[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
BEYOND THE BELTWAY: SUCCESSFUL STATE STRATEGIES FOR SMALL BUSINESS
GROWTH
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HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JULY 10, 2013
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 113-029
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
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
OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 13
WITNESSES
Mr. Pat Costello, Commissioner, Office of Economic Development,
State of South Dakota, Pierre, SD.............................. 3
Mr. Nick Jordan, Secretary, Department of Revenue, State of
Kansas, Topeka, KS............................................. 5
Mr. Aaron Demerson, Executive Director, Office of Economic
Development and Tourism, State of Texas, Austin, TX............ 7
Hon. Jim Cheng, Secretary of Commerce and Trade, Commonwealth of
Virginia, Richmond, VA, testifying on behalf of Hon. Robert
McDonnell, Governor, Commonwealth of Virginia, Richmond, VA.... 10
APPENDIX
Prepared Statements:
Mr. Pat Costello, Commissioner, Office of Economic
Development, State of South Dakota, Pierre, SD............. 24
Mr. Nick Jordan, Secretary, Department of Revenue, State of
Kansas, Topeka, KS......................................... 29
Mr. Aaron Demerson, Executive Director, Office of Economic
Development and Tourism, State of Texas, Austin, TX........ 32
Hon. Jim Cheng, Secretary of Commerce and Trade, Commonwealth
of Virginia, Richmond, VA, testifying on behalf of Hon.
Robert McDonnell, Governor, Commonwealth of Virginia,
Richmond, VA............................................... 40
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Governor's Commission on Economic Development & Job Creation. 47
Governor's Commission on Higher Education Reform, Innovation
and Investment............................................. 87
BEYOND THE BELTWAY: SUCCESSFUL STATE STRATEGIES FOR SMALL BUSINESS
GROWTH
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WEDNESDAY, JULY 10, 2013
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in Room
2360, Rayburn House Office Building. Hon. Sam Graves [chairman
of the Committee] presiding.
Present: Representatives Graves, Chabot, Luetkemeyer,
Mulvaney, Tipton, Herrera Beutler, Hanna, Huelskamp, Rice,
Velazquez, Schrader, Hahn, Payne, and Meng.
Chairman GRAVES. We will go ahead and call this hearing to
order. Ranking Member Velazquez will be just a little bit
delayed. She had a meeting at the White House that she had to
attend, so she will be back in just a little bit. But we will
go ahead and start the hearing. We do have a series of votes
that will be coming up, so we are going to try to move through
as quickly as we can.
But I want to thank all of our witnesses for being here
today as we examine several innovative ways that states are
attracting, retaining, and growing businesses, and I appreciate
again all of you coming in. Some of you come from a good
distance.
There is competition raging in our country, and it is not
competition with the results published on the sports page. It
is competition that is being played out on the front page and
on the business page. States are in a fiercey competition to
create friendly environments to attract new businesses, to keep
the businesses they have, and grow them to both to boost the
economy and create jobs.
Each year, several trade associations, news media outlets,
and think tanks attempt to rate each state to determine which
are the best ones for businesses. Just this week, CNBC released
their 2013 rankings for America's Top States for Businesses.
Forbes Magazine and Thumbtack.com, along with the Kauffman
Foundation release similar lists each year.
While the methodologies for each of these surveys and
studies slightly differs, they all judge states on criteria
such as the cost of doing business, regulatory and tax regimes,
and access to capital. And the states we have represented at
our hearing today consistently perform in the top 15 of these
surveys, proving to be the cream of the crop when it comes to
working for greater business development.
Although growth has been exceptionally weak following the
recession nationally, the states represented here have bucked
that trend and outpaced the national averages, some by
significant margins. States like Virginia, Texas, Kansas, and
South Dakota have significantly lower unemployment than the
national average, and states like Texas, Utah, and Florida,
have outpaced the national gross domestic product average of
2.5 percent in 2012. Simply put, some states are making
excellent headway at attracting businesses to their states and
growing the economies accordingly.
These states are not just courting businesses from other
states but also enticing companies with facilities overseas to
come back to America. These states are proving that with lower
taxes, smarter and less burdensome regulatory regimes, and
access to affordable energy, the United States can and will
continue to be a place where things are built and entrepreneurs
can innovate and thrive.
Again, I want to thank all of our witnesses for being here
today. Again, Ranking Member Velazquez will not be able to give
her opening statement but she will submit it for the record.
And with that, what I will do is turn to Congresswoman Noem
from South Dakota to introduce our first witness. And welcome,
by the way, to the Committee.
Ms. NOEM. Thank you. It is nice to be here, and I
appreciate the chairman allowing me the opportunity and the
privilege of introducing a special guest that we have here from
South Dakota today. I am proud and honored to have the
opportunity to introduce all of you to Pat Costello. I have
known Pat for many years, and continue to be impressed by his
leadership for our state of South Dakota and his desire to grow
and to sustain a healthy economy for us back home, but also for
our country.
As the commissioner of the South Dakota Governor's Office
of Economic Development, Mr. Costello is a leader in bringing
high quality jobs to our state and high performing employees as
well to South Dakota. While we work in Washington to support
policies that encourage job growth and innovation, Mr. Costello
is doing the same thing back in South Dakota. We are fortunate
that in South Dakota our economy has remained strong. We
continue to have relatively low unemployment, less than half of
the national average.
Numerous rankings have shown that South Dakota is one of
the best states in the country to do business and continues to
give individuals a great quality of life. In fact, the Small
Business Survival Index has rated South Dakota's business
climate as number one in the country for new businesses and
startups. Mr. Costello knows this firsthand. Since moving to
South Dakota, he has operated several small businesses in Sioux
Falls, which is our largest city. Before his appointment to
Commissioner, Mr. Costello proudly served on our city council
for the city of Sioux Falls from 2006 to 2010. He was also
chairman for the year of 2009 through 2010. Beyond creating
jobs and fathering economic development within our state's
borders, Mr. Costello also finds time to give back to causes
that matter the most to him. He currently sits on the board of
directors for the Children's Care Hospital, which is a
wonderful facility that cares a lot about children and their
families and school, and is a member of the Rotary Club. Pat
knows what it takes to get the job done, and in South Dakota,
we feel very lucky to have him.
I am very fortunate to be here. It is great to have him. I
know that you will enjoy hearing his testimony today, and I
would like to thank him for taking the time to travel all the
way to D.C. It is quite a trip. I know it pretty well. And to
discuss the importance of small business and the growth
opportunities we have for our country.
So with that I will yield back, Mr. Chairman.
Chairman GRAVES. Go ahead.
STATEMENTS OF PAT COSTELLO, COMMISSIONER, SOUTH DAKOTA
GOVERNOR'S OFFICE OF ECONOMIC DEVELOPMENT; NICK JORDAN,
SECRETARY, KANSAS DEPARTMENT OF REVENUE; AARON DEMERSON,
EXECUTIVE DIRECTOR, OFFICE OF ECONOMIC DEVELOPMENT AND TOURISM;
JIM CHENG, SECRETARY OF COMMERCE AND TRADE, COMMONWEALTH OF
VIRGINIA.
STATEMENT OF PAT COSTELLO
Mr. COSTELLO. Thank you very much.
You know, it is always a pleasure to talk about the great
state of South Dakota. Again, my name is Pat Costello, and I
serve as the commissioner of the Governor's Office of Economic
Development.
I have been in that role for about two and a half years,
and I have been in small business in South Dakota for about 20
years.
I would like to take a few minutes and share with you a
little bit about our state, and why it is a great place to do
business and what we, as public servants, are doing to ensure
that we remain a good place to do business.
First and foremost, is our tax climate. It is unmatched by
any other state in the nation. Only in South Dakota do
businesses enjoy the benefits of no corporate income tax, no
personal income tax, no business inventory tax, no personal
property tax, and no inheritance tax.
This structure leaves money where it belongs--in the
pockets of our businesses, creating a more favorable
environment for long-term business growth. As we like to say in
South Dakota, ``Profit is not a dirty word.''
I was asked today to testify on why South Dakota is a great
place to do business. Well, a big part of that is our fiscal
responsibility and common sense.
When it comes to fiscal responsibility, you would be hard
pressed to find a state that would rank higher than South
Dakota. For the last 123 years, we have consistently balanced
our budget.
Two years ago, like most of the country, we were faced with
some serious budget issues. We buckled down, made the cuts that
were necessary, and today we are in a better financial
situation than most other states in the country.
If we want serious, financially-sound companies operating
in South Dakota, we need to set the example at the state level.
I have already mentioned our favorable tax climate, but I
also want to talk about our favorable regulations and the
consistency of our business leaders.
When I started in our office, I read something in one of
our promotional brochures, ``In South Dakota, our business
climate does not change with the political winds.'' That
statement was written back in the 1980s when Citibank moved
some of its credit card operations to South Dakota when the
state legislature allowed expansion in compliance with the old
Federal Bank Holding Act.
Today, the financial services industry is thriving in South
Dakota. As a matter of fact, in 2012, South Dakota's total bank
assets topped $2.6 trillion, which totaled 18 percent of the
country's bank assets and landed our state as the number one
ranking according to the Federal Deposit Insurance Corporation.
So forward-thinking leaders back in the 1980s, followed by
forward-thinking leaders in the next 30 years, have kept South
Dakota a leader in economic development with reasonable
regulation and low taxation. When our governor, Governor Dennis
Daugaard was elected, one of the first things he did was direct
all state agencies to identify unnecessary laws and regulations
and get rid of them. In two years, executive agencies under
Governor Daugaard have found 374 rules (72,990 words) and 919
sections of codified law (75,266 words) to be repealed, and the
process is less than half done.
That is just good business. And corporate leaders quickly
took note that this Midwest state was serious about maintaining
the type of business climate needed for companies to grow and
prosper.
Another way South Dakota is able to continue to attract
national and international companies like Bel Brands and Marmen
Energy, is by playing to our strengths. With a population of
830,000, we are one of the least populated states in the
country. But in business that can be a good thing. Our small
size affords businesses looking to expand in or relocate to
South Dakota direct access to government leaders.
When Governor Daugaard was campaigning, he promised to be
the state's number one salesperson for economic development,
and there is no question that he has fulfilled that campaign
promise. During the last three months alone, Governor Daugaard
has met with nearly 70 business leaders and site selectors from
across the country to encourage them to continue to grow their
businesses in or locate them to South Dakota. That kind of
personal attention gets noticed.
Another thing that gets noticed is our collaborative
efforts for the people of South Dakota. Our business
development team serves as the liaison with these business
leaders and site selectors on a multitude of issues from
financing to permitting. As every business leader knows,
navigating the permitting process can be time consuming and
frustrating. In South Dakota, we believe in working with
businesses not only to make it happen but to make it happen
faster. As an example, we recently had one company that was
able to receive an air quality permit from our Department of
Environment and natural Resources from start to finish in just
30 days, and we did it without cutting corners. We believe the
state should be an advocate, not a roadblock to doing business.
