February 5, 1993, and requires employers with 50 or more
employees to allow each employee 12 weeks of unpaid leave for
the birth or adoption of a child or because of the serious
health condition of the employee or a parent, spouse or child.
Intermittent leave is available if it is medically necessary or
if the employer and employee reach an agreement. Employers must
maintain the employee's health insurance during the leave and
reinstate the employee to an equivalent job with the same pay
and benefits once the leave is over.
Legislation
Senator Dodd and Representative Schroeder introduced S.
1896 and H.R. 3704, respectively, to expand the FMLA. The
legislation lowers the coverage threshold from 50 employees to
25 employees. Employees would be entitled to a ``parental
involvement leave'' of up to four hours per month or total of
24 hours per year. The leave could be used for school or
community activities involving the employee's child or foster
child. The Senate bill was not considered by the Labor
Committee or voted on by the full Senate.
Committee action
The Committee reviewed statements from several business
owners about the FMLA. The experiences of these employers and
their employees were mostly positive, but several suggestions
were made regarding the administration of the Act. Several
employers reported that the Department of Labor's definition of
``serious health condition'' is so broad that common conditions
such as colds and ear infections could result in qualification
for FMLA leave. Employers also expressed concern about the
availability of intermittent leave. Because employees can take
up to 12 weeks of leave in one hour increments, FMLA leave
becomes difficult to track and can be disruptive to the
workplace.
V. ACCESS TO CAPITAL: SMALL BUSINESS ADMINISTRATION PROGRAMS
Small business is the engine that drives the U.S. economy.
Without the extraordinary growth and success of small
businesses over the past decade, the U.S. economy would have
failed to expand. Ninety-nine percent of all businesses in the
United States are small, and 85% employ fewer than 20 people.
They provide jobs to 54% of the private workforce. Small
businesses also provide about 67% of initial job opportunities
and are responsible for most of the initial on-the-job training
in basic skills.
One of the greatest challenges facing many small businesses
is the availability of capital to support on-going business
activities and to fund business start-ups and growth.
Traditional sources of capital for businesses, such as banks
and large venture capital firms, historically have been
reluctant to make debt and investment capital readily available
to small businesses at reasonable rates and terms. To respond
to this void, the Committee on Small Business devoted special
attention in 1995 and 1996 to studying the effectiveness of
critical Small Business Administration (SBA) finance programs
that were initially created to fill this void. The result was a
series of investigative hearings that produced major bills,
introduced by Senator Bond, that reformed SBA's finance
programs. These key legislative measures received unanimous
bipartisan support in the Senate and were signed into law by
the President.
A. 7(a) Guaranteed Business Loan Program
Background
The 7(a) Guaranteed Business Loan Program is designed to
encourage banks and SBA-licensed non-bank lenders to make long-
term credit available to small businesses. This is SBA's most
popular program. In FY 1996, 45,845 loans totaling $7.7 billion
by banks and non-bank lenders to small businesses were
guaranteed by SBA under the 7(a) program; in FY 1995, 55,596
loans totaling $8.3 billion were guaranteed by SBA.
Legislation
The Small Business Lending Enhancement Act of 1995
During a series of hearings before the Committee on Small
Business in early 1995, it became evident that the Committee
needed to enact legislation to make more 7(a) business loans
available to fund small business start-ups and to support small
business growth. In response to this finding, in June 1995
Chairman Bond introduced the Small Business Lending Enhancement
Act of 1995, S. 895. This bill reduced the credit subsidy rate
for the 7(a) program from 2.68% to 1.06%, which made it
possible for Congress to approve and fund significant program
growth to meet borrower demand. S. 895 was approved unanimously
by the Committee on Small Business and the full Senate. After a
conference with the House of Representatives, it was signed
into law on October 13, 1995, as Public Law 104-36.
Bond-Bumpers comprehensive substitute amendment to H.R.
3719
In early 1996, the SBA notified Congress that projected
program losses for the 7(a) business loan program were higher
than previously presented. Actual recoveries on defaulted loans
were 44%, not 55% as claimed earlier by the Agency. In
addition, SBA and the Office of Management and Budget insisted
that the default rate would continue at a level of over 17% for
FY 1994 through FY 1997, a significant increase above the
default level of 10.5% for FY 1992 and 9.5% for FY 1993. As a
result, these persistently high default rates have led to
increased fees for borrowers and lenders making capital more
expensive for small business borrowers.
In August and September 1996, Chairman Bond and Senator
Bumpers, the Committee's ranking member, drafted a
comprehensive substitute amendment to the House-passed Small
Business Programs Improvement Act of 1996, H.R. 3719. Their
substitute Amendment included program reforms to improve the
safety and soundness of the 7(a) business loan program while
allowing the program to grow and meet the borrowing needs of
small businesses.
The Bond-Bumpers Substitute Amendment strengthens the
requirements to allow SBA lenders to sell off the unguaranteed
portion of 7(a) loans by directing SBA to promulgate new
regulations mandating that each lender maintain a loss reserve
on loans sold on the secondary market. In addition, this bill
directs that SBA-licensed Preferred Lenders and Certified
Lenders be allowed to have a direct roll in liquidating
defaulted 7(a) loans in order to improve recoveries from the
collateral pledged from the loan.
H.R. 3719 requires SBA to create a management data base so
that SBA, the Congress, and outside parties can begin to
understand the reasons for failed 7(a) loans. H.R. 3719 was
included as part of the FY 1997 Omnibus Consolidated
Appropriations Act and was signed into law on September 30,
1996, as Public Law 104-208.
B. 504 Certified Development Company Program
Background
This SBA-backed small business finance program is designed
to stimulate community investment and the creation of new jobs.
Under this program, a bank or SBA-licensed non-bank lender will
make a loan without a government guarantee to a small business
for 50% of the small business' total financing requirement.
Next, SBA guarantees 40% of the financing requirement and takes
a subordinate position to the bank. The remaining 10% is
usually put up by the borrower.
In 1995, SBA testified before the Committee that the 504
program had a very low risk to the government, and the
government's exposure was very low as a result. In response to
SBA's assurances about the fiscal soundness of the 504 program,
the Committee on Small Business approved an incremental
increase in the borrower fees in order to reduce the credit
subsidy ratefrom 0.57% to 0. The fee increases were included as
part of the Small Business Lending Enhancement Act of 1995, S. 895,
which was signed into law on October 13, 1995, as Public Law 104-16.
In March 1996, the President's FY 1997 budget request for
SBA described a much different review for the 504 Program.
Previous assurances about fiscal soundness of the program were
withdrawn, and SBA revealed that program losses were actually
1,200% higher than previously submitted. In fact, SBA had been
understating the default rate and overstating the recovery
rate, which created a dramatic understatement of the risk of
the program and losses actually being borne by the federal
government.
Without delay, the Committee undertook an investigation
into the circumstances surrounding the failure of SBA to
provide accurate and truthful information to the Congress. As a
result, future submissions by SBA and the Office of Management
and Budget to the Congress will more accurately reflect actual
program performance. After studying SBA's budget submission,
the Committee worked closely with the lending community and the
Certified Development Companies to adjust fees paid by the
lenders and borrowers to pay for the increased cost to support
this program. The Committee unanimously approved the Chairman's
504 Program reform proposal, which included new fees and
underwriting changes to reduce the risk of loss under the
program. The Committee concurred with Chairman Bond's
recommendation that the government should not fund additional
future losses under this program.
The Congress adopted the 504 program reform measures as
part of the Small Business Programs Improvement Act of 1996,
H.R. 3719, which was included in the FY 1997 Omnibus
Consolidated Appropriations Act. Without this legislation, an
appropriation of $181 would have been necessary to support the
504 program, and this important program for small business
would have been terminated. This bill was signed into law on
September 30, 1996, as Public Law 104-208.
C. Small Business Investment Company Program
Background
Historically, small businesses that have sought venture
capital investments from the traditional Wall Street investment
firms have walked away empty handed. While small businesses
have been responsible for the net increase in new jobs and
almost all new business start-ups, the well known, large
investment firms have been reluctant to concentrate any effort
to make these small-type investments, which generally fall in
the $500,000 to $2.5 million range. Furthermore, banks have
been reluctant to loan money to these higher risk small
businesses.
SBA's Small Business Investment Company (SBIC) program
supports and encourages this type of small business
investments. The SBIC program loans government-guaranteed risk
capital to venture capital firms licenses by SBA as Small
Business Investment Companies, which they match with private
capital and invest in small businesses. In FY 1995, SBICs
invested $1.09 billion in small businesses; in FY 1996, SBIC
investments increased to $1.17 billion.
An adjunct of the SBIC program is the Specialized Small
Business Investment Company (SSBIC) Program. Firms licensed by
SBA in this program agree to make investments in small
businesses that are owned and controlled by socially and
economically disadvantaged individuals. In FY 1995, $153.5
million was invested by SSBICs in disadvantaged small
businesses. In FY 1996, $101.5 million was invested by SSBICs.
Legislation
The Small Business Investment Company Improvement Act
In 1995 and 1996, the Committee held a series of hearings
highlighting the SBIC program, which culminated in Chairman
Bond's introduction of the Small Business Investment Company
Improvement Act of 1996, S. 1784. This important legislation
was approved unanimously by the Committee and the full Senate.
The Chairman's bill made significant improvements in the
management of the SBIC program designed to enhance its safety
and soundness and reduce the risk of loss to the federal
government. Minimum private capital requirements for new
license applicants were increased to $5 million for debenture-
type licensees and $10 million for participating-security
licensees. Under this bill, SBA will have the discretion to
reduce this requirement to as low as $5 million for a
participating-security licensee after determining that its
management team and investment plan meet all other SBA
requirements.
Under S. 1784, SBA must ensure that each SBIC has a
diversification between management and ownership of SBIC. In
addition. S. 1784 requires that SBA intensify its oversight of
all SBICs to determine that no SBIC receives SBA-guaranteed
leverage when it is under capital impairment, and that SBICs do
not incur excessive third-party debt. SBA mandates that each
SBIC adopt the valuation criteria required by SBA to establish
the values of loans and investments of each SBIC subject to an
annual review by an independent certified accountant.
As a result of S. 1784, for FY 1997 the cost of the program
to taxpayers was reduced from $41 million to $21 million; at
the same time, the amount of government-guaranteed risk capital
available to small businesses grew from $364 million to $700
million.
S. 1784 also provided for consolidation of the SBIC and
SSBIC programs. With the decline in the level of new SBIC
investment funds flowing to disadvantaged companies, the
Committee believed that by combining the resources of both
programs, thus making more investment capital available to
SSBICs, additional investments could be made in disadvantaged
small businesses. S. 1784 further specified that each SBIC
invest at least 20% of its dollar investments in ``smaller
enterprises,'' which are smaller firms with a net income of $2
million orless and a net worth of $6 million or less.
S. 1784, in its entirety, was included in the FY 1997
Omnibus Consolidated Appropriations Act, which was signed into
law by the President on September 30, 1996, as Public Law 104-
208.
D. Expanded Export Opportunities for Small Businesses
Background
Conducting businesses outside the United States places a
significant, and sometimes overwhelming, burden on small
businesses. At the same time the nation has been a leader in
the expansion of the world economic community, America's small
businesses do not have the resources, nor oftentimes the
knowledge, to enter successfully into foreign markets.
One of the primary missions of the SBA in the export arena
is to make credit available to small businesses that wish to
conduct business overseas. In FY 1995, SBA's Export Revolving
Line of Credit Program provided financing for approximately 210
small businesses. As the result of this small number of export
loans, Chairman Bond urged the SBA and the multi-agency Trade
Promotion Coordinating Committee to streamline SBA's export
loan program and take additional steps to make export loans
more readily available to small business. The number of SBA
export loans increased by over 50% in FY 1996.
E. Revitalizing America's Rural and Urban Communities
Background
Historically, America's cities and poor rural counties have
experienced much difficulty attracting investments and creating
new jobs in economically distressed areas. Following a series
of hearings conducted by the Committee on Small Businesses in
1995 on the 8(a) Minority Contracting Program and
Entrepreneurship in America, the Chairman concluded that
federal contracting programs that were designed to assist
minority-owned small businesses were failing to stimulate
investment and the creation of new jobs in the areas where this
help is needed most, in poor rural areas and many inner cities.
Legislation
HUBZone Act of 1996
In February 1996, Chairman Bond introduced the Historically
Underutilized Business Zone Act of 1996, S. 1574, which creates
incentives for small businesses to locate in economically
distressed rural and urban areas. A ``HUBZone'' is a rural
county or one or more census tracts in an urban area where the
median household income is substantially below the state
average.
Small businesses that are located in a HUBZone and that
employ at least 35% of their workforces from a HUBZone would be
eligible for special preferences to receive federal government
contracts. For example, a HUBZone qualified small business
could receive a sole-source federal government contract for up
to $5 million, or the competition for a government contract
could be limited to HUBZone qualified small businesses.
Under Chairman Bond's bill, after a four year phase-in
period, 4% of all federal government contracts would be
targeted to HUBZone-qualified small businesses. In FY 1996,
approximately $8 billion in government contracts would have
been included under this bill.
After introduction of S. 1574, the Committee conducted a
hearing on the bill in March 1996. The Committee took no action
on the bill prior to the end of the 104th Congress.
F. Women Business Ownership
Background
Small businesses owned by women are the fastest growing
segment of the U.S. economy. By the year 2003, more than 50% of
all small businesses will be women-owned. This enormous growth
is occurring even though women continue to be confronted with
more obstacles than men who own businesses.
Women have greater problems than men in raising capital to
start up a small business or to invest in business growth.
During the past two years, some trends indicate that barriers
surrounding women's access to bank loans appear to be falling.
However, women business owners continue to experience a
significant disadvantage in obtaining higher risk venture
capital investments.
During the 104th Congress, the Committee on Small Business
strongly supported SBA's Women Business Ownership Programs. The
President's FY 1997 budget request for SBA, however, proposed
terminating the Women's Business Demonstration Grant Program,
while shifting responsibility for this oversight to the Small
Business Development Centers. SBA never submitted a plan to the
Committee explaining how this transfer would be conducted and
how it would preserve the integrity of this vital women's
business ownership program. As part of the Omnibus Consolidated
Appropriations Act, the Senate Appropriations Committee adopted
a provision requiring that SBA fund the entire Women's
Demonstration Grant Program in FY 1997.
G. Small Business Research and Development
Background
The Small Business Technology Transfer (STTR) pilot program
was established in 1992 to stimulate technological innovation,
use small businesses to meet federal research and development
(R&D) needs, foster and encourage socially and economically
disadvantaged person's participation in technological
innovations, and increase the private sector's
commercialization of innovations derived from federal R&D
projects. In order to be eligible for an STTR award, a small
business must collaborate with a non-profit research
institution, such as a university of a federally funded R&D
center.
The goal of the program is to provide a more effective
mechanism for transferring new knowledge from research
institutions to industry. The General Accounting Office (GAO)
monitors this program on an on-going basis. GAO has reported to
the Committee on Small Business that the quality and commercial
potential of the STTR program's winning proposals were rated
highly during the first complete year of the program.
Legislation
Under legislation adopted by the Congress in 1994, the STTR
pilot program was set to expire on September 30, 1995. The
Committee unanimously approved Senator Bond's recommendation
that the program be extended for one year, and this extension
was included in the Omnibus Consolidated Appropriations Act,
which was signed into law on September 30, 1996, as Public Law
104-208.
The one year extension of the STTR pilot program allows the
Committee on Small Business an opportunity to evaluate a longer
term extension and other program improvements when it considers
the three-year reauthorization of SBA programs in early 1997.
IV. HEALTH CARE ISSUES
The 104th Congress made significant progress in bringing
equity to the small business health insurance market. The
Health Insurance Portability and Accountability Act of 1996,
H.R. 3103, the most extensive health-care reform measure in
almost a decade, included several recommendations offered by
the delegates to the White House Conference on Small Business
and aired by small business owners during the Committee's
``Entrepreneurship in America'' series of hearings.
The Act includes several provisions designed specifically
for small businesses. One of these--a pilot program for Medical
Savings Accounts--will be available only to self-employed
persons and businesses with less than 50 employees. This
restricted program allows individuals to deposit tax-free funds
into a special account to cover routine and preventative
medical care. Employees with monies remaining at the end of the
year can either withdraw the funds or roll them over into an
IRA. Small businesses will also benefit from language in the
bill that promotes small business purchasing coalitions. In
addition, the Act increases the deductible amount of health-
insurance costs for the self-employed incrementally from the
1996 level of 30% to 80% by the year 2006.
Finally, the legislation improves the availability of
health-care insurance without imposing employer mandates.
Effective July 1, 1997, insurance companies that sell policies
in the small group market, (i.e., to companies with between two
and fifty employees) must offer group plans to all employers in
that market. The bill would also curb the insurance industry's
practice of denying coverage to many individuals because of an
pre-existing illness.
VII. BANKING AND FINANCIAL INSTITUTIONS
Regulatory relief for small banks also ranked high on the
legislative agendas of the White House Conference delegates and
Small Business Committee members. Chairman Bond and Senators
Bennett, Burns, Frist, Heflin, Nunn and Warner jointed as co-
sponsors of the Economic Growth and Regulatory Paperwork
Reduction Act, S. 650. This bill, which was incorporated into
the Omnibus Consolidated Appropriations Act, will bring
paperwork and regulatory relief to small banks across the
nation.
Chairman Bond advocated several provisions directed at
smaller financial institutions. The most significant of these
reforms will allow well-capitalized, well-managed banks to
extend federal examination cycles. Small banks will also
benefit from the expanded exemptions from home-mortgage-data
reporting requirements. Finally, extensive changes in the
Truth-in-Lending Act, the environmental liability laws, and
bank application processes are expected to reduce
administrative costs for all financial institutions.
VIII. SECURITIES LAWS
The 104th Congress enacted two securities-related laws that
benefit small and start-up businesses. The Private Securities
Litigation Reform Act of 1995 offers sweeping revisions to the
rules governing private securities litigation and class actions
based on the federal securities law. These modifications are
expected to assist emerging growth in obtaining capital
financing.
The second securities bill, the Capital Markets Efficiency
Act of 1996, streamlines regulatory compliance for small
investment advisors operating in multiple states. Chairman Bond
was a strong advocate for the most notable change to the
securities laws, which provides a uniform federal de minimis
registration exemption from state registration for small
investment advisors. Under this provision, if a small advisor
maintains fewer than six clients in a single state, the advisor
will be exempt from the registration requirements of that
particular state. Another provision ensures uniformity of books
and record requirements for small advisors, thereby alleviating
the problem of complying with varying requirements in multiple
states.
IX. TELECOMMUNICATIONS
A. Telecommunications Deregulation Act
Background
The 104th Congress set a goal of overhauling the nation's
telecommunications laws for the first time since 1936. The
Telecommunications Act of 1996, S. 652, was introduced by
Commerce Committee Chairman Pressler, and its focus was to
phase out unnecessary and burdensome regulation in one of the
country's most dynamic industries. The industry is experiencing
a vibrant growth period and offers businesses and entrepreneurs
limitless opportunities for growth. The government regulatory
structure, however, has failed to keep pace with the industry
advancement, which has hindered rather than promoted the
potential to the telecommunications industry.
Legislation
S. 652 ends decades of excessive government regulation
throughout the telecommunications industry. The legislation
opens the local telephone marketplace to competition and opens
new opportunities for further competition in the long distance
telephone marketplace. The legislation phases out rate
regulation in the cable and video industry while opening up the
industry to increased participants and competition.
