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FULL COMMITTEE HEARING ON 

ECONOMIC RECOVERY: TAX STIMULUS 

ITEMS THAT BENEFITTED SMALL 

BUSINESS WITH A LOOK AHEAD 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

JULY 15, 2009 

Small Business Committee Document Number 111-036 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

PARKER GRIFFITH, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

STANDING SUBCOMMITTEES 

Subcommittee on Contracting and Technology 

GLENN NYE, Virginia, Chairman 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

KURT SCHRADER, Oregon 

DEBORAH HALVORSON, Illinois 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

PARKER GRIFFITH, Alabama 

AARON SCHOCK, Illinois, Ranking 

ROSCOE BARTLETT, Maryland 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma 

GLENN THOMPSON, Pennsylvania 

Subcommittee on Finance and Tax 

KURT SCHRADER, Oregon, Chairman 

DENNIS MOORE, Kansas 

ANN KIRKPATRICK, Arizona 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

DEBORAH HALVORSON, Illinois 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

VERN BUCHANAN, Florida, Ranking 

STEVE KING, Iowa 

TODD AKIN, Missouri 

BLAINE LUETKEMEYER, Missouri 

MIKE COFFMAN, Colorado 

Subcommittee on Investigations and Oversight 

JASON ALTMIRE, Pennsylvania, Chairman 

HEATH SHULER, North Carolina 

BRAD ELLSWORTH, Indiana 

PARKER GRIFFITH, Alabama 

MARY FALLIN, Oklahoma, Ranking 

LOUIE GOHMERT, Texas 

(III) 

Subcommittee on Regulations and Healthcare 

KATHY DAHLKEMPER, Pennsylvania, Chairwoman 

DAN LIPINSKI, Illinois 

PARKER GRIFFITH, Alabama 

MELISSA BEAN, Illinois 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

LYNN WESTMORELAND, Georgia, Ranking 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

Subcommittee on Rural Development, Entrepreneurship and Trade 

HEATH SHULER, Pennsylvania, Chairman 

MICHAEL MICHAUD, Maine 

BOBBY BRIGHT, Alabama 

KATHY DAHLKEMPER, Pennsylvania 

ANN KIRKPATRICK, Arizona 

YVETTE CLARKE, New York 

BLAINE LUETKEMEYER, Missouri, Ranking 

STEVE KING, Iowa 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

(IV) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1 

Graves, Hon. Sam .................................................................................................... 2 

WITNESSES 

Johnson, Mr. Stan, Stan’s Heating and Air Conditioning, Arlington, VA. On 

behalf of Air Conditioning Contractors of America ........................................... 3 

McMillan, Mr.Charles, Director of Realty Relations & Broker of Record, 

Coldwell Banker Residential Brokerage; President, National Association 

of Realtors, Dallas, TX. ........................................................................................ 6 

Woods, Mr. Douglas, President, The Association for Manufacturing Technology, McLean, VA. ............................................................................................ 7 

Hederman, Mr. Rea, Senior Policy Analyst & Assistant Director, Center for 

Data Analysis, The Heritage Foundation .......................................................... 9 

Merski, Mr. Paul, Senior Vice President & Chief Economist, Independent 

Community Bankers of America ......................................................................... 11 

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 25 

Graves, Hon. Sam .................................................................................................... 27 

Johnson, Mr. Stan, Stan’s Heating and Air Conditioning, Arlington, VA. On 

behalf of Air Conditioning Contractors of America ........................................... 29 

McMillan, Mr.Charles, Director of Realty Relations & Broker of Record, 

Coldwell Banker Residential Brokerage; President, National Association 

of Realtors, Dallas, TX. ........................................................................................ 35 

Merski, Mr. Paul, Senior Vice President & Chief Economist, Independent 

Community Bankers of America ......................................................................... 46 

Woods, Mr. Douglas, President, The Association for Manufacturing Technology, McLean, VA. ............................................................................................ 56 

Hederman, Mr. Rea, Senior Policy Analyst & Assistant Director, Center for 

Data Analysis, The Heritage Foundation .......................................................... 63 

Statements for the Record: 

The Associated General Contractors of America ................................................... 68 

Computer Technology Industry Association .......................................................... 74 

(V) 

(1) 

FULL COMMITTEE HEARING ON 

ECONOMIC RECOVERY: TAX STIMULUS 

ITEMS THAT BENEFITTED SMALL 

BUSINESS WITH A LOOK AHEAD 

Wednesday, July 15, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 1:00 p.m., in Room 2360 

Rayburn House Office Building, Hon. Nydia Vela ́zquez [chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Moore, Dahlkemper, Kilpatrick, Ellsworth, Graves, Luetkemeyer and Coffman. 

Chairwoman VELA ́ ZQUEZ. I call this hearing of the House Small 

Business Committee to order. 

This past February, Congress approved landmark legislation to 

revive our struggling economy. In passing the American Recovery 

and Reinvestment Act, Congress laid the groundwork for longterm, sustainable growth. That bill contained several small business provisions, and I am pleased to say many of them are already 

working for entrepreneurs. 

Six months after the Recovery Act was signed into law, the 

clouds are starting to clear. To begin, loans from the SBA are up 

dramatically. As of June, the agency has supported more than $6 

billion in lending. Just as importantly, small business credit markets are coming back to life. Loan volumes in the secondary market 

jumped from under $100 million in December to $360 million last 

month. 

So things are looking up. Still, small firms continue to face challenges in accessing capital, and it would be wrong to say that we 

are out of the woods just yet. 

While we are still only one quarter of the way into a sweeping 

two-year plan, this is a good time to stop and check our bearings. 

Today, we are going to evaluate the progress made thus far. Witnesses and Committee members will discuss the Recovery Act’s 

small business tax provisions. In doing so, we can hopefully pinpoint where we have made headway and identify areas in which 

there are still strides to be made. 

Regardless of the economic climate, tax policy is a critical tool for 

growth. So in drafting the Recovery Act, it only makes sense to include relief for entrepreneurs. Already provisions for increased expensing limits and bonus depreciation are helping small firms expand. They are also creating new avenues for growth. 

2 

Some of the most important provisions in the Recovery Act are 

those that invest in new industries. Small firms are already leading the Green Revolution. Increases in clean energy tax credits are 

helping that process along and generating tremendous opportunity 

for small firms. 

In a recent survey by the Air Conditioning Contractors of America, 75 percent of respondents said that they have seen improved 

sales. Because the efficiency sector is dominated by entrepreneurs, 

good news for green businesses is good news for small businesses. 

Clearly, we have come a long way since February. The Recovery 

Act is not just growing new industries like renewable energy. It is 

also reinvesting in old ones, like construction and manufacturing. 

In May, orders for manufactured goods, the kind that the Recovery 

Act lets firms depreciate, show up $2.8 billion. 

Meanwhile, entrepreneurs in the construction business stand to 

win billions of dollars in infrastructure contracts. That is thanks 

largely to the Recovery Act’s Build America bonds. As of early 

June, those tax exempt bonds helped finance $12 billion in new 

projects. 

I think we can all agree that these are promising bright spots, 

but signs of recovery should not be cause for complacency. In seeing the recovery process through, we will need to be patient, and 

we will need to be sure all opportunities are on the table. 

In terms of success provisions, it makes sense to consider increases or extensions. At the same time there are a number of suggested measures that hold very real potential and are worth a second look. 

In moving forward, it is important to remember one thing. These 

are exceptional times. They cannot be met with apprehension. They 

cannot be addressed with inaction. We need to confirm them head 

on within innovative solutions. That is why it’s so important that 

our policies invest in small firms. They are the ones offering fresh 

solutions, and they are the ones leading the way back to prosperity. 

I would like to thank the witnesses in advance for their testimony, and I’m glad that they were able to make the trip to Washington to be with us this afternoon and look forward to hearing 

from them. 

So with that I yield to the Ranking Member, Mr. Graves for his 

opening statement. 

