U.S. GOVERNMENT PUBLISHING OFFICE

32–694 PDF WASHINGTON : 2019

S. HRG. 115–574 

EXPANDING OPPORTUNITIES FOR SMALL 

BUSINESSES THROUGH THE TAX CODE 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

AND ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

OCTOBER 3, 2018 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.govinfo.gov 

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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED FIFTEENTH CONGRESS 

JAMES E. RISCH, Idaho, Chairman 

BENJAMIN L. CARDIN, Maryland, Ranking Member 

MARCO RUBIO, Florida 

RAND PAUL, Kentucky 

TIM SCOTT, South Carolina 

JONI ERNST, Iowa 

JAMES M. INHOFE, Oklahoma 

TODD YOUNG, Indiana 

MICHAEL B. ENZI, Wyoming 

MIKE ROUNDS, South Dakota 

JOHN KENNEDY, Louisiana 

MARIA CANTWELL, Washington 

JEANNE SHAHEEN, New Hampshire 

HEIDI HEITKAMP, North Dakota 

EDWARD J. MARKEY, Massachusetts 

CORY A. BOOKER, New Jersey 

CHRISTOPHER A. COONS, Delaware 

MAZIE K. HIRONO, Hawaii 

TAMMY DUCKWORTH, Illinois 

SKIFFINGTON E. HOLDERNESS, Republican Staff Director 

SEAN MOORE, Democratic Staff Director 

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C O N T E N T S 

OPENING STATEMENTS

Page 

Rubio, Hon. Marco, a U.S. Senator from Florida .................................................. 1 

Cardin, Hon. Benjamin L., Ranking Member, a U.S. Senator From Maryland . 2 

WITNESSES

Slaughter, Ph.D., Christel, Chair, U.S. Chamber Small Business Council, 

Baton Rouge, LA .................................................................................................. 5 

Lettieri, John, Co-Founder and President, Economic Innovation Group, Washington, DC ............................................................................................................. 12 

Arensmeyer, John, Founder and Chief Executive Officer, Small Business Majority, Washington, DC ........................................................................................ 19 

Bruckner, Caroline, Managing Director, Kogod Tax Policy Center, American 

University, Washington, DC ............................................................................... 26 

ALPHABETICAL LISTING

Arensmeyer, John 

Testimony .......................................................................................................... 19 

Prepared statement .......................................................................................... 21 

Responses to questions submitted by Senators Risch, Heitkamp, Hirono, 

and Duckworth .............................................................................................. 68 

Bruckner, Caroline 

Testimony .......................................................................................................... 26 

Prepared statement .......................................................................................... 29 

Responses to questions submitted by Senators Risch, Heitkamp, Hirono, 

and Duckworth .............................................................................................. 75 

Cardin, Hon. Benjamin L. 

Opening statement ........................................................................................... 2 

Lettieri, John 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 14 

Responses to questions submitted by Senators Risch, Heitkamp, and 

Duckworth ..................................................................................................... 65 

National Federation of Independent Business 

Statement dated October 3, 2018 .................................................................... 80 

National Small Business Network 

Statement dated October 2018 ........................................................................ 86 

Rubio, Hon. Marco 

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

Slaughter, Ph.D., Christel 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 8 

Responses to questions submitted by Senators Risch and Heitkamp .......... 62 

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EXPANDING OPPORTUNITIES FOR SMALL 

BUSINESSES THROUGH THE TAX CODE 

WEDNESDAY, OCTOBER 3, 2018 

UNITED STATES SENATE, 

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, 

Washington, DC. 

The Committee met, pursuant to notice, at 2:37 p.m., in Room 

428A, Russell Senate Office Building, Hon. Marco Rubio, presiding. 

Present: Senators Risch, Rubio, Ernst, Inhofe, Young, Enzi, Kennedy, Cardin, Cantwell, Shaheen, Heitkamp, Markey, Booker, 

Hirono, and Duckworth. 

OPENING STATEMENT OF HON. MARCO RUBIO, A U.S. 

SENATOR FROM FLORIDA 

Senator RUBIO. The hearing will come to order. 

Today’s hearing of the Senate Committee on Small Business and 

Entrepreneurship is about a topic that is quite important, and it 

is timely as the full measure of last year’s Tax Cuts and Jobs Act 

continues to set in midst various other competitiveness policies, 

such as confronting China on unfair economic practices. 

In our new global economy, it is not enough to just cut taxes. You 

have to also cut the right ones, and the new tax law passed late 

last year included a provision called Economic Opportunity Zones. 

This law, which was championed by my good friend Senator Tim 

Scott of South Carolina, will encourage investment in economically 

distressed communities by allowing investors to defer certain taxes 

on income if they invest in low-income communities. 

The new global economy has increased the wealth of many Americans, but it has destabilized entire regions in our country and left 

millions of workers behind. 

Pushing investment to seek out the largest return, regardless of 

which nation or area within the nation, has led to the desertion of 

workers in our own back yards. 

Parts of Florida have experienced this firsthand. The disparities 

are a testament to the uneven prosperity of globally driven rapid 

growth. 

This is where Economic Opportunity Zones comes in. While investors in a global economy might seek a better bottom line by 

shipping jobs to a foreign country, this provision cuts taxes on the 

investments that make jobs here in America. 

The global economy is marked by pushing investment to maximize short-term gain, but Economic Opportunity Zones reduce that 

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short-sighted incentive by cutting taxes on investments held for at 

least 10 years in what are currently lower-income areas. 

This tax provision is not for outside businessmen to make a 

quick buck in low-income areas. This provision encourages longterm gain for the community. 

Small businesses like the ones discussed here today are not just 

competing in their own local economies. They are competing in 

many industries against the world. 

This is not a relaxed environment. Day in and day out, small 

businesses seek out a competitive edge through hard work, creativity, and innovation. 

If a small business has a great breakthrough, it does not stay 

small for long. America’s greatest competitive advantage has always been the ingenuity of our people. Tax cuts should play to that 

strength. 

And as Congress looks to make some of the provisions of last 

year’s tax law permanent, we should put full expensing near the 

top of that list. Full expensing allows businesses to immediately deduct their capital investments instead of eating their cost over a 

decade at a time. 

This means more money to spend on better products, facilities, 

and new shops. It removes a barrier to small business owners putting their ideas into action, making it easier to pull designs off 

blueprints and onto shop floor. 

Unlike other tax cuts, which cut tax rates without regard for investment plans or the creation of American jobs, full expensing rewards the future economy, not the one of the past. It is the tax cut 

for the American idea. 

The tax law’s full expensing provisions for the next 5 years is the 

greatest thing we can do to remake American high-wage jobs for 

the 21st century. I hope we make it permanent. 

With that, I recognize the Ranking Member to offer his opening 

statement. 

OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, 

RANKING MEMBER, A U.S. SENATOR FROM MARYLAND 

Senator CARDIN. Well, thank you, Senator Rubio, and thank you, 

Senator Risch, for calling this hearing, an incredibly important 

subject, expanding opportunities for small business through the 

Tax Code. I can tell you this is an issue I hear frequently from 

small businesses as to how the Tax Code challenges them dealing 

with running a business. So I very much appreciate this subject. 

I think it is extremely important that this Committee hold this 

hearing. 

I want to thank all of our witnesses. Ms. Bruckner, I want to 

also acknowledge you are familiar with our Committee, as I understand. 

Ms. BRUCKNER. Yes. 

Senator CARDIN. Your students are here watching you today, so 

it is good to have your students in the room, and I welcome them 

also to today’s hearing. 

Because of the impact that the Tax Code has on small businesses, I was and still am disappointed about the rush partisan 

process that ultimately resulted in last year’s Republican tax bill. 

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As I said before, the rushed and opaque process prevented our 

constituents from weighing in in a meaningful way on the policies 

that will affect all of them. 

It also resulted in a bill that the Joint Committee on Taxation 

estimated would add $1.4 trillion to the deficit, which could put important programs such as Social Security, Medicare, and Medicaid 

at risk for severe cuts in the future. This deficit is unconscionable, 

and as we are starting to see projections on the deficit come in 

now, those projections are accurate. And that is terribly unfortunate, and it is a burden we are all going to have to figure out how 

to deal with, which will have an impact on our small business community. 

One of the biggest concerns I have with last year’s tax bill is that 

it does not sufficiently target its benefits towards middle-class taxpayers. I include in middle-class taxpayers, the entrepreneurs and 

small businesses that are growing our economy. 

The purpose of the tax bill from the beginning was to help reduce 

the C rate because of its international competition factors. I understand that. That was the purpose of the bill, and those are the entities that got the lion’s share of the tax relief on a permanent basis. 

Some of these businesses, small businesses, will see their tax 

bills reduced, while others will actually see tax bill increases. Regardless of the benefits to each taxpayer, I believe the tax bill was 

a missed opportunity for targeting the Code to small businesses as 

well as modernizing the Code to address the challenges these businesses face. 

For instance, data on business size and revenues suggest that 

very small businesses will only receive a tiny portion of the revisions that are billed as small business provisions in the tax bill. 

Based on available data, this misallocation seems especially true 

for small women- and minority-owned businesses. 

This is a big issue for Maryland. According to a survey conducted 

earlier this year by Paychex, Maryland has the highest rate of per 

capita minority- and women-owned businesses in the United 

States. 

As you know, Mr. Chairman, I held a field hearing last month 

at Morgan State University to discuss the challenges minorityowned businesses face with respect to accessing capital. Taxation 

is an important piece of this puzzle. A major source of capital for 

expansion of a business is reinvesting profits, and the amount of 

tax a business must pay determines the amount of money available 

for growth. 

However, it appears that the tax benefits of the provisions most 

touted as a small business provision, the new Section 199A passthrough deduction, skews heavily towards wealthy, established, 

non-minority-owned businesses. And as I pointed out, the provisions are not permanent. 

In addition, I have heard from businesses of all sizes in the 

amount of complexity the bill adds. It adds complexity because it 

is not a permanent provision. It adds complexity because of the 

way that the calculations need to be made for eligible income. 

Both tax practitioners and small businesses in Maryland organized as pass-throughs have come to my office with questions and 

concerns about how to claim and accurately compute the Section 

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199A pass-through deductions. These questions continue, even following the guidance that the IRS released in August. 

It is my hope that this Committee will serve an important role 

in evaluating, correcting these and other issues. We must help Congress develop more efficient tax policies that are truly designed to 

provide a leg up to small business. 

It is my hope that this hearing will serve as an opportunity to 

develop an agenda for this Committee going forward on tax policy. 

The deeply partisan exercise that was undertaken last year is 

against the best traditions of this Committee, which is broadly 

known for its bipartisanship. It is the role of our Committee to advocate on behalf of small businesses. We have done that consistently on a nonpartisan, bipartisan basis. We recognize small businesses are the growth engine of our economy. That is where jobs 

are created and innovation takes place, and we need to work together in order to make the proper recommendations in regards to 

how the Tax Code affects small businesses in our community. 

I look forward to all the witnesses’ testimony, and I look forward 

to working with my colleagues on both sides of the aisle in order 

to make concrete recommendations on tax issues for small business. 

Senator RUBIO. Thank you. 

I want to recognize Senator Kennedy to present our first witness, 

and we have a distinguished panel. We will get to the others in a 

moment. 

Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. 

We do have a distinguished panel today, and it is my pleasure 

to introduce to the Committee, Dr. Christel Slaughter. She is here 

today representing the U.S. Chamber Small Business Council. Dr. 

Slaughter is the CEO of SSA Consultants. That is a well-known entity in Louisiana. It is a woman-owned management consulting and 

organizational development firm, which she joined in the early 

1980s. Dr. Slaughter’s expertise is in organizational design and development, specializing in areas such as strategic planning and 

performance improvement. 

To give you an example of some of her recent work, it includes 

leading an ongoing organizational development design and buildout of something very important in my State, the Louisiana Emergency Response Network, and also designing integration strategies 

for the State of Louisiana’s multibillion-dollar coastal protection 

and restoration efforts, also something of paramount importance to 

Louisiana. 

Dr. Slaughter serves on the board of the U.S. Chamber of Commerce. She is the chair of the U.S. Chamber Small Business Council. She became the very first woman chairman of the Baton Rouge 

Chamber of Commerce way back in 1986. She serves on the State 

Chamber board of directors as well as the executive committee. 

She holds a bachelor’s degree in marketing. Her doctorate is in 

systems management and organizational design. Both of them are 

from the Louisiana State University, and I am looking forward to 

hearing Dr. Slaughter’s testimony today, as I am looking forward 

to hearing the testimony of all of our witnesses. 

Welcome, Doc. 

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Senator RUBIO. Thank you, Senator Kennedy. 

In addition, we want to welcome Mr. Lettieri. Lettieri is the cofounder and president of the Economic Innovation Group. In this 

role, he leads their policy development, economic research, and legislative affairs efforts to study and address regional inequality 

across the United States. 

He has worked with members of this Committee on a policy provision that we have discussed, the Opportunity Zones, was included 

and passed in the Tax Cuts and Jobs Act. 

Mr. Arensmeyer is the founder and CEO of Small Business Majority. He has started numerous businesses and held leadership 

roles in which he worked on issues of importance to small businesses ranging from health care to access to capital to taxes. 

Ms. Caroline Bruckner is the managing director of—is it Kogod? 

Ms. BRUCKNER. Kogod. 

Senator RUBIO. Kogod Tax Policy Center at American University. 

Prior to this role, she served as a tax counsel in the Senate, where 

she worked on both this Committee and the Senate Energy Committee. Ms. Bruckner focuses her research on tax issues specific to 

small businesses and entrepreneurs. 

And we will begin with Dr. Slaughter. Thank you, you are recognized for your opening comment. 

STATEMENT OF CHRISTEL SLAUGHTER, Ph.D., CHAIR, U.S. 

CHAMBER SMALL BUSINESS COUNCIL, BATON ROUGE, LA 

Ms. SLAUGHTER. Thank you, Senator Rubio. Thank you, distinguished members of the Committee. I am very honored to be here 

on behalf of the Small Business Council. My name is Christel 

Slaughter, as you heard. I am the CEO of SSA Consultants, based 

in Baton Rouge, Louisiana, and the chair of the U.S. Chamber of 

Commerce’s Small Business Council. 

The Chamber is the world’s largest business federation. It represents the interests of over 3 million businesses of all sizes, sectors, and regions, as well as State and local chambers and industry 

associations. 

Ninety-six percent of Chamber member companies have fewer 

than 100 employees, and 75 percent have fewer than 10 employees. 

The Small Business Council works to ensure that the views of 

small business are considered as part of the Chamber’s policymaking process. 

I am here today to give you a few examples of positive impacts 

from tax cuts. The U.S. Chamber of Commerce produces a quarterly small business index in partnership with MetLife, and the 

most recent survey shows small business confidence at an all-time 

high. The findings of our quarterly survey show a great deal of confidence in the direction of the national economy and shows that 

69.7, almost 70 percent of small business owners have a positive 

outlook about their company and the small business environment 

in the United States. 

Early this year and for the purposes of this hearing, small business owners were surveyed, and they were twice as likely to think 

that tax reform would help their business rather than those who 

thought that it would hurt. 

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At a meeting earlier this year, several of my fellow Small Business Council members discussed their plans to reinvest savings realized from the Tax Cuts and Jobs Act. 

Melissa Bercier, who is the founder of Couch Clarity, which is a 

private psychotherapy practice near Chicago, explained how tax 

cuts are giving her an opportunity to provide team building and 

professional development for her staff of 10. Melissa calls her reinvestment strategy, ‘‘helping the helper.’’ The strategy has a positive 

domino effect because Couch Clarity’s two locations help people in 

the community, and a happy Couch Clarity staff means a happy 

community. 

David Mahoney is the president and CEO of Noble Gas Solutions 

in Albany, New York, a gas distribution and welding supply company with 33 full-time and 3 part-time employees. David explained 

how difficult it was getting through the Recession, with Noble Gas 

Solutions experiencing a 15 percent decline in revenue and an 8- 

year business drought without experiencing any additional sales in 

Upstate New York. He told me that last year, the economy in the 

Northeast finally seemed to rebound, and his sales came up 10 percent. The tax cuts allowed David to raise wages and prompted him 

to plan for hiring new staff, a luxury he could not afford for the 

past several years. 

Melissa is here in Washington, D.C., this week to join several 

hundred other small businesses for the U.S. Chamber of Commerce’s fourth annual Small Business Summit. Many of us were 

here on Capitol Hill yesterday meeting with our Senators to help 

explain how we are putting tax reform savings to work by reinvesting in our employees, our businesses, and our communities. 

These examples of how we are reinvesting tax cut savings to provide higher salaries and increased benefits for our employees are 

echoed by small businesses throughout the United States. 

In my small business, our employees are taking home more of 

their earnings, and many of our clients are benefiting from the Tax 

Cuts and Jobs Act. 

One of those clients, Roy O. Martin, announced the opening of a 

new state-of-the-art Oriented Strand Board, or OSB plant, in 

Corrigan Texas, this past year. At full capacity, the plant will ship 

enough product to provide OSB for approximately 70,000 U.S. 

homes per year. Roy O. Martin’s investment in the new plant created 165 direct jobs and more than 470 indirect jobs in construction. 

Another example from one of our clients is ExxonMobil, who announced that it is reinvesting $50 billion in U.S. operations because 

of tax cuts. That was music to the ears of my client, which are the 

locations of ExxonMobil in Baton Rouge. These locations employ 

more than 6,500 people in our State. 

As a practical matter, my job as an organizational consultant is 

less difficult when employees are taking home more pay and the 

company they work for is committed to reinvestment and growth. 

The tax cuts will allow them to make additional investments in operation and staffing. 

This example shows the positive ripple effect of business confidence and optimism due in part to tax reform. 

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Our organizational consulting firm has seen an increase in business this year. Our clients are doing well. They want to remain 

competitive by working with us on strategic plans and making sure 

that they retain their talented employees in this increasingly tight 

labor market. 

We do see some improvements that would be needed for tax reform to have an even greater positive impact, and finally, we would 

like to work with the Committee and your colleagues on the Finance Committee to make the small business tax cuts permanent. 

Many of us want to plan ahead, whether it is to grow our businesses, sell our businesses, or pass on what we have to our children 

or employees. The expiration of several tax benefits in 2025 will 

limit our ability to implement expansion or transition plans for our 

businesses. 

We look forward to working with you on ways to improve the Tax 

Code through legislative action, and we appreciate your attention 

to the ongoing benefits of the Tax Cuts and Jobs Act for the small 

business community by holding this hearing. 

Thank you so much. 

[The prepared statement of Ms. Slaughter follows:] 

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Statement Commerce 

Expanding Opportunities for Small Businesses 

Through the Tax Code 

Christel Slaughter, Ph.D. 

Chair, Small Business Council 

Committee on Small Business & Entrepreneurship 

United States Senate 

October 3, 2018 

1615 H Street NW I Washington, DC 120062 

The Chamber's mission is to advance human progress through an economic, 

political, and social system based on individual freedom, 

incentive, initiative, opportunity, and responsibility. 
9 

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The U.S. Chamber of Commerce is the world's largest business 

federation representing the interests of more than 3 million businesses of all 

sizes, sectors, and regions, as well as state and local chambers and industry 

associations. The Chamber is dedicated to promoting, protecting, and 

defending America's free enterprise system. 

More than 96 percent of Chamber member companies have fewer 

than 100 employees, and many of the nation's largest companies are active 

members. We are therefore cognizant not only of the challenges facing 

smaller businesses, but also those facing the business community at large. 

The Chamber represents a cross-section of the American business 

community with small and large businesses, across major classifications of 

American business-including manufacturing, retailing, services, 

construction, wholesalers, and finance. The Chamber has membership in all 

50 states. 

The Chamber's international reach is substantial as well. We believe 

that global interdependence provides opportunities, not threats. In addition to 

the American Chambers of Commerce abroad, an increasing number of our 

members engage in the export and import of both goods and services and 

have ongoing investment activities. The Chamber favors strengthened 

international competitiveness and opposes artificial U.S. and foreign barriers 

to international business. 
10 

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My name is Christel Slaughter, Ph.D. and I am the CEO of SSA Consultants 

based in Baton Rouge, Louisiana and the Chair of the U.S. Chamber of Commerce's 

Small Business Council. 96 percent of Chamber member companies have fewer than 100 

employees and 75 percent have fewer than 10. The Small Business Council represents 

small business voices as part of the Chamber's policy-making process. 

Examples of Positive Impact from Tax Cuts: 

The Chamber publishes a quarterly small business index in partnership with 

MetLife. The most recent survey shows small business confidence at an all-time high. 1 

The findings reflect a confidence in the direction of the national economy and show that 

69.7 percent of small business owners have a positive outlook about their company and 

the small business environment in the United States. Small business owners surveyed 

earlier this year were twice as likely to think tax reform would help their business rather 

than hurt it. 2 

At a meeting earlier this year, several of my fellow Small Business Council 

members discussed their plans to reinvest savings realized from the Tax Cuts and Jobs 

Act: 

Melissa Bercier, founder of Couch Clarity, a private psychotherapy practice near 

Chicago, explained how tax cuts are giving her an opportunity to provide team 

building and professional development for her I 0 staff. Melissa calls her 

reinvestment strategy, "helping the helper." The strategy has a positive domino 

effect because Couch Clarity's two locations help people in the community, and a 

happy staff means a happy community. 

David Mahoney is the President and CEO of Noble Gas Solutions in Albany, New 

York, a gas distribution and welding supply company with 33 full-time and three 

part time employees. David explained how difficult it was getting through the 

recession, with Noble Gas Solutions experiencing a 15% decline in revenue and 

an eight-year business drought without experiencing additional sales in upstate 

New York. He told me that last year, the economy in the North East finally 

rebounded and his sales went up 10 percent. The tax cuts allowed David to raise 

wages and prompted him to plan for hiring new staff, a luxury he could not afford 

for the past several years. 

Melissa is here in Washington, DC this week to join several hundred other small 

businesses for the U.S. Chamber of Commerce's 141

h annual Small Business Summit. 

Many of us were on Capitol Hill yesterday meeting with our senators to help explain how 

we are putting tax reform savings to work by reinvesting in our employees, our 

1 Findings from an Ipsos poll of 1,000 small business owners and operators conducted by phone 

between June 14 and July 27,2018. Results may be found at: 

https://www .uschamber.com/sbindex/SBI 2018 03 .pdf. 2 Findings from an lpsos poll of 1,000 small business owners and operators conducted by phone 

between January 8-January 25, 2018. Results may be found at: 

https://www.uschamber.com/sbindex/SBI 2018 0 l.pdf. 

1 
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businesses, and our communities. These examples of how we are re-investing tax cut 

savings to provide higher salaries and increased benefits for our employees are echoed by 

small businesses throughout the United States.3 

In my small business, our employees are taking home more of their earnings and 

many of our clients are benefitting from the Tax Cuts and Jobs Act. One of those clients, 

timber company RoyOMartin, announced the opening of a new state-of-the-art Oriented 

Strand Board (OSB) plant in Corrigan, Texas this past May. 4 At full capacity, the plant 

will ship enough OSB for approximately 70,000 U.S. homes per year. RoyOMartin's 

investment in the new plant created 165 direct jobs and more than 470 indirect jobs in 

construction. 

Another example is ExxonMobil, which announced that it is reinvesting $50 

billion in its U.S. operations because of the Tax Cuts and Jobs Act. That was music to 

the ears of my client, ExxonMobil Baton Rouge, which employs more than 6,500 people 

in my state. As a practical matter, my job as an organizational consultant is less difficult 

when employees are taking home more pay and the company they work for is committed 

to reinvestment and growth. The tax cuts will allow them to make additional investments 

in operations and staffing. This example shows the positive ripple effect of business 

confidence and optimism due, in part, to tax reform. 

Our organizational consulting firm has seen an increase in business this year. Our clients 

are doing well and they want to remain competitive by working with us on strategic 

pla1111ing and making sure they retain their talented employees in this tight labor market. 

Improvements Needed for Tax Reform to Have an Even Greater Positive Impact: 

Finally, we would like to work with the Committee and your colleagues on the 

Finance Committee to make the small business tax cuts permanent. Many of us want to 

plan ahead, whether it is to grow our businesses, sell our businesses, or pass what we 

have built on to our children. The expiration of several tax benefits at the end of 2025 

will limit our ability to implement expansion or transition plans for our businesses. 

We look forward to working with you on ways to improve the tax code through 

legislative action and we appreciate your attention to the ongoing benefits of the Tax Cuts 

and Jobs Act for the small business community by holding this hearing. 

3 See a map of businesses that are reinvesting tax cut savings at: 

https:/ /www.uschamber.com/tax-reform. 4 RoyOMartin is a forestry-related and wood-products manufacturing company based in 

Alexandria, Louisiana that employs I, II 0 workers in their two manufacturing facilities. 

2 
12 

Senator RUBIO. Thank you, Dr. Slaughter. 

Mr. Lettieri. 

STATEMENT OF JOHN LETTIERI, CO-FOUNDER AND PRESIDENT, ECONOMIC INNOVATION GROUP, WASHINGTON, DC 

Mr. LETTIERI. Well, good afternoon, Senator Rubio, Ranking 

Member Cardin, and members of the Committee. 

My name is John Lettieri. I am the president and CEO of the 

Economic Innovation Group, a bipartisan research and advocacy organization. Thanks for inviting me to testify today regarding Opportunity Zones. 

Opportunity Zones are the most innovative and ambitious Federal attempt to encourage private investment in low-income communities in at least a generation. While this incentive was designed to support a wide variety of needs, its central purpose was 

to drive investment into operating businesses in underserved areas, 

particularly new ventures and existing small- to medium-sized 

businesses poised for growth. This fundamental goal must now be 

reflected in the rulemaking process in order for Opportunity Zones 

to meet its full dynamic potential. 

Before going further, I want to briefly address the issue that 

prompted the development of Opportunity Zones in the first place, 

namely the uneven economic recovery from the Great Recession. 

While there is much to celebrate regarding the strength and resilience of the U.S. economy today, far too many communities are 

still being left on the sidelines. The geographic distribution of jobs, 

businesses, and wage gains during the recovery has been highly 

concentrated. 

One finding from a forthcoming EIG report helps to illustrate 

this point. As of the end of 2016, less than one-quarter of U.S. 

counties have recovered the businesses lost to the Recession. Regional inequality is a growing challenge, and Opportunity Zones is 

the first major Federal effort since the Recession to address it. 

The first phase of implementation was the selection of the Opportunity Zones themselves, the areas where certain investments 

would be eligible for the tax benefit. Congress set a national framework for eligibility and tasked governors with selecting and submitting their nominations to Treasury based on local input and priorities. 

Meeting the tight deadline in a thoughtful manner required a 

Herculean effort on behalf of governors, their staffs, their local 

partners, as well as officials within the Treasury Department, and 

all parties involved rose to the challenge. Governors selected significantly higher-need places on average than the law required but 

worked hard to strike the appropriate balance between local need 

and market opportunity. 

The following statistics are from EIG’s analysis of the nearly 

8,700 Opportunity Zones nationwide. First, the poverty rate in the 

average Opportunity Zone tract is 31 percent, and the median 

household income is only 59 percent of its State or regional median. 

