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UNLEASHING THE POWER OF

ENTREPRENEURSHIP: STIMULATING INVESTMENT

IN AMERICA’S SMALL BUSINESSES

ROUNDTABLE

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MAY 22, 2002

Printed for the Committee on Small Business and Entrepreneurship

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED SEVENTH CONGRESS

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

PAUL D. WELLSTONE, Minnesota

MAX CLELAND, Georgia

MARY LANDRIEU, Louisiana

JOHN EDWARDS, North Carolina

MARIA CANTWELL, Washington

JEAN CARNAHAN, Missouri

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

ROBERT F. BENNETT, Utah

OLYMPIA J. SNOWE, Maine

MICHAEL ENZI, Wyoming

PETER G. FITZGERALD, Illinois

MIKE CRAPO, Idaho

GEORGE ALLEN, Virginia

JOHN ENSIGN, Nevada

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

EMILIA DISANTO, Republican Staff Director

PAUL H. COOKSEY, Republican Chief Counsel

(III)

CONTENTS

OPENING STATEMENTS

Page

Kerry, The Honorable John F., Chairman, Committee on Small Business

and Entrepreneurship, and a United States Senator from Massachusetts .... 1

Baird, The Honorable Brian, a Representative in Congress from Washington .. 8

Bond, The Honorable Christopher S., Ranking Member, Committee on Small

Business and Entrepreneurship, and a United States Senator from

Missouri ................................................................................................................ 113

DeMint, The Honorable Jim, a Representative in Congress from South

Carolina ................................................................................................................ 10

PARTICIPANTS

Carroll, Francis, Founder and Chief Executive Officer, Small Business Service

Bureau, Inc., Worcester, MA ............................................................................... *

Cooper, Benjamin, Senior Vice President, Government and Public Affairs,

Printing Industries of America, Alexandria, VA ............................................... *

Coratolo, Giovanni, Director, Small Business Policy, U.S. Chamber of

Commerce, Washington, DC ................................................................................ *

Culpepper, Lee, Senior Vice President, Government Affairs, National

Restaurant Association, Washington, DC .......................................................... *

Doye, Angelia, Chief Financial Officer, Gwathmey, Inc., Cambridge, MA ......... *

Eckerly, Susan, Director of Federal Public Policy, National Federation of

Independent Businesses, Washington, DC ........................................................ *

Esparza, Moctesuma, Chairman, New America Alliance, Washington, DC ....... *

Feigen, Jerry, Director of Macklin Center for Entrepreneurship, Montgomery

College, Rockville, MD ......................................................................................... *

Freeland, Kathryn, CEO, RGII Technologies, Inc., Annapolis, MD .................... *

Garritson, Dean, Vice President, Small and Medium Manufacturers, National

Association of Manufacturers, Washington, DC ................................................ *

Heesen, Mark, President, National Venture Capital Association, Arlington,

VA .......................................................................................................................... *

Hughes, Robert, President, National Association for the Self-Employed,

Washington, DC ................................................................................................... *

McCracken, Todd, President, National Small Business United, Washington,

DC .......................................................................................................................... *

McKnight, Duane, Partner, Syncom Funds, Silver Spring, MD .......................... *

McKigney, Darrell, President, Small Business Survival Committee,

Washington, DC ................................................................................................... *

Mercer, Lee, President, National Association of Small Business Investment

Companies, Washington, DC ............................................................................... *

Millman, Amy, President, Springboard Enterprises, Washington, DC ............... *

Newpher, Richard, Executive Director, Washington Office, American Farm

Bureau Federation, Washington, DC ................................................................. *

Phillips, Bruce, Senior Fellow in Regulatory Studies, National Federation

of Independent Businesses, Washington, DC .................................................... *

Tatum, Douglass, CEO, Tatum CFO Partners, LLP, Atlanta, GA ...................... *

Von Bargen, Patrick, Executive Director, National Commission on Entrepreneurship, Washington, DC .................................................................................. *

Wiesen, Jeremy, Associate Professor, New York University, Leonard N. Stern

School of Business, New York, NY ..................................................................... *

Wilfong, Henry, President, National Association of Small Disadvantaged

Businesses, Silver Spring, MD ............................................................................ *

* Comments, if any, are located between pages 11 and 133.

(IV)

PREPARED TESTIMONY AND APPENDIX MATERIAL SUBMITTED

Page

Baird, The Honorable Brian:

Opening statement ........................................................................................... 8

Prepared statement .......................................................................................... 9

Bond, The Honorable Christopher S.:

Opening statement ........................................................................................... 113

Prepared statement .......................................................................................... 116

S. 189 analysis and text ................................................................................... 161

S. 2022 analysis and text ................................................................................. 193

Carroll, Francis:

Prepared testimony .......................................................................................... 198

Cleland, The Honorable Max:

Prepared statement .......................................................................................... 197

Coratolo, Giovanni:

U.S. Chamber of Commerce’s Small Business Tax Policy and Priorities .... 219

Doye, Angelia:

Prepared testimony .......................................................................................... 204

Feigen, Jerry:

Prepared testimony .......................................................................................... 77

Heesen, Mark:

Prepared testimony .......................................................................................... 47

Hughes, Robert:

Prepared testimony .......................................................................................... 220

Kerry, The Honorable John F.:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 5

S. 1903 analysis and text ................................................................................. 135

S. 1676 analysis and text ................................................................................. 147

McKigney, Darrell:

Prepared testimony .......................................................................................... 104

Millman, Amy:

Additional testimony and recommendations .................................................. 207

Phillips, Bruce:

NFIB National Small Business Poll ............................................................... 54

Shore, Bill, Community Wealth Ventures, Washington, DC

Comments for the record ................................................................................. 210

Tatum, Douglass:

Prepared testimony .......................................................................................... 13

Von Bargen, Patrick:

Prepared testimony .......................................................................................... 37

Wiesen, Jeremy:

Prepared testimony .......................................................................................... 108

(1)

UNLEASHING THE POWER OF

ENTREPRENEURSHIP: STIMULATING

INVESTMENT IN

AMERICA’S SMALL BUSINESSES

WEDNESDAY, MAY 22, 2002

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP,

Washington, D.C.

The Committee met, pursuant to notice, at 9:35 a.m., in room

428-A, Russell Senate Office Building, the Honorable John F.

Kerry, (Chairman of the Committee), presiding.

Present: Senators Kerry and Bond.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MASSACHUSETTS

Chairman KERRY. Good morning everybody. Thank you so much

for taking time to join us today. We have a powerhouse gathering

of individuals with political, business, and entrepreneurial experience, and I think it is very exciting to have all of you here to share

some thoughts in this roundtable form of a small business hearing,

with quotation marks around the word ‘‘hearing.’’

I am very, very grateful to all of you. Some of you have traveled

some distance. For others, it is a closer trek. But for all of you,

time is valuable and we very much appreciate your sharing time

with us today.

We are going to have colleagues join us as well. Senator Bond

will be here a little bit later and other colleagues will be in and

out. One of the things we have found on the Committee in the past

few years is that it really helps—this is just a better way to get

at issues. The hearings tend to have their own formalized structure

and end up not being quite as dialogue-prone, and sometimes even

constructively contentious.

So I have found, and I think Senator Bond shares with me the

sense that this can be a much more productive way of really getting at issues, figuring out an agenda, and getting everybody’s participation. I think it is a very positive way to do things and I hope

you will share that sentiment. Some of you have participated before, many of you have not, but I think you will find it is a very

productive way to proceed forward.

As you know, we added the word entrepreneurship—and I do not

take it lightly. Sometimes things happen around here that are cosVerDate 11-MAY-2000 10:12 Jan 09, 2003 Jkt 082488 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\82488.TXT SSC1 PsN: SSC1
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metic, but I do not view the addition of the word ‘‘entrepreneurship’’ to the Committee’s title as cosmetic. Entrepreneurial activity

has its own special qualities, I think, and most of you here would

agree. While all small business is inherently somewhat entrepreneurial, there is an entrepreneurial epic and style and series of

hurdles that, for the kinds of longer-term growth enterprises that

we are trying to encourage, require a special set of disciplines and

knowledge of how to take advantage of certain kinds of opportunities.

It is interesting that of the 600,000 to 800,000 start-ups annually

in the United States, only 1,000 of them receive what we know as

venture capital funding, and usually for more than $1 million. The

vast majority receive either informal and/or angel investor-type

funding of anywhere from $5,000 to $50,000 and wind up at some

point turning the corner, many of them, and becoming one of those

companies that then qualifies for the more traditional kinds of

funding.

What is interesting to think about is so how do you measure at

the very beginning those kinds of companies? Are there some traits

and ways in which one can distinguish immediately who has got

the best opportunity to be that kind of company and get them on

a track where they find that funding sooner? Could we have more

success stories if we had a way, a set of criteria or ways in which

to determine that?

There is a whole area of entrepreneurship that is different in

America today. We do this better than anybody else. We have the

most—even though we do not always find capital flowing as readily

as we would like it to, and part of the discussion here today ought

to be how do we get access to capital. We are always trying to refine that. That is the purpose of the SBA.

But there is a lot more to small business than just the SBA. The

SBA is one kind of relationship and often it is more the SBIR,

SBIC, 7(a), 8(a) sort of lending programs. There is a whole other

set of small business hurdles and needs that are purely entrepreneurial that never need to touch the SBA and we ought to be

thinking about those a lot and that is part of the purpose of this

morning’s effort.

There are so many opportunities now. It is extraordinary when

you think about it. The changes in the marketplace are just phenomenal. If you go back to the 1980s, you all remember the books

that were being written about Japan, Inc., and the end of the

American era and the next century was going to be the Asian century, China and/or Japan, et cetera.

Frankly, the people who proved that wrong were not the U.S.

Government or anybody else but business. American business

buckled down. We had that terrible word called ‘‘downsizing,’’ but

it was effectively a sharpening of the pencil, really. It was a natural process by which people became more competitive and there

was some winnowing out, and we obviously did extraordinarily well

during the 1990s.

At the same time, what Alan Greenspan called the ‘‘virtuous

cycle’’ transitioned into the ‘‘irrational exuberance’’ that cost a lot

of people, and we are still going through that particular adjustment

right now. But the basics are still there, and there is an awful lot

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of money out there seeking good deals and I think it is time to go

back to basics.

There is a disturbing trend that I think most of you would agree,

and I am not sure how it impacts the small business piece, but that

is the trend towards the earnings scandals of Wall Street, the

Enron/accounting practices and the drive towards what we have

seen—I guess the way to phrase it, and this is mostly a larger company phenomenon, but I think it spills over into and has an impact

on smaller entrepreneurial efforts, and that is the growth by accrual, growth by merger, growth by acquisition rather than by creation of product and expansion of sales per se.

The phenomenon by which CEOs have had these rather remarkable increases in options and the ways in which companies have

created, I guess, a Wall Street-oriented quarterly report that does

not, in fact, reflect what we all look for in price earnings ratios. I

think that is one reason why there are still a lot of inflated, overinflated values in the marketplace today and some room for some

adjustment still that we may or may not suffer over the course of

the next months.

