[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

THE TAX OUTLOOK FOR SMALL BUSINESSES: WHAT'S ON THE HORIZON?

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HEARING

before the

COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

HEARING HELD
APRIL 18, 2012

__________

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

Small Business Committee Document Number 112-063
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HOUSE COMMITTEE ON SMALL BUSINESS

SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
ROBERT SCHILLING, Illinois

NYDIA VELAZQUEZ, New York Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
YVETTE CLARK, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
JANICE HAHN, California
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts

Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director

C O N T E N T S

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OPENING STATEMENTS

Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 1

WITNESSES

Aparna Mathur, Ph.D., Resident Scholar, American Enterprise
Institute, Washington, DC...................................... 3
Leonard Steinberg, Principal, Steinberg Enterprises, LLC, West
Windsor, NJ.................................................... 4
Margot Dorfman, CEO, U.S. Women's Chamber of Commerce,
Washington, DC................................................. 6
Martin J. Mitchell, Vice CEO, Mitchell & Best Homebuilders LLC,
Rockville, MD.................................................. 8

APPENDIX

Prepared Statements:
Aparna Mathur, Ph.D., Resident Scholar, American Enterprise
Institute, Washington, DC.................................. 18
Leonard Steinberg, Principal, Steinberg Enterprises, LLC,
West Windsor, NJ........................................... 31
Margot Dorfman, CEO, U.S. Women's Chamber of Commerce,
Washington, DC............................................. 39
Martin J. Mitchell, Vice CEO, Mitchell & Best Homebuilders
LLC, Rockville, MD......................................... 41

Additional Materials for the Record:
Associated Builders and Contractors, Inc. Letter for the
Record..................................................... 48
Statement of the National Grocers Association................ 49
Comments from the Small Business Committee ``Open Mic''
Website.................................................... 53

THE TAX OUTLOOK FOR SMALL BUSINESSES: WHAT'S ON THE HORIZON?

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WEDNESDAY, APRIL 18, 2012

House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1 p.m., in room
2360, Rayburn House Office Building. Hon. Sam Graves (chairman
of the Committee) presiding.
Present: Representatives Graves, Mulvaney, West, Landry,
Schilling, Velazquez, Schrader, Cicilline.
Chairman Graves. Good afternoon, everybody. And we will
call this hearing to order. I want to thank our witnesses for
being here today and I will look forward to everybody's
testimony.
This week, as small business owners across the country are
filing their taxes, we consider the tax burden on them.
According to the National Federation of Independent Business,
federal taxes consistently rank among the top five problems
that small business owners face. And a Small Business
Administration study found costs small and medium-sized
businesses 36 percent more per employee to comply with the
regulations than larger businesses.
Small business owners face other obstacles, too. Many will
be hit with new taxes and tax increases in the health care law,
such as the increase in the Medicare payroll tax and an
unprecedented Medicare tax on nonpayroll income. And if the
2001 and 2003 tax policies are not extended, many small
business owners may see their tax bills increase. Already
facing rising energy costs and scarce capital, they do not need
tax increases in this struggling economy, too.
We should be fostering an environment where people are
rewarded for investment, and that is why we encourage
investment in entrepreneurship. But if we are going to penalize
those investments by raising taxes on them, then our small
businesses will find it even more difficult to access capital.
I agree with the Ways and Means Committee chairman, Dave Camp,
that we need comprehensive tax reform. In the meantime, we must
do all we can to create an environment in which small
businesses can thrive.
And again I want to thank all of our witnesses for being
here and for your participation. Some of you have come a long
way. And I now yield to Ranking Member Velazquez.
Ms. Velazquez. Thank you. Thank you, Mr. Chairman. Welcome
everyone.
In recent months, our economy has shown steady signs of
recovery. In the last quarter of 2011, gross domestic product
grew at an annual rate of 3 percent. Consumer spending is on
the rebound, increasing by the most in seven months in February
despite stagnant wages and rising gas prices. Most importantly,
the U.S. economy is adding jobs--245,000 a month between
December and February.
While this news is promising, the recovery remains fragile,
making it vital that our tax policy promote small business job
growth and does not hinder it. Now more than ever, small firms
need stability and incentives to grow. But after filing taxes
yesterday, the challenge is created by the current tax code and
the uncertainties that lie ahead are on the minds of every
small business owner. Tax law has been used to encourage
business investment through the use of deductions, credits, and
favorable tax rates. Yet, as this Committee is well aware, it
has become riddled with unnecessary complexities which have
created additional burden on small firms. With many expiration
dates looming and ACA tax provisions going into effect in the
coming years, these complications are compounded for millions
of firms.
In that vein, it is my hope that today's hearing will offer
insight on both current and future tax obstacles while also
generating potential solutions. In doing so, we will seek ways
to ensure effective tax efforts are maintained and ineffective
ones are either allowed to expire or modified to encourage
growth and competition. Failure to take any action, however,
could create greater uncertainty in the marketplace and dampen
the recovery for small businesses.
At a time when the economy is starting to exhibit sustained
job creation, small firms cannot have new obstacles to
expansion. Tax policies can disadvantage small businesses as
they seek to compete both domestically and abroad. Small firms
now spend up to 67 percent more on tax compliance than their
corporate competitors and face constant changes to the tax code
creating further confusion and hindering job creation. A fitter
and simpler tax code can encourage entrepreneurship, promote
investment, and yield hiring. After all, as we look at policies
to promote growth, tax reform should be a top priority.
Given that the last major reform of the code took place in
1986, it is clear changes are long overdue and that we cannot
go forward without input from small business owners and
entrepreneurs. Yet, comprehensive tax reform poses its own
challenges. However, many discussions have focused on a
corporate-only approach which disregards the importance of
individual tax rates. Devoting reform efforts on a complete
overhaul of the code supports our nation's job creators by
allowing them to continue hiring and expanding without worrying
about tax increases. Comprehensive reform will have immediate
benefits for small businesses while also serving our nation's
economic objectives of promoting job growth policies.
With that I look forward to today's testimony and thank the
witnesses for your participation. Thank you, Mr. Chairman.
Chairman Graves. Thank you. Unfortunately, it looks like we
are going to have a series of votes that are coming up within
the half hour. So what we will do is at that point in time we
will recess and go vote and then we will come back. I apologize
for that. Ms. Velazquez and I do not get to make the schedule.
If we did, we would do it a little bit different unfortunately.
But we are going to start out with our first witness and
you each have five minutes. And please try to adhere to that if
you possibly can.