Approximately 10 percent of the U.S. population now lives in an 

Opportunity Zone, and minorities make up 56 percent of that population. 

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Governors were intentional about including rural areas and nominated a proportional number of rural Census tracts in terms of 

what was eligible. 

According to data from the Urban Institute, fewer than 4 percent 

of the designated tracts have experienced rapid socioeconomic 

change since the year 2000, and three-quarters of the zones are located in ZIP codes that have seen at least some level of post-Recession employment growth. These findings demonstrate the dimensions of economic need in the average Opportunity Zone as well as 

the opportunity itself. 

The success of the first phase of implementation helped to accelerate the grassroots momentum and interest we see around the 

country today. I have spent the last 10 months traveling to audiences around the country, meeting with various stakeholders in the 

private sector, the public sector, the philanthropic sector, and I can 

say there is tremendous excitement. 

So what will it take to turn market interests into investor action 

and community benefit? While there are many factors in play, realizing the potential of Opportunity Zones hinges first and foremost 

upon timely and effective regulatory rulemaking, and the rules 

themselves must be from the outset geared to facilitate investment 

in operating businesses, not simply real estate. 

To that end, Treasury must address the following threshold 

issues. First, we need definitional clarity. The statute gives Treasury broad latitude to define a number of important requirements 

and tests, including issues related to the eligibility of an Opportunity Zone business and the nature of a qualifying investment. 

These rules must be designed with practical considerations and 

basic market flexibility in mind. 

Second, timing clarity. Qualified Opportunity Funds, the vehicles 

through which all Opportunity Zone investment must be made, 

need adequate time to raise capital, conduct due diligence, and 

build their portfolios. 

And, third, clarity about the benefit. The Opportunity Fund 

structure is one of the most important features of this incentive 

precisely because it is the key to facilitating investment in businesses. Investors have a number of questions regarding how fundlevel activity, including the sale of a portfolio asset, impacts the tax 

benefit. 

These issues are central to the success of Opportunity Zones and 

must be addressed before the market can move its scale. 

My primary hope for this policy, one shared by State and local 

officials, community organizations, and investors alike, is that it 

will succeed where other policies and programs have fallen short, 

namely by providing a true lifeline to entrepreneurs in underserved 

and overlooked communities nationwide. I firmly believe this goal 

is within grasp. 

So thank you for holding this hearing, and I look forward to answering your questions. 

[The prepared statement of Mr. Lettieri follows:] 

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JOHN W. LETTIERI 

PRESIDENT & CEO 

ECONOMIC INNOVATION GROUP 

TESTIMONY BEFORE THE U.S. SENATE COMMITTEE ON 

SMALL BUSINESS AND ENTREPRENEURSHIP 

"Expanding Opportunities for Small Businesses Through the Tax Code" 

October 3, 2018 

Introduction 

Chairman Risch, Ranking Member Cardin, and members of the Committee: 

My name is John Lettieri and I am the President and Chief Executive Officer of the Economic 

Innovation Group (EIG), a bipartisan research and advocacy organization based in Washington, 

DC. Thank you for inviting me to testify regarding implementation of the new Opportunity 

Zones tax benefit, which became law as part of the Tax Cuts and Jobs Act o/2017 (TCJA), and 

holds the potential to promote much-needed economic growth in struggling communities 

nationwide. 

EIG was deeply involved in the development of the Investing in Opportunity Act (JIOA), which 

garnered broad bipartisan support and served as the basis of the Opportunity Zones provision in 

the TCJA. We were honored to work closely with several members of this committee, including 

Senators Tim Scott (R-SC) and Cory Booker (D-NJ), the lead sponsors of IIOA. Since 

Opportunity Zones became law, we have worked with an array of important stakeholders 

nationwide, including state and local policyrnakers, community organizations, major 

philanthropies, and leading investors to raise awareness, provide analysis, and gather feedback. 

Those efforts helped to inform detailed technical recommendations that we, alongside a coalition 

of stakeholders, provided to the Department of Treasury and Internal Revenue Service (IRS) in 

support of timely and effective implementation. 1 

Opportunity Zones are the most innovative and ambitious federal attempt to encourage long-tenn 

private investment in low-income communities in at least a generation. While the incentive was 

designed to support a wide variety of needs across communities, its central purpose was to drive 

investment into operating businesses in underserved areas- particularly new ventures and 

existing small- to medium-sized businesses poised for growth. This fundamental goal must now 

be reflected in the rulemaking process. Simply put, if in practice the forthcoming regulatory 

framework inadvertently biases the tax benefit towards real estate investment or hampers the 

formation of multi-asset funds to invest in operating businesses, it will fail to achieve its true 

1 Economic Innovation Group Opportnnity Zones Coalition. "Economic Innovation Group Opportunity Zones 

Coalition Letter." Received by U.S. Department of the Treasury and David J. Kautter, 18 June 2018. Letter. 

https://eig.org/wp-content/uploads/20 18/06/0pportunity-Zones-Coalition-Letter _ 6.18.18.pdf 
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JOl-IN W. LETTIERI 

PRESIDENT & CEO 

ECONOMIC INNOVATION GROUP 

dynamic potential. Instead, Opportunity Zones would be at risk of repeating the shortcomings 

and narrow scope of past policy efforts. 

Why are Opportunity Zones needed? 

Before going further, it is worth briefly addressing the issue that prompted the development of 

Opportunity Zones: the deeply uneven economic recovery from the Great Recession. While there 

is much to celebrate regarding the strength and resilience of the U.S. economy at the national 

level today, far too many communities are being left on the sidelines in the midst of a prolonged 

economic expansion. The geographic distribution of jobs, businesses, and wage gains during the 

recovery has been highly concentrated. One finding from forthcoming EIG research helps to 

illustrate this point: As of the end of2016, less than one quarter of U.S. counties had gained 

back the number of businesses they lost to the recession. I believe regional inequality within the 

United States will be recognized as one of the defining economic challenges of our era, and 

Opportunity Zones is the first major federal effort to address it. 

The map of Opportunity Zones 

One of the most important features of the Opportunity Zones policy is the role given to 

governors in determining where the incentive will apply. Congress established a national 

framework to identify the census tracts eligible to become Opportunity Zones, but tasked 

governors with down-selecting and submitting their nominations based on local input and 

priorities. On the whole, governors did an effective job in managing a thoughtful, analytical, and 

rigorous selection process nationwide. They tailored their selections to the need and potential of 

their communities, and relied heavily on public and local government engagement, analytics, 

peer-learning, and interagency collaboration. 

Governors selected significantly higher-need places on average than the law required, but 

worked hard to strike the right balance between local need and market opportunity. The 

following are statistics from EIG's analysis of the nearly 8,700 certified Opportunity Zones in 

the United States and territories. 

• Roughly 10 percent (31.3 million) of the U.S. population resides in Opportunity Zones2 

• The poverty rate in the average tract is 31 percent. 

• The median household income in the average tract is only 59 percent of its state or 

regional median. 

• Nearly 70 percent of the population in Opportunity Zones resides in a census tract that is 

"severely distressed" according to the U.S. Treasury Department's CDFI Fund. 

• The average life expectancy in Opportunity Zones is a full three years shorter than the 

national average. 

• The median home is more than a decade older in Opportunity Zones than it is nationally. 

• Thirty-eight percent of resident adults in designated areas are not working, which is 10 

points above the national rate. 

'The number grows to 35 million when including the U.S. territories and Puerto Rico. 

2 
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JOHN W. LETTIERI 

PRESIDENT & CEO 

ECONOMIC INNOVATION GROUP 

• Three-quarters of zones are located in zip codes that experienced at least some level of 

post-recession employment growth from 2011-2015. 

• Minorities make up 56 percent of the Opportunity Zones population. 

• Fewer than four percent of the designated tracts have experienced rapid socioeconomic 

change (a proxy for gentrification) since 2000.3 

"""'"rtv Ram ""d Median Family lm::M~<~ 

in the A~~<~n~~~e Opp<>r!:l.mlty Z,., 

ISO Statu and OC! 

These findings demonstrate the dimensions of economic need in the typical Opportunity Zone. 

While not a panacea, this incentive could become a powerful new tool to reverse local decline 

and promote inclusive growth if it is deployed in a thoughtful and strategic manner. No incentive 

is, by itself, a placemaking strategy. 

Early implementation success 

Treasury deserves significant credit for the way it managed the first phase of implementation: the 

designation of Opportunity Zones nationwide. The statnte gave governors 120 days to snbmit 

nominated census tracts to Treasury for approval. Meeting this tight deadline in a thoughtful and 

orderly fashion required a herculean effort on behalf of governors, their staffs, and their local 

partners-as well as officials within the Treasury and the CDFI Fund. All parties involved rose 

to the challenge with enthusiasm and a real sense of mission and possibility. Treasury ensured 

that eligibility criteria, an impressive mapping interface, and instructions for submission were all 

made available to governors well ahead of the deadlines. Treasury was responsive throughout the 

process and certified the selected tracts in a timely manner. It was federalism working at it 

smoothest, just as I am sure Congress intended. The success of that first phase of implementation 

helped accelerate the grassroots momentnm and interest we see around the country today. 

3 Theodos, Brett, et al. Opportunity Zones Investment Score Dataset. Urban Institute. Opportunity 

Zones: Maximizing Return on Public Investment. 

3 
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JOHN W. LETTIERI 

PRESIDENT & CEO 

ECONOMIC INNOVATION GROUP 

Looking ahead to proposed rulemaking: ensuring new and small businesses can benefit 

Since Opportunity Zones became law, the response among community leaders, state and local 

officials, private sector investors, and other stakeholders has been precisely what Congress 

envisioned. Congress understood that for the incentive to reach a wide array of places, it needed 

to be flexible enough to draw in a wide array of investors, who, in turn, could deploy capital to 

meet a range of local needs. To date, the broad and intense interest from stakeholders reflects the 

ambitious goals of this policy. 

So, what will it take to turn interest into action? While there are many factors in play, the 

potential of Opportunity Zones hinges first and foremost upon timely and effective regulatory 

rulemaking. Investors have yet to receive the formal guidance or regulatory clarity needed to 

inform their decision-making. As a result, the market is not yet responding at scale and capital 

largely remains on the sidelines-even as the clock is ticking for this perishable incentive. 

However, additional clarity appears to be coming soon, as the first round of proposed rulemaking 

is now under review in the Office ofinformation and Regulatory Affairs (OIRA). 

As I noted earlier, successful implementation will require rules that are fundamentally geared to 

facilitate investment in operating businesses. To that end, Treasury must address the following 

threshold issues early in the rulemaking process: 

• Definitional clarity: The statute gives Treasury broad latitude in defining a handful of 

critical terms in a manner appropriate for carrying out Congressional intent, including 

definitions pertaining to the eligibility of a Qualified Opportunity Zone business and the 

nature of a qualifying investment. These rules must be designed with practical 

considerations and basic market flexibility in mind. If too narrow in scope or impractical 

in nature, the rules would undermine the very purpose for which this incentive was 

created. 

• Timing clarity: Qualified Opportunity Funds (QOFs),4 the vehicles through which all 

Opportunity Zone investments must be made, were intended to encourage broad 

participation by allowing multiple taxpayers to pool their resources and spread the risks 

and costs of investment across a portfolio of businesses or business properties. Funds, 

however, need adequate time to raise capital, conduct due diligence, and build their initial 

portfolio of investments. Treasury's rules should include an "on-ramp" period that allows 

newly-formed Funds time to conduct these activities. 

• Benefit clarity: The Qualified Opportunity Fund structure is one of the most important 

features of the Opportunity Zones incentive precisely because it is key to facilitating 

investment in operating businesses. The statute links the benefit to a taxpayer's 

investment in a QOF over a duration of time, rather than a QOF's holding in any 

particular investment. As noted above, Congress intended QOFs to have the ability to 

4 A Qualified Opportunity Fund must invest at least 90 percent of its assets in QualifYing Opportunity Zone business 

stock, partnership interest, or business property. 

4 
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JOHN W. LETTIERI 

PRESIDENT & CEO 

ECONOMIC INNOVATION GROUP 

operate as true portfolio funds -allowing investors to achieve greater scale and mitigate 

risk by pooling capital together and deploying it in a variety of investments. Furthermore, 

Congress anticipated that a QOF would not necessarily hold each of its portfolio 

investments for the entire duration of the Fund, but would instead make initial 

investments and then seek to reinvest later as capital was returned to the Fund from the 

sale of an asset. This again is critical for QOFs that intend to invest in operating 

businesses- particularly new businesses- which arc inherently less predictable than real 

estate projects. Treasury's rules and guidance should affirm that Fund-level "churn" does 

not interrupt the tax benefit to an investor in a QOF. 

These issues are central to the success of Opportunity Zones. Until they are addressed, a 

significant share of interested investors will remain on the sidelines, investment in operating 

businesses within the zones will be muted, and the overall scope and diversity community impact 

will be limited. I stress this point because federal policies have a generally poor track record 

when it comes to boosting private investment in operating businesses -especially early stage 

ventures. My primary hope for Opportunity Zones implementation one shared by state and 

local officials,5 community organizations, and investors alike is that it will succeed where other 

policies and programs have fallen short: by providing a true lifeline to entrepreneurs in 

underserved and overlooked areas of our country. I firmly believe this goal is within reach. 

Thank you, and I look forward to taking your questions. 

5 The United States Conference of Mayors, The United States Conference of Mayors to The Honorable David J. 

Kautter, Received by U.S. Department of the Treasury and David J. Kautter, 23 August 2018. Letter. 

https:/ /www.novoco.com/sites/ default/files/atoms/files/request _for __ guidance _ 082318 .pdf 

5 
19 

Senator RUBIO. Thank you. 

Mr. Arensmeyer. 

STATEMENT OF JOHN ARENSMEYER, FOUNDER AND CHIEF 

EXECUTIVE OFFICER, SMALL BUSINESS MAJORITY, WASHINGTON, DC 

Mr. ARENSMEYER. Senator Rubio, Ranking Member Cardin, and 

fellow members of the Committee, thank you very much for inviting me to speak with you today. 

I was a long-time small business owner prior to founding Small 

Business Majority 13 years ago. With our network of 58,000 small 

business owners across the country and eight regional offices, we 

actively support public policy solutions and deliver resources to entrepreneurs in order to drive a strong, inclusive, small businesscentric job-creating economy. 

Because Congress is considering making the tax cuts that were 

in the tax law permanent, I think it is important to take a look at 

where we are and what the tax law does and does not do. 

As the Ranking Member has stated, the law was a missed opportunity to foster entrepreneurship primarily benefiting large corporations and wealthy individuals, not Main Street small businesses, while dramatically increasing the deficit by $1.5 trillion. 

First, a top priority of this legislation was to slash corporate tax 

rates from 35 percent to 21 percent, even though only 5 percent of 

small businesses pay corporate taxes. 

Second, the law’s treatment of pass-through income gives the 

bulk of the benefits to the wealthiest pass-through entities rather 

than to Main Street. Let us remember that less than 2 percent, exactly 1.7 percent of all pass-through businesses, with average profits of three-quarters of a million dollars account for the majority of 

all pass-through income. 

Data from the Joint Committee on Taxation reveals a whopping 44 percent of the new pass-through deductions; $17.8 billion will 

benefit approximately 200 individuals making $1 million or more. 

By 2024, this skewed benefit will almost double to $31.6 billion. 

Moreover, according to the JCT report, the majority of the 2018 

tax reduction benefit will go to the top 2.3 percent of pass-through 

firms, and by 2024, that percentage drops to 1 percent. 

Clifton Broumand, owner of Man & Machine, a medical keyboard 

and mouse manufacturer in Landover, Maryland, echoes these 

facts, noting that the tax bill was designed for businesses at the 

top of the food chain, not businesses like him. 

Jessica Jolly, a solo-entrepreneur, digital skills coach in Evanston, Illinois, concurs saying the tax law has not done anything to 

help incentivize small business growth or retention. 

Recent polling from ZipBooks found 88 percent of small business 

owners say the new tax cuts have had no impact on their hiring 

decisions. 

This is why last year we proposed a different solution that would 

have benefited small businesses from the bottom up by allowing 

businesses to deduct their first $25,000 in business income with a 

phase-out at higher income levels. This would have ensured a significant direct benefit to true Main Street businesses as opposed to 

large businesses, hedge funds, and the very wealthy. 

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20 

Our proposal appealed to Nancy Clark, owner of Drive Brand 

Studio, a 10-person marketing and PR firm in North Conway, New 

Hampshire. She noted that the 2017 tax cuts have not done anything for her, and that a bottom-up approach would have helped 

small businesses by allowing them to truly reinvest in their businesses. 

Third, the complexity of the new deduction means that any savings will likely go toward tax professionals to help entrepreneurs 

navigate the new law. Indeed, the National Small Business Association found in a survey earlier this year that a mere 7 percent 

say they think filing taxes will become easier under the new law. 

And, finally, a Tax Code with a large gap between top individual 

rates and to pass-through rates will encourage some wealthy individuals to game the system by simply declaring themselves passthrough business entities. 

But given what the law is, what can we do going forward? We 

have some recommendations. 

To echo what John has said, we need to ensure that Opportunity 

Zone guidelines are designed to benefit Main Street small business 

owners rather than focusing on incentivizing real estate development. 

We need to make the new markets tax credit permanent. It is 

expiring next year. 

We need to align form 1099 reporting thresholds and streamline 

income reporting for independent workers. 

We need to identify and fix tax issues unique to micro-enterprises and freelancers, such as burdensome quarterly tax filings. 

We need to establish a standard business deduction for independent entrepreneurs. 

And, finally, we need to finally pass health care tax equity for 

the self-employed so that freelancers can deduct their health care 

expenses from their FICA tax obligations, just like other business 

entities. 

I am happy to discuss these recommendations in more detail 

with the Committee. 

Thank you. 

[The prepared statement of Mr. Arensmeyer follows:] 

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SMALL BUSINESS 

MAJORITY 

WRITTEN STATEMENT 

BEFORE THE U.S. SENATE COMMITTEE ON SMALL BUSINESS & 

ENTREPRENEURSHIP 

HEARING ON 

"EXPANDING OPPORTUNITIES FOR SMALL BUSINESS THROUGH THE TAX CODE" 

October 3, 2018 

JohnArensmeyer, Founder & CEO 

Small Business Majority 

Chairman Risch, Ranking Member Cardin and fellow members of the Committee, 

Thank you for inviting me to speak with you today about opportunities for entrepreneurship 

throughout America. 

I was a long-time small business owner prior to founding Small Business Majority 12 years ago. For 

13 years, I was the founder and CEO of ACI Interactive, an award-winning interactive 

communications company, and earlier l was the chief operating officer of a pioneering multimedia 

business. Following my years of experience running small businesses, I founded Small Business 

Majority to create a national organization to serve as a leading advocate for America's entrepreneurs. 

Small Business Majority's mission is to empower America's entrepreneurs to build a thriving and 

inclusive economy. We actively engage small bnsiness owners and policymakers in support of public 

policy solutions, and deliver information and resources to entrepreneurs that promote small business 

growth and drive a strong, job-creating economy. Our extensive scientific opinion polling, focus 

groups and economic research help us educate and inform policymakers, the media and other 

stakeholders about key issues impacting small businesses and freelancers, inclnding access to capital, 

taxes, healthcare, retirement and critical workforce issues. 

Small Business Majority has a network of sS,ooo small business owners across the country, with 

eight regional offices. We work closely with our network and with more than 1,000 local business 

groups to create a strong small business voice in Washington and state capitals, and deliver critical 

education and resources to America's job-creating entrepreneurs. Through our Entrepreneurship 

Program, we offer free education, tools and events to small business owners and aspiring 

entrepreneurs about access to responsible lending options, retirement, healthcare, wealth building 

tactics and more. 

A thriving small business ecosystem is central to creating a dynamic and inclusive American 

economy. America's 30 million small businesses represent 99% of all employer firms and account for 

half of our nation's jobs and economic output, and their creativity spurs innovation in all sectors of 

the economy. According to the U.S. Small Business Administration, small businesses have created 

1101 14th Street, NW, Suite 950 • Washlnglun, DC 20005 • (202) 828-8357 • www.smallbuslnessmajority.org 
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two out of three new private-sector jobs since the Great Recession.' Private-sector job creation at 

small- and medium-sized businesses has outpaced the rate of large-size companies for every month 

of 2017, per ADP's National Employment Report. 2 

It is because ofthis undeniable importance that the decline in the rate of business formation is 

particularly troubling. According to the U.S. Census Bureau, 414,000 startups were created in 2015, 

down from the pre-recession average of 524,000 between 2002 and 2006, a roughly 25% decline.3 

That translates to fewer jobs created by startups, and less innovation in our economy. We must 

pursue and enact policies that will reverse this trend and enable entrepreneurs to unleash their 

potential and boost prosperity for all. 

The 2017 Tax Cuts and Jobs Act was a missed opportunity to encourage entrepreneurship and 

streamline policies that reduce red tape for our nation's small business owners. Indeed, we believe 

the law will hurt small businesses and the economy because it will increase the deficit by $1.5 trillion 

without giving Main Street a real tax break. Despite the failure to enact meaningful tax reform for our 

nation's entrepreneurs with the Tax Cuts and Jobs Act, there are numerous concrete tax policies 

legislators should cousider to expand opportunities for small businesses, especially for our nation's 

22 million solo entrepreneurs. 

The 2017 Tax Cuts and Jobs Act left Main Street small businesses behind 

The Tax Cuts and Jobs Act was written to the benefit oflarge corporations and wealthy individuals, 

not Main Street small businesses. A priority of this legislation was to slash corporate tax rates from 

35% to 21% even though only 5% of small businesses pay corporate taxes.4 Adding $1.5 trillion to the 

deficit at a time of economic prosperity will do nothing to help small businesses, and it cettainly 

doesn't level the playing field. 

Additionally, the law's treatment of pass-through entities gives the bulk of the benefit to the 

wealthiest pass-through entities, rather than Main Street. Indeed, data from the Joint Committee on 

Taxation (JCf) reveals a whopping 44% of the new pass-through deduction ($17.8 billion) will 

benefit approximately 200,000 individuals making $1 million or more.s In 2024, this will increase to 

$31.6 billion. 

According to the JCT report, the majority of the 2018 tax reduction benefit will go to the top 2.3% of 

pass-through firms, and by 2024 that percentage drops to one percent.6 A business owner with 

$6oo,ooo per year will save almost 25 times that of an owner with $75,000 iu income, despite only 

earning eight times more. According to the Small Business Administration, the median income for 

individuals self-employed at their own incorporated businesses was $50,347 in 2016.7 It is also 

important to note that not all pass-through businesses are small firms: According to the Tax Policy 

Center, less than two percent (1.7%) of all pass-through businesses, with average profits of three-

'Small Business Administration FAQs, June 2016, https:/ jwww.sba.gov/sitesjdefault/filesjadvocacy/SB-FAQ2016_ WEB. pdf 

'ADP National Employment Report, January-August 2017, http:/ jwww.adpemploymentreport.com/ 

3 "A Start-Up Slump Is a Drag on the Economy. Big Business May Be to Blame," The New York Times, September 2017, 

https:/ jwww.nytimes.com/2017/09/20/business/economyjstartup-business.html 

'Brookings Institution, "Nine facts about pass-through businesses," May 2017, https:/ /www.brookings.edu/research/9·factsabout-pass-through-businesscs/ 

'Joint Committee on Taxation, "Tables Related to the Federal Tax System as in Effect 2017 through 2026," April 2018, 

https:/ jwww.jct.gov/publications.html?func=startdown&id=so91 

'Ibid. 

'Small Business Administration, 2018, https:/ jwww.sba.govjsites/default/filesjadvocacy /2018-Small-Business-Profiles· US. pdf 

Small Business Majority 2 www.smallbusinessmajority.org 
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quarters of a million dollars, account for the majority of all pass-through income-hardly your typical 

Main Street small business. 8 

Jessica Jolly, a solo-entrepreneur in Illinois and a member of our Small Business Council, told us 

that she doesn't feel the tax law did anything to help incentivize small business growth or retention, 

particularly for people like her-independent small business owners in their sos and 6os who are 

leaving the corporate world but not ready for retirement She noted that rather than wasting 

resources by giving corporations a break, the tax system should encourage more people to start 

businesses or to become solo-entrepreneurs. 

Policymakers missed a once-in-a-generation chance to craft tax reform that would have made life 

easier for America's small businesses. This is why we proposed a different solution that would have 

benefitted small businesses from the "bottom up" during the debate over tax reform last year. 

Specifically, we proposed allowing small businesses to deduct their first $25,000 in business income 

whether or not they file their tax returns as a pass-through entity or as a C-Corporation. This would 

have ensured that changes to the tax code would have a significant, direct benefit to small businesses 

and self-employed individuals as opposed to large businesses, hedge funds and the very wealthy. 

A proposal like this appealed to Nancy Clark, a member of our Small Business Council and owner of 

Drive Brand Studio, a small business focusing on marketing and PR in New Hampshire. She noted 

that the 2017 tax cuts didn't do anything for her as a small business owner, and that a bottom-up tax 

approach would have helped small businesses by allowing them to truly reinvest in their business. 

She added that legislation should instead focus on creating tax rates that benefit small businesses of 

all sizes to help them compete with big business. She said, "I truly believe the tax law was never 

meant to benefit true small businesses like me. It's unfortunate for me and my fellow New 

Hampshire small businesses because 'mom and pop' shops and small local firms like mine are the 

backbone of this state and our country. To see the tax law not provide support for us is truly 

disappointing, to say the least." 

Tax cuts are too complicated, allow for more loopholes and won't spur 

investment 

The tax cuts are structured in a way that is convoluted and benefits those at the top far more than 

lower-income business owners, with the majority of benefits going to the wealthiest pass-through 

business entities. Small business owners who do see any benefit will not receive enough savings to 

grow or invest back in their businesses. 

A report co-authored by Anne Zimmerman, a member of our national Small Business Council who 

owns a small public accounting firm in Ohio, found the 20% deduction on qualified business income 

is unlikely to generate enough savings for real small businesses to hire new employees, invest back 

into their businesses or make operational improvements.9 Additionally, recent polling from 

Zip Books, an online accounting software company that serves more than 100,000 small businesses, 

found 88% of small business owners say the new tax cuts have had no impact on their hiring 

decisions. 10 

8 Tax Policy Center, "Distribution of Business Income, by Statutory Marginal Tax Rate; Current Law, 2017," March 2017, 

https:/ /www.taxpolicycenter.orgjmodel-estimates/distribution-business-income-march-2017/distribution-business-incomestatutory 

9 Businesses for Responsible Tax Reform, ''The Tax Cuts and Jobs Act: Implications for Small BusineS-'ies," May 2018, 

https://docs.wixstatic.comfugd/4a8609_sae6299d49534af6b27acb872d044C30.pdf 

10 Zip Books, "Tax cuts advertised to fuel spending on jobs, yet small business owners feel differently," September 2018, 

https:/ /zipbooks.com/b1og/tax-cuts-irnpact-on-small-business-owners/ 

Small Business Majority 3 www .srnallbusinessmajority .org 
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The complexity of the new deduction means that any savings will likely go towards tax professionals 

to help entrepreneurs navigate their taxes. Small Business Majority member Clifton Broumand, 

Owner of Man & Machine Inc., a medical keyboard and mouse manufacturer in Landover, Maryland, 

noted that he feels like the tax bill was designed for businesses at the top of the food chain, not small 

businesses like his. He added that the process of filing taxes has gotten even more difficult, and he 

has seen no benefit or savings from the tax law. 