Another way we attract business is by keeping our cost of
living low, because in the business world a low cost of living
equals a low cost of doing business. According to a June 2013
study by the U.S. Commerce Department, South Dakotans pay 87
percent of the national average for goods and services.
Additionally, the U.S. Commerce Department just reevaluated the
numbers for personal income and South Dakota's growth was a
whopping 10.4 percent--more than any other state in 2012.
Of course, I would be remiss if I did not take the
opportunity to let others tell what they think South Dakota is
doing right as well. The Small Business and Entrepreneur
Council evaluated 46 different economic factors and ranked
South Dakota number one for our business policies and
entrepreneurial friendliness. We are also in their top spot for
small business survival. Our low debt and lack of unfunded
pension liabilities and expensive state-funded programs lands
us in the top of Barron's Best Run States in America. Our state
ranks in the top for low tax burden, best business climate, and
one of the highest average credit rankings. And of course,
there is yesterday's CNBC ranking that puts South Dakota as the
best run state to do business.
Thank you again for the opportunity to be here and to
testify about this important topic, and I look forward to your
questions.
Chairman GRAVES. I will next yield to Mr. Huelskamp for the
next introduction.
Mr. HUELSKAMP. Thank you, Mr. Chairman.
It is my pleasure to introduce my friend and former
colleague, Nick Jordan, to my current colleagues. Nick and I
served together in the State Senate for 12 of his 13 years, and
prior to that, Nick spent much of his adult life promoting a
positive pro-growth business environment in Kansas. He served
as the founding president in the Overland Park Convention
Visitors Bureau. And while in the Senate, I know personally
Nick worked to promote issues that were important to small
businesses, especially. In 2010, incoming governor Sam
Brownback tapped Nick to serve in his cabinet as the revenue
secretary. In that role, Secretary Jordan helped shepherd a tax
reform package through the legislature and onto the governor's
desk that will reduce income taxes, especially for small
businesses, which make up about 97 percent of all Kansas
businesses, and it will and is already promoting economic
growth.
In addition to promoting small business issues, Secretary
Jordan and his wife, Linda, co-own a small business with their
daughter Shelly, which is located in Shawnee, Kansas, where the
Jordans have lived for more than 30 years. He remains active in
his church and community, serving on the Board of Directors of
Shawnee Community Services.
Secretary Jordan, thank you for being here today to share
your testimony on some pretty exciting news from Kansas. Thank
you for joining us.
STATEMENT OF NICK JORDAN
Mr. JORDAN. Chairman Graves and Committee members, thank
you for inviting us in today and allowing Kansas to tell our
story. I am going to focus a little bit on tax policy, although
we have had an office of repeal or the governor has done some
pretty dramatic things with budget and regulations in the state
of Kansas, but probably now the most notoriety we are getting
is on the tax policy that we have done in Kansas since Governor
Brownback came into office.
The topic is very important to us. Small business, in
particular, the vast majority, as Congressman Huelskamp said,
of our private sector employers are small businesses--77
percent have less than 100 employees; 98 percent of them have
less than 100 employees. This means for Kansas families to
flourish economically in the 21st century we must have
flourishing small businesses.
With that in mind, Governor Sam Brownback has placed the
utmost importance on pro-growth tax reform at the state level.
We started with the clear-eye understanding that the taxes at
the federal, state, and local levels are a complicated hodge-
podge coupled together over many decades, so to help small
business it is important to reduce the burden of complying with
this onerous system while also reducing the overall tax burden.
So since 2011, Governor Brownback and the Kansas
legislature have teamed up to make the state's tax code fairer,
simpler, and flatter for families and small businesses. This
approach broadens the base and lowers tax rates for the benefit
of the maximum number of Kansans. The result has been historic
and innovative tax relief focused on providing a shot of
adrenaline into the heart of the Kansas economy.
What makes Kansas's approach unique is how we are
strategically accelerating tax relief to benefit small
businesses. While individual income tax rates have been reduced
14 to 24 percent this year starting January 1st of all Kansas
taxpayers, they will by 2018 realize another 23 percent
reduction in tax rates in the state of Kansas. So we have got a
long-range plan on the individual, but what really is exciting
is we have even gone further to boost small businesses.
Starting this year, Kansas began exempting nonwage business
income from state income tax. This is the type of income earned
by a majority of small Kansas businesses which typically are
structured as LLCs, sole proprietorships, and S-corps, commonly
referred to as pass-through entities since the taxes for those
business incomes are filed on individual income tax returns
rather than corporate tax returns. By eliminating the state
income tax for small businesses, we are sending the message
that every business, every innovation, and every entrepreneur
matters when it comes to creating jobs in Kansas. This is in
addition to programs that we have to assist bioscience, tech,
Main Street businesses, and entrepreneurs.
We are encouraging small businesses to grow in other ways
as well. For example, our tax policy encourages private sector
investment by allowing companies to immediately expense their
purchases of equipment software as a state deduction. The small
businesses capture the full tax value of the money related to
their investments, and by that they are keeping tens of
millions of dollars each year which could be reinvested into
businesses, and we are seeing a tremendous increase in the use
of those deductions by small businesses in our returns this
past year.
Additional tax relief is being targeted to rural
communities to simulate small business startups in every corner
of Kansas, not just in our urban centers. This is a pretty
striking number I think. By keeping an additional $4.1 billion
in the pockets of Kansas citizens and businesses over the next
six years, we hope to experience growth rates similar to the
nine states where zero personal income tax would significantly
outperform states that have the highest personal income tax
rates.
Recently, the tax foundation released a paper titled ``What
is the evidence on taxes and growth?'' The special report found
that data consistently point to significant negative effects of
taxes on economic growth, even after controlling for various
other factors, such as government spending, business cycle
conditions, and monetary policy. Every study in the last 15
years finds a negative effect of taxes on growth. If we intend
to increase employment, we should lower taxes on workers and
businesses that hire them. Therefore, in Kansas, we have been
changing the dynamic that has led to an average economic result
so more families can achieve a meaningful increase in income
and opportunity and small businesses can invest in growth and
new jobs. Models being recognized by our neighboring states,
including the chairman's home state of Missouri, certainly is
taking notice of what Kansas is up to, and we hope others in
the regions will join us so that the Midwest becomes a lot more
attractive a place to do small business.
If I can, I will quote your Speaker of the House, Mr.
Chairman, in the Missouri House of Representatives, Tim Jones.
He recently wrote in The Kansas City Star, ``Kansas lawmakers
have accomplished major tax reform and have managed to get the
state economy back on track. These improvements are great for
Kansans and challenge neighboring states to compete for
business and job growth.'' On the other hand, Missouri's
unemployment rate has plateaued at 6.6 percent. Perhaps most
troubling for Missouri is the Kauffman Foundation you mentioned
a moment ago small business climate ranking which gives
Missouri a C and Kansas an A. Speaker Jones concluded Kansas
has proven the competitive economic policies promote a business
friendly environment attracting new companies, and with these
new companies more jobs. The facts are right in front of us.
And I might make one little editorial comment if I can
because the question I am asked most is what is happening to
your revenue since you made all these cuts. We are six months
into this new policy and our revenues are up across the board.
We are above estimates and we are above actuals from last year.
So the growth is in the short-term, at least at this point,
paying off for us.
Thank you, Mr. Chairman.
Chairman GRAVES. Thank you, Secretary Jordan.
Our next witness is Aaron Demerson, who is the executive
director of the Office of Economic Development and Tourism in
the Office of Texas Governor, Rick Berry. The Office of
Economic Development and Tourism is responsible for making the
state of Texas a premier destination for business and travel.
Prior to serving as executive director, Aaron was the district
director of Texas Business Development responsible for domestic
business expansion and recruitment, research, and international
business recruitment. Aaron received a B.A. from Texas A&M and
a banking diploma from the American Institute of Banking.
Thank you for being with us today, and I appreciate you
coming in.
STATEMENT OF AARON DEMERSON
Mr. DEMERSON. Thank you, Mr. Chairman.
Chairman Graves, Ranking Member Velazquez, and members of
the Committee, my name is Aaron Demerson and I have the
pleasure of serving as the executive director of Economic
Development and Tourism Division for the Office of the Governor
in the great state of Texas.
Thank you for the work your Committee continues to do for
small businesses and for the invitation to participate on this
panel. It is indeed a privilege and a pleasure to do so.
Over the course of the past two years and throughout the
years, this Committee has heard from some of the most notable
representatives associated with small business. That is as it
should be and not surprising given the importance of small
businesses to the U.S. economy, and in my case, the Texas
economy.
As we speak here today, somewhere in Texas, someone is
coming up with the next big idea, a better way of doing
business, a better way of doing something that has never been
done before.
Fostering these types of innovations is vital to keeping
Texas at the forefront of the national economy and when these
innovators are ready to go to market, our hope is that the
efforts of this committee, in collaboration with the efforts at
the state-level, will make it easy for them to succeed and
thrive.
We all know that big companies tend to draw the biggest
headlines, and they do, in fact, have a very important role to
play, but we also know the drivers of job creation in Texas and
our nation are the small business men and women. These are bold
entrepreneurs who take real risk pursuing their dreams of
owning their own business. As a matter of fact, these represent
the true vibrancy of the Texas economy and their contribution
to the positive economic climate is a large part of what has
helped attract employers of all sizes to the Lone Star state.
The Committee is seeking information on why certain states
are attractive to businesses. We have found the continued
attractiveness to Texas over the years is based on a number of
reasons, with a major portion of this success associated with
the leadership and emphasis placed on job creation that has
been championed by Governor Perry and our collective statewide
elected delegation.
We know that our second to none business-friendly climate
has continued to help us attract new employees and create jobs.
In this past legislative session (just as we have done in the
past) we took the necessary steps to preserve the business
climate that has made all of that possible.
In some cases, these businesses were fleeing over-taxation
and over-regulation in other states as they sought to expand or
relocate to a place where they are free to succeed. It is our
thought that we can expect more of them heading our way as long
as we remain committed to the principles that have helped make
us the best state in the country to do business.
One of the most important steps for attracting business to
Texas is centered on keeping our taxes low because dollars do
far more to create jobs and prosperity when kept in the
business owner's hands.
To that end, we have continued to enact legislation that
has a positive impact on small business. This year we were able
to make permanent the small business tax relief that was passed
in 2009, which makes permanent the $1 million small business
tax exemption. This important bill provides significant tax
relief to over 140,000 Texas small businesses.
We have worked hard also to keep a fair and predictable
regulatory climate so that a company will know what to expect
six months down the line. The CEOs and CFOs understand this and
continue to find it a very attractive alternative when
considering expansion and/or relocation.
We also have been at the forefront of the legal system to
make it even harder to file frivolous lawsuits in Texas and
approve ``loser pay'' legislation which requires those who file
a frivolous lawsuit and lose to pay the potential court costs
and legal expenses of those they sued.
For us in Texas, economic development begins at the local
level, and it is important that we have effective relationships
at the local level to take advantage of the small business
opportunities. To say that our communities are very aggressive
and serious about small business and job creation is an
understatement. We recently passed legislation creating a small
business advisory committee that will help us align even closer
with the communities on small business initiatives and issues.
