[Senate Report 106-147]
[From the U.S. Government Publishing Office]
106th Congress Report
SENATE
1st Session 106-147
_______________________________________________________________________
SUMMARY OF LEGISLATIVE
AND OVERSIGHT ACTIVITIES
DURING THE 105TH CONGRESS
__________
R E P O R T
of the
COMMITTEE ON SMALL BUSINESS
UNITED STATES SENATE
August 27, 1999.--Ordered to be printed
Filed under authority of the order of the Senate of August 5, 1999
__________
U.S. GOVERNMENT PRINTING OFFICE
58-141 WASHINGTON : 1999
COMMITTEE ON SMALL BUSINESS
CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana JOHN F. KERRY, Massachusetts
PAUL COVERDELL, Georgia DALE BUMPERS, Arkansas
DIRK KEMPTHORNE, Idaho CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah TOM HARKIN, Iowa
JOHN W. WARNER, Virginia JOSEPH I. LIEBERMAN, Connecticut
BILL FRIST, Tennessee PAUL D. WELLSTONE, Minnesota
OLYMPIA J. SNOWE, Maine MAX CLELAND, Georgia
LAUCH FAIRCLOTH, North Carolina MARY LANDRIEU, Louisiana
MICHAEL ENZI, Wyoming
Louis Taylor, Staff Director and Chief Counsel
Patricia Forbes, Democratic Staff Director
Paul H. Cooksey, Deputy Chief Counsel
C O N T E N T S
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Page
I. Summary of Committee Activity for the 105th Congress.............1
A. Regulatory Fairness: Oversight and Implementation of
the Red Tape Reduction Act......................... 1
B. Regulatory Reforms for Small Businesses............. 4
C. Small Business Tax Issues........................... 4
D. Workplace Issues.................................... 6
E. Access to Capital: Small Business Administration
Programs........................................... 7
F. Women-Owned Businesses.............................. 8
G. Federal Procurement................................. 8
H. Health Care......................................... 9
I. Securities Law...................................... 10
J. Banking and Financial Institutions.................. 10
K. Telecommunications.................................. 11
II. Regulatory Fairness: Oversight and Implementation of the Red Tape
Reduction Act...................................................11
A. Small Business Ombudsman and Regional Fairness
Boards............................................. 11
B. Bureau of Land Management Wilderness Management Rule 12
C. Small Business Advocacy Review Panels at EPA and
OSHA............................................... 13
D. IRS Rules........................................... 13
E. Regulatory Flexibility Act of 1980 (Judicial Review) 15
F. GAO Report on APA Compliance........................ 16
III. Regulatory Reforms for Small Business...........................17
A. Mandates Information Act............................ 17
B. Congressional Office of Regulatory Analysis Act..... 17
C. Section 610 Reforms................................. 18
D. Environmental Compliance Tools...................... 19
IV. Small Business Tax issues.......................................20
A. Deductibility of Health Insurance for the Self-
Employed........................................... 20
B. Home-Office Deduction............................... 21
C. Independent-Contractor Reform....................... 22
D. IRS ``Stealth Tax'' Regulations..................... 23
E. IRS Nursery Regulations............................. 24
F. Electronic Federal Tax Payment System............... 25
G. Capital-Gains Tax Reduction......................... 26
H. Estate Tax Reform................................... 27
I. Alternative Minimum Tax Reform...................... 27
J. Tax Relief for Farmers.............................. 28
K. Pension Reform...................................... 29
L. IRS Restructuring and Reform........................ 30
M. Fundamental Tax Reform.............................. 32
N. Internet Tax Freedom Act............................ 33
O. Extension of Expiring Provisions.................... 34
P. Payroll Tax Relief.................................. 35
V. Workplace Issues................................................36
A. OSHA Reform......................................... 36
1. OSHA's Cooperative Compliance Program........... 36
2. Ergonomics...................................... 36
B. Labor-Management Relations.......................... 37
1. NLRB Reform Legislation......................... 37
2. Union Salting................................... 37
3. Minimum Wage.................................... 38
C. Drug-Free Workplace................................. 38
VI. Access to Capital: Small Business Administration Programs.......39
A. 504 Certified Development Company Program........... 39
B. Small Business Investment Company Program........... 39
C. SBAExpress and LowDoc Pilot Loan Programs........... 41
D. Oversight........................................... 42
1. SBA's Lender Examination Procedures............. 42
2. Asset Sales..................................... 44
3. Securitization of the Unguaranteed Portion of
7(a) Loans..................................... 45
E. Small Business Year 2000 Readiness.................. 46
F. Proposed 7(a) and 504 Loan Program Changes.......... 47
VII. Women-Owned Businesses..........................................48
A. Survey of Women-Owned Enterprises................... 48
B. Women's Business Center Program..................... 48
VIII.HUBZones and Federal Procurement................................49
A. HUBZone Act of 1997................................. 49
B. Contract Bundling................................... 50
C. Reporting of Small Business Contracting Statistics.. 51
D. Small Business Research and Development............. 52
IX. Health Care.....................................................54
X. Reform of Consumer Bankruptcy Laws..............................55
XI. Telecommunications..............................................56
A. FCC Access Charge Rule.............................. 56
B. FCC Telephone Directories Rule...................... 56
XII. Hearings of the Committee.......................................57
February 6, 1997: Women-Owned and Home-Based Businesses 57
February 12, 1997: Nomination of Aida Alvarez to be
Administrator of the United States Small Business
Administration..................................... 59
February 26, 1997: The President's Fiscal Year 1998
Budget Request for the United States Small Business
Administration..................................... 60
February 27, 1997: S. 208, The HUBZone Act of 1997..... 61
March 25, 1997: Entrepreneurship in America:
Cultivating Maine Grown Businesses................. 62
April 2, 1997: Entrepreneurship in America: Impacts of
Meat Inspection on Small Business.................. 63
April 3, 1997: Entrepreneurship in America: Solutions
for Tax and Regulatory Fairness for Small Business. 64
April 10, 1997: S. 208, The HUBZone Act of 1997........ 65
April 24, 1997: Oversight of SBA's Non-Credit Programs. 67
May 7, 1997: Oversight of SBA's Finance Programs....... 68
May 15, 1997: Oversight of SBA's Finance Programs--Part
II................................................. 69
May 31, 1997: Entrepreneurship in America: The Impact
of OSHA and Other Agencies......................... 71
June 4, 1997: Small Business Perspectives on Mandates,
Paperwork, and Regulation.......................... 72
June 12, 1997: Oversight of SBA's Microloan Program.... 73
August 19, 1997: Entrepreneurship in America: Fairness
in Regulatory Enforcement.......................... 74
October 22, 1997: Small Business and Fundamental Tax
Law Reform......................................... 77
February 12, 1997: IRS Reform: What America's Taxpayers
Need Now........................................... 79
March 2, 1998: Entrepreneurship in America: Focus on
the IRS............................................ 80
March 18, 1998: The President's Fiscal Year 1999 Budget
Request for the Small Business Administration...... 81
April 28, 1998: Environmental Compliance Tools for
Small Business..................................... 83
May 14, 1998: Nomination of Fred P. Hochberg to be
Deputy Administrator of the SBA.................... 85
June 2, 1998: E-commerce and Y2K: What's Ahead for
Small Business?.................................... 86
June 4, 1998: Oversight of the Small Business
Innovation Research (SBIR) Program................. 88
July 13, 1998: Entrepreneurship in America: Expansion
of Microlending.................................... 89
July 15, 1998: Home Health Care: Can Small Agencies
Survive New Regulations?........................... 90
September 24, 1998: Can Small Business Compete With
Campus Bookstores?................................. 92
106th Congress Report
SENATE
1st Session 106-147
======================================================================
SUMMARY OF LEGISLATIVE AND OVERSIGHT ACTIVITIES DURING THE 105TH
CONGRESS
_______
August 27, 1999.--Ordered to be printed
Filed under authority of the order of the Senate of August 5, 1999
_______
Mr. Bond, from the Committee on Small Business, submitted the following
R E P O R T
I. SUMMARY OF COMMITTEE ACTIVITY FOR THE 105TH CONGRESS
A. Regulatory Fairness: Oversight and Implementation of the Red Tape
Reduction Act
Regulatory reform for small business continued to be a
priority for the Committee during the 105th Congress. The
Committee paid especially close attention to implementation of
the Small Business Regulatory Enforcement Fairness Act of 1996,
which provided small businesses with new tools to reduce red
tape and participate meaningfully in the rulemaking process.
As the principal author of this new law, Chairman
Christopher S. ``Kit'' Bond wanted to ensure that Federal
agencies properly and fully implemented its requirements. He
sought to ensure that the letter and spirit of the law were
being followed. Witnesses at the Committee's hearing on ``Small
Business Perspectives on Mandates, Paperwork, and Regulation''
testified to the importance of regulatory reforms to small
business and oversight of agency implementation. Through
oversight, Congress can better ensure that the benefit intended
by Congress when it enacts legislation is realized once the
statute is implemented.
The Chairman shared the concerns of small business that if
left unsupervised, Federal agencies might not incorporate the
requirements of this ``Red Tape Reduction Act'' into their
policies and practices. This concern was in part the result of
the small business community's experience with the Regulatory
Flexibility Act of 1980, which agencies had historically
ignored. Because the Red Tape Reduction Act amended the
Regulatory Flexibility Act to allow small businesses to sue
agencies in court as a means of enforcing compliance, the time
was right for Congressional oversight and vigilance by small
businesses and their advocates in Congress.
To assist the Committee with its oversight, the General
Accounting Office (GAO) conducted several studies for the
Committee on agency compliance with the Administrative
Procedure Act, the Regulatory Flexibility Act, and the Red Tape
Reduction Act. While each report tells a slightly different
story, the variation between agency interpretations and
compliance with these important laws is troubling.
Throughout the 105th Congress, the Committee monitored
agencies' rulemaking activities to assess their compliance with
the requirements of the Red Tape Reduction Act and the
Regulatory Flexibility Act. On numerous occasions, small
businesses and the trade associations representing them came to
the Committee with information regarding agency rulemakings
that had failed to comply with the law. The Chairman and
Ranking Member joined efforts on several letters to agencies,
calling upon the head of the agency to bring the rulemaking
into compliance with the law. The objective was to ensure that
the agencies knew that Congress was indeed watching and
interested in ensuring agencies complied with the procedural
safeguards provided by these important laws.
The Chairman wrote to the Department of Interior's Bureau
of Land Management (BLM) twice regarding a proposed wilderness
management regulation that would significantly impact small
companies involved in outfitting and leading climbing tours on
land managed by BLM. Despite contrary information from the
small businesses, the BLM had certified that the rule would not
have a significant economic impact on a substantial number of
small entities. Under the Regulatory Flexibility Act, an agency
must perform a Regulatory Flexibility analysis unless it can
certify that the rule will not have a significant economic
impact on a substantial number of small entities. Use and abuse
of the certification process was the subject of several letters
from the Committee.
The Federal Communications Commission (FCC) received
letters from the Chairman and Ranking Member regarding two
separate rulemakings in which the FCC appeared not to take into
consideration the full impact of their actions on small
businesses. First, in the FCC's Access Charge rule, small
businesses were concerned that the FCC had failed to analyze
the impact of changes to the pricing of interstate access
service on small long-distance carriers and certain small
retail businesses that use long distance. The second joint
letter addressed the concerns of small publishers of telephone
directories who raised concerns about the effects on small
businesses of the FCC's determination of the ``reasonable''
price for subscriber list information. In both rules, the small
businesses sought the assistance of the Committee to urge the
FCC to conduct a more thorough Regulatory Flexibility analysis
before proceeding with their rules.
Two rulemakings by the Internal Revenue Service (IRS) also
prompted a series of letters from the Committee for their
failure to assess appropriately the impact of proposed rules on
small businesses. The Chairman sent letters regarding a
proposed rule to amend the definition of ``limited partner,''
which was issued without appropriate attention to the impacts
on small businesses. Similarly, when the IRS issued a proposed
and temporary rule affecting nursery businesses, Senator Bond
wrote to the IRS and the Treasury Department regarding their
narrow interpretation of when IRS rules triggered the need to
comply with the Regulatory Flexibility Act and the Red Tape
Reduction Act. Under their interpretation, compliance was only
required in the limited instances when an IRS regulation would
impose a new paperwork requirement, with a specific form being
required. Otherwise, IRS interpretive rules would be proposed
without the benefit of a Regulatory Flexibility analysis. The
Chairman's letters clearly stated that such a narrow
interpretation undermines the language in the Red Tape
Reduction Act that was expressly intended to require compliance
with the Regulatory Flexibility Act when an interpretive rule
was proposed to amend the Internal Revenue Code.
The Committee's actions on behalf of our nation's home-
health care providers received a great deal of visibility. A
hearing in July 1998 was dedicated to this topic, and Senator
Bond introduced two pieces of legislation in an effort to
remedy the adverse impacts on small home-health care providers
caused by the Health Care Financing Administration's (HCFA)
implementation of regulations on surety bonds and its Interim
Payment System (IPS). In the first instance, HCFA issued
regulations to implement a statutory requirement that home-
health care agencies participating in the Medicare and Medicaid
programs must obtain surety bonds. However, HCFA exceeded the
statutory mandate and issued a requirement for financial
guarantee bonds, instead of overpayment bonds, which placed the
bonds out of reach for most small home-health care providers. A
resolution of disapproval introduced by Chairman Bond, S. J.
Res. 50, earned sixty cosponsors and was the driving force
behind HCFA's agreement to suspend the effective date of its
surety bond regulations pending a study by the GAO and
additional consideration on the contents of the rules.
HCFA's surety bond regulations and its regulations to
implement an IPS were also controversial because HCFA issued
both rules without first publishing a notice of proposed
rulemaking which provides the opportunity for advance notice
and comment by the regulated community. At the hearing in July
of 1998, numerous witnesses spoke to the problems being caused
by HCFA's regulations and the need for relief to ensure that
reputable home-health care providers and their beneficiaries
were not harmed by these regulations.
The Committee also focused attention on provisions of the
Red Tape Reduction Act that sought to ensure that small
businesses get a fair shake during agency enforcement actions.
A hearing was held in Kansas City, Missouri, in August of 1997
to receive testimony from small businesses regarding regulatory
fairness. While progress was being made, the witnesses clearly
expressed the need for additional oversight from Congress and
additional commitment from Federal agencies to internalize the
requirements of the Red Tape Reduction Act. A strong emphasis
was placed on the important role of compliance assistance, and
in 1998, the Committee reviewed reports from the agencies on
their implementation of the compliance assistance and penalty
reduction and waiver provisions of the law. The Committee also
monitored the Regulatory Fairness Program established at the
Small Business Administration (SBA) pursuant to the Red Tape
Reduction Act.
B. Regulatory Reforms for Small Businesses
In addition to oversight, the Committee explored the need
for additional legislation to reduce the regulatory burdens on
small businesses. In June of 1997, the Committee received
testimony from Senator Spencer Abraham and Representative Gary
Condit on S. 389, the ``Mandates Information Act of 1998.'' The
Chairman was a lead cosponsor of this bill, which sought to
build on the successes of the Unfunded Mandates Reform Act of
1995. The Chairman joined Senator Richard Shelby as a lead
sponsor of ``The Stealth Tax Prevention Act,'' which would have
restricted the ability of the Internal Revenue Service (IRS) to
raise taxes through regulation. In addition, Senators Shelby
and Bond introduced legislation to create a Congressional
Office of Regulatory Analysis (CORA), which would assist
Congress in fulfilling its responsibilities under the
Congressional Review Act. Although these bills were not
enacted, each generated meaningful and productive discussions
on the continued need for regulatory reforms tailored to
address the impacts on small businesses.
The Committee's exploration of agency compliance with
Section 610 of the Regulatory Flexibility Act assisted the
Governmental Affairs Committee in developing a proposal to
revise the periodic review of rules provision enacted in 1980.
Despite evidence from the GAO that many agencies were failing
to comply with the Act, the reform language was not supported
by the Administration and subsequently dropped during
negotiations with the Administration.
In an effort to assist small businesses with their efforts
to comply with environmental regulations, the Committee
approved an amendment offered by Senator Conrad Burns to create
a pilot program to establish an advisory committee on Small
Business Environmental Assistance programs. While this program
was approved by the full Senate, it was not considered in the
House of Representatives; however, it is anticipated that this
measure will be considered again in the 106th Congress.
C. Small Business Tax Issues
Throughout the 105th Congress, tax equity continued to be a
top priority for small businesses. In hearings before the
Committee, a wide range of small businesses reported the
effects of disparate tax treatment. Home-based businesses
testified about the lack of a level-playing field they face on
issues like the deductibility of office expenses--a business
based in the owner's home may only deduct such expenses in
limited circumstances, while a business that owns or rents a
separate facility can deduct the costs in full. Similarly, the
self-employed emphasized the inherent unfairness of limitations
on the deductibility of their health-insurance costs when their
corporate competitors can deduct them completely.
Entrepreneurs, too, stressed the inequity caused by the current
worker-classification rules, which in many cases force them to
structure their business relationships not on practicality and
the best economic decision, but on complex and obscure criteria
dictated by the IRS.
Small business owners also repeatedly expressed their
frustration with the overall complexity of the tax code. With
thousands of pages of statutes, regulations, forms,
instructions, and other guidance, entrepreneurs are spending
countless hours of nonproductive time keeping records,
completing forms, and simply trying to keep up with all the
requirements of the current tax system. By some estimates,
small business owners are spending more than 5% of their
revenues on tax compliance, which does not include the amount
they spend to pay the tax bill. With few employees, small
businesses must spend these revenues in many cases on outside
bookkeepers, accountants, and lawyers to make sure that the
business meets its tax obligations and does not run afoul of
the myriad rules and regulations. As too many witnesses
testified, the time and money required for tax compliance takes
valuable resources away from the small business' ability simply
to be productive.
The report of the National Commission on Restructuring the
Internal Revenue Service and the Senate hearings on IRS abuses
highlighted many of the obstacles that small firms face when
dealing with the IRS. Witnesses before the Committee testified
that onerous audits and difficulties in resolving honestly
disputed issues can mean the end of a small business. In
addition, the Committee heard accounts of IRS personnel failing
to provide appropriate customer service and respect for
taxpayers' rights, which not only places enormous burdens on
the individual taxpayer, but also reduces the confidence of all
taxpayers that the tax system is fair.