STATEMENTS OF APARNA MATHUR, RESIDENT SCHOLAR, AMERICAN
ENTERPRISE INSTITUTE; LEONARD STEINBERG, PRINCIPAL, STEINBERG
ENTERPRISES, LLC, ON BEHALF OF THE SMALL BUSINESS AND
ENTREPRENEURSHIP COUNCIL; MARGOT DORFMAN, CEO, U.S. WOMEN'S
CHAMBER OF COMMERCE; MARTIN J. MITCHELL, VICE CEO, MITCHELL AND
BEST HOMEBUILDERS, TESTIFYING ON BEHALF OF THE NATIONAL
ASSOCIATION OF HOMEBUILDERS

Chairman Graves. Our first witness is Aparna Mathur, a
resident scholar with the Economic Policy Study Team at the
American Enterprise Institute here in Washington, D.C.
Dr. Mathur specializes in microeconomics, international
finance, and econometrics. Her work has been cited in The Wall
Street Journal, the Financial Times, and the Economist. She
received her Ph.D. in Economics from the University of
Maryland. And welcome, Dr. Mathur. I appreciate you being here.

STATEMENT OF APARNA MATHUR

Ms. Mathur. Thank you for having me. Chairman Graves,
Ranking Member Velazquez, and members of the Committee, I am
honored to be invited to testify on the topic of small
businesses and tax policy. This testimony documents the impact
of new and higher tax rates and policy uncertainty on
entrepreneurs and small businesses.
Research suggests that young small businesses are the
biggest job creators. According to the Census Bureau, small
firms account for about half of all private sector employment
and represent more than 99 percent of all employer firms.
Moreover, they pay approximately 43 percent of all private
wages and salaries. However, in the current recession, small
business hiring, investment, and employment is down. The start-
up rate has fallen to levels below that in the 1990s and the
start-ups being created are smaller than they were at that
time. In other words, they are creating fewer jobs. Hence, this
recession has been particularly bad for small employer firms.
Future tax increases and new taxes are likely to make the
business environment even tougher for small businesses. In his
budget proposal for 2013, President Obama has proposed raising
the top margin income tax rates on individuals earning more
than 200,000 and couples earning more than 250,000. A 2011
report from the Department of the Treasury shows that
approximately 4 percent of all small businesses face the two
top rates of 33 and 35 percent, but this accounts for nearly 32
percent of small business income. For employer businesses in
particular within small businesses, 10 percent of business
owners and 38 percent of business income was subject to the
high margin rates of 33 and 35 percent. Hence, the tax
increases are likely to affect a large share of small business
income, particularly for employer firms.
In addition, the Affordable Care Act will impose new taxes
on small business earnings. The Medicare payroll tax and self-
employment earnings in excess of 250,000 will rise from 2.9 to
3.8 percent. The Affordable Care Act also imposes a 3.8
percentage point hospital insurance tax on investment income
over 250,000 starting in 2013.
In addition, there are excise tax increases on businesses
that fail to provide qualifying health insurance and another
tax of 2.5 percent of gross income on self-employed people
failing to buy qualifying health insurance.
How will these tax increases affect small businesses?
Economic research suggests that raising taxes on small firms
has a significant negative impact on business activity. Higher
taxes lower the ability of small firms to hire workers. It also
lowers their ability to make wage payments to these workers.
Further, an increase in marginal tax rates reduces the gross
receipts of these businesses, reduces the proportion of
entrepreneurs who make new capital investments, and decreases
the average level of these capital investments. These effects
are more pronounced for high income small businesses which are
the job creators. A paper co-authored by Glenn Hubbard of
Columbia University also found that increasing the
progressivity of the tax code by raising the top marginal rates
discourages entrepreneurs from starting new businesses.
Finally, all the talk about future tax hikes and new
regulations has created a climate of uncertainty for small
businesses which makes it hard for them to make long-term
decisions about hiring and investment. New research shows that
an increase in policy uncertainty, such as about taxes or
government spending or other policy matters leads to large and
persistent declines in aggregate outcomes such as declines in
real GDP, private investment, and aggregate employment. A
recent Gallup poll and also a Chamber of Commerce survey found
that more than 48 percent of small businesses are not hiring
because of the potential costs of health care, and more than 46
percent are not hiring because of concerns over government
regulations.
The above evidence clearly suggests that the proposal to
raise taxes and hire entrepreneurs is exactly the wrong policy
prescription for this time. To encourage job creation we need a
future with lower taxes, not higher. Thank you.
Chairman Graves. Thank you, Dr. Mathur.
Our next witness is Leonard Steinberg, principal of
Steinberg Enterprises, LLC in West Windsor, New Jersey. He is a
federally licensed enrolled agent and certified management
consultant. His tax practice specializes in comprehensive tax
services for small businesses, including tax preparation
planning and problem solving. So welcome, Mr. Steinberg. We
appreciate you being here.

