U.S. GOVERNMENT PRINTING OFFICE

61–270 WASHINGTON : 1999

H.R. 2373, THE START-UP SUCCESS

ACCOUNTS ACT OF 1999

HEARING

BEFORE THE

SUBCOMMITTEE ON EMPOWERMENT

OF THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

WASHINGTON, DC, NOVEMBER 2, 1999

Serial No. 106–39

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELA ́ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBE ́N HINOJOSA, Texas

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

SHELLEY BERKLEY, Nevada

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON EMPOWERMENT

JOSEPH R. PITTS, Pennsylvania, Chairman

PHIL ENGLISH, Pennsylvania

JIM DEMINT, South Carolina

FRANK A. LOBIONDO, New Jersey

EDWARD PEASE, Indiana

JUANITA MILLENDER-MCDONALD,

California

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

TOM UDALL, New Mexico

DWAYNE ANDREWS, Professional Staff Member

STEPHANIE O’DONNELL, Legislative Assistant

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C O N T E N T S

Page

Hearing held on November 2, 1999 ........................................................................ 1

WITNESSES

Kerrigan, Karen, Chairman, Small Business Survival Committee ..................... 4

Pages, Erik R., Policy Director, National Commission on Entrepreneurship ..... 6

Horton, Pepper, CPA, Tax Technology, LLC ......................................................... 8

APPENDIX

Opening statements:

Pitts, Hon. Joseph R ......................................................................................... 23

DeMint Hon. Jim .............................................................................................. 25

Baird, Hon. Brian ............................................................................................. 26

Prepared statements:

Kerrigan, Karen ................................................................................................ 28

Pages, Erik R .................................................................................................... 34

Horton, Pepper .................................................................................................. 42

Additional Information:

Letter to Congressman Baird from Frank Nichols, President, Silicon Forest Electronics, Inc ........................................................................................ 44

Global Entrepreneurship Monitor, 1999 Executive Report ........................... 46

Global Entrepreneurship Monitor, National Entrepreneurship Assessment; United States of America, 1999 Executive Report .......................... 94

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H.R. 2373, THE START-UP SUCCESS ACCOUNTS

ACT OF 1999

TUESDAY, NOVEMBER 2, 1999

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON EMPOWERMENT, COMMITTEE ON SMALL BUSINESS, Washington, DC.

The Subcommittee met, pursuant to call, at 10 a.m., in room

2360, Rayburn House Office Building, Hon. Joseph R. Pitts (Chairman of the Subcommittee) presiding.

Chairman PITTS. We will call the hearing to order.

I am Congressman Joe Pitts from Pennsylvania. Good morning

and welcome. Thank you for joining the Empowerment Subcommittee today for a hearing on the Start-Up Success Accounts

Act of 1999, or SUSA. This bill was authored by the Vice Chairman

of this Subcommittee, my friend from South Carolina, Mr. Jim

DeMint, and by another member of the Small Business Committee

who joins us today, Mr. Brian Baird from Washington.

I am going to yield most of my time to Mr. DeMint, as it is his

bill, and he can speak in more detail about it, but first I would like

to thank Mr. DeMint and Mr. Baird for their work on this legislation and their leadership in the area of tax relief for small businesses.

One goal of the Empowerment Subcommittee is to promote legislative initiatives that enable entrepreneurs to realize their dream

of becoming small business owners and to sustain their small businesses once operational. The Start-Up Success Accounts Act, of

which I am a cosponsor, is an example of this type of legislation,

one which seeks to lessen the burden felt as a result of a complicated Tax Code that is not small-business-friendly.

Excessive taxation is especially detrimental to the success of new

small businesses, which typically encounter numerous difficulties

as they struggle to grow in the first few years. Quite often business

owners are counseled to reinvest their profit into the business by

purchasing equipment or giving bonuses, thereby avoiding taxation

on the business’s profits. But what if there was a way for small

business owners to both avoid immediate taxation and save more

of the money that they earned? That is exactly what H.R. 2373 proposes.

This bill would allow a new small business the opportunity to use

a tax-deferred savings account for a period of time during the beginning stages of business development. By utilizing this SUSA as

a money management tool, start-up, small business owners would

be able to retain capital by putting up to 20 percent of their annual

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taxable income, up to $200,000 per year, into a SUSA. This supply

of capital may help withstand periods of slow business or increased

competition by allowing them to save when business is profitable.

I want to welcome our witness panel, Ms. Karen Kerrigan, Chairwoman of the Small Business Survival Committee; Mr. Erik Pages,

Policy Director for the National Commission on Entrepreneurship;

and Mr. Pepper Horton, a CPA from Greenville, South Carolina,

and entrepreneur himself. Thank you all for being here, and I look

forward to your testimony.

[Mr. Pitts’s statement may be found in the appendix.]

Chairman PITTS. Mr. DeMint.

Mr. DEMINT. Thank you, Mr. Chairman. I thank you for holding

this hearing today, and particularly for your passion to empower

the disadvantaged through our efforts for small businesses. Earlier

this year Representative Baird and I introduced H.R. 2373, what

we call the Start-Up Success Accounts Act of 1999. Our Chairman

has referred to that as SUSA accounts.

The purpose of this legislation is to give small businesses an additional tool to manage finances and particularly to retain capital.

According to the Census Bureau, over 99.9 percent of business closures are small firms. One of the primary reasons for business failures is a lack of capital. This problem is further aggravated by a

tax system that discourages capital retention. The ultimate result

is less growth and less staying power. Operating with no capital,

even a small downturn in sales, can put a new company out of

business.

H.R. 2373 would allow new business start-ups to place up to 20 percent of profits but not more than $200,000 into tax-deferred

SUSA savings accounts for each of the first 5 years of businesses.

This would allow new businesses that are profitable in the first few

years to set aside some profits to prepare for a downturn in later

years. Money could be set aside in an account for up to 5 years

after the deposit.

The idea for this bill came from my own experience as a small

businessman in starting my own company. It is similar to a bill offered by our colleague Kenny Hulshof, which would help farmers

and ranchers manage capital with farm accounts. In starting my

own business, I learned how hard it is to manage finances as you

try to stay afloat, especially in those first few years of business. It

isn’t easy, especially with the current Tax Code, and I believe anyone who takes on the challenge of starting a business deserves not

only our respect, but our support.

I appreciate the work of this Committee in exploring ways to remove obstacles that often stand in the way of the success of small

businesses. Small businesses create virtually all of the net new jobs

in this country today, with women and minority-owned businesses

making up one of the fastest-growing segments of small businesses.

It is particularly important for this Committee to take on this challenge. That is why I am pleased that the Empowerment Subcommittee is having this hearing today to try to empower those

who try to revitalize our Nation.

I would like to add my thanks to all of you who are testifying

today: Karen Kerrigan with the Small Business Survival Committee; Erik Pages, thank you for being here; and particularly Mr.

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Horton from my district, I appreciate you coming up. You not only

have a lot of experiences as an accountant, but you started your

own business and have a little bit of feel what it is like. I particularly appreciate all of you being here, and I yield back the balance

of my time.

