THE WHITE HOUSE CONFERENCE ON SMALL BUSINESS ISSUE HANDBOOK
       THE WHITE HOUSE CONFERENCE ON SMALL BUSINESS
       -----------------------*--------------------
              Foundation for a New Century
The following information comes from the 1994 "White House
Conference on Small Business Issue Handbook * A Foundation for a
New Century."
It was prepared by the Office of Advocacy, U.S. Small Business
Administration, and this first edition came out in April, 1994.
Updates will be added as new information becomes available.
Contact The White House Conference for Small Business, at 1800 G
Street, NW, Suite 1233, Washington, DC, 20006-4407.  Or call
(202) 724-0891 for more information.
                     THE WHITE HOUSE
                        WASHINGTON
Dear Conference Participant:
     It is my great pleasure to welcome you to The White House
Conference on Small Business. Over the coming months, you and
your colleagues will address many important issues and problems.
My entire administration values your unique perspective on the
role of small business in our nation's economic future, and we
will work closely with you to make the Conference a success.
     As you well know, new forces such as globalization, the rise
of new technologies, and the development of new markets are
shaping a new American economy. Many experts believe that smaller
firms, with their nimbleness, adaptability, and creativity, will
play an increasingly important role in that new economy. I
agreethat is why your leadership through this Conference is so
valuable to the nation.
     I look forward to participating in the National Conference
in the summer of 1995, and to reading the Conference's findings
and recommendations. Thank you for your important contributions,
both through your business success and in this Conference.
Sincerely,
Bill Clinton
Dear Conference Participant:
     As a venture capitalist and an active supporter of small
business firms for more than 25 years, I congratulate you on your
decision to join with your peers to map the course of small
business prosperity into the 21st century.  These conferences
will enable members of the small business community to explore
new ideas and develop constructive recommendations to facilitate
the entrepreneurial process.
     Having participated in the first White House Conference on
Small Business, I know reaching consensus on the most important
issues facing small business will not be easy. The interests of
small business are as diverse as the businesses themselves.
However, the White House Conference on Small Business provides a
unique opportunity for the many voices of our community to speak
with a shared purpose.
     Many exciting developments in the areas of information and
communication challenge us to seize the day and move forward. The
information age has not only changed how people will participate
in a work force requiring new skills and new ways of thinking,
but it is changing how all of us communicate and view the world.
     Furthermore, the opportunity to affect government policy on
taxation, capital formation, and international trade, to name
only a few, gives you an idea about the significance of these
conferences.
     The challenge to all conference participants is to speak
openly and constructively to explore the ideas that will help us
flourish in the years to come.
     Again, welcome, and thank you for attending the White House
Conference on Small Business.
Sincerely,
Alan Patricof
Chair, White House Conference on Small Business
Dear Conference Participant:
     On behalf of the U.S. Small Business Administration (SBA),
we are pleased to welcome you to the 1995 White House Conference
on Small Business. This Conference is an opportunity for
America's dynamic small business sector to recommend measures
that will lead to greater success in the global marketplace.
     During the past several months, in town hall meetings around
the country and in task force discussions leading up to this
Conference, we have heard from America's small business owners
and advocates. They have shared with us their concerns for
American small business and have spoken with hope about their
dreams for the future. In a very real sense, your work at this
Conference will help us respond to those hopes and concerns.  We
welcome your good ideas and look forward to working with you to
help implement them.
     To assist you in your discussions, SBA's Office of Advocacy
has prepared an Issue handbook that gives background information
on more than 100 small business topics. We believe you will find
it a meaningful guide to the complex and important issues facing
small business today.
     Please keep in mind that the President and the Congress are
eager to hear your candid, constructive suggestions for those
policy changes that would be of the greatest benefit to the small
business community.  Your views reflect your personal experience,
hard work, and common sense. We know that we can benefit a great
deal from your insight and ask that you give this endeavor your
best effort.
     Thank you in advance for your work in making this Conference
a successful one.  We value your commitment and assure you that
your time and energy will be put to good use.
Sincerely,
Erskine B. Bowles
Administrator
U.S. Small Business Administration
Doris S. Freedman
Acting Chief Counsel for Advocacy
U.S. Small Business Administration
FROM WILMINGTON TO DEARBORN
Tentative schedule of dates and cities for individual state
conferences that precede the June 1995 White House Conference on
Small Business
-----------------------------------------------------------------
1994 Dates                                      Delegates
June 2 - Wilmington, Delaware                      10
June 9 - Nashua, New Hampshire                     10
June 14 - Casper, Wyoming                          10
June 21 - Milwaukee, Wisconsin                     22
June 27 - Billings, Montana                        10
June 30 - Boise, Idaho                             10
July 6 - Sioux Falls, South Dakota                 10
July 12 - Bismarck, North Dakota                   10
July 14 - Minneapolis, Minnesota                   20
July 19 - Charleston, West Virginia                10
July 21 - Columbus, Ohio                           21*
July 26 - Des Moines, Iowa                         14
August 1 - Salt Lake City, Utah                    10
August 9 - Omaha, Nebraska                         10
August 11 - Wichita, Kansas                        12
August 16 - Springfield, Illinois                  22*
September 1 - Indianapolis, Indiana                24
September 8 - Louisville, Kentucky                 16
September 13 - San Juan, Puerto Rico               10
November 9 - Burlington, Vermont                   10
November 10 - Portland, Maine                      10
November 15 - Danvers, Massachusetts               24
November 16 - Anchorage, Alaska                    10
November 17 - Providence, Rhode Island             10
November 22 - Honolulu, Hawaii                     10
November 29 - Cromwell, Connecticut                16
December 1 - Washington, D.C.                      10
December 6 - Virginia Beach, Virginia              26
December 8 - King of Prussia, Pennsylvania         23*
December 13 - Pittsburgh, Pennsylvania             23*
December 15 - Buffalo, New York                    33*
1995 Dates
January 4 - Nashville, Tennessee                   22
January 10 - New York, New York                    33*
January 12 - Baltimore, Maryland                   20
January 17 - Columbia, South Carolina              16
January 19 - Atlanta, Georgia                      26
January 24 - Raleigh, North Carolina               28
January 26 - Birmingham, Alabama                   18
January 31 - Jacksonville, Florida                 25*
February 2 - Miami, Florida                        25*
February 7 - Jackson, Mississippi                  14
February 9 - New Orleans, Louisiana                18
February 14 - St. Louis, Missouri                  22
February 17 - Oklahoma City, Oklahoma              16
February 21 - San Antonio, Texas                   32*
February 23 - Little Rock, Arkansas                12
February 28 - Arlington, Texas                     32*
March 3 - Albuquerque, New Mexico                  10
March 7 - Phoenix, Arizona                         16
March 9 - Las Vegas, Nevada                        10
March 14 - Los Angeles, California                 54*
March 16 - San Francisco, California               54*
March 21 - Seattle, Washington                     22
March 23 - Portland, Oregon                        14
March 29 - Denver, Colorado                        16
April 4 - East Brunswick, New Jersey               30
April 6 - Cleveland, Ohio                          21*
April 11 - Chicago, Illinois                       22*
April 13 - Dearborn, Michigan                      36*
* = States with more than 10 million persons will have two state
conferences.  The number of delegates elected in these states
will be equally divided among the two conferences.
There will be 695 appointed delegates to the National Conference.
Each Governor, Senator, and Member of the House of
Representatives will appoint one delegate and one alternate.
President Clinton will appoint 100 delegates and 100 alternates.
Contents
Facts About the White House Conference
Facts About Small Business
Executive Summary of the Issue Papers
Acknowledgments
THE ISSUE PAPERS
Capital Formation: Investing in the Success of Small Business
Availability of Capital
Banking Reform
Equity Financing through SBICs
Innovative Financing Programs/Leveraging Government Dollars
Pension Fund Investing
Secondary Markets/Securitization
Securities and Exchange Commission Issues
Securities Laws
Small Business Administration 7(a) and 504 Loan Programs
Venture Capital: Alternate Sources of Financing
Community Development: Revitalizing Our Resources
Community Development Financial Institutions
Community Revitalization
Crime/Violence in the Workplace
Defense Economic Conversion
Franchising
Homebased Business
Rural Development
SBA Micro-Loan Program
SBA Technical Assistance
Environmental Policy: Encouraging Environmentally Sound
Development
Cost-Effective/Efficient Environmental Protection
Government Outreach to Small Business
Greater Relief from Environmental Regulations for Small
Business
Impact of Environmental Laws on Access to Capital for Small
Business
Non-Point Sources of Water Pollution
Recycling
Reducing Paperwork Required by Environmental Regulation
Superfund
Tax Incentives for Investing in Pollution Control Equipment
Human Capital: Improving the Competitiveness of the 21st
Century Work Force
Access to Health Care
Adapting to Diversity in the Small Business Work Force
Americans with Disabilities Act
Early Entrepreneurship Program
Encouraging Diversity in Small Business Ownership
Health Alliances/Health Purchasing Cooperatives
Health Care Financing Mechanisms
Health Insurance Deduction for the Self-Employed
Health Insurance Market Reforms
HIV/AIDS Education and Prevention
Medical Liability Reform
Preparing Students for Work
Retirement Plans
Social Security Tax Reform
State-Mandated Health Care Benefits
Substance Abuse
Taxation of Health Benefits
Work Force Skills
Workers Compensation
Worksite Health Promotion
International Trade: Fostering Small Business Interests in the
World Marketplace
Development of a Strategy for Export Assistance to Small
Business
General Agreement on Tariffs and Trade
Import Policy
North American Free Trade Agreement
Trade Finance
Procurement: Balancing Public and Private Resources
Access to Procurement Opportunities
Balancing Private and Public Resources
Best Value Procurement
Competition from Non-Profit Organizations
Labor Laws and Federal Contracting
Prompt Payment Act
Rights in Technical Data
Small Business Set-Asides
Small Purchase Threshold
Subcontracting Opportunities
Surety Bonding
Regulation and Paperwork: Reinventing Regulatory Policy
Alternative Dispute Resolution
Bankruptcy
Civil Justice Reform
Equal Access to Justice Act
Fair Labor Standards Act
Line-item Veto
Negotiated Rulemaking
Occupational Safety and Health Reform
Paperwork Reduction Act
Product Liability
Regulatory Flexibility Act
Small Business Size Standards
Striker Replacement Legislation
Unfunded Mandates
Taxation: Stimulating the Growth of Small Businesses
Accounting Methods
Alternative Minimum Tax
Capital Gains Tax
Corporate Tax Rates
Employee/Independent Contractor Classification
Estate, Gift and Generation-Skipping Taxes
Fiscal Year Conformity
Frequency of Changes in Tax Laws
Growth Tax Credit
Home-Office Deduction
Individual Tax Rates
Integrated Tax System
Inventory Methods
Investment Tax Credit
Net Income Theory
Net Operating Losses
Payroll Tax Reform
Subchapter S Corporations
Taxpayer Bill of Rights
Value-Added Tax
Technology and the Information Revolution: Leading the Way in
Innovation
Capital for Technology Development
Commercialization of Technologies
Critical Technologies
Electronic Commerce
Flexibility in Manufacturing
Information Superhighway
Intellectual Property Protection
Marketing New Technologies
One-Stop Information Centers
Research and Experimentation Tax Credit
Small Business and Federal Research and Development
Standard Industrial Classification Codes
Status of Recommendations from the 1986 White House
Conference on Small Business
Glossary
Acronyms
Index
Facts About the WHCSB
The White House Conference on Small Business is an opportunity
for America's small business community to make its views known to
the Clinton Administration and Congress. To accomplish this,
Congress created an independent commission charged to assemble a
representative group of people from small businesses in state and
regional conferences from June 1994 to May 1995 and a National
Conference in June 1995.
In these meetings, thousands of small business owners, corporate
officers and employees will come together to increase awareness
of the critical role small businesses play in the national and
global economy.  Delegates at the National Conference will
propose a small business "action agenda" to the Clinton
Administration and Congress to ensure small business vitality
into the 21st century.
The Commissioners
President Clinton appointed 11 individuals from the small
business community to oversee the conference process. Alan
Patricof, who owns a firm that invests in small growing companies
serves as the commission chairman.  Nine of the people on the
bipartisan commission are small business owners, one is a
university law professor and one is an executive of a small
business trade association.
Conference History.
The two most recent White House Conferences on Small Business
(1980 and 1986) resulted in the overall participation of 50,000
small business owners and entrepreneurs from the 50 states, the
District of Columbia, Puerto Rico, and the Territories.
Recommendations for legislative and executive branch action were
formulated during both the 1980 and 1986 state and national
conferences.  (A summary of legislative actions resulting from
the 1986 conference's recommendations is included in this
booklet.
1980 Conference
The 1980 White House Conference on Small Business was held in
Washington, D.C., in January, 1980.  Approximately 30,000 small
business owners and entrepreneurs participated in the state
meetings and more than 5,000 people attended the national
conference, including the 1,682 official delegates.
1986 Conference
The 1986 White House Conference on Small Business took place in
Washington, D.C., in August, 1986.  Approximately 4,000 people,
including 1,813 official delegates attended the national
conference.  More than 20,000 small business owners and
entrepreneurs participated in the state-level meetings.
THE 1995 CONFERENCE:
Foundation for a New Century
The 1995 White House Conference on Small Business will be
preceded by at least one meeting per state.  States with
populations of 10 million or more will have two meetings.
Beginning in June, 1994, the state meetings will consist of a
one-day program, including an opening session, issue workshops
and delegate elections.
Task force meetings were held in November and December, 1993 to
outline possible issues and questions for discussion.  Issue
briefs prepared from these task force discussions are included in
the booklet, but are intended to be catalysts for discussion
only.  The following key issue areas will be discussed at the
conferences.
* Capital Formation
* Community Development
* Environmental Policy
* Human Capital
* International Trade
* Procurement
* Regulation and Paperwork
* Taxation
* Technology and the Information Revolution
Delegates
A total of 1,130 delegates will be elected at the state
conferences. A registrant wishing to run as a delegate or vote
for delegates and issue recommendations must attend the
conference in the state in which he or she resides. In order to
run as a dele- to gate or vote for delegates and issue
recommendations, an individual must be an owner, corporate
officer or employee of a small business employing fewer than 500
people. Delegates also must be able to pay their own expenses to
Washington, D.C., and at the National Conference or be prepared
to seek reimbursement of such expenses because of financial need.
Conference registrants who meet the delegate qualifications may
participate fully in the breakout issue sessions and may file as
delegate candidates. Conference registrants who do not meet the
delegate qualifications may participate as observers.  Observers
will not be recognized to speak during the breakout issue
sessions and will not be allowed to vote for issues or delegates.
Regional Conferences
Following the state meetings, delegates may attend regional
meetings. Regional meetings are designed to foster consensus and
sharpen the focus of the National Conference.
THE NATIONAL CONFERENCE
The National Conference, to be held in Washington, D.C., June 11-
15, 1995, will feature daily sessions, official White House
functions, speakers, and social events. In addition to the
elected delegates, delegates appointed by President Clinton, will
also participate in the conference.  The size of the state
delegation is equal to twice the states electoral college vote
plus appointed delegates, with a minimum of 10 members per
delegation.
The conference will conclude with the delegates ranking policy
recommendations to submit to President Clinton and Congress.
CONFERENCE REPORT SUBMITTED TO THE PRESIDENT AND CONGRESS
A final report will be submitted to President Clinton and
Congress.  It will include the findings and recommendations of
the delegates, as well as proposals for any legislative and/or
executive branch action necessary to implement the
recommendations.  The report is due no later than four months
from the date the National Conference is convened.
The Small Business Administration will report to Congress
annually for three years following the delivery of the final
report on the status and implementation of the findings and
recommendations.
FACTS ABOUT SMALL BUSINESS
Based of research conducted by SBA's Office of Advocacy
How many small businesses are there in the United States? In
1992, approximately 21.3 million business tax returns were filed
for 4.5 million corporations, 1.6 million partnerships and 15.1
million sole proprietorships. Many of the firms represented by
these tax returns are very small, part-time businesses.  In fact,
fewer than 14,000 would qualify as large businesses if an
employment cutoff of 500 employees is used to define small and
medium-sized businesses.  About 5.7 million businesses are large
enough to have employees.
Jobs
Small businesses employ about 54 percent of the work force,
contribute 52 percent of all sales in the country and are
responsible for 50 percent of private sector product.
During the 1976-1990 period, small firms with fewer than 500
employees provided 65 percent of net new jobs.  Jobs generated by
small firms are more likely to be filled by younger workers,
older workers and women.  Many of these workers prefer or are
only able to work on a part-time basis, and thus can be more
easily accommodated by small employers.
During the recent recession, it was the small businesses of the
nation that rallied, kept going, and added jobs. From 1988 to
1990, all of the net new jobs in the economy were created by
small firms. During this period, the performance of the nation's
smallest firms (those with fewer than 20 employees) was
extraordinary: they created almost 4.1 million new jobs against a
loss in large firms of more than 500,000 jobs and a loss in firms
with 20-499 employees of 850,000 jobs.
Between December 1992 and December 1993, small-business-dominated
industries (those in which at least 60 percent of the work force
is employed in firms with fewer than 500 employees) increased
employment by 1.3 million (3.2 percent).
Growth
For the first eight months of 1993, 480,163 incorporations were
recorded, an increase of 6.2 percent from the previous year.  New
and successor firms (existing firms that have changed owners)
with employees totaled 949,210 (1993 annual rate based on the
first six months), a 2.0-percent increase from the previous year.
Business failures (the closing of a business with a loss to at
least one creditor) declined 11.4 percent for the first six
months of 1993, while bankruptcies declined 10.1 percent.  During
the first half of 1993, business terminations were down about 2.8
percent.
Training and Education
New technologies and the challenge of foreign competition make
on-the-job training necessary to improve the quality of the
nation's work force.  Small businesses have historically been a
source of training for American workers, providing the majority
of workers the general training they require to function
efficiently throughout their work lives.
A recent study commissioned by the Office of Advocacy, Job
Training Approaches and Costs in Small and Large Firms (Dan
Black, Mark Berger and John Barron, University of Kentucky) found
that small firms provide fewer total hours training to new hires
in the first three months of employment than do large firms, yet
provide more training to new employees with less than 12 years of
schooling, and a comparable amount of training to new hires with
no previous work experience.  Also, firms with fewer than 25
employees provide twice as many hours of informal management
training to employees with less than a high school diploma as
firms with 500 or more employees.
Financing
Overall, small firms rely more on equity capital and less on
external debt capital than larger firms and are more dependent on
short-term than long term debt. Fewer than 50 percent of small
firms borrow once or more during a year. However, small firms
experiencing rapid growth or those with high volumes of
receivables require frequent use of external financing. The cost
of borrowed funds is higher on small firms. Interest rates on
bank loans for small businesses average two to three percentage
points over the prime rate.
Innovation
Studies show that small firms produce twice as many innovations
per employee as large firms. Innovations coming from small
high-tech firms are expected to increase as a result of the Small
Business Innovation Development Act, which mandates that federal
agencies with large research and development (R&D) budgets direct
a designated amount of their R&D contracts to small firms. Fiscal
year 1991 was the ninth year of the Small Business Innovation
Research Program, in which agencies with $ 100 million or more in
extramural R&D obligations are required to set aside at least
1.25 percent of these funds for small businesses. In the first
nine years, almost $3 billion has been awarded to small firms for
a total of 21,501 projects.
International Trade
Exports have accounted for 70 percent of the growth in the U.S.
economy since 1989. Although smaller businesses generally are not
major exporters, many supply large firms with parts and
components that go into export products. Strength in manufactured
exports means that many small manufacturing firms are able to
maintain output levels by continuing to support larger exporting
firms.
Minority and Women's Business Ownership
According to the latest data available, the number of women-owned
nonfarm sole proprietorships increased by 7.9 percent from 1988
to 1989, continuing their rapid growth. There were nearly 5
million women-owned firms (including those without employees).
In 1987, the latest year for which these data are available,
there were 1.2 million minority-owned businesses with total
receipts of $77.8 billion.  Businesses owned by African Americans
numbered 424,000, accounting for the largest share or minority-
owned businesses (34.9 percent), and roughly 3 percent of all
U.S. businesses.  As of 1987, African-American owned businesses
posted receipts totaling $19.8 billion(about 1 percent of total
U.S. business receipts) and employed nearly one-quarter million
American workers.
Between 1982 and 1987, the number of Hispanic-owned firms rose
from 233,975 to 422,373, an increase of 80.5 percent.  As of
1987, Hispanic-owned businesses accounted for roughly 3 percent
of all U.S. business and 24.7 billion in business receipts - 1.2
percent of total business receipts.  They employed more than one-
quarter million American workers.
Businesses owned by Asian Americans and Pacific Islanders rose
from 187,691 in 1982 to 355,331 in 1987, an increase of 89.3
percent.  In 1987, they accounted for the largest share of
minority-owned business receipts (42.6 percent) and were also the
largest among minority-owned businesses in terms of average
annual receipts size, with receipts per firm of $93,221 compared
to an average of $64,131 for minority-owned businesses overall.
Procurement
A decade ago, approximately half of the government awards were
for supplies and equipment.  By fiscal year 1992, that proportion
had dropped to 39.7 percent, and small firms were finding more
opportunities for providing services and research and development
assistance to the federal government.
The overall share or federal procurement that went to small firms
in fiscal year 1992 was 30.8 percent.  Small businesses were
awarded $61.6 billion of a total of 199.8 billion in goods and
services purchased by the federal government.  Some $39.3 billion
was awarded directly to small firms and at least $22.3 billion
was awarded through government prime contractors to small
subcontractors.
In fiscal year 1992, the federal government awarded almost 5.3
billion through the SBA to small disadvantaged businesses in the
8 (a) program, up from 4.3 billion.  Overall, minority-and-women-
owned businesses were awarded contract worth 8.3 billion and 2.6
billion respectively, in fiscal year 1992, up from 7.0 billion
and 2.4 billion in fiscal year 1991.
Executive Summary
Both the economy and the national agenda have changed
considerably in the decade and a half since the first White House
Conference on Small Business was held in 1980. In the intervening
period, small businesses have seen a number of advances: wider
acknowledgment of small firm contributions to the economy and
adoption of a variety of federal laws and regulations designed to
improve the environment for small business growth. Some of these
new initiatives came about as a direct result of the 1980 and
1986 White House Conference on Small Business recommendations.
(See the 1986 update).
Yet, much remains to be done. Many issues on the small business
agenda have yet to be addressed and new concerns emerge
continually. Despite their importance as generators of economic
activity, jobs and innovation, small firms continue to operate at
a competitive disadvantage with respect to their larger
counterparts in nearly every areafrom access to capital to
employee benefit costs to the regulatory and paperwork burden.
This Issue Handbook provides a brief summary of 110 small
business issues identified by task forces comprising a broad
cross-section of the small business community that met in late
1993. The issues are divided into nine major categories: capital
formation, community development, environmental policy, human
capital, international trade, procurement, regulation and
paperwork, taxation, and technology and the information
revolution.
The issue summaries provided here are for information purposes
only: White House Conference participants should feel free to add
to or subtract from the list and to identify the issues and
constructive solutions they believe to be most important.
Capital Formation: Investing in the Success of Small Business
In today's economy, the small business community is still largely
dependent upon traditional sources of debt and equity capital;
however, with the advancement of electronics and computers,
types of financing companies and financial instruments are
playing a larger role.  As small businesses continue to
strengthen and grow in the 1990s and into the next century,
effective use of new capital formation strategies will be
essential.  Recent and anticipated changes in federal financing
programs are designed to further increase small businesses' and
entrepreneurs' access to capital.
Community Development:  Revitalizing Our Resources
Economic renewal for the remaining part of this decade and beyond
will depend largely on our ability to develop creative solutions
to the most vexing problems facing our communities today - the
downsizing of the defense industry, crime, substance abuse and
the decaying infrastructure.  Some of theses problems may be
addressed by government policies and programs that encourage
access to procurement opportunities, enhance technology transfer
and stimulate rather than inhibit entrepreneurship and small
business growth.
Environmental Policy: Encouraging Environmentally Sound
Development
Environmental laws enacted by federal, state and local
governments have brought improvements in environmental quality
and economic opportunities for some businesses.  However,
regulatory laws have sometimes had a negative economic impact on
the small business community, slowing productivity and job
creation and costing several hundred billion dollars annually.
Federal policy must set the importance of environmental concerns
in balance with the needs of the small business community, a
sector particularly vulnerable to burdensome environmental
regulatory requirements  because of more limited resources.
Human Capital: Improving the Competitiveness of the 21st Century
Work Force
The diversification of the work force is one of the major factors
that will influence American businesses in the 21st century.
Small and growing companies will also need to offer increasingly
costly employee benefits in order to attract and retain good
employees. Health care coverage, retirement plans, unemployment
compensation, insurance and workers' compensation premiums
constitute a growing portion of employer costs. Small employers
and entrepreneurs will need to ensure that they and their
employees are adequately trained to meet the challenges of the
21st century marketplace.
International Trade: Fostering Small Business Interests in the
World Marketplace
The future success of the U.S. economy will depend largely on
America's ability to compete successfully in a global arena. It
is estimated that small firms constitute 96 percent of exporting
firmsbut just 15 percent of U.S. exporters account for 85
percent of the value of U.S.-manufactured exports. In an
increasingly global marketplace, successful small firms must know
their international competition and take advantage of
opportunities to export.
Procurement: Balancing Public and Private Resources
In fiscal year 1992, the federal government purchased
approximately $200 billion in goods and services from the private
sector. Of this amount, roughly $62 billion, or 31 percent, was
awarded prime contracts and subcontracts to small and growing
businesses. These firms' participation in federal procurement
opportunities creates more competition, saves the government
money, stimulates greater innovation and provides jobs for many
Americans. The federal procurement rules are complicated,
however, and could be improved to provide greater opportunities
for the small business community.
Regulation and Paperwork:  Reinventing Regulatory Policy
Federal, state and local governments impose numerous requirements
on the operation of businesses.  They range from procedures for
simply obtaining a business license for a local government to
complex federal regulations governing the use of chemicals in the
workplace.  The burdens associated with these requirements are
often exacerbated by substantial paperwork and recordkeeping
requirements.  In addition to the cost and administrative
burdens, small and growing businesses have difficulty simply
keeping abreast of the various regulatory and paperwork
requirements.
Taxation: Stimulating the Growth of Small Businesses
Taxes imposed by federal, state and local governments represent
one of the most significant costs to small and growing
businesses.  Most small businesses must expend substantial time
and resources to comply with extensive, complex and constantly
changing tax laws.  Of the estimated 21 million business tax
returns filed in 1992, approximately 90 percent were filed by
small proprietorships, partnerships and S corporations subject to
individual tax rates; the remainder were filed by "C"
corporations subject to corporate tax rates.  The growth of the
economy depends in part on a tax system that meets necessary
goals without unduly burdening the smallest businesses.
Technology and the Information Revolution:  Leading the Way in
Innovation
Business and technological forces are coalescing in a revolution
that promises to have as significant an impact on the 21st
century as the industrial revolution had on the mid-19th century.
This "information revolution" will transform both how Americans
do business and how they spend their leisure time.  Small and
growing businesses have an important role, not only as users, but
as innovators of this technological revolution.  Throughout the
economy, these businesses create more innovations per employee
that large firms, and this inventive capacity will become
increasingly critical to our country's global competitiveness.
*****************************************************************
ACKNOWLEDGMENTS
WHCSB Commission
Alan Patricof, Chairman
Merle Catherine Chambers
Rudolph I. Estrada
Peggy Zone Fisher
C. Hugh Friedman
Brian Lee Greenspun
Clark Jones
Mary Frances Kelley
Josie Natori
Larry Shaw
Gary M. Woodbury
WHCSB Staff
Mark Schultz, Executive Director
Mary Blazevich
Gudrun Briegel
Ana Carrion-Sague
Steve Cisneros
Helene Colvin
John Doorlay
Nicholas Friendly
Kerry Gurtler
Thomas Hennessey
Gerald Kluempke*
Doug Lauen
Kelly Lees
Chris Mattson
Susan McNay
Chris Parker
Steve Pollock
Lisa Rowe-Ralls
Victoria Smith
Cathy St. Denis
Karen Sudbay
Jody Wharton
Tracy Williams
Kevin Winston
WHCSB Task Force Chairs
Karen Brown
Alan Chvotkin
Jim Kimsey
John Kutler
Virginia Littlejohn
Aaron Lovejoy
Robert McGee
Marc Newkirk
Carol Parry
Robert Pavey
John C. (Jack) Rennie
Richard A. Shaw, Esq.
Frank Swain
WHCSB Task Force Resource Experts
Mark Bloomfield
Dr. Anthony Carnevale
Benjamin Cooper
Ron Fox
Gregory B. Harter
Virginia Littlejohn
Charles Ludlam
E. Colette Nelson
Erik Pages
JoAnn H. Price
John Satagaj
Milton D. Stewart
David K. Voight
U.S. Small Business Administration (SBA)
Erskine B. Bowles, Administrator
Kathryn M. Broeren, Chief of Staff
Richard Hernandez, Counselor to the Administrator
John T. Spotila, General Counsel
SBA Office of Advocacy
Doris Freedman, Acting Chief Counsel for Advocacy
SBA Advocacy Staff Contributors
Issues Staff -
Greg Dean
Allison Giles
Nancy Ing
Gregory Koontz
Edward Koos
Don Kraft
Patricia McBride
James O'Connor
Barry Pineles
Barney Singer
Editorial Staff
Susan Walthall, Acting Director
Sarah Fleming
Sue Johnston
Kathryn Tobias
John Ward
* = On detail from the Small Business
Administration
Economic Research Staff
Bruce Phillips, Director
David Hirschberg
Supriya Kutty
Jules Lichtenstein
Ray Marchakitus
Charles Ou
Raymond Rawlinson
William Scheirer
Edward Starr
William Whiston
Support Staff
Jeanne Bishel
Angela Hamilton
Lisa Kunze
Darlene Moye
Sukie Sanders
Tonya Smith
Publication Design
Margaret Bauer
Printing
Saul's Lithograph
Printing of this Issue Handbook has been funded by the U.S. Small
Business Administration, through donations from Bell Atlantic,
Nynex and Pacific Telesis Group. The cooperation of Bell Atlantic,
Nynex and Pacific Telesis Group in this effort does not in any way
imply an endorsement by the U.S. Small Business Administration or
The White House Conference on Small Business of Bell Atlantic,
Nynex or Pacific Telesis Group, their products or their services.
PACIFIC TELESIS
Group
NYNEX
Yellow Pages
Bell Atlantic
Capital Formation
Raising capital has always been one of the highest priorities for
small and entrepreneurial businesses. Through the 1980s and into
the early l990s, small businesses experienced drastic changes in
their ability to gain access to capital. Stronger banking
legislation and tighter banking regulation enforcement combined
with bank failures and the downturn in the economy to create a
difficult climate for capital formation.
In today's economy, the small business community is still largely
dependent upon traditional sources of debt and equity capital;
however, with the advancement of electronics and computers, new
financing companies and financial instruments are playing a larger
role. As small businesses continue to strengthen and grow in the
l990s and into the next century, effective use of new capital
formation strategies will be essential. Recent and anticipated
changes in federal financing programs are designed to further
increase small businesses' and entrepreneurs' access to capital.
However, with the increasing emphasis on shrinking the federal
government bureaucracy, there will be greater reliance on private
sector initiatives to support the needs of America's
multi-trillion-dollar economy.
For related information, see also sections on Community Development
Financial Institutions, p. 26; SBA Micro-Loan Program, p. 31;
Impact of Environmental Laws on Access to Capital for Small
Business, p. 37; Health Care Financing Mechanisms, p. 47; Trade
Finance, p. 60; and Capital for Technology Development, p. 93.
-------------------------------------------------------------------
Availability of Capital
Should Congress become involved in creating new instruments and
entities to help small businesses improve their access to capital?
BACKGROUND
One of small business's major concerns is access to capital.
Whether it is start-up, expansion, equipment or maintenance
capital, small businesses need debt and equity financing to stay
competitive with larger companies in the marketplace. During the
1980s the traditional sources of debt capital-- banks, credit
unions, and savings and loans-- became less dominant in the lending
market. More non-traditional sources, such as finance companies,
credit card agencies and private investment companies, became
involved in small business capital investment. Other sources of
capital currently being explored include royalty sharing,
securitization, and private and public pension funds.
Federal government programs exist within the U.S. Small Business
Administration (SBA), the U.S. Department of Agriculture, the U.S.
Department of Commerce and other federal agencies to assist small
businesses in gaining access to debt capital. The Securities and
Exchange Commission and banking regulators have programs to help
facilitate equity investment in small businesses.
STATUS
Bills have been introduced in the 103d Congress to alleviate
paperwork and regulatory burdens imposed on financial institutions
in an effort to facilitate small business lending.
The Small Business Guaranteed Credit Enhancement Act of 1993
(Public Law 103-81) was enacted to increase appropriations for the
SBA's loan programs.
The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66)
permits a capital gains exclusion for investment in qualifying
small business stock.
In addition, the President and the banking regulators initiated a
Capital Availability Program in March 1993 to facilitate small
business lending.
DISCUSSION
* How can small businesses better prepare themselves for seeking
capital for their companies?
* What, if anything, should the federal government do to facilitate
the process?
* Should federal government programs target specific industries or
geographic areas for investment (for example, community development
financial institutions and emerging growth industries)?
* Should non-bank financial lenders be regulated by the federal
government for community reinvestment purposes?
* Should Congress develop initiatives to encourage private entities
to invest in small business? Should these initiatives target
specific industries for investment?
* Should public or private initiatives target very small
businesses? Should the initiatives include technical assistance,
education and training components?
Banking Reform
Should Congress enact legislation to encourage more lending to
small businesses by financial institutions?
