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SUBCOMMITTEE HEARING ON 

REGULATORY BURDENS ON SMALL FIRMS: 

WHAT RULES NEED REFORMS? 

SUBCOMMITTEE ON REGULATIONS, 

HEALTHCARE, AND TRADE 

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JULY 30, 2008 

Serial Number 110-109 

Printed for the use of the Committee on Small Business 

( 

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

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLES GONZALEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director 

SUBCOMMITTEE ON REGULATIONS, HEALTH CARE, AND TRADE 

CHARLES GONZALEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Gonzalez, Hon. Charles ........................................................................................... 1 

Westmoreland, Hon. Lynn ...................................................................................... 2 

WITNESSES 

Dudley, Hon. Susan E., Administrator, Office of Information and Regulatory 

Affairs, Office of Management and the Budget ................................................. 4 

Sullivan, Hon. Thomas M., Chief Counsel for Advocacy, U.S. Small Business 

Administration ..................................................................................................... 6 

Wagner, Mr. Chris, Deputy Commissioner, Small Business/Self Employed 

Division, Internal Revenue Service, U.S. Department of the Treasury .......... 7 

Renker, Mr. Paul, Renker, Eichs, Parks, Architects, St. Petersburg, FL, on 

behalf of the American Institute of Architects .................................................. 19 

Van de Putte, Mr. Pete, Dixie Flag Manufacturing Co., San Antonio, TX, 

on behalf of the National Federation of Independent Business ....................... 21 

Scribner, Mr. Scott, Plano TX, on behalf of the National Association of the 

Self-Employed ....................................................................................................... 22 

Santis, Mr. Lon D., Manager of Technical Services, Institute of Makers of 

Explosives ............................................................................................................. 24 

APPENDIX 

PREPARED STATEMENTS: 

Gonzalez, Hon. Charles ........................................................................................... 25 

Westmoreland, Hon. Lynn ...................................................................................... 27 

Dudley, Hon. Susan E., Administrator, Office of Information and Regulatory 

Affairs, Office of Management and the Budget ................................................. 28 

Sullivan, Hon. Thomas M., Chief Counsel for Advocacy, U.S. Small Business 

Administration ..................................................................................................... 52 

Wagner, Mr. Chris, Deputy Commissioner, Small Business/Self Employed 

Division, Internal Revenue Service, U.S. Department of the Treasury .......... 70 

Renker, Mr. Paul, Renker, Eichs, Parks, Architects, St. Petersburg, FL, on 

behalf of the American Institute of Architects .................................................. 77 

Van de Putte, Mr. Pete, Dixie Flag Manufacturing Co., San Antonio, TX, 

on behalf of the National Federation of Independent Business ....................... 86 

Scribner, Mr. Scott, Plano TX, on behalf of the National Association of the 

Self-Employed ....................................................................................................... 90 

Santis, Mr. Lon D., Manager of Technical Services, Institute of Makers of 

Explosives ............................................................................................................. 95 

EXHIBITS: 

IRS Tax Form 8829 - Expenses for Business Use of Your Home ........................ 101 

IRS Tax Publication 587 - Business Use of Your Home ....................................... 102 

(III) 

(1) 

SUB COMMITTEE HEARING ON 

REGULATORY BURDENS ON SMALL FIRMS: 

WHAT RULES NEED REFORM? 

Wednesday, July 30, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

Subcommittee on Regulations,Healthcare, and Trade, 

Committee on Small Business, 

WASHINGTON, DC. 

The Subcommittee met, pursuant to call, at 10:06 a.m., in Room 

1539, Longworth House Office Building, Hon. Charlie Gonzalez 

[chairman of the Subcommittee] Presiding. 

Present: Representatives Gonzalez and Westmoreland. 

Chairman GONZALEZ. Good morning, everyone. My apologies for 

being late. This hearing on the Regulatory Burdens of Small Firms: 

What Rules Need Reforms? is now called to order. I am going to 

start off with an opening statement so that everybody understands 

the procedure. I make an opening statement. The ranking member 

will make an opening statement. Other members can submit opening statements in writing. They will be filed and then we will proceed with the testimony of the first panel comprised of three witnesses, and I will give you instructions at that time. 

I am still trying to catch my breath. I actually came up from the 

basement. And at my age I shouldn’t have done that. The stairs are 

killers. I am very interested in the results of a recent survey of 

small business owners conducted by Suffolk University and released by the American Management Services . The poll found that 

63 percent of respondents believe that the Federal Government is 

doing nothing to help small businesses. 64 percent believe that the 

administration and the SBA specifically aren’t doing enough for 

small businesses. This poll reflects the current challenging climate 

in which many small owners struggling to stay afloat may find 

themselves today. 

The volatile costs of gasoline, the ever-increasing cost for health 

care and the crumbling housing market are negatively impacting 

small businesses. Tough times like these highlight the Federal 

Government’s responsibility to make sure we are not placing undue 

burdens on the small business community. Under the best of circumstances, operating a small business is an enormous undertaking. 

For many entrepreneurs business begins and ends at their desk, 

and there are never enough hours in any given day. The last thing 

these men and women need is to be bogged down by excessive paperwork. But unfortunately, complex Federal regulations have alVerDate Aug 31 2005 16:24 Sep 03, 2008 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\42523.TXT RUSS
2 

ready created a time-consuming logistical nightmare for countless 

small businesses throughout our country. Many government regulations use one-size-fits-all policies that often fail to account for 

small business needs. Consequently, small firms end up bearing a 

disproportionate share of the Federal regulatory burden. Despite 

having tighter profit margins, they are forced to pay more to comply with government rules than their corporate counterparts. 

This discrepancy is so great, in fact, that small enterprises spend 

45 percent more on regulatory compliance than big businesses. 

That adds up to $2,400 in additional fees per employee. And when 

it comes to various other regulations, the differences are greater 

still. Some of these rules can cost small businesses as much as 364 

percent more to comply. One specific regulation, tax reporting, is 

67 percent more expensive. 

In other words, we are forcing small businesses with limited capital to pay more than big businesses with deep pockets. In an attempt to address this inequity, Congress passed the Regulatory 

Flexibility Act way back in 1980, which requires government agencies to consider the effects of their policies in small businesses. But 

after three decades, it has fallen short of accomplishing its original 

goal. This is because Reg Flex tends to be inconsistent in its application. 

For example, there is no uniform method of practicing Section 

610 which, if properly employed, would stem the inequities currently facing small firms. Section 610 requires Federal agencies to 

periodically review rules, and gauge their impact on small businesses. But while it is a good requirement in its design, it has not 

been applied consistently. Recognizing Reg Flex’s shortcomings, 

this committee has already taken steps to improve this system. 

Last December, we passed H.R. 4458, which will significantly 

overhaul the regulatory process. Among other provisions, the bill 

introduced by Mr. Brad Ellsworth of this committee provides an 

important clarification to Section 610. 

In that same vein the Small Business Administration launched 

the regulatory review and reform initiative, or r3, last year. This 

rule promises to improve the Reg Flex system by identifying and 

addressing its ineffective policies. It will also allow entrepreneurs 

to raise their own concerns and suggest targeted reforms. R3 has 

the potential to be an invaluable resource for small firms. It will 

not only give them a voice in the Federal regulation process, but 

it will also address some of their most significant challenges. For 

example, SBA’s Office of Advocacy hopes to use this rule to simplify 

tax policies for at-home businesses. R3 promises to confront this 

issue, along with other concerns, head on. 

As we will discuss today, many Federal compliance policies are 

outdated and unnecessarily complex. Small business owners should 

not have to put hours of their time towards untangling these regulations because, as this committee and our entrepreneurs well 

know, such time would be better spent on conducting business as 

usual. 

In today’s hearing, we will look at the effects of regulatory burdens on small firms. We will also explore potential solutions, such 

as the Small Business Regulatory Improvement Act, and the r3 

program. I want to thank all of the witnesses in advance for their 

3 

testimony. The committee is pleased they could join us today. And 

we look forward to their insight on these issues. 

[The statement of Chairman Gonzalez can be found in the appendix at page 25.] 

Chairman GONZALEZ. At this time, it is my privilege to yield to 

the ranking member, Mr. Westmoreland, for his opening statement 

please. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. Let me just say, 

I really appreciate the chairman having these hearings. He and I 

have talked. And I come from a small business background. I was 

in the real estate building development business. And I certainly 

understand Federal regulations on small business. And as the 

chairman and I have talked, we have come up with a different subject matter that we want to have a hearing on. And I really do 

thank him for this. 

When I was elected to serve in Congress, I was issued a mandate 

by my constituents to reduce the impact of Federal Government on 

our daily lives. And after 4 years, I don’t know that I might have 

failed in that because I can’t think of anything we have reduced in 

the last 4 years. I am all too aware of the feeling that our own government is working against us. This us-versus-them belief is held 

in small businesses all across this country. And honestly, I cannot 

blame anyone for thinking that because most small business people, Mr. Chairman, work 18 to 20 hours a day just trying to keep 

their small business in business and they really don’t have time to 

keep an eye on the government and what the government is doing 

to try to revamp or reorganize their business to make the government, I guess, seem like they have a responsibility. 

Recent government estimates place the cost of complying with Federal regulations at $1.1 trillion. That averages out to about 

$10,000 per household, and I don’t know how much per small business. But we are here today to constructively address what we already know. Excess Federal regulations negatively impact America. 

I think Washington has made a few good steps. However, they 

have been baby steps. President Bush’s executive order directing 

Federal agencies to place more emphasis on the economic impact 

of regulatory proposals is a good idea. However, I feel that it 

missed an opportunity by not addressing the loopholes in the Regulatory Flexibility Act. The executive order also stops short of preventing agencies from using narrow interpretations of Reg Flex in 

order to ignore their congressionally imposed responsibilities. 

SBA’s Office of Advocacy is to be commended for its proactive approach to reducing this burden on small business. The r3 program 

is another step towards this goal. Involving stakeholders in the 

process of pinpointing rules that merit review makes good sense. 

However, the combination of Federal agencies’ distaste for transparency and the Office of Advocacy’s lack of authority to force those 

agencies to consider reforming unnecessary regulations creates an 

environment where very little can be accomplished. 

To be clear, I am not waving a white flag at this issue. Everyone 

in this room has a vested interest in seeing small businesses grow 

and thrive in a global marketplace. In order for that to happen, we 

must work to increase American competitiveness by reforming and 

removing the regulations that restrict growth. This is a top priority 

4 

for me and our Nation’s businesses. And the question is, is it a priority for the agencies in Washington? I welcome these distinguished guests, witnesses, panelists. And I want to thank you for 

your willingness to come here and testify and take some tough 

questions. And again, Mr. Chairman, thank you for holding this 

hearing. 

Chairman GONZALEZ. Thank you very much, Mr. Westmoreland. 

[The statement of Mr. Westmoreland can be found in the appendix at page 27.:] 

Chairman GONZALEZ. Believe me, I appreciate your cooperation 

and that of your staff. And I always want to start off by acknowledging the fine work of the staff of the Small Business Committee, 

and the subcommittee especially, but on both sides and that is majority staff and minority staff. They worked really hard putting the 

memo together and giving us some great explanations and background. 

A special thanks to the witnesses I have already expressed. The 

way this will work is each witness will be given 5 minutes to make 

their statement. You have your written testimony, which will be 

made a part of the record. So if you can just summarize it in those 

5 minutes, it doesn’t seem like enough time, but we will follow up 

with questions. And since it is just the ranking member and myself 

at this point, we will have plenty of time for you to expand and to 

elaborate on some of the statements you would like to make. 