Anyway, all of this is subject to discussion today in whatever

form you would like it to take.

I have to go to a press conference with the National Mayors for

housing shortly.

We do have two pieces of legislation that are particularly important that we are discussing, also, the BRIDGE Act, which is a piece

that a number of you here have worked on and I am anxious for

further discussion of that. I think you are all familiar with the details of it, but it essentially sets aside tax liability as collateral for

lending to help firms retain working capital that they cannot get

otherwise because banks are closing the credit lines. It is a lot

harder to get credit below larger amounts of money today. A lot of

small companies, small businesses, are just shut out.

So that is one approach, and I am very grateful to Congressmen

Jim DeMint and Brian Baird—thanks very much—for their cosponsorship of the BRIDGE Act in the House of Representatives. We

look forward to a good discussion on that.

The second piece of legislation is a piece that I have championed

for some time. When Dale Bumpers was here as chairman in 1993,

we passed a targeted capital gains reduction. I have reintroduced

a capital gains bill with a zero capital gains tax for stock in small

businesses with market value of up to $1 million. The stock must

be held for 3 years. We may change that time period to 5 years.

It was set during the period when the time return on investment

had ratcheted down so significantly. I think we are back into a

more normal cycle now and we probably ought to ratchet it back

up.

But this is for critical technology areas, the theory being that

that could excite the movement of a lot of capital to those areas

where the highest value-added jobs are created and where the

United States has the greatest interest in trying to create and hold

on to market share and be at the lead.

I thank Doug Tatum very, very much, CEO of Tatum CFO Partners, and I am very grateful for his input. He has been really inVerDate 11-MAY-2000 10:12 Jan 09, 2003 Jkt 082488 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\82488.TXT SSC1 PsN: SSC1
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strumental in helping us design the BRIDGE Act and I think he

will make an important contribution to the discussion today.

While I am not here, Patty Forbes will facilitate the dialogue, she

will be in charge, and I think she has a lot of experience in helping

to pull useful information from participants.

So thank you again for being here. We appreciate it very, very

much, and if I could turn to my colleagues from the House for their

opening thoughts, I would like to do that.

[The prepared statement of Senator Kerry follows:]

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STATEMENT OF THE HONORABLE BRIAN BAIRD, A

REPRESENTATIVE IN CONGRESS FROM WASHINGTON

Mr. BAIRD. First of all, thank you all for being here. I have just

come back from yet another trip back to my district, and I can tell

you, what I hear from our small businesses is that the need for

capital right now is the critical determining factor, not just in the

growth, but in the survival of many, many businesses and particularly high growth rate businesses. With the recession, more and

more businesses are saying to me that they just cannot get the capital to expand, and yet it is the expansion on which their survival

may depend.

As the Senator knows, the BRIDGE Act is an effort to address

that. My good friend Jim DeMint and I have worked on this for a

couple of years now and the goal is, as many of you know, to try

to find a mechanism whereby rapid growing businesses can obtain

capital. The somewhat speculative nature, by nature of a rapid

growth business, makes it difficult for them to go to a bank or traditional lending institution and get the capital, because for the

banks or lending institutions to do the due diligence necessary to

verify that the loan is a good one costs so much overhead for them

that they would have to charge a prohibitive interest rate.

So as the folks from Tatum have pointed out, this places fastgrowth businesses in essentially a no man’s land where they need

and could benefit from capital to grow, but they cannot obtain the

capital that would allow them to grow, and the bill we have put

forward essentially allows almost a self-lending mechanism whereby tax liabilities are deferred and can then be used to fund expansion. Those, however, would be paid back to the Treasury with interest so that the net capital cost to the Treasury is actually a positive in the sense that, over time, they will return an interest on

that. We believe it is a creative way to provide a fast-growing and

large potential employing sector of our economy with capital.

I applaud my good friend, Jim DeMint, for his leadership and I

know he will have some things to add to that.

[The prepared statement of Congressman Baird follows:]

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Chairman KERRY. Fine. Thank you very much.

Jim, thanks very much for being with us. Thanks for your help.

STATEMENT OF THE HONORABLE JIM DeMINT, A

REPRESENTATIVE IN CONGRESS FROM SOUTH CAROLINA

Mr. DEMINT. Thank you, Senator and all the folks on the Senate

side who have shown a lot of vision in this. I think we tend to go

to the traditional fixes when looking at stimuli and this is a new

idea. It is something that, Doug, you have found, takes a lot of cultivation on the government side, but the fact that it has come this

far is very encouraging to me.

I was a small businessman for years and it was amazing that

every year, we would sit down and figure out how to disperse what

little capital we had into bonuses or whatever to avoid taxes, so we

really did not accumulate the capital we needed to grow like we

should.

A better example is even yesterday in a hearing for the Small

Business Administration with a veteran who started a business in

his home after 20 years in the service. He talked about the process

of starting a business with $600. He went out and got 17 credit

cards to get their lines of credit and he had so much money borrowed on those cards, paying 20 percent, he was not paying himself

any money and the sad fact was, he was actually showing a profit

because he was not paying himself any money or paying rent and

he had to pay taxes. So the tax code was actually taking his capital

while he was trying to grow. He now has 100 employees, but it was

not because we helped him.

I think the next Microsoft, the next Apple Computer, is in someone’s home right now. The fact that it is very difficult to get capital

is something we need to look at, not to give them money, but this

bill, the BRIDGE Act, basically allows them to borrow from their

own tax liability, to use that as collateral to leverage the collateral

they have to grow their business.

Many of our traditional fixes for taking a tax load off business

can apply to large companies, generally do, companies that can be

downsizing, laying off people, and still get the benefit of some of

our approaches to reducing tax liability. But this bill is targeted at

the companies that are creating jobs today, the ones that are growing. It actually qualifies them based on whether they are growing

or not and have been growing.

So this targets a relatively small amount of Federal revenue. By

just allowing these companies to defer their tax obligation, use it

as collateral, they can leverage even a small amount of money,

$10,000 or $20,000 to $50,000, they can leverage $50,000 in tax liability probably to $100,000 or more, keep their own money and

grow their business, and then pay their tax liability. We are not

giving them money. We are allowing them to keep their own money

and manage their own cash to grow their businesses.

This is a novel idea and I think one that can be expanded in a

number of different directions once we prove it out. The bill is very

limited in the sense that it does not apply to a broad spectrum of

businesses, but it does apply to several hundred thousand companies in this country that are providing almost all of the net new

jobs, and to push this through the Senate, to have an example over

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1Statements located on pages 18-34 in Mr. Tatum’s prepared testimony.

here, it would be a pleasure to help you, Senator, because we think

that this is an idea that may be our best tax idea in a long time.

Thank you so much for your initiative on this.

Chairman KERRY. Thanks so much. Thank you for your expertise

and thanks for being here.

We have three presenters who are going to start off the conversation, the aforementioned Doug Tatum, and thank you, Doug, for

being here, Patrick Von Bargen and Mark Heesen. Why do you not

start off, Doug, and then we will go to Patrick and then Mark.

STATEMENT OF DOUGLASS TATUM, CHIEF EXECUTIVE

OFFICER, TATUM CFO PARTNERS, ATLANTA, GEORGIA

Mr. TATUM. Thank you, Senator, and Congressmen Baird and

DeMint. I will not repeat what has been said earlier about the

BRIDGE Act. I did, however, I believe, have some materials that

you might find interesting. There are four businesses: Les Walker,

CEO of DocuSource, California, you will find that in your package;

Eliot Weinman, who is a CEO and entrepreneur up in Massachusetts, up in the Boston area; Ed Rankin, who is the CEO of

PeopleSolutions and one of the ‘‘Inc. 500 Fastest Growing Businesses in the United States;’’ and then Harden Wiedemann, CEO

of Assurance Medical in Dallas.1

I think you will find that interesting, because these are little vignettes of CEOs who, effectively, fell into no man’s land and into

the capital gaps and their comments on what would have happened

had they been able to defer their tax liabilities and retain that capital in their businesses, and I think you will find that fascinating

if you get a chance to look at that.

But I would summarize my comments by saying we are blessed

with an entrepreneurial culture which is the single most important

economic competitive advantage that we have as an economy. Senator, I have spoken to over 1,000 CEOs in the last 90 days on no

man’s land, by the invitation of various associations, and I point

out in every one of those speeches that your name change in this

Committee is hugely significant, because if you get 100 CEOs in a

room, small business people, men and women, every one of them

had aspirations to grow. Every one of them believed they had that

opportunity or they would not be in the business.

We know statistically that a very small number of those will

break out of being small and become emerging growth entrepreneurial businesses. Those businesses are entirely different than

small businesses, and so your name change is hugely instrumental

in describing the difference, both in this city particularly, but is

recognized out around the country as being a significant understanding of the issues.

Those businesses that grow and grow rapidly, by virtue of their

growth are negative cash flow, but they are economically profitable.

What we have, I think, is in summary in terms of tax policy, is

that we need a world class farm league. You cannot build a great

major league baseball team without a farm league, and these

emerging growth companies are the farm leagues for the venture

capitalists, my friend over here, Mark Heesen. These are the future

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large companies. Those four CEOs whose stories we provided you

in written form generated several hundred employee jobs, several

hundred high-quality jobs in a matter of 24 months in their businesses and every one of them indicated they had to slow down,

stop, or sell as a result of the cash flow constraints.

So I almost summarize the BRIDGE Act as a correction in an

error in the tax code. I am not so sure that the policymakers really

understood the consequences of growth on a microeconomic basis to

rapidly growing companies. The interesting thing, back in—I forgot

the date, 30 years ago, when the SBA—the Federal Reserve, who

we had an opportunity to brief on this, did a study indicating there

was a capital gap for these companies. Well, that capital gap is still

here today and it is exacerbated by a lot of issues that we can get

into.

So it is very, very important that if the research of Patrick and

his group is as significant as we believe it is, which is that a very

small number of companies have generated all the jobs, and I am

suggesting to you that the jobs are not going to be created by large

corporations in the future, and I think there is research to indicate

that, that this group of companies is our most precious national

asset. Tax policy that allows them to retain capital or tax policy

that allows investors to invest in these companies and defer capital

gains is the single most important thing we can do to creating a

great farm league in the next 20 years.

So I will rest with that and turn it over to my colleagues here

and look forward to some questions.

[The prepared statement of Mr. Douglass Tatum follows:]

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Chairman KERRY. Thank you, Doug.

Patrick.

STATEMENT OF PATRICK VON BARGEN, EXECUTIVE DIRECTOR, NATIONAL COMMISSION ON ENTREPRENEURSHIP,

WASHINGTON, D.C.

Mr. VON BARGEN. Senator, thank you for this opportunity to

speak. I am Executive Director of the National Commission on Entrepreneurship. I am delighted to say that most of the points I was

going to cover here have already been covered by Members of Congress, which is a truly delightful situation to have. But let me highlight a few points that have been made and maybe add one or two.

In this report we did of high-growth companies, we found several

things. First of all, when we gathered the research to find out

whether these companies were important to the economy, we came

up with a number of roughly two-thirds. That is, about two-thirds

of the new jobs in the economy are created by these companies.