Given these sentiments, it's not surprising that the National Small Business Association found in a 

recent survey of its members that a mere 7% say they think filing taxes will become easier under the 

new tax law, and 1 in 3 say they already spend more than 40 hours each year on federal taxes." An 

additional! in 3 say businesses plan to, or are considering, switching from a pass-through entity to a 

C-Corporation as a result of the Tax Cuts and .Jobs Act, with the majority saying the temporary 

nature of the small business tax cuts is an issue for their business. 

And importantly, a tax code with a large gap between top individual rates and top pass-through rates 

will encourage some wealthy individuals to game the system by simply declaring themselves passthrough business entities. While the new law exempts certain industries from accessing the passthrough rate, there is no way to guard against all abuse of the pass-through rate and ensure that this 

does not primarily benefit hedge fund managers, lobbyists, lawyers and investment bankers-rather 

than Main Street small businesses. 

Simply put, small business owners wanted a simplified and more streamlined tax system that would 

also help level the playing with large corporations, and they got the opposite. 

Policy recommendations to better senre our nation's entrepreneurs 

Now that the 2017 Tax Cuts and Jobs Act is established law, we must turn to concrete policy 

solutions that could better serve our nation's entrepreneurs within the reformed system. This 

includes the following recommendations: 

• Ensure Opportunity Zones guidelines are designed to benefit Main Street small 

business owners rather than focusing on incentivizing real estate development. 

As to date, little detail has been revealed about how investments in Opportunity Zones 

enacted by the 2017 Tax Cuts and Jobs Act will be implemented. While these investment~ 

hold the potential to benefit small businesses, especially those in underserved communities, 

they must be implemented responsibly. This could include requiring reporting metrics that 

measure program success based on the number of jobs created, where those jobs are located, 

employee wages and the number of businesses created, particularly businesses formed by 

women or people of color. 

• Make the New Markets Tax Credit permanent. This tax credit, which is set to expire at 

the end of 2019, has helped attract more than $6o billion in private sector funding to build 

businesses in economically-distressed communities across the United States. 

• Align form 1099 reporting thresholds and streamline income reporting for 

independent workers. Independent workers receive either a Form 1099-MISC or a Form 

1099-K depending on how they are paid-ifthey are paid via cash or check, they receive a 

1099-MISC if they are paid $6oo or more. However, if they are paid electronically, they only 

receive a 1099-K if they receive at least $2o,ooo in payments and are involved in more than 

200 transactions with that network. These independent contractors are still required to pay 

taxes on income received below this threshold, but are expected to track and report their own 

11 National Small Business Association, 2018 Small Business Taxation Survey, http:/ /nsba.biz/v•rpcontent/uploads/20I8/04ffax-Survey-20I8.pdf 

Small Business Majority 4 www.smallbusinessmajority.org 
25 

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earnings without documentation, which increases the likelihood that an independent 

contractor could misreport their earnings and leaves them vulnerable to costly penalties. 

Aligning the reporting requirements so all independent contractors receive documentation 

for income above $6oo, regardless of how they receive that payment, could ease their 

administrative burden while also increasing compliance. 

• IdentifY and fix tax issues unique to micro-enterprises and freelancers, such as 

burdensome quarterly tax filings for freelance employees. These quarterly filing 

requirements, mandatory for any freelancer who will owe more than $1,000 annually to the 

IRS, are burdensome and leave independent workers vulnerable to costly fees. Reforms 

should be considered that would require some types of companies to withhold on behalf of 

independent contractors, in cases such as: 

o The independent contractor receives more than $6oo in payments; 

o The freelancer is not an incorporated business; 

o The payer issues 100 or more Form 1099s each year. 

• Establish a standard business deduction for independent workers. Independent 

workers must currently track and keep records of all business expenses, such as supplies, 

vehicle costs and other fees, and subtract against their income. This is a burdensome and 

complicated process. A standard business deduction in line with personal standard 

deductions could streamline the deducting of business expenses for solo-entrepreneurs. 

• Pass healthcare tax equity for the self-employed so that freelancers can deduct their 

healthcare expenses from their FICA tax obligations-just like other business entities. 

Conclusion 

Small business owners don't want special treatment in the tax code; they simply want to compete on 

a level playing field. America's entrepreneurs shouldn't have to navigate a tangled web of tax code to 

operate and grow their business. This is why we need a tax code that benefits America's 

entrepreneurs who are focused on growing their enterprises and making payroll at the end of each 

month. While we missed the opportunity to enact meaningful reform for entrepreneurs last year, 

there is still much that can be done to benefit our nation's small business owners and encourage 

more entrepreneurs to follow their dreams, both through ensuring investment in Opportunity Zones 

lives up to its potential for small business and through further responsible tax reforms. 

Thank you for the opportunity to comment on this imp01tant issue for America's small business 

community. I would be happy to answer any questions. 

Small Business Majority 5 www.smallbusinessmajority.org 
26 

Senator RUBIO. Thank you. 

And, finally, Ms. Bruckner. 

STATEMENT OF CAROLINE BRUCKNER, MANAGING DIRECTOR, 

KOGOD TAX POLICY CENTER, AMERICAN UNIVERSITY, 

WASHINGTON, DC 

Ms. BRUCKNER. Committee members and staff, my name is Caroline Bruckner, and I am a tax professor on the faculty at American 

University’s Kogod School of Business. I also serve as the managing director of the Kogod Tax Policy Center, which conducts nonpartisan policy research on tax and compliance issues specific to 

small businesses and entrepreneurs. We have two key areas of expertise—gig economy and 1099 workers—their tax compliance 

issues as well as women business owners and the Tax Code. 

Thank you for inviting me, and by extension, the AU undergraduate students in my Federal Income Taxation class, who are 

here with us today, to talk about expanding opportunities for small 

businesses through the Tax Code. 

I am going to speak quickly because I have a lot to say. 

This Committee has a long history of dating back to its days as 

a Senate select committee in the 1950s of working on behalf of 

America’s small businesses on tax issues and has held more than 

40 hearings over the years on tax-related concerns of small businesses. 

I should know. Prior to joining AU’s faculty, I served on the staff 

of this Committee from 2009 to 2014, ultimately as Chief Counsel. 

My work on this Committee led me to conduct groundbreaking research published in 2017 in a report entitled ‘‘Billion Dollar Blind 

Spot—How the U.S. Tax Code’s Small Business Tax Expenditures 

Impact Women Business Owners.’’ There is no question that taxation plays a key role in the survival and growth of small businesses, primarily through its effect on equity infusion. In fact, it is 

also a fact that 99 percent of women-owned firms are small businesses. 

Existing research generally and by this Committee in particular, 

specifically Senator Shaheen, has consistently found out that—has 

consistently found that women business owners struggle to access 

capital to grow and scale their businesses. This is a common complaint among smaller firms. It is not unique to women-owned 

firms, just more acute. 

In ‘‘Billion Dollar Blind Spot,’’ we detail the legislative history 

and congressional intent to provide access to capital and opportunities for growth to small businesses with four tax expenditures: 

first, Section 1202, 100 percent exclusion of capital gains tax for investment in qualified small business stock; Section 1244, ordinary 

loss treatment for investments in qualified small business stock; 

Section 179, accelerated depreciation for small businesses; and Section 195, which is the $5,000 deduction for qualified startup costs. 

This research is particularly relevant in today’s economy because 

although the 12 million women business owners operating today 

account for 40 percent of all U.S. firms, they remain small businesses, primarily operating as service firms, and continue to have 

challenges accessing capital. 

LAP51NQ082 with DISTILLER

27 

Women of color are leading this charge. These firms grew at a 

rate of 163 percent during the last 10 years, and today, women of 

color own 64 percent of the new women-owned businesses launched 

each day. 

Yet despite this extraordinary growth, our report is the first to 

assess how more than $275 billion of tax expenditures targeted to 

help small businesses access capital and grow impact womenowned firms, and we found that three of the four small business 

tax expenditures we studied are so limited in design that they either explicitly exclude service firms—and by extension, the majority of women-owned firms—or could effectively bypass womenowned firms who are not incorporated or who are service firms 

with few capital-intensive equipment investments altogether. 

Our survey data of over 500 women business owners corroborates 

these findings and nevertheless suggest that when women-owned 

firms can take advantage of tax breaks, they do. 

Our research also suggests the immediate need for Congress to 

conduct oversight into a formal accounting as to how tax expenditures create opportunities for women-owned businesses to access 

capital. 

Our research shows that Congress and stakeholders have a billion-dollar blind spot when it comes to understanding how effective 

small business tax expenditures are with respect to women-owned 

firms. 

In addition, Congress may have doubled down on its billion-dollar blind spot as part of tax reform. Two key provisions of the bill 

reflect additional taxpayer-funded investments that our research 

suggests are less favorable to women business owners. 

For example, according to JCT, more than 90 percent of the $415 

billion revenue loss generated from Internal Revenue Code Section 

199A will flow to firms with income of more than $100,000 in 2018. 

However, 88 percent of women business owners generate revenues 

less than $100,000. 

This inequitable distribution is even more pronounced when considered at higher income levels. Only 1.7 of women business owners have receipts of $1 million or more, but 44 percent of the revenue loss will flow to businesses with $1 million or more of income. 

And those women business owners with revenues of $1 million or 

more are more likely to be in services and excluded altogether. 

This Committee should be congratulated on holding this hearing 

and immediately set to work to develop the needed research to understand how and whether existing tax incentives create opportunities for women-owned firms to access capital. 

As next steps, we recommend the Committee employ the following strategies to develop the necessary research on these issues, 

including requesting the congressional tax-writing committees hold 

joint hearings together with this Committee on the small business 

tax issues identified in our research and in this testimony and, two, 

requesting the Joint Committee on Tax develop estimates on how 

small business expenditures impact women-owned firms in terms 

of the revenue loss distribution. 

In addition, we are so pleased to see our recommendations to 

align the 1099 filing recommendations be supported by small busiLAP51NQ082 with DISTILLER

28 

ness majority. Hopefully, with their support, we can get this finally 

done over the finish line. 

We stand ready to aid the Committee in this important work on 

behalf of millions of small businesses impacted by these issues. 

Thank you so much, and I am happy to answer any questions 

that you might have. 

[Then prepared statement of Ms. Bruckner follows:] 

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AMERICAN 

Expanding Opportunities for Small Businesses 

Through the Tax Code 

Hearing of the United States Senate Committee on Small 

Business and Entrepreneurship 

Wednesday, Oct. 3, 2018 

Testimony of Professor Caroline Bruckner, 

Executive-in-Residence, Accounting and Taxation 

Managing Director, Kogod Tax Policy Center 

Kogod School of Business, American University 

twitter: @carobruckner • cbmck@amcrican.edu • (202) 885-3258 
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Kogod Tax Policy Center Prof. Carohne Bruckner, \X;ritten Testimony, Ocr. 1, 2018 

Chair Risch, Ranking Member Cardin, Committee :Vfembers and Staff, my name is Caroline 

Bruckner and I am a tax professor on the faculty at American University's Kogod School of 

Business. I also serve as the Managing Director of the Kogod Tax Policy Center (KTPC), which 

conducts non-partisan policy research on tax and compliance issues specific to small businesses 

and entrepreneurs. We develop and analyze solutions to tax-related problems faced by small 

businesses. Thank you for inviting me, and by extension, the AU undergraduate students in my 

Federal Income Taxation class who are here with us today, to talk about expanding opportunities 

for small businesses through the tax code. 

The U.S. Senate Committee on Small Business and Entrepreneurship (the "Committee" or 

"SBC") has a long history, dating back to its days as a select Senate committee, of working on 

behalf of America's small businesses on tax issues. Beginning in 1953, this Committee prepared 

a comprehensive survey of the impact of federal taxes on small businesses, culminating in an 

annual report to the Senate with key recommendations. Since then, the Sl3C has held more than 

40 hearings over the years on tax-related concerns of small businesses. I should know-prior to 

joining i\ U's faculty, I served on the staff of this Committee, from 2009-2014, ultimately as Chief 

Counsel. Before public service, I worked in private practice in Washington D.C. as a tax attorney 

with both Pau!Hastings and PwC's Washington National Tax Services. 

However, it was my work on this Committee that led to me to conduct ground-breaking research 

at American University, which we published in June 2017 in a report titled, Billion Dollar Blind Spot 

- How the (J.S. Tax Code's Small Bu.riness Tax E>::pettditures Impact IVomett B11simss Owners ("Billion 

Dollar Blind Spot").' There is no question that "[tjaxation plays a key role in the survival and growth 

of small businesses, primarily through its effect on equity infusion. The major source of equity 

capital for expansion of a business is reinvested profits. The amount tax the business must pay 

1 Bruckner, C.L. (2017). Billion Dollar Blind Spot: How the U.S. Tax Code's Small Business Expenditures Impact Women 

Business Owners. Kogod Tax Policy Center Report, available at 

h.t!Q~ww.american.edu/kogod/r:gsearch/lli!!.9j!9l_Qjjn_Q_~RQUcces2JQ~p_Qf. 
31 

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Kogod Tax Policy Center Prof. Caroline Bruckner, Written Tcstlmony, Oct. 1, 2018 

determines the amount of money available for growth and expansion." 2 In addition, it's a fact 

that 99% women-owned firms are small businesses, according to SBA's Office of Advocacy's 

latest report on women-owned firms 3 These two facts inspired our trailblazing research in Billion 

Dollar Blind Spot to study for the first-time ever whether the small business tax incentives included 

in the tax code created opportunities for women-owned firms to access capital. 

Existing research by academics generally, and this Committee in particular, has consistently found 

that women business owners struggle to access capital to grow and scale their businesses. In 2014, 

under the leadership of its then Chair, Sen. Maria Cantwell, this Committee issued a report finding 

that access to capital is a more severe challenge for women-owned firms and that women only 

account for 16 percent of conventional small business loans, and 17 percent of SBA loans; which 

means just $1 of every $23 in conventional small business loans goes to a women-owned 

business 4 ?v!ore recently, last year Sen. Shaheen issued a report detailing what women 

entrepreneurs need to thrive that concluded, in relevant part, "women entrepreneurs arc unable 

to access their fair share of financial capital, diminishing their chances for growth." 5 At the same 

time, Congress, and this Committee in particular, has worked tirelessly to enhance the U.S. tax 

code to aid small businesses. Small businesses have regularly testified and requested 

Congressional intervention to facilitate access to capital, which is a common complaint among 

these firms. It's not unique to women-owned fitms, just more acute. 

2 1NTERAGENCY TASK FORCE ON WOMEN BUSINESS OWNERS, THE BOTTOM LINE: UNEQUAL ENTERPRISE !N AMERICA. (U.S. Department 

of Commerce) (1978). 

3 Michael J. McManus, Issue Brief Number 13.' Women~s Business Ownership: Data from the 2012 Survey of Business 

Owners, Office of Advocacy, U.S. Small Business Administration (May 31, 2017), available at 

https://www.sba.gov/sites/default/fi!es/advocacy/Womens-Business-Ownership-in-the-US.pdt. 

4 Majority Report of the U.S. Senate Committee on Small Business and Entrepreneurship, 21sT CENTURY BARRIERS TO 

WOMEN'S ENTREPRENEURSHIP (2014), https:l/www.sbc.senate.gov/public/ Cache/files/3/f/3f954386-fl6b·48d2·86ad· 

698a75e33cc4/F74C2CA266014842F8A3D86C3/~J~§.19BA.212l:.cent\!DL:: .... I:?.grr!g[s-to-worn_gn-s-entrepreneurship-reviseded.·v.1.pdf. 

5 Report by SBC Ranking Member Jeanne Shaheen, TACKLING THE GENDER GAP: WHAT WOMEN ENTREPRENEURS NEED TO THRIVE 

(2017), https:l/www.sbc.senate.gov/public/ cache/files/2/5/2Sbd7 ee9-a 37b-4d2b·<i91a· 

§b1ad615bd58/536DC6E705BBAD3BSSSBFA4B§.QQJ;AQ.f?.sbc-)acklirJ&.\h~::Jl~ndeL:lliJPA.ecembJJr·2017·finalpg1. 
32 

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Kogod Tax Policy Center Prof. Carohnc Bruckner, \V'ritten Testimony, Oct. 1, 2018 

As part of our research in Billion Dollar Blind Spot, we detailed the legislative history and Congress' 

intent to provide access to capital and opportunities for growth to small businesses with respect 

to four specific tax expenditures (i.e., IRC §1202 100% Exdttsion from Capital Gain.r Tax for 

Investments in Qualified Small Bttsiness S totk; IRC § 1244 - Ordinary Loss Treatment for Investmen/.r in Small 

B11.riness Stock; IRC §179- ExpensingforSmall B11sinesses; and IRC §195 DedtlttionforQttalified StartUp Costr). Each small business tax expenditure we studied met two criteria: 

1. Congress intended the provision to stimulate growth or access to capital or investment in 

smaller firms; and 

2. Each expenditures generated a cost to U.S. taxpayers of at least SlOO million-' 

Ultimately, Billion Dollar Blind Spot raised questions as to (i) whether the U.S. tax code's small 

business tax expenditures were operating as Congress intended to provide access to capital to these 

small businesses; and (ii) whether the cost of these expenditures had been accounted for in tenns 

of their uptake by women-owned firms. 

Our research is particularly relevant in today's economy because although women business owners 

account for 40% of all U.S. firms and the total number of women-owned firms has increased over 

the last ten years by 58%, women business owners remain small businesses primarily operating as 

set-vice firms (more than 60%) and continue to have challenges growing receipts and accessing 

capitaU \X' omen of color are leading this charge and are the "driving force behind the growth of 

women-owned firms."8 Firms owned by women of color grew at a rate of 163% during the last 

10 years and today, women of color own 64% of the new women-owned businesses launched each 

day9 

6 Billion Dollar Blind Spot, supra n. 1 at 7 (noting revenue loss are a key factor in Congress relies on in determining the 

effectiveness of a tax expenditure). 

7 The 2018 State of Women-Owned Businesses Report, Ventureer {2018), availabfe at 

httos://about.americanexpress.com/fi!es/doc !ibrary/fi!e/2018-state-of-women-owned-businesses-report.pdf. 

9 /d. 
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Kogod Tax Policy Center Prof. Caroline Bmckner, \\'titten Testimony, Oct- 1, 2018 

Despite this extraordinary growth, there has been no fo1mal government or Congressional 

accounting as to whether small business tax expenditures targeted to help small business access 

capital impact are distributed to women-owned f111ns. Our report is the first effort to assess how 

the U.S. tax code's more than $275 billion of tax expenditures targeted to help small businesses 

grow and access capital impact women-owned fitms. 10 Specifically, we found: 

• Three of the four small business tax expenditures (i.e., IRC §1202, §1244, and §179) we 

assessed are so limited in design that they either (i) explicitly exclude service firms (e.g., 

IRC §1202), and by extension, the majority of women-owned firms; or (ii) could effectively 

bypass women-owned firms who arc not incorporated (IRC §1244) or who arc service 

firms with few capital-intensive equipment investments altogether (IRC §179). 

• Our survey data of 515 experienced, engaged women business owners corroborates these 

findings, and nevertheless suggests that when women-owned firms can take advantage of 

tax breaks, they do (lRC §195). However, neither Congress nor Treasury or IRS or SK\ 

has ever measured how the tax code's small business expenditures impact women business 

owncrs. 11 

10 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2017~2021, JCX-34·18 (May 25, 

2018), available at https://wytw.ict.gov/publicatiom,b.lml?func=st@.rt9Qyvn&id=SO~. The revenue loss estimates 

included in this testimony reflect JCT's latest revenue estimates as set forth in JCX-34-18, which include changes 

attributable to tax legislation through February 2018. 

11 Billion Dollar Blind Spot, supra n. 1. As part of our research, we conducted a survey of the members of Women 

Impacting Public Policy (WIPP) and its coalition partners. Our survey was designed to gauge whether and how familiar 

self-identified women business owners are with the Code sections we identified for review and whether those 

women~owned firms accessed them. Our intention in conducting the survey was not to prepare a statistically reliable 

estimate of the entire American population of women-owned firms, or even of the more than one million WIPP and 

their coalition partner members, but rather to gauge whether engaged, experienced women business owners, defined 

by their own self-selection as members of WIPP or one of its coalition partners, are familiar with and take advantage 

of specific tax incentives that Congress has targeted to small businesses. WIPP and its coalition partners invited their 

memberships to participate in the online Survey Monkey survey, which was conducted from March 9, 2017 through 

Aprll11, 2017. We received 515 completed responses from women who, on their own, or with other women, owned 

at least 51% of a business, from the more than 550,000 WlPP or coalition partner members invited to participate in 

the survey. 
34 

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Kogod Tax Policy Center Prof. Carolmc Bruckner, \Vntten Testimony, Oct. 1, 2018 

Our research results suggest the immediate need for Congress to conduct oversight and due a 

formal accounting for how existing tax expenditures create opportunities for women-business 

owners to access capital. 

• For example, Congress designed lRC §1202, which allows angel investors to invest in 

qualified small business cotporations, to explicitly exclude service firms. Our research 

found that this limitation has resulted in only a very small minority of women business 

owners being able to utilize it. Tn fact, we ickntified only three women business owners 

who had ever used IRC §1202 to raise capital for their business. Keep in mind, this is a 

$6.5 billion tax break developed by the former Cbair of tl1is Committee, Dale Bumpers, 

to raise capital for small firms. While we expect that more than three women-owned firms 

have used this provision since 1993, we don't have publicly-available IRS or Treasury 

taxpayer data to prove it. 

• Similarly, with respect to IRC §179, our survey results found that women business owners 

claimed this tax break at significantly lower rates (47%) than existing government research 

finds for businesses generally (60% to 80%). This tax break is one of the more expensive 

small business tax incentives (i.e., it will cost taxpayers $64.5 billion from 2017 -2021), and 

yet we don't have any IRS or Congressional research on how it benefits women business 

owners, and what research we do have suggests that women business owners benefit less 

than business generally from one of the largest small business tax incentives. 

Our research shows that Congress and stakeholders have a billion dollar blind spot when it comes 

to understanding how effective small business tax expenditures are with respect to women-owned 

firms. This blind spot indicates Congress does not have data or research to make evidence-based 

tax policy decisions to expand opportunities for 40% of all U.S. firms to access capital through the 

tax code. In addition, our research suggests that Congress may have doubled-down its billion 

dollar blind spot in the mostrecent overhaul of the tax code, the Tax Cuts and Job,·Actof2017 (P.L. 

115-97) (TCJA). 
35 

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Kogod Tax Po hey Center Prof Caroline Bruckner, \X-'ntten Testimony, Oct. 1, 2018 

In particular, our initial assessment of two of the key tax investments of the TCJA (§199 and §179), 

which were designed based on two of the small business tax incentives we studied (§1202 and 

§ 179), confirms that questions we raised in Billion Dollar Blind Spot were not robustly investigated 

in connection with Congress' efforts on tax reform. Instead, Congress made additional 

investments in small business tax expenditures that our research suggests are less favorable to 

women business owners in terms of distribution of tax benefits, which the .Joint Committee on 

Taxation's OCI) April2018 distributional analysis seems to confirm. 

Por example, according to Table 3 ofJCT's distributional analysis of the TCJA, more than 90% of 

the revenue loss generated from the new pass through deduction under IRC §199A will flow to 

firms with income of more than $100,000 in 2018 and 2024. 12 However, the most recent data 

available finds that 88% (or 10,775,600) of women business owners generate revenues less than 

$100,00013 

This inequitable distribution is even more pronounced when considered at higher income levels: 

only 1.7% of women-business owners have receipts of $1,000,000 or more, but JCT found in 

2018, 44% of the IRC §199A revenue loss will flow to pass-through businesses witl1 $1,000,000 

of income. Moreover, JCT projects that the 44% revenue loss distribution will increase to 52% 

by 2024. 14 While many women business owners will no doubt see some benefit from IRC §199A, 

JCT's distributional analysis raises serious questions as to the equity of the distribution of the tax 

expenditure with respect to women-owned firms. In addition to concerns regarding the 

distribution of the revenue loss generated by IRC §199A, our research suggests additional 

oversight and tax research is warranted with respect to the TCJA's investments into expanding 

IRC §179. 

u Joint Committee on Taxation, Tables Related to the Federal System as in Effect 2017 through 2026 (JCX-32R-18), 

April24, 2018. This document can be found on the Joint Committee on Taxation website at www.jct.ggy_. 

13 The 2018 State of Women-Owned Businesses Report, supra n. 7. 

14 JCT, supra n. 12 at Table 3. 
36 

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Kogod Tax Policy Center Prof Caroline Bruckner, \Vntten Testimony, Oct. 1, 201H 

Congress doesn't know whether the money it has spent trying to help smaller firms access capital 

and grow has been well spent with respect to women-owned firms. The absence of research on 

these issues is contrary to recent Congressional efforts to engage in evidenced-based policy making 

going fotward and means Congress does not have adequate data to understand whether the more 

than $275 billion in tax incentives it has enacted already create opportunities to access capital for 

more than 12 million small businesses or 40% of all U.S. firms. 

This Committee should be congratulated on holding this hearing and immediately set to work to 

develop the needed research to understand how and whether existing tax incentives create 

opportunities for women-owned firms to access capital. That noted, the existing lack of tax 

research and effective Congressional oversight on how tax expenditures impact women business 

owners constrains policymakers from developing evidenced-based policymaking on creating 

opportunities for small businesses through the tax code . 

.r\s next steps, we recommend the Committee employ the follmving strategies to develop necessary 

research on these issues including: 

1. Requesting the Congressional tax-writing committees hold joint hearings together with 

this Committee on the small business tax issues identified in Billion Dollar Blind Spot and 

this testimony; and 

2. Requesting the Joint Committee on Taxation develop estimates on how small business 

expenditures impact women-owned firms in terms of the revenue loss distribution. 

We stand ready to aid the Committee in this important work on behalf of the millions of small 

businesses impacted by these issues. 
37 

Senator RUBIO. That was incredibly impressive. 

[Laughter.] 

We are going to have a vote in a few minutes. I am not going 

to leave. We are going to keep this train running. 

So let me defer to the Ranking Member so he can go vote, and 

then we will figure it out from there. 

Senator CARDIN. We apologize about a vote being scheduled at 

3:15. We do not apologize for the vote because it is opioid legislation, which is strongly supported on a bipartisan basis, but we will 

have to go out to vote and come back. 

Senator RUBIO. Actually, I am still waiting for my alert on this 

phone. I did not get it on this phone. 

[Laughter.] 

So if anyone is listening, it malfunctioned on this one. 

Senator CARDIN. I do not think it started yet, the vote. It did? 

The alert? It came down. 

Senator RUBIO. I did not mean to throw us off track. I apologize. 

Senator CARDIN. Again, thank all of you for your testimony. 

I think I want to start on the targeting of the tax bill. The numbers that you have given us on the $415 billion in regards to the 

199A—I know there are other provisions that affect small businesses that are in the bill, but that was the largest single-dollar 

number, was the pass-through deduction, Section 199A. 