[Mr. DeMint’s statement may be found in the appendix.]

Chairman PITTS. Mr. Baird, would you like to make an opening

statement?

Mr. BAIRD. Thank you, Mr. Chairman. I want to thank you for

holding this hearing, and I thank my good friend from South Carolina, and I thank the witnesses for being here.

We have worked together, the gentleman from South Carolina

and I, because of our concern for small businesses. I am the son

of small business owners. My folks—my mom owned a bridal shop,

and then my father and mother together bought an ice cream store,

and I saw what they struggled with through the lean and the good

years.

One of the things that is clear from that experience personally

and from meeting with business owners in my own district is the

important challenge of finding capital, and the Start-Up Success

Account Act is designed to address precisely that.

I had a business owner come to me and say it is sometimes easier to find the start-up capital to just get going than it is once you

are in place, and then you really need to set something aside to

fund further expansion, and that is precisely what this bill is designed to do. The challenge is how can we make capital more available to our businesses as they try to expand; and importantly, how

can we put the control of that capital in the hands of the business

owners.

As we prepared for this hearing, I talked to some folks who I had

the very great privilege of being at the grand opening of their electronics manufacturing plant just a few months ago. A gentleman

named Frank Nichols has invested every single penny he has got.

He has mortgaged his home. He has gotten help from his church

members, and they have a very, very exciting business on the line

that could expand. They hope to employ as many as 200 people in

our district.

The challenge, however, is capital. And with the consent of the

Chair, I would like to read a portion of a letter that he submitted

to me as he knew I was preparing for this, and it tells the story

why the start-up success account is so important. Here is what Mr.

Nichols writes: ‘‘we have tried the traditional source of funds. The

banks are only interested if you have collateral of a value greater

than the amount you want to borrow, preferably in CDs. The local

economic development sources of funds are not available to startups or are limited to the rural or economically depressed areas. We

have tapped our own sources to the max. Everything we own is

now mortgaged or used to secure the leases or part of our original

capital investments, and our credit card balances are climbing.’’

That is not an uncommon statement, and the situation here is

if he is successful in his first year and realizes profits, we should

put him in a situation where he can set those profits aside for savings for future investments rather than feeling that he has to

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spend them, perhaps, in the process, incurring further debt, thereby further jeopardizing his capital security.

Precisely that mission is what the Start-Up Success Accounts Act

is designed to accomplish, and I thank the Chairman and the witnesses today, and I am interested in hearing your thoughts on how

we can improve the bill.

Chairman PITTS. Thank you.

[Mr. Baird’s statement may be found in the appendix.]

Chairman PITTS. Mr. Moore, any opening statement?

Mr. MOORE. No opening statement, Mr. Chairman.

Chairman PITTS. Then I call on Ms. Kerrigan at this time.

STATEMENT OF KAREN KERRIGAN, CHAIRMAN, SMALL

BUSINESS SURVIVAL COMMITTEE, WASHINGTON, DC

Ms. KERRIGAN. Thank you. First of all, let me thank you for inviting our group, the Small Business Survival Committee, for being

a part of this important hearing. On behalf of SBSC and its more

than 50,000 members, I am pleased to have this opportunity to testify in support of the Start-Up Success Accounts Act of 1999. I am

Karen Kerrigan, Chairman of SBSC, a nonpartisan, nonprofit small

business advocacy and watchdog organization headquartered in the

Nation’s capital.

Let me also thank you, Mr. Chairman, for holding this important

hearing, and, of course, both Congressman DeMint and Congressman Baird for their leadership in introducing H.R. 2373. Many

times our organization has had—our staff, members, our small

business members, members of our board of directors have had the

honor to testify before Congress regarding the hurdles faced by the

small business entrepreneurial sector of our economy and the ways

that our elected officials can help create an economic and policy environment favorable for their growth, success and, of course, their

survival.

SBSC is pleased that the Congress continues to place the needs

of small business at the top of its agenda, and we are encouraged

by bipartisan initiatives such as the SUSA Act of 1999 that will

make a meaningful difference for many young enterprises across

the country.

Access to capital remains a serious obstacle for many small firms

as it was in 1995 when the delegates to the White House Conference on Small Business ranked the issue as one of its top priorities. Out of the 60 recommendations that were presented to the

President and to Congress, 15 of those related to capital needs.

Many of the efforts undertaken by the Congress since that conference to lower the tax and regulatory burden on small businesses,

to help increase risk-taking and entrepreneurship, as well as increase capital access, for example, cutting the capital gains tax,

have been a plus for members as well as small businesses in general.

Passage of the SUSA Act of 1999 sponsored by Representatives

DeMint and Baird is another way, a creative and common-sense solution that would assist many small businesses through the tumultuous and challenging early years of their development. Because

the Tax Code discourages capital retention, many small businesses

are often faced with cash shortfalls at critical phases. These periVerDate 11-MAY-2000 11:23 Jul 21, 2000 Jkt 061270 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 E:\HEARINGS\61270 pfrm01 PsN: 61270
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ods include times when a business needs extra capital for expansion and growth or cycles when business activity may slow down

and there is little flexibility in managing fixed expenses, or simply

periods of adjustment when the business needs an infusion of cash

to react to changes in the marketplace.

The SUSA option whereby new small businesses would be allowed to place up to 20 percent of taxable income into tax-deferred

savings accounts for each of the first 5 years of operation opens up

new financial planning as well as financing opportunities for small

firms most in need of these tools.

This Committee has studied the difficulty that many small businesses face in securing adequate capital to finance their growth. As

most Committee members know, many banks require a documented track record of success, while venture capital and angel relationships are extremely competitive. These networks are often

difficult to penetrate. Unfortunately, the tremendous success of

venture funds in raising significant amounts of capital have made

small investments less attractive. This means that small businesses need more tools to be self-reliant for their capital needs.

The Center for Venture Research of the University of New

Hampshire estimated that about 300,000 growing companies and

about 50,000 start-ups need equity capital each year. That was estimated in an analysis that the university conducted for the Small

Business Administration. CVR projected that total funding needs

for these companies amounted to $60 billion.

The SUSA solution would help small firms get out of the trap of

passing through excess capital to avoid double taxation, subsequently followed by a frenzied search for capital to grow the business or to keep it afloat. Let me add that the owner can spend an

inordinate amount of time and resources seeking such capital during times of need. The SUSA alternative in this regard promotes

self-sufficiency and efficiency. In addition, the funds in these accounts will probably give the small business owner more leverage

in securing competitive loans.

As more and more individuals determine that small business

ownership is a goal they would like to pursue, particularly women

as well as minority Americans, it is incumbent upon our elected officials to identify areas where public policy, particularly the Federal tax system, may be unwillingly assisting business closures.

There are steps that can be taken to save some of the 99.9 percent

of small firms that close their doors, and it is within the means of

Congress to help salvage some of these businesses. This is especially true in many of our urban areas where small business success and nurturing of an entrepreneurial climate may be the only

hope for the revitalization of inner cities, and the same can be said

for small towns and small to mid-sized cities where factories and

businesses have either left the country or moved to more hospitable

business climates.