Well over two-thirds of the innovation in the economy are created

by the companies, and somewhere between one-third and twothirds of economic growth can be accounted for through various

correlations by these companies.

We also found that these companies are across all industries.

They are not just all high-technology companies. And we found that

there are these companies in every single one of the 394 different

labor market areas that we studied in the United States.

Now, in another study we did, which is called ‘‘Five Myths About

Entrepreneurs,’’ we really, for purposes of this roundtable, focused

on two big important needs of these entrepreneurs. One, of course,

is securing enough capital to grow a company, to hire new employees, to purchase or lease equipment, to make the investments that

need to be made in order to grow the company and capture more

market share.

And, of course, the second biggest challenge was convincing very

talented, creative people to leave larger, more secure companies

and join in what is a risky venture, and that is usually done with

stock options and stock issuances.

But the first challenge, this need to raise capital, of course, is the

discussion point for this roundtable, and just to frame it, it has

been done in different ways here, but first of all, it is not a venture

capital problem. We know that even though the average venture

capital deal size has dropped considerably over the last year-anda-half or 2 years, certainly venture capitalists do not invest at levels roughly below $3 million on a general basis, and there seems

to be enough venture capital in the system still to meet the needs

of companies desiring, and at a level of growth where they can use

venture capital.

On the other end, it is not a bootstrap capital problem yet. That

is, entrepreneurs seem to have access and are very good at convincing friends and families to invest in their companies. They are

very good at applying for credit cards. They can do second mortgages on their homes. They can apply savings. That can get them

up to somewhere between $100,000 and $300,000. So it is not that

problem that is the issue.

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The issue is really what we call early stage capital, which is in the range of if a company needs somewhere between $100,000 and

$3 million, what does that company do? And when you think about

the lending behavior of banks, you are really reduced to two possible pots of money to fund that growth. One is to take the profits,

the retained earnings in the company, and reinvest those in the

growth needs of the company, and the other is to convince wealthy

investors, angel investors, to purchase stock in the company and

fund this next stage of growth.

So we have those two pots, and right now, we have obstacles in

the way of both of them. I think, as Doug pointed out, he cannot

believe that the tax system really meant to do what it did in terms

of creating this obstacle for companies to use the profits that they

are generating on their growth path to continue the growth. We

know on the basis of what was attempted in 1993 with Section

1202 of the Internal Revenue Code, this targeted capital gains system, that we have gummed that up enough that that is not being

used by wealthy investors.

So we are here today to discuss the BRIDGE Act, which deals

with that first problem of retained earnings used for investment

and growth, and then also the Affordable Small Business Stimulus

Act, which would deal with the wealthy individual investor issue.

[The prepared statement of Mr. Von Bargen follows:]

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Ms. FORBES [Presiding]. Thank you.

Mark.

STATEMENT OF MARK HEESEN, PRESIDENT, NATIONAL

VENTURE CAPITAL ASSOCIATION, ARLINGTON, VIRGINIA

Mr. HEESEN. Thank you very much. I am Mark Heesen, President of the National Venture Capital Association. I agree with

what has been said so far, that venture capitalists basically need

a farm league. Without a farm league, there is no investment in

emerging growth companies down the line.

Venture capitalists in the year 2000, venture-backed companies

made up 11 percent of U.S. GDP. That is an incredible number

when you think that there are only several thousand venture capitalists in the entire country, and yet those venture-backed companies made up 11 percent of U.S. GDP, 12.5 million jobs, and $1.1

trillion in revenue. So there are a very few emerging growth companies, gazelles, out there that we invest in that become super

stars. There are a lot of failures, as well, and venture capitalists

do not like to talk about their failures, but it is an important part

of the process.

But we cannot even get to those companies unless there are basically programs put together that encourage entrepreneurship, and

unfortunately, things are countercyclical. When times are good, basically, entrepreneurs do not need government as much and you always hear entrepreneurs say the best government is no government at all. The reality is that entrepreneurs need government—

it is a very important element about how they grow, particularly

when it comes to capital gains.

People will not invest in what is very often a speculative venture,

a high-tech company or another type of an emerging growth company, if he or she does not believe at the end of the day that they

will get some sort of financial gain out of it. They can put the

money in a bank, they can put it in a mattress and it will do better

at the end of the day very often than putting that money into a

small company that could become an emerging growth company.

You have to give them some incentive to put money there and capital gains differentials do that.

Section 1202 is a perfect example of a very good intention that

has not, frankly, worked because of bureaucrats at the Treasury.

Congress tried to fix that problem back in 1998 and we are still

working with Treasury to try to get Section 1045 fixed. This bill,

S. 1676, would make marked improvements in Section 1202.

Those are absolutely imperative if we are going to see emerging

growth companies move through the process. Venture-backed investors, by and large, are not tax sensitive because they are pension funds, they are colleges and endowments, they are banks and

insurance companies. Most of them are not tax sensitive. However,

the high net worth individuals and the entrepreneurs themselves

who are not high net worth are extremely tax sensitive, and so it

is important that we look at that early stage so that we have a

very good crop of candidates in which to invest.

What we have found in the last year is a dramatic downturn in

the amount of venture capital investing in this country and that

will likely continue through this year. However, what we have seen

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over the last couple of quarters is an increasing interest in earlystage companies again, which I think is very good news. But it is

just a small portion of all the companies that need financing in this

country. Venture capital has been given kind of rock star status

lately and the reality is that it is a small portion of companies that

we fund. Many of them, as I said, become very important companies, but it is a small portion of those companies in which we invest and there are a lot of others that need things like the BRIDGE

Act so that we can look at them down the line.

Another important element, I think, just to address is something

that is coming down the pike effective January 1 of 2003 and that

is the taxation of ISOs and ESPPs, incentive stock options and employee stock purchase plans. This has nothing to do with the other

stock option issue that everyone is hearing about.

But employers, small employers, and employees who are making under the Social Security limit of $85,000 are going to be paying

an extra tax come January 1 of 2003, a combined tax of 15 percent

on their ISOs and ESPPs. That is a major hit on small companies

and it is something that the Treasury has reversed a 30-year policy

on. The House has actually passed as part of the pension bill a provision that would not allow Treasury to do this. The Senate has not

yet acted upon this, but it is a very important issue to small businesses. Thank you.

[The prepared statement of Mr. Mark Heesen follows:]

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BARRIERS TO ACCESS TO CAPITAL

Ms. FORBES. Thank you very much.

Before we get too far into our discussion with all of you who have

come so far, we appreciate your being here, as everyone has said.

I would like to introduce Mark Warren, who is Senator Bond’s

tax counsel, and Ryan McCormick, who is Senator Kerry’s tax staffer. If we have detailed tax knowledge, I am going to be turning to

them because I am not a tax expert.

If you look in your packets, there should be an agenda in there.

Some of you have been to our roundtables before, but if you have

not, when you would like to speak, you just take your nameplate

and put it up on end like this and I will try to recognize you in

the order that you put them up, but sometimes I do not get it quite

right, so we will get to you eventually. We do kind of move the conversation along, so you will see there are sort of estimated times

next to some of these topics.

We will do the best we can to get everyone’s views in, but please

be assured that if you have written comments, the entirety of your

written comments will be placed in the record. This is transcribed,

so if you could please say your name and the group you are with,

that will help our court reporters.

Mark, did you want to say anything? No?

Congressman DeMint, did you want to say any more? No? Okay.

All right. So looking at our agenda, the first thing we would like

to talk about is we would like to hear your views on what you see

as the barriers of access to capital. We have touched on this a little

bit, but we have sort of three points here and you are welcome to

address any of the three.

Mr. WARREN. One point that I think the presenters have focused

on a lot is a segment of the small business community that is very

rapidly growing and very significant. But I look at it in terms of

the progression of a small business, and what has not really been

touched on, and I know a whole lot of groups here represent, are

the very small businesses, those that are just getting started, those

that are not corporations with stock that would benefit in terms of

capital gains trades. And that, I think, is a constituency that we

have to keep in mind, as well, because if they do not have the opportunity to grow, then you are never going to reach that high

growth stage. So I would appreciate hearing from you all if there

are ideas that we can do either outside of the tax code or through

the tax code that would also benefit that constituency, as well.

Mr. DEMINT. Could I make just a comment?

Ms. FORBES. Yes, sure.

Mr. DEMINT. Just as a note on the BRIDGE Act, as I understand

the way it is written, this could be a one-person company that is

growing. When you have a very small base to start with, it is easy

to meet our growth requirements, so it is not necessarily between

$300,000 and $1 million. A person who can defer a few thousand

dollars the way the BRIDGE Act is structured, and for a one-person company starting, the ability to have a few thousand capital,

leverage it into ten, you can add an employee, can rent space.

So this is something that is designed to help not only the gazelle

emerging growth companies, but applies just as easily and probably

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more often to a tiny little company that went from $10,000 in sales

to $20,000. They have doubled their revenue, and if they do that

over a few years, they have met our criteria. There are obviously

other needs of small business, but this is what we hope to fit in

that slot, too.

Ms. FORBES. Does anyone have some comments or views on any

of these barriers? One of the questions that we have had is at what

point do companies turn the corner, and prior to that, how can you

identify that point and how can you get them to turn the corner

faster.

Mr. Esparza.

Mr. ESPARZA. Yes. My name is Moctesuma Esparza and I am

here representing the New America Alliance, a Latino business

leaders’ initiative. Our organization is made up of very successful

Latino business leaders and would generally fall outside of the

goals of support that this legislation contemplates.

However, I would like to bring attention to the fact that this legislation, as has been discussed, does not really take into account

that there are historical structural inequities in the access to capital for Latinos in particular and for other minorities in the country. The equity that most entrepreneurs use as bootstrap, which

comes from friends and relatives, comes from the accumulated equity in home ownership that has been generated over generations.

Particularly in our communities, it is not that long ago, certainly

in our memory, that restrictive covenants restricted the ability of

Latinos to purchase land in particularly desirable, upscale possible

areas or in areas that equity could be increased in, and certainly

redlining in regards to home loans has historically restricted this

generation of equity, and the equity that is available in our communities is far below the national average as a consequence of

these historical structural inequities.

So certainly I think that it must be acknowledged that in our

communities, the access to bootstrap capital is greatly restricted by

the lack of accumulated equity in home ownership or access to

credit cards.

And further, in regards to the early stage, the availability of access, even social contact with venture capitalists or banking institutions is greatly restricted. I am a fairly successful business person

and the only support that I was able to find in terms of being able

to go and acquire capital came from an African American-run SBIC

and private equity fund, which is represented here by Mr. Duane

McKnight, and had it not been for their particular focus on seeking

out a company like mine, I would not be at this table today.

I have now launched a new company and I have gone out to the

capital markets, to the private equity firms, the venture capital

firms, and I have found nary a Latino anywhere in the ranks of

these companies and I have found that the educational effort that

I must expend to introduce them to the tremendous profit opportunity available in the Latino community is a tremendous time consumption of energy and that, generally, they only want to do what

they know and they only want to work with the people that they

know.