In Texas, as depicted in the handouts that I have passed to
you, we have a state-by-state comparison document and a
``brag'' document as well. As Governor Perry quite often says,
``In Texas, it ain't braggin' if it's true.'' The fact of the
matter is our unemployment rate has consistently been lower
than the national average, and we have continued to lead the
nation in job creation over the years. And we also have the
nation's best business climate and continue to be the number
one export 11 years running and continue to have the highest
number of expansion and relocation projects. All of this
creates a great deal of attention and continues to be of great
interest to a number of small business owners in the United
States and internationally looking to expand or relocate their
business.
It did not happen by accident; it happened because over the
last decade, Texas leaders have made principled, thoughtful
decisions by not over-taxing, over-regulating, or over-
litigating our citizens.
In Texas, we have an obligation, responsibility, and goal
to taxpayers to take the necessary steps to make government
more efficient and streamlined while reducing spending without
raising taxes.
And lastly, only by keeping our families and small
businesses strong can we continue the type of prosperity we
have enjoyed in Texas over this past decade. So how do we
continue to create new opportunities for Texas families and
small businesses? We do this in Texas by continuing to apply a
laser-like focus on small business retention and recruitment
while showcasing the best of what Texas has to offer. In
addition, we will continue to ensure for small businesses a
climate at the state level that is conducive to making a
profit, creating jobs, and enjoying success.
Our hope, Mr. Chairman and Committee members, is that the
same or similar approach is viewed at the federal level. I
sincerely appreciate the opportunity, I welcome you to visit
our great state, and look forward to the discussion and
answering any questions that you might have. Thank you.
Chairman GRAVES. Our next witness is Mr. Jim Cheng, who is
the Secretary of Commerce and Trade for the Commonwealth of
Virginia. In this capacity, he manages the jobs and opportunity
agenda for Virginia and oversees 13 state agencies focused on
promoting the growth of Virginia's business community and
attracting new investment into Virginia's economy. Secretary
Cheng holds a B.S. in computer science from Old Dominion
University, an MBA from Colgate Darden Graduate School of
Business at the University of Virginia, and a J.D. from
Georgetown University Law Center. Thank you for being with us.
I appreciate you coming in.
STATEMENT OF JIM CHENG
Mr. CHENG. Thank you, Mr. Chairman.
Chairman Graves, Ranking Member Velazquez, and other
distinguished members of the Committee, again, I am Jim Cheng,
secretary of Commerce and Trade for Virginia.
Let me begin by conveying Governor Bob McDonald's regrets
that he could not be here today to testify before you, but also
on behalf of the governor and the Commonwealth, I thank you for
allowing me to testify today instead.
Small businesses are the backbone of our economy. Across
Virginia and throughout the United States, small businesses are
creating jobs and opportunity. In Virginia, we have been
focused on job creation and economic development with special
attention to the important role of small businesses in our
economy. Last year, the governor announced 2012 as the ``Year
of the Entrepreneur.'' Throughout the year, among other things,
the governor held monthly office hours to small business
owners, conferences and roundtables across the state, and
featured profiles in entrepreneurship. And we continued our
efforts at job creation in 2013 through efforts like our Rural
Jobs Council. The council's recommendations made it clear that
there are new challenges facing small businesses in today's
global economy. They recommended that we invest in workforce
development, infrastructure, and broadband. The council also
recommended that we create a Governor's School for
Entrepreneurship to encourage middle school students to
consider entrepreneurship as an option.
In Virginia, we continue to focus on things that matter to
entrepreneurs--access to capital, workforce development, and
predictable and accountable government.
Virginia's small businesses need to know that they will
have ready access to capital. In 2012, we enacted a bipartisan
solution to encourage long-term investments in Virginia's small
businesses. The Virginia Small Business Investment Grant
encourages private investment by providing a grant equal to 10
percent of a qualified investment for an eligible investor.
We have also invested in our Virginia Small Business
Financing Authority. The authority aids Virginia's financial
institutions in offering business loans that they may not be
able to offer without the authority's assistance.
Agriculture and forestry continues to be Virginia's largest
industries, generating a combined $79 billion annually and
creating more than 500,000 jobs across the state, mostly by
small businesses. So we passed legislation to establish the
governor's agricultural and forestry industry's development
fund, targeting those industries that have been largely
overlooked in the state's traditional economic incentive
programs.
Of great importance to the Commonwealth and the nation is
our ability to compete in technology innovation. With high-
tech, high-growth startups creating more than 30 percent of all
new jobs, our administration has invested in an environment
that encourages the formation and growth of these companies. We
created incentives to recruit and attract angel and venture-
capital investment, and since 2010, our C stage investment
programs have created over 75 new high-tech companies that have
attracted private capital at a rate of $17 for every $1 of
public funds invested.
A key to entrepreneurial growth at the local level is to
support regional capacity building. We launched a grant program
called ``Building Collaborative Communities.'' The program
promotes regional economic collaboration in economically
distressed areas to stimulate job creation, economic
development, and build community capacity and leadership.
One of the most important issues for a small business is
workforce development and quality of education. Small
businesses thrive because of their ability to recruit, train,
and retain qualified employees. In our past legislative
sessions, the governor has passed numerous innovative and bold
K-12 and higher ed reforms that will keep Virginia's workforce
at world-class levels.
Small businesses need predictability and efficiency. Last
year, the governor launched a regulatory reform initiative to
reduce the number of burdensome regulations placed on small
businesses. We asked industry and small business for ideas, and
specific sections of code that were overly burdensome. As a
result, since September 2012, 562 sections of the Code of
Virginia have been identified, and 157 sections have already
been repealed.
But ultimately, it is not what the federal or state
government can do for small business that matters, but how
government can ensure it does not erect unnecessary barriers to
job creation. We must ensure an environment conducive to
economic vitality and guard against extinguishing the
entrepreneurial spirit with overly burdensome laws and
regulations.
Our work has gotten results. When the governor took office,
unemployment in Virginia stood at 7.3 percent, but now it
stands at 5.3 percent, our lowest unemployment rate in over
four years. Since the beginning of our administration, Virginia
has added 171,000 net new jobs, 153,000 of which are from the
private sector. And the number of unemployed Virginians had
decreased by a total of 80,000 or about 36 percent. And simply
put, more Virginians are working today.
So thank you again for inviting us to speak, and I look
forward to your questions.
Chairman GRAVES. Thank you very much. Thank you to all of
you.
I am going to turn to Mr. Huelskamp to start questions. I
have got to tell you it is exciting to hear the success that
your states are having. And obviously, I have watched what
Kansas is doing, just right across the border, and seeing
businesses leave the state of Missouri for Kansas,
unfortunately. But regardless, with that I am going to turn to
Mr. Huelskamp for first questions.
Mr. HUELSKAMP. Thank you, Mr. Chairman. It really is a
shame that those businesses are moving to Kansas. We will
follow up with that.
But a question for Secretary Jordan, if I might. With a
pretty big, massive comprehensive tax reform package, it did a
lot on the individual side but not much, if anything on the
corporate side. Can you give me directions of what happens at
the state level when you are trying to do comprehensive tax
reform and what happens with those players? And I think it
would be of great interest.
Mr. JORDAN. The Congressman knows when I was in the Senate
I wrote a lot of economic development incentive programs, and
we had a lot of discussions about that while we were serving
together.
We, like all states, have a significant package of
incentives and tax credits to offer to C corps to come to our
state and are probably as competitive as any state, obviously,
in those packages.
We actually, the governor's desire was to lower corporate
income tax to zero. And when we started having those meetings,
we actually found that some of our C corps, some of our
corporations would rather be incentive and tax credit members,
rather than a zero tax credit at this time, and we had a hard
time doing it. So we actually did not lower the corporate
income tax rating--Kansas, at this time. We would still like to
work on that. We would still like to work with the corporate
community to make that happen. Right now, 59.6 percent of our C
corps pay no income tax in Kansas because of the incentive and
tax credit programs.
And again, my statistics, when 98 percent of your
businesses are 100 employees or less, 77 percent of them are 10
employees or less, and by all statistics, whether some say two-
thirds of your job creation comes out of small business, some
say 75 percent come out of small business, we decided to swing
very quickly over to the small business, who many times cannot
take advantage of the incentive and tax credit programs because
the thresholds are so high it is hard for them to take
advantage of. So we swung and decided we would work what we can
to help small business grow in the state of Kansas.
Mr. HUELSKAMP. Thank you, Mr. Secretary.
Question for Secretary Cheng, as well. What do you hear
from small businesses in particular as their biggest complaint
about the federal government and federal policies and
regulations? If you can give us a little insight there.
Mr. CHENG. Mr. Congressman, I think the main thing they say
is there is too much--too much of everything. Too much
regulation, too many things coming down the line, and the
uncertainty. Being from Virginia, we have a very large military
presence, very large U.S. government, civil service sector two,
so worries of sequestration and what follows are very
concerning. So we hear that, especially from our small business
community who are the most affected by little shifts in
policies and spending. So all the regulation, perhaps even
uncertainty in health care, taxation, and government spending
all are a big part of it. So if they knew what was coming down
the line, they could adjust. But since they do not know, they
are all very worried.
Mr. HUELSKAMP. The gentlemen from Texas and South Dakota,
any comment?
Mr. DEMERSON. I would echo the comments. Uncertainty is
huge. That is why in Texas we have made that a focal point to
make sure that things are not changing but that certain efforts
at the federal level have a certain impact on the small
businesses in Texas.
Mr. COSTELLO. Yeah. I would agree. I think in the business
world people just want to understand what the rules of the game
are, but when the rules keep changing it is challenging for
them. So to know that the regulatory process is going to be
consistent, the tax policy was going to be consistent, that
there was a fiscal balanced budget from a federal level would
be very helpful. All those things weigh into it.
Mr. HUELSKAMP. All right. Well, I appreciate that. I yield
back. Thank you, Mr. Chairman.
Chairman GRAVES. Ranking Member Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. I am sorry that I
was late but I was at the White House meeting with the
president.
Secretary Cheng, I am so glad to hear that unemployment
rate is so low in Virginia; right?
Mr. CHENG. Yes, ma'am.
Ms. VELAZQUEZ. Yes. And I guess that in some ways a lot of
that has to do with the federal government presence in
Virginia, whether it is federal spending or federal contractors
because you have one of the highest numbers of federal
contractors in the nation.
My question to you is, regulations of course, heavily
impact small businesses, but I would like to hear have you done
any--and I will ask the question to any of the other members of
the panel--have you done any type of analysis in terms of
regulations that are duplicative--federal regulations as well
as at the state level? Have you ever done analysis that lead to
recommendations either to the state where you come from or the
federal government?
Mr. CHENG. Yes, ma'am. If I just can give you a quick
answer, the answer is yes. We have set up commissions to look
at the federal regulations that we think may be burdensome or
maybe affected by certain changes. I do not have all that
information now but we certainly can get more information for
you. And yes, Virginia is very fortunate to have the federal
spending, but then again, we have a lot of federal spending
contract wise, but in terms of other types----
Ms. VELAZQUEZ. But my question is have you ever done any
analysis in terms of state regulations that are duplicative
with federal regulations?