Chairman Bond introduced legislation with Senators Snowe
and Nickles at the start of the Congress to eliminate some of
the inequities identified by small business owners. The Home-
Based Business Fairness Act of 1997 (S. 460) included
provisions to provide full deductibility of health insurance
for the self-employed and to restore the home-office deduction
for businesses operated out of the home. In addition, the bill
contained a clear test for determining when a worker is an
independent contractor. The bill also provided protection
against the IRS second guessing those decisions and forcing
businesses that contract with independent contractors to pay
large sums for back taxes, interest, and penalties for worker
classifications made in good faith. The bill received strong
support from the small business community, and by the end of
the 105th Congress, it had 36 cosponsors in the Senate.
The Taxpayer Relief Act of 1997 made two parts of the Home-
Based Business Fairness Act a reality--the home-office
deduction was restored and the deductibility of health
insurance for the self-employed was accelerated, reaching 100%
in 2007. The Taxpayer Relief Act also included several other
provisions beneficial to small business including lower
capital-gains tax rates and an expanded exclusion for capital
gains resulting from investments in small firms. Additionally,
the Act provided important relief from the estate tax,
especially for family-owned businesses and farms, and it
reduced the burdens of the alternative minimum tax for many
small business owners and farmers.
In response to calls for IRS restructuring and
strengthening of taxpayer rights, the Chairman introduced
legislation during the Second Session of the 105th Congress to
address these issues as they pertain specifically to small
business taxpayers. With the strong support of the small
business community, major parts of the Putting the Taxpayer
First Act of 1998 (S. 1669) were implemented by the IRS,
including restructuring the agency along customer lines for
taxpayers with similar needs and characteristics such as small
businesses and the self-employed. In addition, a number of
provisions from this legislation were included in the Internal
Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-
206), which was signed into law in July 1998. As a result,
significant steps were taken to create an environment of
service and respect for small businesses across the country as
they interact with the IRS and seek to meet their tax
obligations.
As the 105th Congress drew to a close, additional progress
was made on several tax issues important to small businesses.
As part of the Omnibus Consolidated and Emergency Supplemental
Appropriations Act, the self-employed health-insurance
deduction was again accelerated so that full deductibility will
be achieved in 2003 (instead of 2007) and a greater deduction
will be available in each of the preceding years. The Act also
included several provisions to reduce tax burdens on America's
farmers who have faced difficult economic times in recent
years. In addition, the Act extended a number of expiring tax
incentives important to small firms in a variety of industries.
In retrospect, the 105th Congress enacted legislation that
significantly improves the tax environment for small businesses
in America. While progress was made, however, much work remains
to be done to ensure equal treatment for all small firms and to
provide a fair and simple tax code that is not economically
draining on the business enterprises vital to our economy. In
particular, the Chairman remains committed to ensuring that the
self-employed are treated fairly with respect to the
deductibility of health insurance at the earliest possible
date. It is also anticipated that efforts to reform the
independent contractor rules will continue so that business
relationships can once again be dictated by sound business
decisions and not the tax laws. In addition, the Committee will
continue its oversight of the IRS to ensure that agencies
minimize the burdens on all taxpayers, especially through
compliance with the Small Business Regulatory Enforcement
Fairness Act (i.e., the Red Tape Reduction Act, P.L. 104-121),
which the Chairman authored during the 104th Congress.
D. Workplace Issues
The Occupational Safety and Health Administration (OSHA)
continues to raise major concerns for small business owners.
The uniform regulations promulgated by OSHA, as with other
agencies, often impose disproportionate burdens on small
businesses. In particular, small businesses sought the
assistance of the Chairman regarding OSHA's Cooperative
Compliance Program (CCP). The Chairman met with Charles
Jeffress, the new Assistant Secretary for Occupational Safety
and Health at the Department of Labor, and urged him to work
with employers seeking in good faith to comply with OSHA
standards and to reduce occupational injuries and illnesses.
The agency's CCP initiative was viewed as coercive by many
businesses because it required them to implement a prescriptive
safety and health program or face the full force of OSHA with a
wall-to-wall inspection.
Other issues brought to the Committee's attention included
OSHA's efforts to address ergonomic risk factors in the
workplace and the controversial union practice of engaging in
``salting'' campaigns to harass and intimidate non-union
workplaces.
E. Access to Capital: Small Business Administration Programs
Legislation developed by the Committee in the 105th
Congress to strengthen the SBA's credit programs has led to an
enormous expansion in the availability of loans and investment
capital for small business borrowers, while reducing the cost
and risk exposure to the taxpayers. For small business owners
who often have difficulty securing capital from traditional
lending sources such as commercial banks, the strength and
availability of SBA loan guarantee and investment guarantee
programs are critical components to the success of small
businesses.
In 1997, the Committee approved the ``Small Business
Reauthorization Act of 1997,'' which made important changes in
the Small Business Investment Company (SBIC) program to permit
manageable program growth while strengthening the SBA's
oversight of the program. Most importantly, the 1997 Act gives
the SBA the option to make five-year leverage commitments,
which would conform the program to typical investment strategy
patterns.
The Small Business Reauthorization Act also made important
changes in the SBA's Microloan program by making the program
permanent. The Microloan program had been a pilot program
designed to test whether the SBA could deliver a loan program
for very small borrowers, who were seeking loans of less than
$25,000. In addition, the bill addressed the 504 Certified
Development Company program. In 1995, Congress approved
legislation requiring that the funding requirements be fully
supported by fees rather than Congressional appropriations. The
Reauthorization Act directed that the SBA reduce the fees as
the performance of the program improved and less funds are
needed to fund the loss reserve.
In 1998, the Committee unanimously approved the ``Year 2000
Readiness and Small Business Programs Restructuring and Reform
Act of 1998'' (H.R. 3412). Originally, this bill passed the
House of Representatives and made three technical changes in
the SBIC Program. This House-passed version of the bill was
amended by Chairman Bond to include the full texts of S. 2372,
the ``Year 2000 Readiness Act,'' S. 2407, the ``Small Business
Programs Restructuring and Reform Act of 1998,'' and provisions
from S. 2448, the ``Small Business Loan Enhancement Act,''
which was sponsored by Senator John Kerry, the Committee's
Ranking Member.
As approved by the Committee, H.R. 3412 authorized the SBA
to establish a pilot loan guarantee program to assist small
businesses in correcting Year 2000 (Y2K) computer problems.
Further, the bill established two new reporting requirements
for the SBA relating to pilot credit programs. H.R. 3412 was
approved by the Senate on September 30, 1998. The House of
Representatives was unable to act on the bill before it
adjourned for the 105th Congress.
F. Women-Owned Businesses
During the Second Session of the 105th Congress, Chairman
Bond maintained his commitment to support the continued growth
and expansion of women-owned businesses. In the First Session,
Chairman Bond authored the Small Business Reauthorization Act
of 1997, which addressed several programs administered by the
SBA that serve the women business owners of today and tomorrow.
As part of the Committee's oversight in 1998, it closely
monitored the SBA's handling of the National Women's Business
Council and the Women's Business Center program. Chairman Bond
was joined by Senator Olympia Snowe in introducing ``The Home-
Based Business Fairness Act'' (S. 460) to provide tax relief
called for during the first hearing of the 105th. Additional
support for the bill was provided at a field hearing in Bangor,
Maine, on February 6, 1997, attended by the Chairman and
Senator Snowe. Two parts of S. 460 were included in the
Taxpayer Relief Act of 1997 (P.L. 105-206) passed by Congress
on July 22, 1998.
G. Federal Procurement
During the 105th Congress, the Committee made significant
progress on expanding opportunities for small business to
participate in Federal procurement. Doing business with the
Federal government can make a major difference to small
businesses that operate on a slim margin and need every
customer they can get. Making contracting opportunities
available to a wide array of small businesses also helps a
broader cross-section of the public to benefit from Federal
activities and expenditures, rather than reserving those
benefits for a narrow sliver of well-connected, insider large
businesses. In the long run, it also means real benefits for
the taxpayers, since greater competition means lower prices for
the goods and services the Government purchases.
The most notable and most exciting new endeavor in the
contracting arena is the HUBZone Act, authored by Chairman Bond
and adopted as part of the Small Business Reauthorization Act
of 1997. This new program seeks to direct a greater portion of
contracts to economically distressed areas, to bring jobs and
opportunities to places with some of the most unrelenting
poverty. Small businesses truly are on the front lines in the
battle to reclaim and redevelop these areas, and the job-
creating power of small businesses is their most potent weapon.
By setting increasing goals for contracting in HUBZone areas,
and by ensuring that eligible small businesses must hire at
least 35% of their workforce from these distressed areas, the
HUBZone law offers a real chance to bring economic activity and
growth to our inner cities, distressed rural counties, and
Indian reservations.
The Committee made progress on other procurement matters as
well. New legislation in the Small Business Reauthorization Act
clearly defines a ``bundled contract'' so this practice can be
monitored more effectively and its impact on small business
measured. Combining several smaller contract opportunities into
larger contracts likely reduces the ability of small business
to participate, since they often are unable to fill all the
additional contract requirements. This effectively excludes
small business from contracting and sets aside increasing
chunks of procurement activity for large businesses.
Congress also increased the goal for small business
participation in Government-wide procurement to 23% of prime
contract dollars, up from the 20% adopted into law in 1988. To
enhance the likelihood that these changes translate into real
opportunity for small business, the Committee also adopted
legislation to disclose and control efforts by Executive
agencies to change their statistical methods. Reliable and
valid statistics are crucial for the Committee and for the
small business community to oversee the Government's compliance
with the 23% goal. The temptation for some agencies to engage
in statistical games that appear to increase small business
contracting, without actually doing so, is a threat to the
entire small business procurement program. Although the
legislation was not passed by the House of Representatives, it
was adopted both at the Committee level and by the full Senate.
The Senate and the Committee on Small Business are now on-
record as disfavoring sudden, undisclosed statistical changes
that produce unexplained changes in the performance of
Executive agencies in their small business contracting.
H. Health Care
Health care continued to be one of the top concerns of
small businesses during the 105th Congress. Language in the
Balanced Budget Act of 1997 directed HCFA to issue a series of
regulations intended to curb the rising cost of home-health
care and to rid the Medicare and Medicaid programs of firms
engaged in fraud and abuse. HCFA issued regulations that
exceeded Congressional intent, driving many reputable home-
health care providers out of business. Chairman Bond led the
fight to reduce the adverse impact of HCFA's regulations that
had devastating effects on the small businesses and small non-
profits in home-health care.
On June 10, 1998, the Chairman introduced S.J. Res. 50, a
resolution of disapproval to strike HCFA's regulation to
implement the requirement that home-health care agencies obtain
a surety bond for the greater of $50,000 or of 15% of their
annual Medicare receipts. This resolution was the first one
introduced under Subtitle E of the Red Tape Reduction Act,
known as the Congressional Review Act, that gained broad-based
support in the Senate and the House of Representatives. With 60
Senate cosponsors, the resolution precipitated HCFA's
suspension of the surety-bond rule pending completion of a GAO
study and, potentially, the development of a new proposal. As
the result of an agreement among HCFA, the Chairman, and
Senators Charles Grassley and Max Baucus, HCFA issued a Federal
Register notice on July 31, 1998, suspending deadline for
compliance with the surety rule. HCFA further agreed not to
enforce the rule without providing at least 60 days notice, and
not before February 15, 1999.
On July 15, 1998, the Chairman introduced the Medicare
Home-Health Care Beneficiary Protection Act of 1998 (S. 2354),
to put a moratorium on the IPS that limits reimbursement for
services provided on or after October 1, 1997, pending the
development of an alternate payment system. During the Fiscal
Year 1999 appropriations cycle, Chairman Bond led efforts to
resolve the IPS crisis, which ultimately resulted in a solution
included in the Omnibus Appropriations Act for Fiscal Year
1999. Signed into law on October 21, 1998, this stopgap measure
increased payments to home-health care providers, and delayed
until October 1, 2000, HCFA's proposed 15% reduction in
reimbursements. The law will ensure continued access to home-
health care for seniors and the disabled across the nation.
I. Securities Law
Small businesses were the beneficiaries of securities-
related laws enacted by the 105th Congress. The Securities
Litigation Uniform Standards Act of 1997 (S. 1260) amended the
Securities Acts of 1933 and 1934 to preempt state statutory and
common law in connection with class actions alleging any untrue
statement or omission of a material fact in connection with the
purchase or sale of a ``covered security,'' or that a defendant
used or employed any manipulative or deceptive device or
contrivance in connection with the purchase or sale of a
``covered security.'' In addition, the bill permits any class
action brought in state court involving a ``covered security''
to be removable to Federal district court.
J. Banking and Financial Institutions
In connection with its overall efforts to provide
regulatory reform for small businesses, the Committee also
focused on regulatory relief for small banks. Small banks
benefitted from three banking and financial institutions-
related initiatives in the 105th Congress. First, the Credit
Union Membership Access Act (H.R. 1151), which became Public
Law 105-219, permits credit unions to have members from
multiple occupational groups, provided that the number of
persons in each group (at the time the group joins the credit
union) does not exceed 3,000, with limited exceptions. The bill
also limits commercial lending activities of credit unions,
adopts certain Department of the Treasury recommendations that
improve regulation of credit union safety and soundness, and
changes voting requirements to make it easier for credit unions
to convert to mutual savings banks and thrifts.
Second, the Consumer Bankruptcy Reform Act of 1998 (S.
1301) establishes a ``means test'' for Chapter 7 bankruptcies,
by permitting a court to dismiss a Chapter 7 case or convert it
to Chapter 13 if the court finds ``abuse'' of the bankruptcy
system.
Third, the Financial Services Act of 1998 (H.R. 10)
eliminates the restrictions on affiliation among banks,
securities firms and insurance companies under the Glass-
Steagall Act and permits such companies to combine with one
another as affiliates under an umbrella financial-holding
company. In addition, the bill regulates the insurance and
securities underwriting and sales activities of Federally
chartered depository institutions.
While the Credit Union Membership Access Act was the only
initiative enacted on that issue during the 105th Congress,
efforts to assist small banks will likely continue in the 106th
Congress.
K. Telecommunications
During the 105th Congress, the Committee took action
regarding two FCC rules that affect small telephone
communications firms. In a 1997 Report and Order, the FCC
modified the methods by which local-exchange carriers charge
long-distance carriers for access to their network,
substantially increasing the costs faced by long-distance
carriers that utilize the local-exchange carriers' tandem
switches. The Committee was concerned about the FCC's failure
to analyze the impact of these changes on the pricing of
interstate access service both on small long-distance carriers
and on certain small retail businesses that use long-distance
services. Chairman Bond and Ranking Member Kerry sent a joint
letter to the FCC concerning the agency's compliance with the
Regulatory Flexibility Act on this issue. The Committee's
letter noted the opportunity provided the FCC by the Petitions
for Reconsideration and encouraged the FCC to reassess the
impact of its recent decisions on both small business long-
distance carriers and the small business retailers that such
carriers serve.
Additionally, producers of independent telephone
directories contacted the Committee regarding the potential
impact of a pending FCC rulemaking to implement provisions of
the Telecommunications Act of 1996. Congress intended Section
222(e) of the Act to increase competition and enhance the
ability of independent publishers to compete with directories
wholly owned by telephone companies. Small businesses involved
in directory publishing were concerned that the FCC rule to
determine the ``reasonable'' price for subscriber list
information might not recognize the minimal cost imposed on
telephone companies when providing such information to
requesting independent directories. Chairman Bond and Ranking
Member Kerry wrote FCC Chairman William Kennard urging the FCC
to conduct a thorough Regulatory Flexibility analysis prior to
issuing a final rule and to ensure the rule achieved the
competition Congress intended by protecting small businesses
from market abuses.
II. REGULATORY FAIRNESS: OVERSIGHT AND IMPLEMENTATION OF THE RED TAPE
REDUCTION ACT
A. Small Business Ombudsman and Regional Fairness Boards
Background
The Red Tape Reduction Act [Small Business Regulatory
Enforcement Fairness Act (SBREFA), P.L. 104-121] charged the
Small Business Administration (SBA) with implementation of the
Regulatory Fairness program. The law directs the SBA to
designate a Small Business and Agriculture Regulatory
Enforcement Ombudsman (Ombudsman) to receive comments from
small businesses regarding unreasonable and excessive agency
enforcement actions. The Ombudsman is to issue an annual report
to Congress that includes an evaluation of agencies'
responsiveness based on comments from small businesses. The
Ombudsman also coordinates the activities of the 10 Regional
Small Business Regulatory Fairness Boards (Fairness Boards),
each comprising five small business owners.
Committee Action
During the 105th Congress, the Committee received
complaints from several members of the Fairness Boards that the
SBA appeared more concerned with ``process'' and ``being fair''
to the Federal agencies than giving a voice to the concerns of
small business. Through letters, direct conversations, and a
Committee hearing, Chairman Christopher S. ``Kit'' Bond worked
to educate Peter Barca, the SBA-appointed Ombudsman, on the
importance of rating the agencies in order to provide the
impetus for agencies to change their policies or culture.
Despite these overtures, the Ombudsman's first report to
Congress, issued on December 31, 1997, was disappointing to the
Chairman and many in the small business community. Joined by
House Small Business Committee Chairman James Talent, Chairman
Bond sent a letter to the Ombudsman expressing disappointment
with the SBA's report. In his reply, Mr. Barca acknowledged the
failure to include a ``more rigorous agency evaluation'' and
committed to include an evaluation in future reports. On
October 30, 1998, Mr. Barca advised Chairman Bond that the
second annual report to Congress would be delivered on February
28, 1999, in order to produce a report that better reflects a
full year's activities of the Fairness Boards.
B. Bureau of Land Management Wilderness Management Rule
Background
Throughout 1997, numerous small businesses requested
Chairman Bond's assistance on a Bureau of Land Management (BLM)
proposal governing management of BLM wilderness areas. The BLM
had certified that the agency's proposed rule would not have a
significant economic impact on small businesses, despite
contrary information provided both to the agency and Congress.
Climbing outfitters and guide services that organize and lead
trips as well as the manufacturers and resellers of climbing
equipment disagreed with the BLM's certification, stating that
a prohibition on installation or replacement of fixed anchors
would place climbers' safety in jeopardy and effectively
restrict the use of internationally recognized climbing
destinations under BLM's management.
