[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
H.R. 2373, THE START-UP SUCCESS ACCOUNTS ACT OF 1999
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HEARING
before the
SUBCOMMITTEE ON EMPOWERMENT
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, NOVEMBER 2, 1999
__________
Serial No. 106-39
__________
Printed for the use of the Committee on Small Business
U.S. GOVERNMENT PRINTING OFFICE
61-270 WASHINGTON : 1999
COMMITTEE ON SMALL BUSINESS
JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
DONALD A. MANZULLO, Illinois California
ROSCOE G. BARTLETT, Maryland DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey CAROLYN McCARTHY, New York
SUE W. KELLY, New York BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania DONNA M. CHRISTIAN-CHRISTENSEN,
DAVID M. McINTOSH, Indiana Virgin Islands
RICK HILL, Montana ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania TOM UDALL, New Mexico
JOHN E. SWEENEY, New York DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania STEPHANIE TUBBS JONES, Ohio
JIM DeMINT, South Carolina CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota GRACE F. NAPOLITANO, California
MARY BONO, California BRIAN BAIRD, Washington
MARK UDALL, Colorado
SHELLEY BERKLEY, Nevada
Harry Katrichis, Chief Counsel
Michael Day, Minority Staff Director
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Subcommittee on Empowerment
JOSEPH R. PITTS, Pennsylvania, Chairman
PHIL ENGLISH, Pennsylvania JUANITA MILLENDER-McDONALD,
JIM DeMINT, South Carolina California
FRANK A. LoBIONDO, New Jersey DENNIS MOORE, Kansas
EDWARD PEASE, Indiana STEPHANIE TUBBS JONES, Ohio
TOM UDALL, New Mexico
Dwayne Andrews, Professional Staff Member
Stephanie O'Donnell, Legislative Assistant
C O N T E N T S
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Page
Hearing held on November 2, 1999................................. 1
WITNESSES
Kerrigan, Karen, Chairman, Small Business Survival Committee..... 4
Pages, Erik R., Policy Director, National Commission on
Entrepreneurship............................................... 6
Horton, Pepper, CPA, Tax Technology, LLC......................... 8
APPENDIX
Opening statements:
Pitts, Hon. Joseph R......................................... 23
DeMint Hon. Jim.............................................. 25
Baird, Hon. Brian............................................ 26
Prepared statements:
Kerrigan, Karen.............................................. 28
Pages, Erik R................................................ 34
Horton, Pepper............................................... 42
Additional Information:
Letter to Congressman Baird from Frank Nichols, President,
Silicon Forest Electronics, Inc............................ 44
Global Entrepreneurship Monitor, 1999 Executive Report....... 46
Global Entrepreneurship Monitor, National Entrepreneurship
Assessment; United States of America, 1999 Executive Report 94
H.R. 2373, THE START-UP SUCCESS ACCOUNTS ACT OF 1999
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TUESDAY, NOVEMBER 2, 1999
House of Representatives,
Subcommittee on Empowerment,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 10 a.m., in room
2360, Rayburn House Office Building, Hon. Joseph R. Pitts
(Chairman of the Subcommittee) presiding.
Chairman Pitts. We will call the hearing to order.
I am Congressman Joe Pitts from Pennsylvania. Good morning
and welcome. Thank you for joining the Empowerment Subcommittee
today for a hearing on the Start-Up Success Accounts Act of
1999, or SUSA. This bill was authored by the Vice Chairman of
this Subcommittee, my friend from South Carolina, Mr. Jim
DeMint, and by another member of the Small Business Committee
who joins us today, Mr. Brian Baird from Washington.
I am going to yield most of my time to Mr. DeMint, as it is
his bill, and he can speak in more detail about it, but first I
would like to thank Mr. DeMint and Mr. Baird for their work on
this legislation and their leadership in the area of tax relief
for small businesses.
One goal of the Empowerment Subcommittee is to promote
legislative initiatives that enable entrepreneurs to realize
their dream of becoming small business owners and to sustain
their small businesses once operational. The Start-Up Success
Accounts Act, of which I am a cosponsor, is an example of this
type of legislation, one which seeks to lessen the burden felt
as a result of a complicated Tax Code that is not small-
business-friendly.
Excessive taxation is especially detrimental to the success
of new small businesses, which typically encounter numerous
difficulties as they struggle to grow in the first few years.
Quite often business owners are counseled to reinvest their
profit into the business by purchasing equipment or giving
bonuses, thereby avoiding taxation on the business's profits.
But what if there was a way for small business owners to both
avoid immediate taxation and save more of the money that they
earned? That is exactly what H.R. 2373 proposes.
This bill would allow a new small business the opportunity
to use a tax-deferred savings account for a period of time
during the beginning stages of business development. By
utilizing this SUSA as a money management tool, start-up, small
business owners would be able to retain capital by putting up
to 20 percent of their annual taxable income, up to $200,000
per year, into a SUSA. This supply of capital may help
withstand periods of slow business or increased competition by
allowing them to save when business is profitable.
I want to welcome our witness panel, Ms. Karen Kerrigan,
Chairwoman of the Small Business Survival Committee; Mr. Erik
Pages, Policy Director for the National Commission on
Entrepreneurship; and Mr. Pepper Horton, a CPA from Greenville,
South Carolina, and entrepreneur himself. Thank you all for
being here, and I look forward to your testimony.
[Mr. Pitts's statement may be found in the appendix.]
Chairman Pitts. Mr. DeMint.
Mr. DeMint. Thank you, Mr. Chairman. I thank you for
holding this hearing today, and particularly for your passion
to empower the disadvantaged through our efforts for small
businesses. Earlier this year Representative Baird and I
introduced H.R. 2373, what we call the Start-Up Success
Accounts Act of 1999. Our Chairman has referred to that as SUSA
accounts.
The purpose of this legislation is to give small businesses
an additional tool to manage finances and particularly to
retain capital. According to the Census Bureau, over 99.9
percent of business closures are small firms. One of the
primary reasons for business failures is a lack of capital.
This problem is further aggravated by a tax system that
discourages capital retention. The ultimate result is less
growth and less staying power. Operating with no capital, even
a small downturn in sales, can put a new company out of
business.
H.R. 2373 would allow new business start-ups to place up to
20 percent of profits but not more than $200,000 into tax-
deferred SUSA savings accounts for each of the first 5 years of
businesses. This would allow new businesses that are profitable
in the first few years to set aside some profits to prepare for
a downturn in later years. Money could be set aside in an
account for up to 5 years after the deposit.
The idea for this bill came from my own experience as a
small businessman in starting my own company. It is similar to
a bill offered by our colleague Kenny Hulshof, which would help
farmers and ranchers manage capital with farm accounts. In
starting my own business, I learned how hard it is to manage
finances as you try to stay afloat, especially in those first
few years of business. It isn't easy, especially with the
current Tax Code, and I believe anyone who takes on the
challenge of starting a business deserves not only our respect,
but our support.