And it is kind of shocking, the numbers that you are giving us, 

as to the number of women-owned businesses, minority-owned 

businesses. The amount of the $415 billion received by those businesses is going to be kind of small. 

So if you have $415 billion in the Tax Code, where is the best 

place for us to use it to really reach those small businesses that 

need attention in our system? 

Ms. BRUCKNER. I think that the first thing that you need to consider when you are assessing effectiveness of tax expenditures to 

give access to capital to small businesses is that you cannot limit 

it by industry or by income. 

So when you design tax incentives that are specific to manufacturing or construction or capital-intensive expensing, what you are 

doing is bypassing the majority of women-owned firms who are in 

services that do not have those expenses that are underrepresented 

in those industries, and the fact is women business owners are 

where the growth is with respect to small businesses in general. 

They have grown at a rate of over 58 percent, which is well in excess of the average over the last 10 years. 

Senator CARDIN. Yes, sir. 

Mr. ARENSMEYER. Senator, I think if you are deciding how to 

spend $415 billion, that is a lot of money. I mean, we were not actually in favor of an unpaid-for cut, to begin with, just because we 

have a fairly robust economy, and it weakens the ability of the 

Government to take steps when we do not have as robust an economy. 

That said—— 

Senator CARDIN. Let me put this in a different way, so you understand. I think that was added to try to develop some degree of 

justification that smaller companies have tools in this bill. 

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38 

I agree completely with you that it should not have been unpaid 

for. The whole bill should have been paid for. 

But if we had that amount of relief coming to small businesses, 

how can we better target? 

Mr. ARENSMEYER. Well, I mean, right now, the numbers speak 

for themselves. You can just do the math. The combination of the 

amount of income of the very small number of large pass-through 

entities and the marginal rate being much higher means you get 

a very skewed distribution that does not really impact Main Street 

businesses. 

So we have proposed—and, again, our proposal is just an idea— 

flip it around. Do it from the bottom up. Give the biggest tax break 

to the people at the bottom, and you do that by giving kind of a 

fixed amount. Phase it out at a certain point. We are not wedded 

to that. There are other ways to do it. 

I think you have to look at where is the money going, who is benefiting from the money, and figure out is that really where you 

want to put the biggest bang for the buck. 

Senator CARDIN. Thank you. 

Mr. Lettieri, I want to talk about Opportunity Zones. I support 

Opportunity Zones, so let me just qualify that. And I thank Senator 

Scott and Senator Booker for their leadership in getting that into 

the tax bill. 

But I am concerned as we look at well-intended tax provisions, 

Puerto Rico, for example, in which I think most of us would say 

that we could have done a better job in the tax break we had in 

Puerto Rico. The benefactors of the tax break are going to be investors. We want the investors to invest in underserved areas and in 

longer-term investments. I get that, but the profits could very well 

be taken out of the community and invested anywhere the investor 

wants to invest it. 

What lessons have we learned from the past so that as we implement these Opportunity Zones, we really get permanent commitments to underserved communities? 

Mr. LETTIERI. Well, Senator, thanks for the question. 

It is important to understand that Opportunity Zones are an equity incentive, and so there is an exchange of wealth happening as 

part of that investment to a business owner. Unlike a debt investment, which satisfies a different set of needs, equity is key to 

growth for growth businesses. It is also important to the business 

owner in terms of what it provides them as a wealth event in addition to a chance to grow their business. So—— 

Senator CARDIN. But I understand that the tax incentive is lower 

tax rates on the—— 

Mr. LETTIERI. It is. It is a capital gains incentive to the investor 

as to effectuate a change in behavior, but what they have to do in 

order to get that incentive is to invest equity in a business or business property within the target areas. And by definition within the 

statute, the incentive skews very heavily towards small and new 

businesses, ones that are poised for growth. 

So I think that alone helps to address some of the scoping concerns because of the way it is designed. There is not the same type 

of potential for either misdirected incentive dollars or the kind of 

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leakage that you see going to larger corporations that have maybe 

a toe in the designated area but not truly are of those areas. 

Senator CARDIN. I would just underscore if we do not get it right 

from the beginning, there is going to be a missed opportunity for 

the full benefit. 

I thought your testimony was pretty clear about that, and I appreciate your testimony. I would just urge all of us to stay focused 

on how this is implemented to make sure we do not end up, 10 or 

15 years from now, in the same situation and wonder where the 

money went. 

Mr. LETTIERI. I agree. 

If I could just add one other thing to that, I think Opportunity 

Zones reflect a lot of the concerns about the limitations of policies 

of the past, and that was baked into the design, both in the longterm nature but also to Ms. Bruckner’s point, the intended flexibility of the incentive, not dividing it by sector, because complexity 

is subsidy to larger interests when it comes to the Tax Code. So 

the more simple and straightforward you can make it, the easier 

the uptake is going to be among smaller and newer businesses. 

And that is one of the things we have seen as a failure in previous programs, where the business owners themselves said the 

complexity was a factor in whether or not they used it. 

Senator CARDIN. There is no question. Complexity for small businesses is critical. They do not have staff to handle complexity, and 

I would just urge we get back one more time to 199A. 

I have heard real complaints from small companies as to the 

complexity of the 199A calculations, let alone the fact that it is not 

permanent. 

So I think you are absolutely right, and I am glad it is broader 

in that scope. 

Thank you, Mr. Chairman. 

Senator RUBIO. Thank you. 

I am going to defer my time. 

Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman and Ranking Member. 

I appreciate this opportunity. 

I used to have a retail shoe store, which was a small business, 

and so have had a focus on small businesses. Also, I try to get back 

to Wyoming pretty much every weekend, and when I am traveling, 

I like to get into some businesses, usually businesses that I am not 

familiar with, because one of the things that I have found is that 

any business that I am not familiar with looks pretty simple until 

I see what kind of decisions they have to make—how do they get 

their employees, how do they train their employees, how do they 

advertise, how do they get their customers, how do they treat their 

customers. 

Small business definitely has a tough road because they cannot 

afford the expertise that the big companies can afford. 

The tax bill, of course, was focused on economic opportunity, and 

some of the biggest opportunities are with some of the biggest companies, and a lot of that was repatriating money from overseas so 

that it could be invested in the United States. And I am hoping 

that some of that will be invested in small companies. 

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I would report, though, that in spite of the tax cut, revenues this 

year are up $19 billion over last year, which is above the year before, and that is without the September estimated taxes, which is 

usually the biggest tax receipt month, other than April. That would 

be the biggest tax month resulting from this. 

And when we talk about a hundred—a trillion-and-a-half deficit, 

you have got to remember that that was specified that it would be 

static scoring. Static scoring means that the CBO when they were 

evaluating this had to ignore any effect that the bill would have. 

Then economists told us that if we could have at least 2.4 percent 

GDP, this would be paid off over a 10-year period. 

Now, I mentioned the $19 billion ahead in expenditures this year 

were $240 billion ahead. So the deficit does not just come from the 

tax cut. In fact, the tax cut is doing pretty well, but it is still 

spending. 

Now, Ms. Slaughter, the NFIB recently—the National Federation 

of Independent Business—showed that a majority of small businesses are optimistic about the effects of the tax reform. 

Let me mention some of their findings. Eighty-seven percent of 

the member businesses—these are independent businesses, small 

businesses. Eighty-seven percent of the member businesses believe 

the new tax law will have a positive effect on the economy. Seventy-five percent believe it will positively affect their business, and 

70 percent anticipate the new tax law will positively affect their 

personal tax situation. 

Given the broad range of small businesses represented by the 

U.S. Chamber Small Business Council, what are you hearing from 

members about being easier to invest, to hire, to grow after the tax 

reform? Are there particular elements of the tax reform, whether 

for individual owners or businesses, that have helped the most? 

Ms. SLAUGHTER. Thank you very much, Senator. 

Let me try and address some of your questions. 

Yes, I think that there are a number of examples that are both 

general in nature and specific in nature. 

The most frequent comment that I heard from my clients in preparing for this hearing today was that the reinvestment was put 

into wages and employee benefits. Now, that is not a scientific data 

point at all. That is strictly anecdotal from my experience. 

Everything from the employer paying more of the proportion of 

the employee health care cost to adding additional benefits—Roy O. 

Martin, for example, has added benefits, paying more of the employee cost, and has also put a pharmacist on their staff to help 

reduce the cost of prescriptions. 

Senator ENZI. Thank you. 

Ms. SLAUGHTER. So we are hearing a lot of those things. 

Senator ENZI. My time is pretty limited. So I will ask in writing 

for each of you to answer that question. 

But I want to ask one question on Opportunity Zones. Mr. 

Lettieri, can you mention some ways that we can evaluate and 

track the success of Opportunity Zones? 

We have got 32 of those zones in Wyoming, and it is largely 

rural, but I do not know what metrics to use to do that in populated or unpopulated areas. 

LAP51NQ082 with DISTILLER

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And, again, I would be interested in all of your answers, but in 

20 seconds, I am going to be out of time. 

Mr. LETTIERI. Senator, thank you. 

I think we are a data-driven organization, so more is better when 

it comes to analysis from our standpoint. 

There are a few things that we can do. One is we have a great 

natural experiment. Only 25 percent of the eligible areas were chosen as Opportunity Zones, so we should look at their performance 

over a long period of time versus those that were not chosen and 

see what type of trajectory change we see as a result of the Opportunity Zone designation. 

Opportunity Zones are going to have a different effect in different 

places based on local conditions. It is a very localized, decentralized 

incentive policy, and so we also have to look at what are the local 

communities doing in terms of their local policy and regulatory efforts and their practical support to administer Opportunity Zones 

and enhance the value of the capital coming in for those who actually live in the community. 

I think with those two measures, looking broadly at the performance of the selected zones versus those that were eligible and not 

selected, taking a careful look at best practices at the local level to 

understand what has worked and not worked as well in terms of 

the State and local side of this. 

And then, third, we already know today the number of businesses and jobs that exist in Opportunity Zones as a starting point. 

That is a very easy benchmark to say over time how well do these 

places do over the next 10 to 15 years of adding to those two measures. 

Senator ENZI. Thanks. 

Again, I hope we can submit questions for everybody to answer. 

Senator RUBIO. Senator Shaheen. 

Senator SHAHEEN. Thank you, Mr. Chairman. 

Thank you all for being here. 

This question is really for every one of you. Last June, the Committee held a hearing on tax reform, and during that hearing, I 

read a statement from New Hampshire’s 2017 Small 

Businessperson of the Year, who also happens to be the CEO of a 

company called Celdara Medical, which is a biomedical company in 

Lebanon, New Hampshire. 

And what Jake said in that statement is that he wanted tax reform to help simplify the tax-filing process, and he said this is not 

about paying less taxes. This is about spending less time and energy on taxes and knowing that we are doing them right. 

Now, in the last couple of weeks, we have heard from Jake again 

who says that tax compliance results in large amounts of distraction expense and wasted time, and that the tax law has not addressed his concern. And he says time is the most important resource that a small business has. 

So what steps can we take in Congress, now that that tax law 

has already passed, on a bipartisan basis that can help make the 

tax-filing process simpler and less painful for small businesses? Because the tax bill did not do that. 

So, Ms. Bruckner, do you want to go first? 

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Ms. BRUCKNER. So, Senator Shaheen, one of the key proposals 

that was included in the original Senate Finance Committee bill 

was a proposal to align the 1099–K, 1099–MISC filing requirements, and the way it stands now under current law is that most 

gig workers and independent contractors that are paid electronically, they do not hit the filing thresholds of $20,000 and 200 transactions to actually get the forms they need to file their taxes. 

I did a survey on this and found only 32 percent of the people 

I surveyed got any 1099 at all. How in the world are you supposed 

to file your taxes if you are not getting any kind of form from the 

Government or notification that the IRS knows what you are up to? 

And that is a huge problem. 

I am coming out with new research that actually estimates how 

much it costs in terms of Social Security, and my numbers are jawdropping. I will be happy to submit that to the Committee later. 

Senator SHAHEEN. That would be helpful. 

Mr. Arensmeyer. 

Mr. ARENSMEYER. Yeah. I mean, I just want to quote from the 

bipartisan—I am sorry Senator Cardin is not here—PortmanCardin Act that has a number of provisions in it that I believe have 

bipartisan support, a safe harbor for employer-only tip audits if the 

business fits certain educational and fits certain requirements, 

clarification on reporting requests about tip income, streamlining 

the S corporation process, establishment process, release of Federal 

tax liens on businesses if they have economic hardship, and other 

things like that. 

I cannot believe these do not have bipartisan support. 

Plus, what Caroline talked about on the alignment, also there is 

burdensome quarterly tax filings for freelance employees. We may 

be able to go to annual on that. 

Establishing a standard business deduction for independent 

workers, this is a little bit more out there, but there is a lot of talk 

about just the way we do for individuals, set a standard business 

deduction. You do not have to take it. If you want to get all those 

receipts in a shoe box and count them up, you can do that, but in 

fact, if you do not want to, you just kind of—we come up with a 

number, and we allow them to do standard deduction. 

So there are a number of things that can be done, none of 

which—all of the ones that Caroline and I talked about, I cannot 

believe would not be fairly bipartisan. 

Senator SHAHEEN. Mr. Lettieri. 

Mr. LETTIERI. I guess I would add one new category of things we 

should think about because the compliance burden question is an 

important one. 

We should be thinking about new businesses as a distinct subgroup of small businesses and think about how we can build a tax 

compliance regime for new businesses that allows an easier on 

ramp to viability. 

Those first few years are incredibly challenging, and that is when 

businesses are most vulnerable. That is when that precious time 

resource is the scarcest, and so if we think about the Tax Code 

even outside of the dollars and cents, incentivizing entrepreneurship by easing the on ramp to compliance, I think that would be 

a really effective thing for this Committee to take on. 

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Senator SHAHEEN. Thank you. 

Dr. Slaughter. 

Ms. SLAUGHTER. Thank you, Senator. 

I would echo what your Small Business Award winner said. Time 

is a great challenge to a small business owner, especially very 

small businesses. 

I think that one of my clients has 200 CPAs. They are trying desperately to get information out to their small business clients. They 

find that whether it is sent in an email or a newsletter or whether 

they are holding seminars to try and educate them, there is too 

much noise out there. So small business owners, we do not think 

have even realized the possibilities and the extent of how they 

might benefit from the tax cuts, and they will not until they go 

through this first cycle since the IRS guidelines are still sort of 

coming out in some areas. 

So I think anything that Congress can do to help get information 

out, communicate and simplify, would be wonderful. 

Senator SHAHEEN. So you are not actually suggesting a simplification. You are suggesting that what we need to do is ask the 

SBA to provide information about tax filing? 

Ms. SLAUGHTER. I think both would be tremendously helpful. All 

simplification is good. I would echo what the panel has said. It is 

very, very important. 

Senator SHAHEEN. Thank you. 

Thank you, Mr. Chairman. 

Senator RUBIO. Thank you. 

Senator Young. 

Senator YOUNG. Well, thank you, Mr. Chairman. This is a timely 

hearing. 

As I travel around the State of Indiana, I just encounter countless businesses that are enjoying the impact of tax reform in a very 

positive way, and it is important, however, that we continue to optimize the Tax Code. My hope would be that we do not wait another 31 years before we fix whatever, moving forward, are deficiencies in the Code. 

In Indiana, we are really excited, as I know some of the other 

States are, about this Opportunity Zone designation, and I commend you, Mr. Lettieri, as well as your organization, on conceiving 

of the concept and working with Senator Scott to help champion it 

and get it into law. 

We have 156 Census tracts that have been designated and certified as Opportunity Zones. I would associate myself with everything Mr. Enzi asked about with respect to reporting requirements 

and tracking. If there is anything we can do statutorily or need to 

do moving forward, I hope you will work with this Committee, 

members of this Committee on that. I am very interested in measuring success, as I know you are. 

What recommendations do you have, Mr. Lettieri, for localities 

and States to maximize investments in these designated zones? 

Mr. LETTIERI. Thanks for that question, Senator Young. 

I think it is important to start with the recognition that an Opportunity Zone designation is not a guarantee. This is not a grant 

program. It is not a tax credit allocation. 

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And that on the community side, one of the things we have tried 

to work very hard at educating folks on is they have to do something to prepare. This is not just going to happen to them by default. So what does that mean? That means that on the local level, 

you need to be proactive at working with the different stakeholder 

groups that can build a strategy for what these Opportunity Zones 

in a given community are going to look like. There is not a national 

answer to that question. There is a local answer to that question, 

though, so taking a proactive approach. 

I thought Indiana did a fantastic job with their selection process, 

which really sets up the next step. They involved a lot of local 

stakeholders. They did it in a fairly transparent way. The governor 

has his selections reviewed by an outside board of stakeholders. 

That was impressive to us, and I think it shows a real forwardleaning momentum. 

But this should be deployed as part of a broader strategy. Capital 

is one of the challenges these communities face. It is not the only 

challenge. So this will be a much more effective incentive tool if it 

is part of a broader framework that includes workforce training 

and all kinds of other issues. 

Senator YOUNG. Thank you. 

I have launched an agenda, as I travel around the State of Indiana. We call it our Fair Shot Agenda, making sure that every Hoosier and really every American has a fair shot of success, and we 

leave it up to the individual person to define success. We just want 

to remove barriers, and where appropriate, make sure that Government is a catalyst so that people can realize their dreams. 

One centerpiece of that overall agenda focuses on addressing 

heat gaps in workforce training, including through apprenticeship 

programs and career and technical education. 

How in your mind might Opportunity Zones be integrated in 

broader efforts that aim to address barriers to upward mobility and 

specifically perhaps integrated with respect to some of these workforce training issues? 

Mr. LETTIERI. Well, I think, again, to the earlier question, having 

a workforce-focused approach that runs in parallel to the capitalfocused approach of Opportunity Zones is really critical. 

One of the things we see as we do research about distressed 

areas nationwide, it is one of the strongest and clearest fault lines 

between prosper in communities and those that are not, is an education and training gap. So we have to equalize that playing field 

in a better way for the capital and the opportunity to flow. 

One smart approach locally is going to integrate workforce training oriented towards the types of businesses and investments that 

you are likely to see through Opportunity Zones, so that local residents can actually benefit from this and be integrated in as new 

opportunities open up. 

Senator YOUNG. Can you discuss what steps must be taken to facilitate the greatest amount of investment in Opportunity Zones 

across Indiana and the U.S.? Maybe you have something to add to 

what you have already said which—and I think you have been really clear, and it is my sense of the construct here. It is really up 

to the localities to ensure that they are as fertile ground as they 

can be, as attractive investments as they can be for would-be invesLAP51NQ082 with DISTILLER

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tors—you have just changed the hurdle rate for given investments, 

you meaning your organization working with Congress and this 

President in establishing these Opportunity Zones. 

But are there other steps that we can take to facilitate a maximum amount of investment in Opportunity Zones? 

Mr. LETTIERI. Both in terms of amount and type, I think we are 

at half time right now. Half time was getting the bill passed and 

seeing that first phase of implementation and the zone designation. 

It is not a guarantee that the implementation process, the regulatory rulemaking will follow through to the full potential, and I do 

not say that in an ominous way. I say that is an open question. 

We know, based on past precedent, that most Federal policies 

aimed at these very same types of outcomes have fallen short in 

the rearview mirror of the types of goals that we all would hope 

to see. 

So the rulemaking has to be very intentional to avoid those same 

missteps, particularly in the space of operating business investment. That is the core, the beating heart of Opportunity Zones, if 

it is going to succeed. It is because it draws capital into new and 

small businesses that are poised for growth. 

So if the rules are oriented in that direction, the capital is not 

going to be a problem. There is tremendous interest. There is tremendous potential, and I think we are falling well below our potential as a country in terms of matching capital to opportunity 

around the country. 

But the rulemaking is going to be key. That is the first question 

every investor is asking. It is the question that is going to be determinative of which businesses qualify. If we do not get that right 

on the front end, I think to Senator Cardin’s point earlier, it is very 

hard for a local community to do everything right. They may still 

be stymied at the end. 

Senator YOUNG. Well, we will be watching implementation closely and helping however we can, I know in a bipartisan way, so 

thank you. 

Senator RUBIO. Thank you. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

I want to just talk a little bit about the new economy and about 

the challenges you have. I just want to remark that a 1099 is not 

a Government form. It is authorized and mandated by the Government. But to go back and take a look at the Affordable Care Act, 

actually expanded 1099 requirements, and it was an abysmal failure because, all of a sudden, no one knew. People who were legitimate businesses were having to file so many of these things that 

it added burden onto those small businesses. So I think we are 

challenged. 

I am intrigued by some kind of standard deduction. The Schedule 

C-EZ has a mechanism for like a standard deduction. Can someone 

comment on that? Does not the Schedule C-EZ basically give us a 

vehicle to do a standard deduction for small business? 

Mr. ARENSMEYER. Well, I think what we are suggesting is you 

would have a standard deduction on the business, on the business 

income. It would be a different amount than the standard. 

You are talking about the individual standard deduction—— 

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Senator HEITKAMP. Right. I am talking about—— 

Mr. ARENSMEYER [continuing]. Instead of taking mortgage or 

charitable? This would mean instead of taking business expenses. 

Senator HEITKAMP. Well, that is part of the complicating features, which is that if you are a sole proprietorship, you are going 

to file a Schedule C. If you are organized under some kind of limited partnership or under some kind of Subchapter S, you are going 

to have a whole lot more paperwork. And you could find some 

mechanism to transfer that C-EZ form into your K-1’s, whatever 

you want to look at, when you are looking at a Subchapter S filing. 

But one of the complicating features is we are doing business in 

different kinds of mechanisms and under different kinds of business structures. So when we look at this, we can say, ‘‘Look, why 

do we require thousands of dollars of recordkeeping if your tax liability is going to be less than $2,000?’’ It is ridiculous. 

So I think we all have an idea of where we would draw that line 

and basically say we are going to make it a presumption. You do 

not have to keep any records. You do not have to worry ever 

about—as long as you have the total gross income right, you do not 

ever have to worry about an audit because we have got your back 

on this. 

And it seems to me that that is attractive, but it also does not 

get us in that spot where our small businesses are really doing the 

kind of recordkeeping they need to do to identify how profitable 

they are. And so those tax mandates tend to drive that small business person out. 

I will give you a ‘‘for instance.’’ I used to be the tax commissioner 

in North Dakota, and I would find someone who could take the 

most crumpled up car and put it back exactly the way it was, had 

absolutely no interest in business, but could—greatest body man in 

the world, right? 

So we have got to figure out how we can provide the tools for 

someone who is entrepreneurial like that to actually feel comfortable filing tax returns, and I think some of these shortcuts and 

mechanisms are valuable. And I am very interested in unique 

ideas, recognizing that not everybody does business as a sole proprietor. 

Now, with that said, I would also say that I think when you— 

for all of the discussion we have had about tax reform, my small 

businesses are coming and saying there is no certainty to this for 

us. You have given certainty to the C corps, but you have not given 

certainty to the S corps. You have not given certainty to the limited 

liability partnerships. So how do I now do long-term planning on 

investment if I am operating under that legal structure for my 

business? 

So I think we need to have a real conversation about how do we 

provide that certainty going forward to these smaller businesses 

that are operating not as C corporations. I mean, it is a huge percentage of North Dakota businesses are Sub S’s or they are limited 

liability partnerships or they are even sole proprietorships. So that 

is going to come with a price tag. 

But it seems to me that the role of this Committee is really one 

of advocacy. I mean, a couple members here are on the Finance 

Committee, but to me, their job is to make it all work and to make 

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the system equitable and not be that advocate for the truly small 

business that we want to help. 

So I want to thank the Chairman and the Ranking Member for 

putting this together. I think it is really important that we have 

those discussions about where we have failed small business in 

terms of predictability under this Tax Code and how we can expand their opportunities, but I think we also need—with all due respect, I do not think that this Tax Code simplified anything. 

I mean, if I were writing something, it would not be this if I 

wanted to simplify it. 

So let us keep believing that we can do a better job with the Tax 

Code. 

Thank you, Mr. Chairman. 

Senator RUBIO. Thank you. 

So I am going to ask my questions now as I await for my colleagues to return at some point, and then I will leave and go vote 

and come back. But I have questions, and I want to make sure I 

ask them because I believe we have exhausted—well, there is nobody here. So I think we have exhausted the questions. 

[Laughter.] 

I know you are here, but you already asked your questions. So 

I know you may have a follow-up. 

Let me just start. My concern—I am a big fan of the Opportunity 

Zone concept, and I believe it gives an extraordinary opportunity 

to sort of create, in communities that have been forgotten in America, some of the same benefits that have driven investment overseas. People have gone overseas to make their investments because 

they have better tax treatment or they found labor costs or whatever it might be, and I think we can create the same competitive 

advantage here in distressed communities. 

The concern is always that in the end, the communities themselves may be the site of the investment, but not the beneficiaries 

of the investment. 

So I would just ask everybody on the panel. What needs to be 

done, or what are the markers that we need to be looking for, 

whether it is through local government or anything we can do from 

here, to ensure that the local community, where the investment is 

going into, is also the beneficiary of that new investment? Because 

you can open up a new facility somewhere but not necessarily help 

the people who live in that area and have been left behind. So what 

are the sorts of things that would help ensure that the locations 

of these investments also happen to benefit from them? 

Ms. BRUCKNER. One of the things that you can do—and I have 

a little bit of experience with comparable instruments because of 

the GO Zone, the Gulf Opportunity Zone Act, which was passed as 

part of rebuilding Louisiana in the wake of Hurricane Katrina. 

And one of the things that we did not do enough of was appropriate oversight from Treasury and developing metrics that communities had to hit in terms of economic activity. 

Now, of course, that can be challenging, and it is not like a onesize-fits-all standard, but aspirational or specific metrics that are 

recorded and tracked by Treasury could be one way that you could 

have appropriate oversight that is not too cumbersome and yet still 

be able to fundamentally identify whether or not what you are 

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doing is working and if your investment is really benefiting the 

community. 

Senator RUBIO. Anyone else have a suggestion? 

Mr. LETTIERI. Great question, tough question, because there is 

more than a Federal role to play. In fact, I would argue once the 

regulations are done, there is mostly a State and local role to play 

in ensuring the local benefit. Because this is a tool, not truly a program, it is not an up-front allocation. It is not a tax credit, not a 

distribution of a scarce resource like a grant or a tax credit. So 

there is a fundamentally different construct here that requires the 

local community to really opt into a strategy. 

And so because of the nature of the investment being a longterm—it is a long-term incentive tied to capital gains. It puts the 

investor on the same side of the equation as the business they are 

investing in. If you have equity stake in a business and you have 

to wait a very long time to realize any kind of tax benefit, you also 

run the risk of losing money on that investment. 

So I think that starts in the right place in terms of putting the 

investor on the same side as the business they are investing in, but 

it also requires a long-term strategy from the communities themselves in order to ensure that their particular local needs and conditions are being accounted for in the deployment of this specific 

tool. It is just a tool. It is not a strategy on its own. I think that 

is the bottom line. 

Ms. SLAUGHTER. If I might add one point—— 

Chairman RISCH [presiding]. Please. 

Ms. SLAUGHTER. I know that Senator Rubio had to leave for the 

vote, but I think this is very important. And I also, like Ms. Bruckner, had the opportunity to observe good use of Go Zone opportunities and things that maybe could have been rearranged a little bit 

or better focused. 