Rapid deregulation also presents the possibility of the
large telecommunications conglomerates dominating the industry
before small businesses are prepared to compete in the newly
deregulated environment. Under intense pressure from small
business advocates, the legislation addresses many of the
concerns specific to small telecommunications businesses. Most
importantly, the bill includes Section 257, The Market Entry
Barriers Proceedings, which directs the Federal Communications
Commission (FCC) to examine the industry for regulatory and
financial barriers to entry for small businesses and suggest
plans to eliminate these barriers. The legislation also
requires the FCC to hold regular hearings to examine barriers
to entry throughout the telecommunications industry that
prevent small businesses from entering the industry and
prospering.
Small carriers throughout the telecommunications industry
obtained language in the legislation critical to their futures.
Small and rural cable providers were immediately exempted from
rate regulation, while the existing rate structure for cable-
pole attachments will be phased out over a period of five
years. The legislation also strongly encourages the providers
of cable television programs to sell their product to small
cable buying groups, enabling small cable companies to compete
with the large cable companies that purchase programming at
volume discounts. Alarm monitoring companies, an industry that
is dominated by small businesses, won language that grants
monitoring companies a six year grace period before having to
compete with the incumbent local bell telephone companies,
which are the current owners of the telephonenetworks used by
the monitoring companies.
Small telephone companies obtained language critical to
their ability to compete effectively with the local incumbent
operators and the major long distance carriers. The legislation
includes language requiring the incumbent Bell companies to
offer resale service to small local carriers at wholesale
rates. The bill also requires the Bell incumbent telephone
companies to resell service at nondiscriminatory rates. Small
local carriers were awarded flexibility and limited waiver
possibilities for complying with the interconnection
requirements with which the larger Bell operating companies
were directed to comply under the bill. Both local and long
distance carriers are entitled under the bill to purchase
resale and other services on an unbundled, nondiscriminatory
basis and at nondiscriminatory rates, including such important
functions as dialing parity and directory assistance. Without
these provisions, small carriers would not have a realistic
opportunity to compete.
Committee action
Chairman Bond and the Committee were responsive to the many
concerns that small telecommunications providers had with the
telecommunications bills and advocated legislation that
addressed these small business needs. Upon the signing of the
bill by President Clinton, Chairman Bond immediately sent a
letter to FCC Chairman Reed Hundt outlining the importance of
the Market Entry Barriers Proceeding section to small business
and urged the FCC to give small business entry barriers the
emphasis that they deserve. Chairman Hundt responded with his
concurrence and his assurance that the FCC would conduct
immediate and aggressive hearings and begin the process of
eliminating these market barriers to entry.
Chairman Bond also urged the House-Senate conference
committee to consider important small business
telecommunications issues. In a letter to Chairman Pressler,
Chairman Bond asked that the fullest consideration be given to
the issues critical to small providers advocating
interconnection flexibility and nondiscriminatory resale on an
unbundled basis for small local carriers and wholesale resale
rates for long-distance carriers. The Chairman also made the
case for such important issues as the phasing out of the pole-
attachment rate structure and a separate subsidiary requirement
to ensure that the large companies are unable to cross-
subsidize ventures to compete against small carriers. The
Chairman also advocated a grace period for the alarm monitoring
companies to prepare for competing with the large local
exchange carriers. Each of the Chairman's positions were
included in the final bill as signed by the President.
B. Small Cable Television Concerns
The availability of cable programming at fair and
competitive prices remains a principle concern of small cable
television operators. Shortly after passage of the legislation,
Time-Warner Inc. and Turner Broadcasting System petitioned the
Federal Trade Commission (FTC) for approval of their merger. A
successful merger would have placed Turner Broadcasting a
significant producer of cable programming services, in control
of Time-Warner, part owner of the DBS home satellite system and
a large provider of cable television services. This vertical
integration may have produced a powerful incentive for Time-
Warner Inc. to increase sharply the prices offered to smaller
cable operators at discriminatory prices to favor their own
enterprises. Cable operators were fearful of the effect that
this incentive could have on their ability to compete and
continue to offer quality and affordable services to their
customers.
Chairman Bond contacted each of the five FTC Commissioners
and outlined his concern that the merger could result in such
vertical integration and an incentive to discriminate in
pricing against the small cable carriers. Chairman Bond met
with representatives of the FTC while the merger consent decree
was being considered and made a case on behalf of the small
carriers that the FTC should strongly consider the possibility
of discriminatory pricing incentive should the merger be
approved.
The FTC responded to the pricing concerns held by the small
cable operators, giving Chairman Bond's concerns, as
Commissioner Roscoe Starek said, ``significant and full and
fair attention.'' The consent decree addressed the concerns by
directing that in areas in which Time-Warner and its
substitutes compete with small cable operators, small operators
are guaranteed by the consent decree the same nondiscriminatory
pricing policies offered by Turner prior to the merger. The
Time-Warner company is also prohibited from bundling services
and engaging in discriminatory practices that will undermine
small competitor cable operator's ability to compete with this
telecommunications giant. Small cable operators have a history
of providing high quality service, often to areas that other
operators hesitate to serve. This language rewards these
operators for their service, and gives them opportunity to
compete in this new environment.
X. PRODUCT LIABILITY REFORM
Product liability reform legislation was introduced in the
104th Congress with the support of Chairman Bond and several
members of the Committee. Small businesses expressed their
support to the Committee for uniform product liability laws
with limitations on the possible plaintiffs in a civil suit and
reasonable limitations on the award of punitive damages. These
businesses expressed their frustration with the current state
of the civil justice system. They shared with the Committee
accounts of defending legal claims when plaintiffs are simply
in search of a deep pocket and paying punitive damage awards
that bear little relation to the actual damages. Small business
owners live in a constant state of anxiety that a random claim
and decision could put them out of business or that they could
be financially crippled by legal expenses in defending a
meritless legal claim.
A bill reforming the product liability system was
introduced in the 104th Congress by Senators Gorton and
Rockefeller. The legislation included uniform statutes of
limitations and repose, limited liability for sellers that are
not manufacturers, several liability for non-economic damages,
and reasonable limitations for the award of punitive damages.
Similar legislation was introduced in the past five Congresses
but never came close to becoming law. This bill, with the
strong support of small business, passed in both the Senate and
House for the first time. The Senate bill contained a small
business provision limiting punitive damage awards in a wider
circle of civil cases to $250,000 or twice the economic damage
award for businesses with fewer than 25 full-time employees.
Chairman Bond sent a letter to the conference members
emphasizing the importance of this section for small businesses
and the strong support for introducing common sense into the
process for awarding punitive damages in suits against small
businesses. The conference committee included the section in
the final bill. Despite the support of the bill among small
businesses, President Clinton, vetoed this bill.
XI. HEARINGS OF THE COMMITTEE
``Exploring the Future of the Small Business Administration''--
Washington, D.C., February 10, 1995
On February 10, 1995, the Committee held a hearing to
review the current programs of the Small Business
Administration (SBA) and their future viability in a budget
conscious environment. Chairman Bond summarized the purpose of
this hearing by stating that the voters have indicated they
want change, and ``I view that call for change as a positive
challenge * * * to all of us in government to target our
resources wisely, increase our oversight over Federal
activities, and ask the basic questions of what we are doing,
why are we doing it, how are we doing it, and do we need to be
doing it? ''
Philip Lader, Administrator, U.S. Small Business
Administration was the sole witness. Mr. Lader began his
testimony by stating, ``My vision of the SBA is very much a
public-private partnership.'' He went on to defend the SBA
against reports that only one percent of small businesses in
America are helped by the organization, stating that in 1994
``more than one million businesses directly had training and
education assistance from our various SBA programs.''
Mr. Lader broke down what the SBA offers into four
categories: Money, education and training, advocacy, and the
disaster assistance program. He intended these categories to
show the vast number of people the SBA actually does affect.
The first, money, is the one most people think of when they
think of the SBA. In 1994, the SBA financed $950 million in
loans for small businesses. With this money many businesses
were started and many were able to expand, and as a result, new
jobs were created.
Education and training are services offered by the SBA that
people often do not think about, although they affect more than
one million businesses. These programs help businesses acquire
the knowledge to stay in business and to grow. In addition,
advocacy is a growing part of the SBA today enabling the agency
to undertake research and help reduce the paperwork burdens on
small business by working within the government to see that
agencies adhere to the paperwork reduction requirements. Mr.
Lader estimated that this function of the agency benefits 20
million small businesses.
Finally, the SBA is helping small businesses and all
citizens through its disaster relief program. With a portfolio
of $5 billion and 250,000 people, this service provides
emergency relief not only to small business, but home owners as
well. Although Mr. Lader stated his belief that this program is
very important, he suggested that the disaster loan interest
rate of four percent should be increased to equal the cost of
money to the government plus two percent. He gave as the reason
for this proposed change the high subsidy rate for disaster
loans--for every $100 that is provided, it costs the taxpayer
$32.
Mr. Lader testified that the SBA's programs are very
important to the United States economy as well as individual
businesses. With a few cost cutting measures and changes in
some policies, the SBA will be able to continue to help start-
up and growing small businesses for many more years.
``Small Business Owners Perspective on the Small Business
Administration''--Washington, D.C., February 16, 1995
On February 16, 1995, the Committee held a hearing to
review the Small Business Administration (SBA) and its impact
on small businesses. Chairman Bond, noted that ``54% of
America's force is employed by small business, which generates
50% of the gross domestic product.'' The SBA has been
instrumental in the continued growth of small businesses, but
the Chairman believes it is important to review the SBA and
eliminate the programs that are not working. In addition, it is
critical to look for new, innovative ways for the SBA to keep
up with emerging and growing businesses.
The Committee first heard from two witnesses about their
experiences with the SBA's 7(a) loan program. Bob Giaimo,
President and Chief Executive Officer, Silver Diner
Development, Inc., testified about his experiences with the SBA
and how SBA-guaranteed loans have been a key element in helping
him build three successful small businesses: Blimpies, American
Cafe and Silver Diner. As a college freshman, Mr. Giaimo opened
his first franchise and the SBA provided him with the
credibility and stability to start his own business at such a
young age. Later, he turned to the SBA for help in starting two
other businesses. Giovanni Coratolo, Owner, Port of Italy, Inc.
also testified about his experience with the 7(a) loan program
and the benefits it had on his restaurant business. Mr.
Coratolo urged the Committee to continue funding for the 7(a)
loan program.
Robert C. Varney, Ph.D., Chairman, Greater Washington
Chapter, Council of Growing Companies, President, Robsan Corp.,
and Past Chairman and Chief Executive Officer, International
Telesystems Corp., testified that private investment incentives
are critical for small business growth and development because
they will provide more capital for entrepreneurs to start and
expand their businesses. Lewis A. Shattuck, Executive Vice
President, Barre Granite Association, and member of the Board
of Trustees, National Small Business United, pointed out that
over 50% of the nation's employees are employed through small
business, which he believes is directly related to the SBA and
its programs. And as Virginia Littlejohn, Past President,
National Association of Women Business Owners, President, The
Star Group and Global Strategies, testified, women have become
a growing force in the world of small businesses. ``They own
one-third of all the small businesses in the country.'' The
growth of these women-owned businesses can be attributed to the
SBA's pre-qualification pilot in which women receive help with
the loan process.
The Committee also heard testimony about the need for
improvement within the SBA and its small business programs.
James B. Graham, Founder, Faxland Corp., stated that the SBA
can be effective in assisting small businesses but needs to
make improvements to its services. Due to the paperwork and
higher cost than other avenues available to him, he did not
continue to utilize the SBA loan program. He also stated that
the 8(a) program focuses on helping only minority employers and
not the minority employees. Gary Petty, President and Chief
Executive Officer, National Moving and Storage Association, and
Chairman of the Board, Small Business Legislative Council,
testified about his concern with the effects of government-
imposed burdens on small business, and requested that the
Committee take a cautionary note of lenders passing
requirements onto high-risk entrepreneurs because their chances
for success are already slim.
``Entrepreneurship in America: Excessive Governmental Burdens on Small
Business''--Albuquerque, New Mexico, February 20, 1995
This was the first in a series of field hearings held
during the 104th Congress designed to listen to the concerns of
small business entrepreneurs from around the country. The
philosophy behind the ``Entrepreneurship in America'' series
was to provide smaller entrepreneurs--those who do not normally
testify at hearings in Washington, D.C.--the opportunity to
express their concerns and have an impact on Washington
lawmakers in the environment where they run their businesses.
This hearing, held by Chairman Bond and Senator Domenici,
took place in Albuquerque, New Mexico. Citing the importance of
small businesses to the economy of New Mexico, Senator Domenici
emphasized that 97% of New Mexico's firms were small businesses
and that 57% of those firms employed five people or less.
Senator Domenici also emphasized the negative economic impact
that excessive governmental regulations have had on small
businesses in New Mexico, noting that the governmental burden
per worker for a small business has increased more than a third
since 1989, corresponding to a drop in average profits for New
Mexico's small businesses.
During the hearing, several New Mexico small business
owners testified that they bear a disproportionate burden in
complying with comprehensive federal regulations that are often
designed for large businesses--those that have enough financial
resources and a large enough labor base to amortize these
costs. According to the witnesses, many small businesses simply
do not have the resources to comply with federal regulations
that have grown both in number and complexity. Chet Lytle,
President of Communications Diversified Inc., pointed out that
many regulations are so complex and ambiguous that it is
difficult to determine what a business must do to comply. He
added that ``the cost of determining compliance requirements
diverts funds from job creation and capital investment.'' Greg
Anesi, Regional Coordinator of the Small Business Advocacy
Council in northwest New Mexico, agreed and noted that the
topic most often discussed at council meetings was the
inability to comply with federal regulations. Regulations have
become so complex, and in some cases contradictory, that it is
often necessary to take the costly step of hiring consultants
to help make sure a business is in compliance. The witnesses
said that the burden of coming into compliance with such
regulations can often result in lost time, lower profits, less
expansion, and fewer new jobs.
One of the greatest concerns of the witnesses is the
adversarial attitude of federal regulators. Marlo Martinez of
Espanola, New Mexico, mentioned that regulatory agencies seemed
to discourage businesses rather than offer them assistance.
``There is no spirit of cooperation between regulators and
small businesses,'' she said. Don Davis of Clovis-Portales, New
Mexico suggested that ``regulatory agencies should become more
teacher and coach and less traffic cop and prosecutor.'' Mary
Garza of Las Cruces, New Mexico, pointed out the need to do
away with the ``us against them'' mentality between regulators
and small businesses and bring about cooperation and
understanding. All of the witnesses favored better
communication and quarterly updates on new or revised
regulations. Ms. Garza also suggested that it would be helpful
if rule changes were not implemented until training and
education could be accomplished.
There was a consensus among witnesses that a lack of
accountability exists on the part of federal regulators, which
has brought about a situation in which small businesses are
paying not only for their own mistakes, but for those of the
regulators as well. Mr. Anesi mentioned that ``there is no
practical resourse for a bad regulation or a bad regulator.''
He said that regulators make mistakes in interpreting and
writing regulations and the only recourse for these mistakes is
litigation, which is usually very costly and time consuming.
Small businesses simply do not have the resources to challenge
regulators. Mr. Davis conveyed the feelings of many of the
panelists when he suggested that some form of constant
oversight is necessary ``to ensure that the original intent of
the law is being addressed and that the benefit of
implementation and enforcement is commensurate with the costs
of the requirements.'' This concern was addressed by a
provision in the Small Business Regulatory Enforce Fairness Act
(SBREFA), authored by Senator Bond and enacted into law in
1996. The provision calls for the establishment of an Ombudsman
at the U.S. Small Business Administration (SBA) who will
address complaints and grievances from small business owners.
A major item of discussion at this hearing focused on the
lack of any significant role by small businesses at the front
end of the federal rule-making process and, by extension, the
resulting lack of a level playing field for small entrepreneurs
in complying with those rules. As a direct result of this
hearing, Chairman Bond's SBREFA law was amended to address this
concern by including a section authored by Senator Domenici,
establishing small business advocacy review panels composed of
small business owners who must be consulted before agencies
such as the Environmental Protection Agency (EPA) and the
Occupational Safety and Health Administration (OSHA) make new
regulations that affect small businesses.
``S. 350, Regulatory Flexibility Amendments Act of 1995''--Washington,
D.C., March 8, 1995
On March 8, 1996, the Committee held a legislative hearing
on the Regulatory Flexibility Amendments Act of 1995, S. 350,
introduced by Chairman Bond. The Regulatory Flexibility Act,
enacted in 1980, was designed to reduce the impact of federal
regulations on small business. Under the Regulatory Flexibility
Act, unless a federal agency can certify that a proposed
regulation will not have a significant impact on a substantial
number of small entities, it must prepare a regulatory
flexibility analysis describing the impact and outlining any
alternatives to the regulation considered during the rulemaking
process.
However, the Regulatory Flexibility Act explicitly
prohibited any judicial review of its requirements. Enforcement
of the Act was left to the discretion of the Executive Branch.
As Chairman Bond noted in his opening statement, some Federal
agencies have chosen to ignore their obligations under the Act.
S. 350 would amend the Regulatory Flexibility Act to allow for
judicial review of whether an agency's certification that a
regulation would not have a significant impact on a substantial
number of small entities was proper, and whether an agency's
final regulatory flexibility analysis was in compliance with
the requirements of the Act. At the hearing, the Committee
sought testimony from a number of witnesses on the provisions
of S. 350.
Jere W. Glover, Chief Counsel, Office of Advocacy, U.S.
Small Business Administration, testified that the one problem
most clearly and constantly mentioned by small business is the
regulatory burden imposed by the state and federal governments.
In addition, he testified that one solution universally
mentioned by small business is to improve and strengthen the
Regulatory Flexibility Act and to provide judicial review. Mr.
Glover conveyed the Administration's support for judicial
review of the Act, noting that both the President and the Vice
President's National Performance Review have supported this
amendment. Mr. Glover testified that ``the only real opponents
to judicial review for Regulatory Flexibility Act are the
general counsels and the regulators. They, of course, do not
like having anyone interfere with their process, and it is
always a challenge when we try to resolve those internal
disputes.'' Finally, Mr. Glover described the memorandum of
understanding between his office and the Office of Management
and Budget to work together on compliance with the Regulatory
Flexibility Act.
Johnny C. Finch, Assistant Comptroller General, Government
Division, General Accounting Office (GAO), testified on the
findings of a April 1994 GAO report, which indicated that
agencies' compliance with the Regulatory Flexibility Act has
varied widely from one agency to another. He also testified on
the findings of a 1992 GAO survey of agency compliance with the
requirements for periodic review of regulations under section
610 of the Act. This survey found that three-quarters of the
agencies surveyed believed that they were not required to
publish a plan ``because none of their regulations had a
significant economic impact on a substantial number of small
entities.'' Mr. Finch noted several reasons for agencies'
apparent lack of compliance with the Act. First, no one is
authorized to interpret key statutory provisions for the
various agencies, nor has any guidance been issued defining
these key statutory provisions. Second, there is no standard
criteria for agencies to follow in reviewing their rules.
Third, no one can compel rulemaking agencies to comply with the
provisions of the Act. Mr. Finch also noted that OMB's
authority to review rules to ensure compliance with the Act is
limited because under current executive orders, OMB cannot
review rules proposed by independent regulatory agencies.
Finally, he testified that congressional action is needed to
clarify statutory authority in these areas.