STATEMENT OF LEONARD STEINBERG

Mr. Steinberg. Thank you very much. Chairman Graves,
Ranking Member Velazquez, and members of the House Committee on
Small Business.
Thank you for the invitation to participate in today's
hearing to examine the significant impact our tax system is
having and will have on small businesses and individuals with
regard to the Affordable Care Act, the expiration of the Bush
administration tax cuts, the complexity in the tax system, and
the issues affecting compliance.
As a practitioner, I am responsible for the consequences of
all the laws that Congress passes and helping my clients
fulfill their obligations in filing their taxes. I am a member
of the New Jersey IRS Practitioner Liaison Committee
representing over 200 enrolled agents in the state and all of
our respective clients. Since 2005, I have also represented the
Small Business and Entrepreneurship Council as a member of the
Small Business Advisory Committee through the Financial
Accounting and Standards Board, also known as FASB. And from
2001 through 2004, I was a member of the Taxpayer Advocacy
Panel and chair of the Small Business Self-employed Payroll Tax
Committee.
The issues of complexity have been outlined in my written
testimony and due to the time factor a lot of this will now be
part of the written record. But the tax complexity deals with
many, many issues, some of which I outlined, regarding
depreciation, Section 179, which allows a write-off of
approximately $500,000 in expenses and again, if it is due to
be repealed and go back to a much lower rate which in effect
becomes an automatic tax increase. I am also a member of the
FASB Small Business Advisory Committee and we have the issue of
the International Financial Reporting System that is currently
being considered. Under the IFRS structure, small businesses
would not be allowed to use the last in, first out method of
inventory evaluation. The only method that is available under
IFRS is FIFO, first in, first out. That, too, would be an
automatic huge tax increase because of the reserves that would
be automatically taxable during the first year.
The complexity of the tax law also affects employers at the
state level. While this Committee is involved with federal
issues only, many, if not most states follow the federal rules
and regulations which all add to the cost of doing business.
Many business clients have stated that the tax code is so
complex and cumbersome and filled with so-called loopholes or
special circumstances which make it inherently unfair. Business
people sign the returns stating they are correct but they
really do not know what they are signing. Many have no idea
what the accountants are actually doing but pay them and the
lawyers plenty of money to properly comply and find ways to
reduce the tax burden. It seems that those with more money or
more political influence can get more tax breaks. As an
example, in 2010, Congress made 579 changes to the tax code
which now numbers 3.8 million words and it has been written up
in the press that it is now four times the length of William
Shakespeare's works.
Nina Olson, the national taxpayer advocate, has testified
before Congress and written in her annual report that the tax
code has gotten too complex for reasonable people and even
trained professionals to understand, including members of the
IRS. The tax courts have ruled that IRS publications are not
authoritative sources. In our representation work we must use
IRS revenue rulings, prestigious tax law, and other cases to
boost our representation for our clients. This uncertainty and
all of the other complexity takes money out of the workers'
pockets, reduces job creation, and will lead to a decline in
the overall economy since there will be fewer dollars available
for disposable income and less risk-taking overall.
I would like to conclude by saying that every large
businesses started as a small business. It is the dream of
every small business owner to become the next large business.
When money is taken out of the economy it also affects
charitable giving. Many small businesses support local causes
which are adversely affected by any decrease in the financial
support that they would receive. And let the example of the
Reagan era tax overhaul be a guide for future discussions, when
the tax code was simplified in 1986--I apologize. The result
was the longest continuous period of economic boom in this
country's history and more jobs were created than at any other
time.
The members of this important Committee have the influence
in their respective congressional districts, their state
delegations, and with fellow congressional members to
significantly impact and reignite the most successful economic
engine in the free world. That is the U.S. small business
community. I respectfully request that you make the necessary
changes for the future economic growth of our great nation and
as part of your public service legacy. Thank you.
Chairman Graves. Thank you, Mr. Steinberg.
We are going to recess for three votes. It will not be too
long and then we will come back and we will start with you, Ms.
Dorfman. But with that we will stand in recess until right
after the last vote.
[Recess.]
Chairman Graves. Thanks everybody for bearing with us on
the vote series. I will now turn to Ranking Member Velazquez
for an introduction.
Ms. Velazquez. Thank you, Mr. Chairman. It is my pleasure
to introduce Ms. Margot Dorfman. Ms. Dorfman is the founder and
CEO of the U.S. Women's Chamber of Commerce. The Women's
Chamber of Commerce represents 500,000 members, three-quarters
of whom are small business owners and federal contractors.
Through her leadership, this organization has championed
opportunities to increase women business and career and
leadership advancement. Additionally, Ms. Dorfman has an
extensive background in business, including over 10 years in
executive positions with General Mills and other Fortune 500
firms. Welcome.