I appreciate the work of this Committee in exploring ways
to remove obstacles that often stand in the way of the success
of small businesses. Small businesses create virtually all of
the net new jobs in this country today, with women and
minority-owned businesses making up one of the fastest-growing
segments of small businesses. It is particularly important for
this Committee to take on this challenge. That is why I am
pleased that the Empowerment Subcommittee is having this
hearing today to try to empower those who try to revitalize our
Nation.
I would like to add my thanks to all of you who are
testifying today: Karen Kerrigan with the Small Business
Survival Committee; Erik Pages, thank you for being here; and
particularly Mr. Horton from my district, I appreciate you
coming up. You not only have a lot of experiences as an
accountant, but you started your own business and have a little
bit of feel what it is like. I particularly appreciate all of
you being here, and I yield back the balance of my time.
[Mr. DeMint's statement may be found in the appendix.]
Chairman Pitts. Mr. Baird, would you like to make an
opening statement?
Mr. Baird. Thank you, Mr. Chairman. I want to thank you for
holding this hearing, and I thank my good friend from South
Carolina, and I thank the witnesses for being here.
We have worked together, the gentleman from South Carolina
and I, because of our concern for small businesses. I am the
son of small business owners. My folks--my mom owned a bridal
shop, and then my father and mother together bought an ice
cream store, and I saw what they struggled with through the
lean and the good years.
One of the things that is clear from that experience
personally and from meeting with business owners in my own
district is the important challenge of finding capital, and the
Start-Up Success Account Act is designed to address precisely
that.
I had a business owner come to me and say it is sometimes
easier to find the start-upcapital to just get going than it is
once you are in place, and then you really need to set something aside
to fund further expansion, and that is precisely what this bill is
designed to do. The challenge is how can we make capital more available
to our businesses as they try to expand; and importantly, how can we
put the control of that capital in the hands of the business owners.
As we prepared for this hearing, I talked to some folks who
I had the very great privilege of being at the grand opening of
their electronics manufacturing plant just a few months ago. A
gentleman named Frank Nichols has invested every single penny
he has got. He has mortgaged his home. He has gotten help from
his church members, and they have a very, very exciting
business on the line that could expand. They hope to employ as
many as 200 people in our district.
The challenge, however, is capital. And with the consent of
the Chair, I would like to read a portion of a letter that he
submitted to me as he knew I was preparing for this, and it
tells the story why the start-up success account is so
important. Here is what Mr. Nichols writes: ``we have tried the
traditional source of funds. The banks are only interested if
you have collateral of a value greater than the amount you want
to borrow, preferably in CDs. The local economic development
sources of funds are not available to start-ups or are limited
to the rural or economically depressed areas. We have tapped
our own sources to the max. Everything we own is now mortgaged
or used to secure the leases or part of our original capital
investments, and our credit card balances are climbing.''
That is not an uncommon statement, and the situation here
is if he is successful in his first year and realizes profits,
we should put him in a situation where he can set those profits
aside for savings for future investments rather than feeling
that he has to spend them, perhaps, in the process, incurring
further debt, thereby further jeopardizing his capital
security.
Precisely that mission is what the Start-Up Success
Accounts Act is designed to accomplish, and I thank the
Chairman and the witnesses today, and I am interested in
hearing your thoughts on how we can improve the bill.
Chairman Pitts. Thank you.
[Mr. Baird's statement may be found in the appendix.]
Chairman Pitts. Mr. Moore, any opening statement?
Mr. Moore. No opening statement, Mr. Chairman.
Chairman Pitts. Then I call on Ms. Kerrigan at this time.
STATEMENT OF KAREN KERRIGAN, CHAIRMAN, SMALL BUSINESS SURVIVAL
COMMITTEE, WASHINGTON, DC
Ms. Kerrigan. Thank you. First of all, let me thank you for
inviting our group, the Small Business Survival Committee, for
being a part of this important hearing. On behalf of SBSC and
its more than 50,000 members, I am pleased to have this
opportunity to testify in support of the Start-Up Success
Accounts Act of 1999. I am Karen Kerrigan, Chairman of SBSC, a
nonpartisan, nonprofit small business advocacy and watchdog
organization headquartered in the Nation's capital.
Let me also thank you, Mr. Chairman, for holding this
important hearing, and, of course, both Congressman DeMint and
Congressman Baird for their leadership in introducing H.R.
2373. Many times our organization has had--our staff, members,
our small business members, members of our board of directors
have had the honor to testify before Congress regarding the
hurdles faced by the small business entrepreneurial sector of
our economy and the ways that our elected officials can help
create an economic and policy environment favorable for their
growth, success and, of course, their survival.
SBSC is pleased that the Congress continues to place the
needs of small business at the top of its agenda, and we are
encouraged by bipartisan initiatives such as the SUSA Act of
1999 that will make a meaningful difference for many young
enterprises across the country.
Access to capital remains a serious obstacle for many small
firms as it was in 1995 when the delegates to the White House
Conference on Small Business ranked the issue as one of its top
priorities. Out of the 60 recommendations that were presented
to the President and to Congress, 15 of those related to
capital needs. Many of the efforts undertaken by the Congress
since that conference to lower the tax and regulatory burden on
small businesses, to help increase risk-taking and
entrepreneurship, as well as increase capital access, for
example, cutting the capital gains tax, have been a plus for
members as well as small businesses in general.
Passage of the SUSA Act of 1999 sponsored by
Representatives DeMint and Baird is another way, a creative and
common-sense solution that would assist many small businesses
through the tumultuous and challenging early years of their
development. Because the Tax Code discourages capital
retention, many small businesses are often faced with cash
shortfalls at critical phases. These periods include times when
a business needs extra capital for expansion and growth or
cycles when business activity may slow down and there is little
flexibility in managing fixed expenses, or simply periods of
adjustment when the business needs an infusion of cash to react
to changes in the marketplace.
The SUSA option whereby new small businesses would be
allowed to place up to 20 percent of taxable income into tax-
deferred savings accounts for each of the first 5 years of
operation opens up new financial planning as well as financing
opportunities for small firms most in need of these tools.
This Committee has studied the difficulty that many small
businesses face in securing adequate capital to finance their
growth. As most Committee members know, many banks require a
documented track record of success, while venture capital and
angel relationships are extremely competitive. These networks
are often difficult to penetrate. Unfortunately, the tremendous
success of venture funds in raising significant amounts of
capital have made small investments less attractive. This means
that small businesses need more tools to be self-reliant for
their capital needs.
The Center for Venture Research of the University of New
Hampshire estimated that about 300,000 growing companies and
about 50,000 start-ups need equity capital each year. That was
estimated in an analysis that the university conducted for the
Small Business Administration. CVR projected that total funding
needs for these companies amounted to $60 billion.
The SUSA solution would help small firms get out of the
trap of passing through excess capital to avoid double
taxation, subsequently followed by a frenzied search for
capital to grow the business or to keep it afloat. Let me add
that the owner can spend an inordinate amount of time and
resources seeking such capital during times of need. The SUSA
alternative in this regard promotes self-sufficiency and
efficiency. In addition, the funds in these accounts will
probably give the small business owner more leverage in
securing competitive loans.