Mr. CHENG. Oh, duplicating----
Ms. VELAZQUEZ. What federal regulations are in place?
Mr. CHENG. I will have to look at that.
Ms. VELAZQUEZ. Because that will be a great way to help us.
Mr. CHENG. Yes, ma'am.
Ms. VELAZQUEZ. Or for the state government to say that it
does not make sense; that if we have them on the books in terms
of federal regulations, why have the same type of regulation at
the state level?
Mr. CHENG. I will check on that.
Ms. VELAZQUEZ. You have over 2,000 civilian defense workers
in Virginia----
Mr. CHENG. Yes, we do.
Ms. VELAZQUEZ.--that are going to be and are impacted by
the sequester.
Mr. CHENG. Yes.
Ms. VELAZQUEZ. What impact will this have on the state of
the economy, particularly in Northern Virginia where so many of
these jobs are located?
Mr. CHENG. Well, ma'am, I believe that that is the question
that needs to be answered. So far, our unemployment rate has
held steady and actually, as you mentioned, it has come down.
But now with some furloughs coming up that may affect us. And
we are hanging on and waiting. So far our budgets have been
fine, but we believe that there will have to be some effect.
And of course, the long-term effect is we understand there must
be changes in spending habits of the federal government, and we
are prepared for those. Our companies, I think, are just
waiting for the direction on which way to go.
Ms. VELAZQUEZ. Recently, Jonathan Greenert, the chief of
Naval Operations, addressed Hampton Roads business leaders and
told them that he is preparing for 2014 to be much like this
year. That means cuts in military operations, ship
construction, and more civilian furloughs. What impact will
these cuts have on Virginia if they are sustained over the next
few years?
Mr. CHENG. Ma'am, if I can answer that, I think there are a
couple of thoughts there. One is the original sequester was
very, very, I guess, stilted and a lot of our people told us
that they could not make any judgment calls. I think there have
been some changes to make to make it a little better so they
can prioritize. I think that is a big plus. But I think our
concern is mostly for the small businesses that we are talking
about today because we believe they will be the first ones
impacted on any cutbacks.
Ms. VELAZQUEZ. Sure. Uncertainty. Right? They will not be
able to plan.
Mr. CHENG. Absolutely.
Ms. VELAZQUEZ. There will be 72,000 civilians that will
have less money to spend as consumers.
Mr. CHENG. Absolutely. Right. And it all will have a big
effect. We do not know what it is.
Ms. VELAZQUEZ. So it is our job in Washington for the good
of the economy to address the issue of sequestration.
Mr. CHENG. Absolutely.
Ms. VELAZQUEZ. Mr. Jordan, like many other states, Kansas
has been forced to make some difficult spending decisions while
also ensuring that you raise revenue. How is Kansas balancing
the need for revenue to fund things like education and
childcare with the goal of tax simplicity?
Mr. JORDAN. As I mentioned earlier, our revenues are up
under this new tax policy. And actually, when the governor
first took office we were left with I think it was literally
$800 in the bank, a $500 million hole in our budget, and within
one year we turned that around to a $500 million surplus in our
budget by efficiencies. All agencies are looking at
efficiencies, better ways of operating, and we found several
savings in doing so and have been able to save quite a bit of
money in that. The governor said time and time again I am going
to fund the core responsibilities of government, and I have
been in the Senate elected position and those debates will
always be are you funding it enough or are you not funding it
enough or what kind of funding should we have in there.
The governor's budget this year proposed funding for
education. He particularly fought for higher education in his
budget. Along with the tax plan, we had a plan that funded what
he wanted to fund. Obviously, went through the legislative
session. They made some additional cuts but that was not the
governor's desire in his budget.
Ms. VELAZQUEZ. I just want to hear your angel investor tax
credit----
Mr. JORDAN. Yes.
Ms. VELAZQUEZ.--it really meant to bring investors----
Mr. JORDAN. Right.
Ms. VELAZQUEZ.--to invest in local businesses. Has this
credit been affected?
Mr. JORDAN. It has been very effective. We have really
enjoyed a lot. I actually helped co-author a bioscience
initiative in Kansas that raised it to the number five in the
nation in biotechnology. And the venture angel investor tax
credit was a part of that process and really helped us bring
the biosciences up in Kansas and startups in bioscience,
working with our researchers at our universities. It has been
an extremely successful program. I cannot give you numbers off
the top of my head but we have kept that tax credit, want to
keep that tax credit, and that tax credit has brought a lot of
new money. We are obviously not a big venture capital state. We
are becoming more and more venture capital because of the
bioscience growth and some of our tech growth. Google has made
a big investment in Kansas in some of their high speed cable.
So in all ways it has been a very good program, very good tax
credit for us.
Ms. VELAZQUEZ. Thank you.
Mr. Demerson, Texas is now a majority-minority state for
the first time in its history. What sort of policies does it
have to promote minority business development?
Mr. DEMERSON. In terms of minority business development,
the number of the state agencies in Texas, whenever you are
looking at doing business with the state, their goal is set
within some of those agencies. And so we are going out
statewide, promoting the benefits of doing business in Texas
and those hub or minority-owned businesses are a part of any of
those activities that are taking place at the state level. So
we have always been doing that in the past and will continue to
do even more in the future.
Ms. VELAZQUEZ. Do you have any metrics to compare to? The
last five years?
Mr. JORDAN. Yes. Each of the agencies actually have their
own set of goals and metrics in-house, and so from the
Governor's Office standpoint, I do not have the overall view,
but each agency, if you are dealing with TxDOT, Department of
Transportation, or any of the other agencies, they all have
those goals and metrics.
Ms. VELAZQUEZ. Do you have any oversight to make sure that
those state agencies are doing what they are supposed to be
doing?
Mr. JORDAN. I think from the governor's standpoint, being
the leader of that state, he has oversight over all of those
activities and has done a phenomenal job of reaching out to
make sure that those things are in place.
Ms. VELAZQUEZ. Okay. Thank you, Mr. Chairman.
Chairman GRAVES. Mr. Tipton.
Mr. TIPTON. Thank you, Mr. Chairman. I apologize for being
late. I was not invited to the White House. I am shocked.
I appreciate you gentlemen taking the time to be able to be
here. It is great to be able to hear some of these stories of
success, the entrepreneurship. I did have a couple of
questions.
Mr. Jordan, very interesting story where you had $800 did
you say in the bank and $500 million surplus now?
Mr. JORDAN. Right.
Mr. TIPTON. And you were able to achieve this you noted by
actually letting American people keep more of their money and
actually reinvest those dollars rather than handing it over to
government. But you also noted that you created some
efficiencies.
Mr. JORDAN. Yes.
Mr. TIPTON. Do you think that that is a tale that when we
look at, say, sequestration, do you think it is palatable for
the federal government to reduce the rate of increase by two
percent?
Mr. JORDAN. From our experience, yes. We found a lot of
efficiencies in the state of Kansas. The governor has worked
hard and is looking at better ways of doing things. Yes. We
have certainly, I think, are proof you can do that. You can go
into agencies. You can work with state agencies and find a lot
of efficiencies and savings in those agencies.
The governor has been real big. We have a statute that
requires a 7.5 percent ending balance and I think Congressman
Huelskamp would agree with me. I do not quite remember the last
time we had a 7.5 percent ending balance in Kansas except for
when Governor Brownback came in and required us to have a 7.5
percent ending balance. So in that turnaround to a $500 million
surplus, we also got the state back on a good footing with a
good ending balance every year on our budget going forward.
Mr. TIPTON. Secretary Cheng, we were talking a little bit
about sequestration. Is it pretty much your sense as well that
it ought to be the responsibility of the federal government
maybe to do what the state of Virginia has done--actually show
some responsibility and innovation not to grow government but
to reduce its size and empower the American people with their
own dollars?
Mr. CHENG. Yes, sir. I think that that is something our
governor would absolutely commend. It is something that we have
worked very hard about. We came in three and a half years ago
with a huge deficit, and for the past--and I do not know if it
is public soon, but we are hoping that we will have four
straight years of positive remaining balances in our budget.
And that comes from cutting back things that we have to cut
back.
Mr. TIPTON. I would like to maybe get all of our panel's
comment on this. I think one of the great challenges that we
face--I am a small businessman coming out of the state of
Colorado. A lot of our big worries really are not so much about
what is coming out of the state of Washington, D.C. with ``one
size fits all'' regulatory pattern. I believe we have the
statistics out of this Committee that we are spending $10,685
per employee in just compliance--following rules and
regulations. This is not even taking into account yet the full
impact of the Affordable Care Act and how devastating that is
going to be to job creation and health care ultimately in this
country.
Is it your sense that some of those regulations are left
best to the state given the differences between Virginia, South
Dakota, Texas, and Kansas? Let us make some of those rules to
be able to fit our own particular needs for our own geography
and our own people?
Mr. DEMERSON. From the Texas standpoint, we look at it
quite simply as you do not have what you do not have. If you do
not have it, you do not spend it. It is a simple equation
there. We were fortunate and blessed with a $12 billion budget
surplus in the state and we were able to do some things with
that this past legislative session that were moving us further
down the line. So we take pride in doing what we need to do at
the state level, making sure that there is an impact, and then
we are looking forward to that on the federal side to match
wherever we can to make sure that we are moving forward.
Mr. TIPTON. Great. And Mr. Costello, with South Dakota, you
talked about a strong banking community there. Are your small
businesses given the regulations that we are seeing out of
Dodd-Frank, the threat of further regulations out of Basel III.
Are your small community banks really worried about their
ability to be able to deliver loans to their customers?
Mr. COSTELLO. I think we do hear from our small bankers
that the increasing regulatory environment is very challenging
for them. In South Dakota, we have got the largest bank assets
of any state--$2.6 trillion. I think a lot of that has to do
with the reasonable regulations that we offer in the state of
South Dakota and the competent people that we have in our
division of banking. We hear from banks that have moved their
charters to the state that they are comfortable with our
regulators and that they are very knowledgeable, and so I think
that is important for them to be comfortable. And of course,
our tax structure as well. No corporate income tax in our fee
structure for banks as well as very attractive.
Mr. TIPTON. Okay, thanks. I yield back, Mr. Chairman.
Chairman GRAVES. Ms. Hahn.
Ms. HAHN. Thank you, Mr. Chairman.
Mr. Demerson, I was going through the brag sheet that you
provided and I am not sure that I agree that if it is true it
is not bragging. Ask any grandmother.
And the 2012 CNBC ranking of America's top states for
business caught my attention. And for the honor of the great
state of California, I cannot resist pointing out that in the
CNBC survey that ranked Texas best for business, did still rate
the quality of life in California a full 15 places ahead of
Texas.
Okay, so with the dig aside, I actually want to focus on
another category of the CNBC ranking, Texas ranks first
overall. The only individual category measured that Texas ranks
first in is infrastructure and transportation. Texas has held
onto that first place ranking in infrastructure in the 2013
rankings as well.