Committee Action
Chairman Bond wrote the BLM on March 10, 1997, regarding
the potential impact of the proposed regulation on small
businesses that manufacture rock climbing equipment and provide
guide services. In his reply, the Acting Director of the BLM,
Sylvia V. Baca, offered a partial explanation for the initial
certification and committed the agency to a careful
consideration of the issues raised by small businesses and the
Chairman's letter. On January 14, 1998, Chairman Bond sent a
letter to the new Director of the BLM, Pat Shea, urging him to
ensure that the BLM conducted a meaningful Regulatory
Flexibility analysis prior to issuing a final rule. In the
Unified Agenda published November 9, 1998, the BLM reported
that issuance of a final rule is imminent, but also maintained
that a Regulatory Flexibility analysis is not required.
C. Small Business Advocacy Review Panels at EPA and OSHA
Background
Small businesses have had difficulty complying with the
regulations issued by agencies such as the Environmental
Protection Agency (EPA) and the Occupational Safety and Health
Administration (OSHA), many of which place a great financial
burden on small businesses. Because of the significant impact
of rules issued by these agencies, the Red Tape Reduction Act
(P.L. 104-121) requires the EPA and OSHA, prior to publishing
an initial Regulatory Flexibility analysis, to convene a Small
Business Advocacy Review Panel composed of Federal employees
from the SBA Office of Advocacy, the Office of Management and
Budget (OMB) and the agency initiating the rulemaking, to
elicit comments from small businesses on the rule's impacts.
Under the law, panels are convened for 60 days and must report
to the agency on comments and recommendations from small
entities related to the rule's impacts. The panel report
becomes part of the rulemaking record, and the agency head is
to give consideration to the comments and recommendations
provided.
Committee Action
To date, the EPA has completed panels for 13 proposed
rules: nine panels in 1998 and five in 1997. Although success
of the panel process varies with each rule, SBA's Office of
Advocacy generally credits the EPA with being responsive to
concerns raised. Three regulatory proposals were revised to
reduce the small business impacts, and the EPA often included
in its proposed rules a regulatory alternative suggested by the
small entities participating in the panel process.
With respect to OSHA, one panel was completed in 1997 on a
rule to address occupational exposures to tuberculosis. Small
businesses were not pleased with OSHA's responsiveness to their
concerns. In October 1998, OSHA convened a panel on a proposal
to require employers to implement comprehensive safety and
health programs. The panel issued its report on December 18,
1998, highlighting deficiencies in OSHA's cost estimates and
draft initial Regulatory Flexibility analysis. The report also
recommended non-regulatory alternatives to OSHA.
D. IRS Rules
Background
During the 105th Congress, Chairman Bond worked to relieve
the enormous tax burden placed upon small businesses by the
Internal Revenue Service (IRS). Many small businesses have
difficulty comprehending the complex language of the tax code
and cannot afford legal help often used by big businesses. The
IRS is required to comply with the Regulatory Flexibility Act
and the Red Tape Reduction Act on interpretive rules that
impose collection-of-information requirements on small
business.
Committee Action
Beginning in March of 1997, Chairman Bond sent letters to
the IRS and the Treasury Department regarding rulemakings that
failed to address the concerns of small business. The first
series of letters were in response to an IRS interpretive rule
to change the definition of ``limited partner,'' which ignored
the impacts on small business. Chairman Bond and numerous other
Senators sent a joint letter to Treasury Secretary Robert Rubin
expressing disappointment over the failure to abide by the
Regulatory Flexibility Act and the Red Tape Reduction Act. In
July 1997, Chairman Bond secured a moratorium on issuance of
the proposed rule as part of the Taxpayer Relief Act of 1997,
which was signed into law on August 5, 1997. Consequently, the
rulemaking was suspended through June 30, 1998.
On September 19, 1997, Chairman Bond again called the IRS
and the Treasury Department to task for noncompliance with the
Regulatory Flexibility Act and the Red Tape Reduction Act. This
rule was of great concern to small nursery farming businesses,
which have historically enjoyed a special exemption from IRS
rules on uniform capitalization. Their continued eligibility
for this important exemption came into question when the IRS
issued temporary and proposed rules that changed the definition
of ``farming business.'' Two sentences added to the definition
would have disqualified a nursery business that ``merely
resells plants'' or that grows plants in temporary containers,
resulting in the imposition of significant recordkeeping
burdens associated with maintaining inventories.
The Chairman's letter to the IRS raised concerns shared by
more than 750 small businesses, which submitted comments to the
IRS for its public hearing on the rule in November 1997. In an
October 14, 1997, letter to Chairman Bond, the IRS Chief
Counsel asserted that the definition of farming business was
not being modified and, consequently, no new recordkeeping
requirements would be imposed on small businesses. Without such
recordkeeping requirements, Regulatory Flexibility would not be
triggered. In December, the IRS published a clarification of
the proposal, stating that the definition of farming business
was not being changed.
Small nursery farming businesses received this information
as vindication of their concerns, and they applauded Chairman
Bond for his leadership on the issues. This experience also
demonstrated to the small businesses involved the importance of
agencies receiving factual information from small businesses
early in the rulemaking process. To formalize this interaction,
the recommendation was made to amend the Regulatory Flexibility
Act to require the IRS to convene Small Business Advocacy
Review Panels before issuing an initial Regulatory Flexibility
analysis, a requirement the Red Tape Reduction Act applied to
the EPA and OSHA.
Legislation
On February 24, 1998, Chairman Bond introduced the Putting
Taxpayers First Act (S. 1669), which included three regulatory
reform provisions to benefit small businesses. First, S. 1669
included the ``Stealth Tax Prevention Act of 1997'' (S. 831).
Chairman Bond joined Senator Richard Shelby in sponsoring S.
831, which would designate any final IRS rule that raises
revenues beyond the intent of Congress or current tax practices
as a ``major rule'' under the Congressional Review Act. This
would provide Congress 60 days to enact a resolution of
disapproval before the offending rule could take effect. The
second regulatory reform provision would increase small
business participation in IRS rulemaking by including the IRS
with OSHA and the EPA as agencies that must convene a Small
Business Advocacy Review Panel prior to issuing a proposed rule
with a significant economic impact on small entities.
The third and final reform was to provide taxpayers a
choice with respect to recovery of costs and certain fees.
Under the Internal Revenue Code, a taxpayer may recover costs
and fees, including attorneys' fees, against the IRS if he or
she prevails and the IRS' litigation position was not
substantially justified. The Equal Access to Justice Act
(EAJA), as amended by the Red Tape Reduction Act, permits a
small business to recover such costs when an unreasonable
agency demand for fines or civil penalties is not sustained in
court or in an administrative proceeding. In addition, a small
business may also recover such costs and fees under the EAJA
when it is the prevailing party, and the agency enforcement
action is not substantially justified.
Under current law, the EAJA prohibits a taxpayer seeking to
recover costs and fees in an IRS enforcement action from doing
so under the EAJA if the fees and costs can be recovered under
the Internal Revenue Code. S. 1669 would permit taxpayers to
elect whether to pursue recovery of attorneys' fees and
expenses under EAJA or the Internal Revenue Code. Although
numerous provisions of S. 1669 were enacted as part of the IRS
Restructuring and Reform Act of 1998, these three regulatory
provisions were not included in the IRS bill when it was
considered by the Senate.
E. Regulatory Flexibility Act of 1980 (Judicial Review)
Background
The Red Tape Reduction Act bolstered the hand of small
businesses by allowing judicial review of agency compliance
with the Regulatory Flexibility Act of 1980 (Regulatory
Flexibility Act). At least 14 suits have been filed under the
Act. Of the 10 decided, two cases best illustrate the
importance of this new tool.
On February 24, 1998, the U.S. District Court for the
Middle District of Florida ruled that the National Marine
Fisheries Service (NMFS) failed to comply with the Regulatory
Flexibility Act on a rulemaking to reduce the quota for shark
fishing by 50%. NMFS had improperly certified that the rule
would not have a significant economic impact on small entities
and failed to conduct an appropriate final Regulatory
Flexibility analysis before issuing the final rule. The court
stated that the agency's refusal to recognize the economic
impacts ``raises serious questions about its efforts to
minimize those impacts through less drastic alternatives.'' The
court kept jurisdiction over the case when it remanded the
Regulatory Flexibility analysis to the agency with instructions
to analyze the economic effects and alternatives.
On May 15, 1998, the agency submitted its analysis to the
court, acknowledging the rule's ``significant financial
hardship to shark fishermen.'' On October 16, 1998, the court
granted the plaintiff's request that a special master be
appointed to assist the court in reviewing the agency's remand
submission. The court instructed the special master to assess
the bona fides of the submission with respect to the
``availability of workable alternatives, regulatory or
otherwise'' to reduce the financial injury to shark fishermen.
In a separate case, on May 13, 1998, the U.S. District
Court for the District of Columbia granted a motion for summary
judgment and remanded a regulation back to the BLM. Under the
Regulatory Flexibility Act, the BLM had certified that the rule
would not have a significant economic impact on a substantial
number of small businesses. The Northwest Mining Association
challenged the rule and the BLM's certification because the BLM
did not use the SBA's definition of a small mining business,
and the BLM did not follow the procedures provided in the
Regulatory Flexibility Act to adopt an alternate definition.
The SBA's Office of Advocacy and other mining associations
filed amicus briefs in the case.
The court noted that the small business impacts imposed by
the rule ``appear to have a large impact on the small miner''
and are ``precisely what the procedural safeguards of the
[Regulatory Flexibility Act] and the [Administrative Procedure
Act] are set in place to address.'' The court acknowledged the
public interest in protecting the environment, but also noted
``the public interest in preserving the rights of parties which
are affected by government regulation to be adequately informed
when their interests are at stake and to participate in the
regulatory process as directed by Congress.'' Chairman Bond
hailed this decision, noting that the Regulatory Flexibility
Act was being used as intended to ensure that Federal agencies
do not overlook their obligations to identify and reduce the
impacts of their regulations on small business.
F. GAO Report on APA Compliance
Background
In August 1998, the General Accounting Office (GAO)
released a report to Chairman Bond entitled, ``Agencies Often
Published Final Actions Without Proposed Rules.'' At the
Chairman's request, the GAO had studied the frequency with
which Federal agencies issue final rules without the benefit of
a notice of proposed rulemaking. The GAO found that agencies
are taking advantage of a narrow exemption in the
Administrative Procedures Act (APA) that allows agencies to
waive the notice and comment procedures for ``good cause'' with
compelling reasons. Of the 4,658 rules that the GAO reviewed in
1997, about half of these actions were published without notice
of proposed rulemaking. While many of these rules may be
administrative or technical with limited applicability, 11 of
the 61 major rules reviewed by the GAO were published without a
notice of proposed rulemaking--18% of the major rules.
Committee Action
The GAO's findings were of particular interest to the
Committee because an agency's obligation to comply with the
Regulatory Flexibility Act and the Red Tape Reduction Act is
triggered by compliance with APA's notice and comment
requirements. Consequently, when an agency claims that it does
not have to comply with the notice and comment requirements, it
can seek to avoid the procedural safeguards in these laws as
well. The GAO found many instances in which agencies stated
that because APA notice and comment were not required, then the
Regulatory Flexibility Act was not applicable or that a
Regulatory Flexibility analysis was not required. This topic
was discussed during the Committee's hearing on two rules
issued by the Health Care Financing Administration (HCFA). Both
were issued as final rules with an opportunity to comment
without HCFA first issuing a notice of proposed rulemaking. The
GAO report will assist the Committee's ongoing oversight of
agency compliance with Regulatory Flexibility and the Red Tape
Reduction Act.
III. REGULATORY REFORMS FOR SMALL BUSINESS
A. Mandates Information Act
Legislation
Chairman Christopher S. ``Kit'' Bond joined Senator Spencer
Abraham in introducing the Mandates Information Act (S. 389)
early in 1997. S. 389 would amend the Unfunded Mandates Reform
Act of 1995, which the Chairman also supported, to allow a
point of order against legislation that would impose private-
sector mandates costing more than $100 million. Under S. 389,
the Congressional Budget Office (CBO) would provide Congress
with detailed information on the effects of such mandates,
including the effect on consumer prices, workers' wages, job
creation and small business growth. In his capacity, as a
member of the Budget Committee, Senator Bond provided an
opening statement in support of S. 389, for a February 12,
1997, Budget Committee hearing on the bill. Senator Bond
encouraged the Budget Committee to consider the important
benefits of this bill.
On June 4, 1997, during Small Business Week, the Committee
held a hearing on S. 389. To facilitate movement of S. 389, the
Budget Committee waived its jurisdiction, and the Governmental
Affairs Committee approved it on June 17, 1997. Although the
companion bill, H.R. 3534, passed the House on May 19, 1997 by
a vote of 279 to 132, S. 389 did not reach the Senate Floor
prior to adjournment.
B. Congressional Office of Regulatory Analysis Act
Legislation
On February 25, 1998, Chairman Christopher S. ``Kit'' Bond
joined Senator Richard Shelby as an original cosponsor of the
Congressional Office of Regulatory Analysis Act (S. 1675) to
create a Congressional Office of Regulatory Analysis (CORA).
Patterned after the CBO, but on a smaller scale, CORA would be
a professional, nonpartisan office to analyze major and non-
major regulations and help Congress fulfill its oversight
powers provided under the Congressional Review Act. The bill
would put first priority on analysis of major rules, second
priority on non-major rules recommended for analysis by a
Congressional committee, and third priority on non-major rules
recommended for review by individual Members of Congress. The
bill would also consolidate within CORA certain activities
assigned to the CBO under the Unfunded Mandates Reform Act of
1995 and duties assigned the General Accounting Office (GAO)
under the Congressional Review Act. In addition, CORA would
prepare an annual report on the estimated total cost of
regulations.
Although the House version of CORA was approved by four
committees, it was not considered by the full House of
Representatives. Absent consideration by the House, which was
expected to precede Senate action, the legislation was not
considered by the Senate during the 105th Congress.
C. Section 610 Reforms
Background
Under section 602 of the Regulatory Flexibility Act,
agencies are required to publish a ``regulatory flexibility
agenda'' in April and October of each year to inform the public
of agency rulemakings that are likely to have a significant
economic impact on a substantial number of small entities. The
Unified Agenda of Regulatory and Deregulatory Actions is
published to meet this requirement as well as other
requirements. Section 610(a) of the Act requires agencies to
publish a plan for the periodic review of their existing rules
that have or will have a significant economic impact on small
entities. That plan must provide for the review of all such
rules within 10 years of their publication as a final rule.
Section 610(c) requires agencies to publish a notice that
includes a list of existing rules that have a significant
economic impact on a substantial number of small entities,
which are to be reviewed in accordance with section 610 during
the next 12 months. The notice must include a brief description
of each rule, the need for and legal basis of the rule, as well
as an invitation for public comment on the rule. In recent
years, agencies have included in the Unified Agenda the
announcement of rules to be reviewed under section 610.
Committee Action
In response to a request from this Committee, the GAO
prepared an April 22, 1997, report (GAO/GGD/OGC-97-77R) on
whether agencies were using the Unified Agenda appropriately to
satisfy the notification requirements in section 610(c). The
GAO identified 21 entries labeled ``Section 610 Review'' in the
November 29, 1996, edition of Unified Agenda, but concluded
that none of these entries satisfied all the requirements of
section 610(c). The GAO offered recommendations to improve
agencies' compliance with section 610(c) and to assist the
public in identifying the rules to be reviewed. The GAO later
updated its April 1997 report by examining agencies' entries in
the October 29, 1997, edition of the Unified Agenda. In its
February 12, 1998, report and testimony for the House Committee
on Small Business (GAO/GGD-98-61R and GAO/T-GGD-98-64), the GAO
concluded that 31 of the 34 entries in the Agenda labeled
``Section 610 Review'' were not in compliance with section
610(c). The GAO recommended that the Office of Management and
Budget's Office of Information and Regulatory Affairs and the
Regulatory Information Service Center, which prepares the
Unified Agenda, ensure that future entries labeled ``Section
610 Review'' comply with section 610(c) so that the public is
not misled.
Legislation
On June 27, 1997, Senators Fred Thompson and Carl Levin
introduced S. 981 to provide comprehensive regulatory reform
through cost-benefit analysis and risk assessment. Many small
business organizations that supported the bill were especially
interested in the provision that would provide for periodic
review of existing regulations. The review of rules was opposed
by several environmental groups. The staff of the Committee on
Governmental Affairs consulted with the Committee on Small
Business to craft alternate language that would retain the
support of small business. Revisions to section 610 were
recommended.
On March 10, 1998, by a vote of eight to four, the
Committee on Governmental Affairs amended and approved the
Chairman's mark, which included a provision to revive section
610. Supported by small business, the changes would (1) require
agencies to develop new plans for the periodic review of rules,
with those plans being revised every five years; (2) provide
the opportunity for small businesses to comment on the draft
plans proposed by agencies before they become final; and (3)
require the agencies to publish the conclusion of their reviews
of rules under section 610. During the summer of 1998,
negotiations between the sponsors of S. 981 and the
Administration produced a compromise bill that did not include
the section 610 language because of opposition from the
Administration. S. 981 never reached the Senate Floor.
D. Environmental Compliance Tools
Background
On April 28, 1998, Chairman Bond convened a hearing
entitled ``Environmental Compliance Tools for Small Business.''
Witnesses provided testimony on the complexity of environmental
regulations and the importance of compliance assistance
designed to help small businesses comply with the laws and
regulations administered by the Environmental Protection
Agency.
Legislation
Earlier in the 105th Congress, Senator Conrad Burns
introduced the Small Business Regulatory Assistance Act of 1998
(S. 1957), a bill to provide compliance assistance related to
regulations issued by the EPA, OSHA, and the IRS. Responding to
comments from the small business community, Senator Burns
developed the ``Small Business Environmental Assistance Pilot
Programs'' amendment. The pilot would establish an Advisory
Committee on Small Business Environmental Assistance Programs
to review existing environmental compliance assistance programs
and to recommend the future course for such programs. Second,
the Small Business Administration would be authorized to
establish a demonstration grant program, based on the
recommendations and strategy developed by the Advisory
Committee, to provide four-year grants to certain small
business development centers to provide environmental
compliance assistance to small businesses in partnership with
existing programs.
Committee Action
Chairman Bond accepted Senator Burns' amendment on
September 15, 1998, when the Committee marked up H.R. 3412, the
Chairman's Year 2000 Readiness and Small Business Programs
Improvement Act. H.R. 3412 passed the Senate on September 30,
1998; however, the House did not consider the bill prior to
adjournment.