As more and more individuals determine that small business
ownership is a goal they would like to pursue, particularly
women as well as minority Americans, it is incumbent upon our
elected officials to identify areas where public policy,
particularly the Federal tax system, may beunwillingly
assisting business closures. There are steps that can be taken to save
some of the 99.9 percent of small firms that close their doors, and it
is within the means of Congress to help salvage some of these
businesses. This is especially true in many of our urban areas where
small business success and nurturing of an entrepreneurial climate may
be the only hope for the revitalization of inner cities, and the same
can be said for small towns and small to mid-sized cities where
factories and businesses have either left the country or moved to more
hospitable business climates.
There is a need for the SUSA Act of 1999. Since the
inception of SBSC just 5 years ago, hundreds of small
businesses have contacted our offices in search of capital for
their promising businesses. It is little solace to such
entrepreneurs when we explain to them that we only serve as a
watchdog group advocating legislative measures to increase
access to capital for businesses that are in the start-up
phase. However, we have learned a lot from these entrepreneurs,
and we feel strongly that the SUSA Act of 1999 is one way to
equip such businesses with an option that allows each one of
them to chart their financial destiny and their survival.
Again, I congratulate Representatives DeMint and Baird for
introducing and pursuing with great vigor H.R. 2373. We support
this initiative and look forward to working with Members of the
U.S. House of Representatives to ensure its passage. Thank you,
and I look forward to answering questions from Committee
members.
Chairman Pitts. Thank you.
[Ms. Kerrigan's statement may be found in the appendix]
Chairman Pitts. Before we ask any questions, we will
receive testimony from all three of the witnesses. I now turn
to Mr. Erik Pages, policy director of the National Commission
on Entrepreneurship.
STATEMENT OF ERIK R. PAGES, POLICY DIRECTOR, NATIONAL
COMMISSION ON ENTREPRENEURSHIP, WASHINGTON, DC
Mr. Pages. Thank you, Mr. Chairman, and members of the
Subcommittee for inviting me. My name is Erik Pages, and I am
here representing the National Commission on Entrepreneurship.
We are a new organization with a 3-year charter to help
government policymakers better understand the needs and
interests of entrepreneurs, and to inform public policies that
support these needs. We were established by the Kauffman Center
for Entrepreneurial Leadership, which is part of the Kansas
City-based Ewing Marion Kauffman Foundation.
On behalf of all of our Commissioners, I want to thank the
Subcommittee for holding this important hearing. We also
commend Representatives DeMint and Baird for their leadership
in sponsoring H.R. 2373. It is an important proposal that could
play a critical role in supporting entrepreneurs across the
Nation.
H.R. 2373 is designed to provide support to one of the
fastest growing sectors in the business world. As the
Subcommittee members certainly know, we are enjoying a true
boom in entrepreneurship in the United States. Let me give you
some recent data to support this point. I would like to submit
two reports for the record which detail these points.
In cooperation with the Kauffman Foundation, we recently
released a study of start-up activity in the United States and
nine other industrialized countries. This study, The Global
Entrepreneurship Monitor, found that America is far and away
the most entrepreneurial country on Earth. This was not a
surprise to us. What did surprise us was the pervasiveness of
entrepreneurship across the United States. Each year Americans
start anywhere from 600,000 to 800,000 new companies that hire
employees. That adds up to roughly 14-16 start-ups for every
100 existing businesses. At the same time an additional 2
million new businesses are started each year as self-employment
ventures. So overall, roughly 8 percent of the American adult
population, that is nearly 16 million people, are in some stage
of trying to start a new business. This is a very robust level
of new business activity.
But as you know, the vast majority of new start-ups do not
succeed. This is no surprise as starting a new company is a
high-risk venture. We are continuing to study the factors that
lead to business success and failure, but I can highlight some
preliminary factors that appear to play a role, and H.R. 2373
addresses what is probably the most critical external factor in
a new firm's success, acquiring and retaining capital.
Our Commission has found that capital is readily available
for most businesses in the country today, but unfortunately,
this good news does not apply to all entrepreneurs. Our
research has uncovered a capital gap that often exists for
small start-up companies.
When a company is first started and has limited capital
needs, say under $50,000, funds can generally be obtained from
family and friends or from less orthodox sources like credit
cards. Thus, most people who start a self-employment venture
can generally find funds for that purpose.
However, when a company needs funding in the range of
$50,000 to $1 million or $2 million, sources of equity capital
often dry up. Most venture capital funds are seeking larger
deals, and banks continue to shy away from high-risk start-ups.
Angel investor networks, which are growing in importance, are
available, but not all start-ups have been able to access these
sources of funds. Like venture capital, angel capital funds
tend to be highly concentrated in specific geographical
regions.
Let me talk about the Start-Up Success Accounts Act of
1999. As our analysis indicates, H.R. 2373 is targeted on the
right problem. The first 5 years of a company's life are its
most tenuous. Even if a company is profitable, it must reinvest
its profits into fixed assets, recruiting and training new
workers, expanding distribution channels and other tasks. Thus,
even successful entrepreneurs face major challenges regarding
cash flow during the first 5 years of existence. If firms
survive through this transition period, they tend to succeed.
Indeed, firms that survive after 3 years show significantly
lower failure rates than comparable businesses.
Moreover, many of these firms become what are commonly
referred to in the economic development profession as gazelle
firms. These are companies with annual sales growth increases
that exceed 20 percent or more for 4 years. The typical gazelle
firm does not simply take off after finding a hot niche. The
typical Internet story is not what happens for most companies.
It is far more common to see a gradual development phase over 3
to 5 years, say, followed by robust but not explosive growth.
H.R. 2373 seeks to support these new firms by creating a
tax-deferred account known as a Start-Up Success Account
wherein small businesses can place annual deductions of up to
20 percent of income or $200,000 during the first 5 years.
These funds would be drawn from operating income, and
withdrawals would be treated as taxable income in the year in
which they were drawn. These accounts could provide an
additional safety net for businesses in their critical start-up
phases. During a firm's first 5 years, it will inevitably hit
some type of downturn that affects capital flow.
Under current rules, entrepreneurs often use credit cards
or take on new loans to weather the tough times. These new
accounts could provide a direct source of alternative capital,
or theycould be used as collateral to secure more competitive
loan rates. By allowing new firms to avoid taking on new debt, we can
help set the stage for more rapid future expansion and job creation.
We believe that H.R. 2373 includes several provisions that
are particularly important. First off, the limitations on the
availability of the accounts in terms of the time period, 5
years, and the size of the company, under $5 million in gross
receipts, makes sense. We believe that this program must be
tightly focused on new entrepreneurs and start-up companies.
Secondly, the bill contains some restrictions on the use of
the accounts, and we believe that the Subcommittee might
consider additional language to ensure that the accounts are
explicitly used for new business and are not diverted for other
purposes.
Finally, we believe that the SUSA accounts would be
particularly helpful to women and minority entrepreneurs. These
business founders often start their firms with lower levels of
initial investment, and thus face higher risks of failure in
the event of a business downturn.