I do think that local chambers of commerce, just as you described 

in Indiana, where the governor went out and worked with grassroots organizations to define and went through a process—I think 

that is what it is going to take. I am not sure that you can make 

that happen, but I think that by asking for metrics and oversight, 

you ought to get those kinds of things. 

I do think that the U.S. Chamber can play a role in that, and 

that would help. 

Chairman RISCH. Thank you very much. 

I want to thank all of you for coming, and in case you have not 

noticed, you have got a real Chairman now. So this is going to go 

a lot smoother from here on. 

[Laughter.] 

Senator Ernst. 

Senator ERNST. Thank you, Mr. Chair, very much, and thanks to 

our witnesses for being here for this hearing. 

Last year, Congress passed the Tax Cuts and Jobs Act in providing long overdue tax relief for individuals and businesses, and 

under the leadership of Governor Kim Reynolds, Iowa has followed 

suit by passing the largest tax cut in our State’s history. 

Tax reform is already providing a huge boost for Iowa small businesses allowing our job creators to grow and in return reward their 

employees, which is really great. 

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Recently, I talked to a woman who owns a trucking company and 

a warehousing company in Pella, Iowa, and because of the 100 percent bonus depreciation, her business will be able to purchase six 

new semis and spend millions of dollars upgrading their facility. 

I also heard from the owner of Hamilton Redi-Mix, which is a 

family-owned small business in Jefferson, Iowa, and as a result of 

tax reform, they are providing $1,500 bonuses to their employees. I know in Washington, D.C.-speak, $1,500 is not a lot of money. In Iowa, $1,500 is a lot of money for our employees. 

Surveys show that small business optimism is at an all-time 

high, and while a record number of small business owners plan to 

create jobs and grow their businesses—and it is wonderful. 

I am excited about it. I know our small businesses are excited 

about it in Iowa as well. 

A question for Dr. Slaughter. While this law is a significant step 

in the right direction for our small businesses, there is still work 

left to be done. I think a number of folks have acknowledged that. 

As you mentioned in your testimony, we do need to make these tax 

cuts permanent. Can you talk more about the importance of making the individual income tax cuts permanent? 

Ms. SLAUGHTER. Yes. Thank you, Senator. 

I think that it was even mentioned a moment ago by one of your 

fellow Senators—— 

Senator ERNST. I am sure. 

Ms. SLAUGHTER [continuing]. That the certainty or the lack 

thereof is really a problem for business planning, and so small 

business owners face all the challenges we have talked about—lack 

of access to capital—serious challenges in terms of competing for 

a talented workforce, et cetera. 

To have the opportunity to be able to look forward in what seems 

to be an expanding economy and realize that I am willing to go to 

my lender, I am willing to try and access more capital, or I am willing to try and reinvest—we have a young woman who is up here 

for the opportunity to win a Dream Big Award this evening. She 

runs a child care business in Metairie, Louisiana, and she recently 

made a $50,000 loan to expand her business. And it is very, very 

hard for her to get settled on the fact that if one thing goes wrong, 

she has made a very bad strategic decision. 

Small businesses can be working with millions and millions of 

dollars or $50,000, but I do think that when people feel more of a 

sense of certainty about what is going to happen going forward, 

they will continue to make those investments. 

And just like you talked about in the capital equipment area, we 

have a client who is a big contractor with the petrochemical industry, and he is going to upgrade his entire equipment fleet, which 

is very significant, lots of heavy construction equipment. 

I think that you will begin to see that. You will see those vendors 

and suppliers—the John Deeres, the Caterpillars of the world—who 

supply those pieces of equipment. It will trickle down and benefit 

everyone. 

Senator ERNST. Well, and that is great. And, again, we are seeing the benefit in Iowa, and I know other States as well. And, 

hopefully, we can take that step and make those individual tax 

cuts permanent. 

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50 

Mr. Lettieri, thank you very much for the idea of Opportunity 

Zones. I appreciate that very much. 

In your testimony, you discussed these Opportunity Zones provisions, which we did have in the Tax Cuts and Jobs Act that will 

encourage investment in distressed communities. This was based 

on legislation introduced by Senator Scott, and I cosponsored that 

as well. I thought it was a tremendous idea. 

Iowa has 62 different Opportunity Zones, and many of those are 

in rural communities that have seen stagnant economic growth, 

persistently high poverty rates, and a declining population. How 

can Opportunity Zones help reverse these trends that we are seeing 

in rural America in those distressed communities? 

Mr. LETTIERI. Thank you, Senator. Thanks for your support for 

the Opportunity Zones legislation—— 

Senator ERNST. You bet. 

Mr. LETTIERI [continuing]. Authored by Senators Scott and Booker, and actually, this Committee, quite a few members of this Committee were early and active supporters of that legislation. 

We are already hearing anecdotally some of the best success stories coming out of rural America, which I think surprises some 

folks. When you think about where there is an opportunity to do 

heavier industry, agriculture, some larger-scale projects, a lot of 

those are Opportunity Zone Census tracts in rural communities. 

You need to play to your local advantages, though. This gets back 

to the earlier question about what is the local role and how do you 

develop a template for success. 

The capital piece of this gets a lot easier with Opportunity Zones 

because you have a group of equity investors now looking for opportunities in areas they might have otherwise overlooked, but on the 

recipient end, you need a community that is pulling together to 

really maximize those assets, those local advantages. 

Some of the most dynamic and upwardly mobile places in this 

country are still rural America. There is no doubt that rural America has a lot to offer, but it takes a lot of intentionality to put this 

tool to use in the right way. 

But, again, even early on, even pre-regulation, we are seeing 

some of the early success stories happening in rural America, particularly in the manufacturing and agriculture space. 

Senator ERNST. Absolutely. And I thank you for that. 

Again, aptly named because the opportunity that is being presented to constituents that I have that would not have had that opportunity otherwise. So thank you very much for that. 

Thank you, Mr. Chair. 

Chairman RISCH. Thank you, Senator. 

Senator Booker. 

Senator BOOKER. Mr. Chairman, thank you very much. 

I am really proud of the work. In fact, I think of all the things 

I have accomplished in my 5 years, my very short 5 years in the 

Senate, the Opportunity Zone legislation I wrote with Senator Scott 

and with EIG is probably the most impactful thing that we have 

done to deal with the issue, one of the issues that drove me to run 

for the United States Senate, which was dealing with the high-poverty areas, dealing with the inadequate opportunities for folks who 

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are in low-income areas, whether they are rural or urban. And I 

am just really proud and grateful. 

I just was talking to Tim—Senator Scott—on the floor about 

some of the technical fixes, which were some of the issues I want 

to bring up right now. 

As Senator Scott and I were cosponsors on this Committee, obviously I just want to give a lot of great gratitude to Senator Ernst 

and Senator Young for their partnerships. 

Our legislative intent was really clear in much, in keeping with 

the purpose of today’s hearing, which is to bring private capital off 

the sidelines into high-impact investments, not just real estate, but 

also startups, also small businesses, new entrepreneurships into 

stressed communities because the insanity in our country is that 

most of the VC dollars, most of the investment capital in this country only goes to about three States. It is not equally distributed. 

But genius exists all over America. Great ideas exist all over America. 

So, John, you laid out in your testimony what needs to happen 

on the regulatory side. Is it your view that these recommendations 

will help realize, better realize the legislative intent, to ensure that 

opportunity fund capital flows to startups, entrepreneurs, and 

other small businesses, not just real estate? 

Mr. LETTIERI. Thank you, Senator Booker. 

Absolutely. I think, again, we should be able to measure the success over time of Opportunity Zones to the extent it drives capital 

to new businesses and supports new business formation in overlooked areas. 

We know the statistics. You mentioned some of them are dismal, 

not just in terms of where capital goes, but who receives that capital. And so we know it matters where you live, what you look like, 

who you know, a lot more than it should in this country. And we 

can do better using public policy to close those gaps. 

I think that the danger that we are in now in terms of any time 

you have a new policy is that the path of least resistance is to take 

the most narrow and cautious approach, and that skews towards 

real estate-oriented investment for a very simple reason. Real estate does not get up and walk out of an Opportunity Zone, and you 

have a lot more predictability with where and how you can invest 

in a real estate project than you can in a new business or an operating business that is scaling. 

If you are not intentional on the front end about designing a regulatory framework that is particularly inclusive of the needs of new 

and growing businesses, you are not going to hit the mark. You will 

not do it accidentally. You have to do it intentionally, and you have 

to bake that in on the front end. 

So that is what we are encouraging the Administration to really 

focus on. I think there are definitely things they can do, and Treasury has wide authority to make sure that the connective tissue 

with the regulatory framework is oriented around your core congressional goal which, as you said, is business investment. 

Senator BOOKER. I appreciate that. 

And that really gives me another point. I know Senator Risch 

and I are watching this very closely. We may or may not retire 

from the Senate joined together in an entrepreneurial endeavor. 

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[Laughter.] 

I do not want confirm or deny whether that is true or not. 

Chairman RISCH. You can bring the capital. 

Senator BOOKER. Yes, sir. 

[Laughter.] 

But the truth is one element of this that is really, really important is the data collection element, and Opportunity Zone markets 

cannot function efficiently without access to sort of basic transparent data about Opportunity Zone funds and their investments. 

Information about fund size, investment size, investment type, industry and location are standard and already collected by fund 

managers and could be reported at really little to no cost. 

In addition, reporting about job creation and new business starts 

and other outcome metrics really was a part of the original bill. 

That was the intent of Senator Scott and I. 

Most importantly, making the data available will move capital 

off the sidelines, but connecting investors about what is going on 

out there, connecting them to funds and allow local stakeholders to 

align their development strategies because you and I know how key 

that is for local leaders to be aligned in investment strategies and 

additional incentives with the opportunity fund capital. 

So would Treasury—John, again, for you—would Treasury or the 

IRS adopting a set of impact measures to be reported to help the 

Opportunity Zone market function—would it help the Opportunity 

Zone markets function more efficiently and effectively? 

Mr. LETTIERI. I think if effectively designed, then the answer is 

yes, and the tension is always between how much you collect and 

what kind of burden that places on the recipient and how much we 

need to be able to know in real time where investment is going and 

what type of scale of impact we are having. 

I think there is a way to strike the right balance. I think the 

original bill, as you said, had some very basic measures that are 

collected already. If we can make that straightforward and simple 

at a Federal level, that is one tier of data collection that I think 

would be worth pursuing and considering. 

There is also the State and local, which you all cannot mandate, 

but governors that we are talking to, mayors that we are talking 

to, we are encouraging them to be as transparent as possible at 

creating a platform where either by opting in or by attaching other 

types of carrots to the process, they would get more information 

and more clarity about what is happening in their local jurisdictions. That married to some broad Federal data, I think could be 

very effective over time. 

Senator BOOKER. Thank you so much. 

Mr. Chairman, thank you for the time. 

Chairman RISCH. Senator Cardin. 

Senator CARDIN. While I was out, I heard that you talked about 

the tax administration provisions that are being negotiated today 

between the House and the Senate that I think could really help 

small businesses, and I appreciate you mentioning that. 

I would just hope that we would concentrate on that from now 

to the end of the year because I think that could get done. 

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There has been action in the House. There has been action in the 

Senate. We just have to come together, and many of those provisions could be very helpful to small businesses. 

I would just urge us all to make that a priority. A lot of things 

we are talking about are going to be next-year issues because we 

are not going to have a major tax bill until next Congress. 

I know the House has passed ‘‘Tax Reform 2.0,’’ and I know we 

have pension issues we have to deal with. And, hopefully, in this 

Congress, we can get some of that done. 

Ms. Slaughter, I want to ask you a question on where you see 

the priorities from the Chamber for small businesses. I have noticed over my 12 years that the frustrations of small businesses at 

different times have been different things ranked, and I would be 

curious as to what you hear most from small businesses as their 

greatest challenge, and how does the tax issues rate today as far 

as priority lists among small businesses? 

Ms. SLAUGHTER. Senator, I could not agree with you more that 

it is a reactive sort of cycle, and an unmet need becomes the next 

top priority. 

I will tell you that in these meetings today, we have been talking 

quite a lot in the Small Business Summit and Small Business 

Council meetings about workforce development issues and the lack 

of being able to find trained workers. 

I think Tom Donohue opened yesterday with a figure of about 

700,000 jobs for which there are no U.S. workers available to take 

them. 

Small business will really bear the brunt of that. We cannot compete with the big boys who are able to pay more money. They absolutely have to have someone with a skilled craft—master electrician. They will cherry-pick people who were long-time employees 

and well trained by small business, and so I think that that is a 

rising priority. 

In Louisiana, we have a lot of efforts in terms of dual enrollment 

and jumpstart. We have a big problem with a stigma against jobs 

that do not require a 4-year college degree, and we have a lack of 

awareness. We started a program called Louisiana Calling to try 

and help deal with just communicating, marketing, and making 

parents and students aware of those kinds of jobs. 

So I think the private sector in partnership with public sector, 

local and regional, can help with some of those things, but I do 

think that you are going to hear a lot of new issues that come forward. 

Senator CARDIN. I appreciate that. I hear that a lot also on workforce development issues. It is a tight market, particularly for 

small businesses. So it is something we might want to take a look 

at as to how we can help. 

Ms. SLAUGHTER. Yes. And I think, actually, we are building 

somewhat of a conundrum here because the tax cuts, as I said, 

often will fall to the worker, the current workers, but also new 

businesses and new jobs. So the problem seems like it may get 

worse before it gets better. 

Senator CARDIN. I want to ask Mr. Arensmeyer the issue. You 

have been the most vocal about your concern on the deficit, which 

I share, and we have also pointed out that the complexity issue is 

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made much worse because the temporary nature of the provisions 

that relate to small businesses, that relate to the individual taxpayer as compared to the C rate and some of the issues that affect 

higher-income people. 

So the advertised deficit is $1.4 trillion. If we extend these provisions, it just increases the size of the deficit. So how do you do the 

tradeoff between the concerns on predictability by making these 

provisions permanent, recognizing this bill already is jeopardizing 

other programs because of the deficit and will be made worse if we 

just make these programs permanent? 

Mr. ARENSMEYER. Well, there is continued confusion out there. I 

am not sure that the predictability issue is as great as some people 

are making it out to be. 

You are absolutely right. If Congress is going to consider making 

these tax cuts permanent, then Congress needs to really understand where the benefits are and are not going. 

And from a small business point of view and pass-through point 

of view, they are dramatically skewed to the very small number of 

very well-heeled pass-through entities, some of which you would 

not even call a small business. 

And so I agree with you. I think you all need to think long and 

hard, ‘‘Gee, if we are going to make this permanent, maybe we 

ought to take a closer look at what it is doing,’’ because you are 

just going to—not only are you going to exacerbate the deficit, but 

you are going to exacerbate the problem of the skewed benefits not 

really going to Main Street. 

Senator CARDIN. Thank you. 

Thank you, Mr. Chairman. 

Chairman RISCH. Thank you very much. 

Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. 

Tell me why you think the small business benefits are skewed 

to a select few. 

Mr. ARENSMEYER. Well, Senator, it is simply just looking at data 

on how many businesses are pass-through, what their income is, 

what their marginal rate is, and all the different numbers that I 

gave in my testimony, there are different ways of slicing and dicing 

it. 

Senator KENNEDY. But do not you think most small businesses 

in America are pass-throughs? 

Mr. ARENSMEYER. Correct. 

Senator KENNEDY. All right. 

Mr. ARENSMEYER. But most of them are—the bulk of the income 

and the bulk of the benefit from a tax cut looking at marginal rates 

goes to the very small number at the very top. 

Senator KENNEDY. So you are saying that people who pay more 

taxes are getting a bigger tax cut? 

Mr. ARENSMEYER. Yes. 

Senator KENNEDY. Or is that unfair? 

Mr. ARENSMEYER. Well, they are not only getting bigger tax cut. 

They are getting a higher percentage tax cut. Somebody making 

eight times as much as somebody else is getting 25 times a bigger 

tax cut. 

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Senator KENNEDY. And what provision in the Tax Cuts and Jobs 

Act is doing that? 

Mr. ARENSMEYER. The provision of allowing them to deduct 20 

percent of their pass-through business income. 

Senator KENNEDY. I know that, but how is that language in the 

Tax Cuts and Jobs Act skewed in favor of somebody who has a lot 

of pass-through income as opposed to somebody who has a little? 

Mr. ARENSMEYER. Because you are taking 20 percent of not only 

more tax because they make more, granted, but they actually have 

a much higher marginal rate. 

It is just a question of where the dollars are going. You are talk- ing about $1.5 trillion. It is a question of where is the benefit going. 

Senator KENNEDY. Well, no disrespect, but that is nonsense. I 

mean, if you are paying more in taxes, you are going to get a bigger 

tax cut. What is unfair about that? 

Mr. ARENSMEYER. Well, I mean, one way to look at it is unfair, 

but the other thing is just a fact of where the benefit is going. The 

benefit is not going to Main Street. It all depends on what you—— 

Senator KENNEDY. How do you define Main Street? 

Mr. ARENSMEYER. Smaller businesses that are in communities 

across this country with smaller numbers of employees. Eighty percent of all small businesses have fewer than 10 employees. 

Senator KENNEDY. Is there a cutoff where you become a virtuous 

small business as opposed to some sort of greedy large business in 

your mind? 

Mr. ARENSMEYER. Well, I mean, if you look at the benefit on the 

tax cuts, it gradually goes up, but it goes up geometrically. It goes 

up exponentially because of the combination of the higher income 

and the marginal rate. 

Senator KENNEDY. Okay. Let me ask you about the Opportunity 

Zones. I forget who asked you, but it was a good question about the 

metrics. And I know we have a baseline because we know the employment and the number of businesses, et cetera, before the Opportunity Zones kick in. 

But how do you know if there is growth that is going to be a result of the Opportunity Zones? I mean, we keep throwing money 

at problems we all want to solve without any metrics, without solving—understanding whether the money is giving the effect we 

want. 

Mr. LETTIERI. Thank you for the question. 

In this case, the incentive only goes to investments that have 

been made, A, in a qualifying business or qualifying properties. 

Senator KENNEDY. Right. 

Mr. LETTIERI. We know the constraint. But, B, because of the design of the incentive, it is not a tax credit, so there is actually no 

up-front subsidy. You are not getting any kind of up-front anything 

from Government. 

Senator KENNEDY. Right. 

Mr. LETTIERI. The incentive is to put—— 

Senator KENNEDY. You get a capital gains break. 

Mr. LETTIERI. Right. 

So you are putting private capital at risk over a long period of 

time. Therefore, the benefit only exists if the investment has been 

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ating business in a low-income area, in many ways, by definition, 

that means that the tax benefit has had the effect it was intended 

to have, meaning you have been a successful part of a successful 

business in a targeted area. 

So we can measure—— 

Senator KENNEDY. How do you know the businesses would not 

have gone there, anyway? 

Mr. LETTIERI. Well, in terms of relocation? 

Senator KENNEDY. No. How are you going to know whether the— 

I am not arguing against it. 

Mr. LETTIERI. No, no. I understand that. 

Senator KENNEDY. I have just seen this movie before. 

Mr. LETTIERI. Sure. 

Senator KENNEDY. How do you know that the businesses would 

not have gone there, anyway? 

Mr. LETTIERI. Well, the benefit is to the investor in the business. 

So it may drive relocation activity. I hope it will for businesses that 

are mobile and can opt into an area that there is higher need. 

But the tradeoff here is obviously public expenditure for a certain 

type of public good behavior in the private sector, and so we do not 

know with perfect certainty—and it is impossible to know, unfortunately, with perfect certainty—— 

Senator KENNEDY. Let me cut you off because I am going to get 

cut off. 

Mr. LETTIERI. Yeah. 

Senator KENNEDY. Can I have just another minute? 

Chairman RISCH. Feel free, Senator. 

Senator KENNEDY. All right. Let me ask each of you this question. This is a philosophical question. State, local, and Federal Government are always spending money, giving tax breaks, tax expenditures—some call them ‘‘tax expenditures’’—tax credits to try 

to stimulate the economy. When you do that, you benefit some people over others. And there are some people who game the system. 

This is a question, not a suggestion. Do you think we would be 

better off if State, Federal, and local government all got together 

and say, ‘‘We are going to stop trying to buy business?’’ Just get 

rid of all of these breaks and incentives, and we are going to work 

on a Tax Code. And with all of the money that we saved from trying to bribe businesses to come to a particular area, to come to a 

particular State, we can lower the tax rate. 

Now, I know we do not live in La La Land, and that is probably 

not going to happen. But would it work? 

Professor. 

Ms. BRUCKNER. No. And I also think that there are some tax incentives in the Code that are great. 

The $5,000 deduction for startup cost for businesses can be really, really helpful. My survey data shows that people take it, and 

people like it. And it significantly helps with being able to offset 

their costs. 

Senator KENNEDY. When you give people money, they generally 

like it. 

Ms. BRUCKNER. Yeah, yeah, yeah. 

I do think—to be fair, I do think that taxes are a really clumsy 

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nomic activity. It works eventually, but I think people think that 

it is going to work much faster than it usually does. 

Senator KENNEDY. Okay. That is fair. 

Mr. ARENSMEYER. Senator, you are absolutely correct. This does 

happen more in the State and local level. Money that is designated 

as economic development money is often not targeted to the communities, and in many cases, it does benefit people outside the 

communities or a certain small segment of people in the communities. 

So that said, there is a way to do economic development that is 

more focused on benefits for job creation, benefits in targeted communities, some of what John has talked about, the Opportunity 

Zones, having the data, looking at the metrics, and having some incentives in there for investment in local businesses and Opportunity Zones. 

So I would agree with Caroline. It is a question of how you do 

it. If you are just giving out State and local subsidies to get big corporations to come in, there might be some small benefit, but again, 

it is a bang for the buck. And I do not think it is a cost benefit 

and the best way to use the money. 

Mr. LETTIERI. Just to finish the answer earlier, this is not that. 

I would totally agree we should get rid of, in my view, almost every 

single one of the relocation and State and local type of poaching 

benefits, where the benefit is do you move across arbitrary border 

into an area? 

This is different, again, because the business is not the recipient 

of the incentive. It is to motivate something that we know is not 

happening now. We already have these data. The business creation 

in the target areas that we are talking about is dismal. 

In most cases, there is a higher failure rate than a startup rate. 

You are seeing a hollowing out. We will know if it is working. We 

will know if the trajectory changes because the trajectory is not 

good right now. It is motivating—this is targeted to a behavior that 

we know investors are not engaging in at scale now and certainly 

not to match the scale of the need, and we are paying for it because 

the very types of communities we are talking about, we just pay 

on the back end in terms of social safety net and other types of remedial programs that are very—speaking of clumsy, do not do 

much to open up economic opportunity, but help to address the casualty of a market that has failed in a local community. And in 

many cases, we are talking about decades of decline. So this is not 

just a private-sector problem. This is often public-sector neglect as 

well, and I think that is why this is more targeted. 

Senator KENNEDY. Doc. 

Ms. SLAUGHTER. Senator Kennedy, that is a very interesting hypothesis that we could get local, State, and Federal Government to 

do that, and I think it would be wonderful if we could. And we 

might be smarter and do this in a different way and better. 

I am not sure if I would call it bribery, but performance-based 

incentives work, whether you are talking about an individual worker. 

Senator KENNEDY. It sounds better. 

Ms. SLAUGHTER. It certainly does. It is very diplomatic, but bribery works. So if we want to create internships and apprenticeship 

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programs and we offer some sort of benefit to businesses, large or 

small, for that, you will begin to see an increase in that. 

I do think that the evidence will prove itself that these tax cuts 

are significant. The reinvestments, for example, the depreciation, 

nobody has brought that up, but immediately writing off assets and 

lowering the cost of capital is very significant for some of our clients. They are using that money to really do some marvelous 

things in their businesses, and that is a reinvestment that is going 

to last for many years. I will take this one. 

Thank you. 

Senator KENNEDY. Listen, you have all four been great. Thank 

you very much. 

I went way over and—— 

Chairman RISCH. You did. 

[Laughter.] 

Senator KENNEDY. They will get me back, but thank you. 

Chairman RISCH. Thank you, Senator Kennedy. 

Thank you to the witnesses. This has been a really interesting 

conversation on a really interesting subject, and certainly, people 

have different opinions on this. But people are smart, and they can 

listen to these and make a decision as to which way they want to 

go with the ideas. 

Senator Cardin. 

Senator CARDIN. And I also want to join in thanking all four of 

our witnesses. I think this has been an extremely helpful presentation. 

Senator Kennedy always makes very cogent points. I would just 

point out, if I might, that one of our concerns when targeting, that 

when you take a look at the lion’s share of the business tax relief, 

it goes to C corporations. And C corporations are the larger companies. Very few small companies get the advantage of the C rate. 

So those provisions that are made for the pass-through entities, 

where you get the largest number of small businesses, when you 

take a look at that pie, the majority of the tax relief is going to 

larger businesses, not the smaller business. 

I think that is the point that we are trying to make, and I understand there are multiple reasons for it. And I think you raised 

some very important points, but I just think that was the point 

that we are trying to make. 

And the second point on reducing rates and getting location of 

businesses, it is a hypothetical issue because it is hard to see that 

translate with State and local governments being coordinated with 

the Federal Government, but the challenge is that tax rates being 

equal, it is still difficult to locate in rural areas and in urban areas 

and in high unemployment areas. Generally, their tax bases are 

not as strong. So, generally, their rates are going to be higher and 

therefore a disincentive for a business to locate there. 

So for all those reasons, we do need to compensate so that we 

can get underserved areas a better return for investors. I think 

that is the issue that we deal with, and it is not just the level of 

the rate. It is really the inequality in location that causes us to try 

to want to find some way to compensate. 

I think that is what Senator Scott and Senator Booker were trying to achieve. 

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But, again, I thank all of our witnesses, and I thank the Chairman for his patience. 

Chairman RISCH. Thank you. 

And, again, thanks for taking the time to join us. 

I am going to keep the record open 2 weeks from today at 5:00. 

If anybody else has something for the good of the order, feel free. 

With that, the Committee is adjourned. 

[Whereupon, at 4:14 p.m., the Committee was adjourned.] 

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APPENDIX MATERIAL SUBMITTED 

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Christel Slaughter, Ph.D. 

CEO of SSA Consultants 

Chair of the U.S. Chamber of Commerce's Small Business Council 

Responses to Questions for the Record from the October 3, 2018 Hearing, 

"Expanding Opportunities for Small Businesses Through the Tax Code." 

Senate Committee on Small Business and Entrepreneurship 

Questions from Senate Committee on Small Business and Entrepreneurship 

Chairman Jim Risch: 

Ql) How involved was the Small Business Council in advocating for tax reform? 

A: The Small Business Council is one of several policy committees at the U.S. 

Chamber of Commerce. Tax policy has traditionally been a top concern for small 

business and, therefore, was a high priority for our Council. Our Small Business 

Council presented testimony in the House and in your Committee on March 29, 

2017. Additionally, my predecessor as Chair, Maxine Turner, wrote opinion pieces 

on tax reform along with several other testimonials from Council members and 

other small businesses. U.S. Chamber of Commerce President & CEO, Tom Donohue, 

has consistently advocated for tax relief that would benefit corporate and individual 

taxpayers, insisting that tax cuts for both large and small businesses were necessary 

to spur economic growth. 