Mr. GRAVES. Thank you, Madam Chair, and thank you for calling 

this hearing on the nation’s economic recovery and the tax provisions in the stimulus package. Thank you to all of our witnesses 

for being here today to share your testimony. 

We are all concerned about the economy, but small firms with 

thin margins and lack of capital are particularly struggling. The 

stimulus was signed into law on February 17th, 2009, with pledges 

of job creation and help for small businesses. Although the overall 

package’s hefty price tag was $800 billion, only a fraction, less than 

one percent of it, was devoted to helping small businesses recover. 

Unfortunately, the promised jobs have not been created and the 

economic recovery has not materialized. 

Instead, the June national unemployment rate was 9.5 percent, 

the worst in 26 years. We were told that it could rise to ten percent 

3 

in the coming months, despite promises in January that it would 

not top eight percent if the stimulus package was signed into law. 

The May unemployment rate in Missouri was nine percent, the 

highest on record, and is even higher in some other states. All of 

the spending in the stimulus has consequences. According to the 

nonpartisan Congressional Budget Office, the federal deficit will 

reach a staggering 1.8 trillion in 2009 and 9.1 trillion by 2019, increasing the national debt to 82 percent of GDP. 

We must do better. America’s small business need our help to 

create jobs and turn the economy around. Unfortunately, the stimulus’ tax provisions are simply operating at the edges of the economy. Although the stimulus’ tax provisions can be helpful, the 

broader, long-term answer to small businesses’ economic recovery 

is income tax rate reductions. 

In addition, small companies need predictability in the tax code. 

We need to extend tax relief for more than a single year so these 

firms can budget and plan for investment. 

Small businesses need to keep more of what they earn. Tax rate 

reductions would help them to invest in their companies so that 

they can expand higher workers and get our economy moving 

again. Any new taxes to pay for health care reform, such as the 

proposed surtax on those with incomes over $280,000 will devastate the many small business owners who pay business taxes on 

their individual returns. 

I support temporary tax relief, but we need to go further. Making 

the 2001-2003 tax benefits permanent would give small firms the 

confidence to purchase new equipment and hire more workers. 

That is why I introduced legislation to permanently extend the 

2001-2003 provisions, and I hope Congress will act to provide this 

predictability to our nation’s businesses. 

Again, Madam Chairman, thank you for calling this important 

hearing today, and I look forward to hearing the testimony from 

our witnesses. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Graves. 

And it is my pleasure to introduce our first witness, Mr. Stan 

Johnson, Jr. He is the president of Stan’s Heating and Air Conditioning located in Austin Texas. This company was founded in 1954 

to fulfill the need for a high quality HVAC service company in central Texas. 

Mr. Johnson is testifying on behalf of the Air Conditioning Contractors of America. The ACCA is a group of over 4,000 air conditioning contractors. 

Welcome, sir. You will have five minutes to make your remarks. 

STATEMENT OF STAN JOHNSON, JR., STAN’S HEATING AND 

AIR CONDITIONING, ON BEHALF OF AIR CONDITIONING 

CONTRACTORS OF AMERICA 

Mr. JOHNSON. Thank you for the opportunity to provide testimony on behalf of the small business service contractors that make 

up the heating, ventilation, air conditioning and refrigeration industry. 

My name is Stan Johnson, Jr. I am president of Stan’s Heating 

and Air Conditioning, a heating, cooling, and indoor air quality 

company located in Austin, Texas metropolitan area. My company 

4 

has been serving residential and commercial customers for over 55 

years. We have gone from humble beginnings and now employ 

more than 40 workers. I come before you as Chairman of the Board 

of ACCA, as you have heard. 

Every day more than 4,000 ACCA member companies across the 

nation help homeowners, small business owners, and building managers realize the comfort and cost benefits of efficient HVACR 

equipment. Eighty-one percent of ACCA’s member companies have 

less than 50 employs, and 50 percent have less than 20 employs. 

My comments this afternoon summarize my written submission 

and focus on some of the expanded energy tax incentives passed as 

part of a stimulus bill, and their impact on the residential and 

small business commercial clients of ACCA members. I hope that 

my testimony will help to inform future policy decisions that further assist small businesses in these trying economic times. 

ACCA believes that tax credits are the best way to encourage 

homeowners and building owners to reach and obtain higher efficiency HVACR equipment. Tax credits help soften the blow of the 

new equipment investment cost and shorten the payback period. I 

can attest that three-fourths, but not all of our member companies 

have seen positive proof that tax credits in the stimulus package 

are working. 

The stimulus bill includes several important changes and modifications to existing tax credits for homeowners found under Sections 25(c) and 25(d) of the Internal Revenue Code. Under the old 

Section 25(c) tax credits, homeowners could only claim up to $300 

for installing qualified HVAC or hot water equipment in 2009. The 

stimulus bill boosted the value of the 25(c) tax credits to 30 percent 

of the installed cost up to a $1,500 cap and extended the credit 

through 2010. 

Under the old Section 25(d) of the tax code, a homeowner who 

installed a qualified geothermal heat pump through 2016 could 

claim a $2,000 tax credit. Geothermal systems require higher initial investment cost, but run with dramatically lower operating 

costs. The stimulus bill removed the $2,000 cap and boosted the 

geothermal tax credit to 30 percent of the installed cost with no 

cap. 

In a survey conducted in May, 50 percent of ACCA member companies saw a small increase and 25 percent saw a significant increase in the sales of qualified, high efficiency HVAC equipment. 

One ACCA member commented that without the $1,500 tax credit, 

we would have had massive temporary and some permanent layoffs. Instead, we have been able to keep steady work during a traditionally slow time. 

Another member recently commented that the credits provided a 

big boost to their sales, leading to a 20 percent increase in replacements over the last year. Indeed, the higher value tax credits are 

helping the homeowners elect to replace equipment instead of repair as long as they can get credit. 

And the boost to the geothermal system tax credits has been a 

real home run. Interest in sales of geothermal equipment has seen 

a tremendous spike. My own company has seen a geothermal business go from zero percent of our business in June of 2008 to over 

30 percent of our business in June of 2009. 

5 

But the gains as a result of the tax code changes in the stimulus 

bill have not been without unintended consequences. A seemingly 

small increase in the minimum SEER and EER, energy efficiency 

qualifying standards that was made late in the legislative process 

has created a lot of confusion for manufacturers, distributors, contractors, and homeowners. 

As a result, consumer choices for some homes have become limited, making it difficult for homeowners to take advantage of the 

tax credits in some situations. There is no doubt the tax credits 

and stimulus bill have made high efficiency HVAC equipment more 

affordable for homeowners. However, the stimulus lacked a companion incentive for commercial and small business building owners. The committee’s report last year on seven ways to stimulate 

the economy by letting the Internal Revenue Code showcase the 

disparity of how commercial; HVACR equipment may only be depreciated over 39 years, but because the expected life span of properly maintained HVACR equipment is only 15 to 20 years, commercial building owners have little or no incentive to upgrade to newer, 

more efficiency, energy efficient equipment. The industry replaces 

a larger percentage of old systems in residential applications compared to old systems in commercial applications. 

ACCA supports passage of H.R. 2198 introduced by Representatives Melissa Bean and Peter Hoekstra to correct this disparity and 

reduce the holding period to a more realistic 20 years for HVACR 

equipment that is ten percent more efficient than the federal minimum standards, and a 25 year schedule for all other new HVACR 

equipment. 

ACCA also endorses the idea of allowing small businesses to expense the purchase of HVACR equipment or allowing bonus depreciation of 50 percent of the installed cost in the year the equipment 

was placed into service. 

Still another option would be to extend the residential tax credits 

to qualified small businesses. Many small businesses from professional offices located in condo townhouse projects to small shopping 

centers utilize the same HVAC equipment found in residential 

homes, but because this equipment is installed in commercial property, it cannot qualify for a tax credit. 

With that I will conclude my comments and I will be happy to 

answer any questions you may have. 