BACKGROUND
In 1989, Congress enacted the Financial Institutions Reform,
Recovery and Enforcement Act (FIRREA) and in 1991, the Federal
Deposit Insurance Corporation Improvement Act (FDICIA). Both of
these laws were designed to ensure the safety of the banking
industry in light of the numerous failures of banks and savings and
loan associations during the 1980s. These laws cover all aspects of
banking operations, from establishing guidelines for real estate
lending to setting riskbased capital requirements for commercial
loans. Arguments have been made that the laws extend too far and
are hindering lending by financial institutions, which have already
curtailed lending because of previous economic downturns.
Two other factors arguably have a disproportionate adverse effect
on small business lending: the record level of investment in
government securities by financial institutions has decreased the
monies available for small business lending, and the large number
of mergers and acquisitions of financial institutions has created
lenders without strong ties to communities and their small
businesses.
STATUS
Many bills were introduced in the 103d Congress to reduce bank
regulatory burdens, permit interstate banking/branching, regulate
derivative investments and regulate the mutual fund industry. In
March 1993, the Clinton Administration introduced the Capital
Availability Program, which is designed to facilitate small
business lending by financial institutions. Included in the program
are revised banking regulatory policies toward some small business
loans and permission for financial institutions to create
"character loan" baskets for the regulatory examination of some
small business loans.
In addition, the banking regulators, on December 21,1993, published
in the Federal Register proposed regulations to revise the criteria
for the Community Reinvestment Act (CRA). The proposed rules would
provide greater access and information . on loans made to small
businesses. Small financial institutions would have the opportunity
to utilize a streamlined CRA compliance procedure.
DISCUSSION
* Interstate banking/branching could have an adverse effect on
small business lending by reducing the number of community banks
and creating larger lenders that do not have strong ties to com-
munities and their small businesses. What can be done to facilitate
small business lending in financial institutions that have been
subject to merger or acquisition?
* To help facilitate bank administrative procedures, should smaller
loans to small businesses be reviewed in bank examinations in the
same manner as consumer loans?
* Should Congress address issues of redlining and diversification
with respect to small business lending? If so, how?
* Should Congress enact banking laws that take into consideration
the characteristics of very small businesses?
* What, if anything, should be done to facilitate and improve
education, training and technical assistance for small businesses
to help them become more creditworthy?
Equity Financing through SBICs
Are modifications needed for the U.S. Small Business
Administration's recently restructured Small Business Investment
Company Program?
BACKGROUND
The SBA's Small Business Investment Company (SBIC) Program has
supplied millions of dollars of investment capital to small growing
companies. Specialized small business investment companies (SSBICs)
target investments in socially and economically disadvantaged small
businesses. Investments made by SBICs and SSBICs have helped
thousands of small businesses since the creation of the SBIC
program in 1958.
Since their inception, both SBICs and SSBICs have been capitalized
through private capital and matching SBA funds. Historically, the
primary instrument used for financing is the debenture, a debt
instrument. A new law permits the use of an equity financing
instrument in the SBIC program.
STATUS
As directed by the Small Business Equity Enhancement Act of 1992
(Public Law 102-366), the SBA published a proposed rule that would
restructure the program to permit the use of an equity financing
instrument called a "participating security" (preferred stock,
preferred limited partnership or other similar instrument). With
the proposed participating security, the SBA will guarantee the
payment of prioritized payments on, and the redemption price of,
the security. The use of the proposed security instrument would
permit investment by tax-exempt investors, such as pension fund
investors, who would otherwise incur tax liability if investing in
debt instruments.
The Omnibus Budget Reconciliation Act of 1993 (OBRA) permits the
deferral of recognition of a tax gain by an investor if the gain is
from a rollover investment in an SSBIC. In addition, OBRA also
grants SSBICs an exemption from the active business requirement of
the Internal Revenue Code for the recently enacted capital gains
provisions.
DISCUSSION
* Should the SBIC program be accorded the same tax investment
advantages with regard to capital gains provisions that have been
granted to SSBICs under the recently enacted Omnibus Budget Rec-
onciliation Act of 1993?
* Should Congress allow for rollover of gains from the sale of
publicly traded securities into small business investment
companies, as it does with specialized small business investment
companies?
* Should greater tax incentives be provided to private investors,
including pension funds, in an effort to encourage investment in
SBICs and SSBICs?
Innovative Financing Programs/ Leveraging Government Dollars
Should Congress create a funding mechanism for the establishment of
a loan loss reserve fund for use by financial institutions to
encourage small business lending? Should this initiative be
undertaken in conjunction with existing state programs?
BACKGROUND
A recent example of a state initiative to make capital more
accessible for small businesses is the Capital Access Program.
Currently, 11 states have capital access programs, which create
state-sponsored loan loss reserve funds for financial institutions'
lending to small businesses. The funds are capitalized through
small business loan reserves of financial institutions, fees from
small business borrowers and matching state funds. If a small
business loan goes into default, the financial institution
receives compensation from the fund. The institution may not obtain
funds greater than the amount it has put into the fund plus the
matching state amounts. As the loan loss reserve increases over
time for the lender, the lender is able to make incrementally
riskier loans.
A federal fund could be established to encourage state
participation, thereby creating a much larger pool of funds to back
small business loans. Or as an alternative, federal, state and
local monies could be pooled and designated for small business
lending. One pool of funds would enable larger investment amounts
to be targeted proportionately to the funds contributed by the
state and local governments.
Some have pointed out that the Capital Access Program resembles a
federal insurance for small business loans. In reality, if a
federal program were established it would utilize federal
appropriations to match the contributions of the states toward the
loan loss reserve fund. There would be no federal obligation other
than the initial appropriations.
Another private sector small business financing tool is a proposed
small business participating debenture (SBPD). This instrument is
similar to a bond instrument in that the investor receives regular
interest payments from the small business; however, with the SBPD
the investor will also receive a share of future profits. A key
component of the proposed SBPD is a capital gains rate that is
applied to the investor's share of future profits. The
participating debenture was a former White House Conference on
Small Business recommendation.
STATUS
The Community Development, Credit Enhancement and Regulatory
Improvement Act of 1993 (S.1275) would establish a federal Capital
Access Program, earmarking $50 million to establish a federal fund
and to provide incentives for state participation.
DISCUSSION
* How should a federal program be developed to best leverage funds
to facilitate small business lending?
* Should a program be developed that works independently of, or in
conjunction with, other federal financing programs, such as the
U.S. Small Business Administration's 7(a) Guaranteed Loan Program?
Pension Fund Investing
Should federal pension and retirement plan laws be amended to
facilitate small business investments?
BACKGROUND
Every year, trillions of dollars are invested by public and private
pension and retirement plans. Investments in small businesses,
however, are typically limited to a small share of venture capital
investments and to "economically targeted investments" by public
pension plans. Many believe that pooling of small business
investments--as is already being done with some venture capital
funds--and the pooling of small business loans would reduce the
amount of risk and encourage pension fund investment. (See also the
discussion of Secondary Markets/Securitization.)
STATUS
The Community Development. Credit Enhancement and Regulatory
Improvement Act of 1993 (S.1275) would permit the Secretary of
Labor, in consultation with the Secretary of the Treasury, to
revise pension laws to permit pension fund investment in a small
business loan secondary market.
DISCUSSION
* Should federal guidelines be established to encourage pension
fund investment in small business loan pools and in venture capital
companies investing in small businesses?
* Should the federal and/or state governments issue guarantees or
insurance bonds for pools of small business loans to encourage
pension fund investment?
* To facilitate pension fund investing, should pension laws be
simplified? Should incentives for investments be created?
* Should a federally sponsored information data base on small
business lending and investing be created to encourage and help
ensure prudent investing by pension plan administrators?
* Should Congress amend the U.S. tax code to permit pension funds
to extend credit to small businesses as well as to permit pension
funds to receive operating income from small business investments
without incurring "unrelated business taxable income?"
* Should Congress grant preferential capital gains treatment on
pension fund distributions to retirees for that portion of the
pension fund invested in stock of qualifying small businesses?
Secondary Markets/Securitization
Should Congress establish or encourage the establishment of a
secondary market system for small business loans?
BACKGROUND
Secondary markets and securitization have been in use for a number
of years, particularly in the home mortgage, car loan and credit
card receivables industries. A loan-making institution sells loans
it has originated to an intermediate bundler of loans. The bundler
packages loans and resells the bundle on the secondary market. From
the proceeds of the sale, the originating financial institution is
able to make more loans.
Secondary markets have proven to be extremely successful in certain
financial areas. For small business loans, a viable secondary
market has been much more difficult to implement. Rarely are small
business loans uniform. They are also generally perceived to be
riskier than other types of loans.
The U.S. Small Business Administration has been successful with the
securitization of loans made through its guaranteed loan program;
however, these loans come with the federal government's guarantee.
To promote a viable secondary market for small business loans, many
laws would need to be amended, including tax, banking, securities
and pension plan/labor laws.
STATUS
The 103d Congress has considered a variety of legislative measures
with respect to secondary markets for business loans. Some bills
would create a government-sponsored entity to facilitate a
secondary market. Others would change tax, banking and securities
laws, and allow a secondary market to develop through private
sector initiatives.
The proposed Community Development, Credit Enhancement and
Regulatory Improvement Act of 1993 (S.1275) contains provisions for
private sector initiatives to develop a small business loan
secondary market.
DISCUSSION
* Would a secondary market eventually generate considerable amounts
of capital for small business lending?
* Standardization of small business loans could have a negative
effect on small business lending. Would development of a secondary
market encourage financial institutions to make only loans that are
saleable on the secondary markets?
* A government-sponsored entity would require taxpayer funds for
initial startup. Private sector initiatives would allow a market to
develop at its own pace. Should a secondary market system for small
business loans be in the form of a government sponsored entity such
as the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac) or should it
be established by the private sector?
Securities and Exchange Commission Issues
Should the Securities and Exchange Commission (SEC) consider
further initiatives to facilitate access to the public markets by
small businesses?
BACKGROUND
The Securities and Exchange Commission (SEC) has recently
promulgated final rules that will enable small businesses to gain
access to the capital markets with greater ease. Historically,
small businesses have had difficulty obtaining equity capital. The
high costs of entering the public market, together with loss of
control of the company, discourage many small business owners from
seeking equity capital. The SEC reforms were designed to make the
process of going public less costly and burdensome for small
businesses. The reforms are as follows:
Regulation A, an exemption from the registration requirements of
the Securities Act of 1933, now may be used to raise up to $5
million in a 12-month period for a small business issuer. The Small
Corporate Offering Registration (SCOR) form--in a
question-and-answer format--is currently being used by many states
and can be utilized as the disclosure document for Regulation A
offerings. The small issuer is also able to "test the waters" for
investor interest through broadcasts, advertisements and general
mailings before deciding whether to incur the costs necessary to
offer these securities.
The exemption provided by Rule 504 of Regulation D permits an
issuer to sell up to $ 1 million in securities in a 12-month period
with no restrictions or conditions. In addition, for small busi-
nesses interested in going public, the SEC has implemented a
simplified registration and reporting system available to issuers
with less than $25 million in revenues and less than $25 million
public float.
Of concern to a number of small companies is a recent proposal by
the Financial Accounting Standards Board to revise the accounting
rules for incentive stock options (ISOs). The proposed rules would
require the reporting of stock option grants as a charge again ,t
earnings and the disclosure of the effect of options on net income.
Since stock options are used by some small companies, some believe
that the effect of the reporting and disclosure requirements would
be to harm emerging and high-growth companies. Others believe that
without the accounting of possible future expenditures by
companies, the confidence of small business investors will be
affected.
STATUS
The SEC's final rules for its small business initiatives were
published August 13,1992 and May 14, 1993 (57 Federal Register
36442 and 58 Federal Register 26509).
DISCUSSION
* Should the SEC and the state securities commissioners coordinate
securities regulations to simplify registration and reporting
requirements for small corporations?
* Should the SEC adopt new rules or revise current rules to make it
easier for small businesses to issue unregistered offerings in a
single state or in regional markets and to facilitate secondary
markets for small business stock? * If enabling legislation is
adopted, should the dollar limits of Regulation A and Rule 504 be
raised to make it easier for small businesses to raise capital?
Should certain high technology industries be permitted to have
higher dollar limits under these or other exemptions?
* Should Congress pass legislation directing the SEC to draft
regulations to continue current accounting procedures for incentive
stock options?
Securities Laws
Should federal and state securities laws be changed to help small
companies gain access to the public markets and to facilitate a
secondary market for the stocks? If so, how?
BACKGROUND
Currently, most small corporations must comply with both federal
and state securities laws. Small companies seeking investors from
several states must comply with many complex registration and
reporting requirements. In recent years, many states have adopted
the small corporate offering registration (SCOR) form, which
simplifies the registration and reporting requirements. The Secu-
rities and Exchange Commission (SEC), as a result of recent
amendments to its Regulation A exemption, permits companies to use
the SCOR format for offering documents used in that exemption. Not
all of the states have adopted uniform laws in using the SCOR form,
and small companies still face complicated state and federal
requirements.
STATUS
The Small Business Incentive Act of 1993 (S.479) was passed by the
Senate on November 2,1993. The bill, which proposes to expand SEC
small business initiatives, has been referred to the House for
consideration.
DISCUSSION
* Should the delineation between federal and state securities laws
be better defined?
* What should the roles of the SEC and the state securities
commissioners be with respect to small business public offerings
and small business securities markets?
* Should state securities commissioners have complete jurisdiction
for public companies having less than $10 million in assets?
* Should Congress grant preemptive powers to the SEC over the
states with regard to small business public offerings or small
business securities markets?
* Should the SEC and the state securities commissioners, in a
cooperative effort, establish a small business disclosure document
to be reviewed by only one regulator?
* Should regional regulators be appointed, either by the federal
government or through state cooperative efforts, to govern small
business securities transactions?
* Current laws substantially limit the ability of small businesses
to seek investors, especially from metropolitan areas close to
state lines. Should regional or metropolitan markets be established
to facilitate initial public offerings and to create a liquid
secondary market for small business stocks?
* Once a small business stock is sold through an initial public or
exempt offering, it is difficult to trade eligible stocks on a
secondary market. Should incentives be given to broker/dealers or
to specialists to help foster a secondary market for small business
stock? Should the incentive be in the form of a tax incentive?
* An exemption on private placement offerings enacted in the
Investment Company Act of 1940 permits offerings to no more than
100 smaller sized investors. Should Congress change this provision?
If so, how?
Small Business Administration 7(a) and 504 Loan Programs
Should the SBA's 7(a) and 504 loan programs be changed?
BACKGROUND
Through its loan programs, the U.S. Small Business Administration
guarantees bank loans to small businesses that the banks would not
make on their own. Small businesses that need capital but do not
have a credit history or that are involved in a volatile market
might qualify for the program.  Lenders that would not qualify a
small business for a traditional loan may seek to have a portion of
the loan guaranteed by the SBA.
The most popular program is the Guaranteed Loan Program. The
current rate of guarantee in the loan program varies from 70 to
90 percent of the loan, depending on the loan size and term. The
maximum loan amount to any small business concern is set at
$750,000.
The SBA's 504 Loan Program provides long term, fixed-asset
financing through Certified Development Companies to further job
creation or community development. The 504 financing provides 40
percent of the financing package, while the private lender
contributes 50 percent and the small business concern supplies the
remaining 10 percent. Financing packages can fund up to $2.5
million in capital for a small business.
STATUS
Legislation was enacted in August 1993--the Small Business
Guaranteed Credit Enhancement Act of 1993 (Public Law 103-81)--to
increase the appropriation for the SBA's 7(a) Guaranteed Loan
Program to almost $8.5 billion and for the SBA's 504 Program to 1.2
billion for fiscal year 1994. The law also changed the guarantee
rate on some types of 7(a) guaranteed loans.
Discussion
* If the SBA were able to guarantee pools of small business loans,
the pool could be sold on the secondary market or to pension
investment companies. Should the SBA guarantee expanded to include
pools of small business loans, and not just individual loans?
* The SBA loan guarantee has typically be granted to small
businesses that are unable to obtain capital from traditional
sources.  Should the SBA target specific industries or geographic
areas that have a history of problems gaining a capital?
* Should the maximum level of funding by the SBA in its loan
programs, currently $750,000, be increased? If so, what should the
limit be?
* With the recent enactment of the Small Business Guaranteed Credit
Enhancement Act of 1993, the guarantee rate on some 7(a) loans has
changed and a marketing fee on some sales in the secondary
market of SBA guarantees has been established. Should additional
changes be made to the program?
Venture Capital: Alternate Sources of Financing
Should Congress enact legislation to encourage private investors
and/or private and public pension funds to invest in small
businesses or small business loan pools?
BACKGROUND
During the past several years, institutional venture capital
investments in small businesses have declined from a total of $4.2
billion in 1987 to just over $1 billion in 1991. The investments
recovered partially, to $2.5 billion in 1992 and 1993. The decline
has been attributed in part to the recessionary climate and to a
shortage of willing investors. The U.S. Small Business
Administration's Small Business Investment Company (SBIC) Program
experienced a downturn in venture capital investments as well.
 Less information is available on individual investors in small
businesses--"angel capital." It is estimated that, in the early
1980s, angel capital invested more than $55 billion in small
business ventures. This amount is estimated to have decreased by
more than 50 percent by the early 1990s.
STATUS
The Small Business Credit and Business Opportunity Enhancement Act
of 1992 restructured the SBIC program. The U.S. Small Business
Administration published final rules for comment on August 5, 1993.
The proposed National Competitiveness Act of 1993 would establish
a government venture capital program for high technology companies
modeled on the SBIC program.
The Omnibus Budget Reconciliation Act of 1993 provides a capital
gains exclusion for investment in qualifying small business stock
by individual investors and a 50-percent exclusion on gains from
the sale of qualified small business stock held tow five years.
DISCUSSION
* Should Congress enact legislation to increase participation by
investment companies in small firms and in the creation of a
secondary market for small business loans?
* Should Congress relax provisions in the Internal Revenue Code
that restrict the use of debt instruments by private pension funds
to invest in small businesses or small business loan pools? Such
restrictions have caused pension funds to incur unrelated business
income tax.
* Should Congress pass legislation creating incentives for public
and private pension funds to invest more venture capital in small
businesses?
* Should investment tax credits for equity investments be reviewed
as an alternative to traditional debt-based financing?
* Should SBICs be established to focus on specific industries or
geographic areas?
* Should royalty or profit-sharing mechanisms be established to
encourage venture capital investments?
* Should the capital gains exclusion be increased? Should the
exclusion be greater for seed capital investments held for more
than 10 years?
* Should a rollover of capital gains tax incurred be permitted for
investors who sell existing investments and reinvest in qualified
small companies?
Community Development
One of the most challenging problems the business community is
likely to face in the next decade is the revitalization of
America's economically depressed communities. If economic vitality
is to be restored to urban and rural areas, small businesses must
play a leading role in this effort.
Empowerment zones and related state and local programs are designed
to serve as catalysts to community revitalization. Economic renewal
for the remaining part of this decade and beyond will depend
largely on our ability to develop creative solutions to the most
vexing problems facing our communities today--the downsizing of the
defense industry, crime, substance abuse and the decaying
infrastructure.
Government policies and programs that encourage access to procure-
ment opportunities, enhance technology transfer and stimulate
rather than inhibit entrepreneurship and small business growth will
help address some of these problems. However, the final answers
must come from the communities themselves. Many in the small
business community, as influential actors on the local level, are
uniquely positioned to help resolve the crises faced by many of our
nation's communities.
For related information, see sections on Availability of Capital,
p. 18; Encouraging Diversity in Small Business Ownership, p. 45;
Substance Abuse, p. 53; Work Force Skills, p. 54; Access to
Procurement Opportunities, p. 62; Home-Office Deduction, p. 84; and
One-Stop Information Centers, p. 99.
Community Development
Financial Institutions
Should the federal government implement a network of community
development financial institutions to help promote growth in
historically underserved areas?
BACKGROUND
Currently, four entities provide capital and technical assistance
to historically underserved areas of the country: community
development banks, community development credit unions, micro-loan
funds and community development loan funds (also referred to as
community development revolving loan funds).
Community development banks are federally insured and regulated
depository institutions. Community development credit unions are
also federally insured and regulated; in addition, they have access
to the community development revolving loan program for credit
unions, which provides financial and related services to residents
and communities. Micro-loan funds are private entities funded by
either government agencies or loans from financial institutions.
Most have focused on lending to women and minorities in lower
income areas. Community development loan funds are private
intermediaries that reinvest funds from social and institutional
investors in lower-income communities.
Many traditional financial institutions also target lending to
communities--directly or through community development
institutions--under the provisions of the Community Reinvestment
Act.
STATUS
The Community Development, Credit Enhancement and Regulatory
Improvement Act of 1993 (S.1'75) and the Regulatory Reform Act of
1993 (H.R.3474) seek to establish a community development financial
institutions fund. Community development financial institutions
would be able to obtain federal matching funds to lend to busi-
nesses in economically distressed areas.
DISCUSSION
* If the federal government implements a community development
financial institution system, should the system be developed using
existing financial institutions?
* What, if anything, should be done to facilitate and improve
education, training and technical assistance for small businesses
to help them become more creditworthy?
* Should the Community Reinvestment Act requirements of financial
institutions be included in any initiatives for community
development?
* Should Congress address issues of redlining and diversification
with respect to small business lending? If so, how?
Community Revitalization
What role should the federal government play with respect to new
and expanding small businesses in distressed communities?
BACKGROUND
Throughout the nation there are many economically depressed areas--
communities experiencing a lack of access to capital, inadequate
infrastructure and a fundamentally untrained work force. Small
businesses are vitally important to these communities for jobs, tax
revenues and investment.
Currently, federal initiatives focusing on specific problems of
economically depressed communities are underway in the U.S.
Departments of Agriculture, Commerce, and Housing and Urban Devel-
opment, and the U.S. Small Business Administration (SBA). In
addition, many state and local governments have programs targeted
for distressed communities. Some of these programs are coordinated
with the federal programs; many operate independently of other
efforts.
A key difficulty in addressing the problems of distressed
communities is the wide variation in the problems to be addressed.
Each distressed community is unique, with its own strengths and
weaknesses, making it impossible for any broad-based initiatives to
effectively address every community's needs. An example of this is
the vast difference between rural and urban distressed communities.
Rural communities typically lack effective sources of communication
and in some instances lack a strong infrastructure, while urban
distressed communities are more susceptible to crime and violence.
As the needs of distressed communities are different, so are the
needs of the small businesses located within them. Small businesses
in distressed communities face a variety of problems that can
inhibit their survival and growth, among them, lack of access to
capital or an adequate labor force, poor general quality of life
(including the lack of an adequate infrastructure), and all too
often a patchwork of inconsistent and confusing government programs
and initiatives.
STATUS
The Intermodal Surface Transportation Efficiency Act of 1991
(ISTEA) was enacted "to develop a National Intermodal
Transportation System that is economically efficient,
environmentally sound, provides the foundation for the Nation to
compete in the global economy and will move people and goods in an
energy-efficient manner." The law authorized more than $155 billion
between 1992 and 1997 for highways, research, highway safety and
mass transportation.
The Community Development, Credit Enhancement and Regulatory
Improvement Act of 1993 (S.1275) and the Regulatory Reform Act of
1993 (H.R.3474) seek to establish a community development financial
institutions fund. Community development financial institutions
would be able to obtain federal matching funds to lend to
businesses in economically distressed areas. The House of
Representatives passed the Regulatory Reform Act of 1993 in
November 1993.
Title XIII, Subchapter C, of the Omnibus Budget Reconciliation Act
of 1993 (OBRA) authorizes the establishment of nine "empowerment
zones" and 95 "enterprise communities." Tax incentives and grants
are extended to businesses located in these areas.
The U.S. Department of Agriculture's Rural Development
Administration is currently revising its programs to facilitate
access to capital for rural small businesses.
In addition, the banking regulators, on December 21,1993, published
in the Federal Register proposed regulations to revise the criteria
for the Community Reinvestment Act (CRA). The proposed rules would
provide greater access to and information on small business
lending. Small financial institutions would have the opportunity to
use a streamlined CRA compliance procedure.
DISCUSSION
* What initiatives should be enacted by federal, state and local
governments to help facilitate access to capital for small
businesses located in distressed communities?
* Should legislative initiatives that target specific problems of
distressed communities, like the Community Development, Credit
Enhancement and Regulatory Improvement Act of 1993 (S.1275), be
enacted or should more comprehensive legislative initiatives be
sought?
* Should laws such as the Community Reinvestment Act--which
requires financial institutions to invest in their surrounding
communities--be more vigorously enforced to reduce redlining?
Should incentives be granted to financial institutions and
insurance companies to encourage greater involvement in distressed
communities?
* What incentives, other than tax incentives, might be considered
to attract and keep businesses in empowerment zones and enterprise
communities?
* How should federal government programs-- specifically the SBA's
Small Business Development Center Program, the programs of the U.S.
Department of Agriculture's Rural Development Administration (RDA),
and the U.S. Department of Commerce's Economic Development
Administration (EDA) and Minority Business Development
Administration--be structured to help small businesses in
distressed communities?
* Currently, the SBA, the EDA and the RDA have micro-loan programs.
What, if anything, should be done to facilitate or improve
micro-loan assistance to small businesses?
* What is the best means to provide expert technical assistance to
small businesses in distressed communities?
* Should the role of certified development companies be expanded?
* What might be done to provide more effective education and job
training programs in distressed communities? How should these
programs incorporate the unique characteristics of the individual
distressed communities?
* What legislative or private sector initiatives should be
undertaken to stimulate job creation by small businesses in
distressed communities?
* How should federal, state and local governments coordinate
initiatives to build or rebuild the infrastructures of distressed
communities? What, if anything, can be done to provide a safe and
reliable transportation system?
* What, if anything, can be done to provide a safe and drug-free
workplace?
* What is the best means to establish or to expand advanced
telecommunications systems for small businesses in distressed
communities?
* What education initiatives can be put together by federal, state
and local governments to ensure literate and trainable employees?
* What is the best means for federal, state and local initiatives
to recognize the cultural diversity of distressed communities?
* Should federal, state and local governments be required to
coordinate initiatives and programs for distressed communities?
Should existing programs and policies be made more consistent and
comprehensible to small businesses located in distressed
communities?
* What should be done to encourage the establishment of
public/private partnerships with respect to small businesses
located in distressed communities? Should more private/public
sector initiatives such as small business incubators and mentorship
programs be developed for distressed communities?
Crime/Violence in the Workplace
How does crime and violence affect small businesses and what steps
can be taken to reduce this threat?
BACKGROUND
Whether it is shoplifting, vandalism, assault, armed robbery or
even murder by disgruntled employees or customers, small business
owners are being victimized by crime. According to a recent survey,
an estimated 2.2 million Americans were physically attacked in the
workplace during 1992. Moreover, murder is now the third leading
cause of deaths in the workplace--trailing only motor vehicle and
machinery accidents--according to the National Institute for
Occupational Safety and Health. In a recent survey of small
business merchants located in high-crime areas of the District of
Columbia, nine out of every 10 business owners had been victims of
crime. In addition to physical violence, crime can result in an
increase in insurance premiums tow business owners. Estimates of
the annual cost of crime are as high as $425 billion.
STATUS
In response to the increasing threat of crime and violence, small
businesses are being forced to direct resources to anti-crime and
security devices. Small businesses are also working with law
enforcement agencies in developing strategies to fight crime and
violence against business establishments. In the District of
Columbia, police are providing businesses with electronic
eavesdropping equipment to combat shoplifting and robbery.
DISCUSSION
* How does the threat of crime affect efforts to revitalize
economically depressed urban neighborhoods?
* How does the fear of crime and violence affect employee morale
and productivity?
* Should the Justice Department undertake initiatives to fight
crime in the workplace?
* Should business owners be allowed tax credits for installing
security devices?
* How can local law enforcement agencies work cooperatively and
effectively with the small business community to reduce crime?
* What steps can small business owners take to improve security in
their workplaces?
* Are "hate crimes" a significant problem, especially for minority
business owners?
Defense Economic Conversion
Should the federal government help small businesses make the
transition to a post-Cold War period, as defense installations are
closed and defense industries downsize? If so, how?
BACKGROUND
Both the private sector and government are grappling with ways to
ease the conversion from military to commercial markets that many
defense related firms are facing. Both large and small businesses
that have depended on defense contracts are severely affected by
defense downsizing.
Statistics on small business in the defense industry are limited,
but the Office of Technology Assessment (OTA) estimates that
one-third of the total amount purchased by the U.S. Department of
Defense (DOD) from private businesses comes from small business.
Total DOD awards to small businesses--the sum of prime contracts
and subcontracts--was about $46 billion to $48 billion annually in
the five years from 1986 through 199 35 to 37 percent of DOD awards
to U.S. businesses.
In addition to the small businesses engaged in defense-related
work, there are thousands of other small firms that depend on the
military, such as service and retail businesses located in communi-
ties with concentrations of defense-related employment or in
proximity to military bases.
Firms of all sizes are coming to the realization that there is
little likelihood of big markets for many defense products and
services for years to come. The basic strategies that companies are
adopting include concentrating on their core defense capabilities
through acquisitions and mergers, streamlining their operations,
shedding unprofitable defense business segments, increasing exports
and diversifying into new markets.
Problems likely to prove particularly troublesome for
defense-related smaller firms can be expected to manifest
themselves in several areas:
Management: Compared with large firms, small businesses have
limited resources and personnel devoted to management functions.
Information: Access to information on the defense market,
alternative markets, technology and business assistance programs
will be essential to successful adjustment.
Technology Transfer: Many high-technology firms in the defense
industries will face a choice between adapting their defense
technologies to commercial uses or forfeiting valuable assets. Lim-
ited experience in managing the undertaking, large cash flow
requirements and the lengthy process needed to develop, patent and
market technological innovations can be serious barriers to
successful technology transfer.
Marketing: For many small businesses, the adjustment to reductions
in defense outlays is marketbased rather than product- or
technology-based.
According to a DOD report, successful diversification requires
achievement of at least five conditions: (1) top management
involvement in the diversification project; (2) transfer of the
defense industry firm's unique technology to civilian production;
(3) extensive market research; (4) acquisition of new, skilled
technical and marketing personnel; and (5) commitment and capital
to pursue the conversion project for up to 10 years.
STATUS
The federal government provides various types of assistance to
small firms attempting to adjust from defense-related production to
the civilian marketplace. These programs include: the Small
Business Administration's loan guarantee and business development
programs; the U.S. Department of Commerce, Economic Development
Administration's grant assistance and National Institute of
Standards and Technology programs; the Department of Labor's
Economic Dislocation and Worker Assistance Act job training
assistance; Export-Import Bank assistance; and the Small Business
Innovation Research grant programs run by individual federal
agencies.
DISCUSSION
* Do defense businesses have unique needs that are not being met by
existing government programs? What should be done to meet those
needs? Who should deliver the services--the federal government,
state and local governments, the private sector?
* Should funding and other types of support be targeted to selected
regions?
* Should federal sources provide the information, coordination and
resources necessary to facilitate the development and
implementation of innovative state, regional and local efforts? If
so, how?
* How do the antitrust laws benefit or impede small firms in this
effort?
* Should the government be in the business of providing direct
training assistance or should it spend dollars to create
opportunities to allow employers to determine the most effective
means to employee training?
* Should the government assist the community generally, as well as
small businesses, when a military base closes? If so, how?
Franchising
Should Congress pass legislation to encourage the growth of small
franchisors and franchisees within the franchising industry? If so,
how?
BACKGROUND
During the past decade, franchising has become more affordable for
entrepreneurs and has expanded into many different business areas.
No longer limited to the food services area, many franchise
opportunities are available in industries such as preschool
education, maid services, computer sales and servicing, and
construction contracting.
In 1990, there were 533,000 franchised establishments, up 35
percent from 1970. Small franchise companies--those with fewer than
10 franchisees-- are the fastest growing segment of the franchise
sector. Between 1978 and 1986, the number of these firms increased
by 143 percent, from 304 franchisors to 739; their sales grew by
2,700 percent.
Franchising has been largely unregulated except for federal
anti-fraud statutes enforced by the Federal Trade Commission and
state anti-fraud statutes. Recently, however, states have begun to
take a more active role in pursuing abuses in franchising.
Areas of the franchise sales process needing improvement, according
to some franchise participants and experts, include the cost burden
of regulation, the availability of financial information, the
limited resources for enforcement of regulations and the
non-uniformity of state disclosure rules.
STATUS
Recently, the state of Iowa enacted legislation that establishes
disclosure guidelines for franchisors along with strict anti-fraud
measures. Other states are considering similar legislation.
Legislation introduced in the 102d and 103d Congresses sought to
mandate disclosure requirements for franchisors and would provide
for protection of franchisees when a franchise is terminated. No
action was taken on the proposed legislation. Legislation proposing
additional disclosure requirements tow franchisors was introduced
in the 103d Congress and hearings were held by the House Committee
on Small Business.
DISCUSSION
* Should additional franchisor disclosures be implemented, even if
they add additional costs to the transaction? If so, which?
* Should a federal preemptive statute be enacted to eliminate the
state patchwork of laws on franchising--and possibly increase the
potential for franchising expansion?
* Should the government take any initiatives to encourage small
business franchises? If so, what?
Homebased Business
Should the federal government encourage homebased business
ownership? If so, how?
BACKGROUND
Homebased businesses offer important contributions to communities
and the economy. They serve as incubators for new businesses, allow
inexpensive testing of new products, provide jobs to those who
might otherwise be unable to work because of physical limitations
or household responsibilities, and purchase billions of dollars
worth of computer equipment, office supplies and business services.
Homebased business owners are often selfemployed individuals who
operate a business or profession primarily from a home office,
while telecommuters are employees who do office work at home during
normal business hours.
According to a 1990 proprietary survey, there are approximately 7.4
million home business owners, including those with a side business,
and 7.2 million freelance workers--a total of 14.6 million
homebased business persons out of a work force of 122.7 million.
A number of unresolved policy questions affect homebased
businesses:
There is no formal definition of "homebased businesses." They may
be sole entrepreneurships or virtual joint ventures; they may
employ one or more workers; their owners may do intermittent work
or may work full time, part time, or overtime.
The Internal Revenue Service and the U.S. Department of Labor have
different regulations governing worker classification.