And new areas, particularly considering that the future workforce and the future vitality of this great Nation, is dependent on

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empowering the Latino community, which will quickly become 1-in4 Americans in the next 30 years, is of vital importance to the future health of this country and that providing capital flow to this

community and of easing the problems of bootstrap, of early stage,

and of access to venture capital must be considered in any legislative effort to attempt to help these problems that entrepreneurs

face.

And so far, I have not heard, nor have I read, that any consideration is given to this or any dialogue has been addressed to this.

Thank you.

Ms. FORBES. Thank you.

Bruce Phillips.

Mr. PHILLIPS. Thank you. My name is Bruce Phillips. I am with

the National Federation of Independent Businesses. I would like to

speak a little bit to Mr. Warren’s comments about established

small businesses.

We represent about 600,000 small firms, of which the average

size is about seven. But I would like to call your attention also to

the fact that we publish research, and there is a copy if you would

like to pick one up on the way out, a national small business poll

where we asked—this is Dun & Bradstreet-weighted information,

so it is representative of the country as a whole—we asked 750

companies how many wanted to grow and which ways they wanted

to grow.

[The poll submitted follows:]

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Obviously, keeping tax rates lower, permanently lower, is a number one issue for many of these companies. When we asked the

question, how many of you would like to be able to have $100 million in sales within the next 5 years, of the half that said they

wanted to grow—half of the firms in the survey said, in fact, they

were content with their present size—about 8 to 9 percent of the

companies said they would like to be doing $100 million in sales

within 5 years. Well, if you take about 9 percent, give or take, of

$3 million, you are in the $300,000-$400,000 company range, and

that is the target, I think, that this group is concerned with.

One of the questions that really struck me, when business owners were asked what they liked to do best, the thing that came out

increasingly was they were most interested in operations and serving customers and providing the best possible product. When asked

what they liked to do least, the answer was to raise money, finance, which led me to believe, how do we make this leap between

the people who clearly need the money and would like to grow and

the people who do not have time because they are wearing four

hats at once, trying to make payroll, trying to meet suppliers, trying to meet customers, et cetera, et cetera?

I guess I concluded that it is education, that we need more linking, more networks, more groups like what the Kaufman Foundation has done. Many small firm owners will take a few hours occasionally to go out and listen to some people, even bankers, people

who have gone through this process and have obtained a fair

amount of money in the angel capital stage. But it is, frankly, a

very, very difficult process.

We know that there are at least 300,000 or 400,000 people in the

farm leagues, as the gentleman said. The problem is, how do we

get these people who are so busy with their 6-, 7-, 8-employee companies and who need the money and many of whom would like to

get the money to, in fact, to apply for it, to sit in the seminars, et

cetera, et cetera? And I think that is one of the two problems of

very small firms and continues to be, by the way.

Ms. FORBES. Thank you.

Mr. Hughes.

Mr. HUGHES. Thank you. My name is Robert Hughes. I am a

self-employed CPA from Dallas, Texas. I am also the President of

the National Association for the Self-Employed, a microbusiness

trade association that has about 200,000 members around the

country. Our typical member has fewer than 5 employees.

In concert with what our colleague was saying across the table

about bootstrap capital for small business, it is my belief that that

is one of the most important issues that we should address when

we begin talking about working capital for business. It is at this

level, microbusiness, that jobs are created, innovations are made,

and the economy is stimulated.

Right now, we know that 34 percent of microbusinesses use credit cards to purchase inventory. We know that 64 percent of those

same businesses use credit cards to purchase their capital acquisitions for equipment and business machines. We know also that one

of the detractors of growth in entrepreneur business is access to

working capital.

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So we think while we like some of the provisions of the proposals

that are on the table, we think that they should be expanded to include microbusiness, as well, in the areas of zero to $300,000 of

working capital.

Another provision of the bill that seems to be an oxymoron to me

is that as a tax professional, we spend a tremendous amount of

time endeavoring to reduce the tax liability of the businesses with

whom we work. As you know, that is a significant consideration in

terms of the future growth and cash flow of the organization.

In order to take advantage of these provisions, it is necessary, of

course, to have tax and it is then contradictory to say that we can

increase our working capital because we want to generate a tax liability. If we could find some method that would enable us to provide working capital through tax deferral that would not somehow

conflict with what we are trying to do from a profit perspective,

would enable us to still minimize our tax liabilities and provide

some working capital requirements, it would be useful, as well.

In addition, while the bill may—I am not sure that it does—

should extend to sole proprietors as well as corporations, S corporations, and partnerships.

Ms. FORBES. Thank you.

Mr. Carroll, I am sorry I missed you earlier. I know your nameplate was up.

Mr. CARROLL. Thank you very much, and good morning, ladies

and gentlemen, Senator Kerry, and all staff from all the various

Members of Congress as well as my colleagues from the small business community.

My name is Frank Carroll. I am Chairman and Founder of Small

Business Service Bureau, which is a national small business organization of over 50,000 small companies. I am delighted to be here

with Small Business Service Bureau’s Angie Doye, co-founder and

CFO of Gwathmey, who, with the CEO, Judith Gwathmey, has

built an innovative, highly successful small business in Cambridge,

Massachusetts.

The fast-growing, creative firm is exactly the type of company

that will benefit enormously from S. 1903 and S. 1676 and my congratulations to all of you Members of Congress and small business

people who have worked on it. We all realize that bills have to be

tweaked, and in some cases, certainly S. 1676 needs a little tweaking.

But in the interest of time, I would like to introduce and to call

on Angie and let her tell us how these bills affect her company. I

know how it affects our other members, but let us hear from another small business person who could tell us about her company,

with your permission.

Ms. FORBES. Sure.

Ms. DOYE. My name is Angelia Doye. I am the CFO of

Gwathmey, Incorporated, located in Cambridge, Massachusetts. We

are a small biotechnology company that was founded on an SBIR

grant back in 1996. We now have 9 employees. We have been

awarded seven SBIR grants since 1996, and with those SBIR

grants we have been able to build the technology and to acquire the

equipment that we needed to service the biomedical industry.

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One of the problems that we are facing especially, even right

now, is we are trying to get a bridge loan from the bank in order

to be able to expand the business. As we have developed the technology in-house, we have also had to acquire personnel, and in

looking to do that, we have found that we have to build our contract basis with the industry and that is what we are in the process

of doing now.

It takes about 2 to 3 months just to secure a contract from a

biotech or pharmaceutical company if you move quickly. So we

have asked for a bridge loan from a couple of different banks, and

one of the problems that we come up with is the cash flow issue.

Of course, because we have basically been founded and operated

from SBIR grants, the cash flow is small because you do not make

profits off of grants. But the industry contracts have started to

build up.

We have got equipment, and every time we purchase equipment,

understand that because we are a biotech company, a piece of

equipment is anywhere from $40,000 to $70,000. As we acquire the

equipment we need to service the industry at the end of the year,

it becomes a tax problem—well, a tax problem to me. It is a tax

liability.

The money we do get at the end of the year that we call profits,

we wind up paying out in taxes. So it is a vicious cycle for us in

that we acquire the equipment, we get the personnel, but at the

end of the year, we are taxed, so we do not have the money we

need to go forward into the next quarter. So we have months now

where we have enough money and other months where we do not.

So the bridge loan, we figured, would get us to the point where we

have the bigger contracts coming in toward the end of the year, but

we have been denied due to the cash flow.

And the equipment that we have, the banks are telling us that

it is too specialized for them in case we default on our loan based

on what our cash flow indicates. So I think that the BRIDGE Act

is something that would be very useful for us. We have been encountering this about 3 years now.

Ms. FORBES. Thank you very much.

Giovanni Coratolo.

Mr. CORATOLO. I am Giovanni Coratolo with the U.S. Chamber

of Commerce and I think, certainly from my members, what I have

heard, I think it is important to address this when you address the

issues of access to capital and its barriers, is certainly focusing in

on some of the traditional lending institutions and, in specific, the

7(a) program in which we have seen subsidy rate miscalculations

that have provided the government with the hidden tax on business and capital of up to $1 billion over the last decade.

Certainly, we see this as something that needs fixing. We see our

members that have struggled in the access to capital and institutions that have matriculated out of that process. That is important.

Certainly, this is something that we applaud the efforts of Senator

Kerry and Senator Bond both, who have been on record to provide

the fixes or encourage fixes to this area so that this is an area that

we see that does need attention and needs focus.

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And also, the level of funding in this year’s 7(a) program is something that we are very concerned about, so that, I think, is important to have on the record.

Ms. FORBES. Thank you very much.

Jerry Feigen.

Mr. FEIGEN. Thank you, Patty. My name is Jerry Feigen. I am

Director of the Macklin Center for Entrepreneurship at Montgomery College in Rockville, Maryland. I have been in this arena

for quite a while.

In fact, in the early 1970s when I was with SBA, I tried to use

the word ‘‘entrepreneurship’’ in a document we were going to publish and I was shot down because they thought nobody would understand it or pronounce it. Thank goodness we are here at a day

where it is more than SBA, as the Senator said. It is an educational career alternative in high schools and colleges and universities and has much deeper roots.

I think the BRIDGE Act is a great first step for a limited number

of companies and I support it. I think the issues of costs are always

there, banking costs. What are they going to add on to the piece

of the pie and what is Treasury going to add on in terms of the

processing and paperwork and those kinds of things? But I think

it is a great first step.

I would like to go to the other end of the spectrum. We are at

a point in this country where VCs always talk about pipeline. The

pipeline for entrepreneurship has never been greater at all levels.

Demographics in the immigration area and in the minority area

are just ballooning and the career alternative for entrepreneurship

is at its greatest height.

We just did a program with the NIH last April, April 18, 2002,

500 scientists from the bench to business showed up, 87 percent of

whom want to have an entrepreneurial career, want to take their

science someplace. These are people without a great deal of money,

but a lot of intellectual knowledge. They do not know how to put

a business plan together. And importantly, there are not sources,

except some of the VCs are now—of the activity in the venture

area, bio-focused venture funds are still maintaining some growth.

So I think there is an issue there. How do we mine those entrepreneurs that are not only bio, but IT, science, engineering? They

are coming out of the woodwork and out of the school systems and

they are feeding off of themselves and the access to their capital

means has to be taken care of.

[The prepared statement of Mr. Feigen follows:]

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Ms. FORBES. Thank you.

Todd McCracken.

Mr. MCCRACKEN. Good morning. I am Todd McCracken. I am

President of National Small Business United. I will try to be very

brief.

As I think we have already seen this morning, and I think only

half the folks have spoken, the credit and capital picture for small

business is incredibly complex and there is no silver bullet, there

is no one fix for small business at large. I mean, we are trying to

have a conversation at one table where we are talking about SBICs

and venture capitalists and bank loans and credit card borrowing

and the start-up dry cleaner and biotech firms, all in the same conversation. It is a pretty difficult thread to try to maintain.

But it is clear that small businesses often have great difficulty

obtaining capital, although the difficulty seems to have been less

in the last few years than it was for a great many years. But it

is cyclical in nature and I would like to try to raise one issue that

I think relates to the issue that the BRIDGE Act is trying to get

at, and it is an issue that comes back over time with the economy,

and that is basically the problem of the banking regulators.