Thank you, again, for this opportunity to testify before you. 

[The prepared statement of Mr. Johnson is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Johnson. 

Our next witness is Mr. Charles McMillan. he is the Director of 

Realty Relations and Broker of Record for Coldwell Banker Residential Broker in Dallas, Texas. He currently serves as president 

of the National Association of Realtors, NAR is America’s largest 

trade association representing 1.3 million members involved in all 

aspects of the residential and commercial real estate industries. 

Welcome, sir. 

6 

STATEMENT OF CHARLES McMILLAN, DIRECTOR OF REALTY 

RELATIONS AND BROKER OF RECORD, COLDWELL BANKER 

RESIDENTIAL BROKERAGE, ON BEHALF OF THE NATIONAL 

ASSOCIATION OF REALTORS 

Mr. MCMILLAN. Thank you, Chairwoman Vela ́zquez, distinguished members of the Committee. 

I am Charles McMillan, 2009 president of the National Association of Realtors and a broker from Dallas, Texas. I am here today 

on behalf of more than 1.1 million members of the National Association who deeply appreciate Congress’ efforts to help small businesses recover and prosper during the current economic crisis. It 

is our belief that the 2009 stimulus legislation has provided helpful 

relief to America’s small business owners, including the Realtors, 

by helping to stabilize the housing market and stimulate the economy. 

I want to focus my remarks today on three solutions in particular 

and provide some comments as you have requested on what more 

can be done. First, Realtors appreciate actions take by Congress to 

provide tax incentives that would stimulate housing investment, 

especially among new home buyers. Early in 2008, NAR advocated 

for a tax credit for purchases of a principal residence. Initially Congress created a $7,500 refundable credit for first time buyers, 

which was in effect from April 2008 through June 30, 2009. 

Because buyers were required to repay the amount, the credit 

was more like an interest free loan, and few consumers took advantage of it. The 2009 stimulus increased the amount of the credit to $8,000. 

It eliminated the repayment requirement, and extended the credit 

from June 30th, 2009, to December 1st, 2009. 

With these improvements, it appears that the 2009 tax credit is 

being used. Realtors continue to receive many calls seeking information on the credit and our Website has received a steady volume 

of hits, and according to market data, during the first quarter of 

2009, first time home buyers accounted for more than half of the 

purchases in 134 of the 152 metropolitan markets that we track. 

That is a significant increase from the average 30 to 40 percent of 

home buyers. 

NAR’s research department is working to compile additional information about first-time buyers, and we will be pleased to share 

those profiles with you as we gather that information. Today we 

ask that Congress take additional steps to insure that the tax credit continues to support America’s housing and economic recovery. 

One, we ask that you eliminate the repayment requirement for 

2008 purchasers. It is unfair that some buyers will be penalized 

simply for buying a few months before the 2009 improvements to 

the 2008 credit were passed. 

Two, we urge Congress to extend the tax credit’s December 1st 

expiration date through next year. 

Three, we ask that Congress make the credit available to all purchasers and at least consider increasing the amount of the credit. 

The second provision I want to touch on briefly is the action 

taken by Congress in 2007 to provide relief from the mortgage cancellation tax. This provision has proven invaluable to many sellers 

and has made the time consuming burden of completing a short 

7 

sale simpler. Congress recently extended this tax relief through 

2012. We greatly appreciate those efforts, Madam Chairman. 

However, Realtors ask that you consider making this relief a permanent part of the tax code. 

Finally, the stimulus bill also provided fee waivers for some 

Small Business Administration programs, raises the guarantee on 

another, and created a new loan program. Again, we applaud those 

efforts. 

In conclusion, real estate is small business at its best. By enacting provisions that stabilize America’s real estate markets, you are 

helping small businesses and America’s communities thrive and 

prosper. 

Once again, we thank you for your efforts today. America’s Realtors stand ready to work with you on the additional measures that 

I have spoken of and on other solutions that will help the real estate industry lead our nation into a new era of economic strength. 

Thank you, again, for inviting me to share our views, and I will 

be happy to answer any questions from the members. 

[The prepared statement of Mr. McMillan is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. McMillan. 

Our next witness is Mr. Douglas Woods. He is the president of 

the Association for Manufacturing Technology. Prior to joining 

AMT, Mr. Woods worked at everything from small tool and die 

shops up to multi-billion dollar machine tool corporations. AMT 

was founded in 1902 to represent and promote the interests of 

American providers of manufacturing machinery and equipment. 

Welcome. 

STATEMENT OF DOUGLAS WOODS, PRESIDENT, THE 

ASSOCIATION OF MANUFACTURING TECHNOLOGY 

Mr. WOODS. Thank you, Madam Chairwoman, and I also want to 

thank all of the members of the Committee. I certainly appreciate 

the efforts that you have already put out on behalf of small business--in particular, manufacturing. 

AMT represents over 400 companies that are involved in making 

all of the equipment that is essentially used in manufacturing all 

of the products used within the United States and around the 

world. We make the equipment that everybody else uses to make 

the products that you see every day all around you. 

We have about 310,000 skilled employees involved in our industry--engineers, mechanics, electricians, tool makers, and the managers and owners of the businesses--and a lot of our businesses are 

small businesses, earning ten million or less. Essentially 60 percent 

of our members would qualify as a small business, and 83 percent 

of the manufacturing industry as a whole would represent small 

businesses. 

While we are a small industry by numbers, we are actually quite 

enormously important from the standpoint of what it is that we 

provide. We are the fundamental backbone for any progress that 

would be made in alternative energy programs, health care initiatives, defense industry strength. It is a tremendously important industry but at the same time, we are seeing the devastation of this 

8 

recession on our industry like all the other industries are, and 

maybe even a little bit more so because of being capital intensive. 

Essentially, we were the first ones into the recession, and unfortunately we are going to be the last ones out, and so we certainly 

appreciate the attention of this Committee to the important needs 

of our members. 

Some of the impact of the recession can be evidenced by the fact 

that, from last year, t sales declined 60 percent for our average 

members from 2008 to 2009. In addition to that, we did for President Obama’s Automotive Task Force a recent survey of our members, and 30 percent of them are saying that within six months 

they will be out of business if something does not change with the 

credit industry and/or the current economic situation. So obviously 

this is critically important. 

Our focus at AMT is in the next six months. If we cannot help 

our members survive the next six months, some of these discussions may be somewhat irrelevant. The number one issue we are 

faced with is the credit issue--while all others things tie together, 

the credit issue is a major point. 

The provisions that the Committee has done in the reinvestment 

act have been great. The 90 percent loan guarantee and the 

waiving of the fees have been phenomenal but unfortunately, if you 

still cannot get the credit, the fact that there is a guarantee does 

not really help, and it has been a problem. 

The bonus depreciation and the enhanced Section 179 expensing 

are great things, as well. We really appreciate that. Unfortunately, 

if companies are not making a profit, it is very difficult to use 

those. So they are not meeting the need of our members right now. 

The net operating loss carryback that is fantastic and can be 

used, but we certainly need to have that brought forward in 2009- 

2010 because fortunately for our industry at the beginning of 2008, 

we were actually making some money. So we cannot take advantage of them until we really get into 2009 and 2010 where we really do have problems. 

As for the energy-related tax incentives you provided, some of 

our members are taking advantage of those, but there is some ambiguity in some of the definitions and rules so its diffucult to figure 

out which ventures actually qualify. So not a large number of people actually may take an advantage of those. 

Obviously, we are as concerned, as Representative Graves pointed out in the beginning, that only $200 billion of ARRA’s 787 billion are actually being provided in funds and being committed, and 

with the lack of credit, again, that still is the number one issue for 

us. 

So, I would like to offer some suggestions that might be of immediate help that we certainly could use from a small business standpoint, and I say that as a recent small business person; I just took 

over this position as an association one would be to try to get 

maybe a temporary reprieve on the federal business taxes like 

FICA, which Representative Schock and Nye from this Committee 

have talked about, which would be very important. 