The question remains open whether U.S. Department of Labor and
Environmental Protection Agency regulations should apply to home-
based businesses.
The U.S. government and several major industries are in the process
of downsizing and contracting out, encouraging product development
through teaming or joint ventures in virtual corporations.
Homebased businesses are well positioned to take on this work, but
government regulations inhibit companies from sharing new product
development ideas.
Local zoning laws with respect to homebased businesses vary across
jurisdictions.
STATUS
On January 12,1993, the U.S. Supreme Court ruled that taxpayers
could not write off their home office expenses if they spend more
time and do more important parts of their business activity outside
of their homebased office. The ruling leaves open the question of
deductibility for homebased businesses involving consultants,
independent contractors, repair people, some doctors and others in
service businesses. (For more information, see the Home Office
Deduction discussion.)
DISCUSSION
* How do federal, state and local laws affect homebased businesses?
Should laws that place broad restrictions on homebased businesses
(such as hiring restrictions) be revised?
* Should the definition of homebased business be standardized? If
so, what should it be?
* Should an effort be made to coordinate Internal Revenue Service
and U.S. Department of Labor regulations governing worker
classification?
* How should homebased businesses be categorized for environmental
and other regulatory purposes?
* Should regulations governing new product development be relaxed?
If so, how?
* Should national standard zoning guidelines be developed with
respect to homebased businesses?
* Should incentives be offered to encourage the startup and growth
of homebased businesses?
Rural Development
Should new efforts be initiated to stimulate the development of
small businesses in rural areas?
BACKGROUND
Economic expansion in rural America depends upon the creation and
growth of small businesses, which create jobs and stimulate
economic development.
Two trends are shaping the rural America of the 1990s: the
long-term move away from natural resource "extractive" industries
and the increasing competition in international markets. Both
trends have tended to draw industry away from rural locations.
STATUS
The 1990 farm bill established the new Rural Development
Administration in an effort to shift the rural focus from
agriculture to rural development. The legislation also prompted the
establishment of the National Initiative on Rural America and the
creation of state rural development councils, which currently
operate in 38 states.
DISCUSSION
* Should more investments be made in rural roads, bridges, water
and waste removal systems to encourage business development? If so,
how can such infrastructure investment be stimulated?
* Should government programs target more capital and credit to
small businesses in rural areas? Should the Community Reinvestment
Act be revised to encourage banks to be more receptive to small
business credit needs, especially in rural areas?
* Should federal funding link job creation with a job training
strategy that would encourage rural youth to stay in their
communities?
* Should the state rural development councils' role be expanded?
SBA Micro-Loan Program
Should the U.S. Small Business Administration's micro-loan program
be made permanent?
BACKGROUND
The SBA's Micro-Loan Demonstration Program is a pilot program
designed to make loans through intermediaries to very small
businesses in economically depressed areas of the country. In
addition, the program offers grant monies to qualifying entities
that offer technical assistance to small businesses. Loans by
intermediaries are short-term with fixed interest rates. The loans
may be for as much as $25,000; the average loan is $7,500. The
grant monies provide marketing, management and technical assistance
to low-income individuals who are otherwise unable to obtain
private sector financing for their small businesses.
The program was first implemented in 1992 and issued loans to 45
intermediary lenders. The program was expanded by the Small
Business Credit and Business Opportunity Enhancement Act of 1992,
which permitted the SBA to make loans to up to 110 intermediaries.
STATUS
The Micro-Loan Demonstration Program is scheduled to sunset in
1996.
In addition to SBA's micro-loan program, other federal micro-loan
programs exist within the U.S. Department of Agriculture's Rural
Development Administration (RDA) and the U.S. Department of
Commerce's Economic Development Administration (EDA).
DISCUSSION
* Should appropriations for the intermediary grants be increased to
provide for more technical assistance to small businesses? Should
rural intermediaries be eligible to subcontract out the technical
assistance in areas where their resources must be spread over a
wide area?
* Should the micro-loan program be changed from its current status
as a direct lending authority program to a loan guarantee program,
thereby enabling the SBA to make more loans to intermediaries,
while reducing the government's costs in administering the loans?
* Currently, the RDA, the EDA and the SBA 311 have micro-loan
programs. What, if anything, should be done to facilitate or
improve micro-loan assistance to small businesses?
SBA Technical Assistance
What can government do to enhance small business development?
BACKGROUND
Nearly all--99.7 percent--of the businesses in the United States
are small businesses. The U.S. Small Business Administration
reports that 54 percent of the private work force was in small
firms in 1990 and that 65 percent of the new jobs created between
1976 and 1990 were in small firms.
Yet a quarter of new businesses disappear before completing their
first two years of operation. Understanding the big picture, as
well as finding solutions to immediate problems, has never been
more important to the survival of new and existing small
businesses.
The SBA has several programs through which it provides business
development assistance to small businesses:
The Business Information Center (BIC) Program offers public
facilities designed to address the needs of the small business
owner/entrepreneur in business planning. BICs are currently located
in Atlanta, Chicago, Houston, Los Angeles, St. Louis and Seattle.
Information is available from a variety of sources, including a
reference library, video and audio cassettes, electronic bulletin
boards, computer simulation models and computerized templates and
spreadsheets. In-house business counseling is also available.
The Small Business Development Center (SBDC) Program was
established by Congress in 1980 to make management assistance and
counseling widely available to existing and prospective small
business owners. The 1986 White House Conference on Small Business
recommended strengthening the SBDC program. The SBDC program cur-
rently has 56 primary centers and 935 subcenters. A total of $67
million was allocated in fiscal year 1993, and the same amount has
been requested for fiscal year 1994. In 1992,222,497 clients took
advantage of SBDCs, and more than 319,000 people attended SBDC
training programs. The SBDC program is a cooperative effort of the
private sector, the educational community, and federal, state and
local governments.
The Service Corps of Retired Executives (SCORE) matches retired
business executives--volunteers-- with business owners seeking
advice on how to operate their businesses more effectively. SCORE
volunteers are members of 390 locally organized, self-administered
chapters offering services in more than 700 locations throughout
the United States, Puerto Rico and the U.S. Virgin Islands.
Approximately 12,500 men and women business executives, whose
collective experience spans the range of American enterprise, share
their management and technical expertise with small business owners
and prospective entrepreneurs. SCORE has permanent authorization
and was funded at $3.9 million in fiscal year 1993 and at $3.5
million for fiscal year 1994.
STATUS
The U.S. Congress is considering "competitiveness" legislation
(H.R. 820 and S.4) which would add to the network of technical
assistance centers experts who could help small businesses adopt or
use new technologies. The legislation also would provide grants and
loans to businesses for developing new manufacturing technologies.
As part of the implementation of empowerment zones under the
Omnibus Budget Reconciliation Act of 1993, the SBA has proposed to
establish one-stop capital shops in each empowerment zone. These
shops would work with state, local and private sources to offer a
broad range of information services and technical assistance on
gaining access to capital.
DISCUSSION
* Should new, cutting-edge opportunities be created to help small
business owners cope with shrinking markets, technologies and
production requirements?
* Is the SBDC program effectively meeting the management problems
of small business? Should it be strengthened?
* SCORE volunteers of ten express concern that their activities are
limited because of a lack of funds. Should SCORE receive additional
funding to improve its support for small businesses?
* Staying on top of business responsibilities and rights with
respect to the environment, public health and other issues is a
constant challenge for small businesses. How can complete, accurate
and current information be accessed by small business owners so
that they can manage their businesses effectively and profitably?
Environmental Policy
Environmental protection has become a major concern in recent years
because of an emerging environmental ethic in the business
community as well as among the public at large.
Environmental laws enacted by federal, state and local governments
have brought improvements in environmental quality and economic
opportunities for some businesses. However, regulatory laws have
sometimes had a negative economic impact on the small business
community, slowing productivity and job creation and costing well
over one hundred billion dollars annually.
Federal policy must set the importance of environmental concerns in
balance with the needs of the small business community, a sector
particularly vulnerable to burdensome environmental regulatory
requirements because of more limited resources.
For further information on environment-related topics, see Small
Business Size Standards and Critical Technologies.
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Cost-Effective/Efficient Environmental Protection
What approaches should be implemented to achieve cost-effective and
efficient environmental protection?
Background
Environmental protection (such as that required under the Clean Air
and Clean Water Acts and the Endangered Species Act) is performed
almost exclusively by command-and-control regulations, by which the
government dictates specific behavior or equipment to meet a
government-prescribed standard.  This method is used in
implementing land use prohibitions, as well as permitting
requirements for protecting wetlands and endangered species.
Small businesses support cost-effective and efficient environmental
protection.  Some small businesses, especially in the environmental
technology industries, have benefited from the current
environmental approach.  However, many small firms are subject to
burdensome requirements, the costs of which may not be adequately
considered by governmental regulators during  the process of
establishing acceptable pollution levels.
It has been argued that the command-and-control approach is
inherently inefficient and ill-suited for environmental protection.
Critics of this approach say that inflexible rules can be imposed
from a central location by regulators who often have insufficient
information to accurately determine the least costly means of
achieving the optimal level of environmental protection for a
specific location.
Status
In its National Performance Review, the Clinton Administration
recommended pollution control improvements.  The recommendations
were to streamline the permitting process, eliminate duplicative
regulations and encourage market-based approaches, such as tradable
pollution rights.
Discussion
Measures that could be considered to make environmental protection
more efficient and cost effective include the following:
* Mandating that good science, realistic risk assessments,
comparative risk assessments, net health analyses and cost/benefit
analyses be used in drafting environmental rules and legislation.
* Establishing a Bureau of Environmental Statistics to permit
accurate measurement and assessment of environmental quality and
the effects of environmental regulation.
* Mandating that environmental requirements be established by an
independent, objective body only after assessing the tangible,
measurable public health or environmental harm caused by the activ-
ity to be regulated; also requiring that the tangible, measurable
benefits of the requirements exceed the costs of those
requirements.
* Relying on market mechanisms, such as using tradable
emissions/discharge permits and privatizing natural resources.
* Using alternative regulatory approaches, such as regulating
through private institutions (for example, relying on industry
self-regulation).
* Expanding and strengthening private property rights.
* Expanding current definitions of "regulatory takings" of private
property--that is, significant reductions in the value of property because
of regulatory restrictions--and shifting from landowners to the government
the burden of proof that land use prohibitions do
not constitute regulatory takings.
* Allowing cross-media permitting--that is, granting permits for
more than one medium (air, land or water)--with greater interaction between
trade associations, industry representatives and government agencies.
* Strengthening the Regulatory Flexibility Act by permitting
judicial review and requiring that the indirect impacts of
regulation be measured.
* Preempting some state and local requirements with federal
requirements.
* Improving communication and feedback between the EPA and industry
throughout the rulemaking process.
* Improving government outreach to small business.
Government Outreach to Small Business
Is there a need for improvements in the communication between
government and small businesses on matters concerning environmental
protection?
BACKGROUND
Small businesses face increasingly complicated and burdensome laws. At the
same time, the government may not be doing enough to ensure that small
businesses understand environmental requirements or to
assist them in complying.
STATUS
On November 15, 1993, the U.S. Small Business Administration and
the U.S. Environmental Protection Agency signed a memorandum of
understanding in which they agreed to work together to "encourage, support
and enable U.S. small businesses to develop, market, and/or adopt cost-
effective environmental (including pollution prevention) technologies to
achieve economic growth and environmental
compliance."
Since fiscal year 1992, the SBA's funding has included between
$400,000 and $500,000 for a demonstration program of research and
technical assistance to small businesses in complying with some of the air
toxics provisions of the Clean Air Act. The project is
being conducted at the University of Northern Iowa.
DISCUSSION
Measures to be considered to improve government outreach to small
businesses include the following:
* Establishing mechanisms for greater involvement of small
businesses in the legislative/rulemaking process.
* Supporting effective outreach to small businesses by EPA regional offices
through trade associations and other outreach vehicles.
* Requiring implementation by the EPA of "one-stop shopping" for
environmental regulatory information for small businesses.
* Greater outreach by the SBA, utilizing small business development centers
(SBDCs) and other organizations.
* Increasing small business awareness of environmentally sound
voluntary pollution prevention practices.
* Supporting better communication about opportunities in the
environmental technology business.
* Supporting additional resources, including funding, for EPA's
Office of the Small Business Ombudsman (OSBO) and increasing OSBO's
visibility within the small business community.
* Providing small businesses with free or low-cost access to
compliance assistance.
Greater Relief from Environmental Regulations for Small Business
Should measures be taken to improve the flexibility of
environmental regulations that apply to small businesses? If so,
what measures should be considered?
BACKGROUND
Small businesses are finding it difficult to comply with
increasingly burdensome environmental requirements. Compared with
large firms, small firms generally have less time and money
available for environmental regulatory compliance and it often
takes them much longer to learn about environmental regulations and to
obtain the financing necessary to comply with them.
A few environmental requirements provide exemptions for small
businesses.
However, the number and scope of the exemptions are often very
limited. For example, small businesses with more than nine
full-time employees must file toxic release inventory (TRI) reports under
certain conditions even when they do not release or transfer any quantity
of a listed chemical from their facility. Also,
exemptions are not always appropriate: being small is no excuse for causing
tangible harm.
Unnecessarily burdensome environmental requirements can be
substantially reduced through increasing regulatory flexibility
toward small businesses. The Regulatory Flexibility Act (RFA)
requires federal agencies to evaluate the effects of their proposed
regulations on small entities and, where possible, reduce any
disproportionate adverse effects.
Administration of the RFA program in the Environmental Protection
Agency is in the Office of Policy, Planning and Evaluation (OPPE). Some
have argued that more objective oversight and administration
might be achieved through the agency's small business ombudsman's
office.
STATUS
In Congress, H.R. 830 was introduced early in 1993 to strengthen
the RFA. The RFA can benefit small firms during the regulatory
process by bringing public scrutiny to bear on specific proposed
regulations. For example, the EPA is considering a petition
submitted by the U.S. Small Business Administration's Office of
Advocacy to exempt facilities that release or transfer 5,000 pounds or less
of a listed chemical from filing TRI reports.
DISCUSSION
Measures to be considered for increasing the flexibility of
environmental regulation may include:
* Greater use of de minimis exemptions--provisions exempting
companies that discharge very small quantities of chemicals.
* Greater use of tiering requirements--allowing more than one
standard depending on the facility's size or the quantity or type
of chemical discharge.
* Greater use of phase-in periods and extended deadlines to allow
time for outreach programs and for small businesses to obtain
required financing.
* Allowing substitution of pollution prevention for enforcement.
* Greater flexibility in enforcement in general.
* Mandating communication packages to communities affected by
environmental regulations.
* Using proactive preproposal discussions.
* Requiring the EPA to implement a consultation program similar to that of
the Occupational Safety and Health Administration.
* Better defining "small business" for purposes of applying
environmental requirements.
* Requiring the EPA, through measures such as a strengthened
Regulatory Flexibility Act, to develop less burdensome regulatory
approaches that achieve statutory requirements.
* Requiring that proposed financial penalties pass a
"reasonableness" test to prevent assessing fines on businesses
making good-faith efforts to comply with environmental
requirements.
* Exploring the concept of substituting innovative penalties, such as
mandatory audits or mandatory hiring of environmental personnel, for the
existing fine scheme.
* Requiring agencies having an independent ombudsman program to
place the administration of the RFA program under the ombudsman.
Impact of Environmental Laws on Access to Capital for Small
Business
What measures should be taken to reduce or eliminate the adverse
impact of environmental laws on access to capital for small
businesses?
BACKGROUND
In recent years, it has been argued that a number of environmental laws
have had an adverse effect on small business access to
capital. Those with the greatest impact so far have been Superfund and the
Resource Conservation and Recovery Act (RCRA). The
Superfund program was created to clean up hazardous waste sites.
RCRA regulates solid waste, especially hazardous wastes, and
imposes technical and financial requirements on owners of under-
ground storage tanks. Environmental laws may have affected small
business access to capital in several ways.
First, investors are increasingly reluctant to invest in small
businesses because increasing numbers of investors have been held
liable for environmental cleanups. Superfund and RCRA contain
exemptions from liability for investors that do not exercise
control over the operations of businesses found liable for
cleanups.
However, over the years, court decisions have substantially eroded these
exemptions, holding investors jointly and severally liable
without showing that the investor exercised control over business
operations.
Second, investment is more difficult since uncertainty resulting
from even potential liability creates an incalculable risk for
investment decision making.
Third, the increasing costs of environmental requirements are
forcing small businesses to divert their limited resources from
generating profits to complying with environmental regulations.
Investors are sometimes reluctant to lend capital to purchase
pollution control equipment since such equipment does not generate revenue.
STATUS
Small business investors, including the U.S. Small Business
Administration, have been affected by environmental laws,
especially by the lack of protection for secured creditors under
environmental laws. This situation has further discouraged invest-
ing in small businesses.
Some attempts were recently made to limit lender liability of
investors. In 1992, the Environmental Protection Agency amended
regulations of the Superfund Act to delineate more clearly when a
secured party would be liable for environmental cleanups, but this change
has had little effect.
Congress is considering limiting lender liability with respect to
environmental laws. Among the bills introduced in the 103d Congress were
the Amendments to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 Act of 1993 (H.R. 2462), and the
Depository Institutions Regulatory Improvement Act of 1993 (S.l 124).
DISCUSSION
Measures under consideration for reducing/eliminating the adverse
impact of environmental laws on access to capital include:
* Making Internal Revenue Service policy consistent with the tax
laws, especially with legislative intent.
* Significantly limiting lender liability.
* Allowing "covenants not to sue" on development projects,
especially for urban redevelopment projects.
* Educating the lending community on environmental requirements for small
businesses.
* Establishing an environmental risk insurance program .
* Providing greater access to SBA loan guarantees for
environmentally sensitive projects.
* Amending lender liability to include reasonable protection for
equity investors who are not involved in day-to-day management of
the business.
Non-Point Sources of Water Pollution
How will regulation of non-point water pollution sources affect
small businesses?
BACKGROUND
Efforts to reduce or eliminate water pollution have so far focused
primarily on "point source" discharges, which are discharges at a
specific single location, such as a pipe. "Non-point sources" are
diffuse sources of pollution that are not regulated as point
sources. Non-point sources are normally associated with land runoff
(agricultural, silvicultural, construction or urban),
precipitation, atmospheric deposition or percolation.
The great attention paid to point sources has significantly reduced point
sources' contributions to water pollution problems. Most
water pollution now originates from non-point sources, and gov-
ernment regulators have recently begun focusing more attention on
them. Section 6217 of the 1990 Coastal Zone Management Act
Reauthorization Amendments required all states with federally ap-
proved coastal zone management programs to submit non-point source
pollution control programs to the U.S. Environmental Protection
Agency and National Oceanic Atmospheric Administration (NOAA) for
approval.
Many small businesses are concerned that the non-point source
provisions in the reauthorization bill are too rigid, complex and
costly to effectively reduce non-point source pollutants. They
believe that non-point source proposals may introduce national land use
planning and intrude in an area traditionally regulated at the state level.
STATUS
The Clean Water Act reauthorization bill attempts to implement a
major regulatory program for nonpoint source water pollution. The
Congress will act on this legislation in 1994.
DISCUSSION
Issues to be considered in regulating non-point sources include:
* Federal land use planning.
* Federal regulation in areas traditionally regulated by the
states.
* Concerns that standards be based on good science and realistic
risk assessments.
* Avoiding takings of private property without just compensation.
(See also the discussion under Cost Effective/Efficient
Environmental Protection.)
Recycling
Are additional measures needed to encourage environmentally sound
recycling?
BACKGROUND
Recycling requirements have created opportunities for some small
businesses in the recycling industry. Recycling is sometimes the
most cost-effective and efficient approach for achieving waste and
pollution reduction. Yet small businesses are sometimes
ill-informed about environmentally sound recycling practices.
Some argue that promotion of recycling through direct government
interventions--for example, by imposing recycling mandates on
industry--can distort recycling markets, cause inefficient
recycling and even sometimes cause greater environmental harm.
Moreover, voluntary recycling by small businesses can be hampered
by burdensome government definitions of solid and hazardous waste.
Regulatory obstacles to on-site treatment and recycling of wastes
can also inhibit small business recycling.
STATUS
Some state and local governments have imposed recycling mandates on
industry. Some in Congress wish to follow suit with nationwide
recycling mandates.
The U.S. Environmental Protection Agency (EPA) recently assigned a task
force the responsibility of modifying its regulatory
definition of solid waste under the Resource Conservation and
Recovery Act (RCRA). This could affect some recycling practices.
The EPA is reforming its regulation of hazardous wastes under
RCRA's Subtitle C. The agency recently established a committee of
environmental, industry, state and federal representatives to
develop hazardous waste regulatory options. This initiative could
affect some recycling practices as well.
Executive Order 12873, signed in October 1993, imposes recycling
mandates on the federal acquisition process.
DISCUSSION
Policies that encourage efficient recycling may include the
following:
* Reforming government regulation of waste handling, especially
hazardous waste. Government paperwork and permitting requirements
for handling waste can discourage market-driven recycling because
of the high costs and liability incurred by parties attempting to
recycle such waste.
* Encouraging local jurisdictions and other parties handling waste
collection to charge a collection fee based on the weight or volume of the
waste collected. Flat-rate fees provide no incentive for
waste generators to separate material for recycling from their
waste streams.
* Eliminating government intervention in the recycling marketplace.
* Providing small businesses with more information on
environmentally sound recycling practices.
* Allowing small businesses to perform on-site recycling of waste
streams in a manner that achieves both reasonable business and
environmental goals.
Reducing Paperwork Required by Environmental Regulation
Should environmental paperwork requirements be reduced for small
businesses? If so, how?
BACKGROUND
The paperwork burdens imposed on small businesses because of
environmental regulation have increased substantially over recent
years. Small businesses may be required to comply with as many as
100 environmental regulations. The limited resources available to
small businesses make it increasingly difficult for them to cope
with the added paperwork burden. Moreover, duplicative forms used
to solicit information about environmental compliance often force
small businesses to answer the same questions repeatedly.
STATUS
The National Performance Review recommended that the U.S.
Environmental Protection Agency's permit program be streamlined in ways
that include establishing a permit clearinghouse to serve as
a single point of contact and piloting a cross-program permit
tracking system. Small business advocates are urging Congress and
the EPA to consolidate paperwork requirements.
DISCUSSION
Measures to be considered for reducing paperwork burdens include:
* Allowing filing by computer.
* Consolidating or eliminating duplicative reporting required by
the EPA and other federal and state programs.
* Strengthening and enforcing the Paperwork Reduction Act.
* Adopting cross-program permitting.
* Allowing greater use of group permitting, such as was utilized in the
storm water permitting program.
* Improving EPA assistance to small businesses in explaining
regulatory requirements and the measures needed for compliance.
* Making guidance documents more readily available.
* Simplifying formats for providing information.
* Mandating that the Occupational Safety and Health Administration (OSHA)
finalize its material safety data sheets (MSDS).
* Standardizing permitting requirements.
* Creating an "emissions bank" that would allow companies to trade
emissions "credits" for offsetting purposes under the Clean Air
Act.
Superfund
How should Superfund be reformed?
BACKGROUND
The Superfund program was created by Congress in 1980 for the
purpose of cleaning up the nation's hazardous waste sites. The U.S.
Environmental Protection Agency was given broad authority to
perform this function. The program established a fund to pay for
the cleanup of these sites. Superfund is financed primarily by
taxes on crude oil, certain chemical feedstocks and an
environmental corporate tax. The fund is used when "responsible"
parties cannot be located or are unwilling or unable to clean up
the site.
However, the ultimate costs of hazardous waste cleanup are borne by anyone
associated with a hazardous waste site. The EPA can require not only a
generator of hazardous wastes, but any transporter of
hazardous wastes to a site, or any past or present owner or
operator of the land on which the site is located, to pay for the
entire site's cleanup costs. This has meant that parties,
frequently small businesses, that had nothing to do with creating
the hazardous waste site, have had to pay the full cost of the
site's cleanup.
A review of the costs and benefits of the Superfund program
indicates the following:
 The EPA is authorized to spend a total of $15.2 billion through
1994 on site cleanup. Superfund accounts for 25 percent of EPA's
budget.
 The EPA recently estimated that the Superfund program will
ultimately cost $27.2 billion. However, the General Accounting
Office has questioned the reliability of EPA's Superfund cost
estimates, projecting that Superfund could cost up to $300 billion.
 Along with questions about cost, there are a number of questions
about the effectiveness of the Superfund program. As of October
1991, about 1,200 hazardous waste sites were scheduled for cleanup. Only 63
sites were cleaned up between 1981 and October 1991.
 Superfund's liability system ensures that the contributions of
various parties toward hazardous waste cleanup stand in little or
no discernable relation to their relative responsibility. Moreover,
responsible parties are frequently required to clean a site to the point
that it is cleaner than the surrounding water and soil. And
even after a wastesite has been removed from the list of sites to
be cleaned up, the EPA can decide to apply a more stringent cleanup
standard in the future and may seek payment from the same parties.
 A survey conducted in September 1993 at the University of New
Hampshire's Center for Venture Research showed that Superfund
liability significantly affects small firms' ability to implement
investment decisions. Nearly 70 percent of the respondents cited
the liability system as Superfund's biggest problem.
STATUS
The Superfund program was last reauthorized in 1990 and is due for
reauthorization in 1994. The Clinton Administration has recognized that
changes in the Superfund program are necessary and has
promised to require polluters to "pay more" of the cleanup costs.
DISCUSSION
Measures to be considered for addressing Superfund include:
* Eliminating retroactive liability prior to January 1, 1987.
* Requiring good science and realistic risk assessments in
assessing hazards from waste sites.
* Requiring action/cleanup decisions to be based upon real risks
only.
* Requiring good science and realistic risk assessments in
establishing cleanup standards. This would include a realistic
consideration of future uses of the site.
* Requiring cost-effective remedy selections that have been
reviewed by objective, independent professionals.
* Eliminating "reopeners"--reopening the remediation process at a
site after it has been closed.
* Streamlining the de minimis/de micromis process--the process
originally intended to provide a quick exit from liability for
waste generators that contributed minimum quantities of waste to a site.
* Opening the de minimis/de micromis process to input from EPA's
small business ombudsman.
* Offering alternative funding strategies for site cleanups.
Tax Incentives for Investing in Pollution Control Equipment
Should tax incentives be available to small businesses for
investing in pollution control equipment or other pollution
reduction measures?
BACKGROUND
Small businesses are finding it increasingly necessary to invest in
equipment or other property to comply with environmental
regulations. Yet pollution control equipment cannot be rapidly
written off under current tax laws, nor are tax credits available
for such investments.
Moreover, American small businesses are finding themselves at a
competitive disadvantage because of disparities between U.S. and
foreign tax policy with respect to these investments.
In Canada, pollution control equipment for air and water pollution can be
depreciated over a three-year period, with 25 percent of the investment
qualifying for a write-off the first year and the
balance written off over the remaining two years. In France,
equipment used to purify industrial water or air or to remove odors
receives a 50-percent deduction in the first year. Structures used to
accomplish these tasks can also be expensed in the first year.
STATUS
On June 17, 1993, legislation was introduced to provide tax
incentives for pollution abatement equipment.
DISCUSSION
* Should tax incentives (deductions, tax credits) be provided for
pollution abatement equipment, remedial costs and/or pollution
prevention/reduction measures? If so, what incentives should be
allowed?
Human Capital
Over the next decade, 85 percent of new workers will be women,
immigrants and minorities. The diversification of the work force is one of
the major factors that will influence American businesses in the 21st
century.
Small and growing companies will also need to offer increasingly
costly employee benefits in order to attract and retain good
employees. Health care coverage, retirement plans, unemployment
compensation, insurance and workers' compensation premiums
constitute a growing portion of employer costs. To alleviate
burgeoning costs, federal and state policymakers are considering
mechanisms that will better enable businesses to offer
comprehensive employee benefits packages.
Finally, small employers and entrepreneurs will need to ensure that they
and their employees are adequately trained to meet the
challenges of the 21 st century marketplace. Serious mismatches
between the needs of employers and skills possessed by the work
force will greatly affect economic productivity and international
competitiveness. A shortage of skilled workers could have a
disproportionate impact on the small business community, which
generally offers relatively lower salaries and less extensive
benefits than larger companies. Smaller firms will be scrambling to compete
for--and train--the best workers in a tight market.
For related information, see Fair Labor Standards Act;
Striker Replacement Legislation; Unfunded Mandates;
and Payroll Tax Reform.
Access to Health Care
Should employers be required to offer and pay for health care
coverage for employees, or should individuals be required to enroll in
health plans themselves?
BACKGROUND
While overall access to health care has improved over recent
decades, the access picture has worsened for many, particularly the poor
and uninsured. Lack of access typically results from economic, supply,
distributional and sociocultural barriers.
Most Americans receive their health care through private insurance or
government programs. However, 38.9 million people--15.4 percent of
America's total population--are uninsured, and many more are
underinsured. While 16.6 percent of the non-elderly population in
urban areas have no health insurance, 34.1 percent of those living in rural
areas are uninsured.
According to recent thinking, affordable health care costs can be
achieved only when universal coverage is achieved. However, the
cost of improving access to health care would depend on the extent and
generosity of coverage, and the health care demands of those
who are unable to pay for coverage.
Many critics fear the creation of new entitlement programs because of the
history of Medicaid, Medicare and Social Security growing
well beyond original financial projections. Some argue that
expanding access may cost the American public more money. Others
believe that health care costs will decrease for most Americans
under universal coverage. Preventive care might be expected to
lower emergency room costs, for example.
STATUS
During the past decade, policymakers have discussed reform efforts that
would improve access to health care. Included in the
discussions about comprehensive health care reform are an employer mandate
to provide health insurance, subsidies and tax credits to
assist businesses in providing coverage, an individual mandate to
obtain health insurance and a government-run health system.
Incremental initiatives that would expand access include tax
credits to assist low- and middle income Americans, private
insurance market reforms and expanded use of medical savings
accounts.
DISCUSSION
* How can the revenues for America's health care needs be raised?
* Should employers be required to provide access to health care
coverage to their workers?
* What are the elements of small-group market reform and what has
been their impact on improving access to health insurance for small firms?
* Who are the uninsured and what can be done to improve coverage
among this population?
* Options include, but are not limited to, the following:
 Implement or phase in universal health care coverage, meaning
coverage would be required for all Americans.
 Implement or phase in universal access to health care coverage,
meaning all Americans would have an opportunity to be covered.
 Adopt incremental initiatives aimed at improving access and
reducing health care costs.
 Adapting to Diversity in the Small Business Work Force
What, if anything, can be done to encourage diversity and
multiculturalism in America's small business workplaces?
BACKGROUND
The concepts of work force diversity and "multiculturalism" seek to
recognize, respect and capitalize on the different backgrounds and
experiences of employees. The composition of the U.S. work force is
changing with the addition of more women and minorities; by the
year 2000, these groups will account for more than half the work
force. At the same time, new attitudes and legislation are making
workplaces more welcoming environments for gay and lesbian
Americans and for people with disabilities. Many companies that
have implemented diversity programs report results that include a
more productive, innovative work force and fewer
discrimination-based lawsuits.
STATUS
Demographic, societal and legislative changes have led to changes
in the composition of the work force.
DISCUSSION
* What, if anything, can the government do to help small businesses adapt
to a 21 st century work force?
* Is diversity training cost-effective for small businesses? Could such
training help prevent discrimination-based lawsuits or the
loss of trained, productive workers?
* What, if any, research needs to be undertaken to determine what
initiatives should be taken by small businesses to ensure that
their work forces remain productive and cohesive?
* Should schools assist the future work force by educating them
about diverse cultures and backgrounds?
* Should diversity training include education about HIV/AIDS?
Americans with Disabilities Act
Should the government provide financial incentives or additional
assistance to help small businesses comply with the Americans with
Disabilities Act (ADA)?
BACKGROUND
The Americans with Disabilities Act of 1990 prohibits
discrimination on the basis of disability. It is estimated that
there are approximately 43 million Americans with disabilities, and this
civil rights legislation calls for an end to discrimination in employment,
state and local government services, public accommodations operated by
private entities, and telecommunications.
The ADA has broad implications for businesses. The employment
provisions prohibit discrimination against any qualified individual with a
disability in all aspects of hiring and employment. They
currently apply to employers with 25 or more employees and on July 26,
1994, will apply to employers with 15 or more employees.
The public accommodations provisions prohibit discrimination in
public access. Any entity that opens its doors to the public may be
required to comply with the rules concerning the provision of goods and
services and public access.
Provisions of the ADA touch on nearly every aspect of workplace
life, and full compliance has the potential for being costly for
small businesses. Effective implementation of the ADA's goals is
likely to require a broadly targeted information campaign, a common sense
approach to concepts such as "reasonable accommodation" and
recognition of small businesses' financial constraints.
STATUS
The ADA was passed in 1990. Businesses are now in the process of
implementing provisions covering many aspects of workplace life.
DISCUSSION
* Should tax credits, deductions and training credits be provided
to stimulate compliance?
* Additional informational materials or resources could include
targeted videos, guidelines or seminars. Would such assistance make a
significant difference for small businesses in complying with the ADA?
* In which areas are small businesses most likely to need help?
Early Entrepreneurship Program
Should small business and government support entrepreneurial
education? If so, how?
BACKGROUND
Rapid advances in technology, competition from foreign imports,
demographic shifts in the composition of the work force and the
emergence of a global marketplace have combined to make the
business world a complex, highly sophisticated arena. To be
successful, small business owners and managers need advanced
business management skills and techniques.
Three decades ago, entrepreneurship as a career field was virtually non-
existent. Few American colleges or universities offered degrees in this
discipline. Entrepreneurial education was confined
primarily to vocational and technical programs in the public school system.
Today, entrepreneurial education is taught in 22 community and technical
colleges, 16 high schools, and approximately 90
four-year colleges and universities throughout the United States
and Canada.
STATUS
A recommendation to "encourage entrepreneurial education" ranked
sixth on the list of 60 recommendations of the 1986 White House
Conference on Small Business.