There is a need for the SUSA Act of 1999. Since the inception

of SBSC just 5 years ago, hundreds of small businesses have contacted our offices in search of capital for their promising businesses. It is little solace to such entrepreneurs when we explain to

them that we only serve as a watchdog group advocating legislative

measures to increase access to capital for businesses that are in the

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start-up phase. However, we have learned a lot from these entrepreneurs, and we feel strongly that the SUSA Act of 1999 is one

way to equip such businesses with an option that allows each one

of them to chart their financial destiny and their survival.

Again, I congratulate Representatives DeMint and Baird for introducing and pursuing with great vigor H.R. 2373. We support

this initiative and look forward to working with Members of the

U.S. House of Representatives to ensure its passage. Thank you,

and I look forward to answering questions from Committee members.

Chairman PITTS. Thank you.

[Ms. Kerrigan’s statement may be found in the appendix]

Chairman PITTS. Before we ask any questions, we will receive

testimony from all three of the witnesses. I now turn to Mr. Erik

Pages, policy director of the National Commission on Entrepreneurship.

STATEMENT OF ERIK R. PAGES, POLICY DIRECTOR, NATIONAL

COMMISSION ON ENTREPRENEURSHIP, WASHINGTON, DC

Mr. PAGES. Thank you, Mr. Chairman, and members of the Subcommittee for inviting me. My name is Erik Pages, and I am here

representing the National Commission on Entrepreneurship. We

are a new organization with a 3-year charter to help government

policymakers better understand the needs and interests of entrepreneurs, and to inform public policies that support these needs.

We were established by the Kauffman Center for Entrepreneurial

Leadership, which is part of the Kansas City-based Ewing Marion

Kauffman Foundation.

On behalf of all of our Commissioners, I want to thank the Subcommittee for holding this important hearing. We also commend

Representatives DeMint and Baird for their leadership in sponsoring H.R. 2373. It is an important proposal that could play a critical role in supporting entrepreneurs across the Nation.

H.R. 2373 is designed to provide support to one of the fastest

growing sectors in the business world. As the Subcommittee members certainly know, we are enjoying a true boom in entrepreneurship in the United States. Let me give you some recent data to support this point. I would like to submit two reports for the record

which detail these points.

In cooperation with the Kauffman Foundation, we recently released a study of start-up activity in the United States and nine

other industrialized countries. This study, The Global Entrepreneurship Monitor, found that America is far and away the most entrepreneurial country on Earth. This was not a surprise to us.

What did surprise us was the pervasiveness of entrepreneurship

across the United States. Each year Americans start anywhere

from 600,000 to 800,000 new companies that hire employees. That

adds up to roughly 14–16 start-ups for every 100 existing businesses. At the same time an additional 2 million new businesses

are started each year as self-employment ventures. So overall,

roughly 8 percent of the American adult population, that is nearly

16 million people, are in some stage of trying to start a new business. This is a very robust level of new business activity.

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But as you know, the vast majority of new start-ups do not succeed. This is no surprise as starting a new company is a high-risk

venture. We are continuing to study the factors that lead to business success and failure, but I can highlight some preliminary factors that appear to play a role, and H.R. 2373 addresses what is

probably the most critical external factor in a new firm’s success,

acquiring and retaining capital.

Our Commission has found that capital is readily available for

most businesses in the country today, but unfortunately, this good

news does not apply to all entrepreneurs. Our research has uncovered a capital gap that often exists for small start-up companies.

When a company is first started and has limited capital needs, say under $50,000, funds can generally be obtained from family

and friends or from less orthodox sources like credit cards. Thus,

most people who start a self-employment venture can generally

find funds for that purpose. However, when a company needs funding in the range of $50,000 to $1 million or $2 million, sources of equity capital often dry up.

Most venture capital funds are seeking larger deals, and banks

continue to shy away from high-risk start-ups. Angel investor networks, which are growing in importance, are available, but not all

start-ups have been able to access these sources of funds. Like venture capital, angel capital funds tend to be highly concentrated in

specific geographical regions.

Let me talk about the Start-Up Success Accounts Act of 1999. As

our analysis indicates, H.R. 2373 is targeted on the right problem.

The first 5 years of a company’s life are its most tenuous. Even if

a company is profitable, it must reinvest its profits into fixed assets, recruiting and training new workers, expanding distribution

channels and other tasks. Thus, even successful entrepreneurs face

major challenges regarding cash flow during the first 5 years of existence. If firms survive through this transition period, they tend

to succeed. Indeed, firms that survive after 3 years show significantly lower failure rates than comparable businesses.

Moreover, many of these firms become what are commonly referred to in the economic development profession as gazelle firms.

These are companies with annual sales growth increases that exceed 20 percent or more for 4 years. The typical gazelle firm does

not simply take off after finding a hot niche. The typical Internet

story is not what happens for most companies. It is far more common to see a gradual development phase over 3 to 5 years, say, followed by robust but not explosive growth.

H.R. 2373 seeks to support these new firms by creating a tax-deferred account known as a Start-Up Success Account wherein small

businesses can place annual deductions of up to 20 percent of income or $200,000 during the first 5 years. These funds would be

drawn from operating income, and withdrawals would be treated as

taxable income in the year in which they were drawn. These accounts could provide an additional safety net for businesses in their

critical start-up phases. During a firm’s first 5 years, it will inevitably hit some type of downturn that affects capital flow.

Under current rules, entrepreneurs often use credit cards or take

on new loans to weather the tough times. These new accounts

could provide a direct source of alternative capital, or they could

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be used as collateral to secure more competitive loan rates. By allowing new firms to avoid taking on new debt, we can help set the

stage for more rapid future expansion and job creation.

We believe that H.R. 2373 includes several provisions that are

particularly important. First off, the limitations on the availability

of the accounts in terms of the time period, 5 years, and the size

of the company, under $5 million in gross receipts, makes sense.

We believe that this program must be tightly focused on new entrepreneurs and start-up companies.

Secondly, the bill contains some restrictions on the use of the accounts, and we believe that the Subcommittee might consider additional language to ensure that the accounts are explicitly used for

new business and are not diverted for other purposes.

Finally, we believe that the SUSA accounts would be particularly

helpful to women and minority entrepreneurs. These business

founders often start their firms with lower levels of initial investment, and thus face higher risks of failure in the event of a business downturn.

Some other steps in addition to its consideration of H.R. 2373, we

urge the Subcommittee to consider other steps to support America’s

entrepreneurs. We recommend that you examine the issue of angel

capital and steps that can be taken to create local angel investor

networks around the Nation.

We also urge you to review current technology transfer programs

and examine how we might make these programs more friendly to

entrepreneurs.

Finally, we believe ultimately that the most effective programs

to support entrepreneurs must start at the State and local level.

We would be happy to work with the Subcommittee in examining

these issues. We will soon be releasing an analysis of State best

practices in supporting entrepreneurship, and we will forward

these findings to the Committee when the report is released.