STATEMENT OF MARGOT DORFMAN

Ms. Dorfman. Ranking Member Velazquez, Chairman Graves, and
Small Business Committee members, thank you very much for the
opportunity to speak today on behalf of the U.S. Women's
Chamber of Commerce's 500,000 members, three-quarters of whom
are American small business owners, regarding the tax outlook
for small business.
In preparation for today's hearing, I listened to the views
of our many small business members, and I can tell you there is
a great deal of frustration amongst small business owners
surrounding small and individual tax policies, revenues lost,
and compliance.
This frustration centers around a few broad issues--
complexity, constant change and uncertainty, the costs
associated with managing the ever growing and changing
complexity, the lack of fairness and resulting anti-competitive
outcomes, and the challenge of simply being a good employer and
provider for one's family and community.
Already in today's hearing we have heard a bountiful number
of references to the growing complexity of the U.S. tax code
and how these changes have a great impact not only on business
tax policies but also on individual taxes due to the high
number of small businesses that are structured as pass-through
entities.
The outcome of these challenges has been magnified by the
recession. While large businesses employ armies of accountants,
attorneys, and complex tax evasion strategies to avoid paying
their fair share of taxes, Congress continues to pass press
release ready legislation instead of taking the action needed
to truly level the playing field to invigorate America's Main
Street businesses.
Our small business members tell me the endless and
unrelenting lack of fairness and changing landscape of business
and individual taxation takes away from their focus on the
things that matter to them--securing and keeping good
employees, increasing business competitiveness and
profitability, and investing in future business growth.
Our small business members who are active as federal
contractors tell us they are doubly burdened as they must also
deal with the complexities of the FAR, the EPA regulations, and
state and local issues. It is not feasible or affordable for
small business to employ someone to deal with the spiraling
complexity Congress has created.
When our small business members see how the tax system is
skewed against them and how big business gets away with schemes
to avoid taxes when as a small business they cannot even access
nor use many of the supposedly targeted tax break for small
businesses, they become outraged. And worse, the unfair tax
advantage big businesses have over small businesses decreases
small business competitiveness as well as their ability to hire
and retain employees and to provide good benefits.
We hear endless stories of how tax breaks cannot be used by
our small businesses because of some feature or restriction
that renders it impossible for many small businesses to comply
with. Yet congressional leaders still manage to find a nice
headline proclaiming their love and concern for small business.
For example, tax breaks for investments and equipment are
nice as long as your firm needs equipment and has the cash flow
up front to invest. As most of the smaller, financially
challenged firms do not have cash flows available, they find
this approach simply emboldens their larger competitors while
discriminating against them.
Additionally, an overwhelming majority of small business
members told us they very much want to provide health insurance
for their employees and take advantage of incentive tax
credits. Small business owners are close to their employees who
are their neighbors and often their family members.
Many of our members told us they believe as the provisions
of the Affordable Care Act continue to be implemented, that
they will be better able to provide health care for their
employees and to be better competitors when seeking to secure
and retain employees.
I call upon Congress to end the piecemeal approach you have
taken to tax policy and the grossly unfair tax provisions and
loopholes that can only be employed by larger firms. Small
business owners want to pay their fair share of taxes and they
understand the need of the U.S. government to raise revenues to
provide a quality and secure environment for businesses and
families.
But today we do not have a level playing field. More
legislation aimed at grabbing headlines will not help. What
will help is real leadership in Congress, leaders who come
together to truly work on behalf of small businesses. We know
that small businesses are the job creators. It is imperative
that we simplify tax policy and the complex codes and skew
policies that benefit big business and allow business owners to
focus on the important work they have as revenue generators,
job creators, and community leaders. Thank you.
Chairman Graves. Thank you, Ms. Dorfman.
Our final witness is Martin J. Mitchell. He is the vice CEO
of Mitchell and Best Homebuilders in Rockville, Maryland, where
he works with his father and three siblings. In 2011, Mr.
Mitchell was president of the Maryland National Capital
Building Industry Association. He received his MBA from the
University of Maryland and is testifying on behalf of the
National Association of Homebuilders. Thanks for being here,
Mr. Mitchell.