PANEL I - PARTICIPANTS IN ORDER ARE: HON. SUSAN DUDLEY, ADMINISTRATOR, OFFICE OF INFORMATION AND REGULATORY AFFAIRS, OFFICE OF MANAGEMENT AND BUDGET; 

HON. THOMAS SULLIVAN, CHIEF COUNSEL FOR ADVOCACY, 

UNITED STATES SMALL BUSINESS ADMINISTRATION; CHRIS 

WAGNER, DEPUTY COMMISSIONER, SMALL BUSINESS/SELF 

EMPLOYED DIVISION, INTERNAL REVENUE SERVICE, 

UNITED STATES DEPARTMENT OF TREASURY 

Chairman GONZALEZ. And I will be introducing the witnesses as 

they testify. The first witness is the Honorable Susan E. Dudley. 

Susan E. Dudley was appointed in April 2007 to serve as the administrator of the Office of Information and Regulatory Affairs at 

the Office of Management and Budget. From 1998 through January 

2007, Ms. Dudley served at the Mercatus Center at George Mason 

University, where she directed the regulatory studies program from 

2003 to 2006. Welcome. And we look forward to your testimony. 

STATEMENT OF HON. SUSAN E. DUDLEY 

Ms. DUDLEY. Thank you for inviting me, Chairman Gonzalez and 

Ranking Member Westmoreland. I appreciate the opportunity to 

discuss the Office of Information and Regulatory Affairs, or OIRA 

as we call it, our efforts to ensure that the Federal Government understands the impact of regulations on small businesses, considers 

cost-effective regulatory alternatives for small businesses, and 

looks for ways to reform regulations to lower burdens on small 

business without sacrificing important public protections. 

Small entrepreneurs are the engine of economic growth in America. They represent over 99 percent of employers and provide 60 to 

80 percent of net new jobs. Yet as you pointed out in your opening 

5 

remarks, Mr. Chairman, they bear disproportionate regulatory and 

paperwork burdens. OIRA, along with SBA’s Office of Advocacy 

and other Federal regulatory agencies, is working both to minimize 

unnecessary burdens and also to help America’s small businesses 

comply with regulatory and reporting requirements. 

Since OMB began to keep records in 1981, Federal agencies have 

published over 120,000 Federal rules in the Federal Register. Operating under Executive Order 12866, which was issued by President 

Clinton in 1993, OIRA coordinates interagency review of the most 

significant of these rules prior to publication. We estimate that the 

average yearly cost of the new major regulations issued between 

2001 and 2006 is about 47 percent less than over the previous 20 

years, and yet the average yearly net benefits of new regulation 

has increased substantially. 

While we are working to ensure that new regulations are cost effective based on projections of what their impact will be, most existing Federal rules have never been systematically evaluated to 

understand their actual benefits and costs. Given the number of existing regulations on the books, it would be valuable to understand 

which of them are working as intended and which could benefit 

from reform. One tool to do this is Section 610 of the Reg Flex Act 

as you both have discussed. The Office of Advocacy’s recent guidance to agencies on conducting 610 analyses should make this 

promising tool more valuable. The comprehensive approach envisioned by Section 610 has advantages but it also may not target 

regulations in most need of reform. 

In some cases, businesses and consumers have adjusted to regulations that have been in place such that they are no longer binding. In an effort to identify regulations most in need of reform, both 

OIRA and the Office of Advocacy have solicited nominations from 

the public for regulations that are unduly burdensome, outdated or 

have resulted in unintended consequences. 

In response to our 2004 request for nominations, the public made 

189 recommendations, focussing on regulations that largely affect 

the manufacturing sector. Working with the relevant agencies, the 

Office of Advocacy and the Department of Commerce, we selected 

76 of these for priority consideration and action. To date, agencies 

have completed approximately 70 percent of the 2004 manufacturing reforms, and we plan on providing a comprehensive update 

on the status of these reforms in our 2008 draft report to Congress. 

We have also followed with interest the Office of Advocacy’s r3 initiative, which I am sure Tom Sullivan will talk more about. Several 

of Advocacy’s top 10 are similar to nominations OIRA has received. 

And we are working together with agencies to pursue these reforms. 

OIRA also has authority, under the Paperwork Reduction Act 

and the Small Business Paperwork Relief Act, to reduce existing 

burdens on small businesses. These statutes give OIRA and agencies responsibility for eliminating unnecessary, duplicative, and unjustified paperwork burdens, particularly on small entities. 

In addition to seeking public comment and OMB approval of initial collections of information, agencies must seek and obtain extensions of OMB approval at least once every 3 years. This provides 

6 

a vehicle for ensuring that existing paperwork burdens are re-examined on a regular basis. 

Finally, let me note several E-Gov initiatives that, while not reducing the number of regulations and paperwork burdens on small 

businesses, are designed to simplify and streamline compliance. 

Business.gov is a one-stop shop where businesses can locate the 

government compliance guides and forms they deal with on a regular basis, thereby reducing the effort needed to comply with government regulations. Business owners have self-reported saving 

over 3 million hours so far this year alone by using this portal. The 

Business Gateway Initiative also promotes data harmonization to 

reduce the complexity of reporting processes and improve the reuse 

and distribution of information across Federal, State and local 

agencies. And we plan to release a comprehensive analysis, including several case studies shortly by mid August. Thank you. 

Chairman GONZALEZ. Thank you very much. Appreciate that and 

look forward to some questions and some responses from you. 

[The statement of Ms. Dudley can be found in the appendix at 

page 28.] 

Chairman GONZALEZ. The next witness is the Honorable Thomas 

M. Sullivan. Mr. Sullivan is the chief counsel for the Office of Advocacy at the U.S. Small Business Administration. Prior to joining 

the SBA, he worked as executive director of the National Federation of Independent Business Legal Foundation. Mr. Sullivan, as 

head of the Office of Advocacy, is charged with independently advancing the views, concerns and interests of small businesses before Congress, the White House, Federal regulatory bodies and 

State policymakers. Mr. Sullivan. 

STATEMENT OF HON. THOMAS M. SULLIVAN 

Mr. SULLIVAN. Thank you, Mr. Chairman, Representative Westmoreland. Good morning, thank you for allowing me to appear before the committee. My name is Tom Sullivan. I am the chief counsel for Advocacy. And because my office is independent within this 

Small Business Administration, the views expressed here don’t necessarily reflect the position of the administration or the SBA. This 

testimony was not circulated for comment through OMB. My job is 

to try and remove regulatory barriers that stifle small businesses’ 

ability to create jobs, drive innovation, and build communities. The 

main tool used by the Office of Advocacy to accomplish this is the 

Regulatory Flexibility Act. Section 610 of that Act requires agencies to periodically review the rules that are on the books and consider revising them to reflect modern conditions in order to ease 

the burden on small business. 

GAO reports, law review articles, this committee and others have 

pointed out that government has not done very well in streamlining, downsizing or modernizing existing Federal rules and regulations. To try and address this problem, last year my office 

launched the small business regulatory review and reform r3 initiative. It is designed in part to improve compliance with Section 

610 and further the goals of periodic review. Through r3’s public 

rule reform nomination process, small businesses and their repVerDate Aug 31 2005 16:24 Sep 03, 2008 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\42523.TXT RUSS
7 

resentatives can point out existing agency rules they feel should be 

reviewed and revised. 

Last year small business stakeholders nominated over 80 rules 

for review and reform. 10 of those nominations were chosen for the 

top rules for review and reform this February. Now we are working 

with agencies to respond to those calls for reform. My office will 

post online agency responses to the top 10 reform nominations next 

month, and we will update that progress report every 6 months. 

When the Office of Advocacy started to receive suggestions last 

year for rules that should be reviewed and reformed, we evaluated 

them to see one, whether the rule being nominated has ever been 

reviewed before for its impact on small business. 

Two, whether technology, economic conditions or other factors 

have changed since the rule was originally drafted. Three, whether 

the rule imposes duplicative requirements. Four, whether that rule 

could reasonably be reformed to better accomplish its intended objectives with less burden on small business. 

And lastly, we evaluated the overall importance of the rule to 

small business and communities. Let me be clear to the subcommittee, just because a rule that was not nominated for reform 

does not mean that my office ignores it. Rather, the nominations 

that were not chosen as the top 10 rules for reform have given my 

office valuable insight into how we prioritize the regulatory issues 

of concern for small business. Three weeks ago, we kicked off our 

request for nominations for next year and we have already received 

about a dozen suggestions. I believe that the r3 program will be an 

important tool for keeping agencies’ attention focused on Section 

610 of the Reg Flex Act and improving the quality of reviews of existing regulations. Given the importance of periodic reviews of current rules, Congress, my office and Small Business have a common 

interest in the long-term success of r3. Thank you, Mr. Chairman. 

And I would be happy to answer questions. 

Chairman GONZALEZ. Thank you very much, Mr. Sullivan. 

[The statement of Mr. Sullivan can be found in the appendix at 

page 52.] 

Chairman GONZALEZ. Our next witness is Mr. Chris Wagner, 

who is deputy commissioner of the Small Business Self-Employed 

Division in the Internal Revenue Service. Mr. Wagner has held numerous positions and enforcement functions in the IRS. He also 

served as the Deputy National Taxpayer Advocate. Welcome, Mr. 

Wagner, and you may begin your testimony. 

STATEMENT OF CHRIS WAGNER 

Mr. WAGNER. Good morning, Chairman Gonzalez and Ranking 

Member Westmoreland. My name is Chris Wagner, and I am the 

deputy commissioner for Internal Revenue Service Small Business/ 

Self Employed Division. I appreciate the opportunity with talk to 

you today about the IRS’s efforts to reduce burdens for small businesses. The small business self-employed division is made up of 

26,000 employees who serve about 57 million taxpayers, roughly 

about 1/3 of the tax-paying population. This consists of 9 million 

small business corporations and partnerships with assets of $10 

million or less, 41 million self-employed and supplemental income 

8 

earners, and 7 million other taxpayers who file employment, excise, 

estate, gift and fiduciary tax returns. Because the employees within 

my division work directly with small business men and women, 

they understand the critical roles small business plays in our Nation’s economy. Small businesses represent more than 99 percent 

of all employers and employ half of all private sector workers. 

While my division at the IRS does enforce the tax laws against 

small businesses, we also have an obligation to assist them in understanding and complying with the tax law. 

This taxpayer service aspect of what we do is critical because we 

know that some level of noncompliance reflects a lack of understanding by small businesses of their true tax obligations. This lack 

of understanding is often a function of complexity of the Tax Code 

and the burden associated with complying. 

One of these areas that affects small businesses, and an area of 

prime interest to the members of this subcommittee, is the home 

office deduction. In 1976, Congress passed legislation providing 

very limited circumstances in which an individual, or an S corporation taxpayer, may take a deduction for an office in the home. 

Much has changed in the past three decades. And due to technological advancements and other significant changes to business environment, many more small businesses are now able to operate effectively out of the home. In fact, according to the Small Business 

Administration, home-based businesses represent over 50 percent 

of all small businesses. This evolution makes the benefit of claiming a business deduction for an office in the home even more valuable to small business taxpayers. 

However, because of the complexity involved in claiming the deduction, we believe a number of small businesses that are eligible 

to claim deductions do not. The IRS has looked extensively at this 

issue and explored ways to simplify the computations required to 

claim the office in the home deduction. We concluded that reducing 

burden on business taxpayers with home office expenses could best 

be accomplished through a legislative change. One of the challenges we identified was the statutory requirement to recapture depreciation. 