In conclusion, on behalf of the National Commission on Entrepreneurship, I commend the Subcommittee for holding this important

hearing and for its leadership in supporting America’s entrepreneurs. These visionaries are the engine of the new economy, and

your support is critical to their continued prosperity and vitality.

Thank you, and I look forward to your questions.

Chairman PITTS. Thank you for your testimony.

[Mr. Pages’ statement may be found in the appendix]

Chairman PITTS. Mr. Horton.

STATEMENT OF PEPPER HORTON

Mr. HORTON. My name is Pepper Horton, and I am a CPA from

Greenville, South Carolina. I would just say I am very nervous. I

would like to thank the Committee for the opportunity to come up

here and testify today on the SUSA Act of 1999.

I started in 1989 as a CPA with Ernst & Young where I worked

for 10 years, and eventually left Ernst & Young to start my own

practice so I could deal with smaller businesses that could not afford me when I was working with a larger firm.

I feel that experience has given me a pretty good understanding

of how large businesses operate and how small businesses operate.

As a small business itself, I understand the pressures in how comVerDate 11-MAY-2000 11:23 Jul 21, 2000 Jkt 061270 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HEARINGS\61270 pfrm01 PsN: 61270
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panies manage their cash flows. And having a lot of accounts receivable from large companies, I understand how they manage

their cash flows as well as how they are stretching their payables.

I find a great deal of satisfaction working with new businesses and

feel that I can really make an impact with these businesses as they

try to get off the ground.

In reading through my colleagues’ presentations, I was suddenly

concerned that my presentation was too technical, and that really

comes from my background. Whenever I see a piece of legislation,

I immediately read the code and try to answer the questions what

does the bill say, sometimes just as importantly what doesn’t it

say, and try to figure out how I might use that bill to help my clients. So I apologize if I have gotten too technical.

After reading the act and rereading the act, I summarized my

thoughts into the following points, the first being double taxation.

This bill would clearly be a great benefit to regular or C corporations in managing their cash flow. A corporation’s net income is

taxed at the corporate level, and when these earnings are distributed to the shareholders, the earnings are taxed again as dividends. Double taxation creates an enormous incentive for business

owners and their consultants to keep corporate taxable earnings

low. As a result, business owners engage in tax-motivated spending

at or near year end.

If there is one thing I have learned in my career, it is that taxmotivated spending is at best an inefficient use of resources, and

is often tantamount to throwing away a dollar to save 40 cents.

That is one of the things that I try to continually stress to my clients, that spending money to avoid taxes is usually, like I said,

throwing away a dollar to save 40 cents.

One of the most commonly used mechanisms for lowering corporate profits is increasing compensation to employee shareholders.

Of course, the Tax Code mandates that employee shareholder compensation is reasonable. However, ‘‘reasonable’’ is a subjective term

and often produces a range of compensation amounts that could be

considered reasonable. As a result, business owners often have a

huge incentive to accept compensation amounts that are on the

high end of what is considered reasonable instead of what the business actually needs. This bill would mitigate that motivation by allowing corporations to receive the same tax effect as ‘‘comping out’’

the corporation’s profits while still keeping the cash inside the corporation for future use that may or may not be anticipated.

Another use for the bill would be funding expansion. As a business grows, it must increase its inventory, secure new office or

plant space, purchase new equipment, and train new employees.

While section 179 allows many businesses to expense their equipment purchases, all of the other expansion-related expenditures

generally must be capitalized for tax purposes. This can leave a

new business in the unfortunate situation of having a tax liability

because all of the spending that they have done is not deductible,

or least not 100 percent deductible. It is amortized over a number

of years, sometimes up to 39 years. It can leave the business in the

unfortunate situation of having a tax liability with little cash on

hand. At the end of year 2, for example, a new business could place

some of the cash on hand to fund year 3’s expansion into a SUSA

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account and immediately reduce the business’s tax liability. Even

if this cash is only temporarily placed in a SUSA account, it provides a new business with a valuable tax deferral. Funds which

would have ordinarily been remitted to the Treasury will still be

in the private sector creating jobs and funding economic expansion.

The third point is smoothing out earnings. As you are aware, our

tax brackets are graduated so the individuals and corporations

with higher taxable income pay tax at a higher marginal rate. One

possible use of SUSA accounts would be in the smoothing out of a

business’s earnings to avoid income spikes from temporarily thrusting taxpayers into a higher tax bracket. While generally accepted

accounting principles, or GAAP, aim to match revenues with expenditures in the proper period, the Tax Code tends to accelerate

income recognition and defer deductions in order to increase revenue. This and a host of other business factors can lead to the

bunching of income in a given tax year. This bill could provide taxpayers a tool to lessen the sting of abnormally high taxable income

in a single year.

On the self-employment tax section, section (e)(3) of the bill provides that the amounts included in gross income under the section

will not be included in determining earnings from self-employment.

This creates a planning opportunity to lessen the impact of the selfemployment tax depending on how the business is classified for tax

purposes. Sole proprietorship, single member LLCs and most partnerships’ net earnings are subject to self-employment tax. My experience has shown that self-employment tax can have a potentially

devastating effect on new business owners if they are not properly

advised. If my understanding of this bill is correct, this provision

provides an exclusion of the amount deposited in a SUSA account

from the self-employment tax. That is a tremendous benefit.

One of the things that I have noticed, and I have felt myself as

a new business owner, is that the self-employment tax can kill you.

Especially for people leaving the corporate world to start a business. They really don’t understand how the self-employment tax

works, and they usually end up getting the April surprise when

they do their tax returns and find out that they have not paid

enough to cover the self-employment tax.

The bill’s most obvious benefits are to provide the business with

an opportunity to defer income taxes for up to 10 years while earning a return on the funds. In doing so, however, the bill encourages

businesses to retain earnings rather than engaging in tax-motivated spending. However, I am concerned that as the business

grows and as its profits expand, that the income from the SUSA

will be taxed at a higher marginal rate than would have been paid

in the year the deposit was made.

What I mean by that is that if a business’s earnings are moderate in years 1 through 5, and the business continues to grow, the

cash coming out of the SUSA account may be taxed at a higher

rate than the tax benefit that was received when it went into the

SUSA account. Some tax consultants may be a little reluctant to

recommend to clients that they potentially expose themselves to

paying higher marginal tax rate.

In conclusion, I would like to express my sincere appreciation to

the Congressmen for their efforts to assist small businesses. As a

11

consultant to many small businesses and as an owner of a small

business, I am impressed with their apparent understanding that

small businesses are the backbone of our economy and will be the

number one source of new jobs as we move into the next century.

Obviously I would love to see a bill that eliminated the double

taxation that encourages debt financing and tax-motivated decision-making or a bill that simply lowered the tax rate that new

businesses face. However this bill is clearly an effort to assist small

businesses in managing their tax liability and overall cash flow.