STATEMENT OF MARTIN J. MITCHELL

Mr. Mitchell. Thank you for having me. Chairman Graves,
Ranking Member Velazquez, members of the Committee. Thank you
for the opportunity to testify today.
My homebuilding company, Mitchell and Best, is a family
owned company and has been in operation for 37 years. After a
very tough five years of the worst housing market downturn in
our lifetimes, in 2012 we expect to build 25 homes, thereby
creating at least 75 full-time jobs. We used to build close to
100 homes per year.
Small businesses are the heart of the residential
construction sector. In 2012, nearly 80 percent of the NAHB
builder members had less than 10 employees. About half had less
than $1 million in gross revenues. Three-quarters built 10 or
fewer homes. And 80 percent of homebuilders are organized as
pass-throughs, S corporations, and LLCs. As pass-through
entities, homebuilders and all other small businesses report
and pay taxes at the individual rate. For this reason, NAHB
strongly supports extending the 2001, 2003 income tax cuts now
scheduled to expire at the end of this year.
In addition to the marginal rate cuts, it is important that
the 15 percent rate on capital gains and dividends also be
extended. As many homebuilding companies are family-owned like
mine, the present law on the estate tax rate rules must also be
extended or ideally the tax itself eliminated.
Another issue for small businesses organized as pass-
through entities is the Alternative Minimum Tax. The AMT
complicates business planning and has grown from a tax that
affected a few tax payers to one that could hit more than 30
million taxpayers this year absent a congressional fix.
Also, next year, several new taxes will come into force
that will negatively affect small businesses. One standing from
the 2010 health care reform legislation is a 3.8 percent tax on
certain capital gains that will have a harmful effect on multi-
family apartment developers. Further, there is a pervasive
rumor that this new 3.8 percent tax will take the form of a
sales tax on homes. This incorrect information, which NAHB is
fighting via educational efforts, is having a chilling effect
in some housing markets.
Ultimately, a complicated federal tax system is a burden
and a hindrance on small businesses. Traditionally, the job
creators. For this reason, NAHB supports simplifying the tax
code as part of a deliberative and thoughtful comprehensive
reform effort. Such an effort should include a public process
that examines necessary changes, studies transition rules, and
considers economic impacts. For homebuilders, homeowners, and
prospective homebuyers, a critical element of the tax code is
the mortgage interest deduction, the MID.
The MID has been part of the tax system since 1913 and
helps facilitate homeownership. Its beneficiaries are primarily
the middle class, and in particular younger homebuyers who in
the early years of mortgage are primarily paying interest.
Weakening or eliminating the MID today would be economically
disastrous.
It is also worth noting that any tax reform effort that
would lower corporate but leave individual rates the same or
even higher would have a negative impact on small businesses.
Homebuilders also face a number of other tax issues, including
business debt mitigation and the phantom income tax. What is
hopefully clear from my testimony is how uncertain the current
tax environment is for businesses. The current uncertainty and
tax policy makes it difficult for businesses to plan for years
ahead which may further stall economic growth. In my industry,
we cannot afford further stalled growth. Homebuilding has led
the economy out of almost every recession. Housing provides the
momentum behind an economic recovery because the homebuilding
industry employs such a wide range of workers. Housing is a key
engine of job growth. It is also a key component of consumer
confidence.
In terms of jobs, if we were at normal production levels
for the housing industry, 3 million more people would be
employed at this point in time. As Congress moves forward on
the consideration of tax issues, Homebuilders want it to be a
constructive partner with you in creating a better tax code. I
thank you for the opportunity to testify today and look forward
to your questions.
Chairman Graves. Thank you, Mr. Mitchell.
Mr. Mitchell's testimony expressing concern about the
pending tax increases is echoed by many small business owners
across the country and they are making their views very well
known on the Small Business Committee's website portal. It is
called Small Business Open Mic and I would ask unanimous
consent that these comments be admitted as part of today's
hearing record. Without objection, that is so ordered.
We are going to start questions with Mr. West.
Mr. West. Thank you, Mr. Chairman. Also, Ranking Member.
And thanks to each and every one of the members of the panel
for being here. You know, we just came off of two weeks being
back in our districts, and again, the recurring theme when you
go out and you talk to everyone, the three top issues--access
to capital, regulatory environment, and tax policy. And as you
know, we just passed a budget out of House here that said we
would look at personal income tax rate, condensing those six
tax brackets down to two--25 percent and 10 percent. And of
course, the Ways and Means Committee will look at that cut
line.
But my question to you, because as you know, if we are
talking about lowering tax rates that means we have to get rid
of deductions and eliminate loopholes and things of that nature
and for subchapter S LLCs using the personal income tax rate.
My question to you then, if we take it down to 25 percent or
maybe 22, 23 percent, what are the three deductions that you
see that still need to be retained for small business owners
and for that personal income tax rate? Do you want me to play
the Jeopardy music?
Mr. Steinberg. Number one, charitable donations. That is
probably one of the best tax deductions. But I would also like
to say as a practitioner, a lot of people think that when they
get a deduction it is a dollar for dollar deduction on their
tax. It is not. It is a reduction based upon your marginal
rate. So as an example, if you give $100 in charity but you are
in the 25 percent tax bracket, you only get a $25 deduction off
your taxes. While it is important, a lot of people are under
the misconception that that deduction is a dollar for dollar.
The other aspect which I personally take umbrage with is
the term ``loophole.'' Congress passes the laws. There are no
loopholes. Everything is in law. What a loophole is is the
unintended consequences of the law that gets passed. So if you
want loopholes, there are plenty of unintended consequences
that are built into the tax code that I and my fellow
practitioners really have to deal with on a year-to-year basis
every time Congress passes new tax codes or updates the tax
code. And as people say when they say to me, well, if you go to
a flat tax you are going to put the accountants out of
business. And my answer to that is every time Congress passes a
tax act it should be subtitled ``The Accountants Full
Employment Act'' for that particular reason, because we then
have to implement and make sure all of these aspects are
enforced.
So as far as the three, I would leave the charitable
donations. I understand the issue of mortgage interest. I also
understand the issue of real estate taxes, which is really a
state issue as well as a federal issue. And, of course, that is