I wanted you to maybe expand and tell this Committee what
you think the importance of world-class infrastructure is to
the success and health of small businesses.
Mr. DEMERSON. It has been something that has been very
important to the state from a logistics standpoint to have the
infrastructure in place. I am going to read over an
infrastructure fast facts sheet that we have here. So in Texas,
two logistics complexes--Fort Worth Alliance and San Antonio's
port. Serious logistics complexes that are driving business to
our state. Forty-seven freight railroads, 624 miles of
coastline, number one install of wind capacity, 26 commercial
airports, 10 interstate highways, 16 port-o-calls, and 4.8
million barrels of oil that is coming in. The infrastructure
has been in place and now even to this day we are in a special
session in Texas with our legislative session. They are
addressing transportation needs even to this day where we are
looking at what does the future hold for us and how we are
going to impact that. All of that has an important impact on
small businesses. If we get the logistics right, then they are
in a position to grow even more so. The Panama Canal
expansions, all those things that are there, we are trying to
position ourselves in Texas to be in a position to take
advantage of those opportunities and small businesses benefit
if we make the right decisions in our state in regards to that.
Ms. HAHN. Thank you. I am glad you said that. And I hope
Congress hears that and I hope we really do invest in the
infrastructure in this country, particularly our ports. And I
was interested in Governor McDonald's written testimony when he
pointed out the importance of helping small businesses find new
markets across the seas.
And one of the things I have done back here with my good
friend, Ted Poe, from Texas--we both attended the same
university in Abilene--we founded the Ports Caucus back here
because we would love to raise the level of awareness of our
colleagues in the importance of the ports.
So Secretary Cheng, if you could follow up on what he said.
I think one of the biggest growth possibilities for small
businesses is exporting. And I think if we could really teach,
train, educate, help, handhold small businesses to understand
that their goods and services actually are very valuable and
are marketable overseas, but only if our ports have been
maintained and dredged and improved and modernized to really
help this aspect.
Secretary Cheng, could you just expand on what you see as
the importance of exporting and how ports could play a role in
that for small businesses?
Mr. CHENG. Yes, Congresswoman. Ports are very, very
important. The governor has made at least eight trips in his
three and a half years as governor overseas to Asia, to Europe,
all over the world, and one of the first things that we talk
about is logistics in ports and access. And with the widening
of the Panama Canal coming up in 2015, it will be even more
important for the Asian countries to be able to access the East
Coast of the United States and all our East Coast ports, and of
course, the West Coast ports will benefit from all that
additional commerce.
And if I can just add also about exporting. We have a
program in Virginia called the VLET program. It is the
Virginia's Leaders in Export Trade. And what that is is a two-
year program that we bring in qualified businesses, mostly
small- and medium-size, that are ready to export. We put them
through a two-year program. It is rigorous. It is not every day
but it is rigorous, and they teach them everything from banking
to lines of credit to how to market and how to approach
companies overseas, and they end with a delegation overseas to
a suitable place. And a lot of great stories have come out of
that. It is an award-winning program and I hope that it could
be a benefit to some others, too.
Ms. HAHN. Thank you. I appreciate that. And our ports in
LA-Long Beach, we have a program called Trade Connect, and we
are working, particularly with minority- and women-owned
businesses. And again, if the small businesses can understand
that it actually is viable, it is doable, and it could really
be the difference in them really growing and being successful,
I think that is where I would love to see us all focus.
I yield back the time that I do not have anymore.
Chairman GRAVES. Mr. Luetkemeyer.
Mr. LUETKEMEYER. Thank you, Mr. Chair.
I certainly enjoy the conversation this afternoon. You
gentlemen have really brought a breath of fresh air to the
discussion of small business and the impact that state
government can have.
So my question I guess is twofold. I would like to ask each
one of you what is the number one thing--if you had one thing
to point out, one reform--I mean, you guys have got a regular
package of things that each of you have talked about which is
great, but if you had to talk about one thing that state
government can do to improve small business and the small
business environment in your state, and one thing that the
federal government could do to improve the small business
environment in your state, I would sure appreciate it. I will
start with Mr. Costello.
Mr. COSTELLO. Thank you, Mr. Chair and Congressman.
I think from a state perspective the one Achilles heel and
challenge that we have is workforce. We are a small state,
830,000 people and for large corporations that are looking to
locate into the state, sometimes that is a challenge. Our
unemployment is four percent, and we try to focus more on the
number of jobs we have in South Dakota, and we now have
exceeded the number of jobs in the previous peak back in 2008
before the recession. So the economy is very strong.
Unemployment is low. Our number of jobs is high. Our employed
people are high. So that is the challenge from a state level is
the workforce capacity--building that workforce capacity.
On the federal level, I think what we hear from small
business is just a desire to have some sort of fiscal policy. I
think our business community has lost faith in the federal
government and its ability to control spending, its ability to
manage the affairs and regulatory environment, and I think a
more stable federal environment would be very helpful for small
business.
Mr. LUETKEMEYER. Secretary Jordan.
Mr. JORDAN. Thank you, Mr. Congressman.
I think one of the things we heard over and over from small
business was capital flow. And that is why we have really
focused on tax policy at this point. Coming out of a recession,
a lot of small businesses were really struggling and the
capital flow was not there to be able to grow the business, to
make the investments, to hire the people, and so tax policy is
important both at the federal and state level for small
business. So I would echo the workforce development.
I think one of our challenges is entrepreneurship in rural
Kansas--how do we get more people involved in entrepreneurship?
When we first came in in this administration we had 22 counties
that had double-digit population decline in Kansas, and we sat
down and tried to figure out--if I can promote another program
we have--we sit down to try to figure out how to reverse that
trend and we came up with what we call rural opportunity zones.
And what that meant is if you moved to Kansas from out-of-state
to one of those counties, it is now up to 73 counties, by the
way. The legislature has taken it and expanded it. If you move
into one of those countries from out-of-state, you get five
years no income tax. That has been pretty successful. We just
had our first round of tax returns to kind of know where we are
at on that.
But the part that has really been exciting is we offered
students graduating from college--whether it was instate or
out-of-state--if you moved to one of those counties, we would
pay up to $15,000 of your student loans over a five-year
period. We have had over 800 students apply for that. Now, you
would say, okay, great, all the Kansas students and Missouri
students and everybody--it has come from 32 states. And the top
three degrees are law, engineering, and health care degrees. So
they are professional young people looking back into rural
areas.
So when we talk about workforce development, we have been
concerned about the rural areas and the entrepreneurship there
and the businesses growing in the rural areas as well as our
areas that are successful.
Mr. LUETKEMEYER. Okay. Mr. Demerson?
Mr. DEMERSON. At the state level I think what we can do is
continue to educate. I think we have some fine examples in
Texas. If you look at UTSA, they have a small business
development center that is doing some phenomenal things on the
statewide level that they have even gone international, and so
I think duplicating a lot of those efforts and/or sharing those
successes statewide is what we are going to look at trying to
accomplish at the state level.
From the federal standpoint, it goes back to what has been
mentioned time and time out--just the uncertainty, you know,
regulations. Those type of issues are out there and we hear
those concerns. And so I think if that is addressed or as that
is being addressed you have things that are taking place at the
state level, things that are taking place at the federal level,
and it will give small businesses more opportunities to succeed
at that point.
Mr. LUETKEMEYER. Secretary Cheng.
Mr. CHENG. Yes. Well, I think my colleagues here have made
some really great points, and I echo all of them. If I can add
on to one thing on the federal side, obviously we talked about
predictability, stability, and regulations as very important.
But one thing about workforce I think is that we get funding
for workforce from so many different sources it is difficult
for a state to grasp it and get a hold of it. So somehow a
little clarity because there is a lot of workforce money out
there, but who we control it, as Virginia, we try to do our
best and we have a great workforce, but we could do better. And
part of it is how we handle it with the federal funds coming
in.
For small business, from a state point of view, what we
could be doing better, and perhaps other states, too, is
getting our large cities with the venture capital, angel
capital, and sources of funding closer to the rural parts of
our state because I heard some mention of rural before. That is
also a concern in Virginia and I am sure many other states,
too.
Thank you, again.
Mr. LUETKEMEYER. Very good. I yield back. Thank you, Mr.
Chairman.
Chairman GRAVES. Ms. Meng.
Ms. MENG. Thank you, Mr. Chairman. Thank you, Ranking
Member. And thank you to our witnesses for being here today.
I want to follow up on a little bit of what Congresswoman
Hahn started a conversation about in terms of infrastructure
and how the federal government could be more helpful. I
represent a pretty urban area in Queens, New York City, as so
does Ranking Member Velazquez. And just trying to see how the
federal government can be more helpful in terms of
infrastructure in relation to mass transit, whether it is
trains, subways, or buses, perhaps more relevant in some of
your areas.
Mr. CHENG. Well, Congresswoman, transportation is something
I have been trying to avoid all my career. Sorry about that. I
just had to say that.
Infrastructure is so very important, and the funding is so
complex. I could not begin to discuss it, but I will say that I
have gone on all the trips with our governor and he is our best
salesperson overseas to talk about bringing in business to
Virginia, whether it be exports or direct investment or all
this. What usually we hear the most of are what are your
logistics--your airports, your roads, your ports are so
important to us and they are our number one sales point. Our
location and how convenient it is for our rail system, for our
roads to get cargo from our ports to wherever in the country or
across the Atlantic or through the Pacific. So we absolutely
rely on our infrastructure. In fact, the CNBC rankings talk
about infrastructure all the time, and I think it is a very
good point. And our governor saw that along with all the other
feedback he has gotten and he worked hard to come up in a
bipartisan manner, with a legislator come up with a new
transportation bill that many of you all will see in the
Committee in the Virginia area that I know will benefit the
whole region and bring more businesses and attract more
relocations and opportunities.
Mr. DEMERSON. I think from our standpoint you hear the
ports talking about dredging opportunities. They are all
talking about that and the need for those type of activities to
take place.
In Texas, I have a document here, ``Texas, by Air, Land,
and Sea.'' We are very proud of the infrastructure that we have
in place but we are not complacent with it, and so we want to
do even more so and that is being addressed right now. Texas is
a state that you are driving 3, 6, 9, 13 hours and you are
still in Texas. And so we need to make sure that we are on top
of it in terms of the logistics opportunities, and we have been
fortunate to do that but we are not resting on our laurels. We
want to do more at the federal level. Wherever you guys can be
impactful to the state or the communities, it is going to aid
in our small businesses in our state.
Mr. JORDAN. Infrastructure is important. I think we have
the third or fourth largest number of highway miles in the
country in Kansas believe it or not, and so the legislature has
always been fairly good about funding our infrastructure
program in Kansas. About every five to six years the
legislature appropriates billions of dollars to make sure that
infrastructure is kept up, but I would say the federal and
state partnership is extremely important to get that done.