The Office of Advocacy in the U.S. Small Business Administration
has awarded a contract to study the incidence of entrepreneurial
experience and the correlates of entrepreneurial success.
The U.S. Small Business Administration, through the Service Corps of
Retired Executives, is conducting a series of youth entrepreneurship
programs.
DISCUSSION
* Should the small business community and government encourage
entrepreneurship in American youth? If so, how?
* How are work force skills and entrepreneurship skills distinguished from
each other? How can young people with entrepreneurial talent be identified
and motivated?
* What role, if any, should small business leadership play in developing
entrepreneurial disciplines?
* Are there special needs for entrepreneurial training for women or
minorities? If so, how should they be accommodated?
* Do entrepreneurial training needs change from one industry to another?
Encouraging Diversity in Small Business Ownership
Should the government enhance business ownership among women, minorities,
disabled individuals, and gay and lesbian Americans? If so, how?
BACKGROUND
While the percentage of small businesses owned by women and minorities is
increasing, they are still underrepresented in the business population.
Moreover, business ownership among diverse groups such as disabled
individuals and gays and lesbians, while not as well documented, is
becoming more visible.
Women are starting businesses at twice the rate of men, and make up 32
percent of all small business owners. Between 1982 and 1987, the most
recent years for which data are available, the number of women-owned
businesses rose from 2,612,621 to 4,112,787, an increase of about 58
percent. This rate of growth is more than four times the rate for all
businesses. Women-owned businesses currently employ more than 3 million
workers--twice the number employed by women-owned businesses in 1982.
According to the Census Bureau's Survey of Minority-Owned Business
Enterprises, there were 1.2 million minority-owned businesses with total
receipts of $77.8 billion in 1987--8.9 percent of all businesses and 3.9
percent of receipts. Businesses owned by African Americans accounted for
the largest share of minority-owned businesses (34.9 percent ), while
businesses owned by Asian Americans and Pacific Islanders accounted for the
largest share of minority-owned business receipts (42.6 percent).
The U.S. Small Business Administration's 8(a) Program is one tool for
minority business development. The main purposes of the program are to
foster business ownership and the competitive viability of firms owned by
individuals who are socially and economically disadvantaged, and to expand
their participation in federal procurement.
The Business Opportunity Development Reform Act of 1988 was enacted to
improve the program's administration and improve the ability of 8(a)
certified firms to survive and remain profitable after their exit from the
program.
STATUS
SBA Administrator Erskine Bowles is committed to making SBA's minority
business development efforts more effective. His goals for improving the
8(a) Program include: (1) reducing the application processing time, (2)
reducing burdensome reporting requirements, (3) improving technical
assistance provided to program participants and graduates and (4)
encouraging other government agencies to provide greater contract
opportunities for 8(a) Program participants.
A measure to ensure inclusion of women business owners in the federal
procurement contracts process, H.R.2357, is under consideration in the 103d
Congress.
DISCUSSION
* How can access to capital by minority business owners be increased? What,
if any, steps should be taken to reduce requirements that may impede
minorities from obtaining capital or to enhance access to equity capital?
Should greater reliance be placed on state/local/private sector capital
formation programs?
* Should alliances between large and small businesses be strengthened?
Should large businesses be provided with incentives to assist small
businesses with capital formation?
* How can procurement opportunities for minority business owners be
increased? Should procurement goals be increased for government agencies?
Should mechanisms be developed to ensure better compliance with goals by
government agencies--including local bonding programs? Should research and
development contracts be targeted through subcontractors?
* Should disabled business owners and/or gay and lesbian business owners be
able to qualify under certain circumstances as "socially or eco-nomically
disadvantaged" individuals eligible for participation in SBA's 8(a)
Program?
* Should the definition be changed, as some have suggested, from
"socially disadvantaged business" (SDB) to "historically underutilized
business enterprise" (HUBE)?
* Should the government ensure equal access to government services without
regard to gender, race, national origin, handicap, age or sexual
orientation?
* Should government outreach to community based organizations be
enhanced? * To be successful, it has been argued that minority
entrepreneurs need not only business startup and development assistance,
but greater access to business education resources. Should the federal
government facilitate these efforts, and if so, how?
* How should the 8(a) Program be improved? Should Congress enact
legislation that establishes a specific share of federal contract dollars
for 8(a) firms? As the number of participating firms continues to grow,
should the 8(a) Program be restructured to assure a more equitable
geographic and industrial distribution of 8(a) contracts? How can access to
effective technical and business development programs be increased for 8(a)
contractors?
* Should more assistance be made available to small, minority-owned and
women-owned businesses in complying with federal regulations? Should there
be greater coordination with state and local regulations?
* Women business owners constitute a rapidly expanding segment of the U.S.
business population. What public policy concerns, if any, (for example,
child care) should the federal government consider to assist this growing
sector of our small business economy?
* Should the federal government promote exporting by women and
minorities, and if so, how?
* For statistical purposes, should efforts to determine the business
owner's gender, race, etc., be enhanced (for example, through use of a
check-off on tax forms)?
Health Alliances/Health Purchasing Cooperatives
Are health alliances or health purchasing cooperatives effective
mechanisms for achieving affordable health care in small businesses?
BACKGROUND
The concept of regional health alliances or health purchasing
cooperatives is central to a number of major health care reform
proposals. Through these organizations, large numbers of small employee
groups and individuals would combine their purchasing power to negotiate
coverage arrangements. These groups would benefit from the economic power
of consolidated market share and the cost savings resulting from
simplified administration, efficient marketing, and outcomes information.
Several state and regional models exist that might validate the
fundamental principles on which the alliance concept is based. However,
differences exist among the major reform proposals regarding the
organization, governance, administrative responsibilities and
participation requirements imposed on these structures that might affect
their position in the markets and their longterm financial stability.
Critics of a large health alliance/health purchasing cooperative fear the
market control that could be conferred on a monopoly or oligopoly. They are
also concerned that, absent the ability to select preferred carriers or
providers, the market would continue to be fractionalized among too many
carriers, who will find a way to compete on some risk selection basis.
Others suggest that a number of large alliances competing in a geographic
area around criteria such as price, delivery system design, quality-based
measures and other factors would be a more viable and market-based reform
structure.
STATUS
The health care reform proposals vary according to the size of the health
alliance or health purchasing cooperative. Some plans would require
employers with up to a given number of employees to join large
state-created health alliances, through which employees would choose their
health plan. Other proposals would require states to establish health plan
purchasing cooperatives (HPPCs), with only one per geographic area. People
who work for small businesses or individuals who are unem-ployed or self-
employed would be required to obtain coverage through the HPPCs. Other
bills would allow employers and individuals to choose to purchase coverage
from multiple, voluntary, competing purchasing
cooperatives.
DISCUSSION
* Should participation in health alliances/health purchasing cooperatives
be mandatory or voluntary?
* If mandatory, should health alliances/health purchasing cooperatives
include employers with fewer than 5,000 employees? 1,000 employees? 500
employees? 100 employees?
* Should Medicare or Medicaid recipients and early retirees be included in
these organizations?
* Should these alliances serve as passive brokers or aggressive managers of
their health plans?
* To what extent would alliances' roles complement or supplement the role
of state insurance departments?
Health Care Financing Mechanisms
To finance the expansion of health insurance coverage, should Congress
require employers to pay a portion of their employees' health insurance
premiums or, alternatively, impose a wage-based tax on employers?
BACKGROUND
Many mechanisms are being considered to finance health care reform. One
alternative would require employers to pay a portion of their employees'
health insurance premiums. The amount of the premium would depend on many
factors, such as the extent of coverage and the type of health plan (for
example, an individual or family health plan).
A second alternative would impose a tax on employers based on employee
wages. Wage-based or payroll taxes are currently used to finance programs
such as Social Security, unemployment insurance and worker's
compensation.
Proponents of a mandated premium or payroll tax argue that either would
generate funds that could be used to provide health insurance to ap-
proximately 85 percent of the uninsured (workers and their dependents) who
do not receive health insurance through their employment. Those who favor
a premium contend that the premium would not hurt a business's ability to
compete because, in general, all businesses would be required to pay the
same premium for each employee. Those who support a payroll tax say it
would be less disruptive and easier to implement.
Opponents argue that such health insurance financing mechanisms bear no
relationship to a firm's profitability or ability to pay. In each case,
employers would be required to pay regardless of the financial strength or
weakness of the business, a factor that may hurt the newest and most
marginal firms.
Small firms are often more labor-intensive than capital-intensive
compared with larger businesses, and some small business owners believe
they would be disproportionately affected by either the premium or payroll
tax requirement. They say that the effect of imposing either requirement on
a per-employee basis would be increased costs for hiring and maintaining
workers. Further, either requirement would reduce a small business owner's
ability to control costs. This would affect cash flow, which is an acute
problem in many small businesses.
Some argue that premium or payroll tax requirements would diminish a
business owner's flexibility in deciding what benefits to offer--a decision
that is usually based on affordability of the benefit, the wishes of the
employees and the benefit's impact on the competitiveness of the business.
STATUS
One current health care reform bill would require employers to pay a
portion of their employees' health insurance premiums. The plan would also
allow states the flexibility to adopt a "single-payer system" funded by a
payroll tax. In such a system, a government or centralized entity collects
taxes and pays for its residents' health care, bypassing such
intermediaries as health alliances and health insurers. Federal subsidies
would be available to small, low-wage businesses based upon their total
payroll.
A separate proposal would rely primarily on payroll taxes to finance the
expansion of health insurance coverage. Modeling the Canadian health
system, this proposal would create a national health program financed
through a payroll tax on employers and other tax increases on corporate and
personal income.
Other health care reform proposals would allow employers to continue to pay
the health premiums of their employees on a voluntary basis.
DISCUSSION
* Should employers be required to pay a portion of their employees' health
care premiums?
* Should a payroll tax be imposed?
* How can health care most fairly be financed?
Health Insurance Deduction for the Self-Employed
Should the federal government allow selfemployed individuals to deduct 100
percent of the health insurance expenses incurred on behalf of the
taxpayer, taxpayer's spouse and dependents?
BACKGROUND
The inability of self-employed individuals to deduct 100 percent of their
health insurance expenses, coupled with the increasing cost of health
insurance, has helped create a situation in which a significant number of
individuals cannot afford to purchase health insurance.
While incorporated businesses are allowed to deduct 100 percent of their
health insurance expenses, self-employed individuals operating as S
corporations, partnerships or sole proprietorships are entitled to deduct
only 25 percent of health insurance expenses incurred for the taxpayer,
taxpayer's spouse and dependents. Allowing self-employed individuals to
deduct 100 percent of their health insurance expenses would eliminate the
disparity between C corporations and selfemployed individuals and reduce
the number of uninsured individuals.
Approximately 89 percent of the more than 20 million businesses that file
tax returns are unincorporated sole proprietorships or partnerships.
According to data from the 1983 Current Population Survey (CPS),
approximately 54 percent of all unincorporated self-employed individuals
and 26 percent of the incorporated self-employed were not covered by either
their own or another's health insurance plan. Increasing the deduction
could therefore have the effect of increasing health care coverage for a
significant number of businesses.
In instituting such a policy, however, policymakers must also consider the
cost in lost tax revenues.
STATUS
In the 103d Congress, numerous bills have been introduced that would
increase the health insurance deduction for the self-employed. Both houses
have proposed bills that range from extending the current
25-percent deduction to permanently raising it to 100 percent. The Omnibus
Budget Reconciliation Act of 1993 extended the 25-percent
deduction through December 31,1993, retroactive to July l,1992.
DISCUSSION
* Should the deduction be increased to 100 percent as a way of increasing
health care coverage among self-employed individuals operating as sole
proprietorships, partnerships and S corporations?
* If the deduction is increased, should the increase occur all at once or
be phased in?
Health Insurance Market Reforms
What should be the respective roles of the federal and state governments in
regulating the health insurance industry?
BACKGROUND
Health insurance is often a key benefit of employment. However, the high
cost of premiums, coupled with restrictive insurance practices, makes it
difficult for many small businesses to provide health insurance for their
employees. Those employees who do receive health insurance coverage from
their employer--and wish to retain it--may find it difficult to change
their health coverage, switch jobs or leave to start their own
businesses.
For most small employers, access to the health care system comes through
the purchase of a plan underwritten by a commercial insurer or a Blue
Cross/Blue Shield plan. Since the enactment of the Employee Retirement
Income Security Act (ERISA), which established federal standards for self-
insured and multistate employers, the primary customers for these insurers
have been small businesses.
Because of increased competition for business, insurers began to depend on
creative pricing and medical screening practices designed to minimize the
risk of providing coverage to certain individuals, groups and
industry segments. These practices include individual medical
underwriting, occupational redlining, and a practice referred to as "price
baiting and gouging" whereby discounts are offered for the first year of
coverage, followed by much higher rates in the next year when pre-existing
condition exclusions expire.
In response, state legislatures have begun to enact laws designed to
encourage the guaranteed issue and renewability of insurance contracts,
minimize the use of pre-existing conditions exclusions, establish
uniformity in pricing practices, and, to some degree, permit insurers to
offer "bare-bones" health care plans free of state-mandated benefits.
Because most of these state laws have been enacted since 1990, it is
difficult to measure the extent to which these standards have led to
increased access or reduced or more stable pricing.
State-by-state variations in these reform laws and in the aggressiveness
with which they are being enforced have prompted calls for a unified
federal reform strategy. States have traditionally shown a great
reluctance to permit the federal government to usurp their regulatory
authority. While analysts agree that some form of federal standards might
be appropriate, there is much debate over whether the standards should be
viewed as "floors"--minimum standards on which states would build--or
"ceilings"--absolute standards that would replace state regulations. Some
have raised questions about the federal government's ability to enforce
federal standards without creating a huge new bureaucracy. Many analysts
suggest, however, that leaving states to their own regulatory devices will
undermine the federal government's ability to establish and enforce a
uniform benefits package, since states now have the authority to dictate
the number of benefit plans in their states.
STATUS
Most of the federal health care reform proposals introduced in the 103d
Congress would incorporate many of the state reforms. For example, most
plans would require the guaranteed renewability of a small group's
insurance contracts (except in the case of a company's non-payment or
willful deception), prohibit insurers from denying individuals or groups
coverage based on their medical conditions, and limit or greatly curtail
the use of pre-existing conditions limitations or exclusions. While most
proposals would allow some variations in insurers' pricing structures,
others would require some form of community rating.
DISCUSSION
* Are current state-level insurance reforms successfully increasing access
to affordable health care coverage for small employers and their employees?
* Should the federal government establish operating standards for the
insurance industry?
* If the federal government has a role, should the federal standards
supplement or support states' existing regulatory authority?
HIV/AIDS Education and Prevention
Should the government encourage businesses to adopt AIDS
education/prevention programs in the workplace? If so, how?
BACKGROUND
A critical issue faced by small employers today concerns the potential
impact of HIV infection and AIDS on the workplace. According to the U.S.
Department of Health and Human Services' Centers for Disease Control (CDC),
one in 10 small businesses has already had at least one employee with HIV
infection or AIDS.
Among issues of immediate concern to small employers is compliance with the
recently enacted Americans with Disabilities Act (ADA), which
specifically prevents discrimination against individuals with HIV
infection or AIDS in all aspects of employment. Under the ADA, employers
must comply with new requirements concerning recordkeeping, hiring and job
accommodations for individuals with disabilities.
In addition to new legal requirements under the ADA, other small business
concerns with respect to HIV/AIDS include insurance and health care access
and costs, productivity and work disruption, confidentiality and privacy,
disability requests, discrimination, customer concerns, employee morale,
and accommodations for job skills or requirements.
In addition to the immediate implications of the disease for small
businesses and the economy, trends in the data on employment and on
HIV/AIDS point to longer-term effects. According to the U.S. Department of
Health and Human Services,98 percent of individuals affected by HIV/AIDS
are between the ages of 20 and 60, and 80 percent are between the ages of
24 and 40. The findings suggest the premature loss of workers in their
productive years, a weakening over time of the tax base, and an increased
reliance on public services.
STATUS
In December 1992, the Business Responds to AIDS (BRTA) Program, sponsored
by the CDC, began providing resources and materials to help business and
labor meet these challenges. The program's two major components are a
resource service and a kit of targeted materials. The materials in the kit
cover issues such as the ADA, insurance and workplace policies, and
education. A booklet specifically targeted to small business is referred to
as the "Small Business Guidelines."
The federal government is implementing its own AIDS in the Workplace
Program. In a September 30,1993, directive, the Clinton Administration
mandated that workplace programs be instituted for all agencies in an
effort to make the federal government a "model employer" with respect to
this problem.
DISCUSSION
* Should the government disseminate HIV/AIDS information to small
businesses? If so, how can it do so most effectively?
* Should the government assist small businesses in handling the effects of
AIDS and/or implementing AIDS countermeasure programs? If so, how?
Medical Liability Reform
Should medical liability reform be included in a comprehensive health care
reform package?
BACKGROUND
The United States faces higher medical costs than any other nation. High-
risk medical procedures, coupled with the practice of defensive medicine,
have caused a significant increase in the cost of medical malpractice
insurance, in part because of the rising number of claims filed for
litigation and the cost of settlements and awards.
Increased medical malpractice premiums represent 1 percent of total health
care costs. However, litigation and defensive medicine--including the costs
of duplicative testing--add billions of dollars that translate to higher
health insurance premiums for employers and their employees and higher out-
of-pocket expenses for health consumers. According to a 1993 Lewin-VHI
study, a middle-range estimate of potential defensive medicine savings from
comprehensive malpractice reform is $4.3 billion in 1994 and a total of
$35.8 billion between 1994 and 1998. Lowering these costs would lower
health care costs for small businesses.
During the past 15 years, every state has enacted some type of medical
malpractice reform initiative. While most states have adopted tort reform,
other states have included risk management, practice
guidelines and the implementation of alternative dispute resolution
mechanisms.
At the federal level, enterprise liability is one approach being
considered. Under this approach, corporate enterprises that provide health
care would be legally responsible for injuries caused by health care
provider negligence.
STATUS
Many federal comprehensive and incremental health care reform proposals
have addressed the need for some type of medical malpractice reform in
order to reduce overall health care costs. Various proposals incorporate
arbitration, risk management, fee schedules, periodic payments and a cap on
non-economic damages as instruments of reform.
DISCUSSION
* Should medical liability reform be included in a comprehensive health
care reform package?
* Should states establish alternative dispute resolution mechanisms
(arbitration) to mediate and resolve cases prior to trial?
* Should there be a cap on all non-economic damages?
* Should payment of medical malpractice awards be made over time rather
than in one lump sum?
* Should enterprise liability be adopted?
Preparing Students for Work
Should the government develop or promote initiatives that would better
prepare students for the workforce? If so, how?
BACKGROUND
The business community is becoming increasingly concerned about a skilled
work force. Mismatches between the needs of employers and the skills pos-
sessed by the work force could affect economic productivity and
international competitiveness. America's current educational system is not
closely linked with the world of work: according to the report of the
Commission on the Skills of the American Work Force, the educational system
is almost wholly oriented toward the needs of the college-bound. Very
little is provided for the majority of the nation's youth who leave high
school and go directly to work. As a result, typical high school graduates
too often move from one dead-end job to another.
STATUS
The Clinton Administration's Goals 2000: Educate America Act
(P.L.103-227) was signed into law March 31,1994. Goals 2000 will codify
national education goals; establish a permanent bipartisan national
education goals panel; develop criteria for national voluntary content,
assessment and opportunity-to-learn standards; and establish a voluntary,
national system of occupational skill standards.
The proposed School to Work Opportunities Act of 1993 (H.R.2884 and
S.1361), also supported by the Clinton Administration, would provide
federal grants to state and local public-private partnerships for
planning and implementing a school-to-work transition assistance program
for all youth. Components of such a system would include school-based
learning, work-based learning and intermediary activities between
business, government and other community stakeholders.
The U.S. Congress is also considering legislation to establish a federal
work force preparation and development council of key cabinet members. The
federal council would be able to waive provisions of laws or
regulations of certain programs at the request of states. This
legislation also would create a national advisory board on work force
preparation and development, which would provide advice on how to link
education and training more closely with economic development and job
creation.
DISCUSSION
* How can awareness of the world of work be more effectively incorporated
into America's school systems? What role can small businesses play in this
effort?
* Should information on existing mentoring, tutoring and informal
apprenticeship programs be made more available to small business owners? If
so, how?
Retirement Plans
What should be done to encourage small business owners to establish and
maintain retirement plans?
BACKGROUND
Retirement plans are among the most important fringe benefits offered by
employers. They often provide workers with a significant share of their
retirement income and can be used as an incentive to attract and retain
productive workers.
Retirement plan income will take on even greater importance when the "baby-
boom" generation begins to retire in the first part of the next century.
The Social Security system alone will not be able to meet their needs, and
one study estimates that more than half of these individuals will retire
with inadequate savings.
Despite the benefits of retirement plans,85 percent of U.S. firms do not
sponsor retirement plans for their workers. Small employers are less likely
to offer retirement plans than large employers. Only 14.9 percent of firms
with fewer than 500 employees offer retirement plans, while 87.7 percent of
firms with more than 500 employees provide such plans.
One reason for the low level of participation among small firms is the high
cost of maintaining retirement plans. On a per-participant basis, setup and
annual administrative costs, consultant fees and other costs are
considerably higher for pension plans offered by small businesses than for
those offered by large businesses.
Increased maintenance costs and numerous changes in pension laws and
regulations over the last 10 years have contributed to the general decline
in the number of retirement plans. Internal Revenue Service data indicate
that the establishment of new retirement plans has declined by at least 70
percent over the last eight years, while plan terminations have increased
by more than 100 percent over the last nine years.
There is evidence that the retirement system has been crippled by
excessive regulation and legislative changes over the last decade. If
complexity is the key problem, then the challenge facing the small business
community is to influence Congress to enact simplification legislation that
will encourage small business owners to establish and maintain retirement
plans.
Other evidence, including a study conducted for the SBA's Office of
Advocacy, indicates that employee- and employer-related economic factors
are the primary determinants of whether a small business will offer a
retirement plan. If this is true, proposals advanced to simplify
regulations and increase benefits will not have as large an effect as might
be anticipated.
STATUS
Pension simplification language appeared in the 103d Congress in H.R.13,
the Tax Simplification Act of 1993. H.R.13 contains a number of simpli-
fication provisions, including voluntary design-based "safe harbor"
provisions, which would simplify the administration of Section 401 (k)
plans. Pension simplification provisions are also included in the
proposed Pension Simplification Act of 1993 (S. 762), and measures that
would reform the Pension Benefit Guaranty Corporation (PBGC) have been
included in legislation (H.R.3396 and S. 1780) introduced in the 103d
Congress.
The Omnibus Budget Reconciliation Act of 1993 reduced, from $235,840 to
$150,00, the amount of compensation that can be taken into account under a
qualified retirement plan.
DISCUSSION
* Should retirement plan laws and regulations be simplified? If so, how?
* Should policymakers be encouraged to minimize changes to retirement laws
and regulations in order to provide greater certainty for businesses and
retirement plan professionals?
* Should the costs of establishing and maintaining retirement plans be
reduced, particularly for small businesses? If so, how?
Social Security Tax Reform
Should Congress modify the current Social Security tax rate in order to
fund the Social Security system on a "pay-as-you-go" basis?
BACKGROUND
The Federal Insurance Contributions Act (FICA) imposes a tax on wages in
order to fund old-age, survivors and disability insurance--"OASDI"--
otherwise known as Social Security. Social Security is financed by taxing
employee earnings (up to a maximum of $60,600 in 1994) at the rate of 6.2
percent. This tax is levied on both employers and employees. Currently, the
Social Security tax rate is higher than is needed to meet today's Social
Security costs, creating a surplus of Social Security funds. However,
according to a 1992 report issued by the trustees of the Social Security
program, expenditures are expected to rise rapidly during the 2010-2020
period, when the post-World War II baby-boom generation
retires. Social Security expenditures will begin to exceed receipts and,
according to the trustees, the Social Security system will deplete its
reserves and become insolvent in the year 2036.
Social Security surpluses being generated now will avert substantial tax
rate increases in the future. The surpluses also enable the government to
borrow less money now. Some analysts argue that Social Security surpluses
are masking the magnitude of the federal deficit and are being spent on
other programs.
Social Security taxes reduce available capital, which businesses could use
to increase investments and hire additional employees. They are
particularly burdensome to labor-intensive and startup businesses because
they reduce a business's working capital and, unlike income taxes, must be
paid regardless of a business's profits or losses.
The 1986 White House Conference recommended reforming the Social Security
system.
STATUS
In the 102d Congress, a bill outlining a "pay-as-you-go" Social Security
program was introduced that would have reduced the Social Security tax rate
from the current 6.2 percent to 5.2 percent. Beginning in the year 2010,
the rate gradually would have been raised, to 8.1 percent by 2050, to keep
pace with increased expenditures resulting from the retirement of post-
World War II baby boomers. Also under this proposal, the taxable earnings
base would have increased in steps to $82,200 by 1996. The bill did not
pass.
DISCUSSION
* Should the current Social Security tax rate be maintained in order to
avert substantial increases in the tax rate when Social Security
disbursements begin to exceed receipts?
* Should the Social Security system be shifted to a pay-as-you-go system,
which would reduce the current tax rate but result in future increases in
the rate in order to meet increases in Social Security disbursements?
State-Mandated Health Care Benefits
Should the federal government devise a standard benefits package that would
preempt current state-mandated health care benefits?
BACKGROUND
Virtually every state now mandates certain health care benefits that must
be included in an insured group health insurance plan. These mandates were
originally intended to ensure a basic level of health care coverage;
however, some states now require insurers to cover procedures and
services beyond what many consider to be basic coverage.
Section 514 of the Employee Retirement Income Security Act (ERISA) preempts
all state laws pertaining to employee benefits. While fully insured health
plans are regulated, businesses that self-insure are exempt from state
regulatory oversight--state-mandated benefits, premium taxes and reserve
requirements. Most individuals employed in small firms are enrolled in a
fully insured plan that is subject to state
regulations.
A standard benefits package would make it easier for consumers to use
information to compare health plans and force insurers to compete on their
ability to provide quality, not different, services. A standard benefits
package would make it more difficult for insurers to attract consumers
based upon the services covered under a particular plan.
STATUS
Several of the current health care reform plans include a federal
standard benefits package that would, in effect, preempt state-mandated
benefits. The federal standard benefits package would define the minimum
set of services to which all individuals are entitled.
DISCUSSION
* Should a federal standard benefits package preempt state-mandated
benefits?
* If there is no federal standard benefits package, should insurers that
offer a basic plan be exempt from any state-imposed mandated benefits?
Substance Abuse
Should additional steps be taken to help small businesses establish drug-
free work environments? If so, what steps?
BACKGROUND
The U.S. Small Business Administration estimates that approximately 5
million current users of illicit drugs are employed in the nation's small
businesses. Moreover, while most large businesses are implementing programs
to achieve drug-free workplaces, small firms, more constrained by the costs
of such programs, generally are not offering them. As a result, it is
likely that substance-abusing workers may be
disproportionately employed by small businesses.
The high cost of substance abuse in the workplace is a bottom-line issue
for the nation's small business owners. Substance abuse (which includes
alcohol abuse, as well as illicit drug use) costs the American economy more
than $100 billion every year. Research shows that substance abusers are 5
times more likely to file a workers' compensation claim; 2.5 times more
likely to have lengthy absences from work; 3 times more likely to be late
for work; likely to use 2.5 times more medical benefits; and likely to be
one-third less productive. Despite these statistics, many small business
owners are unaware of substance abuse problems in their
workplace: drug abusers are very skilled at hiding their problems, and the
employer is often the last to know.
Employee assistance programs (EAPs) are an important component of
successful anti-substance-abuse programs. EAPs provide a cost-effective
means for helping employees with substance abuse and other problems by
offering education, information on treatment centers and short-term,
confidential counseling.
STATUS
To enhance workplace and public safety, federal and state laws require
certain businesses to implement drug-free workplace programs. These laws
include the 1988 federal Drug Free Workplace Act, which requires all
government contractors and grantees to have formal written policies
prohibiting workplace drug abuse. More recent legislation requires
transportation-related businesses to implement random drug and alcohol
testing.
DISCUSSION
* Should small business owners be made more aware of federal and state laws
that require drugfree workplace programs and of the federal
resources that are available to assist them with compliance? If so, how?
* Should federal, state and local governments undertake initiatives in
cooperation with the private sector to ensure that small business owners
receive help in implementing anti-substance abuse programs for their
employees?
* Should the federal government sponsor EAP consortia programs to reduce
EAP costs and encourage small business participation?
* In setting priorities for the "federal war on drugs," should there be
more or less emphasis on demand reduction (which includes treatment and
education, as well as prevention in the small business workplace) versus
supply reduction (efforts to stop the flow of drugs into the United
States)?
* Should the SBA provide self-help kits to small business owners that would
help them implement drug-free workplace programs?
* Should federal, state and local governments provide incentives to small
businesses to implement drug-free workplace programs, such as discounts in
workers' compensation premiums?
* How can the government most effectively disseminate substance abuse
information to small businesses?
Taxation of Health Benefits
Should employers be allowed to continue to deduct 100 percent of health
insurance expenses paid on behalf of their employees? Should employees be
allowed to continue to exclude from gross income health insurance
expenses paid by their employers? Should either the employer
deductibility or the employee tax exclusion preference be limited to the
cost of the standard benefits package?
BACKGROUND
Generally, employers are entitled to deduct 100 percent of health
insurance expenses incurred on behalf of their employees. In addition,
health insurance costs paid by employers on behalf of their employees are
not included in the employee's gross income.The Employee Benefits
Research Institute estimates that the tax preference of employment based
insurance cost $50 billion to $60 billion in lost federal income in fiscal
year 1991.
To encourage cost-effective health care decisions, some policymakers favor
limiting the amount employers can deduct for health insurance expenses and
requiring employees to include in income all or a portion of the health
care costs that are paid by their employers.
STATUS
Some plans would allow employer contributions related to the standard
benefits package to be fully tax deductible. Other plans would cap the
employer's health insurance deduction at the cost of the lowest-priced
health plan that meets federal quality and enrollment standards in the
employer's area. Finally, other proposals would tie the employer's tax
deductibility to the cost of the average of the lowest-priced one-third
of the plans offered in an area.
DISCUSSION
* Should a cap be placed on the amount employers can deduct for health
insurance expenses? This would have the effect of increasing a small
business's taxable income.
* Should employees be required to include in reported income the portion of
health insurance expenses paid by their employers? Enacting this provision
would reduce employees' take-home pay and put pressure on small businesses
to increase their employees' salaries.
* Alternatively, should the current preferential tax treatment for health
insurance expenses provided to both employers and employees be
maintained?
Work Force Skills
Should the federal government more effectively facilitate workers'
attainment of basic and advanced work skills? If so, how?
BACKGROUND
A shortage of skilled and appropriately trained workers in the adult labor
force is affecting small businesses' economic productivity and
international competitiveness.
According to the Hudson Institute's report, Work Force 2000, more than half
of the jobs created during the 1990s will require post-secondary training;
only 14 percent of these jobs will be available to workers who have not
completed high school. By the year 2000, an even larger
percentage of new jobs will require some post-secondary education.
Yet about 20 percent of Americans lack a high school diploma; the rate is
twice as high for African Americans as it is for whites, and nearly three
times as high for Hispanics. Moreover, although most reading material
geared toward the workplace is written for at least ninth-grade level, 23
million Americans--20 percent of the nation's workers-- read at no better
than an eighth-grade level.
Because of declining population growth, fewer workers will enter the labor
force over the next decade. Some 85 percent will be women, immi-grants and
minorities--groups that are currently less trained, on
average, than non-minority men.
A shortage of skilled workers will have a disproportionate impact on small
business. Small firms, offering relatively lower salaries and less
extensive benefits than larger companies, will be scrambling to compete for
the best workers in a tight market. The small business community estimates
annual losses of $30 billion because of an underskilled work force.
Small firms have the larger problem, yet are less able to afford the
investments needed to solve it. While there have been some initiatives to
develop consortia of smaller companies, there is little chance that a
company with 100 or fewer employees can afford to singly launch a skills
program. Only 20 percent of all small businesses offer job related
training--and most of that training is financed by the employees
themselves.
A primary adult education and training statute is the Job Training
Partnership Act (JTPA), which was initiated in 1982, replacing the
Comprehensive Employment and Training Act. JTPA manages programs to train
people entering the work force. Services available to qualifying youths and
adults include remedial education and basic skills training,
vocational training, job search assistance and literacy training. JTPA
requires that there be a private industry council for every designated
service area to provide policy guidance and exercise oversight of job
training activities. Educational groups, businesses and government
officials are represented on the councils; one-half of business and
industry representatives on the councils are required to be small
business persons.
STATUS
The U.S. Department of Labor has announced creation of a new office, the
Office of the American Workplace, which will focus on helping employers,
managers and union leaders to improve the quality of American jobs and the
long-term performance of companies. The office will help small and midsized
companies to adopt state-of-the-art workplace practices by offering grants
and technical assistance and pilot programs.
The Clinton Administration's National Performance Review report
recommends major changes to the work force development system, including
the consolidation of more than 30 education and job training programs into
flexible grants for job training and education. This was also a proposal of
the National Governors' Association and the National
Conference of State Legislatures.
The report proposes creating a system of competitive, one-stop career
development centers for all federal, state and local education and training
programs. Core services would be free, but other services would be offered
on a fee basis. Any organization, public or private, would be allowed to
apply for a charter to operate one or more onestop career centers.
The report endorses current legislative efforts by the U.S. Department of
Labor to consolidate training programs for dislocated workers. Another
proposal is the creation of a national work force development council to
eliminate the walls between categorical programs, standardize fiscal and
administrative procedures, develop a comprehensive set of
results-oriented performance standards, and improve the qualitative
evaluation of program performance.
The implementing legislation for the North American Free Trade Agreement
(NAFTA) includes an interim, categorical program to assist American workers
who lose their jobs as a result of the trade agreement. This temporary
program is established as part of the existing Trade Adjustment Assistance
(TAA) program.