Some other steps in addition to its consideration of H.R.
2373, we urge the Subcommittee to consider other steps to
support America's entrepreneurs. We recommend that you examine
the issue of angel capital and steps that can be taken to
create local angel investor networks around the Nation.
We also urge you to review current technology transfer
programs and examine how we might make these programs more
friendly to entrepreneurs.
Finally, we believe ultimately that the most effective
programs to support entrepreneurs must start at the State and
local level. We would be happy to work with the Subcommittee in
examining these issues. We will soon be releasing an analysis
of State best practices in supporting entrepreneurship, and we
will forward these findings to the Committee when the report is
released.
In conclusion, on behalf of the National Commission on
Entrepreneurship, I commend the Subcommittee for holding this
important hearing and for its leadership in supporting
America's entrepreneurs. These visionaries are the engine of
the new economy, and your support is critical to their
continued prosperity and vitality. Thank you, and I look
forward to your questions.
Chairman Pitts. Thank you for your testimony.
[Mr. Pages' statement may be found in the appendix]
Chairman Pitts. Mr. Horton.
STATEMENT OF PEPPER HORTON
Mr. Horton. My name is Pepper Horton, and I am a CPA from
Greenville, South Carolina. I would just say I am very nervous.
I would like to thank the Committee for the opportunity to come
up here and testify today on the SUSA Act of 1999.
I started in 1989 as a CPA with Ernst & Young where I
worked for 10 years, and eventually left Ernst & Young to start
my own practice so I could deal with smaller businesses that
could not afford me when I was working with a larger firm.
I feel that experience has given me a pretty good
understanding of how large businesses operate and how small
businesses operate. As a small business itself, I understand
the pressures in how companies manage their cash flows. And
having a lot of accounts receivable from large companies, I
understand how they manage their cash flows as well as how they
are stretching their payables. I find a great deal of
satisfaction working with new businesses and feel that I can
really make an impact with these businesses as they try to get
off the ground.
In reading through my colleagues' presentations, I was
suddenly concerned that my presentation was too technical, and
that really comes from my background. Whenever I see a piece of
legislation, I immediately read the code and try to answer the
questions what does the bill say, sometimes just as importantly
what doesn't it say, and try to figure out how I might use that
bill to help my clients. So I apologize if I have gotten too
technical.
After reading the act and rereading the act, I summarized
my thoughts into the following points, the first being double
taxation. This bill would clearly be a great benefit to regular
or C corporations in managing their cash flow. A corporation's
net income is taxed at the corporate level, and when these
earnings are distributed to the shareholders, the earnings are
taxed again as dividends. Double taxation creates an enormous
incentive for business owners and their consultants to keep
corporate taxable earnings low. As a result, business owners
engage in tax-motivated spending at or near year end.
If there is one thing I have learned in my career, it is
that tax-motivated spending is at best an inefficient use of
resources, and is often tantamount to throwing away a dollar to
save 40 cents. That is one of the things that I try to
continually stress to my clients, that spending money to avoid
taxes is usually, like I said, throwing away a dollar to save
40 cents.
One of the most commonly used mechanisms for lowering
corporate profits is increasing compensation to employee
shareholders. Of course, the Tax Code mandates that employee
shareholder compensation is reasonable. However, ``reasonable''
is a subjective term and often produces a range of compensation
amounts that could be considered reasonable. As a result,
business owners often have a huge incentive to accept
compensation amounts that are on the high end of what is
considered reasonable instead of what the business actually
needs. This bill would mitigate that motivation by allowing
corporations to receive the same tax effect as ``comping out''
the corporation's profits while still keeping the cash inside
the corporation for future use that may or may not be
anticipated.
Another use for the bill would be funding expansion. As a
business grows, it must increase its inventory, secure new
office or plant space, purchase new equipment, and train new
employees. While section 179 allows many businesses to expense
their equipment purchases, all of the other expansion-related
expenditures generally must be capitalized for tax purposes.
This can leave a new business in the unfortunate situation of
having a tax liability because all of the spending that they
have done is not deductible, or least not 100 percent
deductible. It is amortized over a number of years, sometimes
up to 39 years. It can leave the business in the unfortunate
situation of having a tax liability with little cash on hand.
At the end of year 2, for example, a new business could place
some of the cash on hand to fund year 3's expansion into a SUSA
account and immediately reduce the business's tax liability.
Even if this cash is only temporarily placed in a SUSA account,
it provides a new business with a valuable tax deferral. Funds
which would have ordinarily been remitted to the Treasury will
still be in the private sector creating jobs and funding
economic expansion.
The third point is smoothing out earnings. As you are
aware, our tax brackets are graduated so the individuals and
corporations with higher taxable income pay tax at a higher
marginal rate. One possible use of SUSA accounts would be in
the smoothing out of a business's earnings to avoid income
spikes from temporarily thrusting taxpayers into a higher tax
bracket. While generally accepted accounting principles, or
GAAP, aim to match revenues with expenditures in the proper
period, the Tax Code tends to accelerate income recognition and
defer deductions inorder to increase revenue. This and a host
of other business factors can lead to the bunching of income in a given
tax year. This bill could provide taxpayers a tool to lessen the sting
of abnormally high taxable income in a single year.
On the self-employment tax section, section (e)(3) of the
bill provides that the amounts included in gross income under
the section will not be included in determining earnings from
self-employment. This creates a planning opportunity to lessen
the impact of the self-employment tax depending on how the
business is classified for tax purposes. Sole proprietorship,
single member LLCs and most partnerships' net earnings are
subject to self-employment tax. My experience has shown that
self-employment tax can have a potentially devastating effect
on new business owners if they are not properly advised. If my
understanding of this bill is correct, this provision provides
an exclusion of the amount deposited in a SUSA account from the
self-employment tax. That is a tremendous benefit.
One of the things that I have noticed, and I have felt
myself as a new business owner, is that the self-employment tax
can kill you. Especially for people leaving the corporate world
to start a business. They really don't understand how the self-
employment tax works, and they usually end up getting the April
surprise when they do their tax returns and find out that they
have not paid enough to cover the self-employment tax.
The bill's most obvious benefits are to provide the
business with an opportunity to defer income taxes for up to 10
years while earning a return on the funds. In doing so,
however, the bill encourages businesses to retain earnings
rather than engaging in tax-motivated spending. However, I am
concerned that as the business grows and as its profits expand,
that the income from the SUSA will be taxed at a higher
marginal rate than would have been paid in the year the deposit
was made.
What I mean by that is that if a business's earnings are
moderate in years 1 through 5, and the business continues to
grow, the cash coming out of the SUSA account may be taxed at a
higher rate than the tax benefit that was received when it went
into the SUSA account. Some tax consultants may be a little
reluctant to recommend to clients that they potentially expose
themselves to paying higher marginal tax rate.