Homeowners claiming deductions for an office in their personal 

residence are required to recapture depreciation allowed or allowable when selling their home. In other words, whether depreciation 

is claimed or not, additional computations are necessary and a tax 

liability occurs when the home is sold. Despite the fact that we are 

unable to simplify the home office deduction, we continue to work 

with small businesses, helping them understand their obligations 

and how to claim the deduction. Here are a few ways that we work 

with the public and third-party stakeholders to help small businesses comply with their obligations. We have posted information 

on our Web site, IRS.gov, providing links to specific publications 

with information on the home office deduction. 

We work with partners such as the Small Business Administration, State and local government agencies and community organizations to provide small business tax workshops and other educational seminars which include information on home office deduction. We have produced educational materials to supplement forms 

and publications such as the virtual small business tax workshop, 

9 

which can be viewed online at IRS.gov or ordered as a DVD. An 

entire chapter of the workshop is devoted to the home office expense. We issued a home office deduction fact sheet that is used 

in outreach and is available on IRS.gov in both English and Spanish. 

Mr. Chairman, my written statement discusses in greater detail 

many of the things we are doing to reduce the burden on small 

businesses as well as the steps we are taking in terms of outreach 

and education. I appreciate the opportunity to be here this morning 

to elaborate on a few of those issues. Thank you, and I will be 

happy to respond to any questions. 

Chairman GONZALEZ. Thank you very much, Mr. Wagner. 

[The statement of Mr. Wagner can be found in the appendix at 

page 70.] 

Chairman GONZALEZ. And I will lead off with a question for each 

member of the panel. And I will start off with the administrator 

of the Office of Information and Regulatory Affairs. And you referred to it as OIRA? 

Ms. DUDLEY. Yes. 

Chairman GONZALEZ. OIRA. I am trying to figure out when we 

actually look at the regulatory scheme and its impact on small 

businesses. Now we can do it before the regulation is adopted and 

of course then once it is implemented and its effect. Your office, if 

I understand it, actually comes in at all stages of this, but I think 

it is really important—that you come in before the adoption of regulation—can you explain that quickly to me? And how in the world 

can you really do that, I mean, with the complexity and the enormity of the Federal Government today? 

Ms. DUDLEY. Under President Clinton’s executive order, my office 

reviews—and what we do, we conduct an interagency review. So we 

would engage Tom Sullivan’s office as well as other agencies on all 

regulations both before they are proposed in the Federal Register, 

and again before they are issued in final form. All regulations there 

are classified as significant. So of the 120,000, I would say probably 

a little over 20,000 of those went through the interagency review 

that we coordinate. And we review them—do you want more details 

on how— 

Chairman GONZALEZ. I am just wondering, the percentages that 

are reviewed subject to review or whatever, are there any changes 

that actually occur as a result of the review? And this is not criticism of anyone. I just know that there is only so much time in a 

day. You only have so much in the way of staff. The ability to actually accomplish that particular task. I mean, how realistic is that? 

And in accomplishing that task, how many of these regulations actually get sent back for tweaking, review, total overhaul and such? 

Ms. DUDLEY. Usually when I am sitting in the seat, I am getting 

criticized for changing too many regulations. 

Chairman GONZALEZ. That is a good criticism. 

Ms. DUDLEY. I can actually give you statistics on that. Because 

when we conclude review—there are four options; withdrawn by 

the Agency, consistent with the executive order with changes, so 

that means changes that took place as a result of the interagency 

review; consistent without change; or returned to the agency. And 

10 

we have statistics on how many are in each of those categories. I 

will be happy to give you that. 

Chairman GONZALEZ. Yeah. If you would. And I think in some 

measure—and it is good to actually share that with many individuals or small businesses that may be in contact with—and saying 

look, we do have someone out there. And this is not about fixing 

blame. And I think Mr. Westmoreland and I are together on this. 

This is about fixing the problem. And as a matter of fact, Mr. Sullivan’s initiative and everything came to light as a result of another 

hearing we had. 

Now let’s say it is ongoing. Now you come in after the fact. We 

have the regulation out there, and we are talking about 610 and 

such. How do you function even in that particular environment? 

What is the best vehicle? How do you actually do that? How do you 

perform? 

Ms. DUDLEY. Our focus has been primarily on the new regulations. And so I think that is where you would see the greatest effect on the regulations. But as you say, it is complicated. We don’t 

know what the real impacts will be. And it is important to look at 

the regulations that are in place. To do that, we have sought recommendations from the public for over several years. And what we 

are doing is, in response to those recommendations, we are going 

back to the agencies. We have done something similar to what 

Tom’s r3 does: identify priority regulations for reform, gone back to 

agencies, and are working with those agencies on completing those 

reforms, I hope before I leave office. 

Chairman GONZALEZ. Thank you very much. Which leads me 

right into what Mr. Sullivan has been doing because I think all 

eyes are probably on your office, Mr. Sullivan for guidance. Because 

you are basically in charge of being this advocate for all these 

small businesses. Someone is just going to assume you are the one 

that should be keeping pulse on what is going on out there and 

identifying. So I do want to commend you for the 3r initiative that 

you took. I think that is a great vehicle. And that is what I would 

like to do is maybe concentrate my questions on a couple of things 

about—and for the benefit of the audience, we were having another 

hearing in which Mr. Sullivan was testifying on the Regulatory 

Flexibility Act. 

And I was suggesting that we should have some sort of a site, 

you know, ask Nydia or complain—and meaning Nydia, not out of 

disrespect, but actually a great deal of affection and admiration. 

Chairwoman Nydia Velazquez. She is the chair of the Small Business Committee, and you would just go in on the Internet and you 

would file your biggest grievance against some regulation. So Mr. 

Sullivan informed me, he says, well, we already have that. Nydia 

was very happy to hear that it would not be her Web site or whatever. 

Mr. Sullivan, we are identifying vehicles. How do we get this 

input from the small business community? So you have something 

here. But in our discussions in the office the other day, I think one 

of the concerns, of course, is one that we do something. And that 

is what we are doing here and that we act on it. And you all will 

have your own recommendations but also about continuity. So let’s 

say during your tenure and during Ms. Dudley’s tenure, and who 

11 

knows what 2009 holds other than it is going to be a new administration, and maybe we can be of assistance to make sure there is 

some continuity regardless of change and regardless whether it is 

a McCain administration or an Obama administration. There are 

great changes. 

So what are your views on vehicles such as 3r? What else can 

we do to identify those regulatory schemes that really do need 

some reform from the ground up? What can we do within the agencies and departments, that they meet their own responsibilities in 

that regard? And then about continuity. 

Mr. SULLIVAN. Thank you, Mr. Chairman. I think primarily to 

make the regulatory review and reform initiative work, it will depend, in large part, on the oversight mechanism here in the House 

and also in the Senate. The administration can work as aggressively as possible. But without the type of oversight insistence that 

this committee is looking over agencies’ shoulders to make sure 

they are sensitive to the burden on small business, it won’t work 

very well. 

The r3 initiative, even though I am very proud of it taking place 

under my leadership, is an acknowledgement that there has been 

a law on the books for 28 years that hasn’t worked very well. And 

we are excited that working with that law, the Regulatory Flexibility Act has progressed enough to have this type of initiative. But 

we are still in the infancy about looking at, how do we take the 

existing $1.1 trillion regulatory burden and how do we streamline, 

downsize and modernize it to lessen its impact on the small business community? 

So I think the simple answer to your question is, this type of initiative will depend very much on the vigilance of this Oversight 

Committee to make sure that agencies, when asked by the small 

business community—and please keep in mind, I am simply a megaphone for that small business community. My job is to connect 

Main Street with government agencies and hopefully have those 

agencies have a better result. To the extent that this committee 

makes it clear to those agencies that you are looking over their 

shoulders to make sure that when Main Street small businesses 

voice their concerns, they are heard and responded to will go very 

far in making the r3 initiative a success. 

Chairman GONZALEZ. And I apologize. It is r3. And again, I just 

commend you for that effort. But I think it is important that you 

have advocates on this committee. And hopefully we will be back 

for the 111th Congress so that we can be making those recommendations regardless of who may be in charge at that point in 

time. One last question is, it is important though to deliver. And 

that is that we heard, not only heard and that it was credible and 

a legitimate complaint and that there are changes. I think a surefire way to frustrate your effort is if we don’t respond. So that is 

imperative, is it not? 

Mr. SULLIVAN. Yes, Mr. Chairman. You have recognized really 

what GAO has recognized as a failing of the implementation of Section 610. The Government Accountability Office, GAO, did a review 

recently and said that over the period of 5 years, agencies had actually conducted 1,300 610 reviews. And that seems like a great 

number. The problem is that many small businesses and folks in 

12 

the small business community are first unaware that these reviews 

happened. To the extent that there are positive outcomes of these 

reviews, I don’t think that those have been adequately explained 

or described on how they benefit a small business’s bottom line. So 

this r3 initiative, the regulatory review and reform initiative, is 

also in part to help agencies, to say, you know, the credibility of 

the Office of Advocacy, our relationship with small businesses is at 

an all-time high. Let us use that credibility to make your reviews 

of rules and regulations worthwhile. 

And to the extent that you do something positive, then let’s amplify that positive so that a small business owner knows that it affects their bottom line. Because the disconnect that exists between 

reviews or the lack of reviews, according to GAO, is harming the 

610 implementation. 

So we are hopeful that this initiative long term gives agencies 

the ability to seek approval of reforms that they take and not hide 

it from public comment from small business comment. 

Chairman GONZALEZ. Thank you very much, Mr. Sullivan. And 

a question to Mr. Wagner. Obviously, one of the top 10 was the 

home office deduction. And you have covered it and such. And 

there can be a difference of opinion here. I mean, and the IRS may 

have already responded to Mr. Sullivan. He may already be posting 

their response. And I think that response may be, this will take a 

legislative fix as opposed to regulatory. And we can maybe have a 

difference of opinion on that. And we will probably let Ways and 

Means figure that one out for us. 

How often do you come to that conclusion as you review some 

sort—is review the IRS Code and the regulations that accompany 

the enforcement of the Code as requiring a legislative fix as opposed to a regulatory fix because obviously legislative takes a lot 

longer. 

Mr. WAGNER. Correct. It really depends on the law. Quite often 

we are able to make adjustments as we put out regulations. But 

actually, the laws that we are given in the Internal Revenue Code 

are really very detailed. So most of the regulations we put out are 

interpretative regulations. 

We are just kind of interpreting what is in the Code itself. So 

there are times that we are able to do things through regulation 

and we do apply regulations when we can. But there are times 

when we are limited by the Code or other sections of the Code from 

doing something. In the case of the office in the home deduction, 

that is kind of where we are with that particular issue. 

Chairman GONZALEZ. Mr. Wagner, I am going to read something 

that staff actually prepared regarding—after they reviewed some 

materials from the IRS. And you said in your statement that regulations promulgated by IRS are not subject to review under Reg 

Flex, Regulatory Flexibility Act, because the Agency is only allowed 

to consider the administrative impact, the administrative impact of 

compliance with a regulation, not the tax burden itself. 

So you are making this distinction. You are saying well, sure, it 

is going to cost a small business a whole lot of money because they 

conduct all their business out of that spare room in their house. 

But our regulation can be so complex, it can’t comply. So they don’t 

go ahead and attempt to get the deduction. But the bottom line for 

13 

them is, yeah, it is their bottom line. It does impact them. But 

what you are saying, there is a distinction between the administrative compliance cost and the consequence of the tax burden. 