The Committee also heard testimony from David Voight,
Director of the Small Business Center, U.S. Chamber of
Commerce, Michael O. Roush, Director of Senate Federal
Government Affairs, National Federation of Independent
Business, and John S. Satagaj, President, Small Business
Legislative Council. These witnesses testified in favor of
granting judicial review of the Regulatory Flexibility Act, and
in favor of S. 350. Mr. Voight testified that the IRS has taken
the position that its rules are ``interpretive rules'' exempt
from the Act, and that the applicability of the Act should be
expanded to cover IRS interpretative rules. Mr. Roush testified
on a number of ways to strengthen S. 350, including, broadening
the standing for judicial review, extending the time to file a
challenge, and directing courts to stay successfully challenged
regulations.
``Entrepreneurship in America: Final OSHA Logging Regulations''--
Kalispell, Montana, March 11, 1995
This was the second in the Committee's series of
``Entrepreneurship in America'' field hearings, which were
designed to assist Congress as it rethinks how best to serve
small business by obtaining the views and comments of that
constituency. They were also intended to enable small
businesses to participate in the legislative process through a
forum that is more easily accessible than hearings held in
Washington, D.C.
Chaired by Senator Conrad Burns, the hearing took place at
the Outlaw Inn Convention Center in Kalispell, Montana. The
hearing examined the effects on small business of the
Occupational Safety and Health Administration's (OSHA) final
rule on logging, which became effective on February 9, 1995. At
a time when Congress was considering a moratorium on federal
rules and regulations, the Committee was particularly
interested in obtaining testimony from affected parties on the
logging rule's effect on productivity, worker safety, and
whether the cost of compliance would affect the profitability
of the timber industry. As noted by Senator Burns, the timber
industry ``is the backbone of our economy and I do not want to
see it bogged down in red tape and unnecessary regulations.''
Greg Baxter, Deputy Regional Administration, Region 8, and
Richard Sauger, Senior Safety Specialist, testified on behalf
of OSHA that a number of specific logging issues were raised in
the rulemaking process and that OSHA sought extensive public
comment to provide insight from affected parties. Messrs.
Baxter and Sauger testified that public comment was received
and integrated into the rule on such issues as power-saw brake
requirements to prevent kickbacks, and protective footwear and
face protection. They also noted that state consultation
programs are available in all 50 states, which provide free
safety and health services to small business employers.
The logging industry representatives provided the Committee
with specific comments on the logging rule and the burden that
this regulation would place on their businesses and on
individual workers. John Hansen, Field Safety Representative,
Montana Logging Association, testified that OSHA's new rules do
little to improve on-the-ground safety for loggers in Montana.
He cited the ``silly, doctor approved safety kits * * * and the
imaginative chain saw resistant safety boots as examples of
OSHA's lack of understanding of industry issues.''
Additionally, Mr. Hansen stated that his greatest frustration
was OSHA's ``categorical dismissal'' of many constructive
suggestions offered by logging and safety officials.
Following Mr. Hansen, a variety of industry officials,
small timber owners and workers reiterated their belief that
the OSHA logging final rule would do little to reduce safety
concerns, and in some cases, it would even increase safety
risks inherent in logging operations. Additionally, timber
industry small business owners testified that the compliance
costs associated with the new OSHA rule would be burdensome.
One owner pointed out that he had to pay for his crew to
receive instruction in blood-borne pathogens even though he was
informed by health officials that the risk of such pathogens in
logging operations was ``infinitesimally small.''
The consensus of the timber management officials and
logging worker representatives was that the logging industry
has been extremely safety conscious and has done a good job of
self policing. The panelists were also critical of the onerous
OSHA enforcement practices. Industry representatives believe
that a less confrontational approach, such as providing
consultation services or warning notices for first time
offenders, would promote better cooperation between government
and industry to provide a safe and healthy working environment
for the logging industry.
Many of the comments and suggestions raised at this hearing
were incorporated into the SBREFA legislation, which was signed
into law on March 29, 1996. Among its many provisions designed
to assist small businesses, SBREFA will enable small businesses
to provide their input in the rule-making process and make
federal agencies such as OSHA more accountable for their
enforcement practices. Senator Bond also co-sponsored the
Occupational Safety and Health Reform and Reinvention Act, S.
1423, which is designed to focus OSHA away from its ``gotcha''
enforcement approach to that treats small business owners like
partners in the regulatory process.
``The Small Business Administration's 8(a) Minority Business
Development Program--Washington, D.C., April 4, 1995
On April 4, 1995, the Committee held a hearing to address
questions concerning the 8(a) set-aside program. In particular,
the hearing focused on the original intent of the program,
whether the program is fulfilling its purpose, the presumption
that members of certain racial and ethnic groups are socially
disadvantaged, and ways to expand opportunities without
providing preferences for certain groups of people.
Chairman Bond opened the hearings with a brief history of
the 8(a) program. Section 8(a) of the Small Business Act dates
back to 1953, which until 1967 authorized the SBA to ``let
Federal procurement contracts to small business.'' In 1967, in
response to the Kerner Commission report, President Johnson
substantially revised the program, and Section 8(a) was
``administratively rewritten to direct Federal procurement
contracts to minority-owned small businesses. It was in 1978,
with the adoption of Public Law 95-507, that the 8(a) Minority
Business Program was transformed from an administrative program
to a statutory program. Since that time, the 8(a) program has
grown significantly. According to Philip Lader, SBA
Administrator, the original purpose was a ``response to a
historic pattern of exclusion, or under representation in
business generally, and certainly * * * in Federal
procurement.'' However, he added, ``Of the 5400 currently
certified firms, only about half of them have actually been
getting contracts. Our job is not to guarantee work * * * but
is to allow them to have this extra threshold.''
Other witnesses, such as Judy A. England-Joseph, Director,
Housing and Community Development Issues, Resources, Community,
and Economic Development Division, U.S. General Accounting
Office, pointed out the weaknesses in the program, which she
stated ``are preventing some firms from obtaining experience
essential to their development.'' She noted that ``while SBA
has approved business plans for most firms, it has not given
that same attention to annually reviewing these plans to ensure
that they accurately reflect the firms' development goals and
contract needs.'' She also added that many firms are still
dependent on the 8(a) program after their 9 year participation
limit is reached, causing hardship for the firms in the
competitive marketplace. Peter Homer, Jr., Co-founder and
Member, National Indian Business Association, agreed and
suggested dropping ``unnecessary regulatory limitations on
self-marketing by 8(a) firms * * *. 8(a) firms * * * should be
permitted to compete on a national level at all times.''
Mr. Lader provided the Committee with some statistics
supporting the success of the 8(a) program. The average net
worth of participants entering the program is $54,000. He said
that ``Black Enterprise Magazine, in identifying the 100 top
African-American owned businesses, found that 32 of them were
or are participants in the 8(a) program.'' Mr. Lader claimed
that ``9(a) today is not a Government handout * * * but it
means by which qualified businesses have produced goods and
services that have met or exceeded the market standards and
agency needs.'' However, Joshua L. Smith, Former Chairman, U.S.
Commission on Minority Business Development, disagreed with Mr.
Lader's measure of success, noting that ``minority business
programs in general, have to do with socioeconomic programs.
But in reality, socioeconomic programs are neither social nor
economic. Therefore, the measures of success are totally
lacking.''
``I feel very strongly that one succeeds through hard work
and commitment,'' said Santos Garza, Chairman of the Board and
CEO, Counter Technology Inc., who admittedly benefited from
affirmative action and minority economic development programs.
Cassandra Pulley, Deputy Administrator, SBA, said that there
had been an effort to include minority firms in other programs,
but primarily they are participating in 8(a). ``Without 8(a)
surely that commitment [of helping minority firms] would
continue, but it would be a significant drop and a significant
loss to the minority business community without the access to
Government contracting and the procurement opportunities.''
Nancy E. Archuleta, Chairman and CEO, MEVATEC Corporation, and
Chairman, Latin American Management Association, said, ``the
Council does not believe that past and current discrimination
have been overlooked and that some form or preference is still
needed. Therefore, we proposed * * * streamlining the 8(a)
program and creating additional opportunities for small and
minority owned business.''
Other witnesses testified that special considerations for
businesses based on the ethnicity of the business owners does
more harm than good. According to James B. Graham, Founder,
Faxland Corp., ``the 8(a) program penalizes groups it is
designed to help. Employees who would have qualified for
special contract set asides had they owned the businesses lost
commissions, pay, and benefits because they worked for my
company.'' Arnold J. O'Donnell, Member, Associated General
Contractors of America, and Vice President, O'Donnell
Construction Company, added his belief that ``it is
fundamentally unreasonable to put race as a prime criteria as
to whom can do business with a government organization, and * *
* it just gets worse following that premise. [It] takes away
low bid and quality of work.''
When asked whether opportunities can be expanded without
providing preferences, Ms. Archuletta said the ``answer it
there should be more of a total Federal procurement dollar to
all small businesses, therefore eliminating the need for us to
fight between 24 percent to a mere 2.7 percent of the dollars
that 8(a) companies get.'' R. Noel Longuemare, Principal Deputy
Under Secretary of Defense for Acquisitions and Technology,
U.S. Department of Defense, testified that the Defense
Department's experience has been that ``if the socially
disadvantaged standard is deleted or significantly broadened,
the program will be so substantially changed as to eliminate
the very reason for 8(a).'' According to James Graham, ``the
premise that small businesses need Federal help to compete in
the free market is false. It stems apparently from the belief
that big business has some insurmountable advantage based on
economic resources, when in fact the opposite is true. Our
small business thrived on competing with the giants because the
burden of bureaucracy inflated their cost of doing business.''
``Entrepreneurship in America: Reducing Governmental Burdens on Small
Business''--Kansas City, Missouri, April 12, 1995
This was the third in a series of ``Entrepreneurship in
America'' field hearings held during the 104th Congress. The
purpose of the field hearings was to obtain the views and
comments of small business owners in order to guide Congress as
it rethinks how government can best serve small businesses. The
hearings allowed small business owners to express their
concerns about the state of small business in a forum more
easily accessible to them than Washington, D.C.
The hearing, chaired by Senator Bond, took place in Kansas
City, Missouri, at the University of Missouri at Kansas City.
Chairman bond emphasized that ``the burden of government
regulation falls most heavily on small businesses, so the Small
Business Committee's work will focus on reducing these
burdens.''
Many of the panelists shared Chairman Bond's concerns about
the burdens of over-regulation. Shirley J. Potts, President of
DLT Transportation Services, pointed out that ``each additional
regulation imposes burdensome compliance issues, reporting
costs and fear to small businesses * * * there is a fear that
one mistake can mean substantial costs, maybe even the cost of
our business and all the jobs that go with it.'' According to
Ms. Potts, excessive and overly complex regulations produce
significant expenses and delays, and inhibit growth. Many small
businesses do not have the resources to handle these obstacles
that are often designed to regulate larger businesses. Ms.
Potts suggested federal agencies could provide education,
counseling assistance, and no fault audits to ease the burdens
on small businesses, and help them comply with regulations.
The exorbitant amount of federal regulations was the major
topic of discussion at the hearing. All of the panelists
participating in the discussions were overwhelmed with the
amount of paper work required to keep a business in compliance.
Leon Hubbard of Blue Springs, Missouri, noted that the
substantial amount of paper work, which is often unnecessary,
requires him to either hire extra help or spend more personal
time filling out paper work.
Robert Wheeler of Kansas City pointed out that big
businesses can devote highly trained and specialized staff cost
effectively to dealing with federal agencies and regulations.
Many small businesses simply do not have the resources to
absorb the costs of hiring this type of help, which impedes the
smaller firm's ability to compete with the larger companies.
Mr. Wheeler also pointed out that there is an unequal balance
of power between federal regulators and small business owners.
If a small business owner has a grievance with a federal
regulator or a ruling by a federal regulator, his only redress
is through the judicial system--never an inexpensive endeavor.
Many of the concerns raised at this hearing were
incorporated into Chairman Bond's SBREFA legislation, which
became law on March 29, 1996. Among its many provisions, the
new law allows for judicial enforcement of the 1980 Regulatory
Flexibility Act, requiring federal agencies to consider ways to
reduce any significant economic impact of new regulations on
small businesses and local governments. SBREFA also requires
federal agencies to provide plainly written guides for
regulatory compliance. These ``Plain English'' guides for
compliance are designed to reduce the need for hiring experts
to ensure that a small business is in regulatory compliance. In
addition, the new law establishes an Ombudsman at the Small
Business Administration who will counsel small businesses on
compliance issues and receive confidential complaints and
comments from small businesses about their dealings with
federal regulators. Regional citizen review boards will ``rate
the regulators'' based on these comments and publish a report
card for each agency.
``Entrepreneurship in America: Focus on Capital Formation''--St. Louis,
Missouri, April 12, 1995
This was the forth in a series of field hearings held
during the 104th Congress designed to give entrepreneurs, who
are unable to testify in Washington, the chance to be heard.
The hearing on small businesses access to capital was chaired
by Senator Bond in St. Louis, Missouri.
As Chairman Bond stated, ``[small businesses] employ 54
percent of the American work force. They generate some 50
percent of the gross domestic product. Over the past decade,
for every person laid off by large corporations in this
country, five new jobs will be created by small business. These
new and growing small businesses need ready sources of capital
to grow, to hire new employees, to continue to fuel our
economic growth.'' The SBA has several loan programs that it
employs to assist small businesses in their search for ready
capital, including the 7(a) program, 8(a) program, and the
Small Business Investment Company (SBIC) program.
Each of the witnesses testified about a particular SBA
program designed to assist entrepreneurs with obtaining capital
and operating a successful business. James F. O'Donnell,
Chairman, Capital for Business, Inc., testified specifically
about the SBIC program, and its impact on small business. Mr.
O'Donnell pointed out that the demand for SBIC loans outpaces
the ability to provide such loans under the current budget
appropriation for the program. He expressed his optimism that
eventually there can and should be less government funding and
a privitization of the program while still providing investment
capital through this important program.
William M. Zielonko, Senior Vice President of Retail
Banking, Boatmen's National Bank of St. Louis, testified that
his bank deals with every type of SBA loan and believes that
they are very beneficial to the small business entrepreneur. He
cautioned, however, that the paperwork process needs to be
streamlined. Mr. Zielonko stressed that, ``We know how to
deliver loans, and we find that excessive paperwork strangles
this efficiency. Banks are forced to spend unnecessary
resources on SBA paperwork, and small business owners wait an
unnecessarily long time because of the requirements.''
Dennis G. Coleman, Executive Director, Economic Council of
St. Louis County, a not-for-profit economic development agency,
urged the Committee to continue SBA's 504 Program, and he
emphasized the benefits it has brought to the St. Louis
community with little outlay from the federal government. He
also testified that Small Business Development Centers (SBDCs)
are integral to the expansion of entrepreneurship, but that
they should institute a service charge or fee schedule under
which participating companies match the dollars put up by the
centers. Tess Greenspan, President, Sappington Farmer's Market,
testified that without the Small Business Development Center in
St. Louis, she would not be a successful small businessperson
today. She pointed to an impact study that stated, ``for every
federal dollar invested in the program over $7 in increased tax
revenues are generated,'' which is not to mention the jobs that
are produced from a start-up business. Entrepreneurs turn to
the SBDCs as a valuable source of information, especially with
regard to the requirements imposed by the federal government,
and many businesses rely on the SBDCs to advise them on
business strategy.
Virginia Kirkpatrick, Owner, CVK Personnel Management and
Training Specialists, testified about how the SBA and its
LowDoc programs have helped the people in her community by
making it possible for smaller banks to offer loans. As she
stated, ``Small businesses were creating jobs when large
companies were laying them off. I believe seriously that
without programs like the 504, 7(a), the LowDoc program, the
women's business loans, that many banks would not make those
loans.'' Robert Cimasi, President and Founder, Health Capital
Consultants gives credit to SBA programs for continued job
creation in service industries. He testified that ``As hospital
consolidations and mergers force lay-offs and significant
reductions in the number of service jobs, the importance of new
start-up businesses and the expansion of established health
care service sector businesses become all the more important to
pick up the slack in employment. The capital formation needs of
these small service businesses are not likely to be met through
private sector commercial lending sources or other sources
related to the venture capital and equity markets. It is in
this area and for these reasons that the loan guarantee
programs of the Small Business Administration are most vitally
needed and must continue.''
The opinion shared by Professor Murray Weidenbaum,
Director, Center for the Study of American Business at
Washington University, and Robert Brochaus, Ph.D., Coleman
Foundation Chairholder in Entrepreneurship, and Director of
Jefferson Smurfit Center for Entrepreneurial Studies, St. Louis
University, is that there are two main problems that small
businesses face: high taxation and regulation. If both of these
were reduced government-wide, small business would benefit more
from SBA's programs. They also stressed that these programs
should not have their funding reduced due to their expanding
benefits to the economy.
A number of the concerns raised by the witnesses at this
hearing about the SBA and its programs were incorporated into
the Small Business Lending Enhancement Act, S. 895, which
Chairman Bond introduced in the First Session of the 104th
Congress. This legislation, which was signed into law on
October 13, 1995, made significant improvements to the 7(a)
program and substantially decreased the program's subsidy rate.
In addition, Chairman Bond and Senator Bumpers offered a
substitute amendment in 1996 to the Small Business Programs
Improvement Act of 1996, H.R. 3719, which included other
suggestions of the panelists. In particular, the legislation
restored the 504 loan program to being a self-funding program
and overhauled the SBIC program to expand the availability of
this investment program while limiting the risk to loss to the
federal government. This legislation was signed into law on
September 30, 1996.
``Entrepreneurship in America: Federal Government Burdens on
Agribusiness''--Cape Girardeau, Missouri, April 13, 1995
This was the fifth in a series of ``Entrepreneurship in
America'' field hearings held during the 104th Congress. The
purpose of the hearings was to obtain the views and comments of
small business owners and to guide Congress as it rethinks how
government can best serve small businesses. The hearings
allowed small business owners to express their concerns about
the state of small business in a forum more easily accessible
to them than Washington, D.C. As the late Missouri Congressman
Bill Emerson pointed out, ``these hearings are an excellent
opportunity for people to be in touch with their lawmakers and
to share their thoughts and concerns.''
The hearing focused on two major items of concern to small
businesses: capital-gains tax relief and over regulation by
federal agencies. According to Ronald C. Milbach, President and
CEO of the Production credit Association and Federal Land Bank
Association of Southeast Missouri, ``I think it [a capital
gains tax cut] would have a very positive effect on
agriculture. Currently, a large amount of land is held by
retired farmers who would like to sell, but because of the high
tax burden they face, they're probably not going to sell it.''
Mr. Milbach said that a capital-gains tax break would benefit
more than just the property owners. ``Another factor I think we
would see is the economic impact which would be dramatic from
the standpoint that the title insurance companies would be
selling a lot more title insurance, appraisers would be busy
doing more appraisals, real estate agents selling, and
certainly as a lender I would be in a position to want to hire
new employees, new loan officers. And at the same time, our
agribusiness people that do land grading, those that sell
irrigation equipment, would be in a position to have new sales
opportunities. So I think it would have a dramatic effect on
our economic development in rural America,'' Mr. Milbach said.
As a direct result of the concerns raised by Mr. Milbach and
others, Chairman Bond co-sponsored the Capital Formation Act of
1995 introduced by Senators Hatch and Senator Bieberman, which
would cut the capital gains tax by 50%. The legislation passed
in both houses of Congress, but was eventually vetoed by
President Clinton.