In conclusion, I would like to express my sincere
appreciation to the Congressmen for their efforts to assist
small businesses. As a consultant to many small businesses and
as an owner of a small business, I am impressed with their
apparent understanding that small businesses are the backbone
of our economy and will be the number one source of new jobs as
we move into the next century.
Obviously I would love to see a bill that eliminated the
double taxation that encourages debt financing and tax-
motivated decision-making or a bill that simply lowered the tax
rate that new businesses face. However this bill is clearly an
effort to assist small businesses in managing their tax
liability and overall cash flow. The unavoidable fact is that
our Tax Code contains very few provisions aimed at helping
small businesses get off the ground, and this bill is clearly a
step in the right direction, and I am therefore happy to
support it.
Chairman Pitts. Thank you.
[Mr. Horton's statement may be found in the appendix.]
Chairman Pitts. We will go to questioning now from the
Members.
Mr. Horton, I would like to start with you. You mentioned
in your testimony that the U.S. Tax Code often works against
small entities. What do you think is the most detrimental
effect of our Tax Code on our Nation's small businesses?
Mr. Horton. One of the worst is double taxation of
corporations, and that is one reason why I try to get clients
in early when they are trying to decide what type of entity to
choose so I can steer them away from a regular corporation,
because the double taxation, the same dollar of earnings is
taxed twice.
But the general complexity of the payroll taxes tend to
give clients a lot of trouble. I feel like every one of my
clients get penalized by the IRS in the payroll tax area even
though they are trying as hard as they can to comply. In fact,
they hire me, and sometimes I get them penalized, too. It is
frustrating because I am a paid professional, and I end up
slipping up and getting the client penalized.
There are provisions like section 179 that allow businesses
to expense their equipment purchases, but they have also got to
buy inventory, and that is not immediately deductible. That is
cash out the door that does not provide an immediate tax
deduction. So you can end up in a situation where a corporation
has paper profits, but no cash to pay it.
Chairman Pitts. Thank you.
Mr. Pages, you mentioned in your testimony that you
recommend that the Subcommittee examine the issue of angel
capital. For those of us not as familiar with that, can you
explain?
Mr. Pages. Angel capital refers to individual investors,
often former entrepreneurs, who invest their own wealth in
starting new companies. We found through this study there is a
huge amount of angel capital available in this country, around
$50 billion. If you compare that to the amount spent last year
in venture capital, which I believe was roughly $16 billion in
new investments, you have a huge differential there. So there
is much more angel capital available for start-up businesses
than there is venture capital. Venture capital is largely for
bigger deals and is not available for the types of start-ups
that we hope to help through this legislation.
As Ms. Kerrigan noted, it is very hard to break into
networks to put the business together with the investor, and if
there is some way to create networks so we could spread, if you
will, the wealth from all of this angel capital that is
available to other parts of the country, it would be a very
helpful step that the Subcommittee could take.
What we find now is that the places where there is lots of
venture capital, Silicon Valley, Austin, the Boston area, there
is a lot of angel capital, too. And in effect you are caught in
a chicken and egg situation. People get rich and they invest
back in the areas where they grew up, and the places that don't
have those entrepreneurs located there, it is very difficult
for them to get started in terms of creating an angel capital
network.
Chairman Pitts. Ms. Kerrigan, how many members of the Small
Business Survival Committee are start-ups or small businesses
within their first few years of existence? How many of your
members would be able to take advantage of the SUSA accounts,
and do you feel that they would benefit from this legislation?
Ms. Kerrigan. I would say the majority of our members are
those small businesses or small firms who have endured the
first 4 or 5 years, the ones who have gotten off the ground,
who can become more active in an organization such as ours and
pay membership and stay informed on policy issues and
legislation and how it impacts their business.
I would--and this would be a guess, we can go back and do
this research certainly with our membership, but I would guess
probably about 5 percent of our membership are those businesses
who are in the start-up years and who want to know what is
going on in the Nation's Capital and State capitals nationwide
and how that may impact their business; SBSC members also
include a lot of investor types who invest in these types of
businesses.
So what we want to do, obviously, is grow our membership to
large numbers, and include the start-ups. That is part of our
mission and goal, to not only represent our membership, but
also represent the needs of all small businesses nationwide. So
I would say 5, about 5 percent or so are in that start-up phase
right now.
Chairman Pitts. Thank you.
Now I would like to recognize the Ranking Member of the
Subcommittee, the lady from California, Ms. Millender-McDonald.
Ms. Millender-McDonald. Thank you, Mr. Chairman. I am sorry
that I was late getting here.
Ms. Kerrigan, I want to start with you. You mentioned just
a few minutes ago talking with the Chairman about the need to
look into small businesses and what will perhaps work for them
or to find the exact needs for the small businesses. As we do
recognize the first 5 years of small businesses really are
tenuous, if you will, because of the obstacles that are there.
When you do your needs assessment, are you going to do--what
small businesses are you going to do, across the board, women,
minority, all, or what?
Ms. Kerrigan. When we do a needs assessment, we look at the
needs of our members, which generally relate to taxes and
regulation and other obstacles that are put up by the
government in terms of affecting their growth and success and
their competitiveness, but we look at what the obstacles are
faced by many start-ups as well.
We base that needs assessment on looking at what the
climate is for small firms. Obviously with 99.9 percent of
business closures being small businesses, we have a concern
that, and one of our priorities it, to help those who are just
getting in business get off the ground and become successful.
So we believe that our tax and regulatory agenda pretty
much is generally representative of all different types of
businesses. Whether it is agriculture, minority-owned
businesses, women-owned businesses, these are broad issues that
impact all businesses. I hope that I am answering your question
correctly.
Ms. Millender-McDonald. In a sense, but let me just ask you
this. As you stated in your testimony, access to capital is one
of the most important obstacles, and we need to recognize that.
The basic assumption of this bill, however, is that a business
must be in the black in order to be able to use these accounts.
Do you think that during the first 5 years small businesses on
the average have enough earnings to make this bill a practical
solution?
Ms. Kerrigan. Yes. Are you asking if this will address the
capital needs?
Ms. Millender-McDonald. Yes.
Ms. Kerrigan. Absolutely it will. It would be a practical
solution, because if you do have a business, for example, that
is forced to spend its money year end, as was noted by our
expert CPA at the end of the table, rather than putting it
aside and keeping it for a need later down the road, this just
makes sense, giving them incentives to think ahead not only in
terms of financial planning, but also for self-financing
opportunities.
Yes, I think this is a practical solution for many--is it
going to be something for all firms? No. But it will address
the needs of many small businesses out there.
Ms. Millender-McDonald. But it will not necessarily address
the needs of some minority firms that I have talked with given
that they do not find themselves in the black for the first 5
years, so they are not a position in terms of any access to
capital?
Ms. Kerrigan. It is not the silver bullet. I don't think
that it will address all needs, but I think it will help many
small firms.
Ms. Millender-McDonald. And I suppose I get back to the
needs assessment then, you will certainly look into how can we
help small minority businesses to survive in that they will be
the employer of many of those who will be seeking jobs.
Critical of that is of women and men coming off of welfare to
work. It is important that we look at a needs assessment that
is representative of a minority group.