where the states and the federal government go back and forth.
And those are the three that I would definitely keep.
Mr. West. Does anyone else want to----
Mr. Mitchell. I would have to echo the keeping of the
mortgage interest deduction. Right now that is keeping the
homebuilding industry going. We would see a devastating effect
as I indicated in my testimony in that there has been a lot of
misperceptions about the mortgage interest deduction and who
gets the advantages to that deduction. But housing production
would fall off significantly. But what you would also find is
that not only do we create three jobs for every house that is
built, there is tens of thousands of dollars that go back into
the local community, the state, and the federal government from
the taxes and impact fees that are created for every home that
is built. So the more we can incentivize home ownership to a
reasonable level and a sustainable level, we think that is
appropriate.
Mr. West. Anyone else? I only got two.
Ms. Dorfman. I will have to defer to my accountant.
Mr. West. Last question then. Do we really need to have the
death tax? Especially when we consider the fact that we are
about to take from 35 percent up to 55 percent and we are about
to bring that minimum qualifying amount from 5 million down to
1 million. Is this something that will absolutely crush the
small businesses? And if we look into the future--three, five,
further down the road--do we really need to have the death tax
when it comes to small businesses?
Mr. Steinberg. As a practitioner, and I do not mean to
monopolize the conversation, but this is what I do for a
living. As a practitioner, the inheritance tax, that money has
already been taxed twice. It has been taxed once as income and
it has been taxed also on the dividends and interest that
result from the investment of that. Now you are going to pass
that burden onto the next generation and there are tax
avoidance schemes that are looked at all the time to try and
avoid paying the estate tax.
It is interesting that you bring that up at this point in
time because I am working on an estate right now where the
estate, the owner had passed away and his wife now may have to
sell the house in order to pay the state taxes. Where is she
going to live? What is she going to do? She is 65 years old.
She cannot work. She does not have any means of employment. She
was going to use the assets from her inheritance to be able to
live comfortably for the remainder of her life. You tax that,
where is she going to go? Where is she going to live? So as far
as the estate tax is concerned, I think it is confiscatory and
I think it serves a negative purpose regarding the amount of
money that is generated to the government.
Mr. West. So that is a no. Yes or no?
Ms. Mathur. I think it should be, you know, done away with.
I think there is a lot of--a lot of businesses will be affected
negatively by the tax.
Mr. West. Ms. Dorfman.
Ms. Dorfman. In even looking I believe there was the
challenge originally with the farmers and the land that they
inherited. It was passed down to the generations and the family
farm having to be sold. You know, it is a small business. So.
Mr. West. Yes or no?
Ms. Dorfman. I forget how you crafted the question.
Mr. West. Should the death tax be, you know, maintained or
should we do away with it?
Ms. Dorfman. No tax. No death tax. That is the way to say
it.
Mr. Steinberg. We agree. It should be eliminated.
Mr. West. Thank you, Mr. Chairman. I yield back.
Ms. Velazquez. How do you balance that with deficit
reduction and balancing the budget? Mr. Steinberg.
Mr. Steinberg. Okay, thank you. I appreciate the
opportunity.
Well, one of the ways to do it is Congress does not have an
income problem; Congress has got a spending problem.
Ms. Velazquez. A revenue problem.
Mr. Steinberg. No, it is not a revenue problem. There is
enough revenue coming in. What I suggest is that if Congress
really wants to get their act in order, why do you not make a
recommendation that every federal agency cut their budget by 1
percent? You will have more than enough money to offset all of
these taxes.
Ms. Velazquez. Dr. Mathur, the Ryan budget includes
extending the Bush era tax rate cuts, reducing corporate tax
rates, and moving to only two tax brackets. Yet, in order to
ensure the estimated $10 trillion in cuts are paid for, many
popular tax expenditures must be completely eliminated,
possibly having a disproportionate impact on small firms. The
Ryan budget did not include any details on what expenditures
should be caught. Since we are talking about ways to stimulate
the economy and control deficits without burdening small firms
and the middle class, can you please give us specific credits
or deductions that will make up the trillions in tax cuts
without imposing such burdens on small businesses?
Ms. Mathur. I think the assumption that just reducing
corporate income taxes or reducing personal income taxes will
actually lead to long-term deficits is wrong. I think there is
a lot of, you know, the research suggests that if you actually
cut corporate income taxes or you cut personal income taxes you
could actually see higher taxable incomes being reported. You
could actually see more corporate tax revenues coming into the
system.
Ms. Velazquez. Let us say that it does not happen the way
that you are describing it. Can you give me specific tax
credits that could be--or deductions that will make up for the
trillions of dollars in tax cuts without burdening small
businesses?
Ms. Mathur. I think we will have to go through the list. I
am not sure, you know, which ones are actually working.
Ms. Velazquez. Thank you. Mr. Mitchell, in your recent
testimony you spoke about a Recovery Act tax change that not
only helped your business but made the system a little fairer
to small firms with debt. Can you please elaborate a little
more on the debt exclusion from the stimulus bill and where
your business would be today if that exclusion had not been
enacted into law?
Mr. Mitchell. Yes, I would be happy to.
Under the Stimulus Act there was a deferral policy where if
you had forgiveness of debt, cancelation of debt that created
phantom income, you could defer that out to a period of up to
10 years. Unfortunately, in an industry such as we are in, we
turn our product over. We are not like an apartment builder
where we hold an asset for a long period of time. So even
though that was beneficial and it allowed us to defer, it
really only created a deferral for maybe a year or two because
once you sell the underlying asset that was a part of that debt
you then have to take that phantom income tax. It has helped us
to move things forward for another year or two but we had
situations where Weyerhaeuser Realty Investors was our largest
mezzanine debt holder. They closed down that operation. The
value of land dropped significantly. And we have tens of
millions of dollars of COD which is phantom income. It could be
devastating to us if there is not an adjustment made to that.
And we ask Congress to take a serious look at that.
Ms. Velazquez. So you are telling me that what you are
describing is how one targeted provision in the tax code could
be beneficial to small business.
Mr. Mitchell. I believe it can be for those businesses that
saw, you know, reductions in the value of their assets over the
last five or six years during this downturn.
Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
Chairman Graves. Mr. Schilling.
Mr. Schilling. Thank you, Chairman. I would like to thank