We hear anecdotally from members now who are in a growing

stage. They may or may not be in the BRIDGE Act’s definitions of

a fast-growing company, but they are certainly successful companies but, nevertheless, have cash flow problems that in years past,

in most times, they are able to get a bank loan to get them past

these times. In the last year or so, that has become much more difficult for them and the reasons that appear to be for this are that

the banking regulators are changing the rules of the game, basically, for the banks, in particular, for how they judge the creditworthiness, how they rate the value of inventory and other assets,

for instance, of the businesses’ assets.

I want to raise the issue because we think it is critically important, because the way the bank regulators function now is in times

of great economic boom, they have almost an ‘‘anything goes’’ attitude sometimes, and then when the economy starts to go south,

they exacerbate it by changing their standards and there ought to

be some level of uniformity in what constitutes a good loan and it

should not be different in July of 1998 than it is in August of 2001.

I do not know if anyone who knows more about this and is

smarter on these issues than I am has any particular ideas on how

we can achieve some of that uniformity from the regulators, but I

think it is crucially important.

Ms. FORBES. Okay, thank you.

Darrell McKigney.

Mr. MCKIGNEY. Thank you. I am Darrell McKigney. I am President of the Small Business Survival Committee. We have been supporting the BRIDGE Act for some time, testifying for it on behalf

of the House. We appreciate Senator Kerry’s effort on that.

But one of the things that kind of gets me thinking about the

BRIDGE Act is it really highlights to me how much taxes make the

difference between success or failures of businesses. We heard from

Angelia this morning about how all the profit goes to taxes, and it

strikes me that one of the simplest things we could do to provide

capital for small businesses is continue to cut taxes, to make the

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tax cuts that were passed last year permanent. That is a big help

for small businesses.

The biggest angel investors out there a lot of times are parents

and people who give money or gift money to take care of an estate.

The estate tax is going out of business or is phasing out and then

it is going to rear its head back up. We ought to make that permanent. We ought to make it easier for people to gift money to friends

and family. Those are the people who often know those businesses

and those people the best. That is a good opportunity.

Mark, I think, brought up self-employed people. The fastestgrowing part of the workforce right now are self-employed people.

I think they have increased something like 30 percent over the last

decade, and with technology, that is only going to increase and it

is a great opportunity. The thing is, they run into, I think, a couple

of specific issues.

One, they immediately run into payroll taxes, and that gets into

the issue of Social Security reform. There ought to be a way that

people can invest their money privately so there is more capital out

there for the rest of us to access and get a better rate of return

when they retire and, at the same time, lower rates so they do not

have to pay so much.

The other issue I think they run into is so many times if they

are using a home office or they are using a car or a vehicle, it is

very hard to deduct those things and a lot of times their personal

expenses are mingled in with their business expenses, and those

are, in addition to a lot of the other areas that were brought up

here, I mean, those are some things that I think we could look at

that would have an immediate consequence for people.

[The prepared statement of Mr. McKigney follows:]

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Ms. FORBES. Okay, thank you.

Amy Millman.

Ms. MILLMAN. Thank you, Patty, for inviting us to join this

roundtable and for pulling all of these great folks together. I wanted to mention one theme that comes up from the women entrepreneurs that we talk about. They want to say thank you for making the distinction between the small business, the world of small

business, the world of entrepreneurship. There are some very significant differences in the way these companies start, grow, and

then there are some very similar aspects.

I think the issue that we have faced in small business development and in entrepreneurial development is the difference between

large and small, and the government makes no distinctions, for the

most part, between large and small. When you are a fast-growth

company, those distinctions begin to blur, and so what is happening to many of the entrepreneurs that I run across, very much

like Angie, are that they have grown to a point now where the

large corporate tax regulations, requirements, are kicking in before

they really have reached profitability.

They asked if there would be some recognition of this phenomenon which other small businesses have experienced over the

years, but at a slower pace. They are experiencing it very quickly

and it has meant the difference between staying in business and

not. So there are lists and lists that they are giving me of rules,

regulations, some State, some Federal, that have caused them all

of a sudden to put the skids on their enterprises, much to the consternation of Mark Heesen’s members.

But, in general, that is basically it. As the input comes in, I

would like to have the opportunity to be able to forward their

thoughts to you.

Ms. FORBES. Please do.

Jeremy Wiesen.

Mr. WIESEN. Thank you. I come at entrepreneurship in three different ways. I am a business school professor at New York University, but I have been at UCLA, Berkeley, Stanford, Wharton, Columbia, so I may have been in your neck of the woods.

In the 1980s, I started, with others, Financial News Network,

which was the complete start-up acquired by CNBC later on, started in a garage, basically, in Los Angeles. After that started, something called Tofutti Company, which maybe you have some Tofutti

Cuties in your icebox here, or your kids do. It is still around and

going strong.

Thirdly, aside from teaching entrepreneurship, I have started

something called the Global Goals Institute with Dr. Christian

Kling, who is here today, and we have developed several ideas and

one of them that we focused on in a group meeting was to amend

Section 1244 of the Internal Revenue Code. I have always been a

big fan of Section 1244. I remember in law school, they told us, ‘‘if

you do not remember Section 1244, you may be sued for negligence.’’ And then when I went to the Wharton School, they said,

‘‘by the way, if you do not remember Section 1244, you may be sued

for negligence.’’ So I have always remembered Section 1244 and I

have actually taken advantage of Section 1244.

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It was enacted in 1954. It focuses on losses. The amendment to

Section 1202 focuses on gains. Section 1244 says to the angel investor, you can deduct up to $50,000 a year as a person, $100,000 as

a couple, from losses in small businesses that you have invested in.

It was amended in 1978. Prior to that, it was $25,000 and $50,000.

As of 1978, prior to that, the size of the company had to be

$500,000 in capital. It was raised in 1978 to $1 million in capital.

That is the capital limit at the time that you invest.

At the Global Goals Institute with Dr. Kling, we have held meetings and we have not found anybody who is opposed to raising

those limits. We think it is appropriate. Just on an inflation basis,

they ought to be doubled.

So from a tax point of view, and I have been speaking to folks

on the Committee to try to push this forward. I would be very interested in your ideas, because I think as an investor, you not only

think what happens if it works out, can I save some money on

gains—I can see Douglas is enthusiastic about this——

[Laughter.]

Mr. WIESEN. But what about those losses? If you can write off

the losses against ordinary income and not just against capital

gains, I think it is a tremendous incentive.

In this paper that I have prepared today, I have a bunch of other

ideas and most of them go to how to link into infrastructures. I

know that at Financial News Network, if I had not brought Merrill

Lynch, a firm of very great repute 20 years ago, anyway——

[Laughter.]

Mr. WIESEN. ——If I had not brought Merrill Lynch in as an

early investor to Financial News Network, we would not have had

our studios, our advertising, and many things. And at Tofutti, if I

had not been able to do a national distribution deal with Ha ̈agenDazs, you would not see any Cuties in the supermarkets. So these

were two complete start-ups that depended upon linking into existing business infrastructures, and I think that at another hearing

at another time, we ought to think about how—and I have ideas

here of how to encourage small businesses to be able to link into

existing business infrastructures.

[The prepared statement of Mr. Wiesen follows:]

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Ms. FORBES. Thank you.

Richard Newpher.

Mr. NEWPHER. Thank you very much, Patty. I appreciate the

Senator putting together this meeting and giving us an opportunity

to speak.

I am Dick Newpher with the American Farm Bureau Federation,

and I am not part of the farm team that has been mentioned here

a couple of times. I wish I were. It would at least represent that

I was a lot younger than I am.

[Laughter.]

Mr. NEWPHER. But I am with the American Farm Bureau and

we have 5 million member families across the country, not all of

whom are farmers. There are not 5 million farm families in America. There is probably somewhere around 2 million. We do appreciate very much the concern that is expressed with regard to capital and the concern that is also expressed with regard to taxes and

capital gains taxes and estate taxes especially.

You know, agriculture has traditionally lived off the value of its

property, the equity in its land and the holdings to raise capital.

Most of my life and most of the history of American agriculture,

bankers were quite willing to que up with money because they

knew that there was a piece of land out there that had the ability

to be sold and recover the loan and so on.

We are rapidly finding in agriculture that that is changing. Our

margins are getting smaller. Our debt loads are getting sufficient

that the bankers, especially given the fact that about every 10 to

20 years you have a break in the land prices in agriculture, the

bankers are not quite so eager to lend us money as they had been,

and so we have a great interest in the capital as an existing business. We do not fit the description exactly for new and emerging

and things of that nature, but we are a very critical business to

rural America.

The bills, and I would like to echo a little bit about what Robert

Hughes said in the one specific bill, to make sure that any legislation like this is available to sole proprietorships. We are, by and

large, partnerships, sole proprietorships, Subchapter S corporations. We do have agriculture corporations, which you read about

in the paper as being the nasty people in agriculture and taking

over the world, which is another myth that needs to be dispelled.

But we need to make sure that when we look at these things, we

look at all the business structures that might be about in our land

and especially in agriculture, which are predominated by those

types of structures.

We have, I think, many needs, especially with regards to tax legislation. We have numerous examples of strong agricultural businesses that, because of the death of the principals in the business,

had to be highly mortgaged and/or partially sold in an effort to

keep it going for the next generation. It was mentioned earlier, for

a country to do damage through its tax code to existing viable businesses is probably worse than not passing new legislation to help

us in the future.

In the capital gains area, we very often are stopped from restructuring, changing our businesses in ways that would make sense for

us in rural America and in agriculture because the changing of

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selling of assets, when our assets are principally land, causes us to

have capital gains liability and so we resist change as a result of

having tax liability, and that is another, I think, travesty of the tax

policy that should be changed and should be eliminated.

If you go into the specific legislation, S. 1903, we have a request

for, in agriculture, and we have a couple of bills in agriculture that

could very easily be merged with these bills that would enable agriculture to set aside 20 percent of its net income per year in an account that could be taken back into the cash stream anytime in the

next 5 years, and you could do that for 5 successive years, and then

at that time it would become subject to tax automatically.

Those kinds of things to help us to help ourselves and not, when

we have a good year, take the tax off the top, and when we have

a bad year, there is nothing there to income average and help with

our tax responsibility, is another area that we could very easily, I

think, help, either by amending into S. 1903 or passing individual

legislation.

In addition and in closing, I would encourage, as was encouraged

earlier by Darrell McKigney, that we need, and we have had significant tax policy change. We need to make sure that that tax policy remains in place and that we make especially the estate portion

of that tax policy permanent so that we can rely on our businesses

being passed from generation to generation.

I thank you for the hearing and we will be here the rest of the

afternoon.

Ms. FORBES. Thank you very much.

We have been joined by the Committee’s Ranking Member, Senator Bond. Thank you.

OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.

BOND, RANKING MEMBER, COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A UNITED STATES

SENATOR FROM MISSOURI

Senator BOND. Patty, thank you very much, and thanks to all of

you for coming out for this very important discussion.