The concerns over regulations have increased with the
escalating intrusion of federal regulations into property
owners' land use decisions. Peter C. Myers Sr., former Deputy
Secretary of Agriculture for the U.S. Department of Agriculture
testified that ``EPA regulations involving wetlands, air
pollution and water quality, both surface and ground water, are
best left to USDA to provide landowners technical assistance
and advice, but not regulation by either agency.'' The general
consensus among the panelists was that local commissions are
better suited to make such decisions than federal regulators.
Mr. Myers also stated, ``If allowed to operate on the better
acres in our country without excessive federal regulations,
U.S. farmers can continue to produce more crops per acre and
thus will be able to continue as viable agricultural
operations.
During the hearing, Danny Terry, Chairman of the Department
of Agriculture at Southeast Missouri State University,
testified that ``small businesses represent the foundation of
agribusiness * * * assuming a level playing field, the
efficiency of American agribusiness currently has no rival.''
Dr. Terry went on to add that ``cumbersome and excessive
regulations significantly and adversely tilt this playing
field.'' He suggested that a common sense cost/benefit approach
would benefit both small businesses and regulatory agencies,
making them both more streamlined and efficient. Ed Barnhill of
Charleston, Missouri, suggested that one way to help small
businesses become more efficient would be to reduce the amount
of paper work required by federal agencies. ``The days when you
could concentrate on buying and selling your products and
servicing your customers now seems to be overshadowed by that
paperwork,'' Mr. Barnhill said.
The Paperwork Reduction Act (PRA) of 1995 directly
addressed Mr. Barnhill's concerns by requiring federal agencies
to reduce the paperwork burden created by regulations over the
next few years. Chairman Bond, who strongly supported this
legislation, held a hearing on agency compliance with the PRA
in 1996, Many of the other concerns raised at this hearing were
addressed in Chairman Bond's SBREFA law, which assists small
business owners by providing them with input in the rule-making
process and making federal agencies such as OSHA and EPA more
accountable for their enforcement practices. Chairman Bond also
co-sponsored the Occupational Safety and Health Reform and
Reinvention Act, S. 1423, a measure designed to focus OSHA away
from its ``gotcha'' enforcement approach to one that treats
small business owners like partners in the regulatory process.
``Entrepreneurship in America: Loosening the Government Noose on Small
Business''--Memphis, Tennessee, April 13, 1995
This was the sixth in a series of field hearings held
during the 104th Congress designed to listen to the concerns of
small business entrepreneurs from around the country. The
philosophy behind the ``Entrepreneurship in America'' hearings
series was to seek the views and comments of entrepreneurs from
across the nation to guide Congress as it rethinks how
government can best serve America's small businesses.
Led by Chairman Bond and Senator Frist, this hearing took
place in Memphis, Tennessee. Citing the importance of small
businesses in the United States, Senator Frist said ``the
American small business community ranks as the world's third
largest economic power, behind only Japan.'' Senator Frist also
emphasized the problem Tennessee entrepreneurs are having with
excessive government regulations. He stressed their concern
that federal agencies are strangling them with red tape and
that they need relief in order to produce more economic growth
and new jobs.
Jack Faris, President of National Federation of Independent
Business (NFIB), testified that there are three main things
that need to be changed: frivolous lawsuits, regulatory relief,
and cutting taxes while reducing spending. He later testified
that the initials NFIB members do not like are ``IRS * * * by
far number one. Number two, OSHA. Number three, EPA.''
According to Mr. Faris, who's organization is the nation's
largest small business advocacy organization, government needs
to get out of the small business owner's way, so he or she can
do business and generate new jobs and new revenue for the
government by expanding the tax base.
Arlene Goodman, Chair of the Tennessee Delegation to the
White House Conference on Small Business and former owner of
Nashville KOA Campground, told the Committee of her experience
with government regulations; ``As I looked around the mobile
home and counted the massive files, the computers, the stacks
of paperwork, I realized I was finally really working for the
government. I no longer felt self-employed. The large majority
of information in that mobile home was paperwork, * * * files,
rules, and regulations that my silent partner [the government]
required of me.''
Ron Pickert, Chairman and Chief Executive Officer of
Sofamor Danek Group, Inc., a medical device development and
manufacturing company, expressed concern over FDA's regulatory
ability. ``The FDA controls virtually every aspect of our
operation. This includes expansive authority over the
manufacturing, labeling, promotion, and marketing aspects,'' he
said. Due to the FDA regulations on exports, in 1993 Sofamore
Danek had to merge with a French company in order to remain
globally viable.
Another issue of concern was ``leveling the playing field''
for competition between small businesses and large companies,
as well as easing the burdens of starting new businesses.
Patrick Carter stated that the problem in starting a business
is capital and trying to get a loan. After the business is
started, the problems are taxes, Workman's Compensation, and
the lack of a level playing field for competition. Added to the
everyday costs of running a business, according to David
Hagedorn, General Manager, Frank A. Conkling Co., are costs
``imposed by the federal and local governments upon businesses
in the name of health, safety, environment, Workman's Comp, and
other regulations.'' Ronald L. Coleman, President, Competition
Cams, Inc., said that small business owners, who are faced with
the vague and complicated regulations, try in good faith to
comply with them and end up making mistakes and spending
significant amounts of time and money as a result.
Many of the concerns raised at this hearing were
incorporated into Chairman Bond's SBREFA law, leveling the
regulatory playing field for small business owners by providing
them with input in the rule-making process and making federal
agencies such as OSHA and EPA more accountable for their
enforcement practices. In addition, Chairman Bond introduced
and Congress passed his Substitute Amendment to the 1996 Small
Business Programs Improvement Act, resulting in the expansion
of SBA loan programs for FY 1997. Chairman Bond also
cosponsored the Occupational Safety and Health Reform and
Reinvention Act, S. 1423, a measure designed to focus OSHA away
from its ``gotcha'' enforcement approach to one that treats
small business owners like partners in the regulatory process.
``The Small Business Administration's 7(a) Business Loan Program''--May
18, 1995
On May 18, 1995, the Committee held a hearing on the need
for building a strong foundation under the 7(a) program and to
set the stage for designing a sensible and affordable program
to meet long-term demand for small business financing.
The 7(a) loan program is the most popular and effective
program of the Small Business Administration (SBA). The program
assists small businesses and entrepreneurs in obtaining long-
term business loans that would otherwise not be available on
reasonable terms from banks and other lenders. According to
Philip Lader, Administrator, SBA, the 7(a) program is ``a
splendid example of a public-private partnership that truly is
working.'' He presented statistics indicating that
approximately 60,000 loans are made each year, the average loan
being $139,000. The program guarantees up to 75% of a $500,000
loan. Anywhere from $26 million to $34 million in loans are
made each day. Mr. Lader cited three guiding principles for
this program. The first is ``growth of small business financing
through a zero-subsidy that provides some administrative
flexibility and increased preferred lender participation.''
Second, ``there be incentives for small loans in under served
areas. * * *'' Finally, an ``assurance of continued
profitability for our partners * * * so that they continue to
be active in this program and there is a fair distribution of
costs between the lenders and the borrowers.''
Two witnesses addressed the problem of loan services in the
7(a) program. Joe Scallorns, President, Farmers and Traders
Bank, recommended the ``elimination of all [SBA] regional
offices and substantial reduction in the [SBA] central office.
The field offices who deliver the product could be enhanced by
using only part of the savings from * * * the cutbacks.'' Gary
Hoyer, President and Principal, Princeton Capital Finance
Company, LLC, suggested that to improve the program, the 7(a)
loan originations should increase and thus develop a viable
secondary market ``resulting in greater efficiencies for small
business borrowers, small business lenders, and the
Government.''
To take some of the pressure off the 7(a) program, the SBA
created the Low Documentation (LowDoc) loan program. Mr. Lader
testified that LowDoc is a pilot program because none of the
loans are three years old and therefore cannot be considered
``seasoned.'' However, despite LowDoc being a pilot program,
the government is guaranteeing the loans at 90%. Lyle
Fredrickson, Manager, Government Loan Center, Bank One N.A.,
expressed concern that many of these loans are going to start-
up companies; therefore, the SBA needs to ``look at a credit
scoring system to be applied to LowDoc as a means of helping
SBA underwrite and monitor those loans.'' Though the loans are
not seasoned and most of the capital goes to start-up
companies, LowDoc currently appears to be successful. According
to Mr. Lader, as a result of ``the LowDoc program, with more
responsibility to the lenders, less documentation and review by
the SBA, we currently have a healthier portfolio of LowDoc
Loans than the overall portfolio.''
The biggest issue addressed at the hearing and of most
concern to the witnesses was the question of a zero subsidy
rate and fees for loans. Currently the SBA has a ``savings
account'' funded by the taxpayers to protect against bad loans.
Mr. Lader recommended instead of taxpayers funding the losses,
there should be a fee for borrowers and lenders, so that as the
demand for loans increases, ``the amount paid by the borrowers
and the lenders to that reserve would increase.'' Michael
Gallagher, Manager of Government Loan Programs, Business
Banking Group, Wells Fargo Bank, agreed with the concept of
zero subsidy, but warned ``it should be done so as to
encourage, not displace, private unguaranteed lending programs
and the growth of private unguaranteed secondary markets.'' He
also suggested that the SBA could also be ``self funding by
becoming the monopoly buyer of 7(a) loans and instituting a fee
structure for sellers and keepers of loans. * * *''
Other witnesses testified that a zero subsidy rate would be
a bad idea for the 7(a) program. John J. Canning, President and
Chief Operating Officer, AT&T Small Business Lending
Corporation, and Strategic Business Leader, AT&T Capital
Corporation, testified that as a result of the ``SBA propos[al]
[of] several fees and charges * * * the maximum incremental
rate over the prime rate for a 7(a) loan would increase from
12.75 percent to 3.25 percent, an 18 percent increase.'' Mr.
Scallorns warned that ``if you raise the lender's cost of
making a loan and raise the borrower's cost of getting a loan,
then it is going to be more difficult for small business to get
the capital it needs.'' He made the further point that once the
subsidy is reduced to zero, there will be pressure in
subsequent years to ``raise fees and further decrease the
return to lenders and further increase the fees to borrowers so
that less overall capital will be available.''
As a result of this hearing, Congress passed the Bond-
Bumpers Substitute Amendment to H.R. 3719, which increased
funding to the 7(a) program and provided a number of reforms to
strengthen the program.
``The Small Business Investment Company Program''--Washington, D.C.,
July 13, 1995
On July 13, 1995, the Committee held a hearing to examine
the Small Business Investment Company (SBIC) program. The main
focus of the hearing was how to reform and improve the SBIC
program to enable it to assist more small businesses and
entrepreneurs.
Small businesses are an essential part of the U.S. economy.
They employ more than half of the domestic labor force and
produce nearly half of the gross domestic product. Small
businesses are responsible for a significant amount of the job
growth over the past two decades, while larger corporations
have generally been downsizing over that period of time. The
SBIC program is important because it provides the necessary
capital to promote the development and growth of small
businesses.
During the hearing several witnesses testified about the
importance of the SBIC program. Small businesses are
incessantly faced with difficulty in obtaining long-term
capital necessary for development. Commercial banks usually do
not provide the necessary financing and private venture capital
funds are often extremely selective with their investments.
SBICs create another, much needed option for small business
entrepreneurs.
Patricia M. Cloherty, Chairman of the SBIC Re-invention
Council and President of Patricof & Co. Ventures, Inc., stated
that ``the SBIC program uniquely provides both permanent equity
capital and long-term debt capital to small enterprises when
they need them both.'' SBICs tend to invest in smaller more
diverse enterprises when compared with the private venture
capital industry. Cassandra Pulley, Deputy Administrator, Small
Business Administration (SBA), noted that Specialized Small
Business Investment Companies (SSBICs) go even further.
``SSBICs, by definition, serve under served markets by
investing only in companies owned by persons who are socially
or economically disadvantaged.''
Many challenges face the SBIC program, especially the need
to increase and stabilize the availability of equity capital
and long-term debt financing. Many of the panelists suggested
that stabilizing government funding either by appropriation,
tax incentives, or privatization would be a good way to address
this need. Ms. Pulley agreed with the SBIC Re-invention
Council's recommendations for SBIC programs, which include:
eliminating the need for appropriations by making the program
self funding; providing stable, predictable funding that can
grow to meet the needs of small businesses for equity and long-
term debt; and improving administration of the program to
reduce its risk and improve service.
The Committee also heard testimony suggesting a long-term
strategy of ``a new off-budget government sponsored enterprise
(GSE)'' to privatize the SBIC program. This plan calls for: a
privately-owned GSE with SBIC licensees owning the voting
common stock; a GSE controlled by a Board of Directors; and
mandatory Board representation by former SSBICs, and smaller
entrepreneurial focused SBIC licensees.
The SBIC program has provided a great service to small
businesses in its 37 year history. William F. Dunbar, of the
National Association of Small Business Investment Companies,
said, ``today's SBICs are better managed and better
capitalized. They operate in a more reasonable regulatory
environment and are successfully filling the needs of small
business. Most importantly, today's SBICs are committed to
invest in and work with America's small growth companies to
help them now and well into the future.''
``Entrepreneurship in America: Overview of SBA Programs in Alaska''--
Anchorage, Alaska, August 16, 1995
This was the first of two ``Entrepreneurship in America''
hearings held in Alaska during the 104th Congress. These
hearings were designed to give small business entrepreneurs
from around the country, who are not able to testify at
hearings in Washington, D.C., the opportunity to express their
concerns and have an effect on Washington lawmakers.
The hearing, chaired by Senator Bond, took place in
Anchorage, Alaska, at the invitation of Alaska Senator, Ted
Stevens. According to Jan Fredericks, State Director of the
University of Alaska Small Business Development Center, 99% of
the businesses in Alaska are small businesses, with 65%
employing one to four people. Many of these businesses are
located in remote areas that are many miles from banking
facilities and depend on SBA guaranteed loans. Also, many
Alaskan small business owners qualify as Alaska Native Claims
Settlement Act (ANCSA) corporations under the SBA's 8(a)
program. According to Julie Kitka, President, Alaska Federation
of Natives, Inc., the people of the remote villages are
dependent upon welfare and other forms of public support for
survival, and with the combination of a population boom and a
lack of resources to draw large corporations, it is important
for the SBA to work with the State of Alaska to create ``small
enterprise development, producing local employment and
income.''
During the hearing, several Alaskan small business owners
testified that the SBA loan application process is not
conducive to small businesses. They suggested that the
applications be processed locally, rather than in Washington,
D.C. or at the regional field office headquartered in Seattle,
Washington. This would reduce the amount of processing time and
the confusion in processing the application, particularly for
those businesses that fall under the 8(a) program. Trefon
Agasan, Board Member, Alaska Federation of natives, Inc.,
testified that ``local administration of the [8(a)] program
works very smoothly * * * and should be expanded. It would also
enhance the ability of the 8(a) program to fulfill its mission
* * * as a very important tool to help Alaska natives
participate meaningfully in the private sector.'' Mr. Agasan
was accompanied by Mike Carter, whose application for a waiver
for his construction company was slowed down due to the
confusion that resulted from processing the waiver at a distant
SBA field office. Mr. Carter said that his company was going to
miss a major construction season because of that confusion,
resulting in a major financial impact on his business. Mr.
Carter stated, ``had the people been sitting here and we'd been
dealing with them one on one I think they would have thought it
made sense.''
Like all states, in order for Alaska to continue to develop
its economic base, it needs capital. According to Marc
Langland, President, Northrim Bank in Anchorage, ``As a state
with a young economic base and an enormous geographic area, a
relatively small population and only a handful of large
communities, we have been constrained by a lack of capital over
the last three decades.'' Except for large oil companies,
Alaska's economic base is comprised of small businesses, which
must compete with each other and larger markets to obtain
capital for business start-ups and expansion. ``By lowering
overall credit risks and providing longer-term lending-options
to borrowers, the SBA has enabled banks to make more loans, put
more loan dollars into Alaska communities, and provide greater
depth in financing to specific business sectors than otherwise
would have been impossible for us to do,'' Mr. Langland said.
Statistics provided at the hearing by Frank D. Cox, District,
SBA Anchorage District Office, lent numerical proof to Mr.
Langland's statement. ``In the past 13 years, the SBA has
approved 3,014 business loans and loan guarantees totaling over
$622 million. The current portfolio is approximately 1,800
loans with a total value of $200 million.
An important item of discussion at this hearing focused on
the need for the SBA to promote education and counseling to
entrepreneurs through Small Business Development Centers for
solving problems, rather than consultants who identify problems
but do not offer any solutions. Many small business owners want
to expand their businesses, but have no knowledge of what
programs and aid is available to help them accomplish that
goal.
The burden of government regulations on small businesses
was also discussed. Dr. Joyce M. Murphy, D.V.M., emphasized
that ``we are still dealing with a burdensome and onerous
regulatory process * * * OSHA is killing us.'' She gave an
example of fire extinguishers in her clinic: ``If I were to
follow the OSHA regulations for the fire extinguishers in my
practice, I will be opposed to my local fire code for the fire
extinguishers they want me to use. I am going to get fined if
OSHA walks in; I am going to get fined if my fire chief walks
in. As a small business person, I don't have the time or money
to fool around with this kind of stupidity.'' According to
Pamela L. Marsch, Chief Executive Officer, Enterprise Brokers,
and President, Electronic Solutions, who served as a tax chair
for the 1995 White House Conference on Small Business, the IRS
needs to be downsized and gave several suggestions for
modifying the tax code including capital-gains tax modification
``to encourage reinvestment in small business; and * * * no
retroactive taxation.''
As a result of this hearing and others, Chairman Bond
introduced the Bond-Bumpers Substitute Amendment to the Small
Business Programs Reauthorization Act, requesting
reauthorization and additional funding for SBA programs such as
the Small Business Development Centers and the 7(a) loan
program. In the regulatory arena, he authored and Congress
passed the Small Business Regulatory Enforcement Fairness Act
of 1996 (SBREFA) to reduce the regulatory burdens on small
businesses, and he co-sponsored the Occupational Safety and
Health Reform and Reinvention Act, S. 1423.
``Entrepreneurship in America: Alaska's Small Business Environment''--
Ketchikan, Alaska, August 17, 1995
This was the second of two hearings in Alaska that were
part of the Committee's ``Entrepreneurship in America'' series
of hearings. The philosophy behind these hearings is to give
entrepreneurs who would not normally testify in Washington,
D.C. a chance to express their opinions and concerns in their
local business environment.
Chaired by Senator Bond, this hearing took place in
Ketchikan, Alaska, at the invitation of Alaska Senator, Frank
Murkowski. Senator Murkowski emphasized the importance of small
business to the Alaska economy: ``small business development *
* * in Alaska is really what Alaska is all about. We have no
resident accumulation of capital. Our capital input is
dependent on individuals looking at opportunities in Alaska,
not necessarily for markets, but for resource development.''
The main issue raised by the witnesses at this hearing was
the problem of government regulations negatively affecting
small businesses. Meredith Marshall best summed up the feelings
of many entrepreneurs throughout the country when she asked
that the Senators ``restrict the power of regulators. Make them
hold to a standard of common sense and cost-effectiveness.''
The problems stated most often were the tax code and IRS'
method of auditing, OSHA standards, required employer-paid
health care insurance, and EPA regulations.