We have a huge intermodal facility being constructed by
Burlington Northern. It is going to be very important to us in
shifting products around the country. Wichita, by the way, is
one of the top exporting cities in the country. Of course, the
aviation industry is there but a lot of entrepreneurs are
there. So it is very important to us and that partnership is
important to us, but we try to pull our load.
Ms. VELAZQUEZ. Would the gentle lady yield for a second?
Ms. MENG. Yes. Yes.
Ms. VELAZQUEZ. So I guess, Mr. Demerson and Jordan, you
recognize the importance for the U.S. Congress to reauthorize
legislation such as the highway bill and water--water and
resources--because that will provide resources that you need in
order to keep transportation and infrastructure to the level
that would allow for the states to continue to grow; do you
not? Thank you.
Mr. COSTELLO. I would just like to add, too.
Ms. VELAZQUEZ. Yes.
Mr. COSTELLO. You know, businesses are not going to expand
or are not going to grow without adequate infrastructure. I
think that is just the fundamental premise of it. South Dakota,
for us, our challenges are roads and rail. Some air travel, but
water as well. We are an agricultural state. Our products have
to travel by rail to get to a port to get exported. So to
continue to invest in those infrastructures is just
fundamental.
Ms. VELAZQUEZ. Mr. Chairman, please let the record show
that all the witnesses here support the reauthorization of the
highway bill and WRDA.
Chairman GRAVES. We would love to get the Senate to comply.
Mr. Rice, real quick.
Mr. RICE. Quickly, I really appreciate your being here and
I have enjoyed hearing your success stories. They all center on
a business friendly environment, lower taxes, lower regulation,
good logistics.
Let us say that you were the highest taxed state in the
country. Would that help or hurt your competitiveness? Because
that is where we are as a country.
Mr. JORDAN. I do not know which one but I have spent the
last two years learning economics from a lot of economists. And
I think if you look at the tax foundation, your question is
what high tax are you talking about.
Mr. RICE. You were the highest. Let us say you were the
highest.
Mr. JORDAN. Income? Sales? Property?
Mr. RICE. Income.
Mr. JORDAN. Income tax, I think it hurts your growth. I
think more and more studies are showing income tax hinders your
growth the most of all taxes. And so that would be the answer
here is income taxes is significant.
Mr. RICE. And let us say that the cost of the regulatory
burden in your state was the highest among the 50, would that
help or hurt your competitiveness? Because that is where we are
as a country. And let us say that our infrastructure was
crumbling relative to the other 50 and you had very little
investment because that is where we are as a country. Would
that help or hurt your competitiveness?
Mr. JORDAN. It definitely would hurt our competitiveness.
Mr. RICE. Shame on us because that is exactly where I spent
the last two days going around this capital with a Harvard
professor, Michael Porter, who is an export in international
competitiveness, and we have a lot of work to do. Thank you
very much.
Chairman GRAVES. Thank you all very much. And please,
Secretary Jordan, tell Governor Brownback hello, and Mr.
Demerson, please tell Governor Perry hello. Both are very good
friends of mine.
With that, again, I want to thank all of our witnesses for
making the trip here to the Committee. The United States is
experiencing a very weak economy and economists are predicting
that it is going to continue that way throughout 2013.
With that, I do not want to keep you all through an hour's
worth of votes, but I do appreciate the bright, encouraging,
and optimistic view that you all have and what your states are
doing is very, very impressive.
And with that I would ask unanimous consent that all
members have five legislative days to submit statements and
supporting materials for the record. Without objection, so
ordered. And with that the hearing is adjourned.
[Whereupon, at 2:07 p.m., the Committee was adjourned.]
A P P E N D I X
Written Testimony
Of
J. Pat Costello
Commissioner, South Dakota Governor's Office of Economic Development
Before the U.S. House of Representatives Committee on Small Business
July 10, 2013
Thank you for the opportunity to be here today. It's always
a pleasure to talk about the State of South Dakota. My name is
Pat Costello and I am the commissioner of the Governor's Office
of Economic Development.
I've had the privilege of serving as the Commissioner for
the last two and a half years, in addition to being a small
business owner in South Dakota myself for more than 20 years.
I'd like to take the next few minutes to share with you a
little bit about our state, why it's a great place to do
business and what we--as public servants--are doing to ensure
that we remain the top place to do business.
First and foremost, our tax climate is unmatched by any
other state in the nation. Only in South Dakota do businesses
enjoy the benefits of no corporate income tax, no personal
income tax, no business inventory tax, no personal property tax
and no inheritance tax.
This structure leaves the money where it belongs--in the
pockets of our businesses, creating a more favorable
environment for long-term business growth. As we like to say in
South Dakota, ``Profit is not a dirty word.''
I was asked today to testify on why South Dakota is a great
place to do business. Well, a big part of that is our fiscal
responsibility and common sense.
When it comes to fiscal responsibility, you'd be hard
pressed to find a state that would rank higher than South
Dakota. For the last 123 years, we have consistently balanced
our budget.
Two years ago, like most of the country, we were faced with
serious budget issues. We buckled down, made the cuts that
needed to be made, and today, we are in a better financial
situation than most other states in the country.
If we want serious, financially sound companies operating
in South Dakota, we need to set the example at the state level.
I've already mentioned our favorable tax climate, but I
also want to talk about our favorable regulations and the
consistency of our business leaders.
When I started in our office, I read something in one of
our promotional pieces that said, ``In South Dakota, our
business climate doesn't change with the political winds.''
That statement was written back in the 1980s when Citibank
moved some of its credit card operations to South Dakota when
the state legislature allowed expansion in compliance with the
old Federal Bank Holding Act.
Today, the financial services industry is still thriving in
South Dakota.
As a matter of fact in 2012, South Dakota's total bank
assets topped $2.6 trillion, which totaled 18 percent of the
country's bank assets and landed our state the #1 ranking
according to the Federal Deposit Insurance Corp.
So forward-thinking leaders in the 1980s, followed by
forward-thinking leaders for the next 30 years, have kept South
Dakota a leader in economic development with reasonable
regulation and low taxation.
When our Governor--Dennis Daugaard--was elected, one of the
first things he did was direct all state agencies to identify
any unnecessary laws and regulations and get rid of them.
In two years, executive agencies under Governor Daugaard
have found 374 rules (72,990 words) and 919 sections of
codified law (75,266 words) to be repealed, and the process is
less than half done.
That's just good business. And corporate leaders quickly
took note that this Midwest state was serious about maintaining
the type of business climate needed for companies to grow and
prosper.
Another way South Dakota is able to continue to attract
national and international companies like Bel Brands and Marmen
Energy, is by playing on our strengths.
With a population of 830,000, we are one of the least
populated states in the country.
But in business, that can be a good thing.
Our small size affords businesses looking to expand in or
relocate to South Dakota direct access to government leaders.
When Governor Daugaard was campaigning, he promised to be
the state's #1 salesman for economic development. There is no
question he has fulfilled that campaign promise and then some.
During the last three months alone, Governor Daugaard met
with nearly 70 business leaders and site selectors from across
the country to encourage them to continue to grow their
businesses in or to locate them to South Dakota.
That kind of personal attention gets noticed.
Another thing that gets noticed is the collaborative
efforts of the people of South Dakota.
Our business development team serves as the liaison with
these business leaders and site selectors on a multitude of
issues from financing to permitting.
As every business leader knows, navigating the permitting
process can be time consuming and frustrating.
In South Dakota, we believe in working with the business to
not only make it happen, but to make it happen faster. As an
example, we recently had one company that was able to receive
its air quality control permit from our Department of
Environment and Natural Resources from start to finish in just
30 days.
And we did it without cutting any corners. We believe the
state should be an advocate, not a road block, to doing
business.
Another way we attract businesses is by keeping our cost of
living down. Because in the business world a low cost of living
equals a low cost of business.
According to a June 2013 study by the US Commerce
Department, South Dakotans pay 87 percent of the national
average for goods and services. Additionally, the US Commerce
Department just re-evaluated its numbers for Real Personal
Income, and South Dakota's growth was a whopping 10.4 percent--
more than any other state in 2012.
Of course I would be remiss if I didn't take the
opportunity to let others tell what they think South Dakota is
doing right.
The Small Business and Entrepreneurship Council evaluated
46 different economic factors and ranked South Dakota number
one for our business policies and entrepreneurial friendliness.
We're also in their top spot for small business survival.
(2012)
Our low debt and lack of unfunded pension liabilities and
expensive state-funded programs lands us on the top of Barron's
Best Run States in America. (2012)
Our state ranks in the top for lowest tax burdens (Tax
Foundation, 2012), best business climate (US Chamber of
Commerce, 2013) and one of the highest average credit ranking
(CardRating.com, 2012).
And of course, there is yesterday's CNBC ranking that put
South Dakota as the Best State to do Business.
Thank you again for the opportunity to be here today and
testify on this important topic. I look forward to your
questions.
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Chairman Graves, thank you for inviting me to address your
committee on the very important work we are doing in Kansas to
create an environment for small business success.
This is a topic very dear to us in my state because the
vast majority of private sector employers there are small
businesses--77 percent have fewer than 10 employees, and 98
percent have fewer than 100 employees.
This means for Kansas families to flourish economically in
the 21st century, we must have flourishing small businesses.
With that in mind, Gov. Sam Brownback has placed the utmost
importance on pro-growth tax reform at the state level.
We started with a clear-eyed understanding that taxes at
the federal, state, and local levels are a complicated hodge-
podge cobbled together over many decades. To help small
businesses, it's important to reduce the burden of complying
with this onerous system, while also reducing the overall tax
burden.
So, since 2011, Gov. Brownback and the Kansas Legislature
have teamed up to make the state's tax code fairer, flatter,
and simpler for families and small businesses. This approach
broadens the base and lowers tax rates for the benefit of the
maximum number of Kansans.
The result has been historic and innovative tax relief--
focused on providing a shot of adrenaline into the heart of the
Kansas economy.
What makes Kansas' approach unique is how we are
strategically accelerating tax relief to benefit small
businesses.
While individual income tax rates have been reduced 14 to
24 percent for all Kansas taxpayers, we have gone even further
to boost small businesses, because those businesses are the
engine of job creation for our Kansas families. Once the plan
is fully implemented in 2018, Kansas taxpayers will save an
additional 23 percent on average.
Starting this year, Kansas began exempting non-wage
business income from state income tax. This is the type of
income earned by the majority of small Kansas businesses, which
typically are structured as LLCs, sole proprietorships, or S-
corps, commonly referred to as ``flow-throughs'' since the
taxes for this business income are filed on individual income
tax returns rather than corporate tax returns.
By eliminating the state income tax for many small
businesses, we are sending the message that every business,
every innovation, and every entrepreneur matters when it comes
to creating jobs in Kansas.
This is in addition to programs such as the Kansas
Bioscience Authority, NetWork Kansas and the state's Angel
Investor credit which also help foster entrepreneurship.
We are encouraging small businesses to grow in other ways
as well. For example, our tax policy encourages private sector
investment by allowing companies to immediately ``expense''
purchases of equipment and software as a state tax deduction.