The U.S. Congress is actively considering the School-to-Work
Opportunities Act of 1993 (H.R. 2884 and S. 1361 ) (see Early
Entrepreneurship discussion).
The Clinton Administration is formulating a National Workforce Strategy
proposal to enhance worker security. Among the key features of the
Workforce Security Act: a single, comprehensive employment system, re-
employment services, better information, and easier access to help. Also
expected to be included are timely labor market information about job
openings and relevant training, long-term training and income support for
dislocated workers, unemployment insurance flexibility, one-stop career
centers, a school-to-work transition system, and voluntary
national skills standards.
DISCUSSION
* The General Accounting Office lists 151 federal job training programs.
States and localities have many other programs. Should the government
determine the effectiveness of these programs and ensure that they are
accessible to employees of small businesses? If so, how?
* How can small business needs be equitably represented in government
training proposals?
* Should the government give employers incentives to invest in lifelong
learning for their employees, and if so, what kinds of incentives?
Workers' Compensation
How can escalating workers' compensation costs be brought under control?
BACKGROUND
There are currently 55 separate workers' compensation programs in the
United States and its territories, covering 93.7 million employees--or 87
percent of the nation's wage-and-salary labor force. Workers'
compensation programs vary widely from state to state. In most states,
employers are required to carry insurance coverage from commercial insurers
or are allowed to qualify as selfinsurers. In some states employers are
required to purchase insurance from an exclusive state insurance fund.
Three states--New Jersey, South Carolina and Texas--do not require
employers to provide any workers' compensation coverage. Medical costs
continue to spiral. Between 1980 and 1987, the most recent year for which
data are available, medical expenditures under the workers' compensation
system increased by 151 percent, compared with a 102-percent increase in
overall health care expenses. The average cost of providing workers'
compensation coverage for an employee has increased 438 percent since 1972.
STATUS
To help alleviate the escalating costs of workers' compensation,
policymakers are proposing to integrate workers' compensation medical
benefits into the new health care system. In the short term, delivery
systems would be integrated. Injured workers would receive services through
their health plans, which must demonstrate their capacity to treat work-
related injuries and meet new standards for quality and efficiency. Current
workers' compensation carriers would retain financial responsibility and
reimburse health plans for the services they provide to injured workers. In
the long term, a federal commission would develop a detailed strategy to
fully integrate the financing of workers' compen-sation medical benefits.
Such "24-hour" coverage has already been adopted by several states.
DISCUSSION
* Would small businesses benefit from full integration of the workers'
compensation system into the health care system?
* How can the workers' compensation system be reformed to reduce fraud?
Worksite Health Promotion
Should the federal government require businesses to adopt worksite health
promotion activities as a means of reducing health care costs?
BACKGROUND
Worksite health promotion activities are a key element in the national
strategy to improve the health of Americans. Research conducted over nearly
two decades has demonstrated that these activities can both improve the
health of workers and benefit employers. Worksite health promotion can help
contain costs, reduce absenteeism, increase
productivity and help recruit and retain a quality work force.
Many employers already have some form of health promotion activity. A 1992
study by the Office of Disease Prevention and Health Promotion showed that
81 percent of worksites with more than 50 employees have at least one
health promotion activity. According to a 1991 study by the Bureau of
National Affairs, Inc.,85 percent of employers have some type of smoking
policy, up from 54 percent in 1987 and 36 percent in 1986.
STATUS
The U.S. Department of Health and Human Services has launched a national
initiative called "Healthy People 2000" to improve the overall health of
Americans and to control increasing health care costs by the end of the
decade. The goals of the initiative are to improve access to preventive
services, end disparities in health status among Americans and promote
enjoyment of a better quality of life through the prevention of
disability and disease.
DISCUSSION
* What are the costs and benefits to firms of health promotion
activities? Should businesses be required to provide such activities?
* Should worksite health promotion activities automatically reduce employer
premiums toward employee health insurance?
International Trade
In 1990, exports accounted for nearly 84 percent of the record high $394
billion in GNP growth. The result of the increase in U.S. exports in the
late 1980s is a significantly lower trade deficit and, more important, 2
million new jobs.
The future success of the U.S. economy will depend largely on our ability
to compete successfully in a global arena. Because the small business
community is the engine driving the U.S. economy, it is imperative that
small firms be equipped with sufficient technical assistance, technology
and financial wherewithal to expand their presence in global markets.
It is estimated that small firms constitute 96 percent of exporting firms.
However, it is also estimated that just 15 percent of U.S.
exporters account for 85 percent of the value of U.S.-manufactured exports.
In an increasingly globalized marketplace, smaller firms will need to
expand their export activities in order to succeed during the upcoming
decade.
For further information related to international trade, see Availability of
Capital, p. 18; Marketing New Technologies, p. 98; and One-Stop Information
Centers, p. 99.
Development of a Strategy for Export Assistance to Small Business
Should the United States develop new programs or modify existing programs
to increase exports by small businesses?
BACKGROUND
According to the U.S. Department of Commerce, exports have accounted for 70
percent of growth in the U.S. economy since 1989. Research indicates that
small business products account for approximately 20 percent of all U.S.
exports.
American small businesses often do not have the necessary bank financing to
compete in a global market. Current federal programs assist small
businesses in establishing international markets by offering export
counseling; workshops, training conferences and seminars; export marketing
publications and resource guides; trade delegations and missions; and
financial assistance.
Great Britain, France and Japan each spend three times as much as the
United States on export promotion.
STATUS
Government assistance is made available through state and local agencies,
the U.S. Department of Commerce, the U.S. Small Business Administration and
other federal agencies. Congress has directed the SBA to increase its
efforts toward making small businesses more aware of international business
opportunities.
The SBA and the Department of Commerce have opened four pilot "one-stop
shop export assistance centers." The centers serve as repositories of
information dealing with federal, state and private sector programs to
encourage global competitiveness and exporting.
DISCUSSION
* What type of government assistance is needed to help small businesses
take advantage of global export opportunities?
* How can the federal government more efficiently blend its resources to
help small firms export?
* To what extent should the federal government expand the one-stop shop
concept if the shops are found to be effective in assisting small
businesses?
* Should export assistance be targeted to specific sectors of the
economy? If so, which sectors? Since the federal government already targets
some export assistance to specific industries, should it continue to do so?
If yes, which sectors?
* Should overseas assistance for exporters be targeted toward specific
nations or regions? Since the federal government already targets export
assistance to some specific nations and regions, should it continue to do
so or should it provide more universal assistance? Should that assistance
be reduced if the country or region does not open its markets to U.S. goods
and services?
* Should overseas assistance for exporters be enhanced by increasing the
proportion of embassy personnel dealing with trade matters?
* Since the government provides assistance to other countries, should the
countries receiving the assistance be required to spend a portion of that
assistance on goods and services of U.S. small businesses? If so, can this
be accomplished through "buy-American" provisions?
* What role, if any, should the federal government, and the SBA in
particular, play in assisting small firms to participate in overseas trade
shows, missions and joint ventures?
* Should the federal government, and the SBA in particular, provide greater
assistance to trade intermediaries (such as export management companies,
export trading companies, wholesalers and retailers)? If so, what kinds and
levels of assistance would be beneficial?
* Should government export programs be privatized?
* Should small business owners be educated about risks involved in
exporting and mechanisms to overcome them?
* Should the government help exporting by subsidizing trade missions?
* Should language courses be made more accessible to small businesses to
help them in their foreign business dealings?
General Agreement on Tariffs and Trade
What can be done to ensure that small businesses understand and take full
advantage of the General Agreement on Tariffs and Trade (GATT)?
BACKGROUND
The General Agreement on Tariffs and Trade is a multinational agreement
promoting world trade through negotiations to reduce trade barriers. GATT
provides a forum for monitoring trade activity, enforcing ground rules, and
settling disputes among member nations.
Twenty-two countries originally established GATT in 1947 as a temporary
measure. However, it has evolved into a permanent body consisting of more
than 100 members, including the United States, England, France, Germany,
Japan and Canada.
GATT provides U.S. small businesses with the opportunity to expand into the
global marketplace, particularly in high technology industries such as
telecommunications, medical instruments and devices, computers and
software.
On the other hand, GATT makes the domestic market available to foreign
competition, particularly with respect to the apparel and textile
industries.
Under the most-favored-nation (MFN) clause, member countries must treat all
GATT members equally with respect to tariff concessions. Exceptions to the
MFN clause are given to less developed countries; they also will pay
reduced tariffs.
STATUS
The Uruguay round of negotiations was completed on December 14, 1993, and
approved by the 116 participating nations on December 15, 1993, with a
congressional vote expected on GATT implementing legislation in 1994.
DISCUSSION
* American small businesses in general have a limited understanding about
international trade. What steps, if any, need to be taken to allow small
businesses to have a better understanding of GATT and what it can mean for
their businesses?
* What industries in addition to high technology can benefit from the
passage of the GATT legislation and what, if anything, should the
government do to assist such industries to expand into the global
marketplace?
* Should any action be taken to help industries such as apparel and
textiles that will be affected negatively by the passage of GATT? If so,
what action?
Import Policy
Should the U.S. government help small business importers? If so, how?
BACKGROUND
Many small businesses import foreign products. As a general policy matter,
however, governmental trade assistance is not provided to
importers because of the perceived negative effect of imports on the
country's balance of trade and on domestic industry and employment.
Yet imports are a necessary component of many businesses. The American
business economy, it is argued, is closely tied to the world economy, and
economic success is best achieved through worldwide competitiveness. Free
trade is expected to expand further under NAFTA and GATT, as tariff and
non-tariff barriers for most foreign goods are reduced. Small businesses
need to be prepared to compete and take advantage of the expected growth of
free trade.
STATUS
As part of the North American Free Trade Agreement (NAFTA), the United
States agreed to phase out tariff and non-tariff barriers for goods
imported from Mexico and Canada. As part of the General Agreement on
Tariffs and Trade (GATT), America is expected to reduce tariffs for most
foreign goods.
DISCUSSION
* Should the U.S. government provide trade assistance for small business
importers, for example, by providing foreign product and company refer-rals
and statistics through trade offices or by disseminating information on
trade opportunities under NAFTA and GATT?
* What are the costs and benefits to U.S. small businesses from import
protections?
* Should the government reassess its policy of focusing its trade
assistance only on exports?
North American Free Trade Agreement
Should the government help small businesses take advantage of the North
American Free Trade Agreement (NAFTA)? If so, how?
BACKGROUND
President Bush signed NAFTA on December 17, 1992, and President Clinton
signed side agreements concerning labor, the environment and import surges
on September 14, 1993. NAFTA will transform all of North America into a
free-trade zone, lowering tariffs and removing other barriers to trade.
NAFTA member countries are the United States, Canada and Mexico. The area
currently produces $6.5 trillion in goods and services and is populated by
370 million consumers--thereby surpassing the economic power of the
European Community. According to the U.S. Department of Commerce, a $1
billion increase in exports will translate into 20,000 additional
American jobs.
STATUS
On November 17, 1993, the House of Representatives passed implementing
legislation for NAFTA; the Senate passed the measure on November 20.
Because the President was granted "fast track" authority for NAFTA, the
agreement was voted on without amendments. President Clinton signed NAFTA
implementing legislation on December 8, 1993 (Public Law 103-182).
DISCUSSION
* Historically, free trade has improved the standard of living for U.S.
citizens, and it is believed that NAFTA countries will benefit from lower
tariffs on imported goods.
* What kinds of programs would help small businesses understand NAFTA and
the opportunities it offers them?
* Should the United States seek free trade agreements with other nations?
If so, which nations?
Trade Finance
Should the federal government make efforts to satisfy the financing needs
of U.S. small business importers and exporters? If so, how?
BACKGROUND
Small businesses account for approximately 20 percent of all U.S.
exports. Many small businesses also use imported products. Expansion of
international trade assistance certainly will help some small businesses
increase global opportunities. However, many small businesses will not be
able to take advantage of these opportunities because they lack
sufficient financial resources to obtain financing.
One of the U.S. Small Business Administration's major programs is the
export revolving line of credit. In fiscal year 1992, the SBA set a record
for loans to small business exporters: the agency provided 600 loans to
exporters for a total of $241 million. Other agencies, like the U.S.
Department of Commerce and the Export-Import Bank, offer credit assistance
to small firms with international credit needs.
STATUS
Congress has directed the SBA to increase its efforts to make small
businesses aware of international business opportunities. The SBA and the
Export-Import Bank are currently working together, at the recommendation of
the Trade Policy Coordinating Committee, to harmonize and possibly merge
some of their exporting programs. It is hoped that uniform
documents and procedures will encourage small firms to seek export
assistance.
DISCUSSION
* Should the SBA and other federal agencies that provide international
credit assistance explore ways of leveraging their resources to increase
credit availability?
* Should government budgetary outlays be increased for programs providing
international credit assistance?
* Should government loan programs for international trade include a
specific small business set-aside?
* Should the federal government consider regulatory incentives to
encourage lenders to increase the availability of international trade
credit?
* Should the federal government, and the SBA in particular, provide greater
assistance to trade intermediaries (such as export management companies,
export trading companies, wholesalers and retailers)? If so, what kind and
level of assistance would be beneficial?
* Should regional banks be instructed to assist small businesses in
advising about exports (such as letters of credit, currency risks and
credit analyses)?
Procurement
In fiscal year 1992, the federal government purchased approximately
$200 billion in goods and services from the private sector. Of this
amount, roughly $62 billion, or 31 percent, was awarded in prime
contracts and subcontracts to small and growing businesses. These
firms' participation in federal procurement opportunities creates
more competition, saves the government money, stimulates greater
innovation and provides jobs for many Americans.
The federal procurement rules are complicated, however, and should
be improved to provide greater opportunities for the small business
community. Unfortunately, as government spending decreases,
particularly in Department of Defense procurement, competition for
limited funds will intensify. "Reinventing" federal procurement to
balance several conflicting goals will be the challenge of the
1990s.
For related information, see also sections on Defense Economic
Conversion, p. 28; SBA Technical Assistance, p. 32; Encouraging
Diversity in Small Business Ownership, p. 45; Commercialization of
Technologies, p. 94; and Small Business and Federal Research and
Development, p. 100.
Access to Procurement Opportunities
Do businesses need greater access to Federal procurement
opportunities? If so, how can it be provided?
BACKGROUND
Each year, billions of dollars in government contracts are awarded
to prime contractors and subcontractors.
  Approximately one-third of the aggregate value of goods and
services purchased under contract by the federal government goes to
small firms. In fiscal year 1992, according to the Federal Procure-
ment Data Center (FPDC) and SBA sources, small businesses were
awarded $61.6 billion (or 31 percent) in prime contracts and
subcontracts initiated by the federal government. Of the overall
total, approximately $22.3 billion, or 11.1 percent, was awarded to
small firms in subcontracts.
STATUS
The 1986 White House Conference on Small Business recommended that
the small business share of federal procurement be raised to 40
percent. During that fiscal year, the small business share of
federal procurement was approximately 30 percent. Since then, the
share of federal procurement for small firms has risen only
slightly, to 31 percent in fiscal year 1992. Some argue that a
higher percentage has not been achieved because small firms have
insufficient access to federal procurement opportunities.
Streamlining procurement is the subject of several legislative
proposals and a key focus of the Clinton Administration's National
Performance Review (NPR) as described in the NPR report, From Red
Tape to Results: Creating a Government that Works Better and Costs
Less.
DISCUSSION
* What is the likelihood that small firm opportunities might be
foregone for the sake of procurement simplification and reform?
What can or should be done?
* Should federal procurement officers receive better training
concerning the capabilities and special needs of small business
contractors? Should they be trained in basic business skills to
improve their understanding of contractors' needs and concerns?
* Should federal procurement officers be held more accountable for
their actions? If so, how? Should part of their annual performance
reviews include feedback from contractors?
* What training and outreach efforts, if any, should be developed
to make small businesses aware of the electronic data interchange
(EDI) procurement system recently instituted by the Clinton
Administration?
* Some small firms do not bid on federal contracts because they
feel they do not have sufficient current and historical
information. Should the EDI procurement system include enhanced
abstract and debriefing information?
* When the federal government provides grants to states and other
entities, the grants do not carry the same small business
subcontracting standards as federal procurements. Should such
grants require a flow-down for subcontracts and set-asides to small
and small disadvantaged businesses?
* Small business set-aside and subcontracting programs are
increasingly being blunted by procurement bundling. What should be
done to strengthen the subcontracting program and enforce
compliance with set-aside requirements? What restrictions, if any,
should be imposed on bundling?
* Should the government encourage government agencies to use
innovative programs (e.g., partial set-asides) to get more small
businesses involved in federal contracting? If so, how?
* The Procurement Automated Source System (PASS) is a centralized,
computer-based inventory and referral system of small businesses
interested in being federal prime contractors or subcontractors.
How can PASS be improved? Should this program be expanded? If so,
how?
* Should the offices of small and disadvantaged business
utilization within federal agencies help small firms take advantage
of federal procurement opportunities? Should the employees of these
offices be held more accountable? If so, how?
* What, if anything, should be done to allow government technical
specialists more freedom to discuss actual contracts with bidders?
Balancing Private and Public Resources
Should the federal government develop a more disciplined system for
defining what is an "inherently governmental "function and for
balancing private and public resources?
BACKGROUND
For nearly 40 years, the federal government has had a procurement
policy of relying upon the private sector to provide services and
products whenever possible.
  Some experts believe that the private sector can deliver a better
product or service at a better price than the public sector. In
addition, they believe that increased privatization will result in
more small business opportunities and private sector jobs.
  The Office of Management and Budget (OMB) Circular A-76 requires
federal agencies to conduct cost comparison studies with the
private sector and to contract with the most efficient sources.
However, many argue that implementation of this policy has been
uneven.
STATUS
In December 1992, the White House issued a report prepared by OMB
which revealed that government contracts are not always properly
supervised by federal agencies. As a result, many private companies
take advantage of the government.
  In September 1993, the Clinton Administration's National
Performance Review called for OMB to review Circular A-76 for
potential changes that would simplify the contracting process and
increase the flexibility of federal managers. The report
specifically recommends that the U.S. Department of Defense
implement a comprehensive program of contracting "non-core
logistics" functions competitively.
DISCUSSION
* It has long been held that the government should not compete with
the private sector and that only inherently governmental functions
should be undertaken by federal employees. Is the definition of
"inherently governmental" clear and how should it be applied in
federal contracting?
* Should government entities, like the Federal Prison Industries,
be given advantages or preferences over other businesses competing
for federal contracts? What, if anything, should be done to create
a more level playing field in conducting competitions between
public and private vendors? Are there functions now being performed
by government that could be more effectively and inexpensively
performed by the private sector? If so, what steps should be taken
to privatize them?
* Should OMB Circular A-76 be revised so that it provides more
detailed instructions and stronger compliance mandates for agencies
to follow? If so, how?
* Should federal acquisition policies be modified so that they can
be more readily understood and complied with by contractors, while
still protecting the government's interests? If so, how?
* Do the same standards imposed on contractors by government
contract administrators apply to the government itself, in terms of
meeting the requirements of the contract and the limits of funding?
Best Value Procurement
Should governmentwide guidelines be established outlining how
federal agencies should apply "best value" procurement practices?
BACKGROUND
Best value practices for federal acquisitions are intended to help
government agencies receive the best overall value in the contracts
they award. Under such practices, contracts are awarded by
considering a combination of price and technical factors, with
technical factors taking precedence. The concept removes the
super-preference for low bid proposals and puts best value
negotiated solicitations on equal footing with sealed bid
solicitations.
 A key focus of best value procurement is to give preference to
contractors who consistently demonstrate good performance on
production contracts and who have the ability to deliver on time,
while consistently improving quality.
STATUS
More and more federal agencies are applying best value practices.
DISCUSSION
* Do best value practices help or hurt small firms in obtaining
federal contracts?
* What checks and balances, if any, should be put in place to
assure that government agencies apply best value practices
consistently and fairly?
* ISO 9000 is a standard of quality management, very popular in
Europe, that is rapidly taking hold in the United States and around
the globe. Some federal agencies are revising their quality
specifications to harmonize with ISO 9000 standards. What, if
anything, should be done by the government to help prepare small
U.S. businesses for tougher global standards and increased world
competition?
Competition from Non-Profit Organizations
Should Congress enact legislation that would restrict tax-exempt
entities from engaging in commercial activities that are in direct
competition with for-profit small businesses?
BACKGROUND
Many small businesses are increasingly finding that they must
compete with tax-exempt organizations in providing goods and
services to the public.
  It is virtually impossible for private firms to be competitive
with such tax-exempt entities, which receive many benefits not
available to for-profit businesses. These benefits include
exemptions from federal, state and local taxation, freedom from
payment of customs duties on imported equipment and other items,
access to non-profit mailing privileges, and volunteer or
inexpensive labor. These benefits add up to a substantial cost
advantage for the tax-exempt provider.
  Non-profit competition was a major issue raised at the 1986 White
House Conference on Small Business. In response, the Budget Recon-
ciliation Act of 1987 included several provisions that limited
certain non-profit activities.
STATUS
Although small businesses continue to be concerned about
competition from tax-exempt organizations, federal, state and local
governments appear to be expanding revenue-generating efforts that
also often compete with private entities. Further, cutbacks in
government grants and other funding have forced non-profit entities
into for profit unrelated business activities.
 The unrelated business income tax (UBIT), which is supposed to
level the playing field, does not appear to be working.
DISCUSSION
* Should the Internal Revenue Service be given more resources to
enforce violations of unrelated business income tax laws by
non-profit entities?
* Many universities and other tax-exempt organizations compete
directly with for-profit small businesses. What, if anything,
should be done to limit such competition?
* What regulatory changes, if any, should be made to restrict
government agencies from competing with private firms?
* Should the IRS or another federal agency establish an advisory
committee to review current IRS regulations and tax forms affecting
the non-profit sector?
* If a private firm is available to provide a product or service,
could there ever be a time when it would be in the public interest
or justifiable for a tax-exempt organization to be competing in the
same marketplace, offering the same goods and services? If not,
should such activities be further restricted by law? * Many argue
that the "substantially related" test for determining what
constitutes an "unrelated trade or business" of a non-profit entity
is ambiguous. Should this ambiguity in the tax code be clarified?
If so, how?
Labor Laws and Federal Contracting
Should Congress reform labor laws that inhibit small firms from
participating in federal contracts?
BACKGROUND
Increasingly, the business community is asking whether some of the
older federal labor laws should be reconsidered to determine
whether they are still necessary and whether the burdens they
impose on the procurement system are reasonable.
 The Davis-Bacon Act of 1931 requires contractors for federal and
public works projects to pay workers the local prevailing wage
rate, usually union wages. The act was intended to prevent con-
struction companies offering substandard wages from underbidding
local companies. The threshold for coverage under the act was set
at $2,000 in 1931 and remains the same today.
 The Service Contract Act of 1965 covers service contracts similar
to those of the Davis-Bacon Act for construction. It applies to
contracts in excess of $2,500. It requires contractors to pay the
minimum prevailing wage and specified fringe benefits.
 The Walsh-Healy Public Contracts Act requires contractors that
supply materials to the federal government through contracts in
excess of $10,000 to pay all workers the federal minimum wage, to
agree that no employee is required to work more than 40 hours a
week, and to avoid using workers under the age of 16. Most of the
provisions of the Walsh-Healy Act have been superseded by other
federal legislation.
STATUS
The Clinton Administration's National Performance Review recommends
sweeping changes to federal labor laws, including the Davis-Bacon
Act, the Service Contract Act and the Walsh-Healy Act.
DISCUSSION
* Should Congress repeal or reform the Davis-Bacon Act?
* Should Congress repeal or reform the Service Contract Act?
* Should Congress repeal or reform the Walsh-Healy Act?
Prompt Payment Act
Should the federal government make new efforts to improve its
timeliness in paying its bills?
BACKGROUND
In fiscal year 1991, the federal government spent approximately
$211 billion for the acquisition of needed goods and services.
These federal acquisitions provide an opportunity for participating
businesses to expand and for new companies to be created. The
government also benefits from private sector competition, which
typically results in lower costs, greater efficiency and better
quality.
  However, the government does not always pay its bills on time.
The Prompt Payment Act of 1982 was enacted to provide incentives
and requirements for the federal government to pay bills on time
and to become a reliable business partner.
  Despite the requirements of the 1982 law, payment on time
continues to be a problem. Prompt payment of contractors by the
federal government was a significant issue raised at the 1986 White
House Conference on Small Business.
  In 1987, the SBA surveyed federal contractors and found that 45
percent of small firms and 55 percent of large firms believed that
federal agencies "seldom or never" lived up to the Prompt Payment
Act of 1982.
STATUS
  In 1988, the Prompt Payment Act was amended to clarify and
strengthen the original law and to ensure that vendors supplying
goods and services to the government are paid in a predictable and
timely manner. Many of the recommendations made at the 1986 White
House Conference were included in the amended Prompt Payment Act.
   The Clinton Administration's National Performance Review
recommends that the executive branch create a coherent financial
management system, clarify responsibilities and raise the standards
for financial officers.
DISCUSSION
* Government contractors maintain that work performance by a
federal contractor should be matched by payment performance on the
part of the government. Should the current Prompt Payment Act be
broadened and required to apply to federal contracts and grants at
all levels?
* Should the use of electronic payments to contractors be
encouraged by federal agencies? If so, how?
* Should the Prompt Payment Act be amended to include federal grant
programs, all forms of progress payments, the judicial and
legislative branches, and subcontractors on federal non-con-
struction projects?
* Should proposals to extend the discount period be rejected and
the current discount policy retained?
* Will the National Performance Review recommendations be
sufficient to improve the government's payment performance? If not,
what other measures should be taken?
* Should the government's prompt payment policy include prompt
action and payment on undisputed change orders?
* What measures, if any, should be taken so that contracting
officers can be held at least partially accountable for prompt
payment actions to contractors?
* Should small firm access to financing for government receivables
through banks and other lending institutions be increased? If so,
how?
Rights in Technical Data
Should the federal government relinquish ownership rights of
technical data for which it pays?
BACKGROUND
When the government relinquishes its technical data rights to prime
contract and subcontract developers, access to the data is no
longer available to other firms wishing to compete in related
areas; the result is that fewer opportunities are available for
other firms interested in manufacturing spare and replacement
parts. Competition may be inhibited and the number of contracting
opportunities for small businesses reduced.
  In the early 1980s, abuses in spare parts procurement and the
need to comply with statutory competition requirements prompted the
U.S. Department of Defense (DOD) to seek greater rights in
technical data. The result was the proliferation of new DOD
policies which, as a condition of contract, favored the government
acquiring unlimited technical data rights. Congress echoed DOD's
concerns by enacting new statutory requirements aimed at acquiring
adequate technical data to allow for competitive procurement of
spare parts. The most formative was the Competition in Contracting
Act of 1984 (P.L.98-525).
  These actions were subsequently modified by P.L.99-661 in 1986 to
ensure that the implementing regulations provide a balance between
the government's needs for technical data and the developing
contractor's needs for protection of its proprietary data.
  In October 1988, the DOD published interim regulations
implementing the statutory requirements. Since publication, the
interim rule has been vigorously disputed. Numerous attempts at
resolving data rights issues with industry representatives have
been unsuccessful.
  In November 1991, the FY 1992-1993 National Defense Authorization
Act was enacted. Section 807 of the law required the formation of
a government-industry committee to develop recommendations that
would resolve government and industry disputes regarding rights in
technical data.
STATUS
The government-industry (Section 807) committee is charged with
developing a technical data rule that is equitable to all
participants in defense related contracts. The committee completed
its work at the end of 1993. Numerous small businesses have
criticized the final recommendations; other small companies,
especially those with development capabilities, have supported the
committee's recommendations. The key recommendations of the
committee include:
. Elimination of "required for performance" criteria.
. New treatment of indirect costs.
. Creation of "fixed government purpose rights."
 The U.S. Small Business Administration filed comments with the
advisory committee asking for more analysis of how these
recommendations would affect small firms.
DISCUSSION
* Should the government maintain a strict policy on retaining most
technical data rights when it contracts for the development of a
product and funds all or part of the development costs?
* Is it fiscally prudent for the government to limit competition by
relinquishing technical data rights?
* What, if anything, can be done to ensure that data, which the
government has the right to release for reprocurement purposes, is
made available easily and efficiently to small firms?
Small Business Set-Asides
What, if anything, should be done to increase set-aside awards to
small and small disadvantaged businesses?
BACKGROUND
Small business set-asides are government procurements restricted
exclusively for small business participants. The purpose of
set-asides is to ensure that a fair proportion of total federal
contracts is placed with small firms in each industry group.
  Small business set-asides are mandatory when a contracting
officer from a federal agency determines that, for a particular
procurement, there is a reasonable expectation that offers will be
obtained from two or more responsible small businesses.
  Set-asides may be total or partial and can be further restricted
to only small firms located in a particular labor surplus area.
STATUS
In 1988, Public Law 100-656 established the Small Business
Competitiveness Demonstration Program. The purpose of the program
is to examine and measure the need for small business set-asides in
certain industry groups. Results of the program after several years
of operation were inconclusive. In 1992, the program was extended
through September 30, 1996.
DISCUSSION
* Some industry analysts suggest that a disproportionately large
number of federal contracts in certain industries are being set
aside for small businesses. Do set-asides in certain industry
categories provide an unfair advantage to small businesses?
* What, if anything, should be done to ensure the continued success
of firms that recently expanded above their size standard?
* What, if anything, should be done to help graduating 8(a) firms
continue to grow? Should the government establish a business
assistance program specifically for graduating firms?
* Should small business participation be increased in industries
where such participation is low? If so, how?
* Should set-asides be eliminated when small business utilization
goals are met or exceeded in particular industry groups?
* With regard to meeting set-aside requirements, should the current
percentage test (51 percent rule) for small businesses to contract
with large businesses be retained or changed? Should the percentage
test for small businesses to contract with other small firms be
retained or changed?
* Should changes be made in how size standards are determined and
applied in small and small disadvantaged business set-asides?
* To protect the health and welfare of the small business
community, should the current goals for awarding set-asides to
small and small disadvantaged businesses be changed?
* What changes, if any, should be made to improve the government's
efficiency and effectiveness in collecting small business data
relative to federal procurements?
* Should the government enhance its procurement planning and
forecasting processes so the small business community can be better
informed with regard to upcoming contracts and set-asides? If so,
how?
Small Purchase Threshold
Should new procedures and protections be established for
acquisitions under the small purchase threshold?
BACKGROUND
In 1947, Congress established a "small purchase threshold" of $
1,000 to help assure small business participation in government
contracting. In the intervening years, Congress has raised the
threshold several times, most recently to $25,000 in 1986. The
significance of the threshold is as follows:
. Procurements of less than $25,000 can follow simplified and
streamlined procedures. The government is not required to publish
a Commerce Business Daily notice describing the upcoming
procurement opportunity.
. Current law requires that all procurements under the small
purchase threshold of $25,000 be set aside for small businesses
when there is a reasonable expectation that two or more responsible
small firms will submit bids. This is known as the small business
reserve.
  It has been proposed that the small purchase threshold be
increased to $100,000. Increasing the small purchase threshold will
simplify the government's procurement process, but may hurt small
firms if acquisition opportunities are not adequately publicized.
A threshold that is increased too rapidly, without corresponding
agency changes to improve notification procedures for procurement
opportunities, could minimize competition, sanction sole source
awards and preclude opportunities for many small businesses.
STATUS
There is significant legislative and administrative activity to
increase the small purchase threshold to $100,000.
DISCUSSION
* What processes, if any, should be put in place to ensure that
small firms have ample notice and sufficient information, and can
readily bid on federal acquisitions under the small purchase
threshold?
* If the small purchase threshold is raised, should the small
business reserve be raised to the same level?
* If the small purchase threshold is to be automatically adjusted
within specified time frames, what indices or factors should be
used to determine the change?
* If the threshold is increased, what safeguards can be
incorporated to prevent infringement or loss of contract
opportunities for 8(a) program participants?
Subcontracting Opportunities
Should the current percentage goals established for small business
subcontracting opportunities be retained or changed?
BACKGROUND
Subcontracting with small firms is an integral part of the
performance of federal government contracts. Subcontracting also
provides significant opportunities for small businesses to
participate in contracts that may otherwise be out of their reach.
  Each year, billions of dollars in government acquisitions are
made through prime contractors, who often subcontract with other
firms. The government, through the U.S. Small Business Admin-
istration and other federal programs, supports subcontracting
efforts as a way of increasing competition and providing more
contract opportunities for small businesses.
  Approximately one-third of the aggregate value of goods and
services purchased under contract by the federal government goes to
small firms. In fiscal year 1992, according to the Federal
Procurement Data Center and SBA sources, small businesses were
awarded $61.6 billion of an aggregate total of $199.8 billion in
prime contracts and subcontracts initiated by the federal
government. Of the overall total, approximately $22.3 billion, or
11.1 percent, was awarded to small firms in subcontracts.
STATUS
Participants in the 1986 White House Conference on Small Business
recommended that the small business share of federal procurement be
raised from the then current 30 percent to 40 percent. In fiscal
year 1992, the small business share of federal procurement,
including both prime contracts and subcontracts, was 31 percent.
DISCUSSION
* Public Law 100-656 requires federal agencies to establish
specific numerical goals for the award of contracts to small
business concerns. Should changes in the law be made to increase
the number of subcontracts awarded to small and disadvantaged
businesses?
* Should the training of federal procurement officers concerning
the capabilities and special needs of small business contractors be
improved? If so, how?
* What improvements, if any, should be made regarding the timely
payment of subcontractors for work performed and the resolution of
disputes between prime contractors and subcontractors?
* Women-owned small businesses typically receive less than 2
percent of subcontract awards. Should changes in the law be made to
increase the number of subcontracts awarded to women-owned
businesses?
* What improvements, if any, should be made to increase the level
of awareness by small firms of subcontracting opportunities?
* Should prime contractors be required to list their subcontractors
in their bids or proposals?
* Should subcontracting goals be made an evaluation factor in award
procedures?
* What, if anything, should be done to enforce subcontracting
plans?