Q2) How did you feel tax reform would benefit small businesses? 

A: The Small Business Council believed that lowering rates for corporate and 

individual taxpayers (including small businesses that file as individuals and passthrough entities) would result in economic growth. Maxine Turner, who chaired the 

Small Business Council during passage of the Tax Cuts and jobs Act of 2017, 

explained how tax reform would benefit small businesses in an opinion piece that 

was published on December 17, 2017. That piece may be accessed at: 

https: I lwww. uschamber.com /series /the-case-tax-reform /small-business-taxreform-imperative-economic-growth 

Q3) In your conversations with small business owners as the Chair of the Chamber of 

Commerce's Small Business Council and small business owner yourself do you believe 

that small businesses are fully taking advantage of the provisions in last year's tax 

reform law? 

A: I believe that small business owners who have sat down with their tax advisor or 

Certified Public Accountant (CPA) are taking advantage of the provisions in the Tax 

Cuts and jobs Act of 2017. Unfortunately, I do not think that the majority of small 

business owners have had those necessary discussions with professional advisors 

and, therefore, have not taken full advantage of provisions in last year's tax reform 

law. 
63 

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Q4) What advice have you given to small businesses to ensure they're receiving the full 

benefits of the law? 

A: I consistently tell my peers to seek advice from the professionals (tax advisors 

and CPAs) in order to take advantage of last year's tax reform law. The Chamber's 

Small Business Council published similar advice in an opinion piece that may be 

accessed at: https://www.uschamber.com/series/above-the-fold/what-do-the-bigtax-reform-changes-mean-your-small-business-we-ve-got-answers. 

QS) You run a small business yourself, correct? 

A: Yes. 

Q6) Do you have clients who are small businesses? 

A: Yes. 

Q7) From both your personal perspective and your position as Chair where you are 

working with businesses from across the country, what message are you receiving 

from these businesses? 

A: I am hearing that small business owners are grateful that (a) their employees are 

taking home more pay; and (b) they can re-invest tax cut savings into their own 

businesses. 

QB) Are they excited about what the tax reform law can do for their business 

sustainability and growth? 

A: Yes, small business owners are excited about re-investing any savings realized 

from tax reform to bolster their business's viability through growth, providing more 

employee benefits, or capital improvements. The U.S. Chamber of 

CommercejMetLife Small Business Index surveys 1,000 small businesses every 

quarter. When tax reform passed, the small business owners surveyed were twice 

as likely to think tax reform would help their business than hurt it. 

Q9) Your testimony referenced a map of businesses that are reinvesting savings from 

tax cuts. 

A: Yes, the U.S. Chamber of Commerce maintains a map of businesses, large and 

small, that are reinvesting savings from tax reform. That map may be accessed at: 

www.uschamber.com/tax-reform. 

Q10) Will you please provide the Committee with a more detailed explanation of the 

map? 
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A: The map which may be viewed at www.uschamber.com/tax-reform. graphically 

depicts the positive impacts of tax reform. It shows the names and locations of 

businesses and shows how those businesses reinvested tax cut savings. On the map, 

blue dots represent employee bonuses, yellow dots represent price cuts, and green 

dots represent a combination of benefits, including expansion and capital 

improvements. 

Questions from Senator Heidi Heitkamp: 

Marty Sullivan, a columnist for the journal Tax Notes, described some of the 

uncertainty created by the new tax law for those making over the income 

thresholds. For example, the statute and the proposed Treasury guidance try to sort 

out which businesses are "specified," and therefore are disqualified from taking the 

deduction. According to the Treasury's guidance, physical therapy businesses are 

ineligible for the deduction. But occupational therapy businesses still may be OK. 

Dental practices are out, but optometrists may be good. Similarly, actors are 

disqualified as performing artists, but news readers or disc jockeys may not be. 

Question 1: 

Ms. Slaughter, in light of the Treasury's August guidance, should more be done to level 

the playing field for similarly situated business owners? 

A: Yes, Treasury can provide greater certainty when it finalizes its guidance. The 

U.S. Chamber of Commerce submitted comments to IRS consistent with this 

approach. The comments may be accessed 

at: http://bit.ly/20m2NESmal!BizTaxlRSComments 

Question 2: 

Is the construct of the tax law unilaterally creating winners and lowers within our 

economy without regard to the underlying economic activity and value that the 

business actually creates? 

A: I believe that lowering rates across the board, for corporate filers and individual 

filers (small businesses that file as individuals and pass-throughs), was a good way 

to reform that tax code and stimulate growth. Small businesses have historically 

created the majority of net new jobs and there is tremendous value in job creation at 

a community and national level. 
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Senate Committee on Small Business and Entrepreneurship Hearing 

October 3, 2018 

Follow-Up Questions for the Record 

Questions for Mr. John Lettieri 

Question from Chairman Risch: 

What benefits to entrepreneurs and small businesses do you see from coupling Opportunity 

Zones with programs like this one? 

The SEA's change to the definition of underserved communities for their Community 

Advantage program to include Opportunity Zones is a positive step and a great example 

of how the federal government can align policies and programming behind this new 

market incentive. An Opportunity Zone company with SBA support will find it much 

easier to attract private capital, given the important signaling role that the Agency's 

programs provide to other lenders. Such alignment will increase the likelihood that new 

and small businesses scale and survive in Opportunity Zones, which is central to the 

intent of the legislation. Creating this sort of self-reinforcing ecosystem is essential to 

fostering a mutually beneficial outcome for taxpayers, for investors, for businesses, and 

for communities. We hope to see much more alignment across federal investments and 

programs emerge, and we hope that states and localities follow suit. Opportunity Zones 

are a very compelling organizing principle for these efforts. 

Questions from Senator Heitkamp: 

How would you define a successful Opportunity Zones program in terms of its benefit to Main 

Street, and also to rural America? 

The Opportunity Zones incentive will be successful if it becomes a versatile and widelyused economic development tool to spur new investment across a wide array of 

communities, including rural communities and small-town Main Street corridors. This 

will require both effective federal rulemaking and thoughtful state and local strategies. 

The Economic Innovation Group's 2018 Distressed Communities Index identified an 

increasing ruralization of economic distress in this country. The total number of rural 

Americans living in a distressed zip code rose by nearly 1 million from the 2007-2011 to 

2012-2016 periods even as the total number of Americans living in such struggling 

communities fell. Nationwide, 76 percent of counties had fewer business establishments 

in 2016 than in 2007, and digging deeper we see that rural counties (those with fewer 

than 100,000 people) largely bore the brunt of that trend, with only 20 percent of rural 

counties seeing positive establishment growth over that period, versus 38 percent of 

suburban counties and 58 percent of urban counties. 
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The Opportunity Zones initiative could help address these trends. Signs oflocal success 

in rural and small town Opportunity Zones will include increased levels of investment, 

higher rates of business formation, lower poverty rates, higher employment, and faster 

income growth in the years ahead. 

What is the measure of success in these places? 

Apart from the "graduation rate" at which zones no longer meet the threshold qualifying 

criteria thanks to inward investment and community success, we should be particularly 

focused on the rate of new business starts and frequency of business expansions. These 

will tell us how successful the provision has been at seeding the next generation of 

employers, innovators, and economic anchors in the target communities. 

With a program of this size being implemented across the country for the first time, how do we 

ensure that the benefits of the Opportunity Zones program accrue to all, including women, 

including minorities, and those that have not traditionally had as much access to capital? 

Opportunity Zones are an important new tool we hope will serve as a cornerstone of state 

and local economic development policy. State and local efforts - both policy and 

practical- will be critical to ensuring that capital flows into a diverse set of uses that 

prioritize community benefit at the local level. The federal incentive is a potentially 

powerful tool, but it is no substitute for a thoughtful and inclusive local strategy. State 

and local leaders should pursue supporting and complementary programmingworking with local, civic, non-profit, and private sector partners -to cover the last mile 

and truly connect the capital unlocked by this new tax incentive with underserved 

communities and constituencies. Since the law's passage, my organization and several 

others have been touring the country with exactly this message. 

Question from Senator Duckworth: 

As we await the first round of proposed rulemaking, what specific adjustments could be made to 

Opportunity Zones to guarantee small businesses in communities such as Cairo and Golconda 

receive much-needed investments from Opportunity Zone tax incentives? 

First, I would point out that there is no guarantee that investment will flow to any 

specific region or census tract. Given that, we hope to see state and local leaders mobilize 

around this opportunity to facilitate and direct investment into small businesses in the 

communities in need of revitalization. They can do this by raising awareness among 

startups and scaleups in these communities, by layering additional incentives or 

programs of their own, and by serving as an information broker to help ensure viable 

businesses have the tools and resources they need to become eligible for Opportunity 

Fund investment. 

On the regulatory front, there are a handful of factors that, if addressed properly, would 

facilitate investment in startups and existing small businesses in these communities. 
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First is ensuring that key terms and tests in the regulatory framework provide enough 

flexibility for a wide range of businesses to qualifY without the kind of complicated rules 

or compliance burdens that have limited participation in other programs. For example, 

in the requirement for "substantially all" of a business' property to be located within an 

Opportunity Zone, Treasury's initial proposed rule sets the threshold at 70%, which 

provides the practical flexibility that allows a greater range of new and existing 

businesses in these communities to qualifY and be eligible for investment. 

A second critical issue is ensuring that Opportunity Funds themselves have adequate 

time to identifY qualified operating businesses. Treasury can achieve this by providing a 

reasonable and clearly-defined grace period that treats cash raised by a fund to be 

deemed compliant with the semiannual asset test- similar to the approach used in other 

tax incentive programs. Without such timing flexibility, funds will be discouraged from 

making investments in new and small businesses. 

Finally, there are many questions about how the rules will treat capital "recycled" by an 

Opportunity Fund back into new investments in Opportunity Zones. This is important in 

the context of investing in startups and small businesses, as the fund cycle for investing 

and exiting such businesses is often shorter than 10 years and investors often have little 

control over the timing of an exit. ClarifYing that individual investors must hold their 

stake in an Opportunity Fund for the required 10 year period, while allowing the fund to 

naturally invest, exit, and re-invest according to the market, would help ensure 

Opportunity Zone investment flows into operating businesses. 
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•••• 

............ SMALL BUSINESS 

MAJORITY 

The Honorable James E. Risch 

Chairman, Committee on Small Business & Entrepreneurship 

United States Senate 

Washington, DC 20510-6350 

RE: Responses to Questions for the Recm•dfollowing the hearing on "Expanding Opportunities for 6'mal/ 

Business through the Tax Code" 

Dear Chairman Risch and other members of the Committee: 

Please find below my responses to the follow-up questions submitted following my participation in the 

October 3, 2018 hearing, "Expanding Opportunities for Small Businesses Through the Tax Code." 

Thank you for the opportunity to continue the conversation on this important topic. 

Sincerely, 

1/ 

/t}Lc. ~ 

.John Arensmeyer 

Founder & CEO 

Questions from Chairman Risch 

QUESTIONt: 

Your written testimony states that the complexity of the new deduction for pass-through 

businesses "means any savings will go towaros tax professionals to help entrepreneurs 

navigate their taxes." The ml\iority of small businesses earn below the $315,000 taxable 

income threshold before any limitations begin. For these businesses, they must take the 

taxable iucome earned by the owner from the business and multiply this taxable income by 

20 percent (or 0.2). 

Can you expand on how this process is more complicated for these small businesses? 

The Tax Cuts and Jobs Act was not designed to materially benefit small businesses or save them much 

money. Specit1cally, the treatment of pass-through entities gives the bulk of the benefit to the wealthiest 

pass-through entities, rather than Main Street by giving a whopping 77% of the pass-through reduction 

benefit to the top 2.6% of firms. Indeed, the financial benefits to a pass-through entity making $500,000 

are 20 times the benefits to a business making $75,000. 

What's more, Section 199Aof the law, which pertains to the changes in the pass-through deduction, did 

not take steps to clarify how small business owners determine their qualified business income (QBI). The 

regulations recently released by the IRS regarding Section l99A do not explain if other tax provisions like 

the deduction for health insurance for self-employed individuals, the state income tax itemized deduction 

or the retirement plan contributions of a sole proprietor reduce QBL 

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This Jack of clarity means a small business owner must make complicated decisions in determining their 

QBI, increasing their reliance on tax professionals and further disadvantaging small businesses who do 

not have the resources larger companies have to navigate complicated tax filings. Public opinion polling 

reveals a high level of confusion among small business owners, with a survey from the National Small 

Business Association finding that only 7% of small businesses believe filing taxes will be easier under the 

new law. 

QUESTION2: 

It is true that the vast majority of small business owners rely on tax professionals. Now 

that the small business pass-through deduction regulations have been proposed and can be 

relied upon until final regulations are issued later this year, accountants and tax advisors 

have important details to prepare small businesses' taxes. Preparation costs may increase 

slightly this year for initial compliance, but only modestly. The Regulatory l<'lexibility 

Analysis included in the proposed rules for the section 199A small business pass-through 

deduction estimates a compliance burden of 30 minutes to 2.5 hours for small businesses. 

Once those initial compliance processes are established, won't the benefit be more 

significant in future years? 

Without further simplifications to the tax code, it is unlikely compliance costs for small business owners 

will be significantly reduced in the future. This is reflected in the way small business owners are planning 

for future years. A report co-authored by Anne Zimmerman, a member of our national Small Business 

Council who owns a small public accounting firm in Ohio, found the 20% deduction on qualified business 

income is unlikely to generate enough savings for real small businesses to hire new employees, invest back 

into their businesses or make operational improvements. Additionally, recent polling from Zip Books. an 

online accounting software company that serves more than 100,000 small businesses, found 88% of small 

business owners say the new tax cuts have had no impact on their hiring decisions. 

Even once small business owners are able to more easily navigate the changes in future years, their benefit 

is still very small, especially compared to the wealthiest pass-through entities. 

QUESTION3: 

Will the benefit ofthe 20 percent deduction outweigh the modest cost of compliance? 

As stated in my testimony, and as summarized above, very few Main Street small business owners will see 

a significant benefit from the Tax Cuts and Jobs Act. 

Small Business Majority promoted a more limited small business health insurance tax 

credit included as part of the ACA. This credit was much more limited than the small 

business pass-tltrough deduction based number of employees, average premiums, and 

average salaries. The Small Business Health Insurance Tax Credit instructions (Form 8941 

Instructions) estimates a compliance burden of 15 hours, far outweighing the modest 

benefit. 

Can you clarify this disconnect? 

The Tax Cuts and Jobs Act and the Small Business Health Insurance Tax Credit are significantly different 

tax issues and are not equivalent burdens for small business owners, as the Tax Cuts and Jobs Act 

influences all small business owners and their ability to easily file their annual taxes. That said, we do 

believe the Small Business Health Insurance Tax Credit should be expanded and simplified so more small 

businesses can take advantage of the credit. 

Specific ideas for this include expanding the tax credit to those who offer any ACA-compliant plan in the 

small group market, now that online enrollment through the federal SHOP marketplace is no longer 

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available. We expect few small businesses will be utilizing SHOP and the tax credit now due to the 

changes to the enrollment system, and expanding the tax credit would help more small businesses offer 

health coverage. 

Additionally, we would suggest simplifying the determination for the tax credit by using criteria based on 

the previous year's tax returns and employment level as of a certain date (e.g. 12/31 of the previous year), 

rather than a month-by-month determination as the year unfolds. We also recommend raising the limits 

on the tax credit, particularly as the employee size and income limits combine to close out the credit very 

quickly. 

QUESTION4: 

Did Small Business Majority analyze and comment on the Qualified Business Income 

Deduction proposed rules from the Treasury Department and Internal Revenue Service 

(IRS)? 

QUESTIONs: 

Your written testimony said, "Simply put, small business owners wanted a simplified and 

more streamlined tax system that would also help level the playing field with large 

corporations, and they got the opposite." 

Did the increased individual Alternative Minimum Tax (AMT) thresholds simplify tax 

compliance for small business owners? 

In response to both questions 4 and 5, Small Business Majority is primarily concerned with the structure 

of the pass-through deduction, as this affects the way the vast majority of small business owners file taxes. 

Indeed, according to the Brookings Institution, 95% of small businesses are pass-throughs. The increased 

individual AMT thresholds are unrelated to the QBI deduction and do not help small business owners 

understand the complexities of determining their qualified business income. 

QUESTION6: 

Your written testimony recommended, "allowing small businesses to deduct their first 

$25,000 in business income whether or not they file their tax returns as a pass-through 

entity or as a C-Corporation." The Tax Cuts and Jobs Act {TCJA) nearly doubled the 

standard deduction to $24,000 for joint filers. The nearly doubled standard deduction can 

be combined with the pass-through business deduction. 

Do these changes come close to satisfying your recommendation? 

QUESTION7: 

Does doubling the standard deduction simplify the code for small businesses? 

In answer to both questions 6 and 7, we do not feel that the changes to the standard deduction satisfied 

our recommendation. Everyone receives the standard deduction, but, in addition, the personal deductions 

available to all taxpayers (standard and itemized) we proposed an alternative to the pass-through 

deduction that would structure the benefit in a way that would result in substantial savings for Main 

Street small businesses, rather than wealthy pass-through entities. 

QUESTIONS: 

When answering questions before the Small Business Committee, you referenced the 

Small Business Majority's support for measures that would allow the self-employed to 

benefit from pre-tax deductibility of health insurance premiums the way CEOs of large 

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corporations are able to benefit. The Committee is aware of a final regulation promulgated 

by the Employee Benefits Security Administration on June 21, 2018 that accomplishes what 

you referenced (See 83 FR 28912 (pages 289-28933)). 

Does the Small Business Majority support the U.S. Department of Labor's rule, referenced 

immediately above, that will extend pre-tax deductibility of health insurance premiums to 

the self-employed? 

While Small Business Majority does support proposals that allow premium deductions for self-employed 

individuals, this does not extend to support for the recent expansion of association health plans (AHPs), 

which is the primary concern of the referenced regulation. Under the new Department of Labor rule 

finalized in June 2018, it will be easier for a few select small businesses with younger and healthier 

employees to participate in an AHP. 

This will be detrimental to small businesses as it will create separate risk pools in the small-group 

insurance market-one pool for businesses that want bare-bones plans and one for firms that need more 

comprehensive coverage. This will lead to increases in premiums for small businesses with older or sicker 

workers. Additionally, AHPs offer few consumer safeguards and have traditionally been some of the most 

fraudulent health plans on the market prior to the ACA. 

QUESTION9: 

In your testimony, you focus largely on your view that the pass-through provision does not 

work for small businesses. However, the tax reform law included a number of other 

provisions geared toward providing small businesses with the opportunity to grow, 

including expanding Section 179 expensing, bonus depreciation, and the Opportunity 

Zones policy, to name some of the topics discussed in the hearing. 

Has Small Business Majority looked into these provisions at all? 

Small Business Majority has looked at these provisions, and as stated in my testimony, we are in favor of 

some of these individual provisions. Particularly, Small Business Majority supported the creation of 

Opportunity Zones. However, these zones must be implemented responsibly and in a way that benefits 

small businesses. This could be accomplished by requiring reporting metrics that measure program 

success based on the number of jobs created, where those jobs are located, employee wages and the 

number of businesses created, particularly businesses formed by women or people of color. 

We also supported legislation in 2016 that made Section 179 expensing permanent at the $500,000 level 

and we have supported the more recent increase to $1 million. Specifically, the prior law allowed small 

businesses to deduct up-front the cost of purchasing new equipment and property for up to $510,000 in 

qualified property costs. Under TCJA, the maximum expensing was increased to $1 million and the phaseout threshold amount to $2.5 million. 

However, we did not support the increase in the first-year bonus depreciation beyond the Section 179 

levels, as there would be little benefit for most Main Street small businesses and the lost revenues could 

be better deployed either in a more targeted small business tax cut or toward reducing the deficit. 

Questions from Senator Heitkanm 

QUESTIONt: 

I would like to ask you about the new pass-through deduction under Section 199A of the 

TCJA. To be clear, I think directionally giving small businesses owners tax relief is the right 

idea. However, as drafted, I'm worried that the new Section 199A creates far too much 

complexity for small business owners, I'm also very concerned about the uncertainty it 

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presents to business owners who will be faced with the potential of losing the deduction 

starting in 2026. Entrepreneurs need certainty to plan and grow their businesses, and this 

law was inexplicably designed to add, not limit, uncertainty. 

Mr. Arensmeyer, for pass-through owners that are below the cut off of $315,000 if they're 

married, or $157,500 if they're single, can you explain some of the difficulties they may 

have with determining how to calculate "qualified business income" which is subject to the 

20% deduction? -

The tax law's Section 199A pass-through deduction provisions do not materially benefit small businesses 

or save them much money. Specifically, the treatment of pass-through entities gives the bulk of the benefit 

to the wealthiest pass-through entities, rather than Main Street by giving 77% of the pass-through 

reduction benefit to the top 2.6% of firms. Indeed, the financial benefits to a pass-through entity making 

$soo,ooo are 20 times the benefits to a business making $75,000. 

Regarding the Section 199A regulations, these regulations did not adequately clarify how small business 

owners determine their qualified business income (QBI). Recent regulations from the IRS do not clarify if 

other tax provisions like the deduction for health insurance for self-employed individuals, the state 

income tax itemized deduction or the retirement plan contributions of a sole proprietor reduce QBI. 

QUESTION2: 

Although the cut off was intended to create simplicity for the smallest of pass-through 

businesses, given some of the uncertainty with the new QBI concept do you anticipate 

additional compliance costs for these businesses? 

We believe more small business owners will need to turn to tax professionals to navigate the confusion 

over determining their QBI, with the potential to increase compliance costs significantly. The proposed 

regulations for Section 199Aare 184 pages long, with an additional14 pages ofW-2 compliance guidance. 

What's more, the IRS estimates the cost of compliance with this section could cost $1.3 billion over ten 

years. 

Small business owners are unable to understand regulations with this level of complexity and will need to 

dedicate precious time and money to complying with the tax law. This is particularly problematic for small 

businesses operating on tight profit margins. We know this will prevent small business owners from 

reinvesting profits back into their business or hiring more employees. 

Questions from Senator Hirono 

QUESTIONS 1-6: 

Making the tax law work for working and middle class families: Mr. Arensmeyer, the 

Institute for Taxation and Economic Policy ("ITEP") has estimated that with the most 

recent tax proposal ("Tax Cuts 2.0") the wealthiest 1 percent of households in Hawaii will 

receive more than 10 percent of the benefits, and the wealthiest 20 percent of households 

will receive around 6o percent of the benefits. 

Additionally, even as last year's tax law has provided massive tax breaks to support large 

corporations and shareholders (who have benefited from more than $700 billion in stock 

buybacks this year alone), wage growth for workers has remained weak, and, by some 

measures, has even declined when considering inflation. 

Basically, the early results are in-large corporations and wealthy people are doing very 

well, yet we are not seeing large increases in wages or business formations. 

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Making the tax law work for small businesses: Mr. Arensmeyer, several of the provisions 

from last year's tax law have benefited large corporations and businesses with greater 

resources, who may be better positioned to take advantage of the law's changes than many 

small and medium-sized businesses. Additionally, contrary to claims that the law would 

simplify the tax code for small businesses, we know that when asked many small business 

owners have expressed concerns about the financial costs and complexities that will 

accompany the tax law's changes. 

What, in your assessment, should we be doing to make sure the tax law is benefitting 

working and middle-class families, specifically those who own or work for small 

businesses? 

What specific changes should we consider to better promote wage growth? 

What changes should we consider to better promote the formation of new businesses? 

What changes should we consider in the near- and mid-term to better support small- and 

medium-sized businesses? 

How can we alleviate the burdens of the tax law on these businesses, and, furthermore, 

how can we help these businesses navigate the law's changes? 

What other changes should we consider to expand opportunities for small businesses and 

entrepreneurs? 

Now that the 2017 Tax Cuts and Jobs Act is established law, we must turn to concrete policy solutions that 

could better serve our nation's entrepreneurs within the refo11ned system. I offered several policy 

solutions in my testimony, including the following: 

• Ensure Opportunity Zones guidelines are designed to benefit Main Street small business owners 

rather than focusing on incentivizing real estate development. While investments in Opportunity 

7Ames hold the potential to benefit small businesses, especially those in underserved 

communities, they must be implemented responsibly. This could include requiring reporting 

metrics that measure program success based on the number of jobs created, where those jobs are 

located, employee wages and the number of businesses created, particularly businesses formed by 

women or people of color. 

• Make the New Markets Tax Credit permanent. This tax credit, which is set to expire at the end of 

2019, has helped attract more than $6o billion in private sector funding to build businesses in 

economically-distressed communities across the United States. 

• Align form 1099 reporting thresholds and streamline income reporting for independent workers. 

• Identify and fix tax issues unique to micro-enterprises and freelancers, such as burdensome 

quarterly tax filings for freelance employees. 

• Pass health care tax equity for the self-employed so that freelancers can deduct their health care 

expenses from their FICA tax obligations-just like other business entities. 

• Establish a standard business deduction for independent workers. A standard business deduction 

in line with personal standard deductions could streamline the deducting of business expenses for 

solo-entrepreneurs. 

In addition to the above policy solutions that were in my testimony, we believe the following policy 

solutions could expand opportunities for small businesses and entrepreneurs: 

• Increase limits for deducting start-up and organizational expenses from the current $1o,ooo 

levels to $20,000 each. 

• Maintain and expand Small Business Administration (SBA) lending, counseling, and procurement 

programs. This must also include providing small businesses, particularly minority businesses, 

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with increased opportunities to participate in SBA loan programs and small business 

development center programs. 

• Maintain and expand the Community Development Financial Institutions (CDFI) Fund. 

• Increase the national minimum wage to $12 per hour, and support state and local efforts to enact 

local wage authority-understanding that creating a fair minimum wage is essential to the 

vibrancy of the small business economy by boosting consumer demand, reducing the burden on 

public assistance programs and leveling the playing field for small businesses that understand the 

need for properly-compensated workers. 

QUESTION7: 

Concerns about Medicare and Social Security: Mr. Arensmeyer, recent estimates from the 

Tax Policy Center have indicated that the second round of tax cuts included in the "Tax 

Cuts 2.0" proposal would increase the federal deficit by an additional $3.8 trillion 

(between 2026 and 2038}-so, even as last year's tax law provided massive tax breaks for 

large corporations and shareholders, this new proposal could further increase deficits and 

threaten important social programs like Medicare and Social Security. 

Are you concerned about the tax law's longer-term impact on these or other programs, and 

what that could mean for small businesses and entrepreneurs in the United States? 

Tax Reform 2.0 doubles down on the same problems found in the Tax Cuts and Jobs Act. The newest 

proposal once again gives the overwhelming majority of tax relief to the wealthiest businesses and 

individuals with minimal benefit for most small firms. On top of the $1.5 trillion cost over 10 years for 

TCJA, Tax Reform 2.0 would cost another $657 billion over the next decade. This is an enormous amount 

of money to spend for almost no benefit to most Main Street small businesses. According to our opinion 

polling, we know many entrepreneurs oppose reducing Social Security and Medicare as a way to reduce 

the federal deficit, and we know many small business owners rely on public programs like Medicaid and 

Medicare. Reducing these benefits would significantly hurt small business owners. Increased deficits also 

limit our ability to deal with future economic downturns and issues. 