Also, easing some of the risk requirements on banks who that 

making credits to small business in the manufacturing area and 

possibly offering a temporary stay on certain covenant violations on 

9 

loans that lenders would be actually providing to small businesses, 

maybe take a look at loosening the rope. Do not let it go. It might 

seem counter intuitive to actually increase what are the guidelines 

for somebody that might be in violation, but I think it is critically 

important to look at maybe secondary items like backlogs, employment records, other things that would measure the performance to 

pay back that loan besides just cash, which right now everybody 

would probably be in violation of. 

Longer term, some things such as tax credits for exporting products in 2009 would help trade balance issues and get people exporting their products. As I talked about extending bonus depreciation 

and enhanced Sec. 179 expensing through 2010 and beyond would 

be very helpful. The 5-year net operating loss carryback, if we can 

get 2009 and 2010 included, and possibly look at some companies 

with revenues over the $15 million so that more of our customers 

could also be included in that because they are the ones buying the 

equipment. 

And in some of the legislation that has already been put out 

there, the ′′IMPACT′′ Act and The Build Manufacturing Act, two 

good proposals that already are out there, if aspects of those bills 

could be included, that would be fantastic. 

So the most important thing with all of those said, all of those 

would be for naught if we start imposing any other new programs 

that put taxes onto businesses. So I implore the Committee to do 

the best they can to avoid any burden on these taxpayers going forward. 

And with that I would like to submit if I could a request to have 

my written testimony submitted to the Committee hearing record 

if that is possible. 

Chairwoman VELA ́ ZQUEZ. Without objection. 

Mr. WOODS. Thank you. 

[The prepared statement of Mr. Woods is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you so much, Mr. Woods. 

Our next witness is Mr. Rea Hederman. Mr. Hederman is a Senior Policy Analyst and Assistant Director for the Center for Data 

Analysis in the Heritage Foundation. Me. Hederman joined the 

Heritage in 1995. The foundation is a broadly supported public policy research institute is Washington, D.C. 

Welcome. 

STATEMENT OF REA HEDERMAN, JR., SENIOR POLICY ANALYST AND ASSISTANT DIRECTOR, CENTER FOR DATA ANALYSIS, THE HERITAGE FOUNDATION 

Mr. HEDERMAN. Thank you. 

Chairwoman Vela ́zquez, Ranking Member Graves and other distinguished members of the Committee, thank you for having me to 

speak on the important topic of the 2009 stimulus impact on small 

business and entrepreneurial activity. 

The American Recovery and Reinvestment Act contained a number of provisions aimed at boosting the economic output of small 

businesses either through tax incentives, loan guarantees, or some 

other government initiatives. These provisions included an increase 

10 

in bonus expensing, bonus depreciation of qualified investment expenses. 

Bonus depreciation and expensing provisions are important and 

proper tax policy tools for stimulating economic activity. This is 

why these provisions have been included in previous tax and stimulus bills. 

Specifically, these tools encourage companies to increase investment output and expand activity in the short run. Basically what 

the federal government is saying is that we are having a fire sale 

on capital, and if you act now, you will be able to expand quickly 

and more efficiently. 

Unfortunately, the effectiveness of these proposals may be limited. Since these provisions have expiration dates, small businesses 

may have difficulty expanding before the calendar year and taking 

advantage of these. And current evidence suggests that small businesses have not been able to respond to the latest stimulus proposals. 

For example, a recent survey of small business owners indicated 

they have the same level of capital expenditure and growth in their 

business plans today as they did prior to the expansion of the 

bonus depreciation. Even worse, the number of small business owners planning an expansion over the next year is declining, and we 

see these numbers showing up in the macro economic indicators as 

nonresidential fixed investment has been declining over the last 

three quarters. 

As many Americans are painfully aware, unemployment has 

climbed steadily, reaching 9.5 percent by the end of this year despite projections from the administration’s economic team that the 

unemployment rate would not pass eight percent. Few of the benefits touted by some of the stimulus proposals have been seen to 

date. 

While bonus depreciation expenses were an appropriate policy 

move earlier this year, small business requires Congress to take 

bold action now. Small businesses are some of the strongest pillars 

of employment in the economy. Research shows that job creation 

from small businesses and start-up companies have helped limit 

previous recessions. In fact, over 50 percent of Fortune 500 companies were either founded in a recession or bear market economy. 

While this may seem counter intuitive, this is an example of the 

economic cycle at work and how new companies arising that employ more and more people help in ending a recession. 

Pro growth tax policies can boost small businesses and entrepreneurs, as small businesses expand and hire new employees, offsetting job losses from larger, more established firms. Good economic policies reward these successful companies instead of penalizing their success through higher taxes. 

It is never too late to enact good economic policies. This Congress 

can establish a foundation for strong economic growth by enacting 

strong, good tax policy. First, Congress should make permanent the 

small business tax relief that was enacted in 2001-2003 and the 

bonus depreciation bills that were enacted earlier in this year. Entrepreneurs saw a decline in the marginal tax rates thanks to 

JGTRRA and EGTRRA in 2001 and 2003. Small businesses benefited from lower capital cost as capital gains and dividend taxes 

11 

were reduced. Lower capital cost means that more small businesses 

can be created, as the risk premium for business start-ups decline. 

Unfortunately, capital gains and marginal tax rates are scheduled to quickly increase. These higher taxes are already being calculated by many businesses as they plan for future investment and 

expansion. These higher tax rates will offset the smaller provisions 

in the stimulus bill and hinder future investment. 

Small businesses are also very, very labor intensive. Unfortunately, right now wages are flatter, declining in the last quarter 

and work hours have been shrinking. With the minimum wage expanded to increase over ten percent, companies will have limited 

capability to pass on these wage increases to their employers. Historically, a minimum wage increase of this magnitude results in 

employment losses for small business of one percent. So I would 

like to urge Congress and the Committee to think about delaying 

the minimum wage increase until the economy is more stable. This 

impact will be detrimental to many small businesses who are already short staffed. 

Finally, House Ways and Means Chairman Charlie Rangel announced this tax plan that establishes a surtax on many successful 

companies. The number of people affected by this tax increase, 

about 20 percent of them will have a half of their income from 

small business type associations in income. A tax increase of this 

magnitude will continue to result in job losses and slow economic 

growth. 

I would like to thank the Committee for giving me this time. I 

would like to answer any questions, and if I could submit my testimony to the record. 

Chairwoman VELA ́ ZQUEZ. Without objection. 

Mr. HEDERMAN. Thank you 

[The prepared statement of Mr. Hederman is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. And out next witness is Mr. Paul 

Merski. He is the Senior Vice President and Chief Economist for 

the Independent Community Bankers of America. Mr. Merski has 

more than 25 years of government relations experience in the public and private sector. ICBA represents 5,000 community banks of 

all sizes and charter types throughout the United States. 

Welcome. 

STATEMENT OF PAUL MERSKI, SENIOR VICE PRESIDENT AND 

CHIEF ECONOMIST, INDEPENDENT COMMUNITY BANKERS 

OF AMERICA 

Mr. MERSKI. Thank you, Madam Chair, Ranking Member 

Graves, and members of the Committee. 

I am very pleased to be here to represent our 5,000 community 

banks nationwide. 

Much Monday morning quarterbacking has been taking place 

with the economic stimulus package that was passed back in February. Without a doubt, the severe economic recession did require 

a sizable fiscal stimulus, and ICBA was pleased that in the $787 

billion package many good, positive tax relief measures were included. 

12 

While the bulk of the recovery package enacted did focus on 

spending initiative, beneficial tax relief and reform items are having a very positive effect. Specifically, tax item we see helping the 

economy include the $8,000 first time home buyer tax credit, the 

extension of the alternative minimum tax that prevented 26 million 

people from being forced into paying additional AMT taxes, and 

there was some beneficial tax relief for municipal bonds. 