* Should changes be made to improve the enforcement of liquidated
damages due from prime contractors to subcontractors?
* Should annual performance evaluations of contracting officers
consider compliance by prime contractors with subcontracting plans?
Surety Bonding
What, if anything should be done to make certain that sufficient
bonding capability and capacity are available to qualified small
business contractors?
BACKGROUND
The Miller Act requires that for any federal construction contract
worth $25,000 or more, the contractor must be bonded.
  The U.S. Small Business Administration's surety bond guarantee
program was created to help small contractors meet bonding
requirements. The program assists small contractors in obtaining
bid, payment and performance bonds.
STATUS
Some experts argue that legislative and regulatory changes are
needed.
DISCUSSION
* Should the SBA strengthen its surety bond guarantee program by
raising applicable size standards and dollar amounts available for
bonding?
* What alternatives or innovations to the current bonding
requirements or program would protect and assist small business
contractors in obtaining bid, payment and performance bonds?
* Should Congress enact legislation that would apply the same
non-discrimination and disclosure rules to surety credit as apply
to other types of credit?
* Should the SBA surety bond programs be improved? If so, how?
Regulation and Paperwork
Federal, state and local governments impose numerous requirements
on the operation of businesses. They range from procedures for
simply obtaining a business license from a local government to
complex federal regulations governing the use of chemicals in the
workplace. The burdens associated with these requirements are often
exacerbated by substantial paperwork and recordkeeping
requirements. In addition to the cost and administrative burdens,
small and growing businesses have difficulty simply keeping abreast
of the various regulatory and paperwork requirements.
   A number of research studies have demonstrated that the small
business community is disproportionately affected by government
regulation. Small business advocates argue that efforts must be
made to regulate only when necessary and to adopt only those
methods that achieve regulatory objectives at the lowest possible
cost. Proper analysis of proposed regulatory standards and
associated paperwork burdens, they say, will help to ensure that
the success of small business owners and entrepreneurs is
determined by the marketplace and not by government regulators.
  For related information, see also sections on Greater Relief from
Environmental Regulation for Small Business, p. 36; Reducing
Paperwork Required by Environmental Regulation, p. 39; Medical
Liability Reform, p. 50; Labor Laws and Federal Contracting, p. 60;
Prompt Payment Act, p. 65; Frequency of Changes in Tax Laws, p. 83;
and Standard Industrial classification Codes, p. 101.
Alternative Dispute Resolution
Should small businesses support federal alternative dispute
resolution (ADR) programs?
BACKGROUND
Commercial disputes that cannot be settled informally by the
businesses involved are usually settled through litigation.
Litigation is time-consuming and expensive. More significantly,
given the backlog in both federal and state courts, resolution of
these disputes is often delayed for months or even years. For small
businesses that have not been paid because of a dispute, a long
delay in resolving the dispute may have significant adverse effects
on business operations and credit ratings. Thus, experts say, some
faster mechanism to resolve commercial disputes is needed.
  Given these problems, many businesses, including small
businesses, seek alternative mechanisms to resolve disputes. There
are three major alternative dispute resolution methods currently
used to replace full-scale litigation.
  First, some complex commercial disputes are settled using
mini-trials before judges instead of a jury trial. These trials
involve less use of discovery (the pretrial procedure designed to
uncover evidence related to the dispute) and are less formal
because they are tried before a judge. The results, as with a more
conventional trial, are binding on the participants.
  Second, arbitration, both binding and nonbinding, is used to
resolve commercial disputes. Arbitration uses an independent third
party to review the dispute and determine which party is correct.
In binding arbitration, the arbitrator's determination is final and
unappealable. Nonbinding arbitration permits the parties, if
unsatisfied with the outcome, to seek resolution in the courts.
Many commercial contracts now have clauses requiring binding
arbitration to settle disputes. In certain instances, such as
disputes between stockbrokers and their customers, binding
arbitration is mandated by federal statute.
  Finally, some disputes are resolved through mediation. Mediation
uses a third party to initiate negotiations and reduce friction
between parties. Mediation is a common technique to resolve labor
disputes and is increasingly used to settle commercial disputes. In
mediation, unlike arbitration, the mediator does not force a
settlement on the parties, but may suggest solutions that attempt
to bridge the gap.
  On October 12,1993, the U.S. House of Representatives passed an
alternative dispute resolution bill, entitled the Court Arbitration
Authorization Act of 1993 (H.R.1102). The act under consideration
amends the Judicial Improvements and Access to Justice Act,
reinstating the authority of U.S. district courts to authorize the
use of arbitration in civil actions in which less than $100,000
($150,000 in some district courts) in damages is claimed. However,
the arbitration is not binding and the litigants retain their right
to a trial in federal court.
DISCUSSION
* If ADR resolves disputes more quickly than conventional
litigation, should attempts to settle the dispute through ADR be
mandatory before litigation can be brought in federal district
courts?
* Should the arbitration be binding?
* Should the damages-claimed value be set higher?
Bankruptcy
Should Congress change the U.S. bankruptcy code to create a more
expedient and less costly reorganization process for small
businesses?
BACKGROUND
In recent years, small businesses have filed for bankruptcy in
record numbers. Other small businesses have failed without filing
for bankruptcy, closing their doors with at least one outstanding
debt. Because more than 90 percent of bankruptcies and failures
occur in small businesses, it has been proposed that a small
business reorganization chapter be created in the U.S. bankruptcy
code. As it stands, the reorganization process under Chapter 11 of
the code is lengthy and costly. Small businesses could benefit from
a system that provides for a shortened reorganization timetable,
allows the owner to retain control of the day-to-day operation of
the business and is less costly.
  Some states are experimenting with small business bankruptcy
provisions. The Eastern District Court for North Carolina is
currently utilizing the principles of a small business
reorganization chapter to benefit small businesses and creditors
and to ease court congestion.
  The current bankruptcy code included a small business bankruptcy
section before major revisions were made in 1978. Chapter 11, which
currently permits business reorganizations, could be modified to
streamline small business reorganization proceedings.
  Some argue that the current system is adequate but is not being
implemented properly by the creditor committees and the court
system. Others maintain that as the economy improves, small
businesses will not have a need for a special bankruptcy provision
and that a new chapter would take years to implement properly.
STATUS
Legislation has been introduced in the 103d Congress that would
establish a pilot Chapter 10 for small business reorganizations--
the Bankruptcy Amendments Act of 1993 (S.540).
DISCUSSION
* Should loss carry forward provisions be granted for small
business bankruptcies?
* The recently enacted Omnibus Budget Reconciliation Act of 1993
eliminated the special tax treatment permitted when businesses
exchanged a debt to a creditor for stock. Should this provision be
reinstated for small business reorganizations?
* Should a separate chapter of the bankruptcy code be adopted for
small business reorganizations?
* Should the bankruptcy code be revised to provide better
protection for small business creditors, many of whom are unsecured
and thus have lower priority in being repaid?
Civil Justice Reform
Should Congress enact reforms to the civil justice system?
BACKGROUND
  For small businesses, litigation is both expensive and time
consuming. While alternative dispute resolution techniques may
alleviate some of the costs associated with litigation, some
disputes may have to be decided by the courts. The additional costs
associated with settling disputes through litigation are a hidden
tax assessed on almost every business transaction.
  Executive Order 12778, which took effect January 21,1992,
mandates that lawyers for the federal government attempt to resolve
disputes before trial, use expeditious practices in the acquisition
of pretrial information, and, when possible, narrow the focus of
the litigation.
STATUS
Legislation introduced in the 103d Congress seeks to require all
U.S. district courts to have mandatory arbitration programs for
cases in which less than $100,000 in damages is claimed. The pro-
posed bill is titled the Court Arbitration Authorization Act of
1993 (H.R.1102). The bill passed the House in October 1993.
  Reform plans are being implemented in Delaware under the Summary
Procedures Act. The act addresses the evidentiary and decision
making inconsistencies of arbitration by moving commercial
litigation through an expedited discovery process, setting
limitations on the filing of motions, accepting written reports and
arguments in lieu of testimony, and avoiding unpredictable juries
and crippling punitive damages.
  No legislation has been introduced to extend the principles
announced in Executive Order 12778 to private litigation in federal
courts.
DISCUSSION
* Before considering reforms, should Congress hold hearings that
involve small business constituents to learn about the problems
small businesses face in the civil justice system?
* Should Congress enact reforms to increase the pace at which
disputes are resolved by the civil justice system?
* Should other civil justice reforms be considered, such as
increasing the use of sanctions against lawyers and clients who
bring frivolous lawsuits, reforming the rules of evidence to guard
against the use of "junk science" in the courtroom, and adding more
trial judges in order to reduce the backlog of court cases?
Equal Access to Justice Act
Should Congress amend the Equal Access to Justice Act of 1980
(EAJA) to enhance small business protections against frivolous
government lawsuits?
BACKGROUND
Under the Equal Access to Justice Act, some small businesses (those
with fewer than 500 employees and net worth below $7 million) and
individuals (those with a net worth below $2 million) who prevail
in litigation against the U.S. government may recover costs and
attorneys' fees when the government's position in the litigation
cannot be substantially justified. Attorney fee awards are cur-
rently limited by statute to $75 per hour. Courts will consider
inflationary factors to increase the $75 statutory presumption in
appropriate cases.
STATUS
  The Administrative Conference of the United States held informal
hearings on the EAJA during 1992. Legislation introduced during the
102d Congress that proposed a uniform method for determining
attorney fee awards was not acted upon.
DISCUSSION
* Does the EAJA effectively protect small businesses?
* Should Congress amend the act, with particular emphasis on
reducing litigation that concerns fees and awards?
Fair Labor Standards Act
Should Congress amend the Fair Labor Standards Act to alleviate the
burdens on small businesses?
BACKGROUND
  The Fair Labor Standards Act (FLSA) was enacted in 1938 and has
been amended on numerous occasions. Significant provisions of the
FLSA specify a universal minimum wage schedule for all covered
workers and require an employer to pay overtime for excess hours
worked. Other provisions affect leave policies, thresholds for
coverage and compensatory time.
  A number of provisions and legislative actions related to FLSA,
in addition to the proposed minimum wage increases, affect small
firms.
  In 1989, legislation was passed by Congress amending the FLSA,
principally to raise the federal minimum wage to its current level.
One issue addressed during debate on the legislation in 1989 was
the liberalization of the FLSA's threshold for application--the
so-called small business exemption. The annual dollar volume test
for FLSA coverage of businesses was raised to $500,000, and has not
been raised since that time.
  Also, however, a specific minimum wage and overtime pay exemption
for small retail and service businesses was eliminated. As a
result, despite the passage of the uniform $500,000 level,
individual employees of small businesses became subject, for
the first time, to minimum wage and overtime requirements for any
work week in which they were engaged in interstate commerce.
STATUS
  Legislation was introduced during the 102d Congress to restore an
exemption for businesses grossing less than $500,000 annually.
Three bills calling for an increase in the minimum wage rate (cur-
rently $4.25 per hour) have been introduced in the 103d Congress.
  The U.S. Department of Labor is currently enforcing an
interpretation of the FLSA that effectively prevents employers from
having flexible leave policies allowing partial day absences. The
DOL has held that employers who allow partial day absences, but who
do not provide unlimited paid leave for such absences, are treating
those employees like hourly, not salaried, employees. The effect is
that these employees lose exempt status and are eligible for
overtime pay for up to three years back. Under the FLSA, employers
are usually required to pay time and a half for each hour worked
over 40 hours during a work week. Compensatory time in lieu of time
and a half is not permitted. Legislation is being proposed to give
employers and employees the choice, mutually agreed upon, to elect
time-and-a-half pay during the work week in which the time was
accrued or straight compensatory time during a later work week.
DISCUSSION
* Should the small business exemption level be raised? To what
level?
* Should the minimum wage and overtime pay exemption for small
retail and service businesses be reinstated?
* Should the DOL policy regarding partial day absences be
addressed? If so, how?
* Should legislation permitting employers and employees to elect
compensatory time in lieu of time and a half be adopted?
* Outside sales personnel are exempt from the overtime provisions
of the FLSA. However, inside sales personnel are not, as a rule,
considered exempt. Should this provision be considered for
amendment?
Line-item Veto
Should the President have the authority to veto line items out of
enacted legislation?
BACKGROUND
Currently, when Congress passes legislation, the President has the
option of signing the legislation or vetoing it. Legislation passed
by Congress is usually a compilation of various bills. Often, many
of the items are not related to the main provisions of the bill.
Line-item veto authority would give the President the ability to
veto a particular section of a bill that is unrelated to the main
provisions without vetoing the entire piece of legislation.
Congress would still be able to override a line-item veto.
STATUS
Many bills and resolutions have been introduced in the 103d
Congress to grant the President line-item veto authority.
Currently, none of these bills have been reported out of committee.
DISCUSSION
* Would line-item veto authority help the President cut government
spending and reduce legislative gridlock?
* Is a line-item veto unconstitutional, as opponents believe,
violating the rights and powers of Congress?
* Should the President be able to veto line items not germane to
the primary subject matter of the legislation passed by Congress?
Negotiated Rulemaking
Should the government implement specific negotiated rule making
procedures for agencies to follow?
BACKGROUND
  Although the purpose of government regulation is to promote the
safety and general welfare of the American public, many argue that
the current rulemaking process tends to discourage parties from
meeting and communicating with each other. This lack of
communication leads to general misunderstanding, conflicting and
antagonistic positions toward agency rules, and sometimes expensive
and time-consuming litigation.
  Negotiated rulemaking is a process through which the parties most
likely to be affected by a rule have a chance to negotiate with the
agency developing the regulation before it is published for
comment. Instead of the agency and the affected parties expending
their time and resources litigating a proposed rule, they could
devote their energies to constructively developing the rule
together. As a result, the affected parties would have ownership in
the rule and, rather than challenging it, may be more likely to
comply with the rule once it is final.
STATUS
  It has been argued that legislative and regulatory changes are
needed.
DISCUSSION
* Should the government require all agencies to follow negotiated
rulemaking? How could groups of small businesses best be
represented in such a process?
Occupational Safety and Health Reform
Should Congress reform the nation's safety and health laws?
BACKGROUND
  The Occupational Safety and Health Act (OSH Act) was enacted
originally in 1970 to protect the safety and health of the nation's
workers through the promulgation of standards and programs.
  Additional technical assistance and outreach to the small
business community by the Occupational Safety and Health
Administration (OSHA) may be a way to encourage greater compliance
without fear of citation or penalty. The U.S. Department of Labor
has a small business consultation service that could assist in this
effort.
STATUS
  In 1992, both the House of Representatives and the Senate
considered legislation to amend the OSH Act. New legislation was
introduced in the 103d Congress. Reformation of the act is a
priority for the U.S. Department of Labor and the National Economic
Council, and an interagency working group is studying ways to
reform the act.
DISCUSSION
* Options for change to existing law include:
- Establishment of a joint labor-management safety and health
committee for employers with 11 or more full-time employees, with
an extensive list of committee "rights."
- Establishment and maintenance by employers of written safety and
health programs.
 Expansion of the OSH Act's present criminal penalties.
- Allowing employees to challenge aspects of citations, penalties
and settlement agreements currently between OSHA and the employer.
- Creation of a new, expedited time frame for the issuance of OSHA
standards.
- Requiring that OSHA engage in explicit cost-benefit analyses when
promulgating regulations.
- Use of incentives, such as tax credits and reductions in
mandatory inspections, to encourage voluntary adoption of health
and safety programs and joint labor-management committees by
employers.
- Provision of a model injury prevention program and a condensed
version of regulations for small businesses.
* Should additional funding be made available to OSHA's small
business consultation service to provide more technical assistance?
Should this service be expanded to accommodate the needs of small
employers in low-hazard industries, which have had limited access
in the past?
Paperwork Reduction Act
Should Congress reform the Paperwork Reduction Act?
BACKGROUND
During the 1970s, a regulatory explosion occurred in the United
States. Congress recognized that the associated paperwork and
recordkeeping requirements could impose undue burdens on businesses
and enacted the Paperwork Reduction Act of 1980 (PRA), which took
effect on April 1,1981. The PRA was based on the principle that the
government should, to the extent possible, reduce both the
recordkeeping requirements and the amount of paperwork that
businesses are required to generate and maintain. The PRA targeted
several classes of the public for relief, in particular, small
businesses.
  The Office of Information and Regulatory Affairs (OIRA) within
the Office of Management and Budget (OMB) is responsible for review
of federal agency collection-of-information requests (the statutory
term for both reporting and recordkeeping requirements). With
several exceptions, the PRA requires federal agencies to obtain OMB
approval before conducting or sponsoring a collection of
information. In order to limit paperwork, OIRA is required to
determine that paperwork requirements have practical utility, that
they are the least burdensome necessary, and that they do not
duplicate information otherwise available.
  By virtue of the PRA, OIRA is uniquely positioned to assess
federal burdens and to ensure government sensitivity to the needs
of the small business community, which are not always considered by
the regulating agencies themselves.
STATUS
  The power of OIRA to oversee collections of information was
severely limited in a recent Supreme Court decision interpreting
the PRA. OIRA disapproved OSHA's collection of information on the
use of dangerous chemicals in the workplace as being too
burdensome. But the Supreme Court held that the PRA applies only to
records maintained by the employer or those provided to the
government--not to those provided by the employer to some third
party. This interpretation enables agencies to impose substantial
paperwork burdens without review by OIRA.
  In recent years, a number of bills have been introduced to
strengthen the original PRA, allow for increased public
participation in the regulatory process, and restore the review of
third-party collection of information requests. Legislation has
been introduced anew in the 103d Congress addressing these issues.
DISCUSSION
* Some concern has been raised over the length of the paperwork
review process. Should the duration of the process be limited?
* Should OIRA's oversight be strengthened with respect to the
effects of the paperwork burden on small business?
* Should third-party information collections be covered by the
Paperwork Reduction Act?
Product Liability
Should Congress enact a national uniform product liability law?
BACKGROUND
Product liability reform was one of the top 10 recommendations of
the 1986 White House Conference on Small Business.
  Product liability law obligates suppliers of defective goods to
compensate users for injuries resulting from those goods. Differing
state product liability laws impose widely varying statutes of
limitations and create uncertainty for businesses selling in a
national marketplace, often allowing unreasonably large judgments.
Numerous small businesses have withdrawn products from the market
because of liability concerns.
  Small businesses may be affected more negatively than large
businesses by non-uniform product liability laws. Small firms do
not enjoy economies of scale in production and litigation costs,
they are less able to bargain with potential plaintiffs, and their
limited assets increase their need to rely on market insurance.
  Proponents of a uniform product liability standard believe it
will reduce litigation and insurance costs. Goods will be more
marketable because their prices will not have to cover such
expenses.
  Others believe that product liability laws are a matter of state
concern, and should not be preempted by federal law. Some consumer
groups claim that a national law that imposes a uniform statute of
limitations period on suits against manufacturers will adversely
affect injured parties.
STATUS
  Under consideration in the 103d Congress is a national uniform
product liability bill titled the Product Liability Fairness
Act/Fairness in Product Liability Act of 1993 (S.687/ H.R.1910).
DISCUSSION
* Should a national uniform product liability law be enacted?
Regulatory Flexibility Act
Should Congress amend the Regulatory Flexibility Act by providing
mechanisms to force improved agency compliance?
BACKGROUND
The Regulatory Flexibility Act of 1980 (RFA) requires federal
agencies to examine the impact of their proposed and final rules on
small businesses. After this examination, agencies either certify
that the proposed rules will not have a significant economic impact
on a substantial number of small entities (the act also includes
small non-profits and governmental jurisdictions) or perform a
regulatory flexibility analysis. The certification statement must
be accompanied by a succinct statement explaining the rationale for
the certification. The critical element of a regulatory flexibility
analysis is the examination of alternatives that will reduce the
burden of a regulation on small business or enhance a rule's
beneficial effects on small business.
  The Regulatory Flexibility Act provides an essential tool for
reasoned agency decision making, yet agencies often use exceptions
to avoid their analytical responsibilities. The Internal Revenue
Service, for example, claims that its rules simply interpret
statutes and need not be issued for notice and comment. Because the
IRS issues its rules as interpretations, it is not required to
comply with the RFA. In other circumstances, agencies sometimes do
as little as necessary to comply with the RFA. Each agency has its
own process for complying and no uniform guidelines exist.
Moreover, the RFA requires agencies to examine whether their
proposed rules duplicate existing rules but does not require an
assessment of the cumulative impact of regulations.
  No actions taken to comply with the act are directly
challengeable in court. Regulatory flexibility analyses, but not
certifications, become part of the record reviewed by the court to
determine whether a rule is arbitrary and capricious under the
Administrative Procedure Act. The U.S. Small Business
Administration's Office of Advocacy has the authority to file
amicus curiae briefs in court but has only used that authority
once. A dispute between the Office of Advocacy and the U.S.
Department of Justice concerning the constitutionality of the
amicus authority has never been definitively settled.
STATUS
Bills introduced in each of the past two Congresses to address RFA
issues died in committee. Legislation again has been introduced in
the 103d Congress proposing amendments to the Regulatory
Flexibility Act. On November 18,1993, the House Judiciary
Subcommittee on Administrative Law held a hearing on the RFA. As of
February 1994, 245 members of the House of Representatives had
signed on as co-sponsors to the bill. In March 1994, the Senate
voted to add RFA amendments to S.4, the National Competitiveness
Act of 1993.
  The Clinton Administration's National Performance Review
recommended that agency compliance with the RFA be subject to
judicial review. The National Performance Review task force also
recommended that the Office of Advocacy be authorized to draft
governmentwide guidance on compliance with the RFA.
DISCUSSION
* Would an alternative to judicial review ensure that agencies
comply? For example, should legislation require that regulations
not reviewed under the RFA or its 10-year review provision (the RFA
requires review of agency regulations every 10 years) be
invalidated? Or should the President issue an executive order
declaring that regulations not affirmatively readopted every 10
years after examination under the RFA be eliminated?
* Should the President mandate that uniform guidelines be drafted
by the Office of Advocacy and require that federal agencies adopt
those guidelines to comply with the RFA?
* Should agencies or the Office of Management and Budget be
required to assess the cumulative impacts of their regulations--
within agencies or governmentwide?
Small Business Size Standards
How should the government define a small business? Should the
definition be the same for all purposes?
BACKGROUND
The Small Business Act defines a small business as one that is
independently owned and operated and not dominant in its field. To
carry out its responsibilities under the Small Business Act,
particularly in relation to government procurement, the U.S. Small
Business Administration (SBA) has established size standards for
most industries classified under the Standard Industrial
Classification system adopted by the U.S. Department of Commerce.
  The Regulatory Flexibility Act ( RFA) permits agencies to use a
definition of small business other than that utilized by the SBA
for purposes of performing analyses pursuant to the RFA. Only a few
agencies actually have established separate size standards for
compliance with the RFA.
  In 1992, Congress amended the Small Business Act's size standard
provisions. Now the size standards apply not only to SBA programs
but to all other federal regulatory programs unless an agency
undertakes rulemaking to adopt a different size standard for the
regulatory program. The amendment also requires that the SBA
Administrator concur in the size standard developed through
rulemaking. Two exceptions to this amendment exist: (1) if Congress
specifically provides for a definition of small business in a
statute; or (2) if Congress specifically delegates to a particular
agency the authority to define a small business for its regulatory
programs.
  The disparate size standards that the federal government may use
to define a small business can create problems for all businesses.
The fact that a business is considered small by the SBA for
purposes of procurement may have no correlation to a business's
need to comply with environmental standards.
  While a uniform standard for purposes of regulation may reduce
uncertainty for small businesses, the reduction comes at a cost. A
non-uniform definition enables Congress and federal agencies to
tailor their legislative and regulatory efforts to an appropriate
business measurement. For example, Congress in 1993 modified the
small business exemption from the requirements of the Nutrition
Labeling Education Act. The standard not only examined employment
but the amount of a particular food product produced. A uniform
size standard would not capture the diversity in food product
output and might be inappropriate.
STATUS
  In August 1993, the SBA Administrator requested comments on the
best methods for implementing the amendments to the RFA. A
follow-up letter was sent to agencies that did not reply to the
original notice. Final regulations are being developed by the SBA's
Office of Size Standards in conjunction with the SBA's Office of
General Counsel.
DISCUSSION
* Should there be a uniform definition of small business?
* How should the policymaking bodies in the federal government
(agencies and Congress) balance the need for uniformity against the
benefits of tailoring size standards?
* Would proper utilization of the Regulatory Flexibility Act
alleviate some of these concerns?
Striker Replacement Legislation
  Should Congress enact legislation to prohibit the use of
permanent replacement workers for economic strikers?
BACKGROUND
Legislation has been introduced in Congress to prohibit the use of
permanent replacement workers for economic strikers in all
industries in the private sector. This would be accomplished by
amending the National Labor Relations Act and the Railway Labor
Act.
  Proponents of this type of legislation argue that it is necessary
to restore the balance of power between employers and employees,
which they claim has been lost; opponents argue that this would be
a fundamental change in the current balance, which they maintain is
fair. Employers also are concerned that such a change might affect
the lines of distribution--customers, suppliers and manufacturers--
as well as businesses directly, regardless of whether or not a work
force is unionized. Thus, there may be significant indirect
effects. Proponents last year argued in favor of compromise
provisions to restrict the change to union environments only and to
add a moratorium provision.
STATUS
Striker replacement legislation is under consideration in the 103d
Congress.
DISCUSSION
* How should the issue of permanent replacements for economic
strikers be handled with respect to small businesses?
Unfunded Mandates
Should the federal government impose unfunded mandates on small
business?
BACKGROUND
Federal unfunded mandates are federal requirements placed on small
businesses (or on state and local governments) without provision of
money for compliance. The mandates call for the small business to
conduct a specific task; failure to do so may result in civil or
criminal penalties. For example, the government imposes limits on
the amounts of pollutants that may be discharged into lakes, rivers
and streams. These restrictions generally apply with equal force to
any business discharging pollutants irrespective of size. Yet the
legislation and regulations that impose these requirements do not
provide funds for businesses to purchase equipment or modify their
operations to meet these requirements.
  Unfunded mandates impose substantial direct and indirect costs on
businesses. In the water pollution control example, small
businesses must obtain capital to pay for water pollution equip-
ment. At the same time, small businesses face increased state and
local taxes to pay for unfunded mandates imposed on those
governmental entities by federal policymakers.
STATUS
A group of trade associations representing businesses and
governments have formed an Unfunded Mandate Caucus to educate
Congress about the issue. Numerous bills have been introduced in
the 103d Congress to address various aspects of the unfunded
mandate problem.
DISCUSSION
* Unfunded mandates often address important societal issues such as
safe drinking water, access to medical care and treatment of
Americans with disabilities. How should the federal government pri-
oritize these various issues to avoid imposition of unfunded
mandates?
* State and local governments have been at the forefront of the
unfunded mandate problem, yet the costs of meeting these mandates
are often passed on to small businesses. What consideration should
be given by federal policymakers to both the direct and indirect
costs of unfunded mandates on small business?
Taxation
  Taxes imposed by federal, state and local governments represent
one of the most significant costs to small and growing businesses.
Most small businesses must expend substantial time and resources to
comply with extensive, complex and constantly changing tax laws.
   When discussing tax issues and proposed remedies, however, it is
important to bear in mind the effect any proposal will have on
federal revenues. In order to pay for an initiative that may be a
"revenue loser," Congress may be forced to enact revenue-raising
measures or eliminate other tax incentives.
   Businesses face a variety of tax issues depending on the form of
organization they choose. Most small businesses and entrepreneurs
are organized as sole proprietorships, partnerships or "S"
corporations, which are subject to individual rather than corporate
tax rates. Of the estimated 21 million business tax returns filed
in 1992, approximately 90 percent were filed by these
"pass-through" entities, while the remainder were filed by "C"
corporations subject to corporate tax rates.
   The complexity of the tax system makes it one of the key areas
for reform and fresh thinking. The growth of the economy depends in
part on a tax system that meets necessary goals without unduly
burdening the smallest businesses.
   For related information, see sections on Tax Incentives for
Investing in Pollution Control Equipment, p. 41; Health Insurance
Deduction for the Self-Employed, p. 48; Social Security Tax Reform,
p. 52; Taxation of Health Benefits, p. 54; Unfunded Mandates, p.
77; and Research and Experimentation Tax Credit, p. 99.
Accounting Methods
Should all small businesses be allowed to use the cash method of
accounting?
BACKGROUND
Small business owners must choose a method of accounting that
clearly reflects income. However, there are restrictions on the
types of accounting methods businesses may use. Under the cash
method of accounting, income is reported in the year it is actually
or constructively received and expenses are deducted when paid. The
cash method of accounting is available only to service firms with
average annual gross sales of less than $5 million. Businesses with
gross sales in excess of this amount, along with retailers,
wholesalers, manufacturers or any business where inventory is a
material factor, must use the accrual method of accounting.
  Under the accrual method of accounting, generally income is
reported in the year in which it is earned and expenses are
deducted when incurred. As a result, the accrual method requires
businesses to include in income amounts that have been billed to
customers, even if payment has not been received. The accrual
method can be very complicated to administer and may generate
substantial administrative and accounting expenses for a small
business. Because small businesses typically finance growth from
internally generated earnings, the high costs that may result from
following the accrual method may increase the cost of capital for
small businesses and restrict their ability to increase both
capacity and work force.
  In practice, the accrual method may often reflect business income
more accurately than the cash method. However, attaining this
accuracy can be both expensive and time-consuming to small
businesses. Experts maintain that the cash method of accounting
would relieve small businesses of the administrative costs and
burdens associated with the accrual method. It is feared, however,
that some business owners would take advantage of the cash method
to unfairly lower their tax liability.
STATUS
No legislation is pending on this issue.
DISCUSSION
* Should all businesses with revenues below a prescribed threshold
be permitted to use the cash basis of accounting?
Alternative Minimum Tax
Should Congress enact legislation reducing or eliminating the
alternative minimum tax paid by small businesses?
BACKGROUND
The alternative minimum tax (AMT) is intended to prevent taxpayers
from reducing or eliminating their tax liability by claiming
certain adjustments and tax preference items. The AMT liability
generally equals 26 percent or 28 percent (for individuals) and 20
percent (for corporations) of the amount by which the taxpayer's
alternative minimum taxable income (AMTI) exceeds a prescribed
exemption amount. The taxpayer must pay the greater of the "regular
tax" or the AMT.
  Before the Omnibus Budget Reconciliation Act of 1993 (OBRA) was
enacted, corporations were required to make two different
depreciation calculations to determine their AMT liability: one to
determine their AMTI and one to calculate adjusted current earnings
(ACE) to determine the amount by which their AMTI must be
increased. OBRA eliminated the depreciation component of the ACE
adjustment for tangible personal property placed in service after
December 31, 1993.
STATUS
Legislation introduced in the 103d Congress would provide that
qualified small businesses do not have to take into account
specified adjustments and tax preference items when computing AMTI.
Qualified small businesses would include any business with average
annual gross receipts of less than $1 million for the three
previous taxable years.
DISCUSSION
* Should the AMT be reduced or eliminated for small businesses?
* Should certain tax preference items be exempt from the AMT for
small businesses
Capital Gains Tax
Should Congress reduce the capital gains tax on investments in
small businesses?
BACKGROUND
The Tax Reform Act of 1986 eliminated the 60-percent deduction for
long-term capital gains. Capital gains are now taxed at regular
income tax rates, subject to a maximum tax rate of 28 percent.
  The Clinton Administration proposed and Congress passed the
Omnibus Budget Reconciliation Act of 1993 (OBRA,, which included a
capital gains provision targeted at individuals investing in
original-issue stock of qualified small businesses. A qualified
small business is defined as a "C" corporation with less than $50
million of aggregate capital.  Subject to limitations, investors
who hold such stock for at least five years may exclude 50 percent
of the gains realized on the disposition of the stock.
  The 1986 White House Conference recommended restoring and
improving favorable capital gains tax treatment.
  Opponents of preferential capital gains treatment contend that
the current tax treatment, which defers tax until the capital asset
is sold, already provides favorable treatment for capital gains.
They maintain that reducing the tax on capital gains would
primarily benefit the wealthy.
  Proponents of preferential capital gains treatment argue that the
current tax rate on capital gains compels taxpayers to hold capital
assets rather than sell the assets and pay taxes on both the real
and inflated gain.
STATUS
  A number of bills introduced in Congress have proposed to expand
preferential capital gains treatment. Some proposals calculate the
rate of tax on the capital gain based on the length of time the
taxpayers hold the capital asset. Other proposals seek to index
capital gains for inflation, and still others propose to allow only
certain assets preferential capital gains treatment.
DISCUSSION
  If it is determined that the capital gains exclusion should be
expanded, a number of ways have been proposed in which the
exclusion could be modified to benefit small businesses:
* Expand the targeted capital gains provision contained in OBRA.
This could be accomplished by increasing the capitalization limit
to $100 million and/or indexing it to inflation; allowing C cor-
porations to be eligible for the exclusion; eliminating or
increasing the limit on the amount of gain eligible for the
exclusion; deferring tax on capital gains that are rolled over into
qualified investments; reducing the capital gains rate to zero for
"seed" capital investments held for 10 or more years; and/or
applying the capital gains exclusion to investments in S
corporation stock.
* Allow the gain on the sale of a capital asset used in a trade or
business to be deferred if the proceeds from the sale are
reinvested in the business.
* Provide the owner/operator of a small business a one-time,
$125,000 capital gains exclusion on the sale of the business.
* Index the basis of capital assets to inflation.
* Permit increased write-off of capital losses.
Corporate Tax Rates
Should the corporate tax rate structure be modified to facilitate
small business capital formation?
BACKGROUND
A tax is imposed for each taxable year on the taxable income of
every "regular" or "C" corporation. Corporations are subject to
graduated tax rates. A recent history of corporate tax rates is as
follows:
________________________________________________________________
Taxable               Corporate Tax Rate (%)           % Change
               ....................................