I have to apologize, because as so often happens in the Senate,

this is the ‘‘Perfect Storm’’ day for me. I was looking forward to

being here, but the Smithsonian this morning had its initial kickoff

of the major effort to collect all the artifacts from September 11

and bring together the pictures, the clothes worn by heroes who

rescued living survivors from the Pentagon, a tremendous array of

information and memorabilia and information that is already coming in, and I had sponsored last winter the legislation designating

the Smithsonian as the central repository. I felt that I had to be

there for that, and I have two other things going on.

I am relying on Mark and Patty and the others to keep us up

to speed on what happens here, but I am going to have to express

my sincere thanks, tell you a few brief things, and then excuse myself. I think it is extremely important that we have this discussion

for all of us, through our staffs, to learn about how we can increase

the access to capital for the entrepreneurs who keep this country

growing.

I think last summer we made great progress in easing the capital

drain by reducing tax rates. Some 20 million small businesses are

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taxed on personal rates through proprietorships, partnerships, and

Subchapter S corporations, and that means that individual rate reductions do directly affect and help small business. That means

that small business will be able to put that money back into purchasing new equipment. That means hiring new people, providing

better benefits for those who are there.

The tax bill also addressed another capital drain by dramatically

reducing the death tax, putting it out of its misery in 2010, meaning that we save in small businesses, in very many instances, hundreds of thousands of dollars in estate planning costs currently incurred to try to figure out how to keep the business or the farm

going when the owner dies.

Now, as a lawyer—actually, I am a recovering lawyer. I am in

the 12-step process——

[Laughter.]

Senator BOND. I know that lawyers and accountants benefit

greatly from estate planning, but we can find something else for

them to do if small businesses and farms do not have to spend that

much money trying to avoid this estate tax.

With all of the strengths of the United States Senate, however,

we do have a procedural problem. We did not get to the 60 votes

that we needed to extend the effective date of that tax bill and I

would hate to see, like some Frankenstein monster, the tax rates

rise from the grave in 2011 and penalize anybody who did not have

the decency to die in 2010. It seems to me a rather macabre tax

impact.

But also, let me point out one other thing that will, we think,

bring money into the entrepreneurship of small business. The

Small Business Investment Company Capital Access Act of 2000

will permit and encourage tax-exempt investors like pensions and

endowment funds to invest in small business investment companies. Currently, the tax law imposes a special tax on investment

earnings by tax-exempt institutions and that puts about 60 percent

of the private capital potentially available for starting up small

businesses off the table.

There has been a significant contraction in the amount of money

available, namely, the capital available in the private-equity market, and during the time this SBIC program has taken on a significant role. We think that this change in the tax code to permit taxexempt entities without penalty to participate in the SBDCs would

pave the way for much more investment capital to be invested and

to be made available for small businesses.

In closing, I urge you to look outside the tax system to stimulate

investment in small business. We need to make the tax code simpler and the least burdensome possible, but we also need to be sure

that we do not impose other burdens on small businesses and farm

enterprises through regulatory efforts or activities that make small

businesses and farming unprofitable.

So with that, I leave you with thanks and my best wishes for a

continued productive discussion, because these roundtables do help

us refine and define the issues that we are going to pursue on the

floor of the Senate. With that, again, I am going to have to beg

your indulgence as I go on to the third of my four responsibilities

this morning, so thank you very much.

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[The prepared statement of Senator Bond follows:]

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Ms. FORBES. Thank you, Senator Bond.

Duane McKnight.

Mr. MCKNIGHT. Good morning. I am sort of wearing two hats

here today. I am general partner with Syncom, which is a venture

fund that has been around since 1977, and also as Vice Chairman

of the National Association of Investment Companies, which is a

private equity organization that has about 35 members, about $1.2

billion in capital currently in its membership, and these firms focus

primarily on underserved markets in venture capital, primarily minority entrepreneurs, women, and similar opportunities.

Just listening here, I just wanted to also follow up on Mr.

Esparza’s comments. The capital access issue is not an equal opportunity problem in many respects, not only from a minority standpoint, but also from a gender standpoint and, to some degree, a

geographical standpoint, as well. We even heard that there are

some issues with respect to the type of corporate structure you may

have. There are some people with different corporate structures

who also do not have capital access because of that structure.

I say that to suggest that any legislation that is put in place, a

blanket legislation that is put in place to try to address some of

these intricate issues that we have, needs to address some of the

things that are particular to certain groups in the capital access

scenario.

Also, we have talked mainly about small business growing organically, and as you know, small businesses can also grow from

an acquisition standpoint, and I think tax legislation with respect

to giving access to opportunity plays a large part in the drawing

capital to small business, because many times, the opportunity to

grow that is not there that restricts the capital from flowing. That

could be primarily in the form of if a small business wants to acquire another company, where that company would receive some

sort of capital gains deferment upon selling, would rather sell to a

small business, give a small business an opportunity to buy that

company as opposed to a large business.

As you know, the small business that would probably buy that

company would probably maintain those employees. A large company buying that same company would probably RIF most of the

employees under that scenario. So if there was some ability to

allow small business to acquire a company, the acquiring company’s shareholders are able to defer tax or even have a tax reduction would go to a large extent of allowing small businesses to grow

in that fashion, as well.

Ms. FORBES. Okay. Thank you very much.

I am going to call on Lee Mercer, Kathy Freeland, and Dean

Garritson, and then we will sort of close out this first section and

move on to the second, so if you want to be looking ahead a little

bit and seeing if you have any particular comments you would like

on the record having to do with tax considerations affecting capital

and labor investment decisions. I think some of you have touched

on this, but that is where we are going next.

So with that, Lee.

Mr. MERCER. Thank you, Patty. I am Lee Mercer with the National Association of Small Business Investment Companies. I

would like to thank Senator Kerry and Senator Bond for all that

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they do to help our program and in so doing to help small businesses. Regarding Senator Bond’s statement, I should note that

Senator Kerry and Senator Bond both have introduced separate

pieces of legislation that actually do the same thing, which would

make it easier for debenture SBICs to raise money from tax-exempt

investors by declaring that debenture indebtedness is not acquisition indebtedness, which automatically creates UBTI for a tax-exempt investor.

Why is this important? I want to kind of go back to something

that Mr. Von Bargen stated. He said, most VCs do not invest below

$3 million. The SBIC program does. That is, in fiscal year 2001,

SBIC investments actually represented 55 percent of all venture

capital transactions in this country and the average investment

size was $1 million and the median investment size was about

$300,000. Now, that is 55 percent of transactions. It is probably

only about 15 percent of the money, but it is a large number of

transactions.

Does it solve the problem? No, it does not solve the problem,

which is why the BRIDGE Act, I think, is an interesting proposal

and why we were one of the first, I think Mr. Tatum would say,

we were one of the first to sign on as supporters of it. If you look

at what it does, (A) it is a very efficient way to get capital to fastgrowing companies if the government decides that they want to

support that group, requiring no costly infrastructure to do it.

It is, in essence, if you look at the deal flow problem from both

the venture capitalists’ point of view, and from the small business’s

point of view that is trying to raise money, the venture capital professional may be able to look at 200 deals in a year, but only 30

or 40 of those that they get interested in, and maybe only 15 or

20 of those would they actually do significant due diligence on, and

that one professional would then make perhaps three, at most four,

investments in a year.

So what that tells you is that if you just get down to the 15 or

20 where the venture capital professional is doing serious due diligence, those companies merited some support, probably, some level

of support. They were growing fast enough so that the venture capitalist was willing to spend a significant amount of time investigating them and did not choose to—only chose to invest in three

out of the 15, but those other 12, if they were growing fast enough,

the BRIDGE Act would be a substantial help, and I know I am

kind of blending between A and B.

The other thing that I would like to say is in the 6-plus years

that I have been at NASBIC, and I was a practicing lawyer for

many years a long time ago—I guess I am a recovering lawyer, too.

[Laughter.]

Mr. MERCER. The thing that strikes me as a hurdle for small

businesses is that I am continually amazed at how few small businesses that actually have good stories to tell do not have a business

plan that is in a format that will allow venture capital professionals to digest it quickly so that they can put it into this 200

down to three formula that they use. I mean, that is a true hurdle.

I get business plans, what people purport to say are business plans,

at my office all the time asking me to forward them to SBICs and

they are just not—you cannot do it. So that is a real hurdle, and

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I do not know the answer to the question other than the fact that

I have always suggested that SBA needs to do as much as they can

to solve that problem.

Ms. FORBES. Okay, thank you.

Mr. MERCER. One more thing. I would note that People Solutions, which was one of the stories, is last year’s SBIC and

NASBIC Portfolio Company of the Year, and a great success story

for everybody concerned.

Ms. FORBES. Thank you for making that additional point.

Kathryn Freeland.

Ms. FREELAND. Good morning. My name is Kathryn Freeland. I

am a CEO and sole shareholder of RGII Technologies. We are an

information technology solution provider primarily to the Federal

Government marketplace.

My journey to entrepreneurship was much like many of the stories that have been told today, especially with the one that Mr.

DeMint mentioned earlier this morning, as well. RGII started out

bootstrapping $3,000 and a lot of credit card debt, and I must say

that that is the way many small businesses begin, especially those

small businesses that happen to be minority small businesses, the

Latino community, the African American community, the womenowned business community. We tend to have to start that way.

But I must say that without the SBA, and many of us do turn

to the SBA because maybe we do not have all the information that

we need or the access to the venture capitalists or we may not

want to give up the ownership in our small businesses that we are

trying to grow from ground zero at that time, we end up going to

SBA for assistance, and I must say, without SBA’s assistance, RGII

would not be where we would be today.

RGII is a $30 million company now, almost 350 employees, but

the challenges along the way to get us there mostly centered

around access to capital. And so even though we had access to the

marketplace, the government contracts and what have you, financing those government contracts was a challenge. We could win

them, but how could we support them?

And so, again, the BRIDGE Act, and as Mr. Warren mentioned,

how do you help those microsmall businesses that they may not

need hundreds of thousands of dollars, they may just need $10,000

to $15,000 to $25,000 just to get them started.

So I would implore looking at the BRIDGE Act and making certain that we are including those microsmall businesses in the mix.

Is it really centered around helping all levels of small businesses

and not just those who have reached the peak where that $250,000

tax relief may be of assistance.

So in the midst of all of that, again, the banking community is

not taking the risks. They were not 12 years ago when RGII started and they still are not today, and so we do need the additional

assistance to help those small businesses that are trying to get

from point A to point B to really make their dreams a reality and

what their business plans, as Mr. Mercer said, are stating.

So I thank you for the opportunity to come and talk to you today.

Ms. FORBES. Thank you very much.

Dean Garritson, you have been very patient. Thank you.

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Mr. GARRITSON. Hi. I am with the National Association of Manufacturers, and while most folks might know that we represent some

85 percent of industrial output, fewer people know that the NAM

represents, or 80 percent of the NAM’s members, almost 85 percent, are small manufacturers, and the average small manufacturer at the NAM is about 80 employees.