Additionally, the net operating loss provisions, the immediate $250,000 small business expensing, and of course, the major SBA 

loan program enhancements are all helping many small businesses 

survive and preserve capital during this recession. 

However, the difficult credit market and a depressed economy 

continues to weigh very heavily on our nation’s small businesses. 

ICBA believes additional target tax actions are warranted to boost 

our long-term economic growth. ICBA recommends and supports a 

broad, five-year net operating loss carryback and extended home 

buyer tax credit, robust SBA lending programs, and Subchapter S 

tax reforms. 

At a minimum during these difficult economic times, the tax burden on struggling small business owners should not be increased. 

Additionally, for the stimulus measures to be successful, the unduly burdensome and overly aggressive bank exams that are taking 

place must be addressed. Community banks need the flexibility and 

the capital to support their small business customers on Main 

Street America. 

One of the largest underlying problems preventing our economic 

recovery is still the housing sector. Millions of small businesses are 

suffering the fallout from the dramatic decline in the housing sector because 45 percent of small business loans are backed by some 

type of real estate collateral. Financial institutions in general have 

already written down over 600 billion in real estate assets, and 

that continues. Bank regulators are aggressively forcing even further write-downs, forcing banks to raise even more capital or cut 

back on their lending. 

This vicious cycle in the housing sector must be stopped. The current home buyer tax credit is helping, but we recommend it boosted 

past November and extended to all home buyers, not just first time 

home buyers. 

The Recovery Act did include some positive Subchapter S reforms, but more could be done there as well. More than four million 

small businesses are structured as S corporations, including onethird of all banks. Given today’s tight capital markets, attracting 

capital and funds is critical. Yet the limits that are placed on Sub 

S corporations prevent them from raising capital. 

In order to increase the ability for small businesses to raise private capital, you should increase the number of allowable Sub S 

shareholders, allow IRA investments in Sub S corporations, and 

permit Sub S corporations to issue preferred stock. Given the financial meltdown was caused by asset concentration in the largest financial conglomerates, out tax policies must preserve a diversified 

financial system with capital available for community banks. 

ICBA supported and expanded NOL provision in the economic 

stimulus package, but more needs to be done there, too, and other 

witnesses have already suggested something we support, that is exVerDate Aug 31 2005 18:30 Oct 21, 2009 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\50948.TXT DARIEN
13 

panding the net operating loss carryback which would preserve 

capital for businesses during this difficult recession. 

Today more than half of all small business income earned in the 

United States is earned through pass-through entities, such as Sub 

S corporations that pay the individual income tax. Therefore, Congress must be extremely mindful of how increasing the income tax 

rates will impact small businesses. 

In conclusion, the tax and SBA items passed in the Recovery Act 

are helping. ICBA pledges to work with the Small Business Committee to ensure our nation’s small businesses have the capital 

they need to invest, grow, and provide jobs. 

Thank you. 

[The prepared statement of Mr. Merski is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Merski. 

Mr. Johnson, if I may, I would like to address my first question 

to you. There has been much discussion in the national media 

about the number of jobs lost since we passed the Economic Recovery Act, and you explain in your testimony that nearly 75 percent 

of those surveyed by your organization benefited from the tax credit for HVAC equipment. I just would like for you to comment as 

to where would your industry be today if that credit had not been 

enacted into law. 

Mr. JOHNSON. Madam Chairwoman, there is no doubt that there 

has been a constriction in our industry in the number of jobs. 

There is also no doubt that it would be worse if the tax credits had 

not been out there to encourage homeowners to seriously consider 

the alternative of taking advantage of the program, the tax credit 

program, and moving ahead if needed equipment replacement, creating a win-win situation. It created jobs, and it saved energy at 

the same time, helped the homeowners cut their utility bills. So it 

was a win all the way around the block. 

Yes, we absolutely created jobs. Within my own company as an 

example, we had about a ten percent layoff of staff, and it would 

have been much worse if we had not had the opportunity to increase business. 

Chairwoman VELA ́ ZQUEZ. Of the tax provisions that were included in the Economic Recovery package, can you tell me one or 

two that should either be extended or expanded? 

Mr. JOHNSON. The provisions that are in there should be continued. The $1,500 tax credit, again, if you look at the total picture 

of where we are trying to go with this country, the things that the 

HVACR industry offers are not only job creation, but they are also 

the greenhouse gas issues that we look at and everything else. So 

it is wins on multiple levels. So extending the tax credits for residential applications would be a tremendous benefit. 

What really needs to be looked at is doing something with commercial businesses. Commercial small businesses, commercial 

buildings, we actually do more work on older equipment in commercial applications than we do in residential applications because 

there is no incentive whatsoever, including the depreciation issues. 

So there really needs to be some work in that area. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

14 

Mr. Woods, one of the reasons that firms are struggling to secure 

financing is dwindling cash flow, and the net operating loss provision in the Recovery Act was designed to permit once profitable 

small businesses to offset current losses, thereby reducing the taxes 

owed. 

Do you believe that the provision has improved the cash flow and 

ability to access credit? 

Mr. WOODS. Madam Chairwoman, there is no question that that 

is a good initiative. However, as I was suggested in my testimony, 

in 2008, our companies were making a profit. As we go into 2009, 

now is when our companies are in their most desperate situation. 

If you can carry the provision forward to 2009 and hopefully into 

2010 (because I do not think we are going to come out of this fast 

enough in our industry, as I mentioned, with us being first in and 

last out) it would be very beneficial for us. 

Chairwoman VELA ́ ZQUEZ. So you are telling us that Congress 

should expand it beyond 2009. 

Mr. WOODS. Absolutely, absolutely. That is where the net benefit 

will happen. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Johnson, you mentioned how the depreciation schedules have 

not been updated to match the useful life of certain property. How 

does the failure of the tax code to reflect business operations affect 

your company? And can you offer real life examples of how it alters 

the decisions of your customers? 

Mr. JOHNSON. Well, the existing tax codes for commercial customers allows a depreciation schedule on equipment of 39 years. 

Equipment only last 15 to 20 years. On top of that, you have got 

to consider that a lot of small businesses are in a lease situation. 

They are leasing a property to run their business out of, and the 

leases are uniformly written where the tenant is responsible. So he 

has got a short, maybe a five-year lease. If he has to replace air 

conditioning equipment, he has got a 39 year window to write it 

down in. There is no incentive to do anything but to patch together 

an old piece of inefficient equipment. 

And so we find ourselves going out and patching equipment and 

continuing to keep what is effectively six and seven, eight SEER 

or EER equipment running as opposed to reducing the carbon footprint and reducing the utility consumption and helping the small 

businessman. 

Chairwoman VELA ́ ZQUEZ. Mr. McMillan or maybe Mr. Merski, 

because you make reference to the housing crisis and how important is the home buyer’s tax credit that has proven to be an ineffective means of stimulating our economy or at least the housing economy, but its temporary nature is designed to encourage home buyers to act now. 

However, there are discussions and, you, Mr. McMillan, suggested or recommended that issue be extended. The issue that I 

would like for you to react is that some people are saying that since 

there is discussion going on in Congress about extending it and 

maybe to increase the tax credit, that that would discourage buyers 

from going into the market and purchasing those homes now. How 

would you react to that? 

Mr. MCMILLAN. Thank you, Madam Chairman. 

15 

There really are two distinct issues. We have seen instant response to the tax credit in terms of the increase in existing home 

sales month after month over the past four months. One unintended consequence of the discussion about future actions in Congress is that first-time home buyers anticipating those things taking place take themselves out of the market and sit on the fence 

and wait, and that’s kind of catastrophic right now. We have an excitement back into the marketplace brought on by the tax credit. 

We really need to reduce our inventory at this point so that it contributes immeasurably in healing the economy. 

There is discussion going on in other areas of the Congress about 

increasing the credit. I mentioned it here because we cannot encourage it in too many places. 