Income         1975-78  1979-81   1982-86   1987-93     post-1986
$0-25,000       20       17        15        15             0
$25-50,000      22       20        18        15           -16.67
S50-75,000      48       30        30        25           -16.67
575-100,000     48       40        40        34           -15.00
over $100,000   48       46        46        34           -26.09
  Currently, the tax on corporate taxable income exceeding $
100,000 is increased by the lesser of 5 percent of the excess, or
$ 11,750. The Omnibus Budget Reconciliation Act of 1993 (OBRA)
established a new 35-percent marginal tax rate on corporate taxable
income exceeding $10 million.
  In 1985,79 percent of corporate capital was raised internally,
primarily through retained earnings. A study by the Harvard
Business School found that corporate income taxes restricted busi-
ness growth in three ways: by discouraging risk, by depriving firms
of funds needed for expansion and by making outside capital more
difficult to obtain on reasonable terms.
  Studies by the Securities and Exchange Commission conclude that
businesses must generate approximately $500,000 in profits in order
to sell their stock in a regional offering, and approximately $ 1
million in profits to offer their stock nationally. Until this
level of earnings is attained, most businesses must rely on
internally generated capital.
  Although corporate tax rates on income of less than $75,000 have
been reduced substantially since 1975, the lower corporate tax
brackets have not been adjusted for inflation. As a result, growing
firms are subject to the 34-percent tax rate when their taxable
income reaches $75,000, well short of the half million dollars they
must generate to reach public capital markets.
  The Tax Reform Act of 1986 eliminated many business deductions
claimed by small corporations, but did not reduce the lowest
corporate tax rate. Because many deductions were eliminated, many
small corporations reported greater taxable income and paid more in
corporate taxes. The increase in taxes is particularly burdensome
to undercapitalized startup corporations.
  Proponents of further graduating the corporate rate structure
maintain that this will increase small business access to capital.
They believe this will result in job creation, overall economic
growth, and increased tax revenues at the federal, state and local
levels.
  Opponents contend that owners of small businesses may use the tax
savings for personal rather than business purposes. Others believe
the current budget situation does not permit reducing the revenues
from small businesses because there is no guarantee that benefits
will exceed the costs of such a policy.
STATUS
  The 1980 White House Conference recommended that corporate tax
rates be graduated up to $500,000, with no recapture provision. In
1980, Representative Dan Rostenkowski, chairman of the House Ways
and Means Committee, sponsored legislation to expand the corporate
tax brackets and graduate rates up to $200,000. This legislation
was not enacted. During the 1986 White House Conference on Small
Business, a frequent recommendation of state conferences was to
expand the corporate tax brackets to $500,000.
No legislation is currently pending on this issue.
DISCUSSION
* Should the corporate tax rate structure be modified by expanding
the corporate tax brackets, modifying tax rates and making
adjustments for inflation?
* Should Congress reduce the lowest corporate tax rate, or create
a zero percent tax bracket for the first $20,000 in corporate
income?
Employee/Independent Contractor Classification
Should Congress clarify and codify the definition of "independent
contractor"?
BACKGROUND
Under current law, workers are classified as employees or
independent contractors in one of three ways: (1) explicit
statutory classification; (2) statutory "safe harbors"; or (3) the
"20-factor commonlaw test." The 20 common-law factors are consid-
ered by many to be subjective and inconsistently applied by the
Internal Revenue Service. As a result, businesses that
unintentionally misclassify workers are often subject to back taxes
and severe penalties.
  In fiscal year 1989, the IRS reclassified 76,000 workers from
independent contractor status to employee status and imposed $93.8
million in assessments. From 1987 to 1991, proposed assessments
from IRS reclassification totaled $467 million. The General
Accounting Office estimates that the U.S. Treasury loses more than
$ 1.6 billion in taxes each year because of employee
misclassification.
  Classification of workers is critical because businesses are
required to withhold income taxes and pay FICA (Social Security and
Medicare) and FUTA (unemployment) taxes for employees, but not for
independent contractors. In addition, the classification may also
affect workers' compensation, labor relations and health insurance.
STATUS
  Worker classification legislation has been introduced in the 103d
Congress. The issue was the topic of hearings held by the House
Government Operations Subcommittee on Commerce, Consumer and
Monetary Affairs (June 8, 1993) and the House Ways and Means
Subcommittee on Select Revenue Measures (September 21, 1993).
DISCUSSION
* Should Congress clarify the definition of an independent
contractor? A clear definition would allow businesses to correctly
classify their workers and thus avoid potentially severe
reclassification penalties.
* Should Congress provide a uniform definition of an employee for
fringe benefit, qualified retirement plan, labor relations and
workers' compensation purposes?
* Should Congress simplify and clarify the 20-factor common-law
test currently used to determine employee and independent
contractor status? Additional safe harbors could be provided to
limit penalties imposed as a result of inadvertent mis-
classifications.
* Should the IRS develop an education program to explain and
increase the public's awareness of the tax obligations imposed on
employers, employees and independent contractors?
* Should the IRS place greater emphasis on compliance measures,
such as matching the amounts provided by businesses on Form 1099s
to the amounts reported by independent contractors and increasing
the penalty for those failing to file Form 1099s?
* Should Congress lift the ban that currently prohibits the IRS
from issuing regulations in the independent contractor area?
* To help small businesses classify workers with greater accuracy,
should the IRS explain in greater detail how it applies the present
20-factor common-law test and provide additional examples?
* Should the IRS eliminate back taxes for misclassification when
Form 1099s are filed and there is no evidence of fraud? The IRS
could provide that classification determinations by field agents be
prospective, including classifications for required participation
in retirement and fringe benefit plans.
Estate, Gift and Generation-Skipping Taxes
Should Congress modify or repeal the estate, gift and
generation-skipping ("transfer") taxes?
BACKGROUND
An estate tax is imposed on the transfer of the taxable estate of
every decedent who was, at the time of death, a citizen or resident
of the United States. Taxes on bequests to spouses may be deferred
until the spouse's death. The graduated estate tax rates increase
to a maximum rate of 55 percent. In 1987, the estate tax credit was
increased from $47,000 to $ 192,800, allowing the first $600,000 of
a decedent's estate to be free from the estate tax. A gift tax is
levied on taxable gifts exceeding $10,000 per donee per year. The
gift tax rates are the same as the estate tax rates. An additional
flat 55-percent generation skipping tax is imposed on gifts or
bequests to grandchildren exceeding $ 1 million.
  The current estate tax exemption may be insufficient to cover the
value of many family businesses. As a result, the heirs to a family
business may be forced to sell, liquidate or scale down the
business in order to satisfy the estate tax liability. Only 30
percent of family businesses are passed intact to a second
generation; only 13 percent are passed to a third generation.
  Under the current transfer tax system, an asset received from a
decedent's estate receives a "stepup in basis" equal to the value
shown on the estate tax return. As a result, those who inherit an
appreciated asset may be able to immediately sell the asset without
realizing any gain on the sale. If the transfer tax laws were
repealed, the decedent's basis in the asset, rather than a
stepped-up basis, would be applied. As a result, gain would not be
recognized until the asset was sold and funds were on hand to pay
the resulting tax.
  The transfer tax system forces many estates, as well as the
Internal Revenue Service and the U.S. Department of Justice, to
expend substantial funds to comply with and administer this system.
In 1992, transfer taxes accounted for only 1.1 percent of revenues
taken in. Administrative expenses may offset as much as 75 percent
of the revenues generated by these taxes.
  The 1986 White House Conference on Small Business recommended
eliminating estate and gift taxes on the transfer of small business
assets to family members.
STATUS
Legislation introduced in the 103d Congress includes bills that
would increase the estate and gift tax exemption to $770,000 plus
cost-of-living adjustments (HR. 567), to $850,000 plus cost-of-
living adjustments (H.R. 1475), to $1 million (S. 531) and to $ 1.2
million (H.R. 1110).
 Other legislation (H.R. 2717) introduced in the 103d Congress
would repeal estate, gift and generation-skipping taxes.
DISCUSSION
* Should Congress increase the amount of both the estate and gift
tax exemptions to more accurately reflect the effects of inflation?
* Legislation that would defer estate taxes on the transfers of
small businesses to family members would allow more businesses to
be passed intact to family members. Should Congress exempt small
businesses from the estate tax as long as the business continues to
be owned and managed by a family member?
* Should Congress repeal transfer taxes in their entirety?
Fiscal Year Conformity
Should Congress enact legislation to allow partnerships, S
corporations and personal service corporations (PSCs) to adopt a
tax year different from that of the principal owners?
BACKGROUND
The Tax Reform Act of 1986 generally required all partnerships, S
corporations and PSCs to adopt the same tax year as the principal
owners. The calendar year is the required tax year for all S
corporations, PSCs and most partnerships. Congress enacted this
requirement, referred to as the "fiscal year conformity rule," to
prevent the principal owners of these entities from deferring
income.
  The Omnibus Budget Reconciliation Act of 1987, the Technical and
Miscellaneous Revenue Act of 1988 and the Omnibus Budget
Reconciliation Act of 1989 created and subsequently modified a
statute that permits, under certain circumstances, partnerships, S
corporations and PSCs to elect a tax year different than that of
the principal owners. However, partnerships and S corporations that
make such an election must make a "required payment" by April 15 of
the following calendar year. PSCs electing a different tax year are
subject to prescribed deduction limitations. Because of these
restrictions, few eligible businesses have elected to use a tax
year other than the one required.
STATUS
No legislation is pending on this issue.
DISCUSSION
* The fiscal year conformity rules for partnerships, S corporations
and PSCs have created gridlock for taxpayers, return preparers and
the Internal Revenue Service by requiring the tax returns for both
the entities and principal owners to be compiled in the short time
allotted and filed by the same due date.
* Should Congress enact legislation to allow partnerships, S
corporations and PSCs with less than $1 million in assets or less
than $10 million in gross revenues to adopt a tax year different
from that of the principal owners, without the restrictions
currently imposed?
* Should this rule apply only when the deferral of income to the
owners would be three months or less?
Frequency of Changes in Tax Laws
Should Congress enact major changes to the tax laws less
frequently?
BACKGROUND
Beginning in 1939, Congress enacted major changes to the Internal
Revenue Code every 15 years. Recently, major tax law changes have
been occurring with much greater frequency. For example, from 1981
to 1993, 10 major tax bills were enacted and approximately 9,400
Internal Revenue Code subsections were changed. Changes in tax laws
and regulations also generate numerous additional Internal Revenue
Service regulations and lesser pronouncements. The number and
frequency of these changes have created a 12-year backlog in IRS
regulation projects. The IRS estimates that a third of its budget,
in terms of both financial and human resources, is used to adminis-
ter the changes to the tax laws.
  Proponents of changes in the tax laws say they are necessary to
reflect shifts in economic and tax policy. They maintain that
Congress should enact major tax law changes as often as needed to
reflect these changes.
  On the other hand, it is argued that frequent changes in the tax
laws make it difficult for small business owners and tax
practitioners to stay abreast of the laws. Moreover, frequent and
numerous tax changes, coupled with the delay in IRS regulations,
may reduce a small business owner's ability to undertake successful
tax planning and increase the owner's risk in tax disputes.
STATUS
Although a number of bills seeking to revise the tax code have been
introduced in the 103d Congress, no legislation has been introduced
that would limit the frequency of tax changes.
DISCUSSION
* Should Congress limit the enactment of major tax law changes to
every 5, 10 or 15 years?
* Should Congress bar retroactive changes to the tax code or delay
the effective date of changes until regulations have been
implemented?
Growth Tax Credit
Should Congress enact legislation providing a growth tax credit
(GrC)?
BACKGROUND
  A growth tax credit is a general credit based on a company's
percentage rate of growth in sales over the previous year.
Increased sales ultimately translate into additional jobs and
increased capital expenditures.
  Since 1979, approximately 20 million new jobs were generated by
the entrepreneurial segment of the economy. Growth companies are
paying an increasing portion of the employment taxes and corporate
income taxes collected each year. After paying these taxes, the
businesses are often unable to retain capital for growth and
expansion.
  Advocates of a GTC maintain that it would provide cash flow
relief for successful entrepreneurial companies at precisely the
point when cash flow problems are most acute. The credit would
require no additional government administration. The credit would
be offered to all privately held companies and therefore would be
a direct and non-discriminatory public investment in the future tax
base and employment base of the country.
STATUS
A GTC proposal has been submitted to the House Banking, Finance and
Urban Affairs Subcommittee on Economic Growth and Credit Formation.
However, no legislation regarding the GTC has been introduced.
DISCUSSION
* Should a GTC be enacted? If so, should the credit be equal to a
percentage of sales growth, should there be a cap on the amount of
the credit, and should the credit apply to all businesses, or
should it be limited to businesses with sales greater or less than
a prescribed level?
Home-Office Deduction
Should Congress pass legislation to clarify or modify the current
test that a taxpayer must pass in order to deduct home-office
expenses?
BACKGROUND
Prior to 1976, home-office expenses could be deducted whenever they
were considered "appropriate and helpful" to the taxpayer's
business. Congress, believing that this standard resulted in wide-
spread abuse, enacted legislation as part of the Tax Reform Act of
1976 to prevent the conversion of non-deductible personal, living
and family expenses into deductible business expenses.
  Generally, the Internal Revenue Code provides that no deduction
otherwise allowable shall be allowed with respect to the business
use of a dwelling unit that is used by the taxpayer during the
taxable year as a residence. However, a deduction is allowed to the
extent that expenses are allocable to a portion of the dwelling
unit that is exclusively used on a regular basis: (1) as the
principal place of business for the taxpayer's trade or business;
(2) as a place of business that is used by patients, clients or
customers in meeting or dealing with the taxpayer in the normal
course of his trade or business; or (3) in the case of a structure
not attached to the dwelling unit, in connection with the
taxpayer's trade or business.
  On January 12, 1993, the U.S. Supreme Court ruled in Commissioner
of Internal Revenue vs. Soliman that a taxpayer was not entitled to
a home office deduction because his home office did not serve as
his "principal place of business." To determine the taxpayer's
principal place of business, the court undertook a comparative
analysis of the activities conducted by the taxpayer in his home
office and elsewhere. In its analysis, the court focused on two
primary factors: (1) the relative importance of the functions
performed at each business location; and (2) the time spent at each
location. The Supreme Court's test abolished the facts and cir-
cumstances test adopted by the United States Tax Court and the
Court of Appeals for the Fourth Circuit, which provided that a home
office may qualify as the taxpayer's principal place of business
if: (1) the home office is essential to the taxpayer's business;
(2) the taxpayer spends a substantial amount of time there; and (3)
no other location is available for performance of office functions.
  The Supreme Court's holding in Soliman will not affect taxpayers
who meet clients in their home office and those who work only out
of their home office, such as freelance writers. However, the
Supreme Court's failure to articulate a more precise test may make
it difficult for other taxpayers to determine whether they are
entitled to a home office deduction. Those who do the majority of
their work outside of their home office, but do administrative
tasks at home--such as doctors, repair people, consultants,
personal trainers, teachers and contractors--may find it difficult
to meet the Supreme Court's new test.
  Many small business owners begin their businesses in their homes
prior to moving to other facilities, while others choose to run
their businesses out of their homes for convenience and other
personal reasons. It is argued that business owners should not be
denied legitimate ordinary and necessary business deductions merely
because they operate their businesses out of their homes.
Legitimate deductions, such as mileage for local travel, may be
denied as a consequence of not qualifying for a home-office
deduction.
STATUS
During the 103d Congress legislation was introduced in the Senate
(S. 1116) and in the House of Representatives (H.R. 687,2291,2444
and 3407) to clarify and reverse the impact of the Soliman
decision.
DISCUSSION
* Should Congress enact legislation to repeal the current test used
to determine a taxpayer's principal place of business? If so, what
requirements should be included in a new test?
Individual Tax Rates
Should Congress provide tax relief to small businesses that are
subject to individual tax rates?
BACKGROUND
Income earned by businesses formed as pass through entities, such
as sole proprietorships, partnerships, S corporations, and limited
liability companies, is taxed to the owners of the business using
individual tax rates. The income is taxed in the year earned,
regardless of whether it is actually distributed to the individual
owners.
  Small business owners frequently elect a pass through entity form
of business because, unlike regular or "C" corporations, income
earned by pass-through entities is not subject to double taxation.
Since most small business owners rely on debt financing rather than
equity financing, the regular corporate form of doing business is
not necessary. Businesses that incorporate to avoid unlimited
liability may be eligible to elect to be taxed as an S corporation.
  The Omnibus Budget Reconciliation Act of 1993 (OBRA) created a
new top individual tax bracket of 36 percent on taxable income
exceeding $140,000 for taxpayers filing joint returns and $115,000
for taxpayers filing single returns. OBRA also imposed a 10-percent
surtax on taxpayers with taxable incomes exceeding $250,000. The
tax rate changes are retroactive to January 1, 1993.
  Studies of small business financing reveal that retained earnings
are the primary source of growth capital for small businesses. For
some businesses, individual tax rate increases, coupled with the
erosion of business tax deductions, have lowered after-tax profits
and made it more difficult to accumulate retained earnings. As a
result, some businesses have been forced to postpone plans to
expand or hire additional employees.
STATUS
In the 103d Congress, legislation was introduced but not passed to
repeal the individual tax rate increases and to prevent the
increases from being applied retroactively.
DISCUSSION
* Should income earned by small pass-through entities be subject to
lower tax rates?
* Should taxes on income earned by small pass through entities be
deferred when the earnings are reinvested in the business?
Integrated Tax System
Should the United States implement an integrated tax system?
BACKGROUND
Under the current U.S. tax system, corporate earnings are taxed at
two different levels. Corporations are subject to a corporate tax
on their taxable income, while corporate shareholders are taxed on
dividends received. Unlike the deduction allowed for interest
payments, corporations do not receive a deduction for dividends
paid.
  Most of the major trading partners of the United States have
adopted measures that integrate individual and corporate taxes. In
eliminating or reducing the double taxation of corporate earnings,
these countries have sought to reduce the cost of capital for
domestic investment.
  Double tax on corporate earnings raises several tax policy issues
and may result in a number of serious economic distortions, such as
(1) reducing the incentive for equity investment in U.S.
corporations because of the increased cost of capital; ( 2)
favoring debt financing over equity financing by allowing a
deduction for interest expense without permitting a similar
deduction for dividends; (3) misallocating resources between
corporate and non-corporate sectors because investment decisions
are likely to be made on the basis of the respective tax burdens;
(4) negatively affecting capital accumulation and the savings rate,
with a resulting decline in economic growth; (5) encouraging
earnings retention at the corporate level to fund operations,
resulting in the potential misallocation of resources; and (6)
increasing the use of tax avoidance methods to minimize the effect
of the double tax, resulting in additional controversies between
taxpayers and the Internal Revenue Service.
STATUS
  Since 1975, the federal government has made several attempts to
adopt some measure of integration. The concept of an integrated
system was proposed by previous administrations, but the idea was
never formally included in legislation. Integration proposals were
included in the 1984 study titled Tax Reform for Fairness,
Simplicity and Economic Growth: The Treasury Department Report to
the President, in the 1985 study titled President's Tax Proposals
to the Congress for Fairness, Growth and Simplicity, and in the
January 1992 Treasury Department study, Integration of the
Individual and Corporate Tax Systems: Taxing Business Income Once.
  The 1986 Tax Reform Act directed the Treasury Department to
undertake a study of different approaches to achieve integration.
  In the 103d Congress, a bill (S. 1700) was introduced that would
allow corporations to deduct 50 percent of the dividends paid to
shareholders. In addition, for all but the smallest corporations,
the bill would reduce from 100 percent to 80 percent the portion of
interest payments corporations could deduct. The legislation is
intended to encourage corporations to shift from debt to equity
financing. S. 1700 is pending in the Senate Finance Committee.
DISCUSSION
* To mitigate the economic distortions and inequities inherent in
the present system, Congress could consider integrating the
individual and corporate tax systems. Integration may: ( 1 ) lower
the cost of capital, resulting in increased domestic corporate
investment in the United States; (2) reduce the tax bias toward
debt financing, which should help establish more stable capital
structures; and (3) lessen the incentive to retain earnings.
* Specific integration proposals include: ( 1 ) eliminating the
corporate income tax; (2) for tax purposes, treating corporations
like partnerships in order to allow all net income and losses to be
passed directly to shareholders; (3) allocating corporate net
income, but not net losses, to shareholders; (4) excluding
dividends from shareholders' taxable income; and (5) continuing to
tax corporations, but allowing shareholders to deduct both dividend
and interest payments.
Inventory Methods
Should Congress enact legislation to allow small businesses to use
a simplified inventory method?
BACKGROUND
The Tax Reform Act of 1986 implemented the uniform capitalization
(UNICAP) provision, which generally requires resellers with average
annual gross receipts in excess of $10 million and all man-
ufacturers to capitalize or include in inventory, rather than
deduct, certain direct costs and allocable indirect costs. Some
costs that must be included in inventory are storage, purchasing,
processing and repackaging costs, along with the general and
administrative costs related to these activities. However, certain
small businesses are allowed to elect simplified methods of
accounting for resale and production costs.
  Pursuant to a 1986 Joint Committee on Taxation directive, the
Internal Revenue Service considered creating a simplified inventory
method for small businesses. Nothing has been implemented.
  The American Institute of Certified Public Accountants conducted
a survey of small businesses and found evidence that the level of
additional costs included in inventory under UNICAP often amounted
to less than the costs businesses incurred to comply with the
provision.
  Many small businesses maintain that UNICAP has created
significant compliance burdens. If properly structured, some
believe the complex application of cost allocation currently
required under UNICAP could be eliminated for many smaller
businesses with no change in tax revenues. Reduced complexity would
promote greater taxpayer compliance.
STATUS
No legislation is pending on this issue.
DISCUSSION
* Should the UNICAP provision be amended to exempt small businesses
with assets of $10 million or less?
* Alternatively, should simplified safe-harbor guidelines for small
businesses be provided?
Investment Tax Credit
Should Congress restore the investment tax credit?
BACKGROUND
Prior to 1986, businesses received an investment tax credit (ITC)
limited to 10 percent of the amount invested in certain tangible
depreciable property. The amount of the credit was based on the
Accelerated Cost Recovery System (ACRS) recovery class to which the
property was assigned. Generally, the ITC was claimed for the
taxable year in which the qualifying property was placed in ser-
vice. The Tax Reform Act of 1986 repealed the ITC.
  Proponents of the ITC contend that reinstatement of the ITC would
reduce the cost of capital, encourage investment and promote
economic growth. Some believe the ITC would be particularly helpful
to small businesses, which often cannot finance capital
expenditures as easily as large businesses.
  Opponents contend that the loss in revenues from restoring the
ITC would exceed the revenues generated from ITC investments.
STATUS
Under a February 1993 proposal by the Clinton Administration, small
businesses would have been eligible for a permanent ITC, set at 7
percent for 1993 and 1994, and 5 percent thereafter. Small
businesses would have included those businesses with average annual
revenues-of less than $5 million in the preceding three taxable
years. Those businesses that did not qualify as small businesses
would have been eligible for a temporary 7-percent incremental ITC
for 1993 and 1994. The ITC provision was not included in the
Omnibus Budget Reconciliation Act of 1993.
DISCUSSION
* If the ITC is reinstated, should it be: ( 1 ) limited to
investments in certain assets; (2) available for all qualifying
investments or only for those investments that exceed a
predetermined percentage of the prior year's investments (i.e., an
"incremental" ITC); (3) limited to investments made by small
businesses; and/or (4) made temporary or permanent?
* As an addition or alternative to an ITC, should the Section 179
expensing limitation be increased from its current level of
$17,500?
Net Income Theory
Should the Internal Revenue Code be amended so that the "taxable
income" of a business more closely reflects its "net income"?
BACKGROUND
Generally, a taxpayer may deduct all of the ordinary and necessary
expenses paid or incurred in carrying on any trade or business.
However, a number of provisions in the code restrict or prohibit
the deduction of many expenses that would otherwise fit within the
general rule. For example, some sections prohibit deductions based
upon public policy, such as fines and penalties and treble damage
payments under antitrust laws.
  The Omnibus Budget Reconciliation Act of 1993 amended the code to
deny a deduction for lobbying expenses, club dues and deductions
for travel expenses of spouses, dependents or other individuals
accompanying a person on a business trip unless, among other
requirements, the person is an employee of the taxpayer. It also
reduced the deductibility of meal and entertainment expenses from
80 percent to 50 percent.
  The basis of the net income theory is that a business should pay
income tax only on its net income, which is determined after all
costs incurred to produce that income have been deducted.
   Proponents of this theory argue that neither
Congress nor the Internal Revenue Service should attempt to
determine what business expenses may be deductible. Proponents also
argue that artificial limitations on the deductibility of expenses
incurred to promote a business often tend to unfairly favor large
businesses. For example, many small businesses use meals and
entertainment as their primary method of marketing since they often
cannot afford mass media advertising. While mass media advertising
is fully deductible, only 50 percent of meal and entertainment
expenses may be deducted. It has been argued that limitations such
as these also have a substantial adverse effect on certain
industries.
  Opponents argue that Congress and the IRS must guard against the
deduction of expenses that are too personal in nature or that would
otherwise tend to convey a tax-free benefit. Similarly, many people
have argued that allowing deductions for certain "disfavored"
expenditures (for example, cigarette advertising, pollution
cleanups, etc.) are inappropriate taxpayer subsidies.
STATUS
No legislation is pending on this issue.
DISCUSSION
* Should Congress continue to disallow or limit certain business
expenses, such as lobbying expenses and meals and entertainment, or
should these and other business expenses be deductible in their
entirety?
Net Operating Losses
Should Congress enact legislation to ease the current restrictions
on net operating losses (NOLs) that result from changes in
corporate ownership?
BACKGROUND
In general, a business is entitled to carry back a net operating
loss to each of the three taxable years preceding the year of the
loss, and to carry forward a NOL to each of the 15 years following
the taxable year of the loss. A deduction is allowed for an amount
equal to the aggregate of NOL carrybacks and carryforwards for a
taxable year. Net operating losses may be a corporation's most
valuable asset. However, Section 382 of the Internal Revenue Code
limits NOL carryforwards following certain changes in corporate
ownership. The Tax Reform
Act of 1986 enacted a complex set of rules limiting NOL carry
forwards in the case of any substantial change in ownership of a
loss corporation. A substantial change in ownership may result from
either a purchase or a tax-free reorganization. If a substantial
change in ownership occurs, NOLs ma.v be disallowed in their
entirety, or the rate at which they can be utilized may be limited.
  Some believe restrictions in NOL carryforward rules have had a
disproportionate adverse effect on transactions involving small
corporations. Easing or eliminating the current corporate NOL
restrictions may enable small corporations to attract additional
investors and sources of capital.
STATUS
No legislation is pending on this issue.
DISCUSSION
* Should a targeted exemption to the change in ownership rules be
enacted so that small companies (those with $50 million or less in
capital) do not lose their NOLs when they obtain additional capital
from new investors?
* Should a partial refund of unused NOLs be made available to
companies that continue to incur losses? The refund, which would be
limited to current year losses, could enable some companies to
continue operations and become profitable in the future.
* Changes made to Section 382 by the Tax Reform Act of 1986 have
restricted "trafficking" in NOLs, which penalizes small
corporations that require equity capital to finance costs. Should
changes be made to provide that defined small business transactions
(such as mergers between small businesses) and increases in paid-in
capital would not trigger "change in control" limitations on the
use of NOLs?
Payroll Tax Reform
Should Congress enact a payroll tax exemption for small businesses?
BACKGROUND
Employers are subject to payroll taxes imposed by the Federal
Insurance Contributions Act (FICA) and the Federal Unemployment Tax
Act (FUTA).
  FICA taxes are used to fund old-age, survivors and disability
insurance ("OASDI" or Social Security) and hospital insurance ("HI"
or Medicare).
  The Social Security portion is computed on employee wages,
subject to a cap or "wage base" ($60,600 in 1994), at the rate of
6.2 percent. For the Medicare portion, all employee wages are taxed
at the rate of 1.45 percent. FICA taxes are levied on both
employers and employees. Individuals with income from self
employment are subject to Social Security and Medicare tax rates of
12.4 percent and 2.9 percent, respectively.
  The combined rate for Social Security and Medicare increased by
7 percent from 1986 to 1993. During the same time period, however,
the maximum tax due from employees and employers increased by 84
percent because of the increase in the wage bases.
  In addition to FICA taxes, employers are subject to the FUTA tax,
which is used to fund unemployment insurance. The FUTA tax rate of
6.2 percent is applied to the first $7,000 of employee wages.
Employers in some states are given a tax credit of up to 5.4
percent, resulting in a minimum net federal unemployment tax rate
of 0.8 percent.
  Experts maintain that increases in the wage bases have been
particularly burdensome to labor-intensive and startup businesses
because the increased payroll taxes reduce working capital and,
unlike income taxes, must be paid regardless of a business's
profits or losses. As a result, some businesses may not have the
capital necessary to increase investments and hire additional
employees.
STATUS
Currently, no legislation is pending on this issue.
DISCUSSION
* Should startup businesses be exempt from payroll taxes during a
startup period?
* Should payroll tax rates and/or wage bases be reduced for small
businesses?
Subchapter S Corporations
Should Congress reform the rules for establishing and maintaining
Subchapter S corporations?
BACKGROUND
Subchapter S of the Internal Revenue Code was enacted in 1958 to
help remove some of the tax considerations from small business
owners' decisions to incorporate. Subchapter S provides tax
advantages to eligible corporations that elect to be taxed as S
corporations. Both S corporations and regular or "C" corporations
are entitled to limited liability. However, S corporations avoid
the double taxation encountered by C corporations, which are
subject to taxes at the corporate level and at the shareholder
level when dividends are distributed. Generally, income earned by
S corporations flows through to shareholders, where it is taxed at
individual income tax rates.
  S corporations are subject to a number of limitations and
technical requirements. Enactment of the Subchapter S Revision Act
of 1982 substantially revised Subchapter S provisions to remove
some of these requirements and obsolete restrictions. Additional
changes were included in the Tax Reform Act of 1986. Today, more
than 1.5 million small businesses--42 percent of all corporate tax
return filers--are S corporations.
STATUS
  The S Corporation Reform Act (S.1690), introduced in the 103d
Congress, includes 26 separate Subchapter S proposals designed to
accelerate capital formation, preserve family-owned businesses and
remove "traps for the unwary." For example, shareholder limitations
would be eased by increasing the S corporation shareholder
limitation from 35 to 50 and by counting all shareholders in a sin-
gle family as one shareholder. Tax-exempt organizations, financial
institutions and non-resident aliens--not eligible for S
corporation status under current law--would be permitted to own S
corporation stock, and the types of trusts that are allowed to own
S corporation stock would be expanded. For fringe benefit purposes,
S corporation shareholders would receive the same tax treatment as
owners of C corporations. In addition, S corporations would be
permitted to issue "plain vanilla" preferred stock and own more
than 80 percent of another corporation's stock. Some of these
proposals have also been included in other proposed legislation.
DISCUSSION
* Should Congress enact legislation, such as S. 1690, to broaden
the eligibility rules for S corporations and shareholders,
enhancing the availability and desirability of S corporation
status?
* Should Congress simplify complex rules for S corporations and
shareholders, removing technical provisions that amount to
compliance traps for the unwary?
* Should Congress expand capital formation techniques available to
S corporations in order to create a more level playing field with
C corporations?
* Limited liability companies (LLCs), another form of pass-through
entity, are being organized by an increasing number of small
businesses. Should LLCs be preserved and developed as an
alternative to S corporations?
Taxpayer Bill of Rights
  Should taxpayers be afforded greater protection from potential
abuses of power by the Internal Revenue Service?
BACKGROUND
  The Taxpayer Bill of Rights (TBR), which was part of the
Technical and Miscellaneous Revenue Act of 1988, gave taxpayers a
number of new rights in dealing with the IRS and placed new
responsibilities on the IRS to proceed fairly in taxpayer disputes.
For example, the TBR allows taxpayers to sue the IRS for damages
caused by the IRS's disregard of the Internal Revenue Code and
generally requires the IRS to abate any portion of any penalty or
addition to tax that is attributable to erroneous written advice
furnished by the IRS to the taxpayer.
  The TBR also made many changes to previous law, including: ( I )
expanding the ability of taxpayers to recover professional fees and
costs that result from unreasonable demands by the IRS; (2) at
interviews, requiring the IRS to recognize qualified tax
representatives in place of taxpayers; (3) increasing, from 10 days
to 30 days, the time that the IRS must wait before collecting taxes
through property seizure; and (4) requiring the IRS to provide more
complete explanations in deficiency notices sent to taxpayers.
  The Taxpayer Bill of Rights 2 (T2) was included in legislation
(H.R. 11 ) passed by the 102d Congress in 1992. T2 included
provisions, among others, to expand the IRS's authority to abate
interest, establish the position of Taxpayer Advocate within the
IRS, limit the retroactive application of temporary and proposed
regulations, and increase to $1 million the cap on damages
resulting from reckless or intentional acts committed by IRS
employees. The bill was vetoed.
STATUS
In the 103d Congress, taxpayer rights legislation similar to T2 has
been introduced in the House of Representatives (H.R. 22) and the
Senate (S. 542). S.542 includes proposals that would create the
Office of the Taxpayer Advocate within the IRS to assist taxpayers
in dealing with the agency and to identify problem areas within the
IRS and develop appropriate legislative changes to rectify such
problems. Currently, the taxpayer ombudsman, a career civil
servant, reports directly to the commissioner of the IRS. Some
taxpayer rights advocates believe that an independent taxpayer
advocate office reporting directly to Congress would better protect
taxpayer rights. The proposed legislation also makes several
technical changes to IRS procedures.
  In the House of Representatives, additional taxpayer rights
legislation ( H.R. 3261 ) has been introduced that would: ( 1 )
make IRS employees who are found guilty of arbitrary, capricious or
malicious misconduct personally liable for a portion of the
taxpayer's litigation costs; (2) increase to S I million the limit
on the amount a taxpayer may recover for unauthorized IRS
collection actions; and (3) in tax fraud cases, place the burden of
proof on the IRS.