IV. SMALL BUSINESS TAX ISSUES
A. Deductibility of Health Insurance for the Self-employed
Background
One of the top concerns raised by small business owners
during the 105th Congress continued to be the deductibility of
health-insurance costs by the self-employed. At the start of
the Congress, self-employed individuals could deduct only 40%
of their health-insurance costs, while their corporate
competitors were able to deduct the full cost of health
insurance for their employees. This inequity and the
competitive disadvantage caused by the tax law are significant
reasons for the lack of health-insurance coverage for more than
five million Americans in families headed by self-employed
persons.
Legislation
In response to the concerns raised by the small business
community, including the delegates to the 1995 White House
Conference on Small Business, Chairman Christopher S. ``Kit''
Bond together with Senators Olympia Snowe and Don Nickles
introduced the Home-Based Business Fairness Act of 1997 (S.
460) on March 18, 1997. The lead provision of this legislation
called for full deductibility of health insurance for self-
employed individuals beginning in 1997. With strong support
from small business owners, the bill received considerable
support in the Senate and was the subject of a hearing by the
Senate Finance Committee's Subcommittee on Taxation and IRS
Oversight on June 5, 1997.
The momentum for increasing the deductibility of health
insurance for the self-employed continued to grow as the Senate
took up tax legislation in the summer of 1997. During the
debate, an amendment supported by the Chairman and Committee
Members was added to the bill that would accelerate the
deduction substantially. When it was signed into law on August
5, 1997, the Taxpayer Relief Act of 1997 included a provision
that finally broke the 80% barrier and increased the
deductibility of health-insurance costs for the self-employed
to 100%. While the full deduction was phased in over ten years,
the bill significantly increased the deduction in most of the
intervening years.
Following on the success in achieving full deductibility as
part of the Taxpayer Relief Act, the Chairman affirmed his
commitment to accelerate the phase-in period at the earliest
date possible. Momentum continued to build for further change
throughout 1998, with the Chairman and Committee Members
working to identify opportunities to reach 100% deductibility
at a faster rate. As the Second Session of the 105th Congress
drew to a close, attention turned to an omnibus appropriation
bill and the potential for including the self-employed health-
insurance issue. With the strong support of the small business
community, the Omnibus Consolidated and Emergency Supplemental
Appropriations Act of 1999 moved the effective date for full
deductibility from 2007 to 2003. In addition, the bill phased
in the higher deductibility rates during the intervening period
as follows: 60% in 1999 through 2001, 70% in 2002, and 100% in
2003. Chairman Bond applauded this provision for providing an
additional deductible amount for the self-employed each year,
but reaffirmed that full and immediate tax parity for the self-
employed will continue to be a top priority in the 106th
Congress.
Committee Action
The Committee held hearings that addressed the
deductibility of health insurance for the self-employed on
February 6, March 25, April 3, and October 22, 1997.
B. Home-Office Deduction
Background
A significant issue identified by home-based business
owners is the home-office deduction. After the Supreme Court's
1993 decision, Commissioner v. Soliman, the only home-based
businesses that could deduct the costs associated with their
home office were those that saw their clients in the homes. As
a result, the home-office deduction was not available to
service providers like construction contractors, landscaping
professionals, and sales representatives, who must by necessity
perform their services outside of the home.
Legislation
The Home-Based Business Fairness Act, introduced by the
Chairman and Senators Snowe and Nickles, incorporated the
legislation that Senator Orrin Hatch introduced earlier in the
year, which defines a home office to include one where the
individual performs his or her essential administrative and
management activities, such as billing and recordkeeping,
provided that the business owner performs these activities on a
regular, ongoing, and non-incidental basis and has no other
office in which to perform them.
Home-based business owners across the country rallied in
support of this legislation, arguing that the Soliman decision
puts small businesses operated out of the owners' homes at a
competitive disadvantage. A business owner that rents or buys a
store front from which to operate his or her business can
deduct the rent or depreciate the cost of the property as a
business expense. Yet a home-based business, under the Soliman
decision, cannot deduct the same costs because the office is in
the owner's home. In addition, the decision ignores the current
trend of more Americans working from home due to corporate
downsizing, a desire to spend more time with their children,
and entrepreneurship.
Restoration of the home-office deduction received strong
support in the Senate, and after hearings on the Chairman's
bill before the Senate Committee on Small Business and the
Finance Committee's Subcommittee on Taxation and IRS Oversight,
the issue was included in the Taxpayer Relief Act of 1997. As a
result, beginning in 1999, a home-based business will be
permitted to deduct the associated costs of an office in the
owner's home if it is used for administrative or management
activities of the business, provided that there is no other
office where the owner conducts substantial administrative or
management activities.
Committee Action
The Committee held hearings that addressed the home-office
deduction on February 6, March 25, and April 3, 1997.
C. Independent-Contractor Reform
Background
As in the 104th Congress, small businesses continued to
urge Congress to clarify the definition of an independent
contractor. Over the past three decades, the Internal Revenue
Service (IRS) has relied on a 20-factor test based on the
common law to determine whether a worker is an employee or an
independent contractor. The test is a complex set of extremely
subjective criteria with no clear weight assigned to any of the
factors. As a result, a small business owner is not able to
predict which of the 20 factors will be most important to a
particular IRS agent, and finding a certain number of these
factors in any given case does not guarantee the outcome.
Moreover, the IRS' determination inevitably occurs two or
three years after the parties have determined in good faith
that they have an independent-contractor relationship. A
business recipient of the services forced to reclassify the
independent contractor as an employee must pay the payroll
taxes the IRS says should have been collected in the prior
years, plus interest and penalties. In addition, the
reclassified worker may have a portion of his or her business
expenses disallowed by the IRS, which again results in
additional taxes, interest and penalties. This situation is
stifling the entrepreneurial spirit of many small business
owners who find that they do not have the flexibility to
conduct their businesses in a manner that makes the best
economic sense and that serves their personal and family goals.
Legislation
The final feature of Chairman Bond's Home-Based Business
Fairness Act was a simple and clear safe-harbor based on
objective criteria for classifying a worker as an independent
contractor. The bill also provides a bar against retroactive
reclassifications by the IRS. In addition, the bill repeals
section 1706 of the 1986 Tax Reform Act, which effectively bars
an entire group of independent contractors from the protection
available in section 530 of the Revenue Act of 1978. These
provisions were also separately introduced as S. 473.
While the independent-contractor provisions of the
Chairman's bill received strong endorsements from a wide
variety of business groups, including the National Federation
of Independent Business and the Small Business Legislative
Council, they were not included in either the Senate or House
version of the Taxpayer Relief Act of 1997, which were
considered during the summer of 1997. Instead, the House Ways
and Means Committee included an expansive safe-harbor that
Representative Donna Christensen had introduced during the
104th Congress. The Senate version of the bill was silent on
the issue of independent-contractor reform.
During the conference on the Taxpayer Relief Act, the
Chairman and other Members of the Committee wrote to the
conferees urging them to craft a bipartisan agreement on a
safe-harbor for independent contractors and protection against
retroactive reclassification. A number of small business groups
also urged the House and Senate conferees to consider the
Chairman's provisions in S. 460 as such a compromise solution.
Regrettably, the Clinton Administration informed the conferees
that its top objection to the tax bill was the House's
independent-contractor reform provisions. Consequently, the
final tax bill did not address this critical issue for
entrepreneurs.
In March 1998, Senator Connie Mack introduced as a stand-
alone bill the provisions from the Chairman's Home-Based
Business Fairness Act concerning the repeal of section 1706.
Repealing this provision of the 1986 Tax Reform Act would
permit companies that hire certain technical workers, such as
computer consultants, the same protection against IRS
reclassification that has long been available to other
companies. Again, due to the Administration's opposition, this
provision was not addressed in the tax package that was
ultimately included in the Omnibus Consolidated and Emergency
Supplemental Appropriations Act of 1999, which was passed and
signed into law at the end of the Congress.
Committee Action
The Committee held hearings that addressed the worker-
classification issue on February 6, March 25, April 3, and
October 22, 1997.
D. IRS ``Stealth Tax'' Regulations
Background
At the start of the 105th Congress, the Treasury Department
issued a proposed regulation that ostensibly defined who is a
``limited partner'' for employment tax purposes. The result of
the proposed regulation, however, would be to subject all
income received by many limited partners to self-employment tax
(i.e., Social Security and Medicare taxes). As a result, many
limited partners would have to pay self-employment taxes not
just on their income from the services they perform, but also
on the return they receive for investing in the partnership.
The IRS' proposed regulations became known as the ``stealth
tax'' regulations.
Legislation
Following the promulgation of the proposed regulations,
Chairman Bond wrote to IRS Commissioner Margaret Richardson on
March 10, 1997, requesting an explanation for why the agency
failed to conduct a regulatory flexibility analysis on the
proposed regulations, which plainly impose a collection-of-
information burden on small businesses. With no response from
the IRS and the outcry from the small business community
mounting, the Chairman again wrote to Commissioner Richardson
on April 4, 1997, calling her attention to the fact that in
addition to failing to comply with the Small Business
Regulatory Enforcement Fairness Act, the proposed regulation's
new definition of ``limited partner'' was tantamount to a tax
increase on many limited partners without Congressional
approval. Finally, on April 9, 1997, the Chairman together with
18 other Senators wrote to Treasury Secretary Robert Rubin
requesting that the proposed regulations be withdrawn.
On June 5, 1997, Senators Richard Shelby and Chairman Bond
introduced the Stealth Tax Prevention Act (S. 831), which would
provide for Congressional review of regulations like the
``stealth tax'' regulations if they increase Federal revenue.
While this bill was not addressed by the Senate, the Taxpayer
Relief Act of 1997 included a moratorium on the Treasury
Department issuance of the ``stealth tax'' regulations in final
form in order for Congress to have adequate time to find a
statutory solution to the issue. The moratorium expired on June
30, 1998, but as a result of the persistent pressure from the
Chairman, it appears that the Treasury Department may refrain
from issuing final regulations until Congress provides
legislative guidance on the issue.
E. IRS Nursery Regulations
Background
On August 22, 1997, the Department of the Treasury issued
temporary and proposed regulations concerning the uniform
capitalization rules under section 263A of the Internal Revenue
Code. Representatives of the nursery industry, which is
dominated by small nursery growers, expressed concern that the
new regulations would have a significant, negative impact on
nurseries by narrowing the availability of a statutory
exemption for certain ``farming businesses'' under the tax
accounting rules. As a result, these small businesses would be
subject to considerably greater regulatory burdens and
compliance costs.
Legislation
In response to these concerns, Chairman Bond wrote to
Treasury Secretary Rubin and Acting IRS Commissioner Michael
Dolan on September 19, 1997, requesting that the regulations be
withdrawn for their failure to comply with the requirements of
the Regulatory Flexibility Act and the Small Business
Regulatory Enforcement Fairness Act and for their negative
effects on small business. On October 14, 1997, IRS Chief
Counsel Stuart Brown responded to the letter suggesting that
the regulations merely clarify the definition of ``farming
business'' but do not change it, and that because no small
businesses will be affected, no regulatory flexibility analysis
was required. The reaction from the nursery industry clearly
indicated that the agency did not comprehend the number of
small businesses that would be negatively affected.
In response to a flood of public comments, including the
Chairman's letter, the IRS issued a formal announcement on
November 28, 1997, stating that the regulations would not
change who is eligible for the farming exemption relied upon by
the nursery industry. The nursery industry declared the
announcement to be a victory for its members. While Chairman
Bond applauded the agency's decision, he pledged to review the
final regulations when they are issued to ensure that the
farming exemption is preserved.
F. Electronic Federal Tax Payment System
Background
A provision of the 1993 North American Free Trade Agreement
(NAFTA) legislation required the IRS to collect an increasing
percentage of business taxes electronically. This new
collection requirement will be phased in through 1999. To
implement the requirement, the IRS developed the Electronic
Federal Tax Payment System (EFTPS), which is based on the
dollar amount of employment taxes that a business paid two
years prior. Initially, EFTPS applied only to the largest of
businesses. Beginning in 1997, however, businesses with
employment tax liabilities in excess of $50,000 were required
to use the system, which caused enormous concern within the
small business community. As a result, the Small Business Job
Protection Act extended the date that these small businesses
must start participating by six months to July 1, 1997.
Legislation
Early in the 105th Congress, Senator Nickles introduced
legislation (S. 570) that would raise the threshold for
businesses required to participate in the EFTPS program to $5
million in payroll taxes, rather than the current $50,000
level. This change would effectively make participation in the
EFTPS system voluntary for most small businesses and would
permit small enterprises to use EFTPS if it makes good business
sense, but without being subject to a government mandate.
While this legislation was pending and as the extended
deadline for small businesses to participate in EFTPS
approached, Chairman Bond urged the IRS to waive penalties
voluntarily for one year to permit Congress time to make
statutory changes and allow small businesses time to adjust to
EFTPS without the fear of penalties. He also called on the
agency to use its statutory authority to create a more
reasonable small business exemption from the EFTPS mandate. On
June 2, 1997, the IRS agreed to part of the Chairman's request
and announced that no penalties would be imposed before
December 31, 1997, on small businesses required to use EFTPS.
In addition, the Chairman succeeded in further extending the
penalty moratorium through June 30, 1998, as part of the
Taxpayer Relief Act of 1997. Prior to that date, the IRS again
extended the moratorium through the end of 1998. Finally, on
November 18, 1998, the IRS announced that it would again extend
the penalty waiver for an additional six months. As a result,
small businesses can continue to use paper coupons through June
30, 1999, without incurring a 10% penalty as they make the
transition to EFTPS.
In addition to ensuring that small businesses would not be
penalized for trying to meet the requirements of EFTPS, the
Chairman maintained a dialogue with representatives of the two
Treasury Finance Agents (e.g., NationsBank and First National
Bank of Chicago), which administer the EFTPS system. The
Chairman's goal was to improve communications with the small
business community and clarify the many misunderstandings about
the EFTPS program. While S. 570 was not enacted during the
105th Congress, the Chairman continued his oversight of the
EFTPS program in an effort to minimize the adverse impact on
affected small businesses.
G. Capital-Gains Tax Reduction
Background
Relief from the capital-gains tax was identified as a
significant issue for small businesses during the 105th
Congress. Advocates of a rate reduction asserted that it would
assist small business owners directly in their operations as
well as provide a much-needed source of capital for new start-
up companies and for expansion of existing enterprises, by
encouraging investors to recognize built-in gains. The small
business community also supported expansion of the special
capital-gains tax rules for investments in small companies,
especially modifications that would permit gains to be deferred
so long as they are reinvested in another qualifying small
business. Such a provision would provide successful
entrepreneurs with an additional pool of capital in order to
create a new success story.
Legislation
In response to the capital access concerns raised by the
business sector, the Taxpayer Relief Act of 1997 reduced the
capital-gains tax rate to 20% for most individual taxpayers
(10% for individuals in the lowest tax bracket), and further
reduced the rate to 18% (8% for individuals in the lowest
bracket) beginning in 2001 for assets held for five years or
more. At the insistence of the Clinton Administration, however,
the new 20% rate applied only to gains from the sale of capital
assets held for more than 18 months, rather than 12 months
under prior law. This extension of the holding period resulted
in enormous complexity and compliance burdens on all taxpayers
with capital-gain transactions.
With the strong support of Chairman Bond, the Taxpayer
Relief Act also expanded the 50% exclusion for individuals who
sell stock in a small business acquired at original issuance
and held for at least five years. Under the bill, the amount of
gain that constitutes a minimum tax preference for purposes of
the alternative minimum tax was reduced from 50% of the
excluded gain to 42%. In addition, the bill permits an
individual to roll over gains from the sale of stock in a
qualified small business held for more than six months,
provided that the individual uses the proceeds to purchase
other qualified small business stock within 60 days of the
sale. These changes to the special treatment for capital gains
on the sale of small business stock will encourage continued
investment in small corporations and provide much-needed
capital for their growth and development.
During the conference on the IRS Restructuring and Reform
Act (H.R. 2676), the conferees added a provision to restore the
capital-gains holding period to 12 months. The restored 12-
month holding period was effective for transactions occurring
after January 1, 1998, and is a major victory for small
businesses in terms of reducing compliance costs while
preserving the lower capital-gains tax rates.
Committee Action
The Committee held a hearing that addressed the capital-
gains issue on October 22, 1997.
H. Estate Tax Reform
Background
The estate tax, or more accurately the ``death tax,''
continued to be a top concern for small businesses during the
105th Congress. This tax is increasingly devastating small,
family-owned businesses and farms. Recent statistics indicate
that over two-thirds of these enterprises are being forced to
sell or liquidate their operations in order to pay this tax. As
a result, less than one-third of family-owned businesses are
passed on to a second generation, and only about one-eighth are
passed to a third generation. The families are not the only
losers in this case--every small, family-owned business and
farm forced into liquidation by the ``death tax'' often has a
direct, concrete effect on employment in the local community.
Moreover, the justification for this tax has come under
increased scrutiny since it generates only about 1% of the
Federal revenues.
Legislation
During the First Session of the 105th Congress, Senator
Charles Grassley introduced the Estate Tax Relief for the
American Family Act of 1997 (S. 479). With the support of
Chairman Bond, this legislation served as the basis for the
estate-tax provisions included in the Taxpayer Relief Act,
which incrementally raised the estate-tax exemption for all
individuals from $600,000 to $1 million by 2006. The bill also
provides a $1.3 million exemption for qualifying family-owned
businesses beginning in 1998. Both changes to the estate-tax
law were a substantial victory for the small business
community.
Committee Action
The Committee held hearings that addressed estate taxes on
March 25, April 3, and October 22, 1997.
I. Alternative Minimum Tax Reform
Background
Early in the 105th Congress, the IRS issued guidance
concluding that certain installment sales by farmers would be
treated as a preference item for purposes of the alternative
minimum tax (AMT). Due to the economic difficulties already
plaguing the farming industry, the IRS' decision caused a
considerable public outcry. Representatives of the farming
industry argued that installment contracts are widely used for
cash management purposes, and the IRS' new position would cause
grave consequences across the country.
Small businesses in general also raised concerns about the
growing complexity and compliance burdens of the AMT. With
differing depreciation schedules and rules for other items, the
AMT causes businesses to keep multiple sets of books and
perform complex calculations when preparing their tax returns.
In addition, because most small businesses do not have a full-
time employee to handle these accounting and tax issues, most
firms must hire outside professionals, which further increases
the compliance costs for these businesses.
Legislation
In response to concerns raised by the farming industry,
Senator Grassley introduced legislation (S. 181) that would
overrule the IRS' new position on the treatment of installment
sales by farmers. The Chairman and several other Members of the
Committee cosponsored this legislation, and with the strong
support of the farming industry it was included in the Taxpayer
Relief Act of 1997.