Chairwoman VELA ́ ZQUEZ. Mr. Merski, one of the requirements to 

be on this corporation is that it cannot have a nonresident alien as 

a shareholder. This means that some investors cannot invest in 

U.S. firms. With credit at a near standstill, does it make sense to 

have such a limitation on capital options? 

Mr. MERSKI. Well, that is an excellent observation and question, 

Madam Chair. At a time when small businesses and even small 

community banks that are small businesses as well are trying to 

raise capital, the last thing we should do is have these restrictions 

on private sector individuals that want to invest in small businesses, and by restricting shareholder investment in a Sub S corporation, you’re preventing them from attracting the capital that 

they need. 

So you should really be looking at opportunities to take off all 

the restrictions on capital investment in small businesses. On the 

one hand, you have the federal government issuing TARP money, 

government taxpayer money to small businesses yet, on the other 

hand, restricting private investment in small businesses. 

So your point is a good one, and we should take off all the restrictions that are preventing small businesses from getting shareholder investment. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Graves, I have further questions, and in the second round I 

will come back to other witnesses again. 

Mr. GRAVES. Thank you, Madam Chair. 

As I mentioned in my opening statement, I have introduced legislation to permanently extend the 2001-2003 tax cuts, and my question is to all of you, and it will start with Mr. Johnson. Do you 

think this is going to provide businesses with some predictability 

in the tax code which will allow them obviously to purchase new 

equipment, keep their head above water, hire more workers, whatever the case may be? 

Mr. JOHNSON. There is undoubtedly a nervousness in the small 

business community about where are we going next. It is the whole 

program, but certainly there is fear about committing to spending 

money for anything because we do not know where we are going. 

We do not know what we are going to be doing a year from now. 

So that certainly would be a step in the right direction to help us 

get started. 

Mr. GRAVES. Mr. McMillan? 

16 

Mr. MCMILLAN. I would echo Mr. Johnson’s comments. In the 

world of the entrepreneur, which primarily includes most real estate practitioners, predictability is extremely important, and there 

is a reticence to expand and extend your resources and capabilities 

without that degree of predictability. 

Mr. GRAVES. Mr. Merski? 

Mr. MERSKI. Well, without extending the 2001 and 2003 tax cuts, 

you could see marginal tax rates on small business income exceeding 50 percent. The tax that you are talking about includes dividends, capital gains, the individual income tax, and as we pointed 

out in our testimony, half of small business income would be subject to an increase in the individual income tax if those rates would 

go up. So it would be very important to preserve that are on small 

businesses now and not have that fear that tax rates are going to 

go up and scare off investment in small business. 

Mr. GRAVES. Mr. Woods? 

Mr. WOODS. I would say it is an unequivocal yes, and I think you 

could look at it from two different perspectives. As somebody who 

used to run a Subchapter S company, I think the important word 

that you brought up was the predictability. I personally would 

make decisions of having to invest in my company, my personal 

money, depending on what is going on. Knowing what was going 

on from the tax standpoint and what I would have available for 

money to actually put back into my company was critical. Not understanding what might happen certainly left me at odds as to 

whether or not I needed to keep money on the sidelines, not knowing what would happen next or whether I can put it into my company and be more productive. So no question. 

Mr. GRAVES. Mr. Hederman. 

Mr. HEDERMAN. Absolutely. What we have seen in academic literature is that permanent tax cuts provide a lot more economic 

growth in temporary tax cuts for some of the reasons that my copanelists have already espoused. Predictability and stability are 

very key for the business sector and for economic growth. 

If you are looking forward to whether or not you are going to 

make a decision to invest perhaps, for example, in a small business 

start-up where the small business will expand, being able to predict what your tax rate is going to be, how much you are going to 

put at risk in the economy, those are important factors that go in 

economic growth and because investment is so far looking at one 

of the biggest impacts of possible expiration of these taxes is going 

to be to hinder investment. 

Chairwoman VELA ́ ZQUEZ. The Chair recognizes Mr. Ellsworth. 

Mr. ELLSWORTH. Thank you, Madam Chair. 

Mr. Merski, as you’re probably aware, our offices, sometimes 

Congress becomes the complaint department to the United States. 

I get a lot of calls in my office about the unavailability of credit 

with everything going on, and as a representative for the bankers, 

they call me. People go into their banks, places they have been 

doing business with forever, good ratings, never defaulted on a 

loan. You know the whole story. 

Can you go through? You mentioned some of that in your testimony, but some of the reasons, just some ABCs on why these people feel they are not able to get credit now at the banks they have 

17 

been going to for years so that I can go back and have a better idea 

of what to tell them when they call me? Is that a fair question to 

you? 

Mr. MERSKI. That is an excellent question, and that is something 

that is a severe problem out there in the economy right now, the 

small business access to credit. The bottom line is that banks do 

not make any money and do not make any profits if they are not 

lending. Community banks want to lend. All banks want to lend to 

help those small businesses. The credit environment out there, the 

risk, what the regulators are doing to community banks is preventing the community banks from lending as well as they could 

to small business owners. Regulators want them to increase capital. Regulators are forcing write-downs on properties that 

shouldn’t be written down. The regulatory environment is making 

it near impossible for banks, even banks that have capital to do 

lending. So banks are scared to do lending now. 

Also, the tax environment. If you do not know what the tax environment is going to be like a year from now, it is difficult to lend. 

So anything that could be done by Congress to have more sensible 

regulation. 

The community banks did not cause this financial crisis. This 

was caused by exotic products being crafted by Wall Street and the 

risk taken there on Wall Street, but it is having, as you point out, 

a tremendous impact on Main Street and the ability for small businesses to get credit. 

Another point I will just say briefly is that the secondary market 

for small business loans and other types of credit is still frozen. So 

more policies need to address the secondary market so that loans 

that are made by financial institutions can be sold into the secondary market so they can make fresh loans. 

Mr. ELLSWORTH. Thank you, Mr. Merski. 

Mr. Hederman, you talked about just even today we have heard 

about tax credits for heating and air conditioning, for replacement 

windows, extending the 2001-2003 tax cuts. It seems like now Cash 

for Clunkers, you name it; there is a tax credit for just about everything and every industry. 

Can you tell me it seems like if we simplified the tax code overall 

in this country, wouldn’t it be easier and would we need all of the 

credits and different tax cuts for specifics? Can you tell me what 

the foundation or even your personal view on what our tax code 

should look like in a perfect world? It might do all of this and the 

tax code would not have to be, you know, two feet thick. 

Mr. HEDERMAN. You make an excellent point Congressman. I 

mean, what we see is whenever we enact certain types of tax credits, tax subsidies, we create distortions in the tax code, which provides distortions in the economic behavior. People instead of investing in an item, they might choose to invest in Item B simply because that is being subsidized through taxpayers. 

I think if we want to look back at the time period and said what 

was good tax policy, we cleaned up the tax code. I think we can 

look back to 1986 where former Chairman Dan Rostenkowski, Senator Bradley, President Reagan engaged what I think a lot of people think is one of the best public policy initiatives enacted in this 

town where they sat there and they said the tax code is simply too 

18 

confusing. There are too many deductions. There are too many 

credits. People are taking these write-offs for things they don’t 

want to buy simply so they can pay less taxes. If we get rid of some 

of these taxes, some of these credits, we promote better economic 

behavior. We eliminate a lot of these tax distortions that you point 

out, and you are able to give just about everybody a tax cut by lowering the tax rates for all Americans. 

Instead of trying to sit there and pick winners and losers of who 

deserves a tax credit, you are sitting there cutting taxes for everyone. Everybody can benefit, and that is what most economists 

agree will provide the most economic growth going forward, and I 

think that those types of reforms are going to be most important 

as the tax code continues to be more complicated as it has been 

with the addition of all the credits since 1986. 

Mr. ELLSWORTH. My wife and I still do our own taxes, and I will 

give credit mostly to my wife who does it, but again, we are of average intelligence, but the book we go through is this thick, and it 

is extremely difficult to go through, and yet we still have to fund 

the highways, our law enforcement, our military, all the things, the 

services that we come to expect in this country and we deserve. 