  Currently, IRS regulations can be applied retroactively. Subject
to certain exceptions, proposed taxpayer rights legislation would
limit the retroactive application of regulations by requiring that
temporary and proposed regulations issued by the Treasury
Department be effective prospectively from the date of filing with
the Federal Register.
DISCUSSION
* Should proposed taxpayer advocate legislation be enacted?
* While expanded taxpayer rights could curtail taxpayer
mistreatment by the IRS, they could also result in greater taxpayer
abuse of the system and increased taxpayer non-compliance. What
would be a proper balance between taxpayer rights and appropriate
IRS enforcement authority?
* Should IRS employees who are found guilty of arbitrary,
capricious or malicious misconduct be held personally liable for a
portion of the taxpayer's litigation costs?
* Should the limit on recovery of civil damages for unauthorized
IRS collection actions be increased?
* Should the IRS be required to provide greater detail in the
notice of deficiency?
* In limited circumstances, should the burden of proof be placed on
the IRS?
Value-Added Tax
Should Congress enact legislation establishing a value-added tax or
other consumption-based tax?
BACKGROUND
  A value-added tax (VAT) is a general tax on consumption collected
in stages as goods and services are produced and sold.
  The United States is one of the few Western industrialized
countries without a VAT, and the only one without a VAT or a
national sales tax.
  Foreign VAT systems, which are often used in conjunction with
some type of an income tax system, typically impose a tax on sales
of goods at each stage of production and distribution and on the
sales of services as they are rendered. Although a VAT can be
structured in a variety of ways, the credit-invoice method used in
Europe is the most popular method. Under this method, the tax
imposed on domestic sales generally is equal to the difference
between the tax charged on sales (output tax) and the tax payable
on purchases from other businesses (input tax).
  Another form of consumption tax is a national sales tax, which
operates in a manner similar to a state sales tax. A national sales
tax is levied on the retail price of taxable goods and services.
  Proponents of a consumption tax believe it would stimulate
investment, encourage savings and strengthen U.S. international
competitiveness. Proponents also contend that such a tax would, if
structured correctly, result in a simplified tax system.
  Opponents of a VAT or a national sales tax claim that either
would require a new and complex system that would be costly to
implement and create substantial paperwork and administrative
burdens. They argue that, because of economies of scale, a new tax
system would impose greater compliance burdens and costs on small
businesses.
STATUS
In the past, previous administrations and Congress have considered
and rejected VAT and other consumption-based tax proposals. A
consumption-based tax proposal that may be introduced in the 103d
Congress would replace both the individual and corporate income tax
systems with a "savings-exempt income tax" (SEIT). Under the SEIT,
individuals and companies would be taxed on their consumption
rather than on their income.
  The Clinton Administration is studying the feasibility of a VAT
system as a means to simplify the tax code. While there are no
immediate plans to implement a VAT, the Administration may consider
moving to a VAT at some time in the future.
DISCUSSION
* What, if anything, could be done to ensure that a new tax system
would not impose greater costs and burdens per dollar of revenue on
small businesses?
* If a consumption tax were enacted, the tax could replace one or
more current taxes, such as payroll or corporate income taxes, or
might be considered an additional source of revenue. If a
consumption tax were imposed to generate additional revenue, the
revenue could be used to reduce the deficit or to fund specific
government programs.
* If Congress decides to establish a VAT or other broad-based
consumption tax, a number of fundamental questions would have to be
addressed, such as:
- How would the tax be collected, and what, if any, aspects of the
current tax system would require changes?
- How would the system apply to service businesses as opposed to
manufacturing businesses?
- What, if any, transactions would be exempt from the tax? . Would
small businesses with revenues below a certain threshold be exempt
from the tax? If so, what should the threshold be?
- Who would administer the tax system and how would it be phased
in?
Technology and the Information Revolution
  Business and technological forces are coalescing in a revolution
that promises to have as significant an impact on the 21st century
as the industrial revolution had on the mid-19th century. This
"information revolution" will transform both how Americans do
business and how they spend their leisure time.
  Small and growing businesses have an important role, not only as
users, but as innovators of this technological revolution.
Throughout the economy, these businesses create more innovations
per employee than large firms, and this inventive capacity will
become increasingly critical to our country's global
competitiveness.
  Advocates say it is imperative that the U.S. government establish
consistent federal policies promoting the development and
commercialization of new technologies, that the government and the
private sector increase the availability of capital for
technological innovations, and that the government organize itself
to maximize the potential of small and entrepreneurial firms in
technological initiatives.
  For related information, see sections on Venture Capital:
Alternate Sources of Financing, p. 24; Rights in Technical Data, p.
65; and Growth Tax Credit, p. 84.
Capital for Technology Development
What, if anything, should the government do to improve the
availability of affordable, long-term domestic equity and debt
capital to assist small firms in developing and commercializing new
technologies?
BACKGROUND
  One of the biggest obstacles confronting small firms is access to
sufficient domestic capital for developing and commercializing new
technologies. Some argue that this is a problem of critical
national importance because without such development capital, the
industrial foundation of the country is being eroded.
  Many new technologies developed in the United States are being
commercialized by foreign entities. America's international
competitors are succeeding, not because they do better research,
but because they focus their attention on technology areas of
commercial relevance and getting to market sooner with higher
quality products.
  Many American industries are now predominately controlled by
large corporations that are often concerned primarily about
quarterly results so that they can maintain or increase current
stockholder value. As a result, decisions are often focused on
short-term profits. This pattern will adversely affect the ability
of many U.S. companies to be competitive in the future.
  American venture capital groups often look to fund primarily
companies that can produce short term rapid profits and that can go
public quickly. This is also true in the banking industry, where
longterm "patient capital" is not readily available to small firms.
For many U.S. lenders, short-term, high-collateral, personally
guaranteed loans are the rule.
  Small technology-based businesses pay significantly more for
capital than larger companies, in part because of the long-term
nature of such investments, their lack of liquidity, the risks
associated with commercialization, and the lack of significant tax
incentives since the passage of the 1986 tax bill.
  Some experts maintain that the availability of patient capital
must be increased to encourage technological investment and the
commercialization of new technologies.
STATUS
  Experts maintain that new policies and technologies are needed.
One concept being considered in Congress is small business
technology corporations (SBTCs). These technology corporations
would be housed in U.S. Department of Commerce facilities, but
their licenses would be issued jointly by the U.S. Department of
Commerce and the U.S. Small Business Administration.
DISCUSSION
* Should more incentives be established so that American small
businesses can commercialize American technology?
* Should programs that would help lenders understand the unique
needs of borrowers with regard to new technologies be profiled,
improved and expanded? Should loan programs targeted for specific
technological investments be made available?
* Should tax incentives, such as indexing capital gains tax rates
and loss carryforward allowances for investments in critical
technologies, be made available to increase the availability of
patient capital? Should other tax laws be revised to allow for
greater capital gains incentives in small high-tech businesses?
* Should the government facilitate the establishment of a Civilian
Technologies Corporation to help fund the development of new
technologies? This would be a federally chartered corporation that
would take minority equity positions in promising small firms
involved in developing new technologies.
* Should the SBA develop a guaranteed loan program targeted at
technology-based small businesses? Such a program could be designed
to address the special difficulties faced by technology companies
in obtaining debt capital. It could be modeled after the SBA 7(a)
guaranteed loan program, with loans initiated through banks and
nonbank lenders. The program would likely include special
requirements, such as allowing for a higher guarantee fee and
interest rate.
* Banks and venture capital firms often need help in understanding
and evaluating unfamiliar technologies. Could federal laboratories
be used in a structured way to provide technical assistance to
banks and venture capitalists?
Commercialization of Technologies
Should the government enhance the movement, application and
commercialization of new technologies? If so, how?
BACKGROUND
  Technology transfer is a process through which technology is
developed in one place. then applied elsewhere as, for example,
when new technologies are transferred from federal laboratories to
the private sector. However, some experts maintain that the real
issue is how to move, apply and commercialize advanced technologies
from private and public sources to improve the overall economic
strength of the U.S. economy.
  Technology transfer may be effected in a number of ways: through
the licensing of a government-owned patent to a small company, the
informal exchange of information through casual person-to-person
encounters, the movement of people from one organization to
another, or the formal agreement of government-owned labs to apply
their expertise to help small business.
  The objective of the technology transfer process is to develop
and produce marketable products and services. thus increasing
American productivity and competitiveness. Technology transfer is
most effective when technology is combined with private and
technical resources in projects designed to meet specific industry
needs.
  Despite the known benefits, technology transfer between the
public and private sectors has been limited. Impediments to the
formation of cooperative agreements and relationships include
commercialization costs and the amount of time, energy and
communication it takes to complete the process and make it work.
STATUS
  Some experts believe that new progressive policies are needed to
encourage the movement, application and commercialization of new
technologies.
DISCUSSION
* Should federal laboratories be prohibited from competing with
private companies? Should the government establish a "laboratory
closing commission" to review federal laboratories and determine
whether what they do is necessary and whether they are competing
with the private sector?
* Should the government eliminate the cost sharing requirements for
small business in cooperative research and development agreements
(CRADAs) and eliminate any government rights in intellectual
property developed solely by a small business? Should more funds at
the national labs be allocated for small business CRADAs and should
the labs be required to respond in a more timely fashion?
* Should the government recognize commercialization expenses
(sales, marketing, travel, etc.) as allowable expenses in small
business contracts including Small Business Innovation Research
(SBIR) contracts, CRADAs, Advanced Technology Program (ATP)
agreements and others?
* Are small businesses sufficiently aware of the possibilities for
business and economic growth contained in the application of new
technologies?
* What additional steps, if any, should the federal government take
to promote technology transfer?
* Should all federal research grants include a small business
preference?
Critical Technologies
  What expanded role, if any, can small businesses play in helping
the U.S. government develop and commercialize critical
technologies?
BACKGROUND
  The development and commercialization of critical technologies is
crucial to the growth of the national economy. Technologies
represent a broad continuum from the discovery of scientific knowl-
edge to the making of a final product. Small businesses are
prominent innovators and inventors of new technologies and could
play an influential role with the government in developing and
commercializing critical technologies.
  The role of the National Critical Technologies Panel, as required
by a 1990 amendment to the National Science and Technology Policy
Organization and Priority Act of 1976, is to identify and report on
technologies critical to the satisfaction of national needs. The
law stipulates that the panel is to prepare an updated report
biennially on critical technologies.
STATUS
  In January 1993, the National Critical Technologies Panel issued
its second biennial report. This report identified nine industrial
sectors as making particularly significant contributions to
technology and to the economy. The sectors are applied molecular
biology, distributed computing and telecommunications, flexible
integrated manufacturing, electricity supply distribution,
materials synthesis and processing, microelectronics and
opticalectronics, pollution minimization and remediation, software,
and transportation. These nine industrial sectors cover all the
industrial activities served by the 22 technologies identified in
the panel's first report.
DISCUSSION
* Long-term economic growth and technological excellence are
national priorities. How could incentive systems be developed and
expanded to achieve these goals?
* It has been suggested that the government's role with respect to
critical technologies should be to develop long-term national
strategies and goals that are based on current and future
industrial and technological needs. What role, if any, should the
government play in identifying critical technologies?
* Should small businesses' role in identifying critical
technologies be expanded? What actions, if any, should the
government take to ensure that this happens?
* Should the U.S. Small Business Administration's role in helping
small firms develop and commercialize critical technologies be
expanded?
* Some would argue that the United States has an obsolete federal
technology policy tied to scientific breakthrough with less
emphasis on commercial follow-through. Should anything be done to
break this cycle and place new emphasis on commercialization? If
so, what?
* Should the U.S. government establish a strict national policy
restricting the sale of technology to foreign entities? What
guidelines, if any, should be established to prevent the sale of
American technology at bargain prices?
Electronic Commerce
Should government facilitate the use of electronic information,
particularly electronic commerce? If so, how?
BACKGROUND
  Electronic commerce involves the transfer of data through direct
links between computers. Common examples of electronic commerce
include direct deposit of funds to bank accounts and verification
of credit card transactions.
  One growing aspect of electronic commerce is electronic data
interchange (EDI). EDI involves the use of electronic transfer of
information as a substitute for normal paper transactions, such as
the issuance and fulfillment of purchase orders by computers
instead of paper sent in the mail. For small businesses, EDI
represents an opportunity to reduce paperwork flows, speed
processing of transactions, and ultimately improve customer
relations through a more efficient operation.
  Standardization of electronic commerce, especially EDI--through
the actions of either private organizations or the federal
government--may resolve some security and legal concerns, but may
raise others. Thus, small businesses must be aware of not only the
technical implementation issues, but also the implications of
electronic commerce for their businesses. Firms that do not adopt
electronic techniques run the risk of losing market share and
customers from missed opportunities and the iriability to provide
appropriate service.
STATUS
The federal government is a primary promoter of electronic
commerce, including EDI. The National Performance Review called for
greater use of electronic purchasing and commerce by the federal
government, and the Clinton Administration issued a memorandum to
commence this process. The memorandum requires, among other things,
the establishment of an electronic bulletin board for small
business contracting opportunities.
  Some agencies, such as the U.S. Department of Agriculture, now
issue electronic cards with food stamp allotments that must be
processed by grocers. Many other federal agency procurements will
soon utilize EDI. It will become increasingly important that the
government's trading partners, including small contractors, become
conversant in the technology in order to continue doing business
with the federal government.
DISCUSSION
* How does electronic commerce, such as EDI, affect small business?
* Given that the information utilized in electronic commerce is
sensitive and is being sent over telephone lines, what mechanisms,
if any, are needed to protect the commerce and privacy of the
information?
* How do legal issues governing commercial transactions affect
electronic commerce?
* What further actions, if any, should the government take to
facilitate small business participation in electronic commerce?
Flexibility in Manufacturing
Should incentives be provided to encourage small business owners to
adopt systems that yield greater efficiency and flexibility in
manufacturing and other processes?
BACKGROUND
Flexibility in manufacturing refers to the ability to produce
various product models or styles without costly new investments or
long shutdown periods. It is sometimes envisioned as involving the
use of computer and robot controls to produce desired variants
through simple program changes. More often, however, flexible
manufacturing involves simple replacements of plug-in assemblies,
new processing efficiencies, or redirections of the product flow.
methods of producing such flexibility involve a number of
disciplines, such as flexible design (common features and
components), groupings of products, groupings of product
requirements, mechanical and electronic plug compatibilities,
quality systems covering broad families of products and processes,
quick change-over tooling, and many others.
STATUS
In 1993, the federal government dramatically increased the number
of manufacturing extension centers operating around the country.
These centers provide small businesses with technical assistance
and information about advanced manufacturing processes.
  Experts contend that new policies and legislative actions are
needed.
DISCUSSION
* Should existing resources such as the National Institute of
Standards and Technology (NIST), Small Business Development Center
(SBDC) Program, Manufacturing Technology Center (MTC) Program and
others help small firms move through transition stages to achieve
greater efficiencies and flexibility in manufacturing and other
processes? If so, how?
* Should national policy address the economic potential of
flexibility in manufacturing? If so, how?
* Should small businesses receive tax credits and other financial
incentives to encourage investments in the application of new and
advanced technologies?
* Should small businesses and other firms be allowed to sell net
operating loss (NOL) tax assets? It has been argued that
investments in critical technologies, Hexible manufacturing
processes and marketing and commercialization of new technologies
would be significantly increased if tax assets could be sold.
Information Superhighway
Who should pay for the use of and access to information--users or
taxpayers?
BACKGROUND
During the 1950s, the federal government began one of the most
massive infrastructure development projects ever undertaken--the
construction of the interstate highway system. The system provided
tens of thousands of construction jobs, modified economic
development--particularly in those areas bypassed by the
superhighways--and altered the way Americans live.
  The United States stands on the verge of a similar infrastructure
revolution--the information superhighway. What the interstate
system was to the car-addicted 1950s, the information superhighway
will be to the information-addicted 21st century. The information
superhighway will most likely consist of fiber optic cables linked
into individual houses and businesses. These high-capacity cables
will provide access to voice, video and data transmission through
a single wire. Information and technology that was accessible only
to large corporations and the government will become available to
most Americans, including small business persons. The potential
uses of the superhighway will be limited only by imagination and
access to it.
  Funding mechanisms for the information superhighway will help
determine the accessibility of information: a system funded by
taxpayers will be more widely accessible than one funded by users.
STATUS
Vice President Albert Gore, while a U.S. Senator, sponsored
legislation to finance the construction of an information data
network that would link various institutions of higher learning.
Although that proposal was not enacted, the Clinton Administration
supports the development of an information superhighway. In a major
address concerning telecommunications policy on January 11, 1994,
the Vice President spoke about the incentives for building an
integrated voice, video and data network. The policy announced in
that speech would remove legal and regulatory barriers in order to
foster competition in the provision of the information
superhighway.
  A number of bills introduced recently in Congress would support
these goals but achieve them differently; for example, by
restricting telephone company entry until further competition
exists in the local telephone market. The fact that a number of
telephone companies have either sought mergers (AT&T with McCaw
Cellular or Bell Atlantic and TCI) or proposed substantial
regulatory initiatives (Ameritech and PacTel) increases the likeli-
hood that the superhighways will be built.
DISCUSSION
* Should the government facilitate affordable access to
information? If so, how?
* Should small businesses expend resources for information, either
through tax dollars or outright purchases of information and the
technology to access it?
* Should the government assist small businesses by increasing
awareness of the benefits of information technology? If so, how?
* What is the government's role, if any, in determining who will
pay for the use of and who will have access to the information
transported on America's information superhighway?
Intellectual Property Protection
Should the intellectual property laws be reformed?
BACKGROUND
  The United States depends upon the creativity of its small
enterprises for the development of new products. When technology is
pirated despite intellectual property laws, small business
innovators lose the opportunity to earn a reasonable return on
investment. According to one estimate, U.S. industries lose as much
as $60 billion in annual revenues because of intellectual property
theft.
  A study commissioned by the U.S. Small Business Administration
found that the costs of intellectual property infringements are
especially burdensome to small businesses. Small innovators are
forced to choose between absorbing the competitive and financial
losses typically sustained by victims of piracy, or paying the
enormous legal fees required for a court battle.
  In the SBA study, 81 percent of small enterprise infringement
disputes and 83 percent of large enterprise disputes in the
previous five years were with domestic-owned organizations.
Moreover, a 1986 International Trade Commission report indicates
that intellectual property infringement was directly related to the
loss of 130,000 jobs.
  Among the measures that might be instituted to assist small
businesses in defending their intellectual property against
infringement are the following:
- A requirement of binding arbitration.
- A relaxation of the burden-of-proof test to make it easier to
prove infringement.
- The establishment of a mechanism for providing financial
assistance to defray legal costs incurred by small companies
engaged in litigation against infringers.
  Some contend that the U.S. patent system should be changed from
a first-to-invent to a first-to-file system. Some small companies
are concerned, however, that a change from the current system would
deny the inventor the opportunity to test and develop the invention
before committing the time and expense required to obtain a patent.
Further, big companies have the wherewithal to respond to a
first-to-file system by submitting applications, even if the patent
never produces a worthwhile product. Small firms have no such
capability.
STATUS
While a number of patent-related bills were introduced in both the
House of Representatives and the Senate during the 102d Congress,
the most notable developments have occurred in the international
trade area, through progress on the North American Free Trade
Agreement (NAFTA) and the General Agreement on Tariffs and Trade
(GATT). In these agreements, protection of intellectual property
rights is increased and made more universal.
  A bill introduced in the 103d Congress (S. 149) would require
that any country not meeting or applying certain intellectual
property right standards be treated under unfair trade practice
laws by the U.S. government.
DISCUSSION
* Should S. 149 or similar legislation be enacted?
* Should the government institute binding arbitration, a
burden-of-proof test and/or legal financial assistance to assist
small businesses in defending their intellectual property against
infringement? Given that there is often a trade-off between
intellectual property protection and the expansion of technology,
which goal should assume the highest priority?
* Should the U.S. patent system be changed from a first-to-invent
system to a first-to-file system?
* Many believe the ability of foreign entities to obtain
intellectual property rights from American universities and other
U.S. sources should be inhibited. Should the Bayh-Dole Act be
amended to strengthen small business retention of intellectual
property rights?
* Should the U.S. government seek a worldwide "doctrine of
equivalence" of technologies? This prevents one "inventor" from
obtaining a patent by making only trivial changes to someone else's
patent.
* What should be done to give small businesses greater influence in
determining national technology policies, especially with regard to
intellectual property rights?
* Should tax law be amended to allow patent costs to be fully
expensed? Current accounting standards allow only for the
capitalization and amortization of such costs over the life of the
patent.
* Should the government offer training programs and materials to
better educate small businesses on how to protect their markets and
products?
* What measures, if any, should be taken to expedite the Patent
Office's processing of patent requests? How can processing goals
and accountability measures be put in place? Should the "customer
service" recommendations outlined in the Clinton Administration's
National Performance Review report be established as policy?
* What should the federal government do to help reduce the costs
associated with patent searches and patent applications? Should the
federal government assist individuals and small firms in obtaining
foreign patent rights?
Marketing New Technologies
Should small business play a larger role in the commercialization
of U.S. technology, and what steps, if any, should the government
take to assist them?
BACKGROUND
  The Congressional Research Service reports that commercialization
of technology in the United States often lags behind that in other
countries where governments actively promote it as part of their
economic policies.
  The timely market introduction of new technologies can greatly
enhance U.S. productivity, growth and competitiveness. Failure to
bring ideas to market quickly means that foreign companies will
take advantage of American investment in research by
commercializing the results. Over the long term, the effect may be
to reduce American global competitiveness.
STATUS
On February 22, 1993, the Clinton Administration unveiled a
comprehensive initiative entitled Technology and America's Economic
Growth: A New Direction to Build Economic Strength. The initiative
has three central goals: ( 1 ) long-term economic growth that
creates jobs and protects the environment; (2) making government
more efficient and more responsive; and (3) world leadership in
basic science, mathematics and engineering.
DISCUSSION
* Small business owners face many impediments in the effort to
commercialize. Which are the most difficult to overcome--financial,
legal or other competitive barriers?
* What steps, if any, should the government take to create an
environment that encourages the commercialization process?
* Should additional incentives be created for research
organizations and small businesses to form partnerships to convert
ideas into marketable products?
* Should the government allow sales and marketing expenses to be
treated as overhead costs in government projects? Should more bid
preparation (proposal) costs be treated as indirect expenses?
Should indirect and overhead costs be allowable in the Advanced
Technology Program in order to eliminate the cost-sharing burden on
small business?
* Should the government help expand and facilitate marketing of new
technologies? Should it consider establishing regional marketing
centers, provide a pool of funding for extensive marketing
training, and/or establish global export marketing centers to help
small firms explore new markets? If so, how?
* Should the government provide marketing grants to small
businesses interested in commercializing new technologies? Should
such grants be structured to be competitive, peer-reviewed and paid
back to the government as the company can afford to pay?
One-Stop Information Centers
Should the U.S. Small Business Administration be the gateway for
government information about businesses, including technical
assistance for complying with new laws and regulations? If so, how
should that information be made available--electronically, in print
media or in some combination?
BACKGROUND
  In the complex weave that is the American republic, federal,
state and local governments all have their own requirements for
doing business. The vast number of legal requirements makes it
difficult for small businesses to determine whether they are in
compliance.
  At the same time that governments of all jurisdictions are
imposing restrictions or requirements for conducting business, they
are also establishing programs to assist small businesses. However,
small businesses may have as many difficulties discovering this
type of assistance as they have learning about new regulatory
requirements. Without access to consultants, lawyers and other
professionals, small businesses may not be able to take full
advantage of these programs.
  Establishment of one-stop information centers would enable small
businesses to gather information on business development, capital
availability, and legal or regulatory requirements at one location.
The one-stop shop would receive information from federal, state and
local agencies on a continuing basis to ensure up-to-date
information. For more business-specific information, the shop could
be used as a gateway for access to the appropriate agencies.
Businesses could access the centers electronically and even
download applications and other forms to be completed.
  All levels of government have limited resources. The
establishment of one-stop shops will require resources that
governments may not be able to fund completely; however, private
entities may be willing to assist.
STATUS
The Export Enhancement Act of 1992 authorized the creation of
one-stop shops for federal exporting programs. The export
assistance centers are intended to provide the U.S. exporting
community a single point of contact for all federal export pro-
motion and finance programs. The centers will include
representatives from the U.S. Department of Commerce, the U.S.
Small Business Administration and the Export-Import Bank. The first
of the shops is expected to open in 1994.
  The SBA operates business information centers and small business
development centers, which provide information to small businesses
but do not attempt to serve as all-inclusive information clear-
inghouses.
DISCUSSION
* Should the government work with the private sector to establish
one-stop shops?
* Should the SBA be given more latitude in creating public/private
partnerships and co-sponsorships so that it can better leverage its
resources and those of other agencies to create one-stop shops?
Research and Experimentation Tax Credit
  Should Congress enhance the research and experimentation tax
credit so that it applies to more small, research-intensive
businesses?
BACKGROUND
  In 1981, Congress provided an incremental tax credit for research
expenditures. The justification for the incremental structure was
to encourage research that would not otherwise be conducted, as
well as to lower the cost of the credit. Initially, the credit was
equal to 20 percent of the amount by which the taxpayer's qualified
research expenditures for a taxable year exceeded its base amount,
which was determined by taking the average of the three prior
years' qualifying research expenditures. In 1988, upon the urging
of small business, the credit was extended for the first time to
startup firms and the base amount calculation was restructured.
Currently, the base amount is calculated by taking a ratio of
expected research expenditures to sales over a historic period and
applying that ratio to a measure of recent sales receipts. The
changes were intended not only to enable new firms to take the
credit, but also to shift the benefit to smaller firms. Research
conducted by the U.S. Small Business Administration has shown that
small firms are more innovative per employee than large firms, yet
they enjoy far less of the credit's benefits.
  Growing, capital-intensive companies that have no current tax
liability cannot take full advantage of the research credit. They
can, however, carry the credit forward, although this may be of
limited value.
  Another factor that reduces the effectiveness of the research
credit is its temporary, rather than permanent status. Because
research projects often require long-term investments, the lack of
a permanent research credit inhibits some companies from
undertaking extended research projects. Additionally, a temporary
research credit reduces a firm's ability to plan its research
programs. Business owners and policymakers generally agree that the
research credit should be made permanent so businesses can plan and
budget their research based on this incentive. However, since its
enactment in 1981, the research credit has been extended only
temporarily, often during the final hours of budget negotiations.
  During these negotiations, little consideration has been given to
whether the current incremental form of the credit effectively
encourages small firm research and whether changes should be made
to improve the credit's effectiveness, particularly for small
manufacturing firms.
  One change being considered would modify the research credit to
allow a flat 20-percent credit for research conducted through
consortia. This "collaborative" research credit modification is
intended to encourage teams to participate in research that would
otherwise be too costly, risky or long-term to engage in
individually. Such collaboration is also intended to encourage the
immediate dissemination of research results to a larger pool of
companies, including companies otherwise precluded from taking the
credit.
STATUS
The omnibus Budget Reconciliation Act of 1993 extended the research
tax credit through June 30, 1995. retroactive to July 1, 1992.
  The Research and Development Enhancement Act of 1993 (S.666),
introduced in the 103d Congress would restructure and permanently
extend the research tax credit. The bill would simplify the credit
for small businesses by allowing them to take a flat 10-percent
credit instead of the current 2-percent incremental credit.
Taxpayers would be allowed to update their base periods and could
use the research credit to offset part of their alternative minimum
tax liability. The bill, which is pending in the Senate Finance
Committee, also would encourage companies to engage in
collaborative research projects.
DISCUSSION
* Aside from permanently extending the research credit, what
changes can be made to make the credit more beneficial to small
businesses?
* Should small businesses be allowed to take a flat, rather than
incremental, research credit?
* Should a flat 20-percent credit be provided for collaborative
research?
* Should the research credit be partially refundable?
Small Business and Federal Research and Development
Should the Small Business Innovation Research (SBIR) Program be
improved? What other initiatives, if any, should be taken to
encourage small business participation in federal research and
development?
BACKGROUND
  The SBIR program, administered by the U.S. Small Business
Administration, is designed to stimulate technological innovation
by using small businesses to meet federal research and development
needs. All government agencies with outside research budgets of
more than $ 100 million are required to set aside a specified
percentage for bid by small companies.
  The SBIR program as originally designed has three phases. In
Phase 1, agencies grant initial awards averaging $50,000 to small
companies on a competitive basis to evaluate the scientific and
technical merit and feasibility of an idea. In Phase
II, the agencies award $500,000 or less to the Phase I projects
with the greatest potential. In Phase III, the small company
participants attempt to bring their innovations to the market
through support from private investors or federal funds outside of
SBIR.
  Available research indicates that small businesses' share of
federally funded R&D is less than their share of privately funded
R&D, even after SBIR is taken into account.
STATUS
During the 102d Congress, S.2941, the Small Business Innovation
Research (SBIR) Program Reauthorization Act of 1992 was enacted.
The law contains the following provisions: reauthorization of the
SBIR program for seven additional years, through fiscal year 2000;
an increase in the Phase I award limit from $50,000 to $100,000; an
increase in the Phase Il limit from $500,000 to $750,000; an
increase in the set-aside share to 1.5 percent in fiscal years 1993
and 1994,2.0 percent in fiscal years 1995 and 1996, and 2.5 percent
thereafter; and establishment of the Small Business Technology
Transfer (STTR) Pilot Program. The STTR program authorizes (but
does not require) agencies with more than $1 billion in extramural
research and development budgets to allot .05 percent in fiscal
year 1994, .1 percent in fiscal year 1995 and .15 percent in fiscal
year 1996 to fund joint R&D projects conducted by small businesses
and nonprofit research institutions or federally funded R&D
centers, where not less than 40 percent of the work is being
performed by the small firm.
DISCUSSION
* Small businesses are becoming increasingly concerned because
federal agencies are placing more emphasis on using consortia and
cost-sharing processes in government technology programs. Should
amendments to the Small Business Act be enacted that would level
the playing field and allow small firms to compete equally with
large firms in cost-sharing requirements? A sliding scale based on
size could be applied.
* If cooperative research and development agreements with large
businesses are used, how should small businesses obtain access to
the technology emanating from such ventures?
* What changes can be made to the SBIR program to encourage more
small firms to participate?
* What measures, if any, should be instituted to
accelerate the SBIR topic decision process and payment of awards by
agencies?
* Participants in SBIR have said that the length of time between
the completion of a Phase I award and the go-ahead for Phase 11 is
too long. Should corrective adjustments in this process be made?
* Should bid proposal costs be considered an allowable expense
under SBIR guidelines?
* Should the SBIR act be amended to provide funds for program
administration costs in addition to the funds already legislated
for SBIR awards?
* Should the SBIR program be modified to place greater emphasis on
the development and commercialization of critical technologies and
related technological innovations? Examples of modifications
include:
 Giving industries more flexibility in developing projects in
response to critical technologies, versus the specific topics
emanating from the agencies themselves.
 Including past SBIR winners as reviewers of the proposals'
scientific, technical and commercialization potential.
* Should a system be developed to track outcomes of SBlR-funded
research and commercialization?
Standard Industrial Classification Codes
Should the Standard Industrial Classification (SIC) system be
overhauled to more adequately represent the continuing changes in
the structure of the economy? If so, how?
BACKGROUND
  The Census Bureau's current surveys, quinquennial economic
censuses and the Standard Industrial Classification system on which
they are based, must evolve almost simultaneously with the indus-
tries they cover in order to be effective. Often, new and growing
industries emerge so rapidly that the censuses cannot capture them.
These industries go unmeasured until the census can be changed in
its next round. Thus, valuable information on emerging industries
is unavailable for five years or more.
  The SIC is a major statistical classification system used to
promote the comparability of establishment data describing various
facets of the economy. The SIC system's basic classification unit
is the establishment--an economic unit where business is conducted
or where services or industrial operations are performed. The SIC
system covers the entire field of economic activities by defining
industries in accordance with the composition and structure of the
economy.
  Government procurement and eligibility for designation of
government contract set-asides are based on SIC codes. For example,
if the government needs metal bolts, a contract will be requested
from companies that fall within the SIC code for manufacturers of
metal bolts. Set-aside contracts will be awarded only to those
entities that list their business as predominantly in that SIC
code; if their primary business is something else, they will not be
eligible to obtain a set-aside for the metal bolt contract.
  The latest version of the SIC system was prepared in 1987. For
the most part, changes to the SIC codes have resulted in adding new
and growing industries, deleting or combining declining industries,
and rearranging industries within the existing industry groups.
STATUS
  Participants in the 1986 White House Conference on Small Business
recommended that a commission be established to study the impact on
the American economy of the services, information and technology
sectors and to review the existing SIC codes to ensure that the
categories reflect the current state of the industries. The
Standard Industrial Classification Manual was subsequently pub-
lished in 1987 with updated SIC codes.
  In the process of being developed is a successor to the SIC codes
that will evolve with the continuing growth of the American
economy. A study completed under contract by the U.S. Small Busi-
ness Administration in 1986 and updated in 1989 compares the
federal procurement system of product service codes with the SIC
codes.
  Papers presented at the 1991 International Conference on the
Classification of Economic Activities in Williamsburg, Va.,
indicated that the time had arrived to take a fresh look at the
concepts, methodologies, procedures and uses of economic
classifications for statistical purposes.
  In July 1992, the Office of Management and Budget established an
Economic Classification Policy Committee chaired by the Bureau of
Economic Analysis, U.S. Department of Commerce. The committee is
conducting a public outreach effort.
  To facilitate public comment, the committee has prepared issue
papers on eight key areas of decision leading to a new
classification structure: conceptual issues, aggregation structures
and hierarchies, collectibility of data, criteria for determining
industries, time series continuity, service classifications,
international comparability and detailed product code
classifications.
 A new SIC classification system is to be in place by 1997, with
tentative new classifications to be tested in 1996.
DISCUSSION
* Should the SIC system be modified to enable the government to
classify businesses and identify emerging industries without
restricting businesses to a particular SIC code for procurement
purposes?
* What other changes to the SIC system, if any, should the
government address?
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