Question from Senator Duckworth 

QUESTIONt: 

Your testimony noted that large corporations and the wealthiest pass-through businesses 

will receive the lion's share of the tax benefits from the 2017 tax law. You also shared the 

views of my constituent, Jessica Jolly, who is frustrated that the tax law failed to 

incentivize small business growth and retention, while doing little to encourage start-ups 

and support entrepreneurs. 

Moving forward, what would you advise Congress prioritize when it comes to making our 

tax code more friendly for small business start-ups in Illinois and across the country? 

As stated in my testimony, Small Business Majority supports changes to the tax code that benefit small 

businesses from the bottom up. During the debate over tax reform in 2017, we proposed allowing small 

businesses to deduct their first $25,000 in business income whether or not they file their tax returns as a 

pass-through entity or as a C-Corporation. This would have ensured that changes to the tax code would 

have a significant, direct benefit to small businesses and self-employed individuals as opposed to large 

businesses, hedge funds and the very wealthy. Moving forward, we urge Congress to prioritize legislation 

that will have a direct, significant benefit to Main Street small businesses, rather than large corporations 

and wealthy individuals. 

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KOGOD of BUSINESS 

AMERICAN UNIVERSITY" WASHINGTON, DC 

Expanding Opportunities for Small Businesses 

Through the Tax Code 

Hearing of the United States Senate Committee on Small 

Business and Entrepreneurship 

Thursday, Nov. 1, 2018 

Responses to Questions for the Record 

Professor Caroline Bruckner, 

Executive-in-Residence, Accounting and Taxation 

Managing Director, Kogod Tax Policy Center 

Kogod School of Business, American University 
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Kogod Tax Policy Center Prof. Caroline Bruckner, QFR Responses, Nov. 1, 2018 

CHAIRMAN RISCH QUESTIONS 

QUESTION 1: Do you think women entrepreneurs and small business owners would be faring better 

absent passage of the tax reform law? 

ANSWER 1: Most women business owners and small businesses will see lower tax rates as a result 

of the TCJA, however the full impact of the legislation remains to be seen. While I hope that tax 

reform works to create opportunities for small businesses to access capital, I am concerned by CEO's 

prediction that health care premiums in_ the non-group matket will increase by 10% each year in the 

next decade as a result of the repeal of the individual mandate. This will disproportionately impact 

small businesses. 

QUESTION 2: Can you speak to the benefits women business owners, and small business owners 

generally, may receive from this innovative provision included in the Tax Cuts and Jobs Act (TCJA)? 

ANSWER 2: My research, Billion Dollar Blind Spot, indicates that when small business tax 

incentives are designed to prioritize manufacturing or investment in capital intensive tangible 

property, women businesses owners do not benefit to the same degree as male-owned firms because 

women business owners tend to operate in services and have fewer capital intensive investments as 

business expenses. In contrast to other small business tax incentives, the Opportunity Zone legislation 

does not include prohibitions on investment in service firms or require investment in tangible personal 

property, which would help to enable women business owners in eligible areas qualify for investment. 

QUESTION 3: Will the new section 199A benefit women-owned businesses more broadly than 

sections 1202 and 179? 

ANSWER 3: Most women business owners will see a limited benefit from IRC Section !99A, which 

Congress targeted to individuals with business income. This is a significant difference from IRC 

Sections 1202 and 179, which were designed to help small businesses access capital and simplify 

their taxes, but tend to exclude or bypass the majority of women-owned firms altogether. However, 

by 2024, the Joint Committee on Taxation (JCT) projects that more than half of the revenue loss from 

Section 199A will flow to firms with $1 million of income. At the san1e time, the latest data on 

women-owned fim1s shows only 1.7% women-O)Y.[led fm:nll have incomes of more than $1 million 

and indicates a majority of those firms are likely to be in services. As a result, the latest data on 

women-owned firms suggests that less than 1% of women-owned firms will benefit from more than 

half of the revenue loss of Section 199A in 2024. 

SENATOR HEITKAMP QUESTIONS 

QUESTION 1: What explains, in your view, the absence of research on the effectiveness of federal 

tax legislation, as well as other laws, designed to assist small business owners? 

ANSWER 1: For far too long, tax policy experts have tailed to consider the implications of tax policy 

on women-owned firms, and, instead, have assumed that the U.S. tax code does not reflect gender 

bias because of efforts over the years to remove expressly discriminatory language. This commonly 

accepted assumption-and failure to consider that implicit gender bias may be operative-has 

resulted in the failure of government researchers and economists as well as Congress to consider the 

gender implications of small business tax incentives on women-owned firms. 
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Kogod Tax Policy Center Ptof Caroline Bruckner, QFR Responses, ~ov. 1, 2018 

For example, when I first raised these questions as a U.S. Senate Small Business and Entrepreneurship 

Committee staffer in connection with my work on the Small Business Jobs Act of 2010, I was 

informed by Treasury, SBA and IRS officials that they do not regularly collect specific data on how 

the U.S. tax code impacts women business owners. Instead, they collect data on small businesses 

generally, despite publishing research on the greater challenges women business owners have 

accessing capitaL Later, as an academic researching these issues, I was told by a former Staff Director 

of the Joint Committee on Taxation that this kind of tax research doesn't matter because the U.S. tax 

code doesn't overtly discriminate against women business owners. Moreover, when my team and I 

reviewed more than 1,270 hearings of the Congressional ta-x-writing committees from 1986-2016, we 

were unable to identify a single full-committee hearing that considered the impact of small business 

tax incentives on women-owned firms in more than 1,500 days of hearings. 

At the same time, the Congressional small business committees have routinely held hearings and 

commissioned research on challenges women-business ovvners have accessing capitaL However, 

these committees do not have jurisdiction over tax issues. In my experience, these committees 

focused their hearings on women-owned firms to considering policy solutions over which they have 

jurisdiction. That noted, Congress has an oversight responsibility to account for how it spends 

taxpayer money and who benefits, particularly when it comes lax expenditures, which are akin to 

direct spending federal programs that function as entitlements to taxpayers who meet established 

criteria. 

QUESTION 2: Which agencies and departments within the federal government do you think are 

best-situated to collect small business data as it relates to women-owned firms? 

ANSWER 2: The IRS, working with the National Women's Business Council, the SBA and U.S. 

Census Bureau. 

QUESTION 3: Would you agree with asking that more IRS information be made available for 

research and analysis? 

ANSWER: Yes, however, given taxpayer privacy concerns, IRS should be directed to work with the 

U.S. Census Bureau to develop comprehensive data. Moreover, this data should be regularly collected 

and published as part of the IRS Tax Stat series. 

QUESTION 4: If yes, can this be done in such a way as to preserve taxpayer privacy? 

ANSWER: Yes. The U.S. Census Bureau often "backfills" its survey data with IRS data. Working 

together, the two agencies can develop methodologies to develop the necessary demographic data to 

analyze tax expenditures. The reason this hasn't been done before is because these agencies have 

never bothered to consider the gender implications of these tax incentives on women-owned firms or 

been directed by Congress to develop this data. 

SENATOR HIRONO QUESTIONS 

QUESTION 1: What specific changes should we consider to better support women- and minorityowned businesses? 
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Kogod Tax Policy Center Prof. Caroline Bruckner, QFR Responses, i:'Jov. 1, 2018 

ANSWER l: First, Congress should conduct oversight on tax expenditures included in the U.S. tax 

code targeted to help small businesses access capital and grow their businesses. Such oversight efforts 

would include requesting JCT prepare formal estimates of the cost and distribution of the revenue 

loss of small business tax expenditures (e.g., IRC Sections I 202, 179, I 244, 199A and 199A) in terms 

of income, industry and demographic data, including gender, race, ethnicity, and age. If JCT is unable 

to prepare this data, Congress should task the U.S. Government Accountability Office with doing so. 

Second, this Committee should request the Congressional tax-writing committees hold hearings on 

the issues raised in Billion Do/lor Blind Spot as well as the implications of enhancements to Section 

179 and the new Section 199A on women-and minority-owned firms. Congress needs to hear from 

businesses who may or may not benefit from these provisions to understand the impact of the design 

of the tax expenditures and to account for the distribution of these taxpayer dollars among U.S. 

businesses. 

Third, Congress should pass legislation requiring the IRS develop and publish as part of its Tax Stats 

series regular data on women-and minority-owned firms their ability to claim business tax 

expenditures. Data is necessary to enabling Congress to make evidence-based tax policy decisions, 

however, under current law, the IRS is not required to collect this data and it undermines Congress' 

ability to discern where and how to target tax incentives to these businesses. 

QUESTIONS 2&3: Based on your research, could you elaborate on how these changes would help 

to support these businesses? Can you elaborate further on how increased access to capital would help 

to support these businesses? 

ANSWERS 2&3: To date, Congress has failed to consider how tax incentives impact womenbusiness owners' ability to access capital, which is a more severe challenge for these firms. At the 

same time, the latest research indicates that the total number of women-ov.ned tirms has increased 

over the last ten years by 58%. Indeed, women of color are leading this charge and own 64% of the 

new women-owned businesses launched each day. In fact, women business owners have grov.n from 

4.6% to 40% of all tirms in just my lifetime. That is a remarkable trend that spans multiple economic 

downturns. These firms are a bright spot of new grov.th for the overall economy, but academic and 

government research finds that these firms still struggle to access capital, grow and scale. By 

developing tax research data on how women business owners claim small business tax incentives, 

Congress could make better infonned decisions to help these small businesses continue to grow and 

weatber economic challenges. 

QUESTION 4: Considering this issue from a tax perspective, could you elaborate on your 

recommendations to the Committee and identify other areas where more information on women- and 

minority-owned businesses might be helpful as we discuss how to better support these businesses? 

ANSWER 4: Oversight is an undemtilized tool that Congress can employ to consider who benefits 

from small business tax incentives and determine whether these tax incentives are operating as 

intended. By conducting hearings specifically on these issues and directing government tax 

researchers such as JCT, CRS and GAO to develop tax data that reflects income and industry 

distribution as well as gender and demographic information, Congress will be better able to make 

evidence-based policy decisions to target incentives to generate optimal returns on investment. 

To date, government tax research has neglected to consider the gender implications of business tax 

incentives -while women business owners have grown to represent 40% of all U.S. firms. Moreover, 
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Kogod Tax Policy Center Prof. Caroline Bruckner, QFR Re~ponscs, Nov. 1, 2018 

the academic and government research that does exists routinely finds that women business owners 

specifically have greater challenges accessing capital than their male counterparts. Put simply, we 

have missed the mark and an opportunity to help fuel these firms. The disconnect between available 

research and Congressional tax policy tools to address the challenges women- and minority-owned 

businesses face accessing capital should be remedied. 

QUESTION 5: What kinds of studies or reports would you like to see federal agencies conduct on 

women- and minority-owned businesses to inform these discussions? 

ANSWER 5: The IRS, working with the National Women's Bnsiness Council, the SBA and U.S. 

Census Bureau, should develop regular tax research data on these businesses and their and business 

tax incentives and should publish this data regular as part of its Tax Stats series. Understanding how 

and whether women business owners can claim tax incentives to access capital and grow their 

businesses is necessary to Congress' conducting its oversight of tax expenditures, which function as 

federal entitlement programs. 

QUESTION 6: Could you elaborate on how more information about tax expenditures for womenowned businesses could infonn these discussions? 

ANSWER 6: Congress and taxpayers are entitled to an accounting of how the revenue loss of tax 

expenditures is distributed among businesses. Taxpayers ultimately toot the bill for tax expenditures 

and transparency is key to informed decision-making for both Congress and taxpayers. The tax 

expenditures I analyzed in Billion Dollar Blind Spot collectively cost taxpayers more than $270 

billion over a 5-year period, but we have no existing data as to whether that money is well-spent when 

it comes to women-owned firms accessing capitaL There is no data-other than my survey data--

on how or whether women-owned firms benefit, if at all, from these provisions. Moving forward, 

Congress has spent at least $4 I 5 billion on Section I 99A alone, and the latest research suggests that 

less than I% of women-business owners ;viii receive more than 50% of the revenue loss in 2024. At 

the same time, women-owned firms are 40% of all U.S. businesses, and Congress needs data to ensure 

its making tax-policy investments that will generate a return for taxpayers. Absence of data on 

women-owned firms and tax expenditures ensures that Congress will continue to be operating in the 

dark. 

SENATOR DUCKWORTH QUESTIONS 

I am working with community leaders in Cairo and Golconda in southern Illinois where Federal 

resources have been shuttered, leaving these communities with fewer people and less investment to 

re-start their economies. Rural communities like these may struggle to capture the full benefits of 

Opportunity Zones and New Markets Tax Credits, despite being eligible for the investments. 

QUESTION 1: How would you recommend Congress amend the tax code to better incentivize small 

business entrepreneurs to begin or grow their businesses in rural, economically distressed areas such 

as Cairo and Golconda? 

ANSWER 1: According to recent academic research, increasing access to affordable high-speed 

broadband internet would dramatically change the lives of families and businesses operating in rural 

areas. As opposed to programs such as Opportunity Zones and New Markets Tax Credits that provide 

access to capital when and if a designated rural area or business qualities, regular and immediate 

access to domestic and international markets via the internet is a more immediate strategy to create 

opportunities for rural small business owners who struggle with high internet costs and slow service. 
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TESTIMONY BEFORE THE UNITED STATES CONGRESS ON BEHALF OF 

NFI B. 

Statement for the Record 

Before the 

Committee on Small Business and Entrepreneurship 

United States Senate 

Hearing on Expanding Opportunities for Small Businesses Through the Tax Code 

October 3, 2018 

NFIB 

1201 F Street, NW Suite 200 

Washington, DC 20004 
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Chairman Risch and Ranking Member Cardin, 

On behalf of NFIB, thank you for the opportunity to submit this statement for the record 

of the Small Business and Entrepreneurship Committee hearing entitled, "Expanding 

Opportunities for Small Businesses Through the Tax Code." 

As NFIB represents roughly 300,000 small and independent businesses across the 

country, we appreciate the Small Business and Entrepreneurship Committee's 

continued attention to how tax policy impacts small businesses. 

For years, small businesses have counted tax issues among five of their top ten 

problems, according to NFIB's Small Business Problems and Priorities suNey. 1 The 

recently-enacted Tax Cuts and Jobs Act (TCJA) presented the biggest tax overhaul in 

more than three decades, and it dramatically improved the landscape for many small 

businesses. 

The centerpiece of these tax changes is the new Section 199A, or the small business 

pass-through deduction. This deduction is important because more than 90 percent of 

small businesses are organized as pass-throughs (S corporations, LLCs, sole 

proprietorships, or partnerships), not as corporations. Under the TCJA, a pass-through 

business owner- regardless of the type of business they own - can now claim a full 20 

percent deduction on their share of the business's income up to $315,000 in 2018 for 

those filing jointly. For small business owners whose taxable income exceeds the 

threshold, the deduction is subject to formulaic limitations. The overwhelming majority of 

small businesses in America are eligible for this benefit. According to current IRS 

statistics, it is estimated that there are 23.7 million businesses in the United States. 2 Of 

those, over 23 million have net business income of $250,000 or less3 

Coupled with increased thresholds for the alternative minimum tax and estate tax, a 

doubling of the standard deduction, and a significant increase in the expensing limits, 

the benefits to small and independent business owners are substantial. 

These improvements to the tax code afford significant opportunities to small business 

owners. The much-needed savings provide more capital to invest in growing, hiring, and 

producing. Since enactment of the tax law, the tangible effect has been remarkable and 

historic. According to NFIB's monthly Small Business Economic Trends suNey, 4 small 

business owners are notably confident about the economy. The NFIB Small Business 

Optimism Index has remained high throughout the last 23 months - a historic positive 

trend- with a reading of 107.9 in September, the third highest reading in the suNey's 

1 Holly Wade, Small Business Problems and Priorities, NFIB Research Center, (August 2016), available online at 

https:/ /www.nfib.com/assets/NFIB-Problems-and-Priorities-2016.pdf. 

2 Treasury Office of Tax Analysis, "Methodology to Identify Small Businesses and Their Owners" Technical Paper 4, 

at 10-14 (Nov. 2016). 

3 /d. 

4 William C. Dunkel berg and Holly Wade, NFIB Small Business Economic Trends, NFIB Research Center, (August 

2018) available online at https:/ /www.nfib.com/assets/SBET-Sep-2018.pdf. 

2 
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45-year history. This year has produced 45-year record high measures of job openings, 

hiring plans, actual job creation, compensation increases (actual and planned), profit 

growth, and inventory investment. The record-breaking figures are driven by small 

business owners executing on the plans they have put in place due to significant 

changes in the nation's economic policy. 

To put these reforms and subsequent opportunities for small business owners in 

context, consider David Cranston. He owns a small material handling equipment 

business outside of Pittsburgh with seven full-time and two part-time employees. In 

testimony before the Senate Finance Committee5 in late April, he detailed just how 

important the tax law and, specifically, the pass-through deduction are to his business. 

Cranston noted, "I now qualify for a 20 percent deduction on my pass-through income. 

In real terms, this means I will be able to keep $5,000 to $10,000 a year in my company. 

This is a big deal to a small business owner like me." 

These savings will allow Cranston to expand into a new product line. Cranston's 

business is purchasing new equipment, investing in training, and building a new website 

to self-fund this new product line. 

Cranston's experience is far from unique. On May 17, 2018, NFIB released a survey 

titled Small Business Introduction to the Tax Cuts and Jobs Act (Parl1) to provide a 

baseline reading on small business owners' initial responses to the TCJA.6 The survey, 

the executive summary of which is attached as an addendum to this statement for the 

record, found small business owners are bullish about business and the impact of the 

TCJA: 

The vast majority (76 percent) of small business owners believe the current 

business climate is heading in a positive direction. 

• Three-fourths of small business owners believe the tax law will positively impact 

their business. 

Eighty-seven percent think the new tax law will have a positive impact on the 

general economy. 

The majority of respondents anticipate a lower tax bill next year and plan to allocate the 

extra money across a number of business activities. Among these small business 

owners: 

Forty-four percent plan to increase employee compensation. 

5 Senate Finance Committee hearing, "Early Impressions of the New Tax Law" (April 24, 2018), testimony available 

online at https://www.finance.senate.gov/hearings/early-impressions-of-the-new-tax-law. 6 Small Business Introduction to the Tax Cuts and Jobs Act: Part 1, NFIB Research Center, (May, 2018), available 

online at https:/ /www.nfib.com/assets/TCJA-Survey.pdf. 

3 
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• More than one-quarter (27 percent) plan to use the extra savings to add 

employees.? 

Certain specific benefits stand out for small business owners: 

• Overwhelmingly, 84 percent of small business owners view the creation of 

Section 199A as important. 

• Eighty-five percent consider the reduction of individual rates as important. 

• Two-thirds regard the changes to the estate tax as important. 

• Seventy-six percent of small business owners view the doubling of the standard 

deduction as important. 8 

Unfortunately, these key provisions expire after 2025. This complicates long-term 

planning for small business owners. NFIB urges Congress to make these critical 

provisions permanent, thereby providing certainty and lasting tax relief to small business 

owners across the country. 

7 /d. 

8 /d. 

4 
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~ NFIB 

RESEARCH 

CENTER 

Small Business 

Introduction to the 

Tax Cuts and Jobs Act: 

Part 1 

May 2018 

5 
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Executive Summary 

• Over three-quarters (76 percent) of small business owners believe the current 

business climate is heading in a positive direction (Q#4). 

• The vast majority (87 percent) percent of small business owners think the new 

tax law will have a positive impact on the general economy. Just 4 percent 

believe it will have a negative impact and 9 percent think it will have no significant 

impact (Q#14). 

• Three-fourths (75 percent) of small business owners believe the tax law will 

positively impact their business, 22 percent anticipate it will have no impact, and 

3 percent a negative impact (Q#12). 

• While small business owners are enthusiastic about the law generally, many of 

the details are still unfamiliar to them. Almost one-in-four (24 percent) percent of 

small business owners are not at all familiar with the new tax law (Q#7). 

• Half of small business owners with some familiarity about the law obtained their 

most useful information from their tax preparer or advisor, another 28 percent 

from the general news media (Q#8). 

• Over half (51 percent) of small business owners expect to pay less in federal 

income taxes next year, 7 percent expect to pay more, and 37 percent about the 

same (Q#15). 

• Almost half (47 percent) of small business owners who expect to pay less in 

taxes next year plan to increase business investments with their tax saving 

(Q#15a5) and 44 percent plan to increase employee compensation (Q#15a6). 

Another 40 percent of small business owners plan to pay down debt obligations 

(Q#15a7), 32 percent plan to retain the funds freed up as higher earnings 

available to support business growth (Q#15a4), and 27 percent plan to hire an 

additional employee (Q#15a3). 

• Over half (55 percent) say that the creation of Section 199A, allowing for up to a 

20 percent small business income tax deduction, is "very important" with another 

29 percent "somewhat important" (Q#20B). 

• Forty-five percent of small business owners say that changes to the personal 

income tax brackets and rates are "very important" to them and their business, 

40 percent say "somewhat important" (Q#20A). 

6 
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National Small Business Network 

TCJA Corrections for Economic Sustainability 

Policy Recommendations for the 1151

h Congress • October 2018 

In December of 2017 the Congress passed the Tax Cuts and Jobs Act (TCJA) which included 

many major tax policy changes. We believe the legislation did not achieve the objectives of good 

revenue neutral tax reform and needlessly added to the federal deficit, with potential long-term 

economic consequences. Before considering proposals to extend to provisions, Congress 

should instead work to correct and improve them 

The following recommendations for corrections and additions to the TCJA, are suggested as part 

of a balanced program of both tax policy and budget policy actions to restore a sustainable 

Federal fiscal process. The detailed recommendations build on many of the concepts 

developed by prior House and Senate working groups, and other tax reform advisory groups. 

They focus primarily on business tax reform issues, particularly for small and mid-sized 

businesses, because those will have the greatest impact on job creation and general economic 

growth. 

To support sustainable economic growth, we believe that good tax code reform should 

meet these basic principles: 

o Simplify and coordinate of our overly complex tax code to reduce both taxpayer and 

IRS administrative expense, and improve compliance. 

o Provide equitable tax incentives for the growth of small businesses that provide 

over half of all new jobs. These are predominantly pass-through entities which 

require separation and equitable treatment of the net business income in the 

personal tax code. 

o lncentivize direct long-term investment in businesses, buildings, and equipment 

that create new jobs, rather than short-term speculative transactions which may 

increase individual wealth, but create no new economic activity or jobs. 

• Promote domestic investment and job creation to the greatest extent possible within 

the limitations of international agreements by focusing tax preferences on domestic 

investment. 

• Increase US international business competitiveness, and also reduce the ability of 

multi-national corporations to avoid taxes by shifting profits under a territorial 

system to lower tax rate countries, by taxing all multi-national corporations on the 

basis of their US sales and impacts, the way states tax multistate corporations. 

o Assure that any tax reform is at least revenue neutral and provides adequate overall 

revenue to gradually reduce our national debt and restore long-term fiscal stability. 

1 
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1. Deficit financed tax cuts at a time of relatively strong economic growth 

were not the solution to sustainable economic growth. The GAO and CBO have 

concluded "The federal government is on an unsustainable fiscal path" with spending exceeding 

revenue by $895 Billion in the first 11 months of this fiscal year, with the projected debt growing to 

100% of total GOP in just 12 years. Most economists believe that continuing deficits and our 

growing $18 Trillion national debt will reduce long-term economic growth, and are a very real 

threat to the future sustainability of our economy. We agree with the GAO recommendations, 

and those of other study groups. See our more complete Fiscal Policy Recommendations on our 

website at www.NationaiSmaiiBusiness.net. 

Our overall tax level is not the cause of our current economic and under employment problems. 

The total US average Federal, State, and local tax burden is the forth lowest of all 34 OECD 

countries at 25.7% of GDP. Only Korea, Chile, and Mexico have lower average rates, and the 

average of all other OECD countries is 34.1% of GDP. With the exception of payroll taxes, most 

American businesses pay Federal taxes only when they are profitable. The current federal tax 

level on individuals and "pass-through" business entities is lower than it was during times of 

economic prosperity and growth, and is lower than most other leading industrial nations. The 

stated tax rate on large corporations was higher than other nations, but when adjusted for US 

business tax incentives and other taxes imposed by foreign countries, such as value added taxes, 

it is similar to other leading industrial nations. Even during a time of high corporation earnings, 

corporation income tax revenues have fallen from 5% of gross domestic product in 1952 to only 

about 1.9% today and will fall further with the lower TCJA rates. 

2. Many of the 2017 TCJA provisions did not adequately meet the criteria for 

good tax reform legislation, particularly the goal of tax simplification, and 

may have long-term negative economic consequences. Rather than 

making the TCJA changes "permanent", Congress should focus on 

clarifying, correcting and improving them. 

A. Business tax code changes: 

100% Bonus depreciation, or immediate expensing, of long-term capital investments was 

not needed: 

Although accelerated expensing can be a useful tax tool during a recession, its use at the peak of 

an economic cycle was not needed and significantly. It increased the federal deficit and growth of 

the debt, which will have future negative economic consequences. Even more importantly, 

when the next recession happens, the Congress will have no practical tax incentives left for 

stimulating the economy when needed. The Federal Reserve, which has been massively 

stimulating the economy for the last 9 years, with very low interest rates and monetary expansion, 

is also still in a weak position to provide emergency stimulus when another major recession 

occurs. There are signs that the next recession is not far away and will probably be worldwide. 

Congress should shorten the phaseout ofthis provision. 

Correct the drafting error in the depreciation provisions which eliminated the provision for 

restaurants and retailers to depreciate qualified improvement property over 15 years 

rather than 39 years. The more realistic depreciation period for more frequent renovations is 

important to small businesses and should be restored. 

2 
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The 40% Higher Tax rate on high potential growth C corporation startups will hurt 

economic growth. 

Congress has always said that they understand the contributions small businesses to the 

economy, yet the TCJA elimination of graduated rates on small C corporations actually increased 

the tax rate for small startups by 40%. This is a result of deleting the lower 15% tax bracket on 

the first $50,000 of income. Most high growth potential start-ups, who may become the base of 

the future economy, are organized as C corporations because ofthe need to attract equity capital 

for growth. Based on 2013 IRS statistics, the most current available numbers, approximately 

556,400 small business are in this category and will have their taxes increased. We recommend 

legislation to reinstate the lower 15% tax rate on business income below $50,000 and provide 

graduated rates between $50,000 and $10M of corporation taxable income. 

B. Pass-through entity complexity issues from the Section 199A deduction 

Although it was important to provide an equitable tax reduction for pass-through businesses to 

balance the corporate tax rate reduction, the 199A "deduction" was poorly coordinated with prior 

tax policy and poorly written. There are many unanswered questions and undefined definitions 

and calculations. The IRS has attempted to clarify many of the issues with temporary 

regulations issued in July, but other issues may require additional regulations or legislative 

correction and clarification. 