Ms. Kerrigan. Yes, a broad-based needs assessment not only
in terms of further reducing capital gains taxes or targeting
capital needs towards urban areas, but also looking at what
local governments can do to lower the tax burden in cities, and
in terms of what they are doing perhaps to assist in either
business closures or not enabling their own communities.
Ms. Millender-McDonald. And I would be interested in seeing
what local governments are doing for this, given that they are
strapped themselves most often.
Ms. Kerrigan. I will get this to the Committee. We have not
brought it down to the city level yet, but we do conduct a
small business survival index. It looks at the climate for
entrepreneurship for all 50 States, and we rank them based on
which are more business-friendly than others. We look at a lot
of different programs and policies and how these impact small
businesses.
This is, I think, an important tool. I think this will work
for many small businesses, and, in fact, I think it will help
many minority and women-owned businesses.
But there are a lot of other measures and initiatives that
the Congress is pursuing right now, things that the Small
Business Administration is doing, things that the
administration is doing that I think address this broad-based
need. I would agree with you.
Ms. Millender-McDonald. Mr. Pages, as I have said in the
questioning, speaking with Ms. Kerrigan, that start-up
businesses are the most tenuous in that the first 5 years are
very critical, and oftentimes they find themselves not in the
black after 5 years. But as you stated in your testimony, after
the first 3 years, the success rate tends to improve. How would
this bill help those companies during the first 3 years when
most of the earnings would be used to pay off their debt?
Mr. Pages. In many ways I would think I agree with Ms.
Kerrigan about the impact of the bill. If you think of start-up
businesses in three categories, you have those that are going
to succeed with or without some stimulation or support from the
government, and those that are going to fail. There is a middle
category of firms who are on the edge. I think that is the
appropriate target for this legislation, companies that are
showing slight profit in the first 5 years.
Ms. Millender-McDonald. So it is not for all small
businesses then?
Mr. Pages. I think that is right. As you have noted, many
of these companies do not show a profit during the first 5
years. I think we need to look at other ways to support those
companies. This is targeted at those companies that are showing
fluctuations in income in the first 5 years. They do need to be
profitable to be supported by this bill.
Ms. Millender-McDonald. Is there any specific industry area
which would find these accounts more useful than others, Mr.
Pages?
Mr. Pages. Well, we haven't looked at that. My general
sense would be that more volatile industries might have greater
benefit of--these types of provisions because they would see
their earnings fluctuate more greatly over a 5-year period. You
think of the classic Internet businesses or information
technology businesses where there is a lot of turmoil in the
company and a lot of ebb and flow of its profits. This is the
type of safety net, if you will, that might help those typesof
sectors rather than a more established traditional sector of the
economy, but we have not looked at this in great detail.
Ms. Millender-McDonald. While we have many pieces of
legislation coming before us with small businesses, and we do
recognize small businesses will be the catalyst by which the
economy continues to spur in the new century, we have to look
at how we can get those small businesses that are going to
employ that work force that is going to be the majority women
and minorities. And given that this bill does not specifically
target individuals whose main source of income is a small
business, but rather allows a deduction of funds received from
a qualified small business, would requiring that the funds
deferred not only come from a small business but be the main
source of income for the individual serve the underlying
purpose of the bill better or what?
Mr. Pages. I think the bill is appropriately targeted. I
think it will have a big impact on women and minority
entrepreneurs. If you look at start-up business rates,
minorities, particularly African-Americans, show much higher
rates of entrepreneurship than whites and Hispanics,
particularly as education level goes up.
What we do find, however, is that they are
undercapitalized.
Ms. Millender-McDonald. I was going to say that they do not
succeed because of not having access to capital.
Mr. Pages. That is correct. So this is one way to help them
preserve the limited resources they have. It is not going to
save everyone, if you will, but it is one other way to sort of
conserve that precious cash that they need, particularly if
there is a downturn. If we do have an economic downturn, the
companies that are most poorly capitalized are going to be the
first to fail. So this is very important to help these kinds of
companies conserve their cash.
Ms. Millender-McDonald. Mr. Horton, you stated that H.R.
2373 would be a great benefit to regular C corporations in
managing their cash flow. You also stated that the bill would
allow corporations to achieve the same tax effects as
compensating to the employees the corporation's benefits while
keeping the cash inside the corporation for future use.
As I understand the bill, the only eligible entities
allowed to use the tax-deferred under the SUSA accounts are
individuals. Am I correct, or would the provisions under this
bill allow corporations to defer their profits through the SUSA
accounts?
Mr. Horton. My understanding is that it is available to all
entity types, unless I am misunderstanding that.
Ms. Millender-McDonald. Both individuals as well as
corporations?
Mr. Horton. Right.
Ms. Millender-McDonald. If you were to buy stocks from a
small business corporation, would I place my dividends in a
SUSA account, Mr. Horton, even though this is not a main source
of income, and I have no direct stake in the day-to-day
managing of the corporation?
Mr. Horton. The corporation itself--if my understanding of
the bill is correct, the corporation itself would put the money
in the SUSA account, not the stockholders.
What I was referring to about compensating out the
earnings, what typically happens at year end is the corporation
looks at where it is earningswise and tries to compensate its
owner/employee as much as possible in order to increase the
compensation to the shareholder and decrease the earnings to
the corporation to avoid the double taxation. Am I answering
your question?
Ms. Millender-McDonald. To some degree I am following what
you are saying, anyway. Did you want to finish up because I am
concluding here. You have answered as you see fit?
Mr. Horton. Right. In the C corporation environment the
double taxation is an incredible motivation to taxpayers to try
to lower the corporate earnings, and that is why I think a lot
of the statistics at the corporate level are somewhat doubtful,
because these corporations do whatever they can to keep their
earnings as low as possible in the corporation.
Ms. Millender-McDonald. Mr. Chairman, thank you. Many small
businesses agree that the SUSA bill is a good bill and has the
potential to lead to many positive outcomes for small
businesses, like the ability to use the tax-deferred funds for
leveraging with larger companies. However, most start-up
businesses struggle in the first 5 years, as I have said
before, and this is what concerns me about the bill. I think we
should look at the--I think we should look at the current
support mechanisms that are in place to see why more businesses
are not succeeding, and with that I thank you.
Chairman Pitts. Thank you.
Because of the excellent attendance of the membership, we
are going to start using the lights. We are asking go ahead and
use your time limit on the first round. If we need to, we can
go to a second and third round.
Mr. DeMint. Thank you, and thanks again for your
encouragement of this bill. And one of the things in addition
to just getting your endorsement today is to find ways to help
make this bill better. We do want to look at the language that
was questioned. The intent of the bill is that it relates to a
business entity. The point is to encourage people to leave
capital in a business entity rather than have tax-motivated
spending or to pass it through as salary.
My experience in business as a solo consultant, my first
couple of years in business, is we didn't make a lot of money.
At the end of the year, it was just a matter of do we leave a
few thousand dollars in the company, or do I take it out as
salary.