The Taxpayer Relief Act also provided an exemption for
small businesses from the corporate alternative minimum tax
beginning in 1998. In order to qualify, the business must have
gross receipts of less than $5 million. The Omnibus
Consolidated and Emergency Supplemental Appropriations Act of
1999 also included relief from the AMT by exempting for tax
year 1998 certain tax credits, such as the $500 child tax
credit, HOPE scholarship and Lifetime Learning tax credit, the
adoption tax credit, the tax credit for the elderly and
disabled, and the dependent-care tax credit. Together these
changes will substantially reduce the burdensome recordkeeping
and compliance burdens for many small enterprises and their
owners.
J. Tax Relief for Farmers
Background
Due to a spate of weather-related problems and the global
economic turmoil, farmers, who are predominantly small business
owners, suffered considerable financial difficulties during the
105th Congress. In addition to calling for assistance through
conventional farming programs, many small business farmers and
ranchers urged Congress to provide relief through tax
provisions that would help the industry weather the current
crisis.
Legislation
In addition to AMT relief described above, the 105th
Congress provided important tax relief for American farmers.
During the First Session, in response to appeals from the
farming industry, Chairman Bond and Members of the Committee
joined in a letter to House and Senate conferees on the
Taxpayer Relief Act of 1997, urging them to include income-
averaging provisions for farmers. As a result of these efforts,
the Act permitted farmers to average their income from farming
operations over the prior three years. The provision is
effective for taxable years 1998, 1999, and 2000.
Early in the Second Session, Senator Conrad Burns
introduced legislation (S. 1879), to extend permanently the
income-averaging provisions enacted in the Taxpayer Relief Act.
Senator Grassley also introduced the Farm and Ranch Risk
Management Act (S. 2078), which would permit farmers to
establish Farm and Ranch Risk Management (FARRM) accounts to
ease the effects of bad harvest years. Under the bill, a farmer
would be able to deduct contributions to a FARRM account up to
20% of his income. The account balance could be used during the
following five years to support the farm, and distributions
would be subject to tax in the year withdrawn.
The Omnibus Consolidated and Emergency Supplemental
Appropriations Act of 1999 included a number of provisions that
will provide tax relief for farmers across the country. In
addition to making income-averaging permanent for farmers, the
Act permitted farmers to carry back net operating losses (NOLs)
for five years, instead of the two-year period applicable to
other businesses. This provision will provide immediate help
for farmers by permitting them to offset current losses against
prior years' income and receive a tax refund.
The Act also provided that ``production flexibility
contract'' payments under the Farm Bill will be subject to tax
only in the year the payment is actually received, not when the
farmer has a constructive right to them. This will provide
relief in 1998 by deferring the tax by one year for farmers who
may not actually receive their payments until 1999.
K. Pension Reform
Background
Pension reform continued to be an important issue for small
businesses during the 105th Congress. With concerns rising
about the long-term solvency of the Social Security Trust Fund,
attention also focused on the complexity of the current rules
governing private pension plans and ways to encourage more
small enterprises, which continued to lag behind larger
businesses, to offer retirement benefits to their employees.
Legislation
Early in the First Session, Senator William Roth, together
with Chairman Bond and other Members of the Committee on Small
Business, introduced the Savings and Investment Incentive Act
of 1997 (S. 197). The bill served as the basis for a number of
provisions in the Taxpayer Relief Act of 1997 concerning
individual retirement accounts (IRAs), including an increase in
the income limits for individuals making deductible
contributions to IRAs. The Act also repeals the active-
participation rule under previous law that precludes one
spouse, who is not covered by an employer-sponsored pension
plan, from making deductible contributions to an IRA if the
other spouse is covered by an employer-sponsored plan.
The Taxpayer Relief Act also includes the provisions from
S. 197 that create ``IRA Plus Accounts,'' contributions to
which are not deductible but the earnings in which can be
withdrawn free of tax if the account is open for at least five
years and the owner reaches the age of 59\1/2\. These accounts
have subsequently become known as Roth IRAs. In addition, the
Act includes provisions from S. 197 that permit penalty-free
withdrawals from IRAs for first-time home buyers and for
educational expenses.
Senator Judd Gregg also introduced pension legislation
during the First Session. The Women's Investment and Savings
Equity (WISE) Act of 1997 (S. 620), included reforms to promote
pension participation especially by women. In particular, the
bill called for the elimination of the active participation
rule for spouses covered by employer-sponsored pension plans,
which was later included in the Taxpayer Relief Act of 1997. In
addition, the WISE Act would permit retirement contributions to
be made while an individual is on maternity or paternity leave
and would permit ``catchup contributions'' by parents returning
to work after periods of non-participation in a pension plan.
At the close of the First Session, the Savings Are Vital to
Everyone's Retirement (SAVER) Act was signed into law. This
legislation called for several national summits on retirement
savings, the first of which was held in 1998. In part, the bill
called on the summit participants to focus on pension reform
for small businesses. Chairman Bond recommended several
individuals to serve as delegates to the summit, and Senate
Majority Leader Trent Lott ultimately appointed four of
Chairman Bond's six nominees. The summit was held June 4 and 5,
1998, and provided recommendations for improving the retirement
savings system in this country.
L. IRS Restructuring and Reform
Background
On June 25, 1997, the National Commission on Restructuring
the Internal Revenue Service presented its report detailing the
finding and recommendations of the Commission's year-long
examination of the IRS. The report described an agency sorely
in need of reorganization and of modernization with regard to
its computer equipment and procedures. The Senate Finance
Committee highlighted these difficulties at the IRS during
three days of hearings, held in September 1997. These hearings
focused national attention on abusive behavior by IRS employees
against taxpayers. Additional hearings were held by the Finance
Committee in May 1998, which examined complaints by taxpayers,
including small businesses, about the agency's conduct and
failure to respect the rights of taxpayers.
Legislation
Following the release of the National Commission on
Restructuring the Internal Revenue Service's report, Senators
Bob Kerrey and Charles Grassley introduced the Internal Revenue
Service Restructuring and Reform Act of 1997 (S. 1096), which
provided significant reforms to the operation of the IRS and
improvements to the taxpayer rights provisions in the tax code.
Later in October 1997, the House of Representatives passed
companion legislation, and the Clinton Administration reversed
its long-standing opposition to the bill.
With Senate consideration of the IRS reform legislation
deferred until early 1998, Chairman Bond sent a letter to a
wide range of small business organizations requesting their
ideas on how the IRS could be restructured to serve all
taxpayers better and seeking proposals for improving taxpayer
rights. In addition, the Committee held hearings on IRS
restructuring and reform in February and March of 1998, at
which witnesses testified about the enormous obstacles that
taxpayers face when dealing with the IRS. The witnesses also
evaluated a number of proposals and made recommendations for
improving taxpayer rights for small business owners.
In response to the hundreds of individuals and small
business owners who called and wrote with suggestions and the
Committee's hearings, Chairman Bond developed a package of
proposals to provide relief for a broad spectrum of taxpayers,
from single parents and married couples to small business
owners and farmers. Specifically, the Putting the Taxpayer
First Act (S. 1669) included proposals for restructuring the
IRS, improving taxpayer rights, and expanding electronic filing
of tax and information returns.
A significant provision of the bill called for
restructuring the IRS along customer lines so that taxpayers
with similar characteristics and needs, such as individuals,
small businesses and the self-employed, and large companies
would be able to go to an IRS service center dedicated to them
and with personnel specially trained in issues relevant to
them. On January 28, 1998, IRS Commissioner Charles Rossotti
announced that the IRS would implement a customer-based
reorganization along the lines suggested by Chairman Bond.
Later in March, the IRS announced that it would implement
another provision of the Chairman's Putting the Taxpayer First
Act, namely an advisory board to help the agency with plans to
expand electronic filing. In a letter to IRS Commissioner
Rossotti, Chairman Bond praised the proposal and urged the
Commissioner to implement two other provisions from his bill.
The first would ensure that electronic filing remains a
voluntary option for taxpayers, not another government mandate.
The second would require the IRS to comply with the procedural
safeguards of the Regulatory Flexibility Act of 1980, and the
1996 amendments in Senator Bond's Small Business Regulatory
Enforcement Fairness Act (known as the Red Tape Reduction Act),
when preparing strategic plans and regulations on electronic
filing. These statutes require the IRS to conduct small
business outreach, analyze the impact of regulations on small
entities, and minimize those impacts whenever possible.
The Finance Committee marked up the Internal Revenue
Service Restructuring and Reform Act (H.R. 2676) at the end of
March 1998. Chairman Roth's mark added several provisions from
Chairman Bond's ``Putting the Taxpayer First Act.'' The final
legislation, which was signed into law on July 22, 1998,
contained a substantial number of provisions from Chairman
Bond's bill, including a requirement that the IRS restructure
its operations to serve specific groups of taxpayers with
similar characteristics and needs; greater due process
protections for taxpayers to guard against unreasonable
seizures by the IRS; expansion of the current attorney-client
privilege of confidentiality to cover accountants and other tax
practitioners who provide tax advice; reform of the penalty and
interest rules; a requirement that the IRS establish an
independent administrative appeals process for taxpayers; a
prohibition against the IRS contacting third parties, such as a
business' customers or suppliers, without notifying the
taxpayer first; and a prohibition on communications between an
appeals officer and the IRS auditor or collection agent
handling the case without permitting the taxpayer to be
present.
The legislation also included Chairman Bond's provision
stating that a taxpayer may recover attorney's fees and costs
when the IRS discloses information about the taxpayer without
permission and when an IRS employee improperly browses a
taxpayer's records. This provision clarified the Taxpayer
Browsing Protection Act (S. 522), which was signed into law on
August 5, 1997. That bill prohibited browsing of taxpayer
records by employees of the IRS. Under the bill, any employee
convicted of browsing will be subject to a fine of up to $1,000
or imprisonment of up to one year, or both, and will be
dismissed from employment with the IRS. The bill also requires
the IRS to notify taxpayers whose records are the subject of
browsing.
Committee Action
The Committee held hearings on IRS restructuring and reform
on February 12 and March 2, 1998.
M. Fundamental Tax Reform
Background
The momentum for fundamental tax reform continued to build
throughout the 105th Congress, and small businesses played an
important role in demonstrating the counterproductive effects
of the current tax code. On September 22, 1997, the National
Federation of Independent Business started a national campaign
to end the Internal Revenue Code. This campaign ultimately led
to one million signatures on a petition calling for the repeal
of the current tax law and a fervent plea from small businesses
across the country for a fairer tax system with lower cost and
compliance burdens.
Legislation
In September 1997, Senator Tim Hutchinson introduced S.
1225, which would terminate the tax code by December 31, 2001.
The bill also sets forth principles for a new tax system.
Subsequently, Senator Sam Brownback introduced legislation (S.
1233) that would end the code by December 31, 2000, except
self-employment and Social Security withholding. On November
10, 1997, Senator Hutchinson introduced S. 1520, which combined
the two previous bills ending the tax code on December 31,
2001.
Based on these initiatives, Chairman Bond convened a
hearing of the Committee on October 22, 1997, to examine how
fundamentally reforming the current tax system would affect
small businesses. The major small business groups testified at
the hearing and presented a spectrum of views about whether
Congress should modify the existing tax code or completely
replace it with a new system, such as a flat tax or national
sales tax.
On June 17, 1998, the House approved legislation to
terminate the tax code by December 31, 2002, provided that a
replacement system is adopted by July 4, 2002. The Senate
considered similar legislation as an amendment to the Fiscal
Year 1999 Treasury/Postal Appropriations bill (S. 2312),
although the amendment was ultimately defeated.
With the enactment of the IRS restructuring and reform
legislation in 1998, the Chairman noted that H.R. 2676 was a
solid step forward in protecting taxpayers but that the long-
term problem remains for small businesses--the Internal Revenue
Code is unduly complicated and imposes enormous, unnecessary
burdens on taxpayers. To continue the efforts he started during
the First Session to evaluate replacement tax systems and ways
to simplify the current tax law, Chairman Bond sent letters to
a variety of small business organizations requesting their
input. In addition, the Committee established a suggestion box
on its Internet home page to solicit ideas for fundamental tax
reform. Hundreds of individuals and small business owners
responded to these initiatives, providing important suggestions
for enacting fundamental tax reform.
The Chairman also requested that the General Accounting
Office (GAO) identify the filing and reporting requirements
that place significant burdens on small businesses. In his July
20, 1998, letter Chairman Bond asked the GAO to comment on ways
that these burdens could be reduced or eliminated without
compromising overall compliance with the tax code. Although a
long-term project, this request is anticipated to result in GAO
recommendations that can be used to promote improvements at the
administrative level and as the basis for future legislative
initiatives.
Committee Action
The Committee held a hearing on fundamental tax reform and
small business on October 22, 1997.
N. Internet Tax Freedom Act
Background
Throughout the 105th Congress, the Internet continued to
develop as a new frontier for individuals and businesses in
this country and around the world. Over the past several years,
the growth of the Internet and the volume of business
transactions over this electronic medium has expanded
exponentially. By some estimates it will grow even faster in
the years to come, playing an increasingly important role in
the national and global economy. As a result of this explosive
growth, many businesses, especially small entrepreneurs, have
had to contend with a number of obstacles. Chief among them is
the enormous number, complexity, and ambiguity of tax laws that
could apply to business transactions over the Internet.
According to some estimates, a business could be subject to as
many as 30,000 taxing jurisdictions just for doing business
over the Internet.
Early in the 105th Congress, support began to build for a
moratorium on multiple and discriminatory taxation of Internet
commerce. With small firms playing a major role in this new
marketplace, the issue took on heightened importance for the
small business community.
Legislation
Senator Ron Wyden introduced the Internet Tax Freedom Act
(S. 442) in March 1997, and Senator Gregg introduced the
Internet Fairness and Interstate Responsibility Act (S. 1888)
the following year. Senator Wyden's legislation served as the
basis for the legislation reported by the Senate Commerce
Committee and the Finance Committee during the Second Session.
While the Commerce and Finance Committees' version of the
Internet Tax Freedom Act differed in the details, both called
for a moratorium on state and local taxation of Internet access
(e.g., a monthly service provided by companies like America
Online) as well as on multiple and discriminatory taxes on
electronic commerce (i.e., additional or specific taxes imposed
on electronic commerce that are not levied on other forms of
commerce such as mail order sales). Each version also
established a commission to make recommendations to Congress on
Internet taxation by state and local governments as well as on
international taxation and international trade issues. The
commission is to include representatives of the Federal
government, state and local governments, businesses engaged in
electronic commerce, and consumer groups.
When the Senate considered the Internet Tax Freedom Act in
September, Chairman Bond proposed an amendment to the managers
that would specifically designate that small business be
included as a representative of the electronic commerce
industry on the commission. The managers accepted the
amendment, and it was unanimously approved by the Senate. The
Chairman also supported an amendment to include a
representative of local retail businesses on the commission,
which was approved. The legislation was passed by a vote of 96
to 2 on October 8, 1998.
Because of the pending adjournment and differences with the
House version of the Act, the Senate-passed Internet Tax
Freedom Act was included as part of the Omnibus Consolidated
and Emergency Supplemental Appropriations Act of 1999 (H.R.
4328). This legislation, which provided for a three-year
moratorium on state and local taxation and a 19-member
commission (including a small business representative as
proposed by Chairman Bond), was signed into law on October 21,
1998.
O. Extension of Expiring Provisions
Background
Several provisions of the tax code were due to expire
during the 105th Congress. Small businesses historically have
derived important benefits from a number of these provisions,
including the exclusion for employer-provided educational
assistance for undergraduate education, the research and
development tax credit, the work-opportunity tax credit, and
the welfare-to-work tax credit. The Committee heard from many
small business owners and advocacy groups throughout the
Congress urging continuation of these important tax provisions.
Legislation
The Taxpayer Relief Act of 1997 extended several expiring
tax provisions that are important to small business.
Specifically, the bill extended the exclusion for employer-
provided educational assistance for undergraduate education
until June 1, 2000. The bill also extended the research tax
credit, the deduction for contributions of stock to private
foundations, and the work-opportunity tax credit, each through
June 30, 1998. In addition, the bill made permanent the tax
credit for orphan drug testing.
Subsequently, the 1999 Omnibus Consolidated and Emergency
Supplemental Appropriations Act again extended several of these
popular provisions of the tax code that had expired, or would
do so soon. The Act retroactively restored the research and
development tax credit, the work-opportunity tax credit, and
the welfare-to-work tax credit through June 30, 1999. The
Generalized System of Preferences and the Trade Adjustment
Assistance program were also extended through the same date.
The Act also made permanent the fair market value deduction for
contributions of appreciated stock to private foundations.
P. Payroll Tax Relief
Background
One of the greatest financial burdens borne by small
businesses under the current tax law is the payroll tax.
Specifically, these taxes are the employer's matching
contribution to the Social Security and Medicare taxes withheld
from employees' wages. These taxes constitute an enormous fixed
cost, which can be reduced only by cutting salaries or
eliminating employees. Moreover, the self-employed are even
harder hit since they must pay both the employer's and
employee's share of these taxes, which amount to 15.3% of their
gross revenue. Small businesses have also repeatedly stressed
that the filing requirements that come with payroll-tax
reporting cost them excessive amounts of time and money to
ensure that they are in compliance.
Legislation
On April 15, 1997, Senator John Ashcroft reintroduced the
Working Americans Wage Restoration Act (S. 579), which allows a
deduction from adjusted gross income for payroll taxes paid by
employees through wage withholding and increases the deduction
for self-employment taxes. Critics of the bill argued that its
enormous cost could not be justified as consistent with the
overriding effort to achieve and maintain a balanced Federal
budget. The Senate did not consider this bill during the 105th
Congress.
At the Committee's October 22, 1997, hearing on fundamental
tax reform, several witnesses urged that efforts to reform the
tax code and restructure the Social Security system must keep
in mind the enormous burden that payroll taxes place on small
employers and the self-employed.
V. WORKPLACE ISSUES
A. OSHA Reform
1. OSHA's Cooperative Compliance Program
Background
In October of 1997, Chairman Bond met with Charles
Jeffress, then the nominee to be Department of Labor Assistant
Secretary for Occupational Safety and Health, and sent a
follow-up letter to him regarding small employers' concerns
about the Occupational Safety and Health Administration's
(OSHA) Cooperative Compliance Program (CCP). Chairman Bond
urged OSHA to work with employers seeking in good faith to
comply with OSHA standards and to reduce occupational injuries
and illnesses.