The unavoidable fact is that our Tax Code contains very few provisions aimed at helping small businesses get off the ground, and

this bill is clearly a step in the right direction, and I am therefore

happy to support it.

Chairman PITTS. Thank you.

[Mr. Horton’s statement may be found in the appendix.]

Chairman PITTS. We will go to questioning now from the Members.

Mr. Horton, I would like to start with you. You mentioned in

your testimony that the U.S. Tax Code often works against small

entities. What do you think is the most detrimental effect of our

Tax Code on our Nation’s small businesses?

Mr. HORTON. One of the worst is double taxation of corporations,

and that is one reason why I try to get clients in early when they

are trying to decide what type of entity to choose so I can steer

them away from a regular corporation, because the double taxation,

the same dollar of earnings is taxed twice.

But the general complexity of the payroll taxes tend to give clients a lot of trouble. I feel like every one of my clients get penalized by the IRS in the payroll tax area even though they are trying

as hard as they can to comply. In fact, they hire me, and sometimes I get them penalized, too. It is frustrating because I am a

paid professional, and I end up slipping up and getting the client

penalized.

There are provisions like section 179 that allow businesses to expense their equipment purchases, but they have also got to buy inventory, and that is not immediately deductible. That is cash out

the door that does not provide an immediate tax deduction. So you

can end up in a situation where a corporation has paper profits,

but no cash to pay it.

Chairman PITTS. Thank you.

Mr. Pages, you mentioned in your testimony that you recommend

that the Subcommittee examine the issue of angel capital. For

those of us not as familiar with that, can you explain?

Mr. PAGES. Angel capital refers to individual investors, often

former entrepreneurs, who invest their own wealth in starting new

companies. We found through this study there is a huge amount

of angel capital available in this country, around $50 billion. If you

compare that to the amount spent last year in venture capital,

which I believe was roughly $16 billion in new investments, you

have a huge differential there. So there is much more angel capital

available for start-up businesses than there is venture capital. Venture capital is largely for bigger deals and is not available for the

types of start-ups that we hope to help through this legislation.

12

As Ms. Kerrigan noted, it is very hard to break into networks to

put the business together with the investor, and if there is some

way to create networks so we could spread, if you will, the wealth

from all of this angel capital that is available to other parts of the

country, it would be a very helpful step that the Subcommittee

could take.

What we find now is that the places where there is lots of venture capital, Silicon Valley, Austin, the Boston area, there is a lot

of angel capital, too. And in effect you are caught in a chicken and

egg situation. People get rich and they invest back in the areas

where they grew up, and the places that don’t have those entrepreneurs located there, it is very difficult for them to get started

in terms of creating an angel capital network.

Chairman PITTS. Ms. Kerrigan, how many members of the Small

Business Survival Committee are start-ups or small businesses

within their first few years of existence? How many of your members would be able to take advantage of the SUSA accounts, and

do you feel that they would benefit from this legislation?

Ms. KERRIGAN. I would say the majority of our members are

those small businesses or small firms who have endured the first

4 or 5 years, the ones who have gotten off the ground, who can become more active in an organization such as ours and pay membership and stay informed on policy issues and legislation and how it

impacts their business.

I would—and this would be a guess, we can go back and do this

research certainly with our membership, but I would guess probably about 5 percent of our membership are those businesses who

are in the start-up years and who want to know what is going on

in the Nation’s Capital and State capitals nationwide and how that

may impact their business; SBSC members also include a lot of investor types who invest in these types of businesses.

So what we want to do, obviously, is grow our membership to

large numbers, and include the start-ups. That is part of our mission and goal, to not only represent our membership, but also represent the needs of all small businesses nationwide. So I would say

5, about 5 percent or so are in that start-up phase right now.

Chairman PITTS. Thank you.

Now I would like to recognize the Ranking Member of the Subcommittee, the lady from California, Ms. Millender-McDonald.

Ms. MILLENDER-MCDONALD. Thank you, Mr. Chairman. I am

sorry that I was late getting here.

Ms. Kerrigan, I want to start with you. You mentioned just a few

minutes ago talking with the Chairman about the need to look into

small businesses and what will perhaps work for them or to find

the exact needs for the small businesses. As we do recognize the

first 5 years of small businesses really are tenuous, if you will, because of the obstacles that are there. When you do your needs assessment, are you going to do—what small businesses are you

going to do, across the board, women, minority, all, or what?

Ms. KERRIGAN. When we do a needs assessment, we look at the

needs of our members, which generally relate to taxes and regulation and other obstacles that are put up by the government in

terms of affecting their growth and success and their competitiveVerDate 11-MAY-2000 11:23 Jul 21, 2000 Jkt 061270 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HEARINGS\61270 pfrm01 PsN: 61270
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ness, but we look at what the obstacles are faced by many startups as well.

We base that needs assessment on looking at what the climate

is for small firms. Obviously with 99.9 percent of business closures

being small businesses, we have a concern that, and one of our priorities it, to help those who are just getting in business get off the

ground and become successful.

So we believe that our tax and regulatory agenda pretty much

is generally representative of all different types of businesses.

Whether it is agriculture, minority-owned businesses, womenowned businesses, these are broad issues that impact all businesses. I hope that I am answering your question correctly.

Ms. MILLENDER-MCDONALD. In a sense, but let me just ask you

this. As you stated in your testimony, access to capital is one of the

most important obstacles, and we need to recognize that. The basic

assumption of this bill, however, is that a business must be in the

black in order to be able to use these accounts. Do you think that

during the first 5 years small businesses on the average have

enough earnings to make this bill a practical solution?

Ms. KERRIGAN. Yes. Are you asking if this will address the capital needs?

Ms. MILLENDER-MCDONALD. Yes.

Ms. KERRIGAN. Absolutely it will. It would be a practical solution,

because if you do have a business, for example, that is forced to

spend its money year end, as was noted by our expert CPA at the

end of the table, rather than putting it aside and keeping it for a

need later down the road, this just makes sense, giving them incentives to think ahead not only in terms of financial planning, but

also for self-financing opportunities.

Yes, I think this is a practical solution for many—is it going to

be something for all firms? No. But it will address the needs of

many small businesses out there.

Ms. MILLENDER-MCDONALD. But it will not necessarily address

the needs of some minority firms that I have talked with given that

they do not find themselves in the black for the first 5 years, so

they are not a position in terms of any access to capital?

Ms. KERRIGAN. It is not the silver bullet. I don’t think that it will

address all needs, but I think it will help many small firms.

Ms. MILLENDER-MCDONALD. And I suppose I get back to the

needs assessment then, you will certainly look into how can we

help small minority businesses to survive in that they will be the

employer of many of those who will be seeking jobs. Critical of that

is of women and men coming off of welfare to work. It is important

that we look at a needs assessment that is representative of a minority group.

Ms. KERRIGAN. Yes, a broad-based needs assessment not only in

terms of further reducing capital gains taxes or targeting capital

needs towards urban areas, but also looking at what local governments can do to lower the tax burden in cities, and in terms of

what they are doing perhaps to assist in either business closures

or not enabling their own communities.