Mr. WAGNER. Right. Because when you look at the actual Code 

itself, the law itself, if that is causing the burden, if we make adjustments in the regulations that add to the burden that is caused 

by the tax law itself, then that is what we would consider. So we 

are saying the administrative burden that we add through the regulations is what we would consider under the reform, the Regulation Flexibility Act. 

Chairman GONZALEZ. And I understand that. And I think in the 

discussions it may be esoteric. But to the small business, it is that 

bottom line. It is a burden because the regulation does not allow 

them to take advantage of the deduction which obviously does affect their livelihoods. 

Thank you very much for your responses. And thank you, Mr. 

Westmoreland, for your patience. And I recognize Mr. Westmoreland, the ranking member, for his questions. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. 

Ms. Dudley, in your opening statement, you talked about the 

2007 OMB report to Congress. What was the cost between 2001 

and 2006? And what was the cost over the previous 20 years? You 

mentioned that there was a 47 percent deduction. And you may not 

have those figures now. But I think that that would be interesting 

to actually have those figures. 

Ms. DUDLEY. I will get them to you. I don’t have them right here, 

but I will get them to you. 

Mr. WESTMORELAND. Also the other question is, you mentioned— 

and yet the average yearly net benefits of new regulation has increased substantially. Can you explain what one of those might be? 

Ms. DUDLEY. What one of those regulations might be? 

Mr. WESTMORELAND. Uh-huh. That has got a positive net benefit 

to somebody. 

Ms. DUDLEY. Our report to Congress lists the regulations of the 

previous years. And so it lists the costs and benefits. For the most 

part, we try to make sure every regulation we issue does have net 

benefits unless otherwise constrained by law. There are some statutes that say you can’t really consider those factors. But to the extent that agencies are allowed to consider them, we work with 

them to try to make sure they do. 

Mr. WESTMORELAND. Okay. But do you have any examples of 

what those might be? Could you get some examples? I mean, and 

show me kind of how you go through and try to determine what 

the net benefit is, and how that is I guess associated with who the 

regulation is placed upon. 

Ms. DUDLEY. I think that is a very good question because sometimes the benefits accrue to different people than the costs accrue 

to. So for example environmental regulations will often have very 

large net benefits. And the benefits are social benefits over several 

hundred of years whereas the costs may be falling on people, particularly small businesses today. Others, the benefits and costs are 

borne more by the same people. For example our vehicle fuel efficiency regulations. The benefits are expected to accrue to drivers 

who will save money in gasoline if they have more fuel-efficient 

14 

cars. One thing I should note is on environmental regulations and 

occupational safety and health regulations, Tom’s office under 

SBREFA, the Small Business Regulatory Enforcement and Fairness Act, gives Tom’s office and a small business panel the opportunity to get involved and focus right in on what are the impacts 

of this on small businesses, even before I see it for review. So it 

provides for an even earlier stage of review, for those two agencies 

in particular. 

Mr. WESTMORELAND. I am very familiar with both those agencies. And trust me, we will have people wearing bubbles before it 

is over and they won’t be able to work. 

The other thing I wanted to comment on you to talk about the 

flexibility for community drinking water systems. Very familiar 

with this. In fact, in one of the counties I represent, they basically 

had to run a water line out there, very expensive for the homeowners because it was a small drinking system. You have in here 

that it was started in 1996 when an amendment to the Safe Drinking Water Act came up. You talked about the denominator had 

mentioned that there was really no way—or it had never been 

found to be unaffordable. 

In other words, all the different tests that you had to go through, 

it was really impossible to prove to the EPA any of these things. 

And you said that this nomination is similar to a reform recommended by OMB by the public in 2002, which was approximately 6 years after this came out. And then you say, and we are 

also interested in working with advocacy and EPA to see that this 

nomination is pursued to completion. It is 2008. It has been 12 

years. 

Ms. DUDLEY. Yes. And it is a high priority of mine personally 

and Tom’s personally. There are different legal interpretations of 

how to use the Clean Air Act. And I think it remains to be seen 

whether we actually see that finished this year. I would like to 

very much. 

Mr. WESTMORELAND. Well, you can understand what the concern 

might be in trying to look at some of these if it takes you 12 years 

and you haven’t done it yet. I am assuming this has gone through 

different administrations and so on and so forth. And I think that, 

in and of itself, is a problem. 

Mr. Sullivan, you and I had a great conversation the other day. 

And I am going to ask you the same question I asked you in my 

office. 

How many regulations have been done away with during your 

time at the administration? 

Mr. SULLIVAN. Mr. Westmoreland, I will give you the same answer, although with a little bit more research that I have had— 

Mr. WESTMORELAND. Good. You found one? 

Mr. SULLIVAN. I did. I did. First of all, the Regulatory Flexibility 

Act that my office oversees really does put the responsibility on the 

Agency to make a final decision. And I think that is important for 

the Committee to absorb, is that I tried to lead agencies to the 

right place. I tried to give advice on how their actions will impact 

small business. And with respect to Section 610, I try to give advice 

on how their existing rules may be out of date and how to reform 

them to help small business. But ultimately it is their decision. 

15 

And we use every tool possible to convince agencies to do good for 

small business. 

I would have to say in direct response to that question, we are 

not always successful. And because of that, we don’t have very 

many rules that we have done away with. However, since I have 

been chief counsel for advocacy—or in the last several years there 

have been a few notable rules that do show Washington, D.C.’s sensitivity to how regulations impact small business. 

The first is one that I worked on extensively when I was with 

NFIB and that was the ergonomics regulation that was passed 

under the last administration. My predecessor, Jerry Glover, was 

courageous in standing up and telling his own administration that 

that was not good for small business. And he did not prevail. However, thanks to Congress and the President, they overturned that 

rule. So that is one. But it did take an act of Congress. 

One that is a little bit more recently, and I do view as EPA’s responsiveness to small business concerns, was several years ago 

they were considering requiring every pollution report to be filed 

electronically. And small businesses were very concerned that this 

would cost close to $40,000 to update their computer systems, receive training, and they pleaded with then-Governor Whitman. 

Governor Whitman was the head of EPA at the time. They said, 

you know this may be a good idea at some point when the technology highway is such that every small business has the exact 

software, exact computer systems. Maybe this will make sense and 

maybe it will be an efficient way to submit pollution reports. But 

right now it will devastate us. 

And we presented that material to the Environmental Protection 

Agency. And because of her leadership, they withdrew the rule. So 

that is one that I am very proud of. And with this r3 initiative, we 

were looking for other rules that may be duplicative or out of date 

that we can also work with the small business community and 

agency leaders to say, maybe we don’t need that rule anymore. 

Mr. WESTMORELAND. And Mr. Sullivan, that is the NP—the national—the pollution? 

Mr. SULLIVAN. The actual rule that they were thinking of doing, 

it has a long acronym that is pronounced CROMERR, but it has 

to do with record keeping on a whole slew of different environmental reports that are required. It is not restricted to one particular Clean Water Act— 

Mr. WESTMORELAND. Because there is a national permit that you 

now have to get for storm water run-off. Even though cities and 

counties and States have a permitting process, you now have to 

have a national? 

Mr. SULLIVAN. Yes. Yes. Mr. Westmoreland, you and I did talk 

about a rule that this administration did take a leadership position 

on. And it was the Environmental Protection Agency’s construction 

and development rule. And there was a different EPA administrator at the time. But when small businesses, and in particular 

your former livelihood, the home builders and others said, you cannot require—you should not require another Federal form to be 

sent to Washington, D.C. that is basically already required at a 

local level. 

16 

The home builders believed that sending that other Federal form 

to Washington would not make the rivers and streams cleaner. And 

the head of EPA agreed and did not go ahead with the proposed 

rule at the time. There was legal action. And now the Environmental Protection Agency is under a court order to come back 

again with a similar approach. And my office is working very hard 

with EPA, once again, to make sure that the views of small business enter into the process so that what comes out of EPA reflects 

a sensitivity to small business. 

Mr. WESTMORELAND. Thank you, sir. And Mr. Wagner, just a 

couple questions for you. 

In your statement, you had the burden reduction form 13285A. 

Do you know how many of these Burden Reduction Act, I guess, 

processes have actually been adopted by the IRS, how many have 

been submitted and how many have been adopted? I can imagine 

what some of the submissions you have got were. But do you know 

how many have been adopted? 

Mr. WAGNER. I do not know the exact number of how many have 

been adopted. But I know we have had a lot of good suggestions 

come through and we have adopted but I don’t have the actual 

number. 

Mr. WESTMORELAND. One of the things that the Chairman mentioned was the home office deduction. And I know a lot of people 

that just quit doing it just to keep from being audited or called 

upon by the IRS. Does the IRS have any proactive—in other words, 

if they see a certain number of things that are being filed wrong 

or incorrectly, are they proactive in looking at that administratively to see if there needs to be some type of clarification or 

change when so many people are doing something wrong or improperly or seem not to understand it? 

Mr. WAGNER. We do a lot in the area of outreach and education 

on a lot of issues that we have in the IRS. So we are always looking for areas that we see that people are making mistakes on. This 

area particularly happens to be one, the office in home deduction. 

Looking at the data we have, they get it wrong about half the time. 

About half the time they get it correct, the other half they are either claiming too much or claiming too little on the office in the 

home deduction. Taxpayers let us know if there is an area that we 

need to look at to see if we can make some improvements. 

First of all, we knew there was a burden in this particular area, 

plus we get a lot of feedback through a lot of different organizations, external stakeholders even people who are claiming the deduction are telling us it is difficult to claim this deduction, to calculate it. That is why we looked at it and have spent a lot of time 

trying to figure out how can we do a better job at making this less 

burdensome. And we have spent much time looking at it extensively. And that is how we came to the conclusion that for this to 

really be addressed properly, to really reduce the burden on taxpayers, it would take a legislative change to do that. That is how 

we got the conclusion. That is an example. 

Mr. WESTMORELAND. One final question, Mr. Chairman. I will 

make it quick. And this is to all of you. What brings about a rule 

or regulation change? Does somebody in your office just think of it? 

Does it come from suggestions? Does it come from a legislative acVerDate Aug 31 2005 16:24 Sep 03, 2008 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\42523.TXT RUSS
17 

tion? And I guess it could do all of the above. If it comes from legislative action, is there any consultation with the legislative branch 

to find out exactly what the legislative intent of the law was versus 

what some person in your office may think it should be? And I 

know that is a multipart question. But I would love to hear from 

each one of you about it. 

Ms. DUDLEY. I will start with a quick answer. I think it does 

come from all three. I would say in order or frequency, it would be 

legislative change, discussions with the public. And that is largely 

through the nomination process that OMB has conducted and the 

r3 process that Office of Advocacy is doing. And then I would say 

a distant third would be initiatives from within our offices. 

Mr. WESTMORELAND. Do you check to see what the real legislative intent was from the legislator or from the Committee, from 

which it came before you start enacting rules? 

Ms. DUDLEY. The agencies that are given the authority from 

Congress, they would take the lead on that. So our role is to review 

theirs. So I am not sure of the extent to which that is done. I assume it is done but I don’t know. 

Mr. SULLIVAN. Congressman Westmoreland, I also agree with 

Susan Dudley that changes to regulation do come from all three 

places, legislative agency activity and from small businesses and 

their association representations here in Washington, D.C. 

But I believe and it has been my experience as the chief counsel 

that the more agencies rely on small businesses to help them get 

it right, the better off they are. I see time and time again when 

a small business owner who is also the plant manager, who is also 

the accountant, who is also the H.R. manager, when they sit down 

with OSHA, when they sit down with Department of Labor, when 

they sit down with EPA and say, you know you may have gotten 

this proposal wrong, here is how I would do it. The discussion that 

is not adversarial at that point makes remarkable changes to the 

outcome. And I will give you one example of how a regulatory 

change does happen. 