Scott Milner, CPA, said that an interpretation by the IRS
on capital construction fund (CCF) contributions and Social
Security taxes is unfair to the self-employed shipping vessel
operators in Alaska and that ``owners who establish CCFs pay
double Social Security tax on the money earned that is
contributed to CCFs.'' Another problem he presented was
government employees who can deduct high-cost-of-living
expenses from their taxes while those who work in the private
sector, making the same salary, have to pay taxes on all of
their salary. Steve Seley, Jr. of Seley Corporation, runs a
sawmill and said, ``we have OSHA problems where OSHA has come
to our facility. We ask regularly for voluntary compliance
checks. They give us a list of where we are out of compliance
and then fine us anyway.'' Despite the voluntary check, he
still has been given a fine of approximately $7,500. With
regard to health insurance, Ernesta Ballard, Ballard &
Associates, stated that ``small business is competitively
challenged in this area. Health insurance is generally inferior
in scope, higher in price, much harder to come by, and easier
to lose for small businesses. And, in addition, the costs for
owners are not deductible [unlike that of large
corporations].''
Reexamination of environmental regulation was proposed by
Don Thornlow, President, Communications Unlimited, Inc., who
stated in his written testimony that there needs to be a
``complete review of laws and regulations * * * such as the
Clean Water Act, Clean Air Act, Endangered Species Act, and
National Environmental Policy Act.'' He also mentioned the
problem of government seizure of property caused by
environmental regulations, specifically in regards to wetlands.
He recommended that federal policy be revised regarding the
effect of regulations on private property and recommended that
EPA review its unrealistic penalty assessments and utilize risk
assessment and cost-benefit analysis in land decisions.
Another concern expressed at that hearing was the need for
more funding for SBA loan programs and making the application
process more efficient. Jerry Scudero, President, Taquan Air
Service, Inc., expanded his airline in 1987 with a guaranteed
loan from the SBA. He said, ``I have a very sincere
appreciation for the Small Business Administration's efforts to
stand behind me and help me do what I was not able to do by
myself by providing me with those guaranteed loans through
participating banks with requirements far less stringent that
what the private banks needed to make those same loans.'' John
M. Clifton, Vice President, First Bank, Ketchikan, noted that
``two of our customers have grown in size to become major local
employers, each of which are now employing over 100 people.''
David L. Coates, owner of several small businesses in Ketchikan
emphasized that the SBA loan program ``is an opportunity that
is extremely important to the strong growth and development of
not only a healthy economy in our community but our country as
well.''
Many of the concerns raised at this hearing were
incorporated into Chairman Bond's SBREFA legislation, leveling
the regulatory playing field for small business owners by
providing them with input in the rule-making process and making
federal agencies such as OSHA and EPA more accountable for
their enforcement practices. In addition, Chairman Bond
introduced and Congress passed his Substitute Amendment to the
1996 Small Business Programs Improvement Act, resulting in the
expansion of SBA loan programs for FY 1997. Chairman Bond also
co-sponsored the Occupational Safety and Health Reform and
Reinvention Act, S. 1423, a measure designed to focus OSHA away
from its ``gotcha'' enforcement approach to one that treats
small business owners like partners in the regulatory process.
``Tax Issues Impacting Small Business''--Washington, D.C., September 19
& 20, 1995
On September 19 and 20, 1995, the Committee held two days
of hearings focusing on the tax issues affecting small
business. The hearings were timed so that Members would have an
opportunity to listen to the tax priorities of small business
owners prior to Congressional action on tax legislation and
budget reconciliation. During the two days of hearing six tax
issues vital to small business were addressed including:
reducing the capital gains tax rate, estate tax relief, pension
simplification, classification of independent contractors,
increasing the expensing provision, and the deductibility of
health insurance by the self-employed.
Capital Gains
The hearing began with testimony from Senators Hatch and
Lieberman who discussed their bill, The Capital Formation Act
of 1995, S. 959. Senator Hatch explained that capital-gains tax
relief is important to small businesses throughout the country
and that a cut in the rate is an integral part of balancing the
budget. The effect of a rate cut will be economic growth and
job creation. Senator Hatch noted that, ``As we all know, a
healthy and growing economy requires the ready availability of
capital for new and expanding entrepreneurial activity. And the
job creation generated by this entrepreneurial activity is one
of the keys to increased cash tax flow to our Treasury.''
Senator Hatch went on to say that some economists estimate that
this country has about $8 trillion of unrealized capital gains
and that S. 959 would go a long way towards unlocking a large
portion of that wealth, creating a tremendous benefit for the
economy.
Senator Hatch pointed out that some Members argue that a
capital-gains tax cut unduly benefits the wealthy. He used
Treasury Department figures to show that, although a cut will
benefit some who are wealthy, a cut will also benefit lower and
middle income Americans, as well. The Senator outlined for the
Committee the provisions of S. 959:
1. Reduces by 50% the taxable capital gain on assets held
at least one year.
2. Reduces the maximum corporate capital-gains tax rate to
25%.
3. Considers the loss on the sale of personal residence as
a capital loss.
4. Expand the 1993 provisions championed by Senator Bumpers
that were designed to spur investment in expanding and new
start-up companies. If a taxpayer invests in a start-up company
and holds the stock for between one and five years there is a
50% capital-gains deduction; if the stock is held for more than
five years there is a 75% deduction. Or if the taxpayer decides
after five years to sell and invest the proceeds in another
small business, then the gain on the sale of the first stock is
deferred until the second stock is sold.
Senator Hatch indicated that he believes that the targeted
capital provisions would do a great deal towards increased
investment and job creation in small business.
Senator Lieberman echoed many of the points raised by
Senator Hatch. He also pointed out that the 75% exclusion on
gain from the sale of a qualified small business investment
builds on the 1993 legislation, which up to now has not
produced the results that they would have liked. S. 959 is an
improvement because it removes some of the inhibitions to those
with capital to invest in small businesses. He also cited Joint
Tax Committee estimates reflecting the proposal's relatively
low cost as compared with the potential return. Senator
Lieberman concluded by saying that a large number of people
will benefit including ``middle class people who own a small
business, own a farm, own a little piece of investment
property, or have a share of a mutual fund, or one of the
millions of Americans who are part of a stock option plan where
they work.'' Therefore, the legislation has a broad based,
positive effect on society in this country.
Tom Wiggans, President and Chief Executive Officer,
Connective Therapeutics, on behalf of the Biotechnology
Industry Organization, also testified regarding a reduction in
capital gains. Mr. Wiggans spoke in support of the two tier
system contained in
S. 959, noting that the first tier incentive is for all
investors while the second tier is for venture capitalists,
recognizing that not all investments are the same. ``Venture
capital investments typically involve tremendous risk, yet
potentially, they provide the greatest economic and social
benefits by funding truly novel technologies that create whole
new industries and revolutionize our standard of living.'' He
urged the Members to pass the Hatch-Lieberman legislation.
Estate Tax Relief
Ann Parker Maust, Ph.D., President, Research Dimensions,
Inc. and a member of the National Federation of Independent
Business, testified regarding her experience with the estate
tax laws. Dr. Maust's parents started a family agricultural
business (oranges and cattle) in Florida. Due to an
appreciation in the land underlying the business, the family
realized that they would have to save a considerable sum of
money in order to pay the estate taxes on the family business.
She testified that several unsettling questions arise when a
family is in this situation: ``What would be the total cash
requirement that we would face, not only in terms of the tax
payment, but also the payment for legal advise and support?
Would we have to mortgage any or all of the land underpinning
the business in order to come up with the estate tax cash
requirement? What would happen to planned business expansions
and investments as we attempted to hoard cash and/or mortgage
land in an attempt to deal with these estate tax
requirements?''
Dr. Maust went on to say that the security her parents
thought they had developed over the years was threatened as was
the future of the business. With that, she testified in support
of The American Family Owned Business Act, S. 1086, which would
exempt up to $1.5 million of a family-owned business from the
estate tax. The legislation would relieve her family's fear and
would allow them to continue to operate the business. More
importantly, Dr. Maust testified that the bill would provide
them with ``more of an opportunity to grow the business, using
cash reserves for planned business expansion and investment,
thus contributing to job generation and productivity, and
ultimately to a healthier economy.''
Michael Roush, Director of Federal Government Relations for
the Senate at the National Federation of Independent Business,
also testified regarding the estate tax. In the view of small
business owners, the estate tax is a form of double taxation
that discourages businesses from growing. Small business owners
ask ``why should family businesses, and jobs be destroyed to
pay estate taxes. The estate tax is one of the most intensely
disliked provision in the Tax Code by small business owners,
and S. 1086 will go a long way in helping businesses survive.''
Mr. Roush concluded by urging Members to co-sponsor the bill
and to include it in the reconciliation package.
Charles Kruse, President of the Missouri Farm Bureau, and
Phyllis Gardner, Chairman of the National Cattlemen's
Association Tax and Credit Committee, both testified in support
of S. 1086 and regarding the estate tax as it relates to farms,
ranches, and rural communities. Ms. Gardner testified that
rural economies are largely comprised of family-owned
businesses. ``The viability of main street in rural America and
the surrounding farms and ranches is directly linked to their
ability to stay in business during generational change. The
opportunity to pass your business to the next generation is a
life-long goal for most of us involved in agriculture.
Tradition and family continuity are not trendy terms in rural
America. It is how we live.'' She went on to say that S. 1086
will work and will help keep the backbone of rural America
together from one generation to the next.
independent contractors
In his opening statement, Chairman Bond said that the
uncertainty and unfairness surrounding the worker
classification issue has been a concern of taxpayers for many
years. Today, Internal Revenue Service agents are using a 20-
factor test that is a nightmare for small business. The IRS has
forced businesses to reclassify approximately 400,000
independent contractors as employees and are now converting
almost 2,000 independent contractors into employees each week.
The Chairman recognized that finding a solution to this problem
will not be easy, but was essential because the status quo is
unacceptable. Taxpayers are worried, and the policy is hurting
the economy by stifling job growth and expansion through fear.
The Chairman quoted the Commissioner of Internal Revenue,
Margaret Richardson, who told delegates to the White House
Conference on Small Business that the IRS ``does not care
whether someone is an employee or an independent contractor as
long as they properly report their income.'' The Chairman
concluded that Congress needs to come up with a legislative
solution so that we can move the IRS out of this ``de facto''
role of setting employment policy and back into its role of
revenue collection.
The testimony regarding independent contractors began with
Senator Nickles who at one time ran a small business and who in
conjunction with Chairman Bond planned to introduce the
Independent Contractor Tax Simplification Act. Senator Nickles
testified that it is vitally important for Congress to clarify
who is an independent contractor and who is an employee. The
20-point common-law test is not working, and he pointed out
that the ``General Accounting Office calls the common-law test,
`Unclear and subject to conflicting interpretations.' Even the
Treasury Department has testified, `Applying the common-law
test on employment tax issues does not yield clear, consistent,
or even satisfactory answers and reasonable persons may differ
as to the correct classification.' '' The Senator indicated
that both the IRS and Congress are at fault and the Congress
needs to resolve the issue through legislation. Senator Nickles
went on to outline the three-part test contained in the
legislation and indicated that an effort was made to simplify
the definition of who is an independent contractor. He closed
by saying that the issue is vitally important and solicited
input and support from other Members to ensure passage of the
bill.
The Committee also heard testimony from Thomas Shopa, CPA,
President of McBride, Shopa & Company, Raymond Kane, President
of Pisa Brothers Travel Service, and Paul Hense, CPA and
President of Paul Hense, CPA. The witnesses all spoke in
support of a change in the law that would simplify and clarify
the definition of an independent contractor for small business.
Mr. Kane spoke of his own person experience during IRS
examinations of his business and their resulting assessment of
some $274,000 in penalties for the years 1992, 1993 and 1994.
Mr. Hense testified that as a CPA he tells his clients ``If you
can avoid it, do not have employees. It is more of a hassle
than it is worth. * * *'' And Mr. Shopa testified that he
represent clients through the IRS appeals process and that
appellate conferees will right up front advise the business
that they will lose the case. Each of the three witnesses had
compelling testimony and significant points regarding the
horrendous state of the law surrounding this issue and the need
for its revision.
equipment expensing
John Galles, President of National Small Business United,
and John Satagaj, President of the Small Business Legislative
Council, both testified regarding the equipment expensing
provision under Section 179 of the tax code. Under current law,
small businesses may elect to expense rather than depreciate
the first $17,500 of business property. Small business would
like to see that amount significantly increased. Mr. Satagaj
testified that ``Small business finances many of its capital
asset investments from retained earnings. Waiting 5 or 7 years
to recover that investment is a significant deterrent to
further growth and expansion.'' He went on to advocate
increasing the amount to $50,000. Mr. Galles pointed out that
the increased deduction would help ``cash-strapped small
businesses'' that would like to grow and enlarge their capital
base. An increased ability to expense the business investment
would indeed enhance the long-term productivity of the
business.
self-employed health insurance deduction
Bennie Thayer, President of the National Association for
the Self-Employed, testified regarding the health-insurance
deduction for the self-employed. Mr. Thayer commended the 104th
Congress for reinstating the health-insurance deduction and
making it permanent. He also applauded the increase in the
deduction to 30% for 1995 and thereafter. However, he urged
theCommittee to go the next step and to increase the deduction to 100%.
Currently, corporations may fully deduct the cost of the health-
insurance premiums paid for their employees. Later in his testimony,
Mr. Thayer reported that the deduction is not only important for tax
equity purposes, ``but it would also greatly assist the self-employed
in the purchase of health insurance.'' He cites that nearly three
million self-employed are uninsured and that small firms cannot afford
to cover themselves or their dependents. ``If a self-employed
individual could deduct the full cost of health care coverage, the
number of uninsured Americans should decrease dramatically. If Congress
really wants to increase health insurance coverage of small businesses
and their employees, studies show that a full deduction is the most
fair and effective way to do it.''
More specifically, Mr. Galles cites a 1983 study by the
Employee Benefits Research Council indicating that more than
nine million self-employed individuals are without insurance,
that is one in four of all the uninsured. ``It is also a fact
that enabling business owners to provide insurance for
themselves (a worthy goal in itself) greatly enhances the
likelihood that they will provide insurance for their
employees.''
pension simplification
The cost of starting and maintaining a pension plan for the
benefit of employees is extremely high for small business. Mr.
Roush, of the National Federation of Independent Business,
testified that the ``rising administrative costs and legal
complexity of pension and retirement plans are forcing small
business owners to drop their plans in ever increasing
numbers.'' Given the meager savings rate in America, Congress
should be encouraging employers to establish retirement
programs, but in a desire to insure that all plans are fair,
the current law makes it difficult for employers to offer plans
at all.
The Majority Leader, Senator Dole, was unable to attend the
hearing but submitted his statement for the record, which among
other things, outlined his new proposal to increase savings
among America's small business through the Savings Incentive
Match Plan for Employees (SIMPLE). According to Senator Dole's
testimony, the SIMPLE Plan would be available to small
employers who have no more than 100 employees. Eligible
employees could contribute up to $6,000 each year, and
employers would be required to match employee contributions
dollar-for-dollar up to 3% of compensation, allowing employees
to save up to $12,000 per year. In addition, SIMPLE plans would
not be subject to the nondiscrimination or top heavy plan
rules. Senator Dole's testimony also noted that the SIMPLE
pension proposal had the support of many small business
organizations, including the National Federation of Independent
Business, the U.S. Chamber of Commerce, and the Small Business
Council of America.
``Revitalizing America's Rural and Urban Communities''--Washington,
D.C., October 19, 1995
On October 19, 1995, the Committee held a hearing to
discuss possible means of bringing small businesses and jobs to
impoverished areas of the United States.
Chairman Bond opened the hearing by stating that the role
of the small business community is critical to revitalization
of impoverished areas of the nation. He noted that ``No amount
of training dollars can insure the revival of these communities
if there are no jobs. And we must have businesses, in
particular small businesses, locating and thriving in these
areas if we are to provide these jobs.'' Chairman Bond briefly
summarized his proposal for Historically Underutilized Business
Zone (HUBZones), defined as areas within metropolitan and rural
communities that have very low income and high unemployment.
The goal of HUBZones is to encourage small businesses to
relocate to and employ people in low income, economically
distressed areas by allowing these businesses to receive a
special preference or set aside in bidding on federal
government contracts.
Senators Lieberman and Abraham testified in favor of their
bill the Enhanced Enterprise Zones Act of 1995, S. 1252, which
expands the Enterprise Zones Act of 1993 and ``supercharges''
the nine Empowerment Zones and 94 Enterprise Communities.
Senator Lieberman specified that the bill ``provides a zero
rate of capital gains tax on the sale of any qualified zone
stock, business property, or partnership interest that has been
held for at least 5 years within an enterprise zone or
Enterprise Community.'' The bill also provides limited
regulatory relief, low-income home ownership, and vouchers for
school choice.
Senator Abraham stated that the philosophy behind the bill
is supporting the ``notion that giving jobs, creating tax cuts
and other economic incentives to residents and businesses,
particularly small businesses in distressed areas. * * * '' He
expressed his belief that Enterprise Zones do work, stressing
that ``35 States and the District of Columbia already have
enterprise zones that have produced over 663,000 jobs and $40
billion in capital investment.'' Former Congressman and
Secretary of Housing and Urban Development, Jack Kemp said that
``a good start would be to pass the enhanced enterprise zone
bill'' and couple it with a bill to do away with the capital
gains tax to ``encourage more jobs, more growth, more small
business and more entrepreneurial opportunities.'' He said the
best way to create jobs is to ``get men and women to leave
their existing business and take a risk to start a new
business.''
Addressing the problems of Enterprise Zones, Senator Bond
gave an example from Missouri. He noted that, although 8,800
jobs had been created in the areas designated as enterprise
zones by the end of 1984, only one area was rural, the rest
were central city areas of St. Louis and Kansas City. Senator
Bond proposed three ways in which to enhance the effectiveness
of the enterprise zone program in reaching more areas. He
suggested that the government needs to find criteria for
designating zones, whether they are called ``HUBZones'' or
``Enterprise Zones,'' which combine high unemployment with high
poverty. Second, he stated that ``we have run intothe problem
at the State level the tax incentives are not enough, and at the
Federal level any time you are trying to provide tax incentives you run
into the problem of revenue scoring. The Treasury Department * * *
always puts limits on the amount available.'' To help solve this
problem, HUBZones would use the concept of set-asides to give any
enterprise in a HUBZone an opportunity to bid on federal government
contracts. Finally, in response to the complaint that the 8(a) program
does not always bring jobs to the areas of highest need, Senator Bond
suggested designating areas for companies to receive benefits from the
8(a) program, away from the congressional scoring system.
In written testimony, Senator Kay Bailey Hutchison outlined
her bill, S. 743, which ``utilizes a targeted, limited tax
credit to businesses to help defray their cost of construction,
expansion, and renovation. The legislation builds on the
empowerment zone/enterprise community program now unfolding in
more than a hundred communities across the nation.'' She stated
that other similar programs have been very valuable to the
public. For example, the Historic Rehabilitation Tax Credit in
Fiscal Year 94 ``produced nearly 21,000 jobs, and among 524
projects and leveraged $483M in private investment from a
federal revenue cost of $97M.'' The success is even better for
the Low Income Housing Tax Credit. According to HUD figures
``for every 100,000 new housing starts, 170,000 jobs are
created.'' Mr. Kemp, who is heading up a tax commission for
Senate Majority Leader Dole and House Speaker Gingrich
recommended not only cutting the capital gains tax, but also a
tax credit to offset the payroll tax. Mr. Kemp said that the
capital gains tax is ``not a tax on the rich. It is a tax on
the poor who want to get rich.'' Randall C. Gideon of the
American Institute of Architects said that neighborhood
rebuilding is a local enterprise dependent upon public
participation and that S. 743 ``would fill a gap in the
incentives for the revitalization of commercial
infrastructure'' and ``an effective capital base incentive for
non-historic commercial projects in targeted areas is a missing
piece of the incentive package that must be available to reduce
the risk of investment.''