On January 21, 1998, the U.S. Chamber of Commerce, joined
by several other trade associations, filed a suit in Federal
court challenging OSHA's authority to implement the CCP,
asserting that OSHA had not conducted an appropriate rulemaking
that provided notice and opportunity for comment when
developing the CCP enforcement strategy targeting specific work
sites for participation and possible inspection. The U.S. Court
of Appeals for the D.C. Circuit granted a motion to stay the
implementation of the CCP on February 17, 1998 (the deadline
for employers to advise OSHA of whether they accepted OSHA's
``invitation'' to participate in the CCP) pending the court's
decision on the merits of the suit. Oral arguments were
scheduled for December 1998. OSHA is currently conducting
inspections in accordance with its interim strategy, which the
court ruled on April 6, 1998, was not subject to the stay.
2. Ergonomics
Background
OSHA's intention to issue an ergonomic standard continued
to cause small employers great concern during the 105th
Congress. Early in the year, House Appropriations Committee
Chairman Bob Livingston secured discretionary funding for the
National Academy of Sciences (NAS) to study existing research
on ergonomics and the workplace. In April, Chairman Christopher
S. ``Kit'' Bond joined Senators Judd Gregg, Kay Bailey
Hutchison, Don Nickles, Slade Gorton, Larry Craig and Lauch
Faircloth in a letter asking Senator Arlen Specter to remove
his objections to the study. Due to Senator Specter's
objections, the study was not conducted, and the NAS and the
National Research Council instead held a two-day seminar on
ergonomics on August 21-22, 1998.
Committee Action
On September 3, 1998, at the full Committee markup of the
Fiscal Year 1999 Labor-HHS Appropriations bill, Chairman Bond
supported Senator Gregg's amendment to provide $890,000 for
NAS' Institute of Medicine to conduct a review of all available
scientific literature examining the cause-and-effect
relationship between repetitive tasks in the workplace and
musculoskeletal disorders. The vote produced a 14 to 14 tie,
preventing adoption of the language. However, during
negotiations on the Fiscal Year 1999 Omnibus Appropriations
bill, the conference agreed to House language that called for a
NAS study on ergonomics. As signed into law on October 21,
1998, the Act included $890,000 for the NAS study, although it
did not require that the Institute of Medicine conduct the
study. OSHA is expected to issue its proposed rule on
ergonomics in August 1999, which is prior to completion of the
NAS study.
B. Labor-Management Relations
1. NLRB Reform Legislation
Background
In September 1995, the National Labor Relations Board
(NLRB) initiated a rulemaking, which it has since abandoned,
that would have made it easier to approve requests for
designation of single-site bargaining units without a hearing.
The business community opposed the rulemaking.
Legislation
Chairman Bond cosponsored legislation that would codify
current practices to require the NLRB to conduct a hearing to
consider a petition for approval of a single-site bargaining
unit. The bill would require the NLRB to consider specific
factors to determine the appropriateness of a single-site
bargaining unit when multiple sites are involved and there is
no stipulation or consent as to the appropriateness of a single
unit. With the support of Senator Bond, Congress imposed
restrictions on the NLRB so that no funds appropriated in
Fiscal Years 1996, 1997, or 1998 could be used for the
rulemaking.
2. Union Salting
Background
``Salting'' is a technique used by unions in organizational
and other types of campaigns. Union agents, or ``salts,'' apply
for jobs with non-union employers. If hired, the salt attempts
to convince the employees to join the union and tries to
generate unfair labor practices against the employer. If the
salt is not hired, he or she files an unfair labor practice
complaint with the NLRB alleging the employer failed to hire
the salt because of union affiliation.
Legislation
Chairman Bond was a cosponsor of the Truth in Employment
Act of 1997 (S. 328) and Senator Tim Hutchinson's revised
version, S. 1981, to amend the National Labor Relations Act
(NLRA) to prohibit salting. Chairman Bond supported the bills
in order to restore balance between the rights of workers and
employers. S. 1981 would prohibit controversial salting
campaigns used by some unions to impose economic harm to non-
union employers, while maintaining the right of all workers to
choose whether or not to be represented by a union. Under the
bill, only employees and applicants seeking to work in good
faith would be entitled to the protections provided under the
NLRA. On September 14, 1998, S. 1981 was pulled from the Senate
floor after a 52 to 42 vote on a cloture motion, falling eight
votes shy of the 60 votes needed on the motion.
3. Minimum Wage
Legislation
With the support of President Clinton, Senator Ted Kennedy
introduced legislation to increase the minimum wage to $6.15 by
January 1, 2000. Having sought to provide targeted relief to
offset the burdens of an increased minimum wage on small
business during the 1996 debate, Chairman Bond again
articulated the concerns of small businesses regarding the
impact this proposal would have on the economy and job
creation. Senator Kennedy offered his minimum wage proposal as
an amendment to the bankruptcy bill on September 22, 1998. A
motion to table the Kennedy amendment was agreed to by a vote
of 55 to 44.
C. Drug-Free Workplace
Background
The Drug-Free Workplace Act (H.R. 3853) is a bill to
initiate a demonstration program designed to aid small business
in the establishment of drug-free workplace programs through
Fiscal Years 1999 and 2000 and to encourage states to offer
other incentives for the same. The Committee has been aware
that the abuse of drugs and alcohol in the workplace is a
significant hazard to working Americans and a serious drain on
the economy in terms of lost productivity, increased health
costs and wasted potential. Small businesses employ the vast
majority of American workers.
Legislation
H.R. 3853 authorizes the Small Business Administration to
award grants to intermediary organizations to provide technical
and financial assistance to small businesses to establish drug-
free workplace programs. The bill authorizes $10 million over
two years, of which $1 million or 10% of the funds appropriated
can be used by small business development centers to assist
employers in establishing drug-free workplace programs.
On June 24, 1998, H.R. 3853 was received in the Senate
after passing the House of Representatives, and was referred to
the Senate Committee on Small Business. On September 15, 1998,
the Committee considered H.R. 3853. Senator Paul Coverdell, who
was the sponsor of the Senate companion bill, S. 2203, offered
an amendment in the nature of a substitute. H.R. 3853 as
amended was approved by a unanimous vote of 18 to 0. The Drug-
Free Workplace Act was included in the Omnibus Appropriations
Act of 1999, which was signed into law on October 21, 1998 and
provided $4 million for the program in Fiscal Year 1999.
VI. ACCESS TO CAPITAL: SMALL BUSINESS ADMINISTRATION PROGRAMS
A. 504 Certified Development Company Program
Background
Over the last several years, the Committee has devoted
considerable attention to the 504 Certified Development Company
program. One of the main concerns has been reports and
testimony from the Small Business Administration (SBA) and the
Office and Management and Budget (OMB) about low recoveries
made by the SBA following a default by the borrower under the
504 loan program. Under current law, the SBA liquidates and
forecloses almost every loan made under the 504 loan program.
In 1996, in response to the continuing problem of the SBA
obtaining low levels of recoveries on 504 loans, Chairman
Christopher S. ``Kit'' Bond sponsored the Small Business
Programs Improvement Act included in Public Law 104-208. Among
other provisions, this legislation established a pilot program
permitting approximately 20 certified development companies
(CDCs) to liquidate loans they originated.
During the Committee's review of the President's Fiscal
Year 1999 budget request for the SBA, the Committee received
testimony that the CDCs have proven capable of performing
liquidation and foreclosure activities under the pilot
liquidation program. The Committee also received testimony
that, because the CDCs do not have permanent authority to
engage in liquidations, the SBA has not credited the recoveries
accomplished by the CDCs under the pilot program in subsidy
rate calculations for the 504 loan program. This failure to
credit recoveries received by the CDCs causes losses to be
overestimated in such calculations.
Legislation
Based on these concerns, on July 31, 1998, the Chairman
introduced the Small Business Programs Restructuring and Reform
Act of 1998 (S. 2407). Section 5 of the bill would have made
the pilot liquidation program permanent by requiring the SBA to
permit certain CDCs to foreclose on and liquidate defaulted
loans that they have originated under the 504 loan program. The
National Association of Development Companies strongly endorsed
Section 5 of S. 2407.
At a Committee markup on September 15, 1998, the Small
Business Restructuring and Reform Act of 1998 was included in
the Year 2000 Readiness and Small Business Programs
Restructuring and Reform Act of 1998 (H.R. 3412) that the
Committee reported by a vote of 18-0. The Senate passed H.R.
3412 by unanimous consent on September 30, 1998. The House of
Representatives took no action on the Senate-passed version of
H.R. 3412.
B. Small Business Investment Company Program
Background
In 1958, Congress created the Small Business Investment
Company (SBIC) program to help small business owners obtain
investment capital. Forty years later, small businesses
continue to experience difficulty in obtaining investment
capital from banks and traditional investment sources. SBICs
are frequently their only sources of investment capital. In
1992 and 1996, the Committee worked closely with the SBA to
correct earlier deficiencies in the law in order to ensure the
future of the program. Today, the SBIC program is expanding
rapidly in an effort to meet the growing demands of small
business owners for debt and equity investment capital.
The SBIC program lends government-guaranteed venture
capital to SBA-licensed SBICs, which is matched with private
capital and invested in small businesses. In 1996, the
Committee completed work on the Small Business Investment
Company Improvement Act of 1996 (S. 1784), which was signed
into law on September 30, 1996 (P.L. 104-208). This legislation
made significant improvements in the management of the SBIC
program designed to enhance its safety and soundness and reduce
the risk of loss to the Federal government.
Legislation
The Committee's efforts to improve the SBIC program and to
attract well-managed and well-funded SBICs to increase the
availability of investment capital for small business owners
continued in 1997. The Small Business Reauthorization Act of
1997 (P.L. 105-135) made important changes in the SBIC program
to permit manageable program growth while strengthening the
SBA's oversight of the program. The law gives the SBA the
option to make five-year leverage commitments, conforming the
program to typical investment strategy patterns. In addition,
the law permits the SBA to use fees collected from the SBICs
for licensing and examinations to offset the agency's costs of
performing these necessary functions.
On September 30, 1998, the Senate passed unanimously the
Year 2000 Readiness and Small Business Programs Restructuring
and Reform Act of 1998 (H.R. 3412), which had earlier passed
the House of Representatives as a bill making three technical
changes to the SBIC program. All three changes were included in
an expanded version of H.R. 3412 and were approved by the
Senate. The first change would have removed a requirement that
at least 50% of the annual program level of the approved
participating securities under the SBIC program be reserved for
funding SBICs having private capital of not more than $20
million. The requirement has become obsolete following the
SBA's imposition of its leverage-commitment process and
Congressional approval for the SBA to issue five-year
commitments for SBIC leverage.
The second House change to the SBIC program would have
clarified the rules for the determination of an eligible small
business or small enterprise that is not required to pay
Federal income tax at the corporate level, but that is required
to pass income through to its shareholders or partners by using
a specified formula to compute its after-tax income.
The third House provision would have required the SBA to
issue SBIC guarantees and trust certificates at periodic
intervals of not less than twelve months. The current
requirement is six months. This change will give maximum
flexibility for the SBA and the SBIC industry to negotiate the
placement of certificates that fund leverage and obtain the
lowest possible interest rate.
When the Committee marked up H.R. 3412, it approved a
relatively small change in the operation of the program. This
change, however, would help smaller, small businesses to be
more attractive to investors. The SBICs would be permitted to
accept royalty payments contingent on future performance from
companies in which they invest as a form of equity return for
their investment.
The SBA already permits the SBICs to receive warrants from
small businesses, which give the investing SBIC the right to
acquire a portion of the equity of the small business. By
pledging royalties or warrants, the small business would be
able to reduce the interest that would otherwise be payable by
the small business to the SBIC. Most importantly, the royalty
feature provides the smaller, small business with an incentive
to attract SBIC investments when the return may otherwise be
insufficient to attract venture capital.
During the Committee's consideration of H.R. 3412, it
approved an amendment to increase the program authorization
levels to fund participating securities. In Fiscal Year 1999,
the authorization level would have increased from $800 million
to $1 billion; in Fiscal Year 2000, it would have increased
from $900 million to $1.2 billion. The two increases were
approved by the Committee based on reports that demand in the
SBIC program was growing at a rapid rate, and higher
authorization levels are necessary if the SBIC program is going
to meet the demand for investment capital from the small
business community.
After Senate passage of H.R. 3412, the House of
Representatives was not able to consider the bill with the
Senate amendments prior the adjournment of the 105th Congress.
It was understood, however, that the House Committee on Small
Business intended to take up the SBIC provisions contained in
H.R. 3412 as passed by the Senate early in the 106th Congress.
C. SBAExpress and LowDoc Pilot Loan Programs
Background
On September 18, 1998, the SBA and the President announced
the expansion of two pilot lending programs, SBAExpress and
LowDoc, administered by the SBA under its 7(a) loan program.
Among other changes, the SBA raised the maximum loan amount for
the two pilot programs to $150,000 from $100,000 and
significantly increased the number of lenders eligible to
participate in the SBAExpress program by permitting most
preferred lenders and certain certified lenders to originate
SBAExpress loans. The SBAExpress and LowDoc pilot programs
account for one-eighth and one-quarter of all loan volume under
the 7(a) program, respectively.
Following the SBA's announcement of the expansion of these
programs, Chairman Bond sent a letter to the SBA Administrator,
Aida Alvarez, on September 28, 1998, expressing concern about
the expansion of these pilot programs without providing prior
notice to the Committee. These pilot programs are not
specifically authorized by statute, and the SBA has issued no
regulations governing them. As a result, the SBA is able to
make changes to the programs without comment by interested
parties, circumventing the Administrative Procedure Act, the
Regulatory Flexibility Act and the Red Tape Reduction Act (P.L.
104-121). Moreover, such changes may affect the subsidy rate of
the 7(a) program, which may significantly affect the program
level established by Congress.
Current law does not require the SBA to perform an analysis
of the effect any change in a pilot program, or the initiation
of a pilot program, will have on the subsidy rate for the 7(a)
program. The Committee has, in fact, received information that
the SBA did not perform such a detailed analysis prior to
expanding the LowDoc and SBAExpress pilot programs. Moreover,
current law does not require the SBA to report to the
Committees on Small Business of the Senate and House of
Representatives on the performance of such programs. In his
September 28, 1998, letter to Administrator Alvarez, Chairman
Bond stressed that it is essential for the SBA to provide basic
information on the operation of its pilot programs to the
Committees on Small Business of the Senate and House of
Representatives so they may properly perform their oversight
responsibilities.
Legislation
Because of these concerns, Chairman Bond introduced the
Year 2000 Small Business Readiness Act (S. 2372), which
contains two reporting requirements relating to pilot programs
under the 7(a) program. First, S. 2372 would require the SBA to
report to the Senate and House Committees on Small Business
prior to making any changes to a pilot program it administers
under the 7(a) loan program or the initiation of any pilot
program under the 7(a) program, if such change or initiation
may affect the subsidy rate estimates for the 7(a) program.
Second, the legislation would require the SBA to report to the
Senate and House Committees on Small Business on the number and
amount of loans made under all pilot programs commenced under
the 7(a) loan program; the number of lenders participating in
such programs; and the default rate, delinquency rate, and
recovery rate for loans made under such pilot programs.
As noted above, S. 2372 was included in the Year 2000
Readiness and Small Business Programs Restructuring and Reform
Act of 1998 (H.R. 3412) marked up by the Committee on September
15, 1998. The Committee reported H.R. 3412 by a vote of 18-0.
The Senate passed H.R. 3412 by unanimous consent on September
30, 1998. The House of Representatives took no action on the
Senate-passed version of H.R. 3412.
D. Oversight
1. SBA's Lender Examination Procedures
Background
Over the last several years, Chairman Bond has paid
particular attention to the SBA's examination of lenders
originating loans under the 7(a) program. The Chairman
sponsored the Small Business Programs Improvement Act (SBPIA)
which requires, among other matters, that the SBA perform
annual or more frequent examinations of lenders participating
in the Preferred Lender Program. These lenders are authorized
to originate 7(a) loans without the SBA's prior review and,
over the last two fiscal years, have originated approximately
50% of the dollar volume of loans in the 7(a) program.
On-site lender reviews are essential to ensure that all
lenders participating in the 7(a) program are complying with
the SBA requirements and are engaging in prudent lending
practices. Without such reviews, it is much more difficult for
the SBA to determine whether a lender's loan origination
procedures are placing government funds at risk. At the time of
the Committee's March 18, 1998, hearing on the SBA's Fiscal
Year 1999 budget request, the SBA had not begun examinations of
lenders as required by the SBPIA, even though such examinations
were mandated in 1996. Accordingly, in conjunction with the
Committee's March 18, 1998, hearing, Chairman Bond urged the
SBA to commence such examinations promptly. The Chairman
requested, and received, specific information from the
Administrator on the SBA's schedule for completing examinations
for each preferred lender and detailed information with respect
to the SBA's plans on conducting such examinations. The SBA
began conducting on-site reviews of preferred lenders in May
1998.
In addition, on June 11, 1998, the General Accounting
Office (GAO) released a report requested by Chairman Bond
entitled ``Few Reviews of Guaranteed Lenders Have Been
Conducted.'' Chairman Bond requested the report to determine
how the SBA conducts on-site reviews to monitor participating
lenders' compliance with the agency's 7(a) loan program
policies and procedures, and what actions the SBA is taking to
comply with the requirement under SBPIA that the agency
implement a program to provide an annual review of each lender
participating in the Preferred Lender Program.
The GAO report found that, until just prior to the report's
publication, the SBA had not complied with its own operating
procedures that require periodic monitoring of lenders
originating government-guaranteed loans under the 7(a) program
or complied with the examination requirements in the SBPIA. The
report specifically provides that in the five SBA district
offices reviewed by the GAO, the SBA had not conducted reviews
of 96% of the lenders in those districts in the past five
years. Moreover, the GAO found no evidence that 625 of the 744
lenders that had been in the 7(a) program for at least one year
had ever been reviewed. The report, however, acknowledged that
the SBA had recently begun a program to conduct on-site reviews
of all preferred lenders so as to comply with the SBPIA.
Because of this recent action, the report concluded that it is
too early to tell how successful the program will be.
The GAO report also details that, in the last five years,
SBA's Inspector General has conducted audits at only three
Small Business Lending Companies (SBLCs), one audit consisting
of a review of only three loans. SBA regulations require its
Inspector General periodically to audit all SBLCs originating
loans under the 7(a) program. SBLCs are lenders that originate
small business loans under the SBA's 7(a) loan program but are
not depository institutions. As such, their lending activities
and safety and soundness are generally not monitored by Federal
or state banking regulators.