As small businesses capture the full tax value of the money
related to their investments, they are keeping tens of millions
of dollars each year, which can be reinvested in the
businesses.
Additional tax relief is being targeted to rural
communities to stimulate small business startups in every
corner of Kansas, not just our urban centers.
Specifically, Kansas is providing a full state income tax
rebate to new residents who move from out-of-state into rural
opportunity zones.
By keeping an additional $4.1 billion in the pockets of
Kansas citizens and businesses over the next six years, we hope
to experience growth rates similar to the nine states with zero
personal income tax, which significantly outperform states with
the highest personal income tax rates.
Recently the Tax Foundation released a paper titled, What
Is the Evidence on Taxes and Growth? The special report found
that data ``consistently point to significant negative effects
of taxes on economic growth even after controlling for various
other factors such as government spending, business cycle
conditions, and monetary policy ... Every study in the last 15
years finds a negative effect of taxes of growth ... If we
intend to increase employment, we should lower taxes on workers
and businesses that hire them.''
Therefore, in Kansas, we have been changing the dynamic
that has led to average economic results--so more families can
achieve a meaningful increase in income and opportunity, and
small businesses can invest in growth and new jobs.
This is a model being recognized by our neighboring states,
including Chairman Graves's home state of Missouri, and we hope
others in the region will join us in reducing taxes on small
businesses and making the heartland of America the fastest
growing region in the nation.
As Missouri Speaker of the House Tim Jones recently wrote
in The Kansas City Star:
``Kansas lawmakers have accomplished major tax reform and
have managed to get the state economy back on track. These
improvements are great for Kansans and challenge neighboring
states to compete for business and job growth ...
``On the other hand, Missouri's unemployment rate has
plateaued at 6.6 percent. Perhaps most troubling for Missouri
is the Kauffman Foundation's small business climate ranking,
which gives Missouri a C and Kansas an A ...''
Speaker Jones concluded, ``Kansas has proven that
competitive economic policies promote a business-friendly
environment, attracting new companies and, with those new
companies, more jobs ... The facts are right in front of us.''
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Chairman Graves, Ranking Member Velazquez and members of
the committee my name is Aaron Demerson and I have the pleasure
of serving as the Executive Director of the Economic
Development & Tourism Division for the Governor's Office in the
great State of Texas.
Thank you for the work your committee continues to do for
small businesses and for the invitation to participate on this
panel as it is indeed an appreciated privilege to do so.
Over the course of the past two days and throughout the
years this committee has heard from some of the most notable
representatives associated with small business.
That's as it should be and not surprising given the
importance of small businesses to the US economy and in my case
the Texas economy.
Small business owners are making a real difference in
countless lives, for countless families in Texas....from the
Panhandle to the Gulf coast.
And as we speak here today someone, somewhere in Texas is
coming up with the next big idea, a better way of doing
something, or doing something that's never been done before.
Fostering these types of innovations is vital to keeping
Texas at the forefront of the national economy and when these
innovators are ready to go to market, our hope is the efforts
of this committee in collaboration with the efforts at the
state-level will make it easier for them to succeed and thrive.
We all know the big companies tend to draw the biggest
headlines and they do, in fact, have a very important role to
play.
But we also know the drivers of job creation in Texas and
our nation are our small business men and women. As we like to
say, ``Small business is big business in Texas.'' 98.7 percent
of Texas employers are small businesses--these are bold
entrepreneurs who take real risks pursuing their dreams of
owning their own businesses. As the SBA recently profiled,
Texan small businesses under 500 people were responsible for
all of the state's net new jobs over the last five years.
Consequently, the over 2.3 million Texas small business owners
represent the true vibrancy of the Texas economy with the
nearly 4.1 million jobs they create. And their contribution to
the positive economic climate is a large part of what has
helped us attract employers of all sizes to the Lone Star
State.
The committee is seeking information on why certain states
are attractive to businesses. We have found the continued
attractiveness to Texas over the years is based on a number of
reasons, with a major portion of this success associated with
the leadership and emphasis placed on job creation that has
been championed by Governor Rick Perry and our collective
statewide elected delegation.
We know that our second to none business-friendly climate/
environment has continued to help us attract new employers and
create jobs. And this past legislative session (just as we have
done in the past) we took the necessary steps to preserve the
business climate that's made all that possible.
In some cases these businesses were fleeing over-taxation
and over-regulation in other states as they sought to expand
our relocate to a place where they're free to succeed.
And it is our thought that we can expect more of them
heading our way as long as we remain committed to the
principles that have helped make us the best state in the
country to do business.
One of the most important steps for attracting business to
Texas is centered on keeping our taxes low because dollars do
far more to create jobs and prosperity when kept in the
business owner's hands.
We have worked hard to keep a fair and predictable
regulatory climate so that a company will know what to expect a
quarter, six months or a year down the line. The CEO's and
CFO's understand this and continue to fid it a very attractive
alternative when considering expansion and/or relocation.
To that end, we have continued to enact legislation that
has a positive impact on small business. This year we were able
to make permanent the small business tax relief that was passed
in 2009.
The recently signed HB500 offers over $700 million in
business tax relief and makes permanent the $1 million small
business tax exemption. This important bill provides
significant tax relief to over 140,000 Texas small businesses
by establishing that any business making below $1 million in
revenues will always be free of any franchise tax obligation
whatsoever, thereby leaving more dollars in their pockets to
invest in new hires and new equipment. Additionally, the bill
reduces the margin tax rate on nearly 800,000 businesses in
Texas, bringing meaningful tax relief to the heart and backbone
of the mighty Texas economic engine.
We have also been able to further enhance our legal system
to make it even harder to file frivolous lawsuits in Texas and
approved ``loser pay'' legislation which requires those who
file a frivolous lawsuit and lose to pay the court costs and
legal expenses of those they sued.
For us in Texas economic development begins at the local
level and when you represent a state that has 254 counties and
when driving for three, six, or even 14 hours you are still in
that state it becomes very important that you have effective
relationships at the local level to take advantage of the small
business opportunities. To say that our communities are very
aggressive and serious about small business and job creation is
an understatement. Legislation was recently passed that will
establish a new small business advisory committee that will
allow us to align even closer with the communities on small
business initiatives and issues. We also are close to
completing our marketing plan for attracting more small
business to our state.
...and lastly in Texas as depicted in the attached state by
state comparison document and our ``brag'' sheet (the Governor
states that in Texas--it ain't braggin' if it's true) our
unemployment rate has consistently been lower than the national
average and we have continued to lead the nation in job
creation over the years. We also continue to have the nation's
best business climate, continue to be the number one exporter
11 years running and continue to have the highest number of
expansion and relocation projects.....all of this creates a
great deal of attention and continues to be of great interest
to a number of small business owners in the United States
looking to expand or relocate their business.
It didn't happen by accident....it happened because, over
the last decade, Texas leaders have made principled, thoughtful
decisions by not over-taxing, over-regulation or over-
litigating our citizens.
In Texas we have an obligation, responsibility, and goal to
the taxpayers to take the necessary steps to make government
more efficient and streamlined while reducing spending without
raising taxes.
Our statewide elected officials continue to act on the
tough decisions necessary as they recently thoughtfully made
their way through the budget-writing process this session which
should result in additional jobs and opportunity thus leaving
Texas even more competitive than ever.
And that same process and challenge associated with tough
decisions is taking place at small businesses and around
kitchen tables all across our state and nation.
Small business owners have continued to find new ways to
tighten their belts, separating wants from needs and making
responsible decisions to live within their means.
Only by keeping our families and small businesses strong
can we continue the type of prosperity we've enjoyed in Texas
over this past decade.
So how do we continue to create new opportunities for Texas
families and small businesses?
We do this by continuing to apply a laser-like focus on
small business retention and recruitment while showcasing the
best of what Texas has to offer. In addition we will continue
to ensure for small businesses a climate at the state-level
that is conducive to making a profit, creating jobs and
enjoying success.
Our hope is that the same or a similar approach is viewed
at the federal level.
I sincerely appreciate the opportunity, welcome you to
visit our great state, and look forward to the discussion and
answering any questions you might have.
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Testimony Before The
HOUSE COMMITTEE ON SMALL BUSINESS
Regarding
``Beyond the Beltway: Successful State Strategies for Small Business
Growth''
July 10, 2013
Submitted by: Honorable Robert F. McDonnell
Governor of the Commonwealth of Virginia
Chairman Graves, Ranking Member Velazquez and other
distinguished members of the Committee on Small Business, on
behalf of the Commonwealth of Virginia, I thank you for
inviting me to offer testimony today at this important hearing.
Small businesses are the backbone of our economy. Across
Virginia and throughout the United States small businesses are
creating jobs and opportunity. The Small Business
Administration estimates that small businesses represent 97.8
percent of all employers in Virginia. Approximately 70 percent
of all new jobs created are from small business. The work of a
small business owner is not easy. Increased regulation, taxes
and other burdens have made it more difficult for small
businesses to thrive. Small businesses are critical to ensuring
economic prosperity throughout the United States.
In Virginia, we've been intensely focused on job creation
and economic development with special attention to the
important role of small business in our economy. Last year I
announced 2012 as ``The Year of the Entrepreneur in Virginia.'
We highlighted Virginia's colleges and universities activities
that encourage young Virginians to pursue entrepreneurship as a
career option. Throughout the year I held monthly office hours
with small business owners, roundtables across the state and
featured profiles on entrepreneurship.
One thing is clear, small businesses need flexibility and
predictability from government. In Richmond, we are working to
do our part.
Fostering an entrepreneurial environment is a team sport in
Virginia. In my administration, commerce and trade,
administration, agriculture and forestry, technology and
veterans affairs work together to create a strong, welcoming
economic environment for small business.
During one of my `Year of the Entrepreneur' office hours, I
met NFIB member Timothy Heydon of Shenandoah Growers, located
just outside of Harrisonburg, Virginia. Shenandoah Growers was
founded over two decades ago by entrepreneur farmers with a
dream of bringing fresh culinary herbs to homes throughout the
country. Shenandoah Growers has today become a leading provider
of fresh herbs in the United States, specializing in supplying
the retail grocer.
I recently asked Tim to serve on my Rural Jobs Council.
Through his work and the leadership of my Chief Jobs Creation
Officer, Lt. Governor Bill Bolling, the Council put forward
recommendations that make it clear that entrepreneurs need
leaders to be mindful of the unique challenges facing small
businesses in today's global economy. The Council recommended
that we invest in infrastructure and broadband as well as
targeted workforce development efforts. The Council also
recommended that we create a Governor's School for
Entrepreneurship to encourage middle school students to
consider entrepreneurship as a career option.
In Virginia, we continue to focus on things that matter to
entrepreneurs--access to capital, workforce development and a
predictable and accountable government.
Access to Capital
Virginia's small businesses need to know that when the time
is right to grow their business, the capital they need will be
readily accessible. In 2012, we worked with members of the
Virginia General Assembly and stakeholders to enact a bi-
partisan solution that will encourage long-term investments in
Virginia's small businesses. The Virginia Small Business
Investment Grant helps encourage private investment for two
years by providing a grant equal to 10 percent of a qualified
investment for an eligible investor.