Ms. MILLENDER-MCDONALD. And I would be interested in seeing

what local governments are doing for this, given that they are

strapped themselves most often.

14

Ms. KERRIGAN. I will get this to the Committee. We have not

brought it down to the city level yet, but we do conduct a small

business survival index. It looks at the climate for entrepreneurship for all 50 States, and we rank them based on which are more

business-friendly than others. We look at a lot of different programs and policies and how these impact small businesses.

This is, I think, an important tool. I think this will work for

many small businesses, and, in fact, I think it will help many minority and women-owned businesses.

But there are a lot of other measures and initiatives that the

Congress is pursuing right now, things that the Small Business Administration is doing, things that the administration is doing that

I think address this broad-based need. I would agree with you.

Ms. MILLENDER-MCDONALD. Mr. Pages, as I have said in the

questioning, speaking with Ms. Kerrigan, that start-up businesses

are the most tenuous in that the first 5 years are very critical, and

oftentimes they find themselves not in the black after 5 years. But

as you stated in your testimony, after the first 3 years, the success

rate tends to improve. How would this bill help those companies

during the first 3 years when most of the earnings would be used

to pay off their debt?

Mr. PAGES. In many ways I would think I agree with Ms.

Kerrigan about the impact of the bill. If you think of start-up businesses in three categories, you have those that are going to succeed

with or without some stimulation or support from the government,

and those that are going to fail. There is a middle category of firms

who are on the edge. I think that is the appropriate target for this

legislation, companies that are showing slight profit in the first 5

years.

Ms. MILLENDER-MCDONALD. So it is not for all small businesses

then?

Mr. PAGES. I think that is right. As you have noted, many of

these companies do not show a profit during the first 5 years. I

think we need to look at other ways to support those companies.

This is targeted at those companies that are showing fluctuations

in income in the first 5 years. They do need to be profitable to be

supported by this bill.

Ms. MILLENDER-MCDONALD. Is there any specific industry area

which would find these accounts more useful than others, Mr.

Pages?

Mr. PAGES. Well, we haven’t looked at that. My general sense

would be that more volatile industries might have greater benefit

of—these types of provisions because they would see their earnings

fluctuate more greatly over a 5-year period. You think of the classic

Internet businesses or information technology businesses where

there is a lot of turmoil in the company and a lot of ebb and flow

of its profits. This is the type of safety net, if you will, that might

help those types of sectors rather than a more established traditional sector of the economy, but we have not looked at this in

great detail.

Ms. MILLENDER-MCDONALD. While we have many pieces of legislation coming before us with small businesses, and we do recognize

small businesses will be the catalyst by which the economy continues to spur in the new century, we have to look at how we can

15

get those small businesses that are going to employ that work force

that is going to be the majority women and minorities. And given

that this bill does not specifically target individuals whose main

source of income is a small business, but rather allows a deduction

of funds received from a qualified small business, would requiring

that the funds deferred not only come from a small business but

be the main source of income for the individual serve the underlying purpose of the bill better or what?

Mr. PAGES. I think the bill is appropriately targeted. I think it

will have a big impact on women and minority entrepreneurs. If

you look at start-up business rates, minorities, particularly AfricanAmericans, show much higher rates of entrepreneurship than

whites and Hispanics, particularly as education level goes up.

What we do find, however, is that they are undercapitalized.

Ms. MILLENDER-MCDONALD. I was going to say that they do not

succeed because of not having access to capital.

Mr. PAGES. That is correct. So this is one way to help them preserve the limited resources they have. It is not going to save everyone, if you will, but it is one other way to sort of conserve that precious cash that they need, particularly if there is a downturn. If we

do have an economic downturn, the companies that are most poorly

capitalized are going to be the first to fail. So this is very important

to help these kinds of companies conserve their cash.

Ms. MILLENDER-MCDONALD. Mr. Horton, you stated that H.R.

2373 would be a great benefit to regular C corporations in managing their cash flow. You also stated that the bill would allow corporations to achieve the same tax effects as compensating to the

employees the corporation’s benefits while keeping the cash inside

the corporation for future use.

As I understand the bill, the only eligible entities allowed to use

the tax-deferred under the SUSA accounts are individuals. Am I

correct, or would the provisions under this bill allow corporations

to defer their profits through the SUSA accounts?

Mr. HORTON. My understanding is that it is available to all entity types, unless I am misunderstanding that.

Ms. MILLENDER-MCDONALD. Both individuals as well as corporations?

Mr. HORTON. Right.

Ms. MILLENDER-MCDONALD. If you were to buy stocks from a

small business corporation, would I place my dividends in a SUSA

account, Mr. Horton, even though this is not a main source of income, and I have no direct stake in the day-to-day managing of the

corporation?

Mr. HORTON. The corporation itself—if my understanding of the

bill is correct, the corporation itself would put the money in the

SUSA account, not the stockholders.

What I was referring to about compensating out the earnings,

what typically happens at year end is the corporation looks at

where it is earningswise and tries to compensate its owner/employee as much as possible in order to increase the compensation

to the shareholder and decrease the earnings to the corporation to

avoid the double taxation. Am I answering your question?

16

Ms. MILLENDER-MCDONALD. To some degree I am following what

you are saying, anyway. Did you want to finish up because I am

concluding here. You have answered as you see fit?

Mr. HORTON. Right. In the C corporation environment the double

taxation is an incredible motivation to taxpayers to try to lower the

corporate earnings, and that is why I think a lot of the statistics

at the corporate level are somewhat doubtful, because these corporations do whatever they can to keep their earnings as low as

possible in the corporation.

Ms. MILLENDER-MCDONALD. Mr. Chairman, thank you. Many

small businesses agree that the SUSA bill is a good bill and has

the potential to lead to many positive outcomes for small businesses, like the ability to use the tax-deferred funds for leveraging

with larger companies. However, most start-up businesses struggle

in the first 5 years, as I have said before, and this is what concerns

me about the bill. I think we should look at the—I think we should

look at the current support mechanisms that are in place to see

why more businesses are not succeeding, and with that I thank

you.

Chairman PITTS. Thank you.

Because of the excellent attendance of the membership, we are

going to start using the lights. We are asking go ahead and use

your time limit on the first round. If we need to, we can go to a

second and third round.

Mr. DEMINT. Thank you, and thanks again for your encouragement of this bill. And one of the things in addition to just getting

your endorsement today is to find ways to help make this bill better. We do want to look at the language that was questioned. The

intent of the bill is that it relates to a business entity. The point

is to encourage people to leave capital in a business entity rather

than have tax-motivated spending or to pass it through as salary.

My experience in business as a solo consultant, my first couple

of years in business, is we didn’t make a lot of money. At the end

of the year, it was just a matter of do we leave a few thousand dollars in the company, or do I take it out as salary.