So I appreciate the input, and I think that is where we need to 

start moving towards a reasonable and fair tax code in this country 

that might solve a lot of this. 

thank you, Madam Chair. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

I appreciate the opportunities this afternoon to discuss this with 

this panel. They have got a lot of expertise here, and I certainly 

appreciate your comments. 

Mr. Woods, your comments are a great concern to me because I 

have got a lot of tool and die manufacturers in my district. They 

rely on the aircraft industry and the automobile industry, which is 

really struggling in that area. Thirty percent of them will be out 

of business in the next six months. That certainly gives me moment for pause. 

I do not know if we can enact anything quickly enough to help 

those industries to get back on their feet, but I certainly appreciate 

your remarks this afternoon. One of the things that I want to ask 

is I know that Mr. Hederman has made some comments with regards to tax policy. I know we are in the process of obtaining this 

week some new tax proposals that would really impact the private 

small business guys here with regards to health insurance stuff, to 

be able to pay for this. 

If we allow the 2001-2003 tax cuts to expire and then put on top 

of them additional taxes which are being proposed, we are looking 

at close to 65 percent tax rates for small business people who four 

million of the businesses are S corps which are going to pay on 

those income taxes. That is going to decimate in my judgment. I 

would like for you to address that question if you would, please. 

Mr. WOODS. Sure. One of the things that always disturbs me is 

when I read the paper about some of the ways to pay for some of 

these programs, which you know, we all agree that we need to have 

programs. Everybody wants to have good health care. Everybody 

wants to have the clean environment. Everybody wants to take 

19 

care of energy independence. All of us, absolutely, but the problem 

is you cannot do all of those things on the backs of small business; 

and you need to be careful about trying to do all of those things 

before the end of the year as if there is some magic thing that happens at the end of the year. 

Right now small businesses are in the worst situation they have 

been in probably 80 years, and to enact anything additional on top 

of that right now would be devastating. When we collected the information for the automotive task force in looking at who was going 

to be around and who was not going to be around, it became clear 

pretty quickly that the six month window was imperative. And trying to find something from the standpoint of a program that could 

come forward now and help them was, you know, life and death. 

The thought of having something additional on top of all the 

problems we are already trying to sort through essentially puts 

these businesses into a situation where if they are going to put 

their last gasp of putting their home up if it was not already up 

or borrowing the kid’s college fund to try to get through just to 

make it to the other side of this; if they thought on top of doing 

that to make it through this that they were then going to have 

these additional taxes on top, I think a lot more are going to throw 

the towel in because it is a self-defeating prophecy. They really 

cannot get there. 

So I can tell you from my personal experience as a business 

owner, again, I have only been running the association for two 

months. My whole life I have been a business owner. It would be 

devastating. 

Mr. LUETKEMEYER. I appreciate your position because you guys 

have been on both sides of the table, which gives you a very unique 

perspective, and I appreciate that. 

Mr. Merski, very quickly, one of the things that has concerned 

me is that community banking folks are the ones that really are 

the glue that holds our economy together, I believe, from the standpoint that they make the loans to small businesses, which small 

businesses then hire the people and develop the products and make 

our country go. 

So to me they are the glue that holds it together. Yet they are 

the ones who are struggling with a lot of the stuff that is going on, 

and the regulatory environment that we are in is a real problem. 

I have had some discussions with the FDIC and the Federal Reserve folks, and there seems to be a disconnect. 

Have you in your organization or you and your organization; 

have you discussed with the FDIC, the Fed., the Comptroller, any 

of these regulatory groups to come up with some sort of a mindset 

on how to address these problems, how to work with the banks? 

Because there is a huge disconnect right now between what is 

going on in the field and what is going on in D.C., and it needs 

to be resolved if we are ever going to get out of this mess. 

Mr. MERSKI. Well, absolutely, Congressman, that is a tremendous concern throughout the community banking industry from the 

pressure that the regulators have swung the pendulum way too far 

in the other direction and are stifling the bank’s ability to do lending, even banks that are well capitalized, well run, know their customers, know their small business owners and their communities. 

20 

The over-regulation, the excessive examinations are forcing bankers to pull in, and it is a very highly regulated industry where the 

regulator can shut you down and bankers that are in fear of these 

regulators are pulling in their lending, and that is a severe problem that’s causing a downward spiral in the ability for small businesses to get the credit that they need. 

So, yes, something needs to be done there. We have been working 

very well with the regulatory agencies to make sure that regulation 

is fair but also regulation is such that it does not stifle the ability 

of banks to lend. 

Chairwoman VELA ́ ZQUEZ. Would the gentleman yield for a second? 

Mr. LUETKEMEYER. Yes. Thank you, Madam Chairwoman. 

Chairwoman VELA ́ ZQUEZ. I hear that there are so many regulations then, the regulatory burden on community banks and small 

banks, and that there are too many regulations, but on the other 

hand, what caused the crisis that we are in? It was the lack of 

oversight or too many regulations? 

Mr. MERSKI. Well, there is a discrepancy in the application of 

regulation, where you had highly regulated, well overseen community banks where the regulators are in the bank every year examining everything that they do, and then you had a lot of gray area, 

non-bank lenders. You had a lot of Wall Street exotic products that 

were outside of the regulatory oversight. So with the financial regulation reform that is being presented now, we are trying to make 

sure that the unregulated sector of the financial industry is 

brought in under that same regulatory oversight that is given to 

community financial institutions. 

So it was the discrepancy in the application of regulation. Many 

financial entities were completely unregulated or beyond the scope 

of what the FDIC and OCC does. So you raise an excellent point. 

The regulation has to be fair across the board so you do not have 

these gaps. 

Chairwoman VELA ́ ZQUEZ. Thank you for yielding. 

Do you have any more questions? 

Mr. Moore. 

Mr. MOORE. Thank you, Madam Chair. 

To Mr. Johnson and Mr. Woods, many economists say that it will 

be at least 18 months and possibly two years or longer before the 

United States returns to strong economic growth capable of creating a substantial number of jobs, and many of the tax provisions 

being discussed today are temporary. For example, the increased 

Section 179 expensing ends after tax year 2009. The expansion of 

next operating loss carry-back is good for only tax years ’08 and 

’09, and tax break s for consumers, such as the first time home 

buyer credit are also limited to just this year. 

In your opinion will your business or other businesses have sufficient funds to expand and grow your business should the economy 

begin to recover next year and are these tax changes providing you 

with enough of a boost not just to survive this year, but to plan 

for the future? 

Mr. JOHNSON. You know, part of the problem, Congressman, is 

that our businesses are so interrelated to other businesses that it 

is a bigger problem than just our problem. For example, the air 

21 

conditioning industry is very tied to the housing industry. If the 

housing industry is doing badly, guess what. We are going to be 

doing poorly also, and we are seeing that. That is happening to us 

right now. 

So as we look at how long it takes the other segments of our industries in this country to recover, we are going to have to see how 

long it’s going to take us to recover, and we are going to be someplace behind them, getting back up to speed. 

Do I think that we have enough? We ]are playing it very close 

to the vest and trying to be as conservative as we can in our daily 

operating methods and what we are doing, how we are doing what 

we are reporting. 

Mr. MOORE. Mr. Woods, do you have any comments? 

Mr. WOODS. Yes. I would just mention clearly I am not an economist, and I am sure I am nowhere near as smart as my fellow panelists are on economic matters, but what I do know for sure is that 

we as an industry, a manufacturing industry, are not going to be 

coming out of this in 2009, and that is a fact. Six months ago when 

we first started getting into this, we might have thought that actually by 2010 it would be a good year and things would be going 

well again for our industry, and with the data information and 

clear evidence of companies that are disappearing and in deep trouble and what we see on the horizon, we doubt that to be the case 

in 2010. 