We've also invested in the Virginia Small Business
Financing Authority. The VSBFA aids Virginia's financial
institutions to offer business loans that they might not be
able to offer without the authority's assistance.
One of the most burdensome taxes in Virginia is the
Business Professional and Occupational License (BPOL) tax. We
passed legislation to allow localities to exempt from the BPOL
tax if they lose money and are unprofitable during the taxable
year. We also provided localities a choice in how to impose the
BPOL tax. Commonsense tax policy is key to attracting small
businesses.
Agriculture and forestry continues to be Virginia's largest
industries, generating a combined $79 billion annually and
creating more than 500,000 jobs across the state, most of these
agriculture and forestry operations are small businesses.
During the 2012 General Assembly session, we introduced
legislation to establish a new economic development tool
targeted for agriculture and forestry industries, which had
been largely overlooked in the state's traditional economic
incentive programs. Created as the Governor's Agriculture and
Forestry Industries Development Fund (AFID), the legislation
passed and was funded with unanimous support from the Virginia
General Assembly.
The AFID provides incentive grants for projects that
utilize Virginia grown products in value-added or processing
facilities. These agriculture and forestry value-added or
processing facilities can have tremendous impacts on the
regions in which they locate. Areas where these facilities
typically locate are rural with higher unemployment.
Agriculture and forestry are already economic drivers in the
area, so facilities of this kind can build on the region's
existing strength. The value-added and processing facilities
have a greater economic ripple effect as a result of growers in
the region having a new market in which to sell products.
Although the program is new and only about a $1 million has
been allocated thus far in economic development and planning
grants, we believe that we'll farm revenue increase as a result
of these facilities, jobs being created on the farm and in the
facility, greater opportunities to increase farm profitability
and more farmland preserved, and more economic benefits for the
region as a whole as a result of revenue generated on the farms
and at the facility.
We have also opened up nine agriculture and forestry trade
offices in Asia, Europe and other regions, resulting in record
exports in each of the past two years and on the way to a
third.
Of great importance to the Commonwealth and the Nation is
our ability to compete in technology innovation. With greater
than thirty percent of new job creation originating with high
growth technology start-up companies, our administration has
invested in ensuring that Virginia delivers the economic
environment necessary to start and grow successful high
technology companies.
We created targeted incentives to recruit and attract angel
and venture investment.
The Angel Investment Tax Credit encourages
early-stage investment in technology, biotechnology and
energy startups. While Virginia is one of 20 or so
states that have an angel credit, ours is among the
most competitive with a 50 percent leverage of the
first $50,000 an investor puts into a qualified
Virginia technology startup.
Another success story is the Capital Gains
Tax Exemption, Entrepreneurs and investors who make
qualified investments in early-stage technology,
biotechnology and energy startups in Virginia, through
June 30, 2015, will be exempt from paying state income
tax on their long-term capital gains throughout the
life of the investment. If and when investments in
these qualified companies are successful over the life
of a company, any long-term capital gains attributable
to the investment will be exempt from Virginia's income
tax, facilitating a growth in the growing share
facility market.
We created a very competitive Virginia
market for data centers that turned into real jobs and
revenue for Virginians. I signed legislation to expand
Virginia's current data center sales tax exemption to
also include data center tenants.
We created the Commonwealth Research
Commercialization Fund (CRCF) is aimed at advancing
science- and technology-based research, development,
and commercialization to drive economic growth in
Virginia. The CRCF will encourage emerging ideas and
turn them into real world solutions and jobs for
Virginians.
The Center for Innovative Technology GAP
Funds have underwritten critical and immediate first
financing for tech startups with high potential for
achieving rapid growth and generating significant
economic return. The GAP Fund's targeted areas include
software, telecommunications, semiconductors, media and
entertainment, e-commerce, networking and equipment,
electronics/instrumentation, industrial/energy,
computers and peripherals, biomedical and life science
applications.
During the past three and a half years, our seed stage
investment programs will have created over 75 new high
technology companies that have attracted private capital at a
rate of $17 dollars for every $1 of public funds invested.
Successful start-ups like Invincea whose cyber security
software will be deployed on every Dell computer help ensure
the competitiveness of the Commonwealth and the Nation.
This type of innovative, market facing approach to economic
development makes Virginia appealing to entrepreneurs.
Regional Capacity Building
A key strategy to support entrepreneurial growth at the
local level is to support regional capacity building. We
launched a new grant program called ``Building Collaborative
Communities.'' The effort is designed to assist regions in
creating and sustaining new economic opportunities across
Virginia. The program promotes regional economic collaborations
in economically-distressed areas to stimulate job creation,
economic development and build community capacity and
leadership.
Regional economic development leadership is key. An
excellent example is the Southwest Virginia Blueprint for
Entrepreneurial Growth and Economic Prosperity, a community-
based initiative designed to promote entrepreneurial activity
in the region. The Blueprint was developed to inspire
collective action, impact policy, foster regional networks,
build on the region's assets and to seek new investment.
Workforce Development
One of the most important issues to small and growing
business is workforce development and the quality of education.
Small businesses thrive because of their ability to recruit,
train and retain qualified employees. From a small manufacture
that is able to partner with a local community college to a
ensure qualified pipeline of workers to a tech start-up that
works to commercialize and license technology from one of the
Virginia's public institutions of higher education, human
capital matters.
The Virginia Higher Education Opportunity Act of 2011,
known as the ``Top Jobs Act,'' adopted unanimously by the 2011
General Assembly demands more access at lower costs to
Virginia's universities. To reforms make clear link between
higher education and job creation.
Provides a roadmap for achieving an
additional 100,000 undergraduate (associate and
bachelor's) degrees for Virginians over the next 15
years by (1) increasing enrollment of Virginia
students, (2) improving graduation and retention rates,
and (3) incentivizing higher education to lower tuition
increases.
Focuses additional degree attainment in
high-demand, high-income fields (e.g., STEM,
healthcare) that are keys to top jobs in the 21st
Century economy. Incentivizes public-private
collaboration on STEM-related and other commercially
viable research.
Higher education's return on investment is
proven. The Weldon Cooper Center's study for the
Virginia Business Higher Education Council shows that
every 1 dollar currently invested in Virginia's public
higher education system yields 13 dollars in increased
economic output. College graduates on average earn
twice as much as those without college degrees.
Provides for sustained reform-based
investment and innovation in delivery of higher
education services, as well as extending college degree
opportunities to more citizens in creative, cost-
effective ways. Institutions' must generate six-year
plans to address strategies and use of incentives for:
Year round use of physical facilities and
instructional resources
Technology-enhanced instruction and
resource-sharing across the higher ed system
Innovative and economic degree paths
Ongoing restructuring and managerial
reforms
Reverses the dramatic funding reduction
cycle to higher education through a new comprehensive
funding model framework with four components: basic
operations and instruction; enrollment growth funding;
need-based financial aid (for low- and middle-income
families); and financial incentives to promote
innovation and increased research and development;
Creates a collaborative Higher Education
Advisory Committee consisting of executive and
legislative branch representatives and representatives
of higher education institutions to develop performance
criteria for incentives, institution-specific base
funding policies, economic opportunity metrics for
degree programs, opportunities for additional, cost-
saving managerial autonomy and efficiency reforms, and
other key policies.
Provides enrollment-based funding to
increase access for qualified Virginia students at
public and private colleges and universities.
Enhances long-term affordability through a
three-prong strategy; (1) puts in place a model for
stable and predictable state funding support, relieving
the upward pressure on tuition; (2) provides for
development of need-based financial aid options aimed
at middle-income as well as low-income families.
The workforce development pipeline starts in K-12. Virginia
is competing internationally for job creating businesses. I
have put forward necessary reforms to ensure our K-12 system is
preparing the next generation of small business owners and
entrepreneurs.
This year, we passed bold and innovative education
legislation that ensures that every child has great teachers,
that sets clear and high standards for our schools, and that
establishes a roadmap to provide choice, accountability and
opportunity for every student in Virginia. We passed the
Opportunity Educational Institution to turn around chronically
underperforming schools. The Teach for America Act, which
passed unanimously in both chambers, will give difficult to
staff schools another tool with which to bring in talented and
motivated teachers. Virginia will soon increase accountability
and transparency with A-F school grading, giving parents and
families another tool to advocate for and achieve better
schools for their communities. With passage of the Educator
Fairness Act, we have reformed the teacher contract and
grievance system to ensure that our children have the best
possible educators.
Government Reform
Small businesses need predictability and efficiency. Last
year, we launched a regulatory reform initiative to reduce the
number of burdensome regulations placed on small businesses.
Since September 2012, 562 sections in the VAC have been
identified: and 157 sections have already been repealed. We
asked industry and small business for ideas and specific
sections of the code that were overly burdensome.
Virginia also offers small business owners a `Business One
Stop' for business formation. Rather than seeking permits and
formation documents from a handful of agencies, we offer a
streamlined one stop shop.
We worked with the legislature this year to merge small
business agencies into one to focus on small business. As of
January 2014, Virginia will have one small business agency--the
Department of Small Business and Supplier Diversity. The new
streamlined agency will be laser focused on small business and
economic development.
The most important thing government can do is listen to
industry needs and be responsive. Last year for example, we
heard from Virginia's craft beer industry that they needed a
legislative fix to allow retail sales of beer and sampling on
the premises of Virginia breweries. We worked with stakeholders
and made the case for legislation. Senate Bill 604 passed and
as result we've seen more jobs and increased interest in
Virginia as a tourism and craft beer destination. This
legislation directly resulted in a major west coast brewery
deciding to locate its east coast brewery in Virginia. In fact,
Hardywood Brewery in Richmond launched `Session Beer 604,'
brewed to commemorate the signing of SB604 into law.
We have put a special focus on developing new businesses
where we have unique strengths. Virginia's wine, film
production and tourism industries are among those with new
targeted tax incentives and offices to promote development. All
have grown at a rapid pace.
In Virginia we are working to keep taxes low, and
regulation and litigation to a minimum in order to allow our
entrepreneurs and job creators to grow their businesses and
create the private sector jobs our economy needs.
Ultimately, it is not what the federal or state government
can do for small business that matters, but how government can
ensure it does not erect unnecessary barriers to job creation.
We must ensure an environment conducive to economic vitality
and guard against extinguishing the entrepreneurial spirit with
overly burdensome laws and regulations.
Our work has gotten results. When we took office,
unemployment in Virginia stood at 7.3%. Now, it stands at 5.3%,
our lowest unemployment rate in over 4 years. Virginia also has
the lowest unemployment rate in the Southeast, the second-
lowest rate east of the Mississippi River, and an unemployment
rate that is more than a full point lower than any of our
neighboring states. Since the beginning of our administration,
Virginia has added 171,000 net new jobs, 153,000 of which are
in the private sector, and the number of unemployed Virginians
has decreased by a total of 80, 164, or 36%. Simply put: More
Virginians are working today.
Thank you and I look forward to your questions.
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