the panel for being here today.
I am a small business owner. I have a pizzeria in Moline,
Illinois. And you know, the one thing that I understand is that
our business is down. We are off about 35 percent and the gas
prices continue to just crush our business. And a lot of the
business folks that I have spoken with recently are very
concerned about the Bush-Obama tax cuts expiring because as
this downturn economy is here and then now they take on another
hit with a 35 percent or, you know, most of the folks I talk to
are anywhere from 20 to 40 percent off, once those expire,
basically what is going to happen is it is going to put a lot
of these companies out of business.
And I think it is really, really imperative to understand,
I believe, is that we have to stop spending money that we do
not have. And that is the thing. Because as we continue to
spend it, you know, we are $16 billion in debt, it is a huge
burden on our kids and our grandkids. And, you know, once we
stop the ridiculous spending--the Tunnels for Turtles and all
of the other things that we have been doing for years--then we
can look at revenue increases. But until then we have got to
really stay focused in on that type of stuff.
What I would like to do is just, Mr. Steinberg and Mr.
Mitchell, the new health care law creates much uncertainty for
our small businesses through mandates, regulations, and tax
increases that do not take effect until 2014. One specific tax,
the Small Business Health Insurance Tax, will increase premiums
by two and a half percent in the year 2016 alone. According to
the Joint Committee on Taxation is what they are telling us, do
you think that this tax increase will make it more difficult
for employers to provide health care which is the overall goal
of the president's health care law after all and then predict
health insurance costs in the future by giving us that
increase? Just kind of a basic.
Mr. Mitchell. Well, from our aspect, despite maybe what is
thought about in the public, we are now operating at razor thin
margins if we are on the black side of the ledger at this point
in time. So any type of an increase, even a 2.5 percent, which
may not sound like a significant amount but on your overall
employee base it will be a significant burden. So right now it
will be difficult for us. We are an industry that has been hit
with several code changes in the last 10 changes, significant
ones that have changed our cost structure. But any additional
cost item that is placed on us such as that will make it
difficult for us to continue and survive.
Mr. Steinberg. There are consequences through having that
tax passed and number one would be whether the IRS has the
resources to be able to enforce it. Right now the IRS is
operating razor thin as it is with their budget. They do not
have the resources to enforce the current tax law. How are they
going to have the resources to enforce additional mandates that
are being passed through the Affordable Care Act? And the other
aspect is that you are really taking money out of the owners'
pockets. And I happen to know Ms. Velazquez's district. I grew
up in Brooklyn so I know--and Queens. And I know the area.
Sunnyside Avenue. You have got bodegas. You have got
laundromats. You have got hair salons. You raise the amount of
tax that they are going to pay, those small businesses are not
going to be able to employ the local people. So how are they
going to stay in business if you take more money from them?
Ms. Velazquez. I do not think they are making over
$250,000.
Mr. Steinberg. That is not the issue. That is not the
issue, Congresswoman. The issue is you are taking money away
from them that they cannot give to hire somebody else. Or let
us say a young high school student wants to come in for a job
after school and is looking for a job and they want to be able
to give them a job to be able to do it. If they do not have the
money, that high school kid--I worked high school jobs after
high school. They want to be able to work. If they do not have
the money, what is a high school kid supposed to do? Where are
they going to get the experience and learn how to do it if the
money is being taken out of the economy and being sent to
Washington? There is a disconnect there between what is
happening in Washington and what is happening on Sunnyside
Avenue.
Ms. Velazquez. I totally disagree with you.
Mr. Steinberg. I respectfully accept that.
Mr. Schilling. Can I reclaim my time? You guys can do this
later.
Just one quickly, Mr. Steinberg and Mr. Martin (sic)
because you guys have experience in this, how much would you
say your company or members spent preparing and comply with the
tax code or the regulations each and every year? Because I see
this as money that we could be expanding and hiring people. But
can you give me a ballpark of some of your clients and then
maybe what your business does in complying?
Mr. Steinberg. The average tax return for an S corporation
for me takes about three hours. That is just doing the tax
return. That is not doing all the due diligence behind it. So
when you factor in all of the work behind it you are looking at
approximately 6 to 10 hours worth of work before the tax return
is completed.
Mr. Schilling. So basically you are able to hire another
worker to do all of this extra work. Right?
Mr. Steinberg. But then have to pass that cost on to the
client.
Mr. Schilling. That is right. Okay.
Mr. Steinberg. So the client, in effect, is paying for
compliance one way or the other. So therefore, I am taking more
money out of the client's pocket rather than having the client
be able to put that money back into the business.
Mr. Schilling. Very good. Thank you.
Mr. Mitchell. From our standpoint we have never been a
large enough firm to be required to do audited financial
statements. We have always done different levels below that.
The complexity of our tax returns in our type of business going
back from the downturn of the early 90s is that we basically
have to put every project into a separate LLC and then we have
to compile those up and roll those up to one LLC. As a business
that is not operating profitably for the last couple of years,
we are still having to put out $30,000 to $40,000 a year to
have our tax returns done. That is not our financial
statements. We have our financial statements done internally.
We get some input and feedback from our accountants but we do
not have them do that. That does make it even more difficult to
obtain equity and debt, but it is just one of those things we
have to look at every penny that we are spending these days. It
is a significant number for a firm like us.
Mr. Schilling. Very good. I thank you for your time and
yield back.
Chairman Graves. Mr. Schrader.
Mr. Schrader. Thank you, Mr. Chairman.
Dr. Mathur, the data I have seen would indicate that our
tax revenues, federal tax revenues are pretty much at an all-
time low since World War II. Would you agree to that?
Ms. Mathur. Yes.
Mr. Schrader. So how would you describe the state of our
economy right now with our revenues, tax revenues at an all-
time low, taxing of businesses is, you know, at the lowest
point it has ever been.
Ms. Mathur. I do not agree with that the taxing of
businesses is at its lowest point it has ever been. I think, I
mean, if you look at the corporate tax rate, we have one of the
highest corporate tax rates now amongst----
Mr. Schrader. With LLCs. Most of your small business folks
as I understood, we are talking about LLC.
Ms. Mathur. A lot of small business folks will also face