Senator Ashcroft testified that ``one of the first things
that Government should do, however, is to soberly assess its
contribution to the problems in the cities.'' He further stated
that ``in its urge to help, Government has done many things
that have been tremendously counterproductive.'' Senator
Ashcroft proposed that regulations, particularly EPA
regulations, have contributed to the problem. ``These programs
have cleaned the soil, but they sullied the environment. They
have addressed certain risks but they have forgotten about
unintended consequences.'' Senator Ashcroft introduced the
Urban Regulatory Relief Zone Act, S. 1184, to allow a mayor
with a city population of 200,000 or more to establish a
commission to assess the regulations and petition for
regulatory waivers, giving the people more control and making
the environment more business friendly.
From a community standpoint, Mark Bendick, Jr., PhD.,
Project Director, Committee for Economic Development, said that
``it is appropriate not to use a single criterion, such as
resident's low income alone, to target benefits or define
eligibility for benefits in the bills, but instead the emphasis
should be on finding the simultaneous presence of multiple
problems.'' He said that ``historically such lone ranger
efforts are relatively ineffective in revitalizing distressed
communities.'' Community revitalization needs participation by
the residents and community leaders to succeed.
``The Cost of Regulations on Small Business''-- Washington, D.C.,
October 31, 1995
On October 31, 1995, the Committee held a joint hearing
with the House Committee on Small Business (the first in two
decades) on a report by the Small Business Administration's
Office of Advocacy on the relative impact of regulatory
compliance costs on small business. Numerous studies have
examined the impact of regulations on business in general. For
example, the cost of state and federal regulations on the
business community has increased from an estimated $330 billion
in 1988 to an estimated $400 billion today. The Office of
Management and Budget has reported that taxpayers expended 6.64
billion hours on federal paperwork in fiscal year 1992,
including some 5.6 billion hours for taxpayer compliance with
IRS regulations.
While these overall burdens are well documented, little
research has been done on the relative burdens faced by small
business. In 1994, Congress requested that the Chief Counsel
for Advocacy conduct a ``study or the impact of all Federal
regulatory, paperwork and tax requirements on small business''
(P.L. 103-403, Section 613). The hearing provided an
opportunity for Jere Glover, Chief Counsel for Advocacy, Office
of Advocacy, Small Business Administration, to testify on the
findings of the report, ``The Changing Burden of Regulation,
Paperwork, and Tax Compliance on Small Business: A Report to
Congress.'' As Mr. Glover testified, the report sought to
answer three basic questions: (1) does the burden of regulation
fall more heavily on small firms, (2) if so, is it good public
policy to regulate in such a way as to give large firms a
competitive cost advantage in the marketplace, and (3) if the
answer is no, how can the regulatory process be changed to help
achieve a level playing field.
The report found that regulations do fall more heavily on
small business. While firms with fewer than 500 employees
generate some 50% of total employment and sales, they bear 63%
to 67% of the total burden of regulations, paperwork, and tax
compliance costs. Small businesses pay an average of 50% to 80%
more per employee than big business to comply with federal
regulations. Research conducted for the Chief Counsel by Thomas
D. Hopkins, a leading researcher in the costs of regulations,
showed that the average cost of regulations per employee in
1992 was $5,532 for firms with less than 20 employees, $5,298
for firms with 20-499 employees, and $2,979 for firms with over
500 employees. Thus, the regulatory burden on small businesses
is over 80% greater than for large business. In the
manufacturing sector, regulatory cost were substantially
higher, averaging $9,016 per employee for firms with less than
20 employees, $10,605 for firms with 20-499 employees, and
$4,855 for firms with over 500 employees.
As to the second question, the report found that the
disproportionate impact of regulations on small businesses
gives large firms a competitive cost advantage in the
marketplace and serves as a disincentive to small business
formation, growth, job creation, and innovation. The report
concluded that the ``inequitable allocation of regulatory costs
is not good public policy.'' While regulations may confer
benefits on society, ``This inequitable cost allocation gives
large firms a competitive advantage, a result at odds with the
national interest in maintaining a viable, dynamic, and
progressive role for small businesses in the American
economy.'' Furthermore, ``If the nation's goals are to generate
employment and innovation, improve global competitiveness, and
encourage economic growth, government action should not impose
disproportionate costs burdens on the small business sector to
solve other problems.''
As to suggested reforms, the report first surveyed the
current efforts to reduce the impact of regulation of small
business. It noted that Administration's efforts to ease the
regulatory burden were undertaken primarily through Executive
Order 12866, which confirms the requirements, first established
by President Reagan, that regulations undergo a cost-benefit
analysis, that the benefits of a regulation should justify its
costs, and that agencies should tailor regulations to impose
the least burden on society, including businesses of different
sizes. In addition, the Administration's National Performance
Review directed federal agencies to conduct a page-by-page
review of all regulations and to eliminate or modify those
regulations in need of reform. Finally, the Administration has
promised a 25% reduction in the EPA's paperwork burden.
The report noted that regulatory reform was among the most
important issues at the 1995 White House Conference on Small
Business. The delegates recommended requiring cost-benefit
analysis and scientific risk assessment of all new regulations,
enhanced input from small business in the development of
regulations, paperwork reduction, periodic review and sunset of
regulations, and fairer enforcement policies. The most
important regulatory reform issue at the conference was
judicial review for the Regulatory Flexibility Act. The Act
requires government agencies to analyze regulatory alternatives
that minimize the impacts on small businesses whenever there is
likely to be a significant economic impact on a substantial
number of small entities. While the Regulatory Flexibility Act
has saved small business many millions of dollars in regulatory
costs, federal agencies have not fully complied with the
requirements in part because compliance with the Act is not
subject to any form of judicial review.
As noted in the report, the regulatory reform legislation
in both the House and Senate provided for many of the
regulatory reforms sought by the White House Conference on
Small Business including judicial review of the Regulatory
Felxibility Act, risk assessment, cost-benefit analysis and (in
the Senate bill) periodic review of regulations. While the
Senate regulatory reform bill, S. 343, was opposed by the
Administration and the subject of an extensive filibuster, the
report noted that Congress did reauthorize the Paperwork
Reduction Act. The new law requires the Administration to
reduce paperwork requirements by 10% per year in 1996 and 1997
and by five percent each year thereafter. In a significant
change sought by small business, the new law extends coverage
of the Paperwork Reduction Act to include federal agency
disclosure requirements and information required to be
disclosed to third parties.
The report found that ``several obstacles to curbing the
rising cost of regulations remain,'' citing the current backlog
of regulatory requirements such as under the Clear Air Act, as
well as additional regulatory requirements that may be in new
legislation. In attempting to answer the third question, the
report found that ``despite more than 13 years of experience
with the Regulatory Flexibility Act, public policy makers need
additional direction to reconcile their regulatory decisions
with the national goals of preserving competition through the
growth of small business.'' The report concluded that, ``The
need for regulatory reform through initiatives such as amending
the Regulatory Flexibility Act is great.''
In response to the findings of the report, Chairman Bond
stated, ``this report breaks new ground in assessing the burden
placed on small business by government regulation relative to
large business. It confirms what many of us have long
suspected--and what our series of field hearings suggested--
that small business bears more than its fair share of the cost
of regulations. Our field hearings have clearly shown that this
disproportionate burden creates series obstacles for small
businessmen and women across the country. The need to reform
regulations and the laws that produce them could not be more
clear.''
``The Impact of Rail Mergers on Small Shippers''--Washington, D.C.,
November 8, 1995
On November 8, 1995, the Committee held a second joint
hearing with the House Committee on Small Business on the
effect of past and proposed railway mergers and consolidations
on small shippers. The rail industry is currently going through
a period of so-called ``mega-mergers'' between freight
carriers. These include the recently completed merger of the
Burlington Northern with the Santa Fe ($7.8 billion in
revenues) and the proposed merger of Union Pacific with
Southern Pacific ($9.1 billion in revenues). These mergers will
reduce the number of major rail carriers in much of the western
half of the country.
Freight shippers may stand to gain from the greater
efficiencies created by these mergers. Some shippers,
particularly high volume shippers moving freight between major
destinations, expect these mergers to result in improved
service and reduced rates. However, many shippers, particularly
small shippers, have expressed concerns to the Committee that
these mergers may lead to a less competitive rail industry with
higher freight rates and/or reduced service.
Under legislation enacted earlier in 1995, the Interstate
Commerce Commission (ICC) ceased to exist at the end of the
year. Separate legislation, enacted at the end of 1995,
transferred the powers of the ICC to a newly established board
at the Department of Transportation. The new board will review
rail mergers and consolidations using factors similar to those
currently considered by the ICC.
The first panel consisted of Dan Glickman, Secretary of
Agriculture, who testified on the importance of a competitive
rail transportation system to the agricultural sector and the
anticompetitive problems posed by rail mergers. Secretary
Glickman, in response to questions by Senator Bond, also
expressed his concern over the shortage of rail cars and the
effects of that shortage on the agricultural sector.
The second panel consisted of C. Phillip Hoffman,
Secretary, Hoffman & Reed; William York, Manager, Lange
Company, LLC; James F. Jundzilo, Transportation Manager, Tetra
Chemical Company; Duane ``Butch'' Fischer, President, Scouler
Grain Company; Ned Leonard, Manager of Communications and
Governmental Affairs, Western Fuels Association; Ed Emmet,
President, National Industrial Transportation League; Curtis
Grimm, Professor, College of Business and Management,
University of Maryland; and Richard J. Barber, Barber &
Associates.
One of the issues raised by a number of witnesses was the
number of shippers that will see their competitive freight
alternatives reduced from three options to two or from two
options to one. For example, the Committee received testimony
that the proposed Union Pacific-Southern Pacific merger would
reduce the rail options from two carriers to one on routes
connecting a total of 164 market areas where Union Pacific and
Southern Pacific handle $1.6 billion in freight. In comparison
the Burlington Northern-Santa Fe merger affected 20 market
areas with a combined revenue of only $165 million. Mr. Barber
disputes these figures and testified that the level of two to
one reductions would be significantly less.
Another issue raised by several witnesses who are small
volume grain shippers was the supply and distribution of rail
cars. These witnesses testified that there is a shortage of
rail cars in the Midwest for grain shipments, and they worry
that they will not have access to rail cars in the needed
numbers and at the required times. Even if these small shippers
have access to the needed rail cars, they are equally concerned
with competitive rates. While some commodities can move easily
by truck, others such as grains, fertilizers, mineral ores,
bulk chemicals and aggregates depend very heavily on rail
transportation. Shippers of these products often find it
difficult to shift to truck or barge transportation and are
concerned about maintaining competition among rail carriers.
The Committee also heard from small shippers, particularly
in rural areas away from the main rail lines, who worry that
these mergers may accelerate the trend of emphasizing high-
volume routes at the expense of lower-volume routes. Small
shippers testified that they are particularly concerned that
the discount rates frequently offered for shipments of 100 or
more rail cars will make smaller shipments, and small shippers,
non-competitive. In addition, smaller shippers are concerned
that even on major routes, the merged rail carriers may be less
willing to stop to pick up and deliver small volumes of
freight. These shippers worry about the possibility that the
freight rail service to their facility might end or be
drastically reduced, and that the rail line might simply be
abandoned by the newly consolidated rail carrier.
Senator Bond noted during the hearing that, ``These small
shippers have a vital interest in maintaining high quality and
competitively priced freight rail service in this era of mega-
mergers in the rail industry. While they recognize that these
mergers present opportunities for more efficient rail service,
they are also concerned that these mergers may adversely affect
small shippers.'' The Chairman highlighted the situation of
grain elevators throughout much of the Midwest. ``Many of these
elevators are totally dependent on rail transportation to get
their product to market and to import fertilizer at competitive
rates.'' He emphasized that competitive rail service is
essential not only to the grain elevator operators, ``but to
the hundreds of farmers who depend on the local grain elevator
to get their corn, soy beans and wheat to market.''
``Small Business and OSHA Reform''--Washington, D.C., December 6, 1995
On December 6, 1995, the Small Business Committee and the
Labor Committees held a joint hearing on the effect of the
Occupational Safety and Health Reform and Reinvention Act, S.
1423, on small businesses. Chairman Bond described Occupational
Safety and Health Administration (OSHA) reform as an extremely
important issue for small business and explained that small
businesses do not have the resources to hire expensive
consultants to arm themselves for a game of ``gotcha'' with
OSHA. Chairman Bond said that the provisions of S. 1423
recognize that most employers want to comply with OSHA's
regulations. Employers want safe workplaces because of workers
compensation rates and because their employees are their most
important assets. The legislation forces OSHA to leverage its
resources so that strong enforcement is directed at employers
that are not voluntarily complying. Those employers that have
effective safety and health programs would be able to focus on
voluntary compliance through inspections by certified third
parties and proof of fewer than average accidents.
Senator Kennedy, ranking member of the Labor Committee,
expressed concern that the legislation exceeds President's
Clinton goals for OSHA Reinvention. Senator Kennedy stated that
he was in favor of helping small business comply with OSHA, but
that he opposed S. 1423 because it weakens employee
protections.
Senator Kassebaum, Chairman of the Labor Committee,
commended Assistant Secretary Joseph Dear for his work in
``reinventing'' OSHA and explained the importance of codifying
some of those provisions. Senator Kassebaum responded to
Senator Kennedy's concerns by explaining that most of the
bill's provisions codify some of the OSHA programs designed to
help small business. S. 1423 is designed to change businesses'
relationship with OSHA from an adversarial to a working
relationship.
The Committee heard testimony from a panel of four small
business owners who described their involvement with OSHA and
offered suggestions for reform legislation. Mark Hyner,
President of Whyco Chromium, and Daniel Richardson, owner of
Latta Road Nursing Homes, were delegates at the White House
Conference on Small Business. Both testified about the
priorities identified for OSHA reform at the White House
Conference and said that S. 1423 contained many of these
priorities. Mr. Hyner stated that most small businesses support
the goals and intent of OSHA, but that every business owner
that he knows has at least one OSHA horror story. Mr. Hyner
explained that in his experience, OSHA rarely leaves a facility
until the inspector finds a way to fine the small business. Mr.
Richardson emphasized that the use of third-party consultants
results in safer workplaces because consultants, unlike OSHA
inspectors, understand the demands of particular businesses.
Mr. Richardson stated that OSHA and its citation-based
structure were flawed and that legislation is necessary to
ensure that the American workplace is safer with OSHA than
without it.
The Committee heard testimony from two additional small
business owners, Earl Bradley, President of EBAA Iron, and Mike
McMichael, President of McMichael Company. Mr. Bradley noted
that good safety practices not only save lives, but are good
business, and he explained the importance of eliminating OSHA's
``quota mentality.'' Mr. Bradley said that provisions allowing
employee participation in safety programs, codification of
OSHA's safety programs, third-party consultation, and allowing
abatement of hazards were important parts of S. 1423, which he
supported. Mr. Bradley also stressed the importance of
leveraging OSHA's resources to increase the focus on serious
violators. Mr. McMichael testified about OSHA's practice of
citing general contractors for violations when a sub-
contractor's employees cause the condition leading to the
citation. Mr. McMichael explained that he is a general
contractor who has no employees, yet OSHA has cited him for the
violations of sub-contractors.
The Committee heard testimony from Paul Middendorf,
Director of the Georgia OSHA Compliance Program. Mr. Middendorf
testified about the importance of OSHA consultation for small
business. The Georgia program allows small businesses to
request help from OSHA in developing safety and health programs
and in identifying hazards. The Committee also heard from John
Cheffer, Chairman of the National Governmental Affairs
Committee on the American Society of Safety Engineers. Mr.
Cheffer expressed support for provisions in the bill that allow
inspections by certified third-party consultants. Mr. Cheffer
explained that it is necessary for OSHA to look to the private
sector for assistance because of limited resources. David
Carroll, Director of Safety at Woodpro Cabinetry, testified
about his experience in OSHA's Voluntary Protection Program
(VPP). Mr. Carroll explained that consultation and partnership
with OSHA is important to small business and expressed support
for the codification of the VPP program.
The Committee also heard testimony from two union
representatives. Robert Georgine, President of the Building and
Construction Trades Department of the AFL-CIO, said that he
disagreed with the legislation's underlying theme that
workplaces would be safer if government activity was replaced
with voluntary compliance. Mr. Georgine suggested that the best
way to improve safety is to give OHSA a bigger budget for more
inspectors and to strengthen employee rights. Deborah
Berkowitz, Director of Occupational Health and Safety for the
United Food and Commercial Workers, testified that the bill
ignores the fact that enforcement is the key to preventing
injuries. Ms. Berkowitz admitted that there are cases in which
OSHA has ``gone overboard'' and been ``overzealous,'' and she
said that the key challenge is allocating OSHA's scarce
resources.
``Proposals to Strengthen the Small Business Investment Company
Program''--Washington, D.C., December 12, 1995
On December 12, 1995, the Committee held the second in a
series of three hearings to identify and evaluate steps that
the SBA has been taking to improve the Small Business
Investment Company (SBIC) program, and to begin considering
other improvements requiring legislation over which the
Committee has jurisdiction. Senator Burns of Montana stated at
the outset of the hearing that he hoped the panelists would
``come to us * * * with suggestions and solutions for how to
reduce the default rate and make these federal dollars more
broadly utilized.'' Senator Harkin also noted that, ``the SBIC
program provides a crucial niche in credit availability,
namely, venture capital. Without venture capital, the ability
of business outside of the norm, often the most creative,
cannot grow and prosper. This is particularly true in rural
areas, such as in my home state of Iowa, which are often served
by small banks that are limited in the types of loans they are
able to make to their customers.''
Legislation passed in 1992 accomplished a number of
important objectives, including improving the operating
environment for SBICs, and reducing the risk of loss of
taxpayers. The legislation also served to raise the licensing
standards, and increase minimum capital requirements, making
SBICs viable economic entities. While these were steps in the
right direction, Chairman Bond emphasized that more can be
done.
Many of the panelists' recommendations were to operate the
SBIC program using common sense, sound business practices.
Keith R. Fox, Chairman of the National Association of Small
Business Investment Companies, suggested that privatizing or
``out sourcing'' certain parts of the program, for example, the
licensing and examination process, would not only save money
but also improve the quality of the function. Stanley W.
Tucker, a member of the Board of Directors of the National
Association of Investment Companies, concurred that
privatization should be considered. All of the panelists agreed
that in the current environment of belt tightening, the money
that is available needs to be used as efficiently as possible.
During this period of federal spending reductions, it is
unlikely that this program will receive additional funds
through appropriations. ``But if we legislate strict licensing
and oversight requirements to ensure businesslike and
accountable operations by SBICs and by those at SBA
implementing the program, I believe we can reduce the credit
subsidy rate and stretch the available appropriations much
further,'' Chairman Bond noted.
Many panelists favored eliminating Specialized Small
Business Investment Companies (SSBICs). The current
distinctions between SBICs and SSBICs contributes to a negative
perception of SSBIC licenses, which makes it harder to attract
private capital. As a result, the panelists conclude that the
function of the SSBICs would be absorbed by regular SBICs.
Many of the panelists' concerns were addressed by S. 1784,
a bill proposed by Senator Bond that would expand and improve
the SBIC program.