What we have found is a different problem with access to capital

than some of the issues raised today, but some have hinted at it,

Todd and others, and that is that the access to capital from the

current lending community and the traditional lending community,

banking, is significantly restricted.

I have got just one chart. I will pass it forward. You can see the

first number is the Federal funds rate and the second line going

the same direction is actually the nature of commercial and industrial loans. So while the rates for money are getting cheaper, the

loans are not getting through.

[The charts submitted follow:]

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There are three numbers that kind of explain that. One is during

the last calendar year, $70 billion was taken in by the banking

community, and I am sorry the banking community is not here because they are going to hear me not beat up on them at the end

of this. But of that $70 billion that they took in, what did they do

with the money? As it turns out, $70 billion was restricted or reducing commercial industrial loans and $140 billion went into

Treasury. That is not good for the entrepreneurial and manufacturing community, which is a very highly capital-intense community.

But what we have found, that despite the decreasing interest

rate, the dollars are not flowing, but we are not beating up on

bankers. We have heard enough from the banking CEOs of small

and medium-sized banks, regional banks that service more than 80

percent of our members, is that the regulators have come to them

with a rather broad swath and told them in no uncertain terms to

reduce lending to certain SIC codes. We find that to be way too

broad a sweep. In fact, we described it, or some of our partners in

this fight have described that as while the Comptroller at Treasury

has gone out witch hunting, they have just got a couple of folks

sweeping the front porch with a broom, and it is entirely true.

The regulating community, from the Comptroller at Treasury, is

a little too harsh and a little too broad and a little too bureaucratic

to be able to provide individual lending to individual enterprise levels, and we find that regulatory structure to be overly reactive in

a down-cycled economy.

It will not surprise anybody to tell you that we have got some

thoughts on taxes, but I am going to hold on to those for the second

half of this.

Ms. FORBES. Thank you very much.

TAX CONSIDERATIONS AFFECTING CAPITAL AND LABOR INVESTMENT

DECISIONS

Ms. FORBES. Let us move ahead to the second portion. We are

not exactly sticking to the time, so we may have to cut this a little

bit short because I know that the Chairman wants to hear your

views on the two bills that he has introduced, especially if you have

recommendations on broadening them, some of you have mentioned

that. So why do we not turn to the tax considerations affecting capital and labor investment.

There were some questions that we would like to hear from you,

especially those of you that are representing large groups. What

are the primary tax considerations that small business must make

when determining to make capital or labor investment decisions

and how do these differ, and you have the manufacturers, you have

those self-employed, you have other groups that might—we are sort

of trying to figure out if there is like a one-size-fits-all solution.

Mark.

Mr. WARREN. Let me just add one other kind of question to the

mix. We heard from a lot of the groups here at the end of last year

and the beginning of this year that there was a lot of progress

made with Treasury’s announcement of the new $10 million threshold for cash accounting. I think that that change, especially for the

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microsmall business starting out, is a significant improvement in

terms of reducing complexity and burden.

I wonder, given some of the proposals out here that would require accrual accounting, is that going to be a significant hurdle

imposed by the tax system?

Ms. FORBES. Mr. Culpepper.

Mr. CULPEPPER. I am Lee Culpepper with the National Restaurant Association and I just want to make a quick point under

topic two: Tax Treatment of Capital Investments.

Restaurant buildings are currently depreciated over 39-and-ahalf years, which is an absurd schedule. The average restaurant is

renovated every 6 to 8 years, and that is just one example, I think

of the depreciation schedule overall that is really not well thought

out. It is based more on politics and it is based more on needs in

terms of the budget than it really is on the useful life of property.

So in terms of something that would help restaurants, and perhaps small businesses in the country at large, an update of the depreciation schedule to comport more with what is accurately going

on in the economy would be very helpful.

Ms. FORBES. Thank you.

Ben Cooper.

Mr. COOPER. Thank you, Patty. I am Ben Cooper with the Printing Industries of America. It is interesting to be here with highgrowth companies. Printing is a little bit different situation. We are

a roughly 500-year-old industry and continue to do reasonably well,

but kind of reaching for the first time in that 500-year-period a bit

of a downturn. One of the issues that we think about with this is

to what degree does the government become a partner or an impediment?

I recall back in the early 1980s when one of our industry’s favored tax themes, the investment tax credit, was eliminated. One

reason it was eliminated was because companies, including companies in our industry, were making equipment purchase decisions

not based on growth, but based on the tax code.

We have some similar kinds of problems now, only in reverse,

and that is that the tax code has become an impediment and it has

almost no bearing on reality, similar to Lee’s situation. I think one

aspect of the tax code that borders on comical is that we are still

carrying a 5-year depreciation schedule on computers while we

allow software, and this is even absurd, to be depreciated over 3

years. I am not sure how many of you could justify that. And when

we say computer, it is entertaining to look at the tax code because

among the things the tax code actually classifies as computers are

calculators and similar office machines. What means is they really

have not reexamined the term ‘‘computer’’ since the late 1970s.

But to carry a computer on your book or any kind of computer

system for 5 years, it is comical. That tends to benefit larger companies, who tend to lease and can turn the equipment over. As you

move down the scale of companies, they are not leasing, they are

buying, and most of our members are maybe of a nature and generation where they do not tend to throw things away, so because

they do not dispose of it in a rational way, even though they may

have it in the closet, it may be holding plants or what else, it is

still carried on the books.

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We have been working on this issue, I think, for—I think this is

the seventh year. We were pleased to see the 30 percent bonus depreciation because that helped a great deal.

One of the things, and I know NAM shares our views on this,

it is a little frustrating because the emphasis, not in this group, but

the emphasis you hear in the economy on the high-tech sector,

somebody is buying that high-tech stuff and it is manufacturing

companies. If we do not buy, they do not sell, and if the tax code

is an impediment to buying, they are not going to sell. So I think

we have to start looking at this thing as a bit more of a partnership.

We were very disappointed and have been disappointed for several years that the Congress has not been able to take a look at

depreciation schedules. I am actually at the point now where I

would go back maybe several decades and say that we probably

should do away with the corporate income tax altogether and make

things a lot simpler, but at the very least, what we ought to be

doing is looking at more innovative ways to use depreciation, and

maybe first and foremost to allow companies to take a schedule

that makes sense for their business, not based on a schedule that

the Federal Government sets out that seems to purport to some

universe that is no longer rational.

Ms. FORBES. Thank you.

I am just going to ask Ryan McCormick to respond a little bit

to your comments because I know that Senator Kerry and Senator

Bond have a bill that addresses some of—or two bills.

Mr. COOPER. And there are many bills, yes.

Mr. MCCORMICK. I just wanted to say, I think Senator Kerry

shares your concerns about depreciation schedules. I think that

having accurate depreciation schedules greatly enhances the ability

to encourage business investment and he was a strong advocate of

the 30 percent bonus depreciation provision in the economic stimulus act.

We have included in S. 1676 a proposal to shorten the depreciation schedule for computers from 5 years to 3 years and for computer software from 3 years to 2 years. That is a start. I know

there are a number of other items which also deserve consideration, but at least in terms of the high-tech equipment, we wanted

to get started on that as soon as possible.

Mr. COOPER. Not to overstay my welcome here, but one thing to

keep in mind, we are talking about computers, and I know you are

aware of this, but we are not talking about PCs. In our industry,

computer systems for relatively small companies, we find companies with 10 and 15 employees are spending hundreds of thousands

of dollars in computer purchases and it is the type of equipment

where our industry is going, and this is not unique in printing, it

is true throughout manufacturing, where the computer technology,

it pervades the manufacturing field now and it is that equipment

that is in this 5-year category.

Ms. FORBES. So you are saying the definition needs to be looked

at, not just the number of years?

Mr. COOPER. The definition is comical. You could not even identify a computer based on the definition that is used in the code

now. You would not be able to recognize what you were dealing

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with. We have been working with Treasury, and I think that as a

result of one of Mr. Archer’s recommendations several years ago,

there was a study done by Treasury on depreciation schedules, and

to tell you the level to which this thing has come, they said that

there was—this is almost a direct quote—anecdotal evidence that

computers are depreciated faster than 5 years, but no empirical

evidence.

I do not know what they were looking at, but to say that there

is only anecdotal evidence that computers are turning over faster

than 5 years is laughable. I do not blame them so much for that,

it is just part of the system that we are in now that we cannot

move these things quicker than we do.

Ms. FORBES. Okay.

Yes, Mark.

Mr. WARREN. Let me just add to one point that Ben raised. I

think this is a classic example of the partnership issue, where you

are buying technology. If Congress were able to both look at the

definition and make the useful lives a little more reasonable, which

is one of the things that Senator Bond set out to do at the beginning of this Congress with the 5-year reduction in the class life to

3 years for computer equipment, as well as to allow software to be

depreciated quicker and also expensed, you get that partnership. In

addition, you encourage better productivity and efficiency within

the businesses and that spreads, as well, because then your customers are more likely to be buying from you, whether or not it is

the IT community.

I think that is what Chairman Greenspan has said over and over

again, that the productivity and efficiency of our manufacturing

and our overall economy is the key to getting us back to a more

robust economy, so that is a very good point.

Ms. FORBES. Thank you.

Doug Tatum.

Mr. TATUM. I was going to talk to you about the cash basis issue.

I have a briefing here prepared by one of my partners, but that

rule generally does not apply to manufacturers, wholesalers, retailers, publishers, and a variety of people that are around the table.

One other part, as I read it, indicates that it provides that the

taxable income must be determined under the method of accounting on the basis for which the taxpayer regularly keeps income in

keeping its books, and that might be a misinterpretation of that.

Mr. WARREN. The consistency requirement was removed in the

final rule.

Mr. TATUM. Okay, because I was going to say, it is important

that businesses look at their financial status under accrual and the

banks and the capital markets require that, regardless of whether

you are reporting on tax basis.

The other thing, back to your comment earlier, the BRIDGE Act,

Angelia and Kathryn, would have applied to you probably your second year in business. So one of the case studies indicates that the

opening second year of business, the company was at $100,000 in

revenue. So it is the accumulation of a quarter-million dollars up

to $10 million, but it allows you to retain that capital even when

you are small and growing, and that capital is extraordinarily preVerDate 11-MAY-2000 10:12 Jan 09, 2003 Jkt 082488 PO 00000 Frm 00132 Fmt 6633 Sfmt 6602 C:\DOCS\82488.TXT SSC1 PsN: SSC1
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cious in those early days, and so those are two issues that I wanted

to comment on.

Mr. HUGHES. Just one third method, and that is percentage completion for contractors may need to be included, too.

Ms. FORBES. Okay.

Dean Garritson.

Mr. GARRITSON. Trying to find one-size-fits-all in a tax issue,

good luck.

[Laughter.]

Ms. FORBES. I was not saying that that was the right approach.

I was just trying to get you to identify the different approaches.

Mr. GARRITSON. Agreed. I was just thinking, to get 30 people

around the table from different industries to agree that there is

only one ox that should be fattened, umm. It is a difficult bill to

try to fit, but I am wondering if we do not get there by some of

the modifications of depreciation. We heard it from Lee and from

Benjamin with their organizations. Depreciation, we all use similar

schedules, despite the nature of the assets.