high tax rates of 33 and 35 percent.
Mr. Schrader. But you just testified a minute ago that the
federal average is at an all-time low. Our taxes----
Ms. Mathur. The revenues are low because----
Mr. Schrader. Let me finish my comment, please.
Ms. Mathur. Sure.
Mr. Schrader. I will ask you a question; you can answer.
Okay?
Ms. Mathur. Okay.
Mr. Schrader. So what I am saying here is that our revenues
are at an all-time low. Our taxes are at an all-time low
overall. I will grant you a point, it depends on what business
you are in or what part of the world you come from. But they
are at an all-time low. If taxes alone determine the health of
our economy, we should be booming right now and we are not
booming. So while I share everyone's concern on, you know, tax
policy, I think it is completely inaccurate and hyperbolic to
say that, you know, low taxes equal great economy. We are not
seeing that right now in the United States of America.
Second point, Mr. Steinberg, you are absolutely ill
informed on the American--or excuse me, the Affordable Care
Act. Congresswoman Velazquez is absolutely correct. The
revenues in that bill are for larger businesses. Businesses 50
employees or under are completely exempt. Those are truly the
small, small--I am a veterinarian. I am like Representative
Schilling. I have got a small, small business. And I am very
appreciative of the fact that that is recognized in the
Affordable Care Act. Health care right now is totally
unaffordable. As we have heard testified here today, the
effects of that act do not occur until 2014 and already
businesses are shedding, you know, their health care plans. So
the system now is broken. We have to do something. And I
respect the fact that the bill is imperfect. Every bill we pass
is probably imperfect and we have got a long way to go. But I
would suggest respectfully we do not throw the baby out with
the bathwater.
My question, Mr. Chairman, sir, to the panel, you have all
testified, at least all agreed I think, that our tax code is
too complex and comprehensive tax reform is probably a good
idea. There are several proposals out there. Congressman Ryan
has given an attempt at that and I appreciate that actually.
There is another one out there that the president put together
through his Debt Commission, sometimes commonly called the
Simpson-Bowles Report. And there has been a recognition that
certain deductions are very, very important. They call out the
primary interest deduction through the Gang of Six work. They
talk about the charitable deduction that Mr. Steinberg talked
about. The real world is, you know, for every junction we save,
I am a big one to say that, prime interest mortgage deduction,
that is a big cost. That is one of the bigger deductions we
have. And that will affect how much we can lower the rate going
forward.
But I guess I would just like a general from each of you,
do you think that the Simpson-Bowles framework of comprehensive
tax reform with certain critical tax deductions to make sure
our economy, and the housing industry in particular, recovers
is maybe a decent template at least for this Congress to work
off of? There were 38 members of Congress that agreed to that.
I am curious where you all stand.
Mr. Mitchell. Well, I have to admit I do not know all the
details of the Simpson-Bowles, but we are supportive of a
reform of the tax code and supportive of the simplification as
you talked about and we think that it was mentioned here
earlier, if you go back to 1986 when some of the reforms were
made, there were certain protections for important items such
as the mortgage interest deduction and other housing. But there
were other housing changes that made severe impacts that were
negative to the housing industry. So I think that, you know,
while we support the overall goals, I cannot get into the
details. I apologize. I can go back and talk about that.
Mr. Schrader. Ms. Dorfman.
Ms. Dorfman. I would have to say I am not familiar with all
the details either but our members definitely would like to
have a simplified code. We also think that the unfair tax
advantages that the large corporations are enjoying should be
re-examined and perhaps removed so that there is a level
playing field. Trying to compete as a small business when the
corporations, obviously the large corporations have that
advantage, it is hard to go ahead and, you know, grow in a
market space with that competitive disadvantage.
Mr. Schrader. Mr. Steinberg.
Mr. Steinberg. Any framework that the Congress can begin to
look at that is going to significantly improve the tax
structure is definitely welcome. And, of course, with the CBO
and the other panels, the American Enterprise Institute and
some of the other think tanks in the city, as they do the
analysis of it as you begin to progress, it is a start. It took
us 40 to 50 years to get to this point. We are not going to
solve it in one or two years. It has got to be a phased
implementation. And each Congress can change it as they
change--as the Congress changes every two years, then they can
do away with what the previous Congress has done. What you need
to do is you need to codify it and say this is permanent so
that businesses have a way to plan. They have certain
certainty. Right now there is no certainty among the small
business owners. You know that. And Mr. Schilling knows that.
There is no certainty in the tax code. So once you have that
certainty, if you are going to use Simpson-Bowles, that is a
good framework to start. And just let the statistics tell you
where it goes from year to year.
Mr. Schrader. Good.
Ms. Mathur. I agree that we need tax simplification. We
need a process where, you know, if you are thinking of cutting
down rates then, you know, we also care about effective rates.
I think what matters when we think about actually getting
revenues, that was the point I was trying to make earlier. You
can have high rates but that does not always translate into
high revenue. We know that with the corporate tax rate. We have
one of the highest rates and we have one of the lowest revenue
collections in all of the Western countries. So we should aim
for simplification but I think we need to care about where we
stand in terms of the effective rates as well.
Mr. Schrader. I am actually over my time. Mr. Chairman,
thank you very much. I just want to say I appreciate the
comments particularly on the last question and ask you to do a
little more homework if possible and give me a little more
feedback based on Simpson-Bowles, Gang of Six type of changes
because it is the only bipartisan game we have in town. It is
not perfect but at least it is a starting point for finally a
productive discussion that I think America is craving right
now. Thank you. And I yield back, sir.
Chairman Graves. Mr. Mulvaney.
Mr. Mulvaney. I am all right.
Chairman Graves. Are you sure?
Mr. Mulvaney. Yes. I yield back.
Chairman Graves. I want to thank you all for participating
today. And I think we should all be concerned about the burden
of taxation on our nation's small businesses, the effect of
these pending tax increases, the fact that the administration
seems to be willing to let that happen, and the impact that is
going to have on our economic recovery.
I would ask unanimous consent that members have five
legislative days to submit statements and supporting materials
for the record. Without objection that is so ordered. This
hearing is adjourned.
[Whereupon, at 2:35 p.m., the Committee was adjourned.]

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