Bill Farren was a small business owner, very successful gas station owner from Pine Bluff, Arkansas, and in the 1980s he got very 

upset that he had to fill out a Federal form that told his local fire 

chief that he had gas on the premises. 

Now because Mr. Farren was so aggravated by this, he decided 

to tell his Members of Congress, he told my predecessor, he told the 

Chair and ranking members of the Small Business Committee, he 

told the head of the Environmental Protection Agency, Carol 

Browner, that this rule should be done away with. And because of 

the tenacity of that small business owner, the rule was eventually 

changed and done away with. And many times, Congressman 

Westmoreland, that is what it takes. 

Mr. WESTMORELAND. Sure. 

Mr. WAGNER. I am not the expert to speak on this for the IRS. 

Our Chief Counsel is the one who really should be talking about 

this. But I would say that we definitely do get recommendations 

from all three areas that you just talked about. 

Mr. WAGNER. But also, we do look at the legislative intent. As 

a matter of fact, that is one of the discussions we had about this 

particular issue for the office in the home deduction. We came to 

18 

the conclusion it would take legislation to correct this. We looked 

at the legislative intent of Congress when they created the exception in 280A. And that is how we came to that conclusion. That is 

definitely something we consider in our regulations. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. 

Mr. GONZALEZ. Thank you very much, Mr. Westmoreland. And 

just one last observation. And that is, I think, Mr. Wagner, when 

you pointed out that on the home office deduction, that half of the 

time people get it wrong or something. If that is not a huge red 

flag. I mean, you can understand people’s reluctance. And in my 

discussion with a dear friend of mine, who is actually a tax court 

judge, he was explaining to me about exclusive use, the very restrictive standard and how people get tripped up. You know, did 

you ever, you know, do anything on that computer or that television for one second? Did you watch ESPN for 5 minutes? And 

boom, you are in trouble. 

I think there are some—and I know there is going to be a disagreement whether we can do it through regulation or a legislative 

act, we need to be providing that. I mean, with the Internet out 

there, we are really talking about micro-businesses now. Small 

businesses we understand, but within that definition are just thousands and thousands of micro-businesses. And which lends itself, 

obviously, to operating out of someone’s home. We have to accommodate at that or else we shouldn’t have that deduction. But I 

think it is a fair deduction for, again, proper use, when properly 

used. 

But I want to thank all three witnesses. And at this time you are 

dismissed. And hopefully, we will see you again. And thank each 

of you for your service, and we will go ahead and set up for the 

next panel. We are going to resume the hearing. And I am going 

to make an assumption, Mr. Sullivan is here, and I realize the 

other witnesses may not be able to—from the previous panel, because of scheduling, may not be able to stay and listen to the testimony. I assure the witnesses of the second panel we have representatives from those agencies. 

So your testimony is very important not just for the information 

you provide members of the committee, but also those very agencies that we have been discussing and their actions. Again, I will 

be introducing the witnesses right before they testify. Instructions 

to the witnesses again, green light means you have the 5 minutes. 

When the yellow light comes on, that is 1 minute. And then red, 

that is the end of your 5 minutes. But please understand your full 

statements are made part of the record. And further, we will have 

time for questions and answers. 

19 

PANEL II - PARTICIPANTS IN ORDER ARE: MR. PAUL RENKER, 

PRINCIPAL, RENKER EICH PARKS ARCHITECTS, ON BEHALF 

OF THE AMERICAN INSTITUTE OF ARCHITECTS; MR. PETE 

VAN DE PUTTE, DIXIE FLAG MANUFACTURING COMPANY, ON 

BEHALF OF THE NATIONAL FEDERATION OF INDEPENDENT 

BUSINESS; MR. SCOTT SCRIBNER, PLANO, TEXAS, ON BEHALF OF THE NATIONAL ASSOCIATION FOR THE SELF-EMPLOYED; AND MR. LON SANTIS, MANAGER TECHNICAL SERVICES, INSTITUTE OF MAKERS OF EXPLOSIVES 

Chairman GONZALEZ. And again, just like the other witnesses, 

you may be able to elaborate on some of the information you wish 

to provide us. The first witness is Mr. Paul Renker. Mr. Paul 

Renker is the principal of Renker Eich Parks Architects in St. Petersburg, Florida. His firm specializes in educational facilities and 

historic restoration. Mr. Renker is testifying on behalf of the American Institute of Architects. Founded in 1857, AIA is the leading 

association for licensed architects, with more than 83,000 members. 

Welcome, Mr. Renker. 

STATEMENT OF PAUL RENKER 

Mr. RENKER. Good morning, Mr. Chairman and Ranking Member 

Westmoreland and members of the Subcommittee. I am Paul 

Renker. I am an architect, small business owner, and a member of 

the American Institute of Architects. Thank you for inviting me to 

discuss the Federal procurement regulation that has been identified under the SBA’s r3 initiative as being burdensome on small 

businesses that contract with the Federal Government. Commonly 

referred to as the retainage clause, the Federal Acquisition Regulation rule for fixed-price architectural-engineering services allows 

Federal agencies to impose a 10 percent withholding, or retainage, 

on fees. This 10 percent can be hell until the full construction of 

a project. 

This retainage clause presents an unnecessary burden to nearly 

230,000 small A/E firms who contract with the Federal Government. It is a strong deterrent for small firms for three reasons. 

First, 10 percent is higher than the amount withheld under many 

other types of service contracts. For small design firms with a very 

small profit margin, having 10 percent of their fee held back for 

what could be years greatly restricts their cash flow. 

Secondly, A/E firms typically complete the major portion of their 

work in the design phase, long before construction is complete. This 

leaves design firms short of 10 percent of the payment amount for 

a substantial period of time. The result, as the chairman of the 

American Council of Engineering Companies Small Firms Council 

recently said, is an interest free loan to the Federal agencies at the 

small firms’ expense. 

Third, a 10 percent retainage requirement is not necessary in 

order to protect the taxpayers. There are common methods of determining whether performance of A/E services has been satisfactory 

long before payment of services or completion of construction. Furthermore, the withholding is counter to the Brooks Act, which establishes the qualifications-based selection process, or QBS, for A/ 

E firms. 

20 

QBS ensures that only the most competent and capable firms, 

those with a proven track record of good performance, are selected 

for design contracts with Federal agencies, even before they negotiate potential fees. I would like to take a few moments to relate 

our firm’s first experience with a Federal project. Through the QBS 

process, our firm was chosen and awarded a contract to design a 

new Job Corps Center for the Department of Labor in St. Petersburg, Florida. 

This was a small business award, and we are very happy and 

proud to be selected. We started fee negotiations in June of 2006. 

We received our first payment for services approximately 220 days 

from the start of fee negotiations. I mention this because our firm, 

as a small business, has to staff and plan for large projects such 

as this. This resulted in our firm incurring costs and expenses for 

salaries and overhead for 220 days without compensation. We were 

forced to borrow money to maintain our salaries and expenses. 

When compensation was received, 10 percent was withheld, further 

impacting our cash flow. We understand that the intent of the 10 

percent retainage is to protect the interests of the government and 

the taxpayers and to help ensure they receive services equal to or 

greater for what they paid. 

However, this is already addressed under the system in which 

architects and engineers provide services. The Department of Labor 

contract we signed includes a handbook and detailed description of 

services and deliverables required for payment. We are required to 

submit progress documentation of our work at four key milestones. 

In each case, professionals hired by the Department of Labor review our work in great detail for compliance with submittal requirements, as well as the design program intent. Only after our 

submittal is reviewed and approved is our invoice for services accepted and processed for payment. 

The 10 percent retainage of our fees was held in increasing 

amounts over the entire period of our design services. It should be 

noted that 10 percent is not retained from the contractor’s pay requests during construction. We were told we could write a letter requesting the Department of Labor release our retainage for design 

services. We received our 10 percent retainage approximately 500 

days after our contract notice to proceed. As the Small Business 

Committee is dedicated to opening the Federal marketplace to 

small businesses, we strongly encourage it to support eliminating 

the retainage. This will ensure that small A/E firms are able to design the buildings that represent the Federal Government without 

placing their solvency in jeopardy. 

Thank you, Mr. Chairman, and members of the subcommittee for 

giving me the opportunity to testify today. I would be pleased to 

answer any questions you may have. 

Chairman GONZALEZ. Thank you very much, Mr. Renker. 

[The statement of Mr. Renker can be found in the appendix at 

page 77.] 

Chairman GONZALEZ. The next witness is Mr. Pete Van De 

Putte. Mr. Pete Van De Putte is President and CEO of the Dixie 

Flag Manufacturing Company in San Antonio, Texas. I have known 

Pete and his family for a number of years. He is my constituent. 

And he will be voting on November 4th. I have no idea, and I don’t 

21 

want to influence at this time. He currently serves on the NFIB 

Texas Leadership Council. Mr. Van De Putte is here to testify on 

behalf of NFIB. Founded in 1943, NFIB represents small businesses in Washington and in all 50 State capitals. And I do want 

to point out that Mr. Van De Putte is married to my wonderful 

state senator, Leticia Van De Putte. Welcome, Pete. 

STATEMENT OF PETE VAN DE PUTTE 

Mr. VAN DE PUTTE. Good morning, Chairman Gonzalez, Ranking 

Member Westmoreland. I am Pete Van De Putte from San Antonio, 

and I really appreciate the opportunity to be here today. As a member of the NFIB since 1980, I am pleased to offer my testimony. 

My business, Dixie Flag Manufacturing Company, is a small family 

business in San Antonio. This year we are proud to be celebrating 

our 50th year in business. In that 50 years, we have had the privilege to provide jobs to some terrific men and women, and to be the 

first employment experience for a number of our employees’ children. 

I come here today not only representing small business owners, 

but the millions of people who depend on small businesses for their 

livelihood. At the outset, I want to commend the committee for 

holding this hearing on the Office of Advocacy’s Regulatory, Review 

and Reform Initiative, or r3, an effort to identify outdated and ineffective Federal regulations. The complexities of Federal regulations 

are especially onerous to small businesses, so I appreciate the committee’s interests in addressing this important topic. NFIB’s national membership spans a wide range of small business operations, from one-person enterprises to firms with hundreds of employees. 

While there is no one definition of small business, all NFIB members have one thing in common: Their businesses are independently owned. Clearly, we are talking about the truly small businesses in America, businesses whose priorities and abilities to handle regulatory challenges are greatly different from their larger 

counterparts. Earlier this year, the SBA Office of Advocacy released the 2008 top 10 rules for review and reform. The r3 program 

strikes right at the heart of one of the major burdens facing America’s small business, the cumulative Federal regulatory burden. 

Being a small business owner means more times than not you 

are responsible for everything from ordering inventory to cleaning 

the toilets and hiring employees to dealing with mandates imposed 

by Federal, State, and local governments. That is why government 

regulations and the paperwork they generate should be as simple 

as possible. The less time a small business spends with government 

overhead, the more they can spend improving their business, employing more people, and growing the American economy. Unreasonable government regulation, especially paperwork burdens, continues to be a top concern for small business owners like me. 

Regulatory costs per employees are the highest for small firms, 

and our members consistently rank those costs as one of their most 

important issues. The r3 program plays an important role in regulatory reform, urging agencies to write regulations that are easy to 

read and understand, and to review the impact each regulation has 

22 

on small business. For its part, Congress plays an important oversight role by looking at both new Federal regulations and changing 

those already on the books. 