Committee Action
In conjunction with the Committee's March 18, 1998, hearing
on the SBA's Fiscal Year 1999 budget request, Chairman Bond
urged the SBA to promptly commence SBLC reviews by requesting
from the Administrator information on the number of
examinations the SBA Inspector General has completed in the
last two years. The Chairman also requested that the
Administrator explain in detail the SBA's plans to examine the
safety and soundness of such lenders on a regular basis. The
SBA commenced a program on September 28, 1998, to audit
regularly the safety and soundness of licensees under the SBLC
program, and the SBA has contracted with the Farm Credit
Administration to conduct such audits. The Committee will
continue to work with the GAO and the SBA Office of Inspector
General to monitor SBA's efforts to examine regularly the
lending practices and safety and soundness of SBLCs.
On October 26, 1998, Chairman Bond, along with
Representative James Talent, Chairman of the House Committee on
Small Business, sent a letter to Administrator Alvarez
expressing concern that the SBA intended to expand the number
of licensed SBLCs beyond the existing fourteen licensees. The
letter stressed that because the SBA has only recently begun to
audit the safety and soundness and lending activities of SBLCs,
it is imprudent to expand the SBLC program prior to the SBA and
the Committees evaluating the results of such SBLC audits and
examinations. In response to this letter, Administrator Alvarez
indicated that the agency will not lift the moratorium on
licensing SBLCs. However, the Administrator confirmed that the
SBA has formulated preliminary plans to license new nonbank
lenders (titled ``New Market Lending Companies'') to originate
loans under the 7(a) program, but that the agency intends to
establish financial resource requirements that meet or exceed
those currently in place for other 7(a) lenders. The Committee
intends to watch and evaluate closely the SBA's efforts in this
area.
2. Asset Sales
Committee Action
As a result of pressure brought by the Committee and the
OMB on the SBA since 1997, the SBA unveiled plans to conduct
private sector sales of loans and other assets held by the
agency. These sales, scheduled to commence in 1999, would
include repurchased and defaulted notes, as well as real estate
and other property securing such notes.
To assist the Committee in evaluating the SBA's asset sale
efforts, on August 21, 1998, Chairman Bond sent a letter to
Administrator Alvarez requesting reports commissioned by the
SBA addressing sales of its assets in private markets. The
reports received by the Committee detail the asset disposal
method that will result in the highest net cash generation for
the SBA, determine the optimum sale time for SBA assets, and
contain estimates of the amounts that the SBA should obtain by
selling such assets. If the SBA fails to obtain an appropriate
return for such assets, it may result in a higher subsidy rate
for the applicable loan programs. The Committee will continue
to monitor the SBA's asset sale efforts.
3. Securitization of the Unguaranteed Portion of 7(a) Loans
Background
The Small Business Programs Improvement Act (SBPIA),
enacted September 30, 1996, prohibits the sale of any
unguaranteed portion of a 7(a) loan after March 31, 1997, until
the SBA issues a final regulation that applies uniformly to
depository institutions and other lenders and that sets forth
the terms and conditions of such sales, including maintenance
of reserve requirements and other safeguards to protect the
safety and soundness of the 7(a) program. This provision was
included in the statute because, while it appeared that market
forces were adequately protecting investors of securitized
unguaranteed portions of 7(a) loans, the SBA had not issued
regulations requiring that lenders maintain a reserve to ensure
that they retain significant exposure on the loans they
originate.
On February 26, 1997, the SBA proposed a regulation in
response to the SBPIA recommending that each lender (bank and
nonbank) retain a continuing economic interest equal to 5% of
the face value of each loan included in a securitization. The
proposed regulation noted that nearly all respondents to the
SBA's earlier advance notice of rulemaking recommended that
lenders retain at least a 5% tangible economic interest in the
total amount of a guaranteed loan. The SBA, however, did not
finalize this proposed rule, but instead issued an interim rule
on April 2, 1997, that permitted the agency to approve
securitizations on a case-by-case basis. Despite not issuing a
final rule in conformity with the SBPIA, the SBA continued to
permit lenders to sell the unguaranteed portion of 7(a) loans
under the interim rule. Moreover, the SBA continued to
discriminate between bank and nonbank lenders by permitting, in
1997, an SBLC to securitize the unguaranteed portion of 7(a)
loans without maintaining a 5% reserve to protect the SBA from
loss, while requiring a Federally-regulated depository
institution to maintain such a reserve. These actions were in
clear defiance of the statutory requirement in the SBPIA.
Committee Action
On December 10, 1997, Chairman Bond sent a letter to
Administrator Alvarez expressing grave concern over the SBA's
failure to comply with the requirements of the SBPIA relating
to securitization of the unguaranteed portions of 7(a) loans.
The letter also questioned Administrator Alvarez regarding
reports in the media that the SBA's approval of a
securitization by an SBLC, without retention of a reserve, was
deemed to be ``politically fixed'' by career officials at the
SBA. Finally, the letter requested the SBA to suspend the
securitization program until the agency had promulgated a final
regulation in conformity with the SBPIA. Administrator Alvarez
responded on December 17, 1997, that the SBA would continue to
approve securitizations on a case-by-case basis prior to
issuing a final rule in compliance with the SBPIA.
Following this response, the Chairman sent a second letter
to Administrator Alvarez on January 22, 1998, in which he re-
emphasized his serious concerns about the SBA's management of
the securitization program. Administrator Alvarez responded on
February 2, 1998, stating that the SBA has been developing a
``new rule'' to govern the securitization program. In
conjunction with the Committee's hearing on March 18, 1998,
regarding SBA's proposed Fiscal Year 1999 budget, Chairman Bond
questioned Administrator Alvarez several times regarding SBA's
compliance with the securitization requirements in the SBPIA,
as well as her intentions regarding approving securitizations
of the unguaranteed portions of 7(a) loans prior to the
issuance of a final rule.
On May 18, 1998, the SBA published a proposed rule that
would permit all participating lenders to sell, securitize,
sell a participating interest in or pledge the unguaranteed
portion of 7(a) loans. The proposed rule requires a lender to
retain a subordinated tranche on a securitization of
unguaranteed portions of 7(a) loans that is equal to the
greater of (i) twice the loss rate experienced on the lender's
SBA loans over a ten-year period or (ii) 2% of the unguaranteed
portion of the securitized loans. The industry has generally
responded positively to this proposed rule, which is likely to
be finalized in early 1999.
E. Small Business Year 2000 Readiness
Background
On June 2, 1998, the Committee held a hearing on two
issues: problems faced by small businesses conducting
electronic commerce (e-commerce) and the effect the Year 2000
(Y2K) computer problem will have on small businesses. The Y2K
problem is a result of programmers over the years writing
computer code that used only two digits to represent years.
This means that certain computers and processors in automated
systems will fail because such systems will not recognize the
year 2000, but will mistake it for 1900.
At the hearing, the Committee received testimony that the
companies most at risk from Y2K failures are small- and medium-
sized industries, not larger companies. Witnesses testified
that this anomaly is caused by two factors. First, many small
companies have yet to realize the extent the Y2K computer
problem affects their businesses. Second, many small companies
may not have the access to capital to cure such problems before
they cause disastrous results. The Committee also received
information that only 15% of all businesses with less than 200
employees have even begun to inventory the automated systems
that may be affected by this computer glitch, much less begun
fixing such systems. Moreover, a study on Small Business and
the Y2K Problem sponsored by Wells Fargo Bank and conducted by
the National Federation of Independent Business found that an
estimated 4.75 million small employers are exposed to the Y2K
problem.
Legislation
In response to the testimony at the hearing and to mitigate
the effect on the economy that small business exposure to the
Y2K problem may have, Chairman Bond introduced the Small
Business Year 2000 Readiness Act (S. 2372) on July 30, 1998.
The bill was cosponsored by Senators Robert Bennett, Olympia
Snowe and Frank Lautenberg.
The legislation was intended to serve the dual purpose of
providing small businesses with necessary capital to continue
operating after January 1, 2000. It was also designed to make
financial institutions and small firms more aware of the Y2K
problem by providing a specific solution for financial
institutions with small business customers that are not Y2K
compliant. The legislation would have required the SBA to
establish a limited-term loan program, which would sunset after
October 31, 2001. Under that program, the SBA would guarantee
50% of the principal amount of a loan made by a private lender
to assist small businesses in correcting Y2K computer problems
with the loan amount capped at $50,000. The guarantee limit and
loan amount were designed to limit the exposure of the
government and ensure that eligible lenders retain sufficient
risk so that they make sound underwriting decisions. The
legislation would have further permitted lenders to process and
document Y2K loans using the same internal procedures they
currently use on loans of a similar type and size not governed
by a government guarantee, in the same manner as the existing
SBAExpress pilot program.
The bill further provided that each lender designated as a
Preferred Lender or Certified Lender by the SBA would be
eligible to participate in the Y2K loan program. This would
include approximately 1,000 lenders that have received special
authority from the SBA to originate loans under the SBA's
existing 7(a) loan program.
At a Committee markup on September 15, 1998, S. 2372 was
included in Chairman Bond's Year 2000 Readiness and Small
Business Programs Restructuring and Reform Act of 1998 (H.R.
3412). The Committee reported H.R. 3412 by a vote of 18-0 and
the Senate passed the bill by unanimous consent on September
30, 1998. The House of Representatives took no action on the
Senate-passed version of H.R. 3412.
F. Proposed 7(a) and 504 Loan Program Changes
Committee Action
The Year 2000 Readiness and Small Business Programs
Restructuring and Reform Act of 1998 (H.R. 3412), as reported
by the Committee, contained changes to the 7(a) loan program
and the 504 loan program. First, the bill would have required
appraisals of real estate collateral for 7(a) and 504 loans by
state licensed or certified appraisers only if more than
$250,000 of the loan proceeds are used to acquire, construct or
improve real property. Currently, OMB requires all agencies
that manage credit programs to ensure that all credit
transactions over $100,000 have an appraisal prepared by a
state licensed or certified appraiser. The increase in the
appraisal requirement threshold was adopted as an amendment
sponsored by Senator John Kerry at the Committee markup.
Chairman Bond supported the amendment following receipt of a
letter from the SBA, approved by OMB, stating that it had no
objection to raising the appraisal threshold amount.
Second, H.R. 3412 would have also repealed a provision
requiring that the SBA pay a lender under the 7(a) loan program
100 basis points less than the interest rate on a loan when a
lender is paid the guaranteed portion of a defaulted 7(a) loan.
In 1996, Congress enacted this requirement anticipating that it
would decrease subsidy costs of the 7(a) program substantially.
This has not proved to be the case, and Chairman Bond supported
the amendment to H.R. 3412 because the paperwork burden caused
by this provision has been disproportionately high compared to
the savings achieved. As noted above, the House of
Representatives took no action on the Senate-passed version of
H.R. 3412.
VII. WOMEN-OWNED BUSINESSES
A. Survey of Women-Owned Enterprises
Background
A top priority for women's business organizations was to
ensure that the Commerce Department conduct a new Survey of
Women-Owned Business Enterprises (SWOBE). This survey was
jeopardized by the Administration's decision to have the Small
Business Administration (SBA) pay for the survey rather than
the Commerce Department. In 1998, the SBA obtained permission
from Congress to reprogram $1 million for the survey. The SBA
also reprogrammed $500,000 in Fiscal Year 1997 for the survey.
Committee Action
At the Committee's March 18, 1998, hearing on the
President's Fiscal Year 1999 Budget Request for the SBA,
Chairman Christopher S. ``Kit'' Bond inquired about the
additional $1 million being requested by the SBA for SWOBE. The
Administrator and SBA staff responded that additional funds
might be required in Fiscal Year 2000. In response to written
questions submitted by the Chairman, the Administrator reported
the cost for SWOBE to be: $527,814 in Fiscal Year 1997;
$991,000 in Fiscal Year 1998; $750,000 in Fiscal Year 1999; and
$500,000 for Fiscal Year 2000. Consistent with these estimates,
the Fiscal Year 1999 Omnibus Appropriations Act provided a
line-item of $800,000 for SWOBE.
B. Women's Business Center Program
Background
In preparation for reauthorizing the SBA, the Chairman
focused attention on SBA programs serving women during a
hearing on oversight of the SBA's non-credit programs. The
National Association of Women Business Owners urged the
Committee to consider ways to improve SBA programs to serve the
needs of women better. Procurement, access to capital, and
business education and training were again named as top
priorities for women business owners.
Legislation
In response to the comments provided by women business
owners, on June 12, 1997, Chairman Bond joined Senators Pete
Domenici and John Kerry as the lead sponsors of the Women's
Business Center Act (S. 888). This legislation increased the
authorization for Women's Business Centers from $4 million to
$8 million, doubling the request submitted by the
Administration. The bill also extended the number of years the
Centers could be eligible to receive funding from three to five
and enabled Centers currently in their third year to apply for
an additional two years of eligibility.
Chairman Bond continued to demonstrate his commitment to
the Women's Business Center program during the Second Session
of the 105th Congress. The Women's Business Center program
authorizes the SBA to award grants to locally-run Centers for
business education training, including marketing, finance, and
management assistance. In 1998, Chairman Bond introduced
legislation to increase the authorization level for the program
from $8 million to $12 million beginning in Fiscal Year 1999.
With the support of the Association of Women's Business
Centers, the legislation also included a requirement that the
General Accounting Office (GAO) conduct a baseline and follow-
up study on the SBA's administration of the program. The
Chairman's bill was unanimously approved in Committee on
September 15, 1998, and passed the Senate on September 30,
1998; however, the House did not consider the bill prior to
adjournment. The Chairman will continue his efforts to
strengthen and expand this program during the 106th Congress.
VIII. HUBZONES AND FEDERAL PROCUREMENT
A. HUBZone Act of 1997
Background
During the 105th Congress, the Small Business
Administration (SBA) began implementing the HUBZone program,
which was enacted as Title VI of the Small Business
Reauthorization Act of 1997. The SBA published its proposed
HUBZone rules in the Federal Register of April 2, 1998. On May
1, 1998, Chairman Christopher S. ``Kit'' Bond submitted written
comments to the SBA on the proposed rules, most notably
concerning the SBA's ``trial balloon'' to limit HUBZone small
businesses to those of at least 16 employees and no more than
one-half of the maximum size standard normally applicable for a
particular Standard Industrial Classification (SIC) code.
Chairman Bond argued that the SBA did not have the authority to
impose additional limitations beyond those written into the
HUBZone statute. The SBA dropped its additional size standard
ideas when it published final rules on June 11, 1998, noting
Chairman Bond's argument in its ``Section-by-Section Analysis''
explaining the change. Conforming changes in the Federal
Acquisition Regulation were published as an interim final rule
in December 1998.
During 1998, it became apparent that the HUBZone
legislation included some technical errors that, left
uncorrected, could result in dramatically different
interpretations of the law than that intended by the Congress.
The most significant problems concerned the Act's definition of
``qualified census tracts'' and ``qualified nonmetropolitan
county.'' As expressed in Committee reports at the time the
HUBZone Act was enacted, those definitions were to be mutually
exclusive; thus, in metropolitan areas, HUBZones would be
defined only at the census tract level, while in
nonmetropolitan areas, the definition would be on a county-by-
county basis. Drafting errors in the legislation omitted the
restrictive language and misplaced one test (the unemployment
test for nonmetropolitan counties). Thus, for example, Bronx
County, New York, due to its high level of unemployment, would
qualify as a ``qualified nonmetropolitan county'' despite its
urban character. This counterintuitive result potentially
undermines the program by diffusing the program's attempt to
target areas most in need.
Legislation
To address this problem, along with some minor non-
substantive changes, Chairman Bond included a package of
technical corrections in the Small Business Programs
Restructuring and Reform Act of 1998 (S. 2407), which he
introduced on July 31, 1998. This package was included in the
Year 2000 Readiness and Small Business Programs Restructuring
and Reform Act of 1998 (H.R. 3412) passed by the Committee on
Small Business on September 15, 1998. The measure also passed
the Senate by unanimous consent on September 30, 1998, but was
not considered by the House before the 105th Congress
adjourned.
B. Contract Bundling
Background
In 1988, President Reagan signed a bill setting a goal that
20% of the total value of Federal prime contracts be awarded to
small businesses. In 1997, testimony and other evidence
accumulated by the Committee outlined a series of actions by
the Administration that could remove many prime contract
opportunities from the reach of thousands of small businesses.
Legislation
The Committee included in the Small Business
Reauthorization Act of 1997 (P.L. 105-135) a special subtitle
that responds to the Federal government's practice of
``bundling'' or consolidating smaller contracts into very large
contracts. Contract bundling often prevents small businesses
from competing for contracts or ultimately obtaining them
because of the size or geographic dispersion of the contract.
This practice, intended to reduce short-term administrative
costs, can result in a monopolistic environment with a few
large businesses controlling the market supply.
The Small Business Reauthorization Act of 1997 focuses
attention on this issue by clearly defining contract bundling.
The Act also raised the government-wide goal for small
businesses to 23% of prime contract dollars. Further, the law
strengthens the role of the SBA to appeal decisions of Federal
agencies that decide to bundle smaller contracts into larger
contracts, including the right of the SBA Administrator to make
an appeal directly to the head of the agency or department. The
Act also established in law, for the first time, that all
Federal agencies report through the Federal Procurement Data
System all contract actions involving bundled requirements with
an anticipated contract award value exceeding $5 million. This
reporting requirement will permit the Committee to obtain
accurate information on the number of contracts being diverted
from small businesses to large businesses.
The new law also directed the SBA to publish proposed rules
in the Federal Register not later than 120 days after
enactment, which would have been April 1, 1998. Final rules
were to be published within 270 days of enactment, or not later
than August 29, 1998. Neither statutory deadline was met.
C. Reporting of Small Business Contracting Statistics
Legislation
Chairman Bond included in H.R. 3412 provisions to tighten
Congressional oversight of Executive Branch reporting of small
business contracting statistics. In April 1998, the Department
of Energy's (DOE) Office of Inspector General issued a report
criticizing the DOE's collection and presentation of its
statistics on agency contracting with small business. Among
other things, the DOE had inaccurately reported high goals and
achievements for such contracting, by excluding the value of
certain contract expenses from its base number of total prime
contracts. Most disturbingly, these changes initially were
approved by the SBA on the grounds that the DOE had a ``unique
situation'' regarding these expenses. Although this approval
was later revoked when the SBA was informed that the ``unique
situation'' was not in fact unique, the SBA's initial approval
and later revocation were not formally disclosed to the
Congress, the Committee, or the public. As part of the small
business legislation adopted by the Committee and approved by
the Senate, provisions intended to put these matters on the
public record were adopted. Negotiations with the SBA resulted
in compromise language on this subject, which was incorporated
into the bill through a floor amendment (S. Amdt. 3674) that
was adopted by unanimous consent when H.R. 3412 was adopted,
also by unanimous consent, on September 30, 1998.