The accountant always said take it out as salary because you

may need it as salary in a couple of months, and you would have

paid taxes twice on it if you do that. So consequently, as I went

through those first few years of business, there was seldom enough

capital to move ahead to hire people, and I think the growth was

slower. It was not necessarily just a matter of survival, but there

was tax-motivated spending of buying something that we didn’t

need to reduce our profits or maybe we didn’t need then. But the

point here is to try to encourage people to leave money in a company without bad tax consequences so that company would be

stronger, better able to hire people, and would be stable in the future, and we want to be make sure that the language of the bill

reflects that.

One question, we want to make sure that we don’t have unintended consequences of this bill or unnecessary complexity. One of

the things you mentioned, Mr. Horton, that got my attention is

that there might be some reluctance to use these accounts because

the tax rate may be lower in the first year than it is the fifth year

when the money is taken out.

17

Would it be your recommendation that it be taxed at the rate

when it was put in, or is there some way that we can improve this

so it is not a risk to the company to save capital?

Mr. HORTON. I think it would be beneficial to cap the amount of

tax paid when the funds come out the SUSA account to the amount

that would have been paid had the funds not gone into the SUSA

account. That certainly creates a little bit of administrative complexity, but I think that is probably manageable.

If the taxpayer were in the 15 percent bracket when the money

goes into the account, and they are in the 35 percent bracket when

the money comes out of the account, they have deferred themselves

into 20 percent of extra tax liability.

Mr. DEMINT. Well, that is a great point.

Does any other panelist have any concerns about unintended consequences or unnecessary complexities in what we are trying to do?

Ms. KERRIGAN. No. I wouldn’t—when we talk to a lot of our

members about various things that we can do to fix the Tax Code

to help small businesses, there is always the question, well, gee,

shouldn’t we—rather than further mucking up the system or making it more complex, shouldn’t we just overhaul the entire system

or do some type of simple flat tax? Since the Congress really hasn’t

come to any agreement of whether that should be done, what type

of tax system we should have, we still think that there are things

that have to be done. We can still do things to help small businesses.

This is an immediate need, and the Congress needs to react in

an immediate way and not let this whole debate over complexity

and what type of system we are going to move to paralyze them

in their efforts right now, because there are small businesses who

need their help, in terms of looking at various parts of the Tax

Code, whether it is estate tax relief, SUSA accounts, capital gains

tax, whatever.

Mr. DEMINT. All right. Good.

Mr. Chairman, I yield back.

Chairman PITTS. Mr. Baird.

Mr. BAIRD. Mr. Chairman, I neglected earlier to ask unanimous

consent to introduce Mr. Nichols’ letter into the record.

Chairman PITTS. Without objection.

[The information may be found in the appendix.]

Mr. BAIRD. I have a couple of questions, and my good friend Mr.

DeMint—it shows why we are working together on this—precisely

picked up on the question that you addressed, Mr. Horton, and my

staff and I kicked that very issue around this morning, in fact, and

it is something we might want to explore.

One of the things that I want to pick up on a little bit is, as Mr.

DeMint said, to me the issue is how do we provide an engine to

the economy, not how do we proliferate small businesses. And there

may be some small businesses that do not succeed perhaps through

bad management, maybe they have a product that nobody wants,

et cetera. But there will be a subset of businesses who are succeeding and are, in fact, generating revenue, and those maybe are

more likely candidates of engines of job creation.

The way I see this bill is it is targeted at precisely those businesses who are having early success, who have the potential to exVerDate 11-MAY-2000 11:23 Jul 21, 2000 Jkt 061270 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HEARINGS\61270 pfrm01 PsN: 61270
18

pand on that early success, if they can find a way to better manage

and access their own capital, rather than spending themselves into

a precarious debt position or lack of capital situation.

So yes, I agree with the Ranking Member that there will be

needs to help other businesses who are not profitable early on find

capital, but part of what I am seeing here, and certainly what

many business owners locally have told me, is that this empowers

the successful business that is already demonstrated an achievement to be even more successful.

Does that square with your experience and as you look at this

bill, your thoughts about it?

Mr. PAGES. Yes, I think you have got it exactly right. Not all entrepreneurs are created equal is one way to look at it. There is a

certain subset that we call high growth, and those are the companies that really generate most of the economic development, most

of the net new jobs. You need a base of all sorts of small businesses

for those types of entrepreneurs to prosper, but it is really a small

subset of these companies that are the net creators of new jobs in

this country. Again, the term I used in my testimony was ‘‘gazelle’’

firms, but it is really fast-growing, high-growth entrepreneurs is

really what you need to encourage to foster local economic development and to create lots of new jobs and innovation and technology.

So this is the subset you really want to focus on.

Mr. BAIRD. Let me ask one other question.

Mr. Nichols, from my district, raised an interesting question. He

thought that this might be—the access to this opportunity might

be a way to leverage more competitive loan rates. Any thoughts on

that? It was a possible use that had not occurred to me, but it is

intriguing. Any thoughts on that from you folks?

Mr. HORTON. Well, one thought, there is a provision in the bill

that prevents the account from being pledged as collateral on a

loan, and I think that if that were removed, then perhaps you are

right, this could be used to secure a loan and get more favorable

interest rates. My reading of the bill right now is that it is similar

to an IRA where if you pledge it as collateral on a loan, then it is

treated as distributed.

Mr. BAIRD. What would be the pros and cons of that as you see

it, Mr. Horton?

Mr. HORTON. Well, if you could use it as collateral, then you

could leave it in the account, leave it in the corporate form and still

get a loan with more favorable terms. If you leave it the way it is

now you may see the money coming out of the accounts rather than

staying in the accounts.

Ms. KERRIGAN. I was just thinking, it may not be something that

could be pledged against a loan, but on the other hand, if you do

have a SUSA account and depending upon the size of that account,

and what money you have set aside as a business owner for future

cash needs, I do think that planning says something about business

management and the business itself in terms of how you are thinking ahead like financial planning, planning for future crises or

what have you. So I don’t know if it serves as a direct pledge, but

more of an indicator that this business has its act together. It is

thinking ahead, and it is using all the tools available to succeed in

the future.

19

Mr. BAIRD. So the lender will look at that, and even though they

are not saying, we could directly access that capital to pay back the

loan, they could say, here is a business that is planning ahead, that

is not operating right on the margin, and that is a sense of security

for a lender.

Ms. KERRIGAN. Yes, in terms of looking at that, but plus all the

broader business practices as well.

Mr. HORTON. Even on a more basic level than that, it will show

up on the company’s balance sheet, which makes the balance sheet

look more favorable to a lender.

Mr. BAIRD. I want to just close by thanking you all. I know that

Mr. DeMint and myself really do want this bill to help businesses.

And, Mr. Horton, you apologized earlier for being so detailed and

technical, but no apology necessary. I am sincerely grateful to you

and each one of you for what I think are very insightful analyses.

And I want to invite you, after you go home, going home on the

airplane or whatever, and you may be saying, gosh, there are some

ways to make this better. Mr. DeMint and I would be very open

to your suggestions about how to improve it, if it has problems. We

are not here to have anyone say what a great bill we have done,

we are here to learn from you and, if it has problems, to improve

those and make the bill even better. So I look forward to your

interaction. Thank you, Mr. Chairman.