To keep up with the changing environment, regular evaluation is 

imperative to find outdated, ineffective, and onerous regulations. 

With respect to the specific recommendations of the r3 program, 

one particular provision of particular interest to NFIB members is 

the standard home office deduction. This issue is of particular interest to me, because my parents started Dixie Flag Manufacturing 

Company in my bedroom in 1958. Dixie Flag now employs 45 people, but then it was just my dad, my mom, and my grandmother. 

While the rate of new home-based businesses continues to grow, 

the existing home office deduction remains burdensome and complicated. It requires a small business owner to determine how 

much of their house is used for business, and to keep detailed 

records that substantiate that deduction. 

The complicated recordkeeping now required by the IRS to qualify for a home office deduction is a barrier to many who would 

qualify, but do not have the time and the staff to do the paperwork. 

That barrier would be removed if a standard deduction for homebased businesses was allowed. NFIB members believe that small 

home-based businesses should have the option of either a standard 

home office deduction or using the current system. The standard 

deduction would allow business owners to claim a deduction he or 

she is entitled to, reduce the filing burden, and ultimately improve 

tax compliance. 

In conclusion, I appreciate the opportunity to comment on the r3 

program and the impact of Federal regulations on small businesses. Along with the other small, independent business owners 

who make up the membership of the NFIB, I hope that Congress 

will continue to take significant steps to reduce this burden, and 

that Federal agencies will adopt the r3 recommendations suggested 

by SBA’s Office of Advocacy. Thank you again for the opportunity 

to testify. I look forward to answering any questions you might 

have. 

Chairman GONZALEZ. Thank you very much, Mr. Van de Putte. 

[The statement of Mr. Van de Putte can be found in the appendix 

at page 86.] 

Chairman GONZALEZ. Our next witness is Mr. Scott Scribner. Mr. 

Scribner is a realtor from Plano, Texas. He is currently affiliated 

with Keller Williams Realty. Mr. Scribner is here to testify on behalf of the National Association for the Self-Employed. The NASE 

represents hundreds of thousands of entrepreneurs and micro-businesses, and it is the largest nonprofit, nonpartisan association of its 

kind in the United States. And welcome, Mr. Scribner. 

STATEMENT OF SCOTT SCRIBNER 

Mr. SCRIBNER. Thank you. Chairman Gonzalez, Ranking Member 

Westmoreland, and members of the subcommittee, I would like to 

thank you for giving me a chance to speak to you this morning. I 

applaud the time and energy you spend helping small businesses 

around the country. Your efforts are appreciated. My name is Scott 

Scribner, and I have been a member of the National Association for 

23 

the Self-Employed for a number of years. Along with my wife Barbara, I own a real estate sales business in Plano, Texas. We have 

operated the business, primarily from home, for almost 14 years. 

Before that, I was a commercial banker and president of a small 

East Texas bank. Our business currently has one full-time employee, but we plan to expand our team in the near future. 

My purpose today is to comment on the IRS home office deduction. Since we run the business from our home, we are allowed to 

deduct expenses related to our home office. The problem we face is 

the time and complexity in figuring the deduction. And I know that 

we are not alone. I have talked with many of my peers about this 

issue, and most everyone agrees either they don’t understand the 

deduction or are afraid that if they take it they increase their 

chances of an audit. 

By way of illustration, this is the home office deduction form 

8829. It is only one page, and it looks simple enough until you actually read it. There are 43 line items required just to complete the 

form. Most of the information needed requires time-consuming effort to complete. For example, line 30 says carryover of casualty 

losses, while line 32 says allowable excess casualty losses. So I 

have to know the difference between carryover, excess, and allowable. And I am not even sure I have any casualty losses. There is 

more, but I think you get the point. I am told on the form 14 different times to see instructions. 

Now my wife would be shocked to hear this, but even I read instructions occasionally. And believe me, there are plenty of instructions for the home office deduction. In fact, these are the instructions, all 31 pages worth. So it seems to me that I face a choice. 

One, spend hundreds of dollars and lost time collecting data, reading 31 pages of instructions and completing the form; two, pay a 

CPA hundreds of dollars to do it for me; or three, forego the deduction altogether. In my case, I wanted to make sure that my CPA 

had a great vacation in Hawaii last year, so I chose option two. 

Unfortunately, the majority of my fellow self-employed business 

owners prepare their taxes without professional help. Thus, the 

time burden and complexity of the home office deduction causes 

many of them to choose option three and not utilize this tax benefit 

at all. Like most business owners, I would rather be providing good 

service to my clients, growing my business, and creating new jobs, 

not spending time trying to comprehend tax forms and instructions. 

On the other hand, it seems unfair not to deduct home office expenses. It seems to me there should be a better way. Small business should have a choice. If time and resources allow, let homebased businesses take the traditional deduction, or, if they prefer, 

how about a standard home office deduction. This provides a way 

for small business owners to take the home office deduction without negatively impacting their business. 

For me, I would choose to take the standard deduction and then 

get back to work in my business. I am sure many other people feel 

the same way. The NASE is supporting the Home Office Deduction 

Simplification Act, H.R. 6214, which would provide a $1,500 standard deduction option for home-based businesses. In addition, House 

Small Business Committee Chairwoman Velazquez is preparing 

24 

legislation that would also include a standard home office deduction. 

I encourage Congress to support these bills and help the 52 percent of small businesses who work from their home. Again, I appreciate the chance to be here and to speak about this important topic. 

Thank you for the passion and energy you put into helping small 

businesses. 

Chairman GONZALEZ. Thank you very much, Mr. Scribner. 

[The statement of Mr. Scribner can be found in the appendix at 

page 90.] 

Chairman GONZALEZ. And our next witness, and I hope I get this 

last name right, is Lon D. Santis. Is that correct? Mr. Santis is 

Manager of Technical Services of the Institute of Makers of Explosives. He interacts with Federal agencies on issues involving commercial explosives and oversees IME’s safety library. The IME was 

founded in 1913 to provide accurate information and comprehensive recommendations concerning commercial explosive materials. 

And welcome, Mr. Santis. 

STATEMENT OF LON D. SANTIS 

Mr. SANTIS. Thank you, Chairman Gonzalez and Ranking Member Westmoreland, for the opportunity to appear before you today. 

Your interest in MSHA’s regulation of explosives is greatly appreciated. MSHA’s explosives regulations are inconsistent with national consensus standards and other agencies’ regulations. This 

exposes miners to undue risk and wastes the resources of mining 

operators and contractors, the vast majority of whom are small 

businesses. 

87 percent of the United States’ commercial explosives are consumed in mines, 65 percent in surface coal mines alone. Yet 

MSHA’s surface coal regulations have never been updated since 

their inception in 1971. In comparison, the National Fire Protection 

Association’s national consensus standard on explosive safety, 

NFPA 495, has been updated 10 times since 1971. In the last 10 

years, I have been in many meetings and discussions with MSHA 

officials, labor representatives, and mine operators regarding updating these regulations. Despite universal agreement that the regulations need to be updated, MSHA has not been able to get this 

done. 

For the remainder of my testimony, I will touch on the most significant vulnerabilities and burdens created by MSHA’s lack of attention to explosives in recent years. First, many of MSHA’s explosives regulations are inconsistent with current best practices. Even 

MSHA’s own regulations for coal and metal/nonmetal mines are inconsistent with each other. For example, the surface coal regulations are inconsistent with nearly every other standard with regard 

to the fundamental concepts of blast site and blast area. These 

terms should be crystal clear. The blast site is the immediate area 

around the explosives, where only authorized personnel and equipment should be present during the loading process. Failure to clear 

the blast area when a blast occurs causes half of the explosive accidents in mines according to MSHA. 

Second, MSHA explosive regulations contain outdated and inappropriate references. The definitions for explosives in their regulaVerDate Aug 31 2005 16:24 Sep 03, 2008 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\42523.TXT RUSS
25 

tions are incredibly flawed. The metal/nonmetal regulations refer to 

nonexistent sections of the U.S. Department of Transportation’s 

DOT regulatory code for definitions of critical terms like detonator, 

blasting agent and explosive. Likewise, the surface coal regulations 

refer to different definitions of these terms than DOT. All of 

MSHA’s regulations still use the explosives classification system, 

class A, B, and C, that was abandoned by DOT in 1992. The regulations also refer to nonexistent sections of the Bureau of Alcohol, 

Tobacco, Firearms and Explosives (ATF) regulations. They refer to 

technical standards for blasting agents that were written in 1963. 

Third, MSHA’s explosives regulations are a barrier to improved 

technologies, technologies like electronic detonators. Electronic detonators actually represent the second revolution of initiation technology that was missed by the surface coal regulations. To legally 

and safely use electronic detonators in mines, manufacturers must 

get MSHA to exempt their brand name product from the regulations. This is a cumbersome process that can take months even for 

the next generation of a previously approved system. Such a process disadvantages small businesses from entering the electronic 

detonator market. 

Fourth, MSHA’s explosives regulations and policy create security 

vulnerabilities. Through a memorandum of understanding with the 

ATF, MSHA agrees to enforce Federal explosives laws in underground mines. MSHA’s regulations for underground mines have 

significant security gaps. And to the best of my knowledge, MSHA 

is not enforcing more stringent ATF rules like those ensuring that 

only personnel with ATF background checks have possession of explosives underground. 

Finally, and very briefly, MSHA has lost its ability to ensure a 

safe supply of explosives for the Nation’s underground coal miners. 

Mining coal with explosives has become an exclusive niche for 

small businesses in the underground coal mine community. This 

loss adversely affects MSHA’s ability to conduct accident investigations, field audit quality control testing, and approvals of new and 

improved explosives. While I have only been able to scratch the 

surface of the problems with MSHA’s explosives regulations here, 

my written statement and the Small Business Administration’s r3 

nomination describe to a greater extent each of the points above. 

MSHA’s failure to update their regulations creates risk where 

none need exist, and wastes the resources of small businesses. 

Thank you for this opportunity, and I look forward to answering 

your questions. 

Chairman GONZALEZ. Thank you very much, Mr. Santis. 

[The statement of Mr. Santis can be found in the appendix at 

page 95:] 

Chairman GONZALEZ. You are the beneficiary of that initiative, 

obviously, by Mr. Sullivan. It gave you a vehicle in which to voice 

those concerns. Mr. Renker, I am going to start off with the questions, obviously, in the order of the witnesses as you all testified. 

Why the difference on the retainage? And I will tell you now my 

Association of Building Contractors always complain about, you 

know, the 5 percent and such. I can only imagine if it was 10 percent. But they are a pretty vocal group. What is the reason for the 

difference, doubling it? 

26 

Mr. RENKER. I wish I knew. I have been an architect for 34 

years, and this is the first contract I have ever had retainage on 

my fees. In every other case we present a product, that product is 

reviewed and approved, and then we invoice for our services. So, 

you know, to have a 10 percent retainage was a big surprise to me. 

Chairman GONZALEZ. And I am sure it has been asked, I am sure 

there is an answer out there. What we will do is we will pose the 

question for you and see if we get a response. Now you would be 

surprised, we are Members of Congress, right, Mr. Westmoreland, 

but many times it is the old thing about, you know, they don’t wait 

you out, they will wear you out. So we are familiar with some of 

that, but we will try to get that response. I just was wondering why 

the difference. I do want to talk to you about something you may 

not have touched on completely, and that is the reverse auction, 

and the fact that it might conflict with the qualifications-based selection process. Can you give me some information from your perspective? 