The accountant always said take it out as salary because
you may need it as salary in a couple of months, and you would
have paid taxes twice on it if you do that. So consequently, as
I went through those first few years of business, there was
seldom enough capital to move ahead to hire people, and I think
the growth was slower. It was not necessarily just a matter of
survival, but there was tax-motivated spending of buying
something that we didn't need to reduce our profits or maybe we
didn't need then. But the point here is to try to encourage
people to leave money in a company without bad tax consequences
so that company would be stronger, better able to hire people,
and would be stable in the future, and we want to be make sure
that the language of the bill reflects that.
One question, we want to make sure that we don't have
unintended consequences of this bill or unnecessary complexity.
One of the things you mentioned, Mr. Horton, that got my
attention is that there might be some reluctance to use these
accounts because the tax rate may be lower in the first year
than it is the fifth year when the money is taken out.
Would it be your recommendation that it be taxed at the
rate when it was put in, or is there some way that we can
improve this so it is not a risk to the company to save
capital?
Mr. Horton. I think it would be beneficial to cap the
amount of tax paid when the funds come out the SUSA account to
the amount that would have been paid had the funds not gone
into the SUSA account. That certainly creates a little bit of
administrative complexity, but I think that is probably
manageable.
If the taxpayer were in the 15 percent bracket when the
money goes into the account, and theyare in the 35 percent
bracket when the money comes out of the account, they have deferred
themselves into 20 percent of extra tax liability.
Mr. DeMint. Well, that is a great point.
Does any other panelist have any concerns about unintended
consequences or unnecessary complexities in what we are trying
to do?
Ms. Kerrigan. No. I wouldn't--when we talk to a lot of our
members about various things that we can do to fix the Tax Code
to help small businesses, there is always the question, well,
gee, shouldn't we--rather than further mucking up the system or
making it more complex, shouldn't we just overhaul the entire
system or do some type of simple flat tax? Since the Congress
really hasn't come to any agreement of whether that should be
done, what type of tax system we should have, we still think
that there are things that have to be done. We can still do
things to help small businesses.
This is an immediate need, and the Congress needs to react
in an immediate way and not let this whole debate over
complexity and what type of system we are going to move to
paralyze them in their efforts right now, because there are
small businesses who need their help, in terms of looking at
various parts of the Tax Code, whether it is estate tax relief,
SUSA accounts, capital gains tax, whatever.
Mr. DeMint. All right. Good.
Mr. Chairman, I yield back.
Chairman Pitts. Mr. Baird.
Mr. Baird. Mr. Chairman, I neglected earlier to ask
unanimous consent to introduce Mr. Nichols' letter into the
record.
Chairman Pitts. Without objection.
[The information may be found in the appendix.]
Mr. Baird. I have a couple of questions, and my good friend
Mr. DeMint--it shows why we are working together on this--
precisely picked up on the question that you addressed, Mr.
Horton, and my staff and I kicked that very issue around this
morning, in fact, and it is something we might want to explore.
One of the things that I want to pick up on a little bit
is, as Mr. DeMint said, to me the issue is how do we provide an
engine to the economy, not how do we proliferate small
businesses. And there may be some small businesses that do not
succeed perhaps through bad management, maybe they have a
product that nobody wants, et cetera. But there will be a
subset of businesses who are succeeding and are, in fact,
generating revenue, and those maybe are more likely candidates
of engines of job creation.
The way I see this bill is it is targeted at precisely
those businesses who are having early success, who have the
potential to expand on that early success, if they can find a
way to better manage and access their own capital, rather than
spending themselves into a precarious debt position or lack of
capital situation.
So yes, I agree with the Ranking Member that there will be
needs to help other businesses who are not profitable early on
find capital, but part of what I am seeing here, and certainly
what many business owners locally have told me, is that this
empowers the successful business that is already demonstrated
an achievement to be even more successful.
Does that square with your experience and as you look at
this bill, your thoughts about it?
Mr. Pages. Yes, I think you have got it exactly right. Not
all entrepreneurs are created equal is one way to look at it.
There is a certain subset that we call high growth, and those
are the companies that really generate most of the economic
development, most of the net new jobs. You need a base of all
sorts of small businesses for those types of entrepreneurs to
prosper, but it is really a small subset of these companies
that are the net creators of new jobs in this country. Again,
the term I used in my testimony was ``gazelle'' firms, but it
is really fast-growing, high-growth entrepreneurs is really
what you need to encourage to foster local economic development
and to create lots of new jobs and innovation and technology.
So this is the subset you really want to focus on.
Mr. Baird. Let me ask one other question.
Mr. Nichols, from my district, raised an interesting
question. He thought that this might be--the access to this
opportunity might be a way to leverage more competitive loan
rates. Any thoughts on that? It was a possible use that had not
occurred to me, but it is intriguing. Any thoughts on that from
you folks?
Mr. Horton. Well, one thought, there is a provision in the
bill that prevents the account from being pledged as collateral
on a loan, and I think that if that were removed, then perhaps
you are right, this could be used to secure a loan and get more
favorable interest rates. My reading of the bill right now is
that it is similar to an IRA where if you pledge it as
collateral on a loan, then it is treated as distributed.
Mr. Baird. What would be the pros and cons of that as you
see it, Mr. Horton?
Mr. Horton. Well, if you could use it as collateral, then
you could leave it in the account, leave it in the corporate
form and still get a loan with more favorable terms. If you
leave it the way it is now you may see the money coming out of
the accounts rather than staying in the accounts.
Ms. Kerrigan. I was just thinking, it may not be something
that could be pledged against a loan, but on the other hand, if
you do have a SUSA account and depending upon the size of that
account, and what money you have set aside as a business owner
for future cash needs, I do think that planning says something
about business management and the business itself in terms of
how you are thinking ahead like financial planning, planning
for future crises or what have you. So I don't know if it
serves as a direct pledge, but more of an indicator that this
business has its act together. It is thinking ahead, and it is
using all the tools available to succeed in the future.
Mr. Baird. So the lender will look at that, and even though
they are not saying, we could directly access that capital to
pay back the loan, they could say, here is a business that is
planning ahead, that is not operating right on the margin, and
that is a sense of security for a lender.
Ms. Kerrigan. Yes, in terms of looking at that, but plus
all the broader business practices as well.
Mr. Horton. Even on a more basic level than that, it will
show up on the company's balance sheet, which makes the balance
sheet look more favorable to a lender.
Mr. Baird. I want to just close by thanking you all. I know
that Mr. DeMint and myself really do want this bill to help
businesses. And, Mr. Horton, you apologized earlier for being
so detailed and technical, but no apology necessary. I am
sincerely grateful to you and each one of you for what I think
are very insightful analyses. And I want to invite you, after
you go home, going home on the airplane or whatever, and you
may be saying, gosh, there are some ways to make this better.
Mr. DeMint and I would be very open to your suggestions about
how to improve it, if it has problems. We are not here to have
anyone say what a great bill we have done, we are here to learn
from you and, if it has problems, to improve those and make the
bill even better. So I look forward to your interaction. Thank
you, Mr. Chairman.