So to answer your question, programs obviously need to be somewhat elastic to what is currently going on in the economy, but it 

would be safe to say that for 2009 and 2010, they will clearly need 

those break opportunities, and if they have losses in those years, 

then your programs that actually allow you to take advantage of 

the losses need to be then harvested or utilized as you get past 

2010. 

Mr. MOORE. Thanks to the panel, I yield back, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Ms. Dahlkemper. 

Ms. DAHLKEMPER. Thank you. Thank you, Madam Chair. 

I wanted to ask you a question since this is fresh, what we are 

looking at right now, in terms of the health care. This kind of relates back into taxes, but eight percent that is being proposed for 

small businesses to cover health care costs if they do not provide 

health care for their employees, I mean, I come out of a small business. My husband is still running that business, and we were talking about this payroll, eight percent of your payroll, and actually 

what we pay for our health care now, that actually would be a pretty good deal for us. 

So I guess I just want your opinion. Mr. Woods, I have a lot of 

small, you know, manufacturers in my district in Pennsylvania, 

and, Mr. Johnson, my company is design-build. But I am just curious how that would affect those in your association. 

Mr. WOODS. You actually have a fantastic region in Erie, Pennsylvania for our members. There is a number of great ones there, 

including our past chairman. Yes, while that may seem like one 

facet of that overall bill which I did not get a chance to read all 

1,018 pages, there are certainly elements that may be beneficial, 

and I am sure there could be 300 of the 1,000 that are great proVerDate Aug 31 2005 18:30 Oct 21, 2009 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\50948.TXT DARIEN
22 

grams. The eight percent by itself would certainly seem to be a 

nice, viable number compared to other costs. 

I think the concern gets to be just any additive cost, any additive 

tax at this point, and the unknowns of all of the other potential 

costs that go along with it. So that by itself seemingly may be good 

if you weren’t doing some other program already as a percentage 

of payroll. 

I think the bigger issue gets to be all of the other potential costs 

to get associated with that as you unravel the implementation of 

the full program. 

Ms. DAHLKEMPER. Right now, what would you say percentagewise is your association providing health care? Do you have any 

idea what that is? 

Mr. WOODS. I could not tell you what the number is. I can tell 

you that the whole time that I was in business in Rochester, New 

York up the throughway from your neighborhood, almost all the 

companies in Rochester that were in the tool and die and manufacturing industry, almost everybody I knew was in it, but I could not 

give you an actual statistic for our association. 

I would be happy to get back to you with that. 

Ms. DAHLKEMPER. I would appreciate that if you could. I am trying to get some sense on this. 

Mr. Johnson. 

Mr. JOHNSON. And I thank you for the question. Let me tell you 

that in February we had a national meeting in Fort Worth, Texas, 

and we had a town hall meeting at that national convention that 

focused on health care, and we voted in the room. There were 500 

or so people probably in that room, and we voted. About 60 or 70 

percent of our membership were in support of what President 

Obama had on the table at that time. That support has evaporated. 

They are taking too much money. There were suggestions being 

made on how to do this that did not sound nearly as expensive as 

what we are seeing today, and small business cannot support. 

Ms. DAHLKEMPER. Can you elaborate on that a little bit about 

what specifics you are talking about? 

Mr. JOHNSON. Well, I wish I could, and like Mr. Woods, I had 

not read the entire package, but the dollar amount that is attached 

to it and the hit that we are going to take for it are not proper or 

correct. 

We provide insurance at my company. We provide insurance for 

our employees. We pay a great deal of the cost ourselves, and we 

want to continue that program, but I think within our industry we 

recognized there was some need for reform nationally, and there 

are things that need to be done. 

But the dollar amount that is being put on the package is going 

to hurt small business tremendously, and the support that we 

showed in February is not there today. 

Ms. DAHLKEMPER. Mr. McMillan, did you want to comment? 

Mr. MCMILLAN. I would. Thank you, ma’am. 

Even though you did not direct the question at me, there is a crisis in health care in the Realtor family. We have 1.1 million Realtors, and health care is not available to us, period, as a small business structure. We have more than 300,000 Realtors who have no 

23 

access to health care at all. When we couple that with the average 

age being around between 50 to 52, it is a high risk problem. 

The other Realtors who do have health care have it through a 

spouse being employed in another industry. So thank you for letting me contribute that. 

Ms. DAHLKEMPER. Thank you. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves, do you have any other 

questions? 

Okay. I do have a question for Mr. Johnson. Based on the fair 

question that Ms. Dahlkemper approached before, and that is what 

percentage of your payroll represents the health care insurance 

that you provide to your workers? 

Mr. JOHNSON. What percentage do we pay? 

Chairwoman VELA ́ ZQUEZ. Yes. 

Mr. JOHNSON. I believe that we pay 80 percent. I would have to 

go back and check, but we pay about 80 percent of the premiums 

for the employees. 

Chairwoman VELA ́ ZQUEZ. And that represents what percentage of 

your entire payroll or your expenses? 

Mr. JOHNSON. I am sorry. I do not know exactly the answer to 

that. It is probably two percent, a pretty small number. 

Chairwoman VELA ́ ZQUEZ. Okay. Mr. McMillan, FHA approved 

lenders recently approved a bridge loan program that allows first 

time buyers to use their federal tax credit to cover closing costs or 

a downpayment. Have you seen more taxpayers taking advantage 

of this program to get more people into homes? 

Mr. MCMILLAN. Madam Chairman, there is a pent up demand 

for this, and we are grateful that FHA permitted that, but there 

are only 11 states that have the capability to offer the FHA program, and they do so by having a nonprofit housing entity at the 

state level that is a pass-through similar to one of the taxing entities. When you file your taxes, you can get a bridge loan at closing. 

In the other states, the National Association of Realtors has tried 

to provide information to members so that those who do not have 

that state program, can create similar programs in their states, but 

it is an excellent program. There is great demand throughout the 

nation for money tied to the tax credit at closing as opposed to 

waiting to file, but it is not available in all states. 

Chairwoman VELA ́ ZQUEZ. Great. Right now the credit is $8,000. 

Is there a number that you propose that will help the housing market? 

Mr. MCMILLAN. Madam Chair, any increase to the $8,000 will be 

helpful. The numbers that I have seen thrown out there is almost 

a doubling, an increase to $15,000. We think it would be awfully 

helpful if the tax credit could be extended beyond being available 

only to first time home buyers, to all home buyers because there 

is a tremendous amount of inventory that must be absorbed before 

we can get back on track. 

Chairwoman VELA ́ ZQUEZ. Okay. Do any of the members here 

have any other questions to the witnesses? 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

Just a quick question. Mr. McMillan, your group does not have 

a group health policy that all of your membership could participate 

in? 

24 

Mr. MCMILLAN. Congressman, we do not. My limited understanding of that is the type of organization that we have, we are 

prohibited from having such. I do not understand the complexities 

of the insurance industry, but there are groups, small businesses 

of our size who are involved with unions who certainly could have 

health care with shops of four to five, 20 people, but we do not 

qualify under that. 

Mr. LUETKEMEYER. Well, my thought process was that there are 

a lot of proposals out there, but one is to allow small businesses 

to be able to pool together, and I think your group is a perfect 

group to look at from the standpoint that you could pull together 

as a state or as a total organization or as a region to be able to 

find a way to provide that kind of coverage for your group and be 

able then to find a way to lower your cost. 

So I appreciate your comments. 

That is all I have, Madam Chairman. 

Mr. MCMILLAN. Thank you, sir. 

Chairwoman VELA ́ ZQUEZ. Thank you very much. 

And we will continue to have discussions regarding the tax provisions in the stimulus package since there are discussions about extending or expanding some of those tax credits and have discussion 

with the Ways and Means Committee to share with them our concerns regarding those provisions that are having a positive impact 

on small businesses. 

With that, I just want to take this opportunity to really thank 

all of you for coming before our Committee today, and I ask unanimous consent that members will have five days to submit a statement and supporting materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. 

Thank you. 

[Whereupon, at 2:20 p.m., the Committee meeting was concluded.] 

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