Mr. RENKER. Well, from my perspective, architects and engineers 

are selected on the QBS system, where we submit our qualifications and the agencies review in depth our qualifications as past 

performance and select us on the basis of who they feel can do the 

best job. And at that point we negotiate our fees. The reverse auction process is contrary to that Brooks Act in that they are asking 

for fees up front, I understand, and then they post them, and whoever is the last one to, you know, the one who is willing to go the 

lowest, I guess, gets the contract. But I honestly am not personally 

familiar completely with the reverse auction system. 

Chairman GONZALEZ. I think that bears looking into. You know, 

at what cost? I understand the motivation on a reverse auction. It 

kind of makes sense in the most simplest of concepts. But in practice, you may not end up accomplishing what you really want to 

accomplish. There is a lot more than everybody racing to see who 

is the lowest bidder on this thing. 

Mr. RENKER. From an architect/engineer’s standpoint, where we 

provide services that involve health, safety, and welfare of individuals, going on—and I think that is the reason for the QBS system—going on the low price and trying to remove services on that 

basis just doesn’t seem wise. 

Chairman GONZALEZ. I sure do thank you, Mr. Renker. Mr. Van 

De Putte, I know you are going to be in total agreement with Mr. 

Scribner here regarding the home office deduction and what that 

means. And I think we have legislation out there that is addressing 

it. We may have some other legislation that may be spearheaded 

by the Chair of this full committee, which is, of course, Nydia 

Velazquez, to whom I referred earlier, and I can tell you you don’t 

have a stronger advocate for small businesses than Chairwoman 

Velazquez. 

And so that is a good sign. And I am hoping that we are going 

to be able to do something, especially with the tremendous support 

that we have from Mr. Sullivan’s office. Can you think of any other 

regulation that impacts you that you would say, well, this is on my 

mind, I think there is ways of streamlining it? And what is the best 

vehicle for you to make your opinion known as to what is detriVerDate Aug 31 2005 16:24 Sep 03, 2008 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\42523.TXT RUSS
27 

mental to you in the operation of your business that is not truly 

necessary in any regulatory scheme? 

Mr. VAN DE PUTTE. Yeah, I think there is probably more than 

we would have time to talk about. I think one of the things that 

I have come upon, it seems that when you are looking at Federal 

wage and hour, when you look under the reality of how business 

operates today and what goes on, their definitions of what is exempt employee, nonexempt employee I don’t think necessarily reflects reality. 

I once had a run-in with them where I had five employees doing 

the same thing, and they said because one of those employees had 

a degree they were a professional, the other four weren’t. Which 

doesn’t make an awful lot of sense to me under all sorts of concepts 

of fairness and equal pay and equal this and that. The fact that 

the Federal Government would discriminate against somebody because they did or didn’t have a degree was surprise to me. But I 

was told that is the way the regulations run. 

And I think that would be one area where the rules are very 

complicated. And when you are a business owner trying to do 

things right, and trying to be careful when you are employing people, and you are being fair, again, as a small business owner, when 

every time I want to do something, the first call I have to make 

is to the attorney, my attorney, to interpret this rule, and of course, 

as soon as they pick up the phone the meter starts running. And 

as small businesses, we don’t have staff attorneys. We don’t have 

staff accountants. We have to go out into the marketplace and pay 

retail. 

Chairman GONZALEZ. And again, thank you very much. Mr. 

Scribner, you have come out with basically, and I wanted to make 

sure that I touched on this, because we have been able to identify, 

obviously, problem areas that have come up to the forefront, again, 

because of what Mr. Sullivan was able to initiate in his own office. 

The big thing is this thing about this home office deduction. And 

like I said, just in my over-dinner discussion with a tax judge, he 

seemed to agree. I mean, you are truly at risk. So we have legislation out there. And I can ask Mr. Van De Putte, too, and I think 

you also agree in your testimony, Pete, that maybe it would just 

be a standard deduction. Maybe cut through all this. And if you are 

audited you are audited, I mean, there is not much anybody can 

do about things like that. But nevertheless, rather than the strictness of it, that just basically disallows you. 

Mr. SCRIBNER. Mr. Chairman, I can speak for myself. I am in a 

very, what I call a perpetual business, constantly in motion with 

buyers and sellers and contracts and accounting and legal aspects. 

And the biggest challenge that I face as a small business person 

is the ability to try to hold it all together, so to speak. In other 

words, to have the time to address all of the issues and concerns 

I need to address to run my business. And that, I think, is the big 

issue and would be the advantage of the standardized home office 

deduction. It just is very unwieldy and very time-consuming for me 

as a small business person to keep up with tracking the various 

home office expenses and trying to understand those rules. So I 

think that is the perfect advantage of the standard home office deduction. 

28 

And I think that—it is my understanding that 27 percent—only 

27 percent of small businesses actually take the deduction. And I 

think that is because of, you know, a few of the things that I addressed in my comments, the fears that they have about IRS audit 

and just the overall complication and the time involved in taking 

the deduction. 

Chairman GONZALEZ. The other thing that may not be related to 

today’s hearing, but I wanted to touch on it quickly because of your 

own background, before you were with Keller Williams, you said 

you were—was it with a community bank? 

Mr. SCRIBNER. Yes, I was in commercial banking for 12 years. I 

was the CEO of a small East Texas bank. 

Chairman GONZALEZ. Because Mr. Westmoreland and I, for a future hearing, we were considering actually bringing in our independent community bankers and seeing what is going on out there 

in the credit markets, the impact of the regulatory scheme. Because first and foremost, we always think that they truly represent 

the access to capital within the community. 

So again your own experience, we may draw on that, we may call 

you back and just—there is a reason that you are in real estate 

today, and I am not saying that you weren’t happy as a banker. 

Mr. SCRIBNER. I welcome the opportunity. 

Chairman GONZALEZ. Mr. Santis, it is very interesting, because 

you are talking about, obviously, an activity that is very specific to 

different areas of the country when we are talking about the explosives, the use of them and such. And it is amazing, though, that 

you pointed out that you haven’t had any real updates on regulations and such for a period in excess of 30 years. And technology 

does move forward. Practices, best practices change and such. 

What would be the reason for this inactivity? It seems like—and 

I know there is always staffing. There is always budgetary constraints and such. 

But why haven’t we moved forward? And the reason for that is 

that, you know, I believe in regulation. I think we all understand 

for safety reasons and leveling playing field and all that and standards, reasonable, effective regulation. And these are outdated that 

we are talking about, these are burdensome, onerous and such. But 

why do you believe you would have in your particular field such neglect over such an extended period of time? 

Mr. SANTIS. Well, I think only MSHA could really give you a full 

answer. My opinion is that in some respects, we are a victim of our 

own success in the explosives industry. We have improved technology and products immensely over the years. And explosives accidents are a fairly rare occurrence in mining. But I think as recent 

experience in mining has shown us, we can go a long period of time 

without accidents and fatalities, and then suffer mine inundations, 

mine explosions, massive failures of the mine roof, and then scramble about with how are we going to deal now with this problem 

that has been thrust in front of us. 

And I feel that the explosives area is another potential catastrophe waiting to happen. And the Agency just doesn’t seem to recognize that. I think that the Agency may not have as much technical expertise in house to comprehend the problems. And hopeVerDate Aug 31 2005 16:24 Sep 03, 2008 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\42523.TXT RUSS
29 

fully, the r3 initiative will provide some impetus for the Agency to 

address this critical issue. 

Chairman GONZALEZ. Because as Mr. Sullivan pointed out, the 

follow through with r3, of course, is the response from that particular agency or department. And then looking at it. Again, it is 

the credibility and legitimacy of the response. Again, thank all the 

witnesses, and at this time I am going to recognize the ranking 

member for his questions. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. This is a target 

rich environment. Mr. Renker, talk about the 10 percent retainage. 

You know, the P word up here sometimes to some people is a bad 

word. And that would be profit. With the 10 percent retainage, it 

almost causes not so much of a competitiveness with bidding because when you are bidding and you understand that they are 

going to have a 10 percent retainage, and I know in a lot of jobs 

that I have had people that I know that bid, you know, they make 

three, four, five percent on some of these government contracts. 

And having a 10 percent retainage, as you spoke before, you know, 

just kind of—it really hurts your cash flow. And really and truly, 

it really keeps some people in small businesses from being able to 

bid on some of these Federal contracts that they would like to bid 

on, but they cannot suffer that kind of cash flow shortage. Would 

you say that is a true statement? 

Mr. RENKER. Yes, sir. 

Mr. WESTMORELAND. Are you aware that I believe starting in 

2011, there is going to be an additional 3 percent retainage on Federal contracts? 

Mr. RENKER. No, sir, I am not aware of that. 

Mr. WESTMORELAND. There is going to be an additional 3 percent 

withholding for your Federal taxes that will be done on Federal 

contracts. And so we are only complicating our situation by this. 

There is several people in the House, I believe Mr. Meek, Mr. 

Kendrick Meek and myself and others are on a bill to repeal that, 

to make that not go into effect. And I would hope that the chairman, at some point in time, when we are looking at some regulations, we can look at what that will really do to the cost of how 

the Federal Government does business. 

Also having dealt with architects for a long time, typically on a 

retainage issue, my experience has been, especially on a government contract, that you cannot get your draw until the architect 

has actually gone out and inspected and made sure that what he 

had intended to go in place had actually gone in place, and that 

the right materials, grades, and so forth were put into place. Is 

that typically your experience? 

Mr. RENKER. Yes, to some degree. In a sense as architects we are 

not providing the construction product. We provide the design product. And in each case, the Agency that we work for reviews our 

product, and in great depth and in detail, and only after they review and approve our product, then we are allowed to invoice. And 

usually with the Federal Government they have been good, once 

they accept our invoice, they pay us electronically in 30 days. But 

it is getting that invoice accepted and doing all the work that creates the time lag for us. 

30 

Mr. WESTMORELAND. Sure. That is kind of like Mr. Scribner had 

the instructions for the home deduction. 

Mr. RENKER. Yes. 

Mr. WESTMORELAND. Mr. Van De Putte, I know Mr. Santis handling explosives is probably under tremendous government regulations. You are in the flag business. How many regulations do you 

find that are on a flag business? And I am assuming that you make 

flags. And what type of regulations do you have that causes you 

the most trouble other than the home deduction? 

Mr. VAN DE PUTTE. Well, because we purposely don’t use chemicals, we are a sewing operation, we have actually kind of constructed our business so we are not having to deal with some of 

this. Because the people that I know that are in the business of 

doing printing, for example, have got all sorts of these EPA hoops 

they have got to jump through to make that happen. 

In our case, it is just the normal course of a business doing business. It is dealing with OSHA and dealing with EPA. Even though 

we don’t use any chemicals, we still have to spend time filling out 

forms to report the fact that we don’t use any chemicals. And wage 

and hour and IRS. It is just the cumulative burden of everything. 

I have got one of my highest paid people on my staff spends most 

of his time dealing with not how to make my business run better, 

but how to make sure that we are filling out all the forms and 

doing all of the reporting to the Federal Government just in the 

normal course of doing business. Whereas the smartest financial 

guy I have got in my building, if I could turn him loose on helping 

me to be a more successful business in making and selling flags, 

we would be a more successful business. But I go in and talk to 

him about that and he is busy because he has a form he has got 

to turn in. 

Mr. WESTMORELAND. So what you are saying is basically out of 

fear of more regulations, you haven’t expanded your business into 

some other areas— 

Mr. VAN DE PUTTE. Absolutely. 