If you buy the notion that capital equipment spurs productivity

and that productivity, given that labor growth can only grow at 1

percent per year for as far as the eye can see, so that productivity

is the only way you are going to be able to get non-inflationary economic growth, then you are kind of straddled with the notion that

you have got to be able to reduce the costs of capital assets over

time, and that means in our tax code either access to capital at better rates or, more importantly when you look at the tax code and

specifically this section of the discussion, depreciation. It just is not

any more complicated than that.

And then broad-based depreciation that you supported, particularly the bonus depreciation, was extraordinarily helpful to a number of businesses. The capital equipment sectors of the manufacturers, we do not expect to expand much more in the way of capital

equipment. Actually, we expect to spend a lot less than we did last

year and last year was a bad year. So that sort of bonus depreciation that you were able to pass, very effective.

To continue that sort of depreciation discussion would be very

much appreciated, at least in the small, medium, and the large

manufacturing sector of the economy, but for our purposes as a

small manufacturer that has no other place to go than either cash

flow or the banks, we would like to see some help in the Comptroller of the Currency, and then the second half of that is the depreciation with respect to cash flow by virtue of lower taxation.

Ms. FORBES. Thank you very much.

Giovanni Coratolo.

Mr. CORATOLO. Thank you, Patty. Several things that come to

mind when discussing investment decisions affecting capital and

labor driven by the tax code, number one, certainty about tax code,

and certainly we see the problems with the tax legislation that has

been recently passed and its expiration within 10 years, and I

think that has been mentioned. In order to make proper investment decisions, a lot of investors need to have certainty of those

decisions over length of time or else it really undermines that investment and certainly induces a lot of risk in that decision making

process, so that may scare away some of the capital.

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We certainly proffer, which has been mentioned, the elimination

of the estate tax, making that permanent after 2010, and also accelerating the Economic Growth and Tax Relief Reconciliation Act

of 2001, trying to make that permanent, also. But also, making decisions, investment decisions on capital and labor, we really should

address AMT.

The AMT unfairly penalizes businesses that invest heavily in

plant and equipment and machinery. The AMT significantly increases the cost of that capital, discourages investment and productivity enhancing assets by negating many of the capital formation

incentives provided under the regular tax code. So this is something that we do not normally look at, but still, it does add a layer

of complexity in making those investment decisions that those investors have to take into account, and certainly we have to be careful of when we look at capital formation and those decisions that

are spurred by the tax code.

Thank you, Patty.

Ms. FORBES. Thank you.

Susan Eckerly.

Ms. ECKERLY. I am Susan Eckerly. I am with NFIB. I work with

Bruce.

I thought Dean raised a good point, particularly when Giovanni

added a new tax item with respect to AMT. I think we probably

have a pretty healthy list of tax cuts that all of our organizations

would like, and one thing I think that would be good to look at is

the calendar. We only have about, what, after the recess last week,

there is June, July, and basically September, three legislative work

periods, and I doubt much will happen in September other than the

funding end game, in which to close out some of the tax legislative

items that are already pending now for this Congress.

One thing that has already passed the Senate is the expensing

limits that have been raised that are in Senator Bond and Senator

Kerry’s bills, and anything that both Kerry and Bond can do as

leaders of the small business in the Senate to push those would be

great because there is an opportunity, I think, to advance those before the end of the year, and there is already a lot of momentum

behind those. I know particularly the Senate had a great vote on

those.

And also, I mean, other folks have mentioned obviously the tax

permanency. We have, hopefully, a vote coming up before the end

of June on the death tax and those are things that already have

momentum, already have been acted on this year that we can advance on, and although there are other items that are mentioned

here that are good, hopefully, there are a lot of members represented by all our organizations and hopefully we can stir the

grassroots to help sort of finish what we have already started so

far this Congress.

Ms. FORBES. Okay. Go ahead.

Mr. WARREN. Just to keep us grounded with what Susan and

Giovanni and others have said, a number of these tax provisions,

while in and of themselves, they are discrete, they all do flow together into the whole access to capital notion. Going back, a number of people have said it before, I think Senator Bond, as well: the

more that we do not demand that a business pay in taxes, the more

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capital that they have in hand to reinvest in equipment and grow

their business and create jobs and keep jobs in this environment,

especially for the microbusiness, the very small. That, I think, is

a significant issue that warrants some discussion and for us to

keep in mind.

Ms. FORBES. Mark Heesen.

Mr. HEESEN. I thank you. I just wanted to echo what Susan said

in the respect that we have to look at this realistically about what

can be done over the next 6-7 months, frankly, and a lot can be

done at Treasury, and that is the Senate putting Treasury to do

things that they have, frankly, not done for the last number of

years, and when you look at Section 1045 on the qualified small

business stock, that is something that the Senate certainly can put

its foot on the ground and say, Treasury, you have been trying to

work on regulations, or you have been saying you are going to be

working on regulations for years. Depreciation is another example.

Come January 1, 2003, like I said, without Treasury doing something or without pressure being put on the Congress, we are going

to see another major tax increase on smaller companies.

These are things that can be done without legislation being

passed and when you are looking at literally 40 legislative days between now and any legislation being passed probably in March of

next year at the earliest, let us look at things that really can work

in the very near term, and there are some very concrete things that

can be done for the smaller companies and emerging growth companies by some little pressure on Treasury. Thank you.

Ms. FORBES. Okay. Thank you.

POLICY PROPOSALS TO STIMULATE SMALL BUSINESS INVESTMENT AND

CAPITAL FORMATION

Ms. FORBES. If there are no more comments on this particular

section, I think we need to move on to the last section. Go ahead.

Mr. WARREN. What about the UBTI bills?

Ms. FORBES. Sure. Absolutely.

Mr. WARREN. The floor is also open for the change in the unrelated business income rules to allow greater investment by tax-exempt organizations into SBICs, since they are a significant funder

of investment capital.

Ms. FORBES. And let me just say, we are very aware of how few

weeks are left. It sounds like a long time, but we are trying to

get—I mean, one thing about the BRIDGE Act, it does have bipartisan support in both Houses. So assuming—and Senator Kerry is

on Finance, and Senator Snowe, who is the cosponsor here. So,

hopefully, that will have a vehicle to go on. Obviously, it is probably not going to go by itself. I mean, it could theoretically, but it

is pretty unlikely.

Similarly, on this UBTI piece of legislation, or there are different

versions of it, but if we can get momentum on the House side, then

maybe we can get—it is not that controversial, it is just complicated and that makes it a little bit tricky in terms of getting the

Finance Committee people to include it in something, especially—

in that case, it does not cost any money, but if a bill costs money,

then you have got to overcome that hurdle, as well.

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So we welcome your comments on the BRIDGE Act, the UBTI

proposal, the Affordable Small Business Stimulus Act, particularly

the capital gains incentives part of that.

Okay, Ben.

Mr. COOPER. Well, certainly, as we mentioned before, we support

the provisions in the Small Business Incentive Act. Those are

things we have been looking for for a long time.

One point about the expensing provisions which are in the legislation, which Susan also referenced, the levels right now are,

frankly, so low that if you are in anything other than service or retail, you really cannot take advantage of it. There is a sense that

that may be what it was intended for, but even moving up to the

modest levels that it is moving up in the proposed legislation will

allow small companies in our industry, and over half of our companies have fewer than 10 employees, it will allow those companies

in certain years to be able to take advantage of expensing and I

think that is very important, particularly in light of the difficulty

in getting the depreciation schedules resolved.

So I do think that that is an important piece of legislation, and

we really do not have a—I do not think the BRIDGE Act applies

to our industry particularly well. I think that most of our folks

would welcome an opportunity to have that sort of tax problem, to

have that kind of profit. It does not exist in our industry. In fact,

I think the goal in most of our smaller companies in our industry

is to have even enough income to be taxed. We have almost the reverse problem. However, if these companies succeed and have to

advertise, that would be a good thing. We would like that.

Ms. FORBES. Thank you.

Robert Hughes.

Mr. HUGHES. We, too, like the Act a lot. We think it will do a

lot to stimulate microbusiness. We do have some concerns about

the capital gain exclusion provisions on the sale of the stock, not

so much from the way it looks on paper, because who could deny

that that would be good. However, I think in actual utilization out

in the field, the provision will have very limited usage and acceptance for these reasons.

The first is that when small businesses are sold, the professional

is probably going to use a stock sale as the last choice. Typically,

there may be an asset sale as opposed to a stock sale, and if so,

this provision probably would not apply.

The second part of it is that the formation, the entity formation

has changed significantly in the last 10 years. The entity of choice,

in my opinion, today is the limited liability company as opposed to

some other flow-through entity, like an S Corporation. In fact, few

S Corporations are formed these days compared to limited liability

companies, and it is not clear—I think it does not apply, but it is

not clear that it applies to limited liability companies that operate

as corporations but are certainly not taxed the same way corporations are taxed.

So if an entity was formed, the business was successful, operated

3 to 5 years, whatever the criterion ends up being, and then the

business were sold, this provision would have no effect, and so in

some way, that provision needs to be structured so that it will

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allow for the transaction to escape some portion of tax, not just a

corporate entity.

Ms. FORBES. Everybody else just loves these bills and does not

have anything else to recommend? Okay.

[Laughter.]

Ms. ECKERLY. Patty, just to give you a response with respect to

the BRIDGE Act, our members sort of suffer the same fate as

Ben’s, and unfortunately, I do not think they would be able to take

advantage of it at this point.

But certainly with respect to, I think it is S. 1676, there are several provisions in there that we support. I know Senator Bond has

got some of those same provisions——

Ms. FORBES. Similar.

Ms. ECKERLY. ——And we would love to see—hope that that

could proceed this year. I mean, particularly with respect to expensing, the depreciation schedules, to echo what Ben said, are

complex. Our members generally expense and need to see those expensing limits raised to really—that would benefit them probably

the most.

Ms. FORBES. Okay. Mark, do you have anything?

Well, thank you all for coming. You have raised some really interesting points and some really helpful points.

Jerry, did you want to say something?

Mr. FEIGEN. Just one quick thing. I know we are all going to be

feeling the aftermath of Enron and the regulatory and the pendulum, which should occur and will affect all of us deeply when the

pendulum swings the other way. I just think we really have to be

on top of what changes the SEC and the Treasury Department. We

worked 20 years to get certain exemptions in focus and respect and

we need to live with the aftermath, but it should be based on what

we say we can live with.

Ms. FORBES. Okay, and Giovanni wanted to comment?

Mr. CORATOLO. I certainly want to thank Senator Kerry for having this and Senator Bond. It is a terrific way to present our views

and our thoughts and certainly the format is terrific, so we applaud

your effort in this respect.

Ms. FORBES. Thank you very much. Thank you. Thanks everyone.

I will remind you, if you have written comments or if something

occurs to you, we leave the record open for about a week after

today, so let us say until the end of next week, if you have additional things you would want to submit. Thank you very much.

[Whereupon, at 11:36 a.m., the roundtable was adjourned.]

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