``S. 917 and S. 942: Implementing the White House Conference on Small
Business Recommendations on Regulations and Paperwork''--Washington,
D.C., February 28, 1996
On February 28, 1996, the Committee held a legislative
hearing on two bills designed to implement recommendations of
the White House Conference on Small Business on paperwork
reduction and regulatory reform. The Small Business Advocacy
Act, S. 917, was introduced on June 13, 1995 by Senator
Domenici, and the Small Business Regulatory Fairness Act, S.
942, was introduced on June 16, 1995 by Chairman Bond. Both
bills were referred to the Committee on Small Business. The
purpose of the hearing was to solicit input from delegates to
the White House Conference on Small Business, the
Administration, and the small business community generally on
how best to implement the White House Conference on Small
Business recommendations. In addition, the Committee sought
specific comments on the legislative language of both S. 917
and S. 942 and on a February 8, 1996 staff discussion draft of
an amendment combining elements of both bills.
The Committee first heard from Senator Russ Feingold who
testified in favor of amending the Equal Access to Justice Act
to make it easier for small business to recover their
attorney's fees in litigation against the government and to
raise the statutory rate for attorney's fees. He testified in
support of the amendments to the Equal Access to Justice Act to
limit the government's ``substantially justified'' defense, but
urged the Committee to go further and eliminate the substantial
justification threshold altogether.
The first panel consisted of three of the regional
regulation and paperwork chairs of the White House Conference
on Small Business: Scott J. George from SBA region 7, Rosemary
Reed from SBA region 3, and Scott Holman, Sr. from SBA region
5. These witnesses described the disproportionately heavy
regulatory burdens they face as small business owners and those
faced by small business generally. They also described the
White House Conference recommendations to reduce regulatory
burdens, including the need for a new approach to regulating
based on cooperation, not confrontation, for fitting
regulations to the size of the business, and for periodic
review of regulations. Additionally, these witnesses testified
on the need to make regulators more accountable for their
actions. They also emphasized the need for the provisions of S.
942 allowing judicial review of the Regulatory Flexibility Act
and those expanding the Act to include interpretative rules of
the IRS. These witnesses also made a number of suggestions for
technical modifications to the discussion draft.
The second panel consisted of Kent P. Swanson, President of
Nurses Available, Inc. on behalf of the National Federation of
Independent Business, Victor N. Tucci, President of Three
Rivers Health and Safety Inc. on behalf of National Small
Business United, H. Daniel Pincus, President of HDP Industries
on behalf of the National Association of Homebuilders, Wendy
Lechner, Legislative Director of the Printing Industries of
America, Inc. on behalf of the Small Business Legislative
Counsel, and James Morrison, Senior Policy Advisor of the
National Association for the Self-Employed. The panelists
testified on the need for judicial review of the Regulatory
Flexibility Act and for expanding the coverage of the Act to
include IRSinterpretative rules. Other testimony supported the
requirement for ``Plain English'' guides to assist small businesses in
their efforts to comply with regulations.
The second panel also described the adversarial
relationship that often exists between government agencies and
small businesses, and the witnesses testified about the need
for a more cooperative and less punitive approach to regulatory
compliance. The panel favored the provisions in the bill
establishing agency programs to reduce or waive fines on small
businesses for first time violations and establishing an
enforcement ombudsman to record the problems that small
businesses have with enforcement officials. Other testimony
described how small business owners feel blackmailed into
paying unjustified fines because they cannot afford to go to
court and fight the government, and the need for the provisions
of the bill that amend the Equal Access to Justice Act to make
it easier for small businesses to recover their attorney's
fees. Finally, the panel made a number of suggestions on
improving the text of the discussion draft.
At the conclusion of the hearing, Chairman Bond announced
his intention to move expeditiously to a markup of S. 942, and
to amend the bill to incorporate the comments of the witnesses
at the hearing. He also indicated his desire that the
legislation move forward on a bipartisan basis under his
leadership and that of Senator Bumpers. A markup of the S. 942
was held on March 6, 1996.
``S. 1574, The HUBZone Act of 1996: Revitalizing Inner Cities and Rural
America''--Washington, DC, March 21, 1996
On March 21, 1996, the Committee held a hearing to evaluate
the Historically Underutilized Business Zone (HUBZone) Act of
1996, S. 1574. The hearing allowed small businesses in
Washington, D.C. to testify about how the HUBZone Act would
affect their businesses and community, and that of inner cities
and rural counties of America.
Citing the importance of providing incentives to encourage
the revitalization of decaying inner cities and poor rural
counties, Chairman Bond recognized an overriding ``consensus
that much more needed to be done and that much of it could be
done through small businesses.'' Chairman Bond indicated his
desire through the HUBZones Act to ``encourage investment in
low-income metropolitan and rural areas where poverty and
unemployment are very important concerns,'' thus having an
immediate impact on economically distressed areas and creating
new job opportunities and growth.
The Committee primarily heard from the owner and employees
of e. villages and its venture in Northwest Washington, D.C.,
Edgewood Technology Services, Inc. (ETS). C. Austin Fitts, co-
founder of e. villages, testified that if the HUBZone Act were
passed into law, it would ``significantly support [e.
villages'] mission of building a distributed work force in
underserved communities.'' He pointed out the importance of the
Act to offset effects of recently reduced subsidies for housing
and how ``successful efforts to promote economic growth in
these communities [would] minimize Federal Government losses as
well as losses on the part of private lenders and investors.''
In conclusion, Mr. Fitts recommends that the definition of
eligible small businesses under this Act be simplified and the
size standards be waived for those companies that are not able
to achieve and maintain the 35% employment eligibility
requirement.
Other witnesses included employees of ETS, which is a
working HUBZone example. ETS employs residents of its immediate
community, and all of ETS's employees are trained on-site and
provide data processing and computer graphics specialization.
According to the witnesses, the HUBZone Act would enable
distressed and underutilized areas to provide jobs to citizens
in areas where these opportunities may not otherwise be
afforded, as well as minimize governmental loss by assisting
those willing to help themselves move from welfare to work.
Marvin G. Harris, Site Manager of ETS, testified in support
of the HUBZone and said, ``the HUBZone legislation can provide
significant subcontracting opportunities for small
businesses.'' He also noted that the legislation provides
significant training and helps instill a work ethic to a
community sometimes overlooked. Mr. Harris was also accompanied
by several of his employees, including Bridget J.C. McLaurin
and Wanda Riddick, who provided examples of what ETS had done
for their lives. They also discussed their views on the impact
that a HUBZone can make on their community and communities like
theirs.
There was a consensus among the witnesses that the HUBZone
Act of 1996 would allow for improvement in the nation's inner
cities and poor rural areas by providing incentives to small
businesses to employ citizens of these areas. The witnesses
stressed that the Act would have a significant effect on the
lives of the people in these underutilized areas and would also
benefit the state and federal government as well as the small
business community.
``Small Business and Employee Involvement: The TEAM Act Proposal''--
Washington, D.C., April 18, 1996
On April 18, 1995, the Committee held a hearing on the
effect of the Teamwork for Employees and Management (TEAM) Act
of 1995, S. 295, on small business on April 18, 1995. The TEAM
Act, introduced by Sen. Kassebaum, amends the National Labor
Relations Act (NLRA) to allow employers and employees to
participate in organizations created to address matters of
mutual interest (including issues of quality, productivity, and
efficiency) provided such organizations cannot negotiate, enter
into, or amend collective bargaining agreements.
Chairman Bond stated in his opening statement that the NLRA
offers two options to employees and managers: employee
involvement through unions, or no involvement at all. As a
result, the 90% of American workers who are not unionized have
no opportunity to be involved in workplace decisions. He also
explained that a small business owner from Missouri had wanted
to attend the hearing, but her attorney explained that she
risked a confrontation with the NLRB if she came to explain how
her employees are involved in the workplace. Chairman Bond said
that her story illustrated the importance of allowing small
businesses to form informal partnerships with employees and
said that it was regrettable that the current state of the law
deterred her from appearing before the Committee.
Senator Warner who chaired the hearing at Chairman Bond's
request, pointed out that employee involvement increases
productivity and that in a time of global competition, the
government should not be impeding competitive and safe
workplaces. Senator Warner also emphasized that nothing in S.
295 prevents unionization.
The hearing was divided into two panels. The first panel
included representatives from four small businesses. Bill
Budinger, CEO of the Rodel, Inc., a Delaware manufacturer,
opened his statement by saying that his attorneys had
recommended that he not testify at the hearing. Mr. Budinger
was a delegate to the White House Conference on Small Business
and said that delegates at the conference discussed global
competition and the need for American businesses to be capable
of competing. He testified that his company formed committees
that included employees to explore ways to decrease health-care
costs and improve productivity. Mr. Budinger said that he
realized that what he was doing probably violated the NLRA, but
that employee involvement had helped his company enormously.
Chester ``Mac'' McCammon described his experiences as an
employee at Universal Dynamics, Inc., and he explained that he
had been a union member in the past, but he now worked for a
non-union company. Mr. McCammon said that he would like to see
the law changed to allow a wider range of employee
participation options in the management process. Mr. McCammon
said that the quality control and other self-directed teams had
to be dismantled at Universal Dynamics because of the National
Labor Relations Board's (NLRB) interpretations of section
8(a)(2) of the NLRA.
Harold ``Skip'' Pascoe, an executive officer at Sunsoft
Corporation, testified that employee participation has allowed
his company to compete with larger corporations with more
resources for personnel management, process improvements, and
training. Mr. Pascoe also mentioned the regulatory requirements
of other agencies, such as the Food and Drug Administration,
which require employee involvement in manufacturing in direct
conflict with section 8(a)(2) of the NLRA. Donna C. Gooch,
Director of Human Resources at Sunsoft Corporation, explained
that human resources coordination requires an understanding of
what employees need and calls for recommendations so that
``win-win'' solutions can be implemented, both of which would
be facilitated by enactment of the TEAM Act. Dennis Rampe,
President of Precision Litho, testified about employee
involvement at his printing company. Mr. Rampe explained that
the primary goal of employee involvement entities was better
communications between employees and management. Mr. Rampe
believed that teams had improved trust and respect between
employees and management, resulted in greater job satisfaction
and customer service, and had helped his company be successful.
Mr. Rampe noted, however, that after reading about section
8(a)(2) of the NLRA, he dismantled his employee teams. As a
result, communications were not as successful and customer
service suffered.
The second panel consisted of four experts on employment
policy and business productivity with a variety of viewpoints.
Owen Herrnstadt, Legislative Counsel to the International
Machinists and Aerospace Workers, testified that passage of the
Team Act would result in evisceration of the NLRA's prohibition
of company unions. James Rundle, Senior Extension Association
at the School of Industrial and Labor Relations at Cornell
University, testified that the Team Act was unnecessary because
the NLRB does not bring very many section 8(a)(2) cases. G.
Roger King, a partner at Jones, Day, Reavis & Pogue, testified
about section 8(a)((2) cases he had litigated. Mr. King
described S. 295 as an extremely modest proposal that did not
interfere with the NLRA. Mr. King emphasized that even if the
NLRB did not bring many section 8(a)(2) cases, the threat of
litigation was impeding employee participation and increased
productivity. Edward E. Potter, President of the Employment
Policy Foundation, testified about a study he had conducted
that showed that 70% of productivity is due to employee
involvement. Mr. Potter said that over a 20-year period, given
the current level of employee involvement for the median-wage
worker, the worker would make $17,000 more with employee
involvement than without it because of increased productivity.
Following the hearing, the Senate and House approved an
amended version of the TEAM Act. Despite strong small business
support, President Clinton vetoed the legislation.
``Issues Affecting Home-Based Business Owners''--Washington, D.C.,
April 23, 1996
On April 23, 1996 the Committee held a hearing on issues
affecting home-based business owners. The hearing gave the
Committee an opportunity to recognize and pay tribute to a
growing phenomenon in America, that of the home-based
entrepreneur. During 1995, approximately two million Americans
started home-based businesses. The development of new computer
and other technologies, corporate downsizing, and the need to
balance the demands of work and family have all added to the
increasing popularity of home-based businesses. Chairman Bond
pointed out that ``Changes in tax policy need to be considered
to ensure that our laws do not inhibit the growth and
development of home-based businesses.''
The Committee heart testimony from small business owners
about three major tax issues: worker classification, the
deductibility of health-insurance by the self-employed, and the
home-office deduction.
Worker Classification
Witnesses testified that determining worker classification
is one of the most important tax issues facing small business
today. The delegates to the White House Conference on Small
Business ranked it as their highest priority issue. The
ambiguity in the current law makes it extremely difficult for
business owners to determine whether a worker is an independent
contractor or an employee. For many years, the Internal Revenue
Service has been using a 20-factor common-law test to determine
worker status. The test is subjective and unpredictable and,
IRS agents are capitalizing on the lack of clarity and
resolving many cases in favor of an employment relationship at
the expense and disruption of bona fide independent-contractor
arrangements. As a result, some small business owners are
reluctant to hire independent contractors.
Witnesses discussed their views of the Independent
Contractor Tax Simplification Act, S. 1610, introduced by
Chairman Bond and Senator Nickles to correct the problem. The
bill sets out a short list of simple criteria in determining
whether a person providing services to another is an employee
or an independent contractor. To take advantage of this new
provision, the parties must properly report payments to the
IRS, just like under current law. This ensures that all taxes
properly due to the Treasury will be collected. The bill
provides immediate clarification and relief to taxpayers
currently undergoing IRS examinations. The change in the law
would save many businesses from long and expensive battles with
the IRS.
Debbie Jo Horton, a CPA and the New England Regional Tax
Implementation Chair to the White House Conference on Small
Business, testified that this ``bill represents the spirit of
the White House Conference on Small Business recommendation
#224. It addresses a majority of concerns raised by the
delegates as their top vote-getter. I commend Senators Bond and
Nickles for their diligence and consideration. It is one of the
most important issues plaguing small businesses today.''
Chairman Bond asked whether Ms. Horton, as a CPA, sometimes
finds herself in a position of recommending to clients that
they not use independent contractors because of the danger of
being reclassified by the IRS. She indicated that she has made
such recommendations in certain cases because the interest and
penalties that accrue as a result of reclassification can be
devastating to a small or even a mid-sized company.
Not all the comments regarding the bill were favorable. for
example, Senator Wellstone was concerned that if the language
is not carefully drafted there may be ``a bunch of people who
really are employees all of the sudden classified as
independent contractors for the convenience of the company''
potentially disadvantaging the employees. Senator Bumpers also
wanted to see the language tightened up so that a new law is
not created that could encourage coercive reclassification of
workers.
Health Insurance
Another top concern of home-based business owners is health
insurance with nearly four million of the self-employed being
uninsured. At the time of the hearing, the law provided that
corporate employers could deduct the full cost of health
insurance, while self-employed business owners could deduct
only 30% of their health-insurance costs.
Jim Johnson testified on behalf of the National Federation
of Independent Business and said that full deductibility would
bring parity in this area of the tax law and would also create
an incentive for the self-employed to purchase insurance for
their employees. Ms. Horton testified that the deduction of
health-insurance costs ranked 15th by the White House
Conference delegates, and she also said that the ``inequity
places a severe financial burden on small businesses owners.''
During the hearing there appeared to be bipartisan support
for increasing the health-insurance deduction. The Chairman
noted that the week prior to the hearing, the Senate voted on
an amendment to the Health Insurance Reform Act that would
increase the amount that self-employed individuals can deduct
for health-insurance costs. The Chairman commented that while
the legislation ``is not perfect, it represents a step in the
right direction in terms of leveling the playing filed for
America's small business entrepreneurs'' and pledged that his
effort to achieve tax equity on this issue would continue to be
a top priority.
Home-Office Deduction
The Committee also heard testimony on a third tax issue
important to home-based business owners, the home-office
deduction. In 1993, the Supreme Court in, Commissioner v.
Soliman, narrowed the availability of the home-office
deduction. Under the Soliman decision, the bulk of the
businesses revenue must be generated within the home office and
the business owner must see clients in the home office in order
to qualify for the deduction. The effect was to deny the
deduction to self-employed plumbers, home-care nurses,
contractors, and many others who perform their work outside of
the home but whose office is their home. During the 104th
Congress, legislation was introduced that would expand the
deduction for small businesses and entrepreneurs and would
allow the deduction if it is the sole location where essential
administrative or management activities are conducted on a
regular basis.
The Chairman noted the importance of the deduction to the
self-employed and especially to parents raising children while
working at home. In addition, he commented that as the number
of home-based businesses increases, the importance of the
deduction mounts.
Senator Bumpers pointed out that the logic behind the
Soliman decision was, in his opinion, flawed in that it ignored
the reality of today's business environment. He pointed out
that although the deduction may have been abused by some
taxpayers, that does not give cause for denying the deduction
to those who are legitimately entitled to it. He cautioned that
lawmakers ``should do whatever we can to allow the deduction
when a home office is a real cost of doing business, while at
the same time taking care not to open a new loophole for those
who are simply seeking a tax write-off.
Diane Sutton testified on behalf of the National
Association for the Self-Employed and said that the number of
home-based businesses is increasing because society is
changing, technology is changing, and the workforce is
changing. She went on to say that these changes are pushing
away from the large employer and ``one job site'' model of the
1950s and 1960s. Ms. Sutton testified that an ``enlighten
approached to home-based businesses would be to facilitate home
office deductions, with the appropriate safeguards against
abuse.'' Ms. Horton testified that the Saliman decision should
be reversed and pointed out that the White House Conference
delegates also ranked the issue 29th amongst the top 60 issues.
The Chairman noted that access to technology, corporate
downsizing, and the need for two income families will likely
accelerate over time. He expressed his strong support for home-
based entrepreneurs and his belief that Congress must do
everything possible to create and maintain an environment where
home-based businesses can grow and flourish.
``Nomination of Ginger Ehn Lew To Be Deputy Administrator of the United
States Small Business Administration and the United States Small
Business Administration's Fiscal Year 1997 Budget''--Washington, D.C.,
May 1, 1996
This was a combined hearing on the nomination of Ginger Ehn
Lew to be Deputy Administrator of the Small Business
Administration (SBA) and on the SBA's fiscal year 1997 budget.
Congresswoman Nancy Pelosi, of California addressed the
committee concerning Ms. Lew, who is a native Californian. In
her remarks Ms. Pelosi expressed considerable support for Ms.
Lew from the entire California delegation. Senator Barbara
Boxer of California also submitted a letter in support of Ms.
Lew. Ms. Pelosi was later joined by Phil Lader, Administrator
of the SBA in backing Ms. Lew.
Ms. Lew, a native of San Francisco, possesses a bachelor's
degree in political science from UCLA and a law degree from the
University of California. If confirmed she would bring a broad
background to the SBA. Her experience includes service as a
small business advisor for Arthur Young & Company, as well as a
key role in the start up of a biotechnology company. She also
has a strong background in government service. She served as
Regional Chief Enforcement Counsel for the Department of
Energy, and most recently she served as a top advisor to the
late Secretary Ron Brown at the Department of Commerce.
As Deputy Administrator, Ms. Lew would essentially be the
Chief Operating Officer of the SBA. She expressed a desire to
``continue to advocate for changes within the SBA, as well as
with other agencies, to find ways to relieve the regulatory
burden on small businesses and to allow them to get on with the
business of doing business.'' She also expressed a desire to
develop a sincere cooperation with the Committee. ``This
Committee has had a long history of bipartisan support for our
Nation's small business, and I look forward to working with you
and other members in this spirit.''
Ms. Lew answered questions from Committee members on a
variety of topics including Committee initiatives, her
experience, and her joint tax returns from 1992 to 1995, which
showed no tax liability. This lack of liability was a major
concern for Committee members and was apparently generated by
losses involved in a limited partnership real estate venture.