Mr. WESTMORELAND. —that might require you to do chemicals 

and so forth? 

Mr. VAN DE PUTTE. Absolutely. 

Mr. WESTMORELAND. And that is pitiful. But the other thing is 

I notice you have 45 employees. 

Mr. VAN DE PUTTE. Uh-huh. 

Mr. WESTMORELAND. Don’t get to 50. 

Mr. VAN DE PUTTE. I am actively working not to. 

Mr. WESTMORELAND. If you get to 50 you are going to be under 

that Family Medical Leave Act, and you are going to have start 

keeping up with the minutes that your employees take off. So that 

is a shame that we limit you, because it sounds like starting with 

your grandmother that business has been very successful. And you 

certainly have the opportunity to employ more people in San Antonio, Texas, but unfortunately, because of your fear of the regulations and stuff, you are just not going to expand that business. So 

my apologies to you that we have that kind of effect. Mr. Scribner, 

you are way too common sense. But Mr. Chairman, I would like 

unanimous consent that Mr. Scribner be able to submit that IRS 

form and those 37 pages of instruction— 

31 

Chairman GONZALEZ. Without objection. 

Mr. WESTMORELAND. —into the record, if you wouldn’t mind 

doing that, because I would like a copy of it. I think I can use that 

at some later time. 

[The information can be found in the appendix at pages 101 and 

102.] 

Mr. WESTMORELAND. So thank you for coming and for testifying 

and for standing up for all the self-employed people. Because I 

think it is in all of us that we all want to be entrepreneurs and 

want to be self-employed. But one other question I wanted to ask 

you, you talked about your banking experience and being with a 

small community bank. And as I go back and look at regulations 

that this body has passed with unintended consequences, I think 

Sarbanes-Oxley is one of those unintended consequences about the 

amount of money that it has cost small banks that are owned by 

community stockholders that are already audited by the State 

banking agencies and Federal banking agencies, and yet they have 

to pay for a third independent completely outside audit. 

Mr. SCRIBNER. I think that is exactly right. As a matter of fact, 

both from my banking perspective and even as a realtor, I see the 

effects of some of the concerns with a regulation like SarbanesOxley in terms of the requirement to actually have people on staff 

just to deal with regulations, which again, I think, takes away from 

the intent of the business, and that is to have as much profit as 

they possibly can, creating jobs, and stimulating the economy. And 

having been a banker, it is interesting, my perspective is I was a 

banker for a long time, and so I saw a lot of small business clients, 

but it is interesting when you change hats and all of a sudden instead of being the guy giving the money you are the guy trying to 

make the money. And all of the challenges with respect to additional regulation are hard for a small business person to keep up 

with. 

Mr. WESTMORELAND. Sure. Absolutely. I am looking forward to 

that hearing that we are going to have on the small banking and 

small business and how banking affects their business. But thank 

you for being here. 

Mr. SCRIBNER. Thank you. 

Mr. WESTMORELAND. Mr. Santis, I know that since I have been 

in Congress, we have had several terrible accidents that has involved mining and explosions and other things. And sometimes 

Congress tends to have a knee-jerk reaction rather than sitting 

down and looking at facts and details and talking to the people 

that are involved in the business. Do you know of anybody that 

handles explosives that aren’t careful? 

Mr. SANTIS. Unfortunately, yes. Aside from accidents that are 

caused by flying material when the button is pushed, the second 

most frequent cause of accidents is misuse of the product, someone 

doing something— 

Mr. WESTMORELAND. Would education solve that or more regulation? 

Mr. SANTIS. Education helps. But education only reaches a small 

proportion of our community. The ones that attend seminars and 

get training are probably not the ones making mistakes. What we 

see, and especially in the small business community, is that they 

32 

rely on the regulation as the ceiling of performance. And that is 

where they feel they need to operate. So they reach that level and 

they feel that they are good. Unfortunately, this is not good 

enough. 

Mr. WESTMORELAND. Well, I understand, but I thought you mentioned that the regulations didn’t really conform with your best 

practices of handling explosives. 

Mr. SANTIS. That is true. That is true. And fortunately, the vast 

majority of people in mining operate above the level set by the regulations, demanded by the mine operators, the suppliers of the 

products and the employees themselves, because there is a considerable self-preservation interest. 

Mr. WESTMORELAND. So you are thinking there needs to be more 

regulation on the mining industry? 

Mr. SANTIS. We think the regulations need to be consistent, not 

necessarily more. The problem comes about through inconsistency 

and confusion and wasting of resources. Citations for things that 

are simply not an issue. Those should go away. Those issues, regulations that were written for the use of black powder, for example, 

which is something we don’t do today. They are still on the books. 

Mr. WESTMORELAND. I am kind of confused about your statement 

that education doesn’t get to everybody. I am assuming you are 

saying that regulations do? 

Mr. SANTIS. Well, yes. 

Mr. WESTMORELAND. And the regulations aren’t up to the best 

practices, so I am confused. If they are not up to the best practices 

and your people don’t get education, then how do they know what 

the regulations are? 

Mr. SANTIS. Oh, the MSHA enforces the regulation. They are 

aware of what the regulation is. MSHA has training requirements, 

for example, that the employees must be trained on the regulation. 

We think that there needs to be consistency in the regulation, 

which would elevate the level of safety in those operations that operate right at that ceiling. 

Mr. WESTMORELAND. And when you say consistency in the regulations, are you talking about the different types of explosive businesses, or what are you talking about consistency? 

Mr. SANTIS. Practices. I am talking about practices, differences 

in practices. For example, a small blasting contractor may blast in 

a construction site one day, a quarry the next, and a coal mine the 

next. All three of those performance regulations would be different. 

And he must adjust his practices and procedures at each one of 

those sites. And that is a very difficult process. As you pointed out, 

we are regulated by up to 3,000 entities. And consistency is paramount. 

Mr. WESTMORELAND. Yes. So what you are saying is the inconsistency could bring about confusion? 

Mr. SANTIS. That is right. 

Mr. WESTMORELAND. And more area for something to happen. 

Mr. SANTIS. Right. And leaves gaps. When you let something sit 

since ’71, gaps develop. 

Mr. WESTMORELAND. Well, Mr. Chairman, that is all the questions I have. I want to thank you for doing this. I look forward to 

us having some more of these. And as most small businesses, we 

33 

are result-oriented. And hopefully, these hearings will have a result. 

Chairman GONZALEZ. Well, the follow through is important. 

Thank you for your participation, as always, Mr. Westmoreland. 

We are not going to have a regulation-free environment. I think we 

all understand that. And we probably should not for a lot of the 

obvious reasons. The importance is the time, the place, the manner 

of the regulation that doesn’t impede, is not a detriment to our citizens. And that is the goal that we all share, whether they be Republican, Democrat, whatever. But we have some really good people that are really invested in this particular endeavor, and we are 

going to need your help. 

So I would like to end the hearing with giving each of the members of the last panel one minute to tell us anything that you think 

we haven’t heard, or that you believe we should walk away with 

as maybe this one very important message. What would you like 

us to do? Anything that is on your mind. You have got one minute. 

And we will start with Mr. Renker. 

Mr. RENKER. Okay. I, certainly in my testimony, I mentioned a 

period of time during negotiations with the government with regard to our fees. Again, we are selected on qualifications and then 

we negotiate our fees with the government. If you noticed, it took 

us over a hundred days, almost 115 days to negotiate our contract 

with the Federal Government, and 200 hours on my part, which 

are uncompensated hours. And the negotiation process is extremely 

onerous, and almost caused me to walk away from the contract, 

quite frankly. They negotiate hourly rates and overhead as if we 

were a large company, you know, the Bechtels or whatever. 

And you know, when we look at my firm, the person who keeps 

the books on a day-to-day basis is me. And during negotiations, 

they asked for accounting information that is just not available. 

And I had to tell them, look, I am sorry, but you can’t get blood 

from a stone. And it dragged on the negotiations for quite a bit. 

And it made it very, very difficult even to negotiate the contract. 

And I would hope that—and we were talking about this maybe 

for another year or another time, that we look into how the Federal 

Government negotiates with a small business versus a large business, and maybe make some allowances for that. Thank you very 

much. 

Chairman GONZALEZ. Thank you. Mr. Van De Putte. 

Mr. VAN DE PUTTE. I think if there is one thing I would like you 

to take away, I would like the committee to take away from this 

is, first of all, something that seems self-evident to us, but doesn’t 

seem to be to the government, is that small business is different 

from big business. 

Small business owners, unless their business happens to be a law 

office or an accounting office, are usually not lawyers or accountants. They are bakers or they are mechanics or flag makers or they 

are crafts people who have a passion for what they do and they 

want to do it and be able to turn that into the ability to make a 

living and be an entrepreneur. 

Unfortunately, we live in a world where, yes, you need regulation, but it is the onerous and the burdensome, redundant regulations that end up making those crafts people and these people who 

34 

are artisans and skilled people who want to use their hands, use 

their ability to make a living and employ people have to become 

lawyers and accountants or pay gobs of money to lawyers and accountants just to be able to survive. And I think that is where I 

would hope that the government would understand big business 

has an incredible advantage because they have, you know, a lineup 

of lawyers and accountants and lobbyists and everything that they 

have got to look out for them that are on salary and they are paying all the time. When a small business has to go to this, again, 

we are having to go out and pay full retail. And it is a very expensive proposition. And so simple rules that a layman can understand 

would just go a long way. And maybe not 31 pages of instructions. 

Chairman GONZALEZ. Thank you very much. Mr. Scribner. 

Mr. SCRIBNER. I would like to echo what Mr. Van De Putte says 

regarding business size. You know, I think as a business gets larger it affords a greater opportunity for specialization within the organization. Micro-business tends not to have that ability. Give you 

an example, my Keller Williams office, there are 250-plus agents 

in my office, so there are 250 small businesses generating revenue, 

paying expenses, helping their clients. And anything that can be 

done to support simplifying the regulations on these small business 

people I think is an advantage. Because I observe every day— 

again, I am in a very perpetual business. And it is all we can do 

to keep up. Which, you know, we are happy about that. 

We have a good business. But I just see the challenges that my 

colleagues face every day in trying to keep up with regulations, 

keep up with all of the processes that need to occur in their business. So I think anything that can be done to simplify regulations 

and help support small business is going to be an advantage. 

Chairman GONZALEZ. Mr. Santis. 

Mr. SANTIS. Thank you. I would like to commend the Office of 

Advocacy for this r3 initiative, because I don’t think that without 

it we would have a prayer in getting MSHA to act on this matter. 

This is a very solvable problem. And one of the things that Mr. Sullivan mentioned in the nomination and selection process were solvable issues. We are dealing with outdated references that could be 

dealt with in a direct final rule. There is no controversy there. We 

are dealing with inconsistency within the Agency itself. Certainly 

the Agency can harmonize within its own departments. 

And finally, we have consensus standards that have been established that—the hard work is done. The standards are out there. 

They just simply need to be incorporated into the regulation. I 

would encourage this committee to continue to support the Office 

of Advocacy. And in fact, I think one of the weaknesses that they 

suffer from is enforceability. From my understanding, Tom can basically cajole agencies into acting. And I hope that we can be successful here, but certainly a bigger stick would be helpful for Mr. 

Sullivan, I am sure. 

Chairman GONZALEZ. Thank you one and all. And I now ask 

unanimous consent that members will have 5 days to submit a 

statement and supporting materials for the record. And without objection, it is so ordered. And this hearing is now adjourned. 

[Whereupon, at 12:01 p.m., the subcommittee was adjourned.] 

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