Chairman PITTS. Thank you.

Mr. LoBiondo.

Mr. LOBIONDO. No questions.

Chairman PITTS. I think the other Members have gone. We will

start the second round.

Mr. DeMint.

Mr. DEMINT. I think in the interest of time and our panelists,

really my questions have been answered, except to Mr. Baird’s

point. If there is anything else that has crossed your mind as a way

to make this bill better, it is really draft legislation at this point.

The hearing is one step on improving it. So any concerns you have,

don’t leave without expressing them, and if any of you have any

thoughts on the way home, let us know, because in the next week

or two we want to refine the language and finalize it. But you have

really covered a broad spectrum and added a lot of encouragement

and confirmation to us to move this bill through as one tool for new

businesses to be successful. So thank you.

Any other comments?

Chairman PITTS. Ms. Millender-McDonald.

Ms. MILLENDER-MCDONALD. Mr. Chairman, I just want to emphasize that when you say success accounts or start-up businesses,

you are really talking about successful businesses, you are not talking about fledgling businesses, because in a sense this bill will not

really be a source of support for one who has not been in the black

for 5 years or better, but rather those who have seen success as

they have gone along.

So this still does not address a small business that is not in the

black, but rather successful businesses as they continue to thrive

and pretty much offer new jobs, but the jobs aren’t in areas where

it is most needed. So while this will not be that panacea, I am just

20

suggesting the bill is really for more or less successful small businesses or those that are thriving and not those that are fledgling.

Chairman PITTS. Mr. DeMint.

Mr. DEMINT. Just to respond briefly, I think we all agree, it

won’t apply to all businesses, but it only does apply to new businesses, and perhaps the benefit will be to those that have a faster

start. But it is not unusual for a business at any time to have a

good year and then a very bad year, or to start out, as I did, with

a contract that ended after the first year, to have significant profits

in one year and then be out trying to borrow money the next year.

It is just a bad system that discourages those companies in the

first 5 years, if they do have a profitable year, to get all of the capital out of the company instead of trying to maintain some so that

they can get through the next year. It would be very unusual for

any new business to just start off and have five great profitable

years, and if they do happen to have a good year or two, we would

want them to reinvest and grow even faster.

I think it will help the company that is making almost no money.

If only you set aside $1,000 or $2000, if you are a solo practitioner

and keep it in the business instead of as a salary, it does give you

a little staying power.

So I think the application will be, again, not totally inclusive, but

I do think it would help the solo entrepreneur as well as the companies that start off fast and then have a bad year somewhere in

those first 5 years.

Thank you.

Chairman PITTS. Thank you.

Mr. Baird.

Mr. BAIRD. I would like to echo what Mr. DeMint said. I appreciate your concern. I actually see this bill as having great potential

to help women and minority start-ups. You needn’t have a profitable 5 consecutive years. At any point where you experience profit,

you can use that profit to put into a SUSA account, and the model

I would have that I think would benefit greatly minorities and

women entrepreneurs would be, for example, the very small corner

grocery store that you see people with their—the mom is in there,

the dad is in there, the kids are in there. They are starting from

5:00, and they are working until 10:00 at night, and they are purposefully starting small, and they are being tremendously frugal,

and they are taking those savings and they are putting them aside.

They have been successful right from the get-go because they have

started within their means. They are working tremendously hard,

they are putting sweat equity into it, but they are also willing to

forego the short-term profit so that they can later expand. So for

3 or 4 consecutive years, they could keep their operation relatively

small, put a lot of sweat equity into it, take this money, set it into

a SUSA account, and then after 4 years expand, and that is when

they draw on the SUSA account, because they have saved the personal money to expand versus every year being right on the margin.

Or let’s say you have a woman working a business out of her

home. She has a little office, she has not a lot of expenses, but she

does generate a profit. She sets those aside in a SUSA account.

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After 3 or 4 years it has built to the point she can establish an office outside the home.

I see plenty of applications, if people are frugal and successful

early on, to use this, and I think it has a lot of potential for women

and minority-owned businesses.

Chairman PITTS. Would any of the witnesses like to comment on

that?

Mr. PAGES. I would just simply offer that if there is a company

that is growing on an aggressive growth path and profits in the

first 5 years is probably going to quickly grow too big to access the

accounts, and I think the accounts should not be designed for that

type of company. I think Congressman DeMint has the right picture of this. The typical account user will likely have ups and

downs in the first 5 years of existence and is really much more tenuous than the really fast-growth company that kind of just gets hot

right from the start. That is not our vision of where this legislation

would apply.

Chairman PITTS. Ms. Kerrigan.

Ms. KERRIGAN. I would agree with everything Congressman

Baird said. I would like to change the assumption here to the fact

that women-owned businesses in this country are tremendously

successful, so I think we need to think about this more in a positive

way in terms of how it will impact many women-owned small businesses.

There is a huge success story here in terms of female-owned

firms and women-owned businesses, the amount of economic

growth that they are responsible for in job creation, and all that

other good stuff. And looking at the growth, the phenomena of

women-owned businesses and also the growth of many minorityowned businesses, you have to assume with that growth and their

success that there is going to be a portion of those businesses who

will benefit from this.

But I again would like to add, do we need to be doing more for

small businesses beyond this? The answer is absolutely yes. There

are obstacles and government-imposed burdens and a lot of things

at the local level, I think, that are hurting their chances for success

and survival. Someone who considers themselves a fledgling business in their first year and may not make a profit, perhaps this is

something good in their second year or third year that they can

benefit from.

So anyway, I am just reaffirming or supporting the comments of

the Congressman.

Chairman PITTS. Thank you.

Mr. Horton.

Mr. HORTON. One thing I wanted to point out, the term ‘‘small

business’’ is very broad. It is true that this bill would not help businesses that are losing money, but let us not forget that, at least

with most of my clients, that some of them have an idea, and they

are trying to start this big business, and they are willing to lose

money for years and years and years trying to get it going, but

most of them are men and women who want to open five restaurants in a town or five auto repair shops. They may be able to

stand losing money in year 1 and possibly year 2, but if they are

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not making money after that, they are going to give it up, because

they need this to earn a living.

So I think under the tent of small businesses, there are a lot of

different businesses, and I don’t want us to forget about the men

and women who are starting businesses to provide them with

money to eat, not necessarily just to come up with a good idea that

may make them rich.

Chairman PITTS. All right. Are there any other questions? Any

closing comments from anyone?

If not, this has been an excellent, excellent hearing. We thank

you for your very informative testimony. We will keep the record

open for 5 legislative days for anything you would like to add.

Chairman PITTS. Mr. Pages, you have a couple of reports that

you would like to make a part of the record.

[The information may be found in the appendix.]

Chairman PITTS. If there is nothing else, the Subcommittee hearing is adjourned. Thank you.

Ms. KERRIGAN. Thank you.

Mr. PAGES. Thank you.

Mr. HORTON. Thank you.

[Whereupon, at 11:15 a.m., the Subcommittee was adjourned.]

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