During the hearing the Committee also addressed the fiscal
year 1997 budget request for the SBA. Chairman Bond stated that
he continues ``to believe [the] SBA can be streamlined and made
more efficient in achieving its mission.'' There is a need for
the SBA to make better use of its resources and to prepare for
the future of the SBA.
There was extensive discussion regarding the 7(a) and 504
loan program budget increase request. Mr. Lader said that the
``principal portion of the additional amount in the President's
budget'' for these programs is consumed by a subsidy rate
change by OMB. The remainder of the funds are necessary to keep
up with the growth of the program.
Senator Olympia Snowe voiced the concerns of many Committee
members when she noted in her written statement: ``I am * * *
concerned to see that the latest budget proposal of President
Clinton includes a $664 million funding request for the SBA in
1997--an amount even greater than that requested in 1996. If we
are to work toward a balanced budget, we must be sure that
funding requests for federal programs are both justifiable and
realistic * * *. I am concerned that this increased budget
request may be lacking under both of these standards.''
``Small Business Investment Company Reform Legislation''--Washington,
D.C. May 10, 1996
On May 10, 1996, the Committee held the third in a series
of hearings to determine ways to improve the Small Business
Investment Company (SBIC) Program. In his opening statement
Chairman Bond expressed his desire ``to continue to build on
the improvements in the SBIC program contained in the law
passed by Congress under Senator Bumpers' Chairmanship of this
Committee in 1992.''
During the first hearing in this series, the Committee
heard from small business people who have used the SBIC program
to their advantage in developing their business. Often the
SBICs were the only ones willing to work with these small
businesses. The second hearing consisted of testimony from
people involved in venture capital lending, or more
specifically, the lending/investing side of the SBIC program.
This hearing was designed to pull together the ideas from
the first two hearings and to form draft legislation to improve
the SBIC program. In his opening remarks, Chairman Bond
identified these main objectives:
``To reduce the risk of SBIC defaults by putting in
place a few important statutory standards governing the
licensing and leveraging of SBICs, such as increasing
the required level of private capital, eliminating the
special distinctions between SBICs and SSBICs,
requiring experienced and qualified management for all
SBICs and requiring a level of diversification between
SBIC investors and the management team'';
To put ``in place a few important statutory
safeguards governing the operating practices of SBICs,
such as requiring frequent and meaningful valuations
and examinations of SBIC licensees and their
investments, and setting reasonable limitations on the
ability of SBICs with outstanding SBA leverage to
further dilute their private capital reserves by
incurring additional debt from other sources.''
Chairman Bond also emphasized the importance of SBICs
investing in businesses located at the lower end of eligible
size standards. ``Licensees with less than $2.5 million of
private capital, while they represent 38 percent in number of
all licensees, provide only 4 percent of the program's private
capital.'' Leveraged at more than a four to one level, this
amounts to significant risk for the SBA. In fact, since 1989,
over 90 percent of the liquidation efforts by the SBA involved
those licensees in the range below $2.5 million. This created
some contention among Committee Members, some questioning the
need to take the risk, and others insisting it is necessary.
Terry L. Jones, President of Syncom Capital Corporation,
pointed out that 80% of SSBIC's have private capital totaling
less than $2.5 million. If the standard were changed,
economically and socially disadvantaged people would be left
out of the SBIC program.
The Small Business Administration indicated that it
approves of any legislation that will improve its ability to
provide equity and long-term debt, and reduce its cost to the
taxpayers. The administration, however, does not support
specifically legislating such regulations due to the lack of
flexibility and the problems that it could cause.
``Implementation of the Small Business Agenda''--Washington, D.C., June
5, 1996
On June 5, 1996, the Committee held a hearing on
implementation of its small business agenda. The Committee
wanted to know how the small business agenda, which is based on
recommendations of the 1995 White House Conference on Small
Business and the Committee's prior hearings on Entrepreneurship
in America, was being implemented by the Administration. One
small business priority, paperwork reduction, was selected as a
focus of the hearing.
The Committee sought to collect information on how the
Paperwork Reduction Act of 1995 (PRA) was being implemented by
federal agencies. Specifically, the Committee set out to
examine whether PRA mandated government-wide paperwork
reduction goals were established and being enforced by the
Executive Branch. As practicable examples of compliance with
PRA provisions, the Committee looked at paperwork reduction
practices at the Internal Revenue Service (IRS), the
Occupational Safety and Health Administration (OSHA), and the
Environmental Protection Agency (EPA).
In addition to the PRA, the Committee evaluated the impact
of other laws on the implementation of the small business
agenda. The Small Business Regulatory Enforcement Fairness Act
of 1996 (SBREFA) as well as the newly amended Regulatory
Flexibility Act were of particular interest to the Committee.
The purpose of both of these laws, as well as the PRA, is to
provide the small business community with tools to assist it in
working within the government regulatory processes.
The Committee requested testimony on how Executive Branch
policy and procedures were assisting small business in working
with the regulatory process. The Committee was especially
interested in testimony involving the SBA's Office of Advocacy.
SBA's Chief Counsel for Advocacy is required by the SBA's
enabling legislation to promote the interests of small business
within the Administration, especially in regulatory matters.
Finally, the Committee sought testimony directly from small
business representatives on implementation effectiveness. In
particular, the Committee requested small business' perceptions
of actions by the Office of Advocacy taken to represent small
business concerns before regulatory agencies. The Committee
also requested legislative recommendations from small business
that could further support the efforts of the Office of
Advocacy.
In his opening statement, Chairman Bond stated that the
cost of the government's regulatory paperwork burden is
enormous. The cost of paperwork burdens exceeds $400 billion
per year, with small business' costs estimated at $100 billion
dollars. Chairman Bond pointed out that these costs only
represent the cost of preparing and filing forms, reports, and
other paperwork required by the federal government. The
government-wide paperwork burden total has risen substantially
between 1980 and 1995 from 1.5 billion burden hours in 1980 to
more than 6.9 billion hours in 1995.
The first panel of witnesses included Michael Brostek,
Associate Director, Federal Management and Workforce Issues,
General Government Division, General Accounting Office (GAO),
and Peter F. Guerrero, Director, Environmental Protection
Issues Resources, Community and Economic Development Division,
GAO. The GAO testimony was developed in response to a February
1996 letter from Chairman Bond requesting testimony on the
Administration's implementation of the Paperwork Reduction Act
of 1995. Specifically, Chairman Bond requested testimony on:
(1) what plans and processes OMB and certain agencies (EPA,
OSHA, and IRS) have established to meet the Paperwork Reduction
Act's burden reduction goals, (2) whether progress has been
made since the Act became effective on October 1, 1995, both
government-wide and in the three agencies, that will achieve
the Act's burden reduction goals within the time frames
established in the Act; and (3) measurement issues Congress
should be aware of in its oversight of agencies' progress in
reducing paperwork burden.
The GAO witnesses testified that the PRA requires the OMB's
Office of Information and Regulatory Affairs (OIRA) to
establish a 10% paperwork reduction goal in FY96 and FY97 as
well as five percent goals for the following years. Mr. Brostak
testified that OIRA has not, as of the hearing date, set any
government-wide paperwork reduction goals for FY96 even though
the PRA became effective October 1, 1995, nine months earlier.
In addition, even if planned agency-specific goals were used,
their total would not equal the 10% government-wide reduction
goal. The GAO witnesses, based on their burden hour
projections, stated that OIRA would only require agencies to
attain a one percent government-wide reduction for FY96. This
projection, combined with out-year PRA reduction requirements,
was discussed, and the Committee expressed concern about the
Administration's failure to attain the reduction goal.
GAO's testimony provided examples of agency compliance with
the PRA. Mr. Brostak testified that EPA Administrator Carol
Browner committed the Agency to a 25% paperwork burden
reduction from its January 1995 baseline of 81 million hours by
June 1996. Contrary to EPA's commitment, GAO's analysis
projected EPA's paperwork burden would total 117 million hours
by September 1996, a 44% increase. An accurate EPA paperwork
baseline was a subject of lengthy discussion at the hearing.
EPA, according to GAO, had revised its baseline several times
during 1995 and 1996 making consistent analysis difficult. In
summary, GAO agreed with Committee members that EPA's paperwork
burden was continuing to increase. One reason cited by GAO for
the increase was new regulation requirements, such as the Clean
Air Act.
The GAO witnesses testified that OSHA originally projected
its paperwork reduction burden at four percent. OSHA
subsequently revised its reduction by interpretive rulings
within the Department of Labor, thereby claiming an eight
percent reduction. To do this, OSHA claimed an additional 17
million burden hour reduction due to planned phase out of
third-party information collection burden. This interpretive
ruling prompted discussion on whether agencies were keeping
different sets of books, one for public release and a second
with reduction figures. The GAO witnesses responded that
agencies had been revising their burden hours totals since the
original PRA baselines were established in August 1995 and that
this made consistent goal evaluation difficult.
GAO testified that the IRS, which accounts for over 75% of
the total government paperwork burden, has claimed savings in
simplifying forms and instructions as well as moving eligible
taxpayers to the ``EZ'' versions of required forms. Ms. Brostak
testified that IRS would only reduce its paperwork burden by
0.9% for FY96.
Finally, the GAO witnesses testified that OIRA had failed
to keep Congress properly informed of major activities related
to the PRA, as required under the Act. Mr. Brostak pointed out
two major activities of which Congress was not informed: (1)
OIRA has not established any burden reduction goals to date,
and (2) agency projections, which OIRA received in early 1996,
indicated that the 10% government-wide paperwork reduction goal
called for in the Act would not be achieved.
The Committee examined the Office of Advocacy's 1995 annual
report of agency compliance with the Regulatory Flexibility
Act. The report's purpose is to inform the small business
community and others of the regulations on which the Office of
Advocacy has commented on. As a result, the report serves as an
indicator of the Office of Advocacy's support of the small
business agenda. Chairman Bond stated that 5,133 regulations
were considered by the federal government in FY95, of which 918
regulation were considered significant by the federal agencies
themselves. Chairman Bond pointed out that the Office of
Advocacy filed only 57 written comments to the 918 significant
rules under consideration. In addition, only four of the 57
comments dealt with the big three agencies for small business:
EPA, OSHA, and IRS. Chairman Bond compared 1995 totals to 1992
when over four times as many comments were written, even though
there were almost 1,000 fewer regulations considered in 1992.
The witnesses on the second panel testified about the
Office of Advocacy's performance. The Committee, in addition to
information collection, was seeking testimony on potential
legislative recommendations to strengthen the Office of
Advocacy. The panel included Mary K. Ryan, Deputy Chief
Counsel, Office of Advocacy, SBA, who testified that the major
starting point for Office of Advocacy activities is to
implement the 60 recommendations of the White House Conference
on Small Business. Ms. Ryan testified about specific Office of
Advocacy actions that were undertaken to implement the
conference recommendations, especially the use of information
and education initiatives.
The second witness on this panel was Jack Faris, President,
National Federation of Independent Business, which represents
over 600,000 small businesses across the country. Mr. Faris's
testimony outlined several legislative and executive actions
required to fulfill small businesses' priorities, including
regulatory reform, tax reform, health-care reform, legal
reform, and a balanced federal budget.
The final witness was R. Wendall Moore, Executive Vice
President and Co-Founder, Red Hot & Blue Restaurants, Inc.,
who, in addition to being a small businessman, was a former
Acting Chief Counsel for Advocacy as well as Deputy Chief
Counsel for the SBA. Mr. Moore testified, based on his SBA
experience, that while the Office of Advocacy was legislatively
intended to be ``an independent voice'' for small business, he
believed that the public law establishing the Chief Counsel is
inconsistent with the original congressional intent and
therefore does not allow the Office to operate independent from
Administration policy. Mr. Moore testified that since the Chief
Counsel for Advocacy is appointed by the President and the
office's budget and staff levels are determined by a
presidential appointee, its independence is extremely
improbable. Mr. Moore gave legislative recommendations that
could be considered to strengthen the Office of Advocacy.
One issue discussed during the hearing was the potential
minimum wage increase, which eventually passed the Congress in
September 1996. Messrs. Faris and Moore commented that the
proposed minimum wage would impose an additional burden on the
small business community. Mr. Faris expressed the concern that
the minimum wage was not even on the ``radar screen'' as a
issue for small business at the White House Conference. As a
result, he was unclear why the Administration would make it a
priority at this time.
The small business panel also provided the Committee with
testimony advocating major reform in the present tax code. The
panelists stated that the majority of federal paperwork
requirements presently imposed on small business revolve around
the current tax system, and until this structure is modified,
changed, or scraped, many small business persons will view
paperwork reduction actions as a Washington bureaucratic game.
``Implementation of the Small Business Regulatory Enforcement Fairness
Act of 1996''--Washington, D.C., July 24, 1996
On July 24, 1996, the Committee held an oversight hearing
on the Administration's implementation of the Small Business
Regulatory Enforcement Fairness Act (SBREFA). On March 29,
1996, as Title III of the Contract with America Advancement
Act, SBREFA was signed into law by President Clinton. The
effective date of SBREFA was June 28, 1996. The Act, originally
sponsored in the Senate by Chairman Bond as S. 942, is intended
to legislate specific recommendations of the 1995 White House
Conference on Small Business, which deal with the development
and enforcement of federal regulation, including judicial
review of agency actions under the Regulatory Flexibility Act.
In authorizing judicial review of the Regulatory
Flexibility Act, SBREFA helps insure that federal agencies
consider ways to reduce any significant economic impact of new
regulations on small businesses. In addition, it requires
federal agencies to prepare ``Plain English'' compliance guides
spelling out in easy to follow language how small business can
comply with federal regulations.
Another provision sets up an independent Ombudsman to
receive confidential complaints and comments from small
businesses about their dealings with federal regulators.
Regional review boards will ``rate the regulators'' based on
these comments and publish their findings in a report card for
each agency. SBREFA also allows small businesses to recover
their expenses and legal fees from the government when
enforcers make excessive demands for fines or penalties that
cannot be sustained in court. Finally, the bill authorizes
Congress to review and overturn new regulations written by
federal agencies within a 60-day window. This last provision
was not part of the bill as reported by the Committee, and
therefore was not a focus on the hearing.
While SBREFA had only been in effect for less than a month
on the hearing date, the hearing was held to determine what
actions the Administration had taken to date in compliance with
the new law. The Committee received testimony from the OMB's
Office of Information and Regulatory Affairs (OIRA) and SBA's
Office of Advocacy on Administration plans for SBREFA
implementation. Additionally, the Committee sought the
perspective of small businesses on what effect any
circumvention of SBREFA procedures would have on their
businesses' activities.
The first panel consisted of Sally Katzen, Director, OIRA
and Jere Glover, Chief Counsel, Office of Advocacy, SBA. Ms.
Katzen testified that the Administration was active in its
support for the passage of SBREFA and highlighted provisions of
the legislation for implementation. Ms. Katzen testified that
OIRA and the SBA have worked together on a wide range of issues
and had already begun planning discussions with regulatory
agencies on the implementation of SBREFA.
Mr. Glover testified about the Office of Advocacy's
implementation of SBREFA. He pointed out that judicial review
was a major recommendation of the 1995 White House Conference
on Small Business and complimented the Committee for moving
swiftly to address this important issue. Mr. Glover went on to
explain that the Office of Advocacy was involved in several
avenues of outreach to inform and educate small business about
the SBREFA provisions.
One issue of significance discussed in the hearing was the
meaning of the term ``significant impact on a substantial
number of small businesses,'' as required by the Regulatory
Flexibility Act. Mr. Glover testified that industry data is
helpful, but many times this issue becomes a judgment call
caused by individual circumstances. Chairman Bond followed up
Mr. Glover's testimony by questioning him about whether the SBA
had provided the necessary guidance to agencies on this issue.
Chairman Bond pointed out that recent SBA guidance failed to
address this issue.
This issue of OIRA and SBA providing meaningful guidance on
the Regulatory Flexibility Act was discussed by the Committee
and the Administration witnesses. Both witnesses were asked for
assurances that their offices would provide proper guidance and
accountability procedures to agencies to ensure compliance with
the Regulatory Flexibility Act provisions. Specifically,
Section 610 of the Act, requiring agencies to inform small
business of the periodic review of significant regulations, was
reviewed. The Committee wanted to make sure that agencies
review their present Section 610 procedures to ensure
compliance with its provisions for advance notification to
small business in the rulemaking process.
Finally, Chairman Bond, as a follow-up to the June 1996
Committee hearing on implementation of the small business
agenda, asked Ms. Katzen when OIRA would issue the required
Paperwork Reduction Act burden reduction goals for fiscal year
1996. The Chairman expressed concern that the Administration
was 10 months into the fiscal year and had not issued any
reduction goals. Ms. Katzen answered that Administration
officials were continuing to meet and discuss the reductional
goals but had not come to any final conclusions.
The second panel of small business representatives
testified on recent agency regulatory actions. This panel
provided the Committee with a small business perspective on the
Administration's implementation of SBREFA. The panel included:
William M. Smiland, Co-owner, Smiland Paint Company; Richard
Hardy, President, XIM Products, Inc.; Willis J. Goldsmith,
Partner, Jones, Day, Reavis & Pogue; and Jean Smith Mohler,
Assistant Counsel, Petroleum Marketers of America.
The panelists focused on EPA and OSHA regulatory actions
and how these actions appear to circumvent new regulatory
procedures mandated by SBREFA. Mr. Smiland pointed out that EPA
issued a paint and coatings proposed rule on June 26, 1996 just
two days before the effective date of SBREFA. Additionally, he
pointed out that EPA only issued part of the proposal on June
26 and did not publish the remainder of the rule until the next
week, after the SBREFA effective date. By doing this, Mr.
Smiland suggested, the agency had no requirement to convene a
Small Business Advocacy Review Panel as required under SBREFA.
As a result, small business was denied a valuable tool for
input into the rulemaking process.
Mr. Goldsmith testified that OSHA, by issuing guidelines
for Nighttime Workplace Violence instead of following
traditional rulemaking procedures has denied small business
important protections in the rulemaking process. Mr. Goldsmith
testified that some OSHA guidelines, as issued, can be used for
enforcement purposes thereby making guidelines have the same
effect as OSHA rules without being subject to key rulemaking
provisions, such as public comment from small businesses, as
required by SBREFA.
Ms. Mohler testified that EPA, on June 27, 1996, one day
before SBREFA's effective date, published a proposed rule to
expand the Toxics Release Inventory (TRI). Ms. Mohler pointed
out that the rule, which must be approved by OMB before
publication, appears to have been significantly expedited by
OMB to allow EPA to publish it before the SBREFA effective
date. Ms. Mohler testified that while some rules require months
of OMB review, the TRI rule was cleared by OMB within one week
of review. Additionally, Ms. Mohler believes that EPA's initial
regulatory flexibility analysis, as called for in Regulatory
Flexibility Act, was badly flawed. She suggested that the
Agency's haste to publication was done to avoid the small
business review panel required under SBREFA, and as a result
the quality of the analysis suffered.
The Committee heard testimony from Mr. Hardy on the
significant impact that the paint and coatings rule is having
on his small business. He testified that this rule will require
his company to spend over $1 million in research to find
alternative methods to comply with the new rule. He testified
that the rule significantly effected speciality paints, which
are an important part of his business and that of many small
paint manufacturers and painters. Mr. Hardy stated that input
from small paint companies, as required under SBREFA, would
have allowed for a more orderly and less costly transition to
the proposed rules for small business.