1. Is it equitable to exclude true business income from the designated professions such as 

health care, accounting etc. if a single taxpayer is over the $157,000 income limit and a 

married taxpayer is over the $315,000 income limit? Wouldn't it rather be better to develop 

balanced provisions for all business types that separate "personal" business activity which 

should be taxed as wages, from business income resulting from return on capital 

investment and the wages of others? This is also true sinceJhere is no longer a higher 

C-corporate rate for these types of entities. 

2. The regulations acknowledge that common law employees include lease employees, but 

partners who receive guaranteed payments working in their capacity of an "employee" are 

excluded from the wage calculation. The Service said that it wanted to write regulations so 

as to not require businesses to change their entity type. By disallowing payments to 

partners, they are in fact requiring the partnership to change form. 

3. How are various businesses and various rental properties to be aggregated with 

relationship to their selves and each other and how is the IRS "related activity" test to be 

applied? 

4. Rental Real Estate 

a. What qualifies as a rental real estate business? 

i. If it rises to a business, will it be subject to payroll or self-employment taxes 

or excluded under Section 1402 as rental property? 

ii. What if it is a net, net lease? 

5. Is the rental of tangible personal property qualified business income? 

6. What is depreciable property under Section 199A 199A(b)(2)(B)(ii)? 

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a. Under the IRS de minimis rules, we can elect to expense any item costing under 

$2,500 in the year of purchase. If we make this election, do we lose the ability to 

add them to our asset calculation under this section? 

b. If the taxpayer takes bonus depreciation under Section 168(k) or Section 179, will 

that effect the ability to include the asset in the asset calculate? 

c. Under Section 199A (b)(6)(B)(ii), inclusion in this section is limited to property that is 

being depreciated for the full year. Therefore, where depreciation for property 

placed in service is determined based on the month it is placed in service and the 

property was not place in service in January, will the property not be included in the 

final year. 

7. How does qualified business loss interact with qualified business income and a net 

operating loss? 

8. How are passive income and passive loss activities going to interact with qualified 

business income and qualified business losses and net operation losses? 

9. How are allocation of wages and depreciable basis going to allocated to partners who are 

receiving special partnership allocations? 

10. How wiii199A work with publicly traded partnerships? 

Other issues: 

Membership Dues 

Are dues paid to business organization such as trade associations and business organizations 

such as the Chamber of Commerce still deductible? 

2. The TCJA also eliminated or reduced several personal tax expenditures to 

generate offsetting revenue, but these tax expenditures should be 

reconsidered. 

Tax law, including tax expenditure incentives, can be a major factor in economic decisions by 

both businesses and individuals. Tax policy is also one of the few remaining strategic tools to 

provide targeted economic incentives for domestic economic growth, or emergency stimulus 

during recessions. Businesses and investors often focus on short-term profit, rather than on the 

long-term sustainability of their business; the health of the national economy; or concern for the 

environment. Tax policies that overly "broaden the base and reduce the rate" limit the ability of 

Congress to provide strategic incentives for long-term economic sustainability and international 

competitiveness. Flat tax structures tend to encourage short-term speculation instead of longterm direct investment. They also encourage movement of investment capital anywhere in the 

world where the potential return is highest. 

Reducing most current tax expenditures in order to reduce maximum tax rates probably also 

increases the effective tax burden on middle income and small business taxpayers while reducing 

tax revenue from large corporations and the verv wealthy. Most tax expenditures, including 

deductions, credits, and preferential tax rates are limited either by specific maximum amounts, or 

maximum overall income levels for which the provisions apply. These limits are in place to 

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obtain the greatest economic or social policy affect with the least loss of tax revenue, and often 

have the greatest incentive effect and benefit for middle income taxpayers. 

The $10,000 limitation on deductibility of State and Local taxes will make it more difficult for 

school districts to pass funding measures for better education systems and for cities and states to 

fund better public safety and infrastructure programs. These are serious problem areas where 

the federal government provides little funding or support and local citizens should be incentivized 

to solve them without having to pay a "tax on a tax" for income they never actually received. The 

provision also implies that the federal government is better able to determine what services 

taxpayers really need better than their local governments, which is not supported by any 

evidence. 

The SALT deduction limitation is also particularly harmful to s·mall business owners. 

Most small business are pass-through entities and have to pay the state income tax on their 

business income, which can be as high as 1 0% in some states, on top of the taxes on their 

personal income and property, probably making all of the tax on their small business income nondeductible. We recommend that if the cap on personal state and local taxes is not increased, that 

small businesses be allowed to deduct at least the first $50,000 of state income tax on their 

business income, in addition to the personal cap. 

Another deduction eliminated by the TCJA was the deduction of employee business 

expenses~ With the changes in technology and the workforce more employees are working 

outside of a conventional business location and are being required by employers to fund more of 

their own expenses for equipment, transportation and even work space. Since these required 

costs reduce their effective income, they should be deductible against the income, just as they 

would be allowed for a self-employed contractor. 

Existing Congressional data does not provide adequate decision-making data for Congress to 

accurately evaluate existing tax expenditures, deductions, and rate preferences. We 

recommend that the House and Senate Budget Committees and Senate Finance and House 

Ways and Means Committee jointly request the CBO or JCT to develop a current comprehensive 

analysis of the actual economic benefits of all tax expenditures. 

General Tax Policy Recommendations for Future Reform 

3. Tax Simplicity, Clarity, Equitability, and Efficiency Recommendations: 

One of the key goals of tax reform was to simplify the complexity of the current code, and provide 

greater tax system clarity and equitability for different taxpayer entities. The TCJA actually 

complicated tax calculations by implementing the poorly conceived and poorly written Section 

199A. The current code, which was built on successive layers of changes by past Congresses, 

has become too complex with too many adjustments, limitations and phase-outs for taxpayers to 

understand and comply with. Many provisions either purposely or unintentionally negate or limit 

the effects of other provisions. Other provisions have become outdated by changes in technology 

or business practices. 

A. Increase the role of the Joint Committee on Taxation, Treasury Tax Policy and the 

IRS in assisting Members of Congress in the ongoing development of a simpler and 

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better-coordinated federal tax code. Complexity makes it difficult for taxpayers, and even 

professional tax preparers, to understand and comply with the code. Complexity also 

increases the administrative burden on the IRS and makes it difficult for them to provide good 

taxpayer assistance and improve filing accuracy and taxpayer compliance. Often the IRS 

has to resolve legislative issues with hundreds of pages of detailed regulations which 

increases the administrative burden on the IRS, and often just further increases complexity 

for the taxpayer. The Congress should direct JCT, Treasury and the IRS to develop a joint 

working group to identify existing code issues requiring better legislative clarity or 

coordination, and a process to develop legislation to resolve them. 

B. Continue to revitalize the management and business systems of the Internal 

Revenue Service to provide better taxpayer assistance and an efficient and equitable 

administration process. The ability of the IRS to properly and efficiently administer the tax 

code is currently hindered by incomplete improvements to vital business systems such as 

data processing and communication technology. The IRS is also facing increased 

administrative responsibilities, such as the ACA and FATCO, combined with declining budget 

allocations, and heavy turnover of key staff. With budget cuts, training has been reduced 

and staff expertise has declined. This is resulting in declining levels of performance in many 

areas and increased burdens on taxpayers and return preparers. The combination of a 

complex tax code, declining taxpayer assistance, inadequate IRS budgets, and reduced IRS 

training and staff levels will eventually threaten accurate and equitable enforcement of tax 

laws. If this happens, it will also reduce collection of the revenue needed for all other 

Federal programs and services. 

Congress and the Administration need to recommit to the goals of the 1998 IRS Reform and 

Reorganization process by providing funding for better taxpayer assistance, support for 

improvements to technology systems, and stronger management emphasis on business 

process re-engineering for greater efficiency in the tax administration process. The IRS 

needs increased Congressional budget support and better proactive communication on 

agency issues. The Administration and the Senate also need to complete the revitalization 

of the IRS Oversight Board, rather than eliminating it, with additional nominations, to assist 

IRS management with continuing organizational improvements and improving communication 

with the Congress. 

C. Provide standard tax code definitions and coordinated inflation adjustments for all 

limit and rate bracket provisions. Multiple definitions exist for many items of income and 

types of credits and deductions. These need to be standardized and simplified. Congress 

needs to review the Internal Revenue Code for fixed limitations and provisions, which are 

long overdue for inflationary adjustments, such as the business gift limitation, and update 

them. Then, adopt a standard inflationary adjustment provision to replace the myriad of 

specific provisions in the code for rate brackets and all dollar limitations which should have 

periodic adjustment. The provisions should require a reasonable minimum inflation change 

before a periodic adjustment is made. We also support the tax clarity and simplification 

recommendations of the American Institute of Certified Public Accounts Tax Policy 

Committee. 

F. Simplify state income tax nexus issues for out-of-state businesses by adopting a 

modernized federal limitation on non-nexus state income and business activity taxation, 

of both services and products. This should include digital products delivered from outside a 

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state via public carriers and electronic transmission by businesses without state nexus. 

Modern electronic technology has greatly increased the ability of even small businesses to sell 

services nationally without any physical nexus in a state. Unfortunately, this increased 

capability, combined with increased legislative and enforcement activity by revenue starved 

state governments, is creating significant state income tax nexus problems for businesses. 

Complying with out of state income tax or "business activity" tax laws for a small amount of out 

of state income often subjects small businesses to significantly higher accounting and tax 

preparation expenses, and a higher total tax liability 

G. Pass marketplace fairness legislation to facilitate each state's right to use sales and 

consumption taxes, and simplify retailer remittance of interstate consumption taxes. 

The Supreme Court's Wayfair vs South Dakota decision clarified the right of states to require 

out of state sellers to collect state sales taxes, but created major new problems for both the 

states and retailers. Congress should support effective and efficient interstate, and 

international, collection of state sales and use taxes. Market Place Fairness legislation would 

provide an equitable business environment for those businesses that properly collect state 

sales taxes. A federal interstate sales tax administration legislation would not create any new 

taxes, but would simply enable states that have chosen to use consumption-based taxes to 

efficiently collect them on the growing volume of internet purchases. Because an increasing 

volume of internet direct to consumer sales are originating from outside the US, the Congress 

should also consider international agreements and other actions that can help states collect 

use taxes on foreign direct sales. 

4. Capital Gains Tax Reform Recommendations: 

Congress should encourage long-term direct capital investment by adjusting the 

calculation of long-term capital gain, on assets held more than 10 years to remove 

taxation of the phantom gain from monetary inflation, and properly reflect the true 

constant dollar value of the gain. But, the provision should only be applied to direct 

economic investment in businesses, property, or business equipment, not in traded 

securities or other speculative investments that do not produce new economic activity. 

Calculation of the adjustment would be simple, and require only a multiplication of the dollar 

gain using IRS supplied existing data on the cumulative inflation change from the year of 

purchase to the year of sale. 

The current personal income tax code provides a lower tax rate for a "long-term capital gain" on 

an asset held for more than 365 days. This actually progressively penalizes longer-term 

investments that are held more than one year because of the failure to adjust for monetary 

inflation over the investment life. The investments that America needs to build a sustainable 

economy by starting or growing businesses, and building business infrastructure, are not 366-

day investments. True long-term business investments may not provide a capital return for 10, 

20, 30, or 40 years or longer. Even owners of relatively small businesses will generally be in 

the maximum rate bracket in the year they sell their business or business property resulting in 

taxation at the maximum rate. Most states also add an additional state tax of up to 10% on 

capital gains, based on the federal calculation. 

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The current law also provides the same tax treatment for individuals who invest in speculative 

secondary market investments such as traded stocks. Except for new offerings, traded stock 

purchases create no new economic investment or funding for business growth. Ironically, 

secondary economic investments actually have a greater tax benefit because they can be easily 

sold after 1 year when the tax benefit is greatest. Where the asset is a business or investment 

property, this short tax incentive peak encourages the owners to focus on short-term "paper" 

profitability and the potential for resale, rather than long-tenn growth and sustainability. The 

366-day incentive peak also encourages financial speculators to purchase and sell off asset rich 

businesses, rather than operating and growing them. 

Almost all other value comparisons that extend over long periods such as economic statistics, 

government budgets, and other tax code provisions, are adjusted to remove the artificial effect 

of inflation. Although compensating for some inflation distortion is part of the justification for 

having a lower tax rate on capital gains, this is a classic case where a "one size fits all" 

approach does not work. 

Based on the last 40 years of inflation, the Federal taxes alone would actually exceed the total 

real economic gain on the sale of an asset after about 40 years at a 23.8% tax rate. State 

Capital Gains Taxes, which are usually based on the federal calculation, can also add up to 10% 

additional tax on the inflationary increase. Although an adjustment should be made on assets 

held for more than 10 years, the scoring cost of correction legislation could be reduced by limiting 

the adjustment to business property or direct business investments where the taxpayer is an 

active participant. Potential revenue offsets for an inflation adjustment include increasing the 

"long-term" capital gains holding period to 2 or 3 years, or slightly increasing the capital gains tax 

rates. 

5. Other issues 

A. Permanently equalize the deductibility, up to a reasonable cost limit, of individual or 

group health insurance at the entity level for all forms of businesses. 

For the year 2010 ONLY, the Small Business Jobs Act of 2010 finally allowed self-employed 

taxpayers, and partners, to deduct the cost of their health insurance, without paying payroll 

taxes on the insurance cost, as all corporations can. The equal and simple deductibility of 

group health insurance regardless of the legal fonn of business entity has been a key issue for 

small businesses for many years. Prior Congressional action partly corrected this problem for 

S Corporation stockholders, but 21 million self-employed individuals are still required to treat 

the expense as a non-business expense even if they provide identical coverage for their 

employees. This results in the taxpayer paying an additional 15.3% on the insurance 

expense. Because of their small group sizes, the self-employed already pay the highest 

relative insurance rates. This inability to deduct their own insurance has always been an 

emotional disincentive for small business owners to provide group health insurance for their 

other workers. 

B. Provide equitable employee cafeteria benefit options for small business owners. 

Small businesses compete for workers with large businesses and the public sector. Because 

of differing family situations, differences in benefit options available through other family 

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members, or because of personal preferences, many employees often want different benefits 

than fellow workers. 

The 2010 PPACA Health Care Bill included provisions for a simplified Cafeteria Plan. 

However, current restrictions make them unattractive for most small businesses, other than C 

corporations, because business owners cannot be part of the plan. Current law specifically 

prevents sole proprietors, partners, and sub chapter S corporation shareholders from 

participating in a cafeteria benefit plan. These limitations discourage small businesses from 

offering employees a very logical form of employment benefit and make small businesses less 

attractive for prospective employees. 

C. Modernize and simplify the qualified home office deduction to allow de-minimus 

personal use and the conduct of business with clients using electronic technology. 

The TCJA eliminated deductibility of all employee business expenses. Therefore, this 

deduction is no longer allowed to employees who are required to work from their home. This 

should be reinstate along with other employee business expenses. 

Currently, home-based businesses represent about 52% of all American firms and generate 

10% of the country's total GOP, or economic revenue based on SBA research. In the future, 

that percentage is likely to grow as new technologies and the Internet make new business 

models possible and increase the ability of people to work remotely. 

In 2012, the IRS provided a regulatory standard for a simplified home office calculation with a 

maximum deduction of $1500, but could not address some the basic statutory limitations of 

the existing code without Congressional action. Internal Revenue Code Section 280A(c) (1) 

defines the requirements that must be met to deduct home office expenses. It generally 

permits a deduction for a home office in a taxpayer's residence Q!l!y if it is used "exclusively 

on a regular basis. This is a much higher standard than required of regular business or 

governmental offices The code also requires the office to be "used by patients, clients, or 

customers". This language in the code has been interpreted by the IRS to require clients or 

customers to be physically present in the home office. Today, many businesses do business 

with their customers without any physical presence. It is both unrealistic and unreasonable not 

to also allow some de- minimus personal activity in an otherwise qualified home office area 

and to allow the use of digital business practices. Congress should make these changes by 

statute .. 

D. Increase the deductibility of business meals for small businesses up to 75%. 

As stated earlier, TCJA eliminated any deduction for entertainment and meals other than 

business meals. The 1995 White House Conference on Small Business identified the 

importance of the business meal deduction to the success of small business. They often do 

not have appropriate space at their business to meet and work with important clients, referral 

sources or suppliers. Large businesses often have meeting and conference rooms at their 

facility that are often tax deductible. Small businesses, particularly home-based businesses, 

may have only their kitchen table. They often have to use restaurants as an opportunity to 

prospect for business and to complete transactions with clients. Other existing code 

provisions properly limit excessive meal expenditures. 

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E. Simplify the matching of third party payment reporting on Form 1099 K by correcting 

the law to require NET income reporting. 

Congress made a technical error in the legislation requiring third party payment processors to 

report annual proceeds as an enforcement provision on a gross basis. The IRS has tried to 

work around this flaw in the legislation by building average estimates of what percentage of 

net income might result from gross transactions, but many businesses are not "average", and 

it is resulting in too many "false positive" examinations. 

F. Return the contribution due date for IRA investments to the extended return due 

date. 

Prior to the Tax Reform Act of 1986, standard IRA contributions, like all other retirement plan 

contributions, were permitted up to the earlier of the extended due date of the return, or when 

the return was filed. Their due date is now April 15, with no extensions. This causes a 

burden on taxpayers who have to make IRA contributions at the same time that both prior 

year final tax payments and their current year first quarter estimated tax payment are due. 

G. Make permanent the TCJA increased Federal Estate Tax exemption to allow better 

long range estate planning, and protect mid-size family businesses and farms, but do 

NOT repeal the Estate Tax. 

The current estate tax exemption of about $11 Million per person, or $22 Million per couple is 

adequate to protect 99% of small family businesses and farms from a federal estate tax 

impact. However, the estate tax is still an important business continuity issue for faster 

growing mid-size businesses and larger farms because of rising land values. The Estate tax 

should not be repealed though, because far more small businesses and farms would be hurt 

by high capital gains taxes when the businesses are sold to children or others, without the 

step-up in basis as part of the current Estate Tax. 

6. International Corporate Tax Policy Recommendations: 

We believe Congress erred in adopting a territorial tax system for multinational 

corporations combined with lower tax rates as a way to make US businesses more 

competitive. The reduction of corporation taxes rates by other nations has been a race 

to the bottom, with a significant loss of tax revenue from businesses. Adoption of a 

territorial system, even with base erosion provisions will actually make permaent the 

incentive to move business activity to lower tax countries. We believe the Congress 

should work with other nations to change the taxation of multi-national businesses 

(MNB) to a formulary allocation system based on their percentage of sales in each 

country, to remove the incentive for profit shifting to lower tax countries and for 

corporate inversions. This would put US businesses on the same tax allocation basis 

as foreign owned multinational businesses with US taxable income and remove some 

or all of the US income tax cost burden on exported goods. 

The current corporate income tax system allows multinational corporations, particularly those 

with high intellectual property values, to use inter-division accounting manipulations to shift 

taxable profits to divisions in lower tax countries where the earnings can multiply. This not 

only reduces US tax income, but also creates a tax incentive barrier to recognizing and reinvesting those earnings in the US for domestic business growth. When intellectual property 

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is developed with US Research and Development tax credits and protected and given value 

by the US Patent system, the profits from that research should be taxable in the US. 

The US should instead tax the profit of US Corporations from all their controlled foreign 

business subsidiaries and other investments on the world-wide" basis. The worldwide 

taxable profit, and any tax credits, should then be apportioned on the basis of the percentage 

of final sales, or a combination of sales, assets, and employment in the US. There should 

have been no reduced tax rate on repatriated profits because a lower rate would provided no 

new economic incentives, since the pr~fits are from prior year's sales. Repatriation will 

probably also not result in any major US economic benefit from new domestic corporate 

investment based on economist analysis. Analysis of the last voluntary repatriation incentive 

found the funds were primarily used for increased dividends and stock buy-backs. The tax rate 

on repatriated profits does not affect current business competitiveness and businesses have 

already applied the credits for foreign taxes paid against other income. 

Allocating taxation of profits based on the location of sales or other factors has long been 

used to allocate profits of national businesses between the states. Currently 21 states use a 

single sales factor for allocating taxable profit and 17 states use a double weight sales or 

other factors allocation formula. It is also a logical way, with careful limitations and interaction 

with other countries, to allocate taxable profits internationally. Taxing on the basis of national 

sales would remove the incentive for profit shifting by multi-nationals. It would also 

discourage the game of countries bidding down their tax rates to attract tax shifting and allow 

them to increase revenue for their countries. 

Formulary Allocation (FA) would be the simplest of "border adjustable" options, with few 

transition or regulation issues, and no negative impacts on domestic businesses. It would 

utilize the existing US corporate tax code and international accounting standards, up to the 

final step of per country allocation. MNBs, with US tax nexus would calculate taxable 

income on a worldwide basis, but only pay US income tax based on their percentage of sales, 

or other economic impact factors, in the US. FA meets the stated bi-partisan Congressional 

objectives for international tax reform, including removal of US income tax cost on American 

exports. 

FA would make it easier for corporations to correctly calculate their US taxes, and for the IRS 

to accurately audit them since it would rnore closely match the unified reports MNBs produce 

for financial reporting purposes. The US states, and political subdivisions in some other 

countries, have used a sales factor, or multi factor allocation system including sales, 

employment, and assets, for many years. Most multi-national corporations with US state 

nexus already report their state income tax liability on that basis now. The US already taxes 

multinationals on a worldwide basis, except for foreign headquartered corporations, who are 

treated on an activity nexus basis very similar to the way they would be treated under a 

formulary allocation system. Although there is some potential for misrepresenting sales 

destinations, the rules used by the states should provide a good basis for accuracy. 

FA removes the incentive for profit shifting" to lower tax countries by dividing total world-wide 

profit to be taxed based on a fairly clearly definable percentage of sales, or other factors, by 

country. Businesses would not want to reduce sales in the US, regardless of the tax rate. FA 

also removes the incentive for corporate inversions by taxing both domestic, and foreign 

corporations that have US tax nexus, on the same percentage of sales basis which should 

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meet WTO standards for equal treatment. 

FA removes the need for the US, and also for other nations, to try to "bid down" their 

corporation tax rates to undercut other countries and encourage profit shifting and asset 

relocation in their direction. If FA was adopted by other countries, it would also allow them to 

return their tax rates on MNBs to higher levels without losing revenue due to profit shifting. 

FA would not be a "New Tax" that could be blamed on either political party. And FA is 

inherently border "adjusted". It would remove some or all of the US federal income tax cost 

from goods sold outside the US, making them more competitive. FA would also not disrupt 

most state corporate income tax systems, which are generally based on the current federal 

corporation code with formula allocation of unitary profits just as the federal tax would be. FA 

would give US multinational businesses permanent tax relief on export sales, rather than 

allowing permanent tax avoidance from MNB profit shifting, under a territorial system. 

Although a detailed analysis is needed, FA could also increase overall US corporation tax 

revenue, based on historical data, while reducing tax avoidance and broadening the tax base, 

without creating a disincentive for US manufacturing and investment due to comparative tax 

rates. JCT should be asked to do an analysis using the most current and projected data, 

but FA would appear to be revenue positive after elimination of Section 199 credits, foreign 

income tax credits, and the revenue loss from deferral of recognition. The increased tax 

revenue could be used to reduce the corporate tax rate, or pay down the deficit. If JCT 

analysis is not revenue positive, the Congress could also just significantly reduce the 

corporate tax rate on the percentage of export sales, rather than fully eliminating the tax. 

7. New Revenue Balancing Options 

A Value Added Tax: The size of the national debt and annual budget deficits in relation to current 

income tax revenues makes it unlikely that Federal income taxes alone could pay down the debt, even if 

quickly returned to previous levels. Even if the House and Senate switch to Democratic control in 2019, 

the likelihood of any significant income tax increases overcoming a Presidential veto in the next 2 years is 

probably nil. 

The only additional revenue generator with the potential to stabilize and reduce the deficit in conjunction 

with the income tax is probably a Value Added Tax. During the tax reform debate, many Republicans 

showed an interest in moving to a "consumption tax" and to also allow a refund of the tax on US exports, 

to promote international economic competitiveness. A VAT meets those requirements far better than 

previous Republican proposals, and even at low rates has the potential to generate significant revenue, 

with relatively low complexity and lower potential for tax avoidance in an increasingly less "traceable" 

and international economy. We recommend that the Finance and Ways and Means Committees start a 

bi-partisan review of value added taxation as a potential supplement to the income tax. Because 

consumption taxes tend to be regressive in impact, some adjustment may need to be made to income 

taxes to off-set the impact on lower income citizens. 

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An "Automatic" Budget Balancing "Fail-Safe" Act: Because of the very high level of 

partisanship that currently exists in the Congress it will be very difficult for either party to take any 

leadership in balancing the budget by increasing taxes or reducing major expenditure programs. The 

only possible way to get agreement on Increase revenue may be through bipartisan pre-agreement on an 

"automatic" deficit control process similar to prior "paygo" and budget sequestration laws, which weren't 

perfect, but helped control deficits without either party having to take the pollical "blame" for the 

necessary action. Congress should first try to balance expenditures with adequate tax revenue to pay for 

them using regular order and the process improvements suggested earlier. But as a "Fail-Safe" to 

prevent deficits except in times of national economic emergency, we suggest the Congress adopt a 

provision which would provide for automatic income tax rate increases necessary to offset any prior 

budget year deficit. 

Within 60 days of the end of each Federal fiscal year, the Congressional Budget Office would 

send to the Congress, a Budget Reconciliation Report listing the estimated amount of all 

federal expenditures and all estimated Federal revenue for the preceding fiscal year. If the 

estimated expenditures exceed the projected revenue, the report shall specify the amount of 

the deficit which will be collected under the Act as adjustments to the following years specified 

tax rates. 

Within thirty days after a determination by the Congressional Budget Office that a revenue 

deficit existed for the prior fiscal year, the Department of the Treasury shall send to the 

Congress a determination of the uniform percentage of increase in tax rates for corporations; 

Individuals; heads of households; unmarried individuals other than surviving spouses and 

heads of households; married individuals filing jointly; married individuals filing separate 

returns; estates; and trusts that would be needed to collected the deficit amount. 

Sixty days after the Congress receives notice of an automatic rate adjustment percentage 

determined by the Department of the Treasury, the rate adjustments would then be added by 

law, to the currently adopted tax rates for each Income tax category for following calendar 

year, unless the Congress approves by a 60% majority vote of both houses a "Declaration of 

Economic Emergency Requiring Deficit Financing" to rescind or reduce the automatic tax rate 

adjustment. At the end of the following fiscal year, any revenue collected as a result of an 

automatic rate increase which exceeds the amount the original CBO determined deficit for the 

prior year, shall be used to reduce the outstanding national debt. 

These recommendations were prepared for the National Small Business Network by Eric 

Blackledge and Thala Rolnick CPA. 

The NSBN is a nonprofit group that evolved from the 1995 White House Conference on Small 

Business Regional Tax Issue Chairs and do not represent the interests of any other organization 

or business. 

National Small Business Network 4286 45th Street South St Petersburg, Fl 33711 

Phone 541-829-0033 Fax 541-752-9631 Emaillnfo@NationaiSmaiiBusiness.net 

Related research and information is available on our website at www.NationaiSmaiiBusiness.net 

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