Chairman Pitts. Thank you.
Mr. LoBiondo.
Mr. LoBiondo. No questions.
Chairman Pitts. I think the other Members have gone. We
will start the second round.
Mr. DeMint.
Mr. DeMint. I think in the interest of time and our
panelists, really my questions have been answered, except to
Mr. Baird's point. If there is anything else that has crossed
your mind as a way to make this bill better, it is really draft
legislation at this point. The hearing is one step on improving
it. So any concerns you have, don't leave without expressing
them, and if any of you have any thoughts on the way home, let
us know, because in the next week or two we want to refine the
language and finalize it. But you have really covered a broad
spectrum and added a lot of encouragement and confirmation to
us to move this bill through as one tool for new businesses to
be successful. So thank you.
Any other comments?
Chairman Pitts. Ms. Millender-McDonald.
Ms. Millender-McDonald. Mr. Chairman, I just want to
emphasize that when you say success accounts or start-up
businesses, you are really talking about successful businesses,
you are not talking about fledgling businesses, because in a
sense this bill will not really be a source of support for one
who has not been in the black for 5 years or better, but rather
those who have seen success as they have gone along.
So this still does not address a small business that is not
in the black, but rather successful businesses as they continue
to thrive and pretty much offer new jobs, but the jobs aren't
in areas where it is most needed. So while this will not be
that panacea, I am just suggesting the bill is really for more
or less successful small businesses or those that are thriving
and not those that are fledgling.
Chairman Pitts. Mr. DeMint.
Mr. DeMint. Just to respond briefly, I think we all agree,
it won't apply to all businesses, but it only does apply to new
businesses, and perhaps the benefit will be to those that have
a faster start. But it is not unusual for a business at any
time to have a good year and then a very bad year, or to start
out, as I did, with a contract that ended after the first year,
to have significant profits in one year and then be out trying
to borrow money the next year. It is just a bad system that
discourages those companies in the first 5 years, if they do
have a profitable year, to get all of the capital out of the
company instead of trying to maintain some so that they can get
through the next year. It would be very unusual for any new
business to just start off and have five great profitable
years, and if they do happen to have a good year or two, we
would want them to reinvest and grow even faster.
I think it will help the company that is making almost no
money. If only you set aside $1,000 or $2000, if you are a solo
practitioner and keep it in the business instead of as a
salary, it does give you a little staying power.
So I think the application will be, again, not totally
inclusive, but I do think it would help the solo entrepreneur
as well as the companies that start off fast and then have a
bad year somewhere in those first 5 years.
Thank you.
Chairman Pitts. Thank you.
Mr. Baird.
Mr. Baird. I would like to echo what Mr. DeMint said. I
appreciate your concern. I actually see this bill as having
great potential to help women and minority start-ups. You
needn't have a profitable 5 consecutive years. At any point
where you experience profit, you can use that profit to put
into a SUSA account, and the model I would have that I think
would benefit greatly minorities and women entrepreneurs would
be, for example, the very small corner grocery store that you
see people with their--the mom is in there, the dad is in
there, the kids are in there. They are starting from 5:00, and
they are working until 10:00 at night, and they are
purposefully starting small, and they are being tremendously
frugal, and they are taking those savings and they are putting
them aside. They have been successful right from the get-go
because they have started within their means. They are working
tremendously hard, they are putting sweat equity into it, but
they are also willing to forego the short-term profit so that
they can later expand. So for 3 or 4 consecutive years, they
could keep their operation relatively small, put a lot of sweat
equity into it, take this money, set it into a SUSA account,
and then after 4 years expand, and that is when they draw on
the SUSA account, because they have saved the personal money to
expand versus every year being right on the margin.
Or let's say you have a woman working a business out of her
home. She has a little office, she has not a lot of expenses,
but she does generate a profit. She sets those aside in a SUSA
account. After 3 or 4 years it has built to the point she can
establish an office outside the home.
I see plenty of applications, if people are frugal and
successful early on, to use this, and I think it has a lot of
potential for women and minority-owned businesses.
Chairman Pitts. Would any of the witnesses like to comment
on that?
Mr. Pages. I would just simply offer that if there is a
company that is growing on an aggressive growth path and
profits in the first 5 years is probably going to quickly grow
too big to access the accounts, and I think the accounts should
not be designed for that type of company. I think Congressman
DeMint has the right picture of this. The typical account user
will likely have ups and downs in the first 5 years of
existence and is really much more tenuous than the really fast-
growth company that kind of just gets hot right from the start.
That is not our vision of where this legislation would apply.
Chairman Pitts. Ms. Kerrigan.
Ms. Kerrigan. I would agree with everything Congressman
Baird said. I would like to change the assumption here to the
fact that women-owned businesses in this country are
tremendously successful, so I think we need to think about this
more in a positive way in terms of how it will impact many
women-owned small businesses.
There is a huge success story here in terms of female-owned
firms and women-owned businesses, the amount of economic growth
that they are responsible for in job creation, and all that
other good stuff. And looking at the growth, the phenomena of
women-owned businesses and also the growth of many minority-
owned businesses, you have to assume with that growth and their
success that there is going to be a portion of those businesses
who will benefit from this.
But I again would like to add, do we need to be doing more
for small businesses beyond this? The answer is absolutely yes.
There are obstacles and government-imposed burdens and a lot of
things at the local level, I think, that are hurting their
chances for success and survival. Someone who considers
themselves a fledgling business in their first year and may not
make a profit, perhaps this is something good in their second
year or third year that they can benefit from.
So anyway, I am just reaffirming or supporting the comments
of the Congressman.
Chairman Pitts. Thank you.
Mr. Horton.
Mr. Horton. One thing I wanted to point out, the term
``small business'' is very broad. It is true that this bill
would not help businesses that are losing money, but let us not
forget that, at least with most of my clients, that some of
them have an idea, and they are trying to start this big
business, and they are willing to lose money for years and
years and years trying to get it going, but most of them are
men and women who want to open five restaurants in a town or
five auto repair shops. They may be able to stand losing money
in year 1 and possibly year 2, but if they are not making money
after that, they are going to give it up, because they need
this to earn a living.
So I think under the tent of small businesses, there are a
lot of different businesses, and I don't want us to forget
about the men and women who are starting businesses to provide
them with money to eat, not necessarily just to come up with a
good idea that may make them rich.
Chairman Pitts. All right. Are there any other questions?
Any closing comments from anyone?
If not, this has been an excellent, excellent hearing. We
thank you for your very informative testimony. We will keep the
record open for 5 legislative days for anything you would like
to add.
Chairman Pitts. Mr. Pages, you have a couple of reports
that you would like to make a part of the record.
[The information may be found in the appendix.]
Chairman Pitts. If there is nothing else, the Subcommittee
hearing is adjourned. Thank you.
Ms. Kerrigan. Thank you.
Mr. Pages. Thank you.
Mr. Horton. Thank you.
[Whereupon, at 11:15 a.m., the Subcommittee was adjourned.]
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