Committee Action
At the invitation of the Committee on Energy and Natural
Resources, Chairman Bond submitted written questions on the
DOE's statistics reporting during the nomination hearings of
Bill Richardson to be Secretary of Energy on July 22, 1998, and
Gregory Friedman to be Inspector General of the Department of
Energy on September 17, 1998. The responses of Secretary-
Designate Richardson were unsatisfactory, as he argued in favor
of DOE's position to exclude the contract expenses in question
from the base of total contract dollars. He did, however,
commit in general terms to increase small business contracting
opportunities. Inspector General-Designate Friedman was asked
more general questions about the role of the IG in monitoring
these situations and he committed to a follow-up meeting with
DOE management to review their responses to the April 1998
report.
D. Small Business Research and Development
Background
In 1982, Congress established the Small Business Innovation
Research (SBIR) program because small businesses are principal
sources of innovation in the United States. In order to remain
competitive in the global economy, the United States has
historically depended heavily on innovation through research
and development (R&D). Our dependence on small business for
innovation is significant.
The SBIR program requires agencies with extramural R&D
budgets of $100 million or more to set aside not less than 2.5%
of that amount for R&D conducted by small businesses. It is a
three-phase program. Phase I is designed to determine the
scientific and technical merit and feasibility of a proposed
research idea. A Phase I grant award cannot exceed $100,000.
Phase II is designed to develop the idea further, taking into
consideration such matters as the idea's commercialization
potential. Phase II grant awards cannot exceed $750,000. Phase
III is the commercialization phase. It is funded by non-Federal
funds for the commercial application of the technology or non-
SBIR Federal funds for continued R&D under government
contracts.
Ten years after Congress originally approved the SBIR
program, it was re-authorized by the Small Business Research
and Development Enhancement Act (P.L. 102-564, October 28,
1992). The principal purposes of the 1992 Act were to: (1)
expand and improve the SBIR program; (2) emphasize the
program's goal of increasing the private sector's
commercialization of technologies; and (3) increase small
business--participation in the program by women-owned small
business concerns and by socially and economically
disadvantaged small business concerns.
The 1992 Act also established the Small Business Technology
Transfer (STTR) program, a new pilot program. Congress intended
to create an easy-to-use vehicle for moving ideas from research
institutions to the marketplace where they can best benefit the
U.S. economy. The STTR program accomplishes this goal by
linking small businesses with creative ideas to universities,
nonprofit scientific and educational institutions, and Federal
laboratories. Under the STTR program, R&D that benefits our
national defense, promotes health and safety, or improves our
highways and airports can move from the early R&D state to the
marketplace. The STTR program ensures that innovative ideas
developed by universities and nonprofit organizations, in
partnership with quality small businesses, serve an active role
in building our nation's economy. The ``Small Business
Reauthorization Act of 1997'' (P.L. 105-135) extended the STTR
program for four years, through the end of Fiscal Year 2001.
The 1992 Act directed the General Accounting Office (GAO)
to undertake two reports on the SBIR program. The first report
was submitted to the Senate and House Committees on Small
Business on March 8, 1995.
In April 1998, the GAO issued its second comprehensive
report on the state of the SBIR program. Subsequently, in June
1998, the GAO addressed the report in testimony before the
Committee. The message was clear: this is a worthwhile program
that is running very well. There are 10 Federal agencies that
participate in the program, and the GAO concluded they are
adhering to the program's funding requirements. Competition has
been intense among small business R&D firms in response to
solicitations from the 10 agencies. The GAO found, however, it
was very rare for an agency to make an award when the agency
received only one proposal in response to a solicitation.
The GAO report raised some concerns about the success of
multiple-award recipients of SBIR grants. In particular, the
GAO pointed out that the average levels of sales and additional
developmental funding for the multiple-award recipients are
lower than those for non-multiple-award recipients. On average,
multiple-award recipients--sales are $12,000 lower than those
for non-multiple-award recipients, while the levels of
additional developmental funding are almost $90,000 lower for
the multiple-award recipients.
The GAO's analysis of the Department of Defense's (DOD)
data shows differences that are even more pronounced. Survey
data from the DOD showed that annual sales are more than
$250,000 lower for multiple-award recipients, and the average
levels of additional developmental funding for multiple-award
recipients are more than $175,000 lower than those for non-
multiple-award recipients.
Legislation
The Year 2000 Readiness and Small Business Programs
Restructuring and Reform Act of 1998 (H.R. 3412), as reported
by the Committee, would have removed the sunset date for the
SBIR program, effectively making the program permanent.
Testimony before the Committee and the findings of the GAO
clearly supported this action.
As approved by the Committee, the bill also required each
agency subject to the SBIR program to use the same formula set
forth by the Director of the Office of Management and Budget in
calculating extramural budgets.
Members of the Committee continue to express their concern
about the high concentration of SBIR awards in a small number
of states, with nearly 80% of awards going to businesses
located in six states. In 1997, the Congress approved a special
program that directs the SBA to award grants for outreach
activities in states where SBIR participation is low. The
Committee, accordingly, included in H.R. 3412 a provision
directing existing Federal outreach activities, such as the
electronic commerce (e-commerce) resource centers and the
procurement technical assistance centers, to conduct specific
outreach activities to support the SBIR program funded out of
their existing budgets. The Committee intends to continue to
review closely the success of activities at the SBA and the
agencies subject to the SBIR program to conduct effective
outreach activities in states receiving small numbers of SBIR
awards.
Although H.R. 3412 passed the Senate unanimously on
September 30, 1998, the House of Representatives did not
consider the bill before Congress adjourned for the year. It
will be necessary for Congress to enact legislation in the
106th Congress extending the SBIR program before the program
terminates on September 30, 2000.
IX. HEALTH CARE
Background
Chairman Christopher S. ``Kit'' Bond led the fight to
reduce the adverse impact of two Health Care Financing
Administration (HCFA) regulations that had devastating effects
on small businesses and small non-profits in home-health care.
Language in the Balanced Budget Act (BBA) of 1997 directed HCFA
to issue a series of regulations intended to curb the rising
cost of home-health care and to rid the Medicare and Medicaid
programs of firms engaged in fraud and abuse. HCFA, however,
issued regulations in response to that Congressional directive
that exceeded Congressional intent, driving many reputable
home-health care providers out of business.
The first regulation was issued under Section 4312(b) of
the BBA, which requires home-health care agencies to obtain a
surety bond that is not less than $50,000. In contrast, HCFA's
regulations required home-health agencies to obtain bonds for
the greater of $50,000 or 15% of their annual Medicare
receipts. These bonds were essentially financial guarantees,
requiring collateral or personal indemnification equaling 100%
of the bond's face value, intended by HCFA to ensure repayment
of overpayments made by Medicare. With more than 85% of home-
health care providers being small businesses, the bonds were
unreasonably expensive and unobtainable. HCFA also ignored the
procedural safeguards under the Administrative Procedure Act
and the Regulatory Flexibility Act of 1980 in developing the
rule by failing to issue a notice of proposed rulemaking prior
to the final rule and failing to conduct an appropriate
Regulatory Flexibility analysis.
HCFA's Interim Payment System (IPS) regulation caused even
greater uncertainty regarding the future availability of home-
health care. The BBA required HCFA to develop an IPS to limit
reimbursement for services provided on or after October 1,
1997. HCFA's resulting IPS rule, however, was too severe,
causing many home-health agencies to close their doors. In
addition, HCFA's progress on the more favorable prospective
payment system (PPS), which was to be in place by October 1,
1999, was behind schedule.
Legislation
On June 10, 1998, Chairman Bond introduced S. J. Res. 50, a
resolution of disapproval to strike HCFA's regulation to
implement the surety bond requirement. S. J. Res. 50 was the
first resolution introduced under Subtitle E of the Red Tape
Reduction Act, known as the Congressional Review Act, that
gained broad-based support in the Senate and House. With 60
Senate cosponsors, the resolution precipitated HCFA's
suspension of the surety bond rule pending completion of a
General Accounting Office study and, potentially, the
development of a new proposal. As the result of an agreement
between HCFA and Chairman Bond and Senators Charles Grassley
and Max Baucus, HCFA issued a Federal Register notice on July
31, 1998, suspending the deadline for compliance with the
surety rule. HCFA further agreed to not enforce the rule: (1)
without providing at least 60 days notice and (2) not before
February 15, 1999. That date was established as the Senators
wanted to ensure that HCFA's actions would take place when
Congress was in session and able to respond.
On July 15, 1998, Senator Bond introduced the Medicare
Home-Health Care Beneficiary Protection Act of 1998 (S. 2354),
to place a moratorium on the IPS pending the development of an
alternate payment system. During the September 3, 1998,
Committee markup of the Labor, HHS, Appropriations bill,
Senator Bond offered his IPS bill as an amendment. Although he
was forced to withdraw the amendment because of cost concerns,
Senator Bond persisted, producing an eleventh hour solution in
the Omnibus Appropriations Act for Fiscal Year 1999. Signed
into law on October 21, 1998, this measure increased payments
to home-health care providers, and it delayed until October 1,
2000, HCFA's proposed 15% reduction in reimbursements. The law
will ensure continued access to home-health care for seniors
and the disabled across the nation.
In November 1998, HCFA issued an additional notice
clarifying that it would not make claims against any surety
bonds prior to a new deadline for compliance. HCFA also advised
the intermediaries holding bonds to return them to any home-
health agency that requests this in writing. During the 106th
Congress, the Committee will closely monitor HCFA's work on the
surety bond, the revised IPS and the forthcoming PPS
regulations.
Committee Action
On July 15, 1998, Chairman Bond convened a hearing of the
Committee on Small Business to focus attention on HCFA rules.
In response to information gathered at the hearing and HCFA's
refusal to participate, Chairman Bond sent a letter to the
Department of Health and Human Services on July 24, 1998. The
Chairman's letter called on Secretary Donna Shalala to work
with Congress to enact an immediate moratorium on the IPS and
to withdraw the suspended surety bond regulations.
X. REFORM OF CONSUMER BANKRUPTCY LAWS
Legislation
Chairman Christopher S. ``Kit'' Bond supported the Consumer
Bankruptcy Reform Act of 1998 (S. 1301), which passed the
Senate on September 23, 1998. If enacted, the bill would have
increased the amount collected by small business creditors from
debtors in bankruptcy. The bill established a ``means test''
for Chapter 7 bankruptcies, by permitting a court to dismiss a
Chapter 7 case or convert it to Chapter 13 if the court finds
``abuse'' of the bankruptcy system. Under current law, Chapter
13 requires consumers to establish a repayment plan (that
generally lasts between three and five years) for their debts,
while Chapter 7 allows consumers to liquidate their assets and
eliminate most unsecured debts. To determine ``abuse,'' the
bill required a court to review whether (1) the debtor could
pay at least 30% of nonpriority, unsecured claims from
disposable income and (2) the debtor filed the petition in bad
faith. The bill, however, prohibited motions to be brought to
convert or dismiss Chapter 7 cases if a debtor's family has
monthly income of no more than ``the national median family
monthly income'' for a family of equal size. The bill also
would have eliminated certain abusive creditor practices.
The House of Representatives passed its version of consumer
bankruptcy reform legislation on June 10, 1998. The conference
report reconciling the Senate and House versions of this
legislation was not approved by the Senate prior to adjournment
of the 105th Congress.
XI. TELECOMMUNICATIONS
A. FCC Access Charge Rule
Background
In its May 16, 1997, Report and Order, the Federal
Communications Commission (FCC) modified the methods by which
local-exchange carriers charge long-distance carriers for
access to their network. The Report and Order also
substantially increased the costs faced by long-distance
carriers who utilize the local-exchange carriers tandem
switches. The Committee was concerned about the FCC's failure
to analyze the impact of changes to the pricing of interstate
access service both on small long-distance carriers and on
certain small retail businesses that use long-distance
services.
Committee Action
On November 20, 1997, Chairman Christopher S. ``Kit'' Bond
and Senator John Kerry, the Committee's Ranking Member, sent a
joint letter on Regulatory Flexibility compliance to the FCC.
The Committee's letter noted the opportunity provided the FCC
by the Petitions for Reconsideration and encouraged the FCC to
reassess the impact of its recent decisions on both small
business long-distance carriers and the small business
retailers that such carriers serve. Because the Report and
Order were scheduled to go into effect on January 1, 1998,
Chairman Bond and Ranking Member Kerry urged prompt
consideration of these issues and the Petition for
Reconsideration pending at the FCC.
B. FCC Telephone Directories Rule
Background
In June 1998, the producers of independent telephone
directories contacted the Committee regarding the potential
impact of a pending FCC rulemaking to implement provisions of
the Telecommunications Act of 1996. Congress intended Section
222(e) of the Act to increase competition and enhance the
ability of independent publishers to compete with directories
wholly owned by telephone companies. Although the market is
dominated by directory subsidiaries of telephone companies,
independent directory producers have successfully developed
competitive products. More than 80% of independent directory
producers are small businesses. Small businesses involved in
directory publishing were concerned that the FCC rule to
determine the ``reasonable'' price for subscriber list
information might not recognize the minimal cost imposed on
telephone companies when providing such information to
requesting independent directory producers.
Committee action
On July 17, 1998, Chairman Bond and Ranking Member Kerry
wrote the FCC Chairman William Kennard urging the FCC to
conduct a thorough Regulatory Flexibility analysis prior to
issuing a final rule and to ensure the rule achieved the
competition Congress intended by protecting small businesses
from market abuses. On September 3, 1998, Chairman Kennard
responded, acknowledging the statutory preference for
competition. He assured Chairman Bond that these concerns would
be part of the record contemplated by the FCC staff and the
Commission in this rulemaking. Currently, the FCC is working on
its final report and order, with the SBA's Office of Advocacy
assisting with the Regulatory Flexibility analysis.
XII. HEARINGS OF THE COMMITTEE
``Women-Owned and Home-Based Businesses''--
Washington, D.C., February 6, 1997
On February 6, 1997, the Committee held a hearing on issues
affecting women-owned and home-based businesses. Chairman
Christopher S. ``Kit'' Bond convened the hearing to examine the
obstacles facing women business owners and home-based
businesses, as well as small businesses'' access to capital,
and effects of Federal procurement policy. In addition, the
hearing focused on the burdens imposed by the tax laws, in
particular, independent-contractor classification, the home-
office deduction and health insurance for the self-employed.
All of the witnesses testified that there are many
obstacles facing small business owners, many that have little
or no effect on big business. The first witness, Carolyn A.
Stradley, President and Chief Executive Officer, C & S Paving,
Inc., provided a first-hand account of the hardships she
overcame to become a small business owner. Susan Peterson,
President, Founder, and Chief Executive Officer of Susan
Peterson Productions, Inc., and Ms. Stradley noted that the
fastest growing economic segment and vital component of our
society and economy are women-owned businesses. Ms. Peterson
and several other witnesses pointed out that there are eight
million women-owned businesses, and over the years women-owned
firms have had a better success rate than the average American
firm. However, Phyllis Hill Slater, President of Hill Slater,
Inc., pointed out that marginalization often occurs for women
business owners. The witnesses noted, as a prime example, the
Federal agencies failure to meet the 5% prime contracting goal
for women suppliers in the Federal Acquisition Streamlining Act
of 1994 (FASA). Bonny Filandrinos, President of Staffing
Solutions, Inc., pointed out that small businesses can neither
afford nor do they have the same resources that big businesses
have to hire consultants and experts to help them ensure
compliance with government regulations.
The witnesses also stressed that women-owned small
businesses lack Federal procurement opportunities. Ms. Stradley
and Ms. Slater noted that only 2% of the $176 billion awarded
through Federal contracting has gone to women-owned firms,
while women employ one in four workers in America. Ms. Slater
also stated that the Federal government procurement market
remains virtually closed to women suppliers. In addition M.
Carole Wiedorfer, owner of M. Carole Wiedorfer CPA, testified
that many women start their home-based businesses to obtain
greater control over their compensation.
Access to capital also poses a problem to small businesses,
and women-owned firms in particular, according to the
panelists. Ms. Stradley pointed out that increased access to
capital for women business owners is needed because they still
have lower levels of capital than their male counterparts.
Moreover, as Ms. Filandrinos pointed out, women do not have the
same financial backing as men do. Andrea Silbert, Executive
Director and Co-Founder, Center for Women and Enterprise,
agreed and stressed the added need for education and training,
both of which are provided by Women's Business Centers like
her's in Boston, Massachusetts.
In the tax area, many witnesses agreed that independent-
contractor status is a top issue affecting small businesses.
Bill Trembly, President of Trembly Associates, Inc., testified
that tax laws imposed by the government often affect hiring
decisions, and as a result, businesses frequently take
inefficient steps simply to fall within Internal Revenue
Service (IRS) guidelines. Mr. Trembly, along with Ms.
Wiedorfer, suggested that the 20-factor common law test for
independent-contractor status is too difficult to figure out
and too subjective. They concluded that independent-contractor
qualifications are inefficient because they cause business
owners to spend unnecessary amounts of time, money, and effort
on compliance, which is never assured due to the ambiguous
rules that favor the IRS. Mr. Trembly suggested, as an
alternative to this and the overall complexity of the tax law,
that a flat tax should be enacted.
Two final issues plaguing small businesses were also
discussed at the hearing: the home-office deduction and the
deductibility of health-insurance costs by the self-employed.
As a result of the Supreme Court's 1993 Soliman decision, the
home-office deduction has been dramatically narrowed and now
requires a home-based business to see clients in the home,
which is impossible for many entrepreneurs like plumbers,
landscapers, and salespersons. Ms. Wiedorfer explained that the
current state of the law places many home-based businesses at a
competitive disadvantage with their large competitors, which
can deduct all of their office expenses. She pointed out that
the benefit of the deduction is reduced if the home-based
business has no earned income for the year, since no tax
deduction is allowed. Ms. Wiedorfer testified that under
current law the Federal regulations and tests are too difficult
to interpret, which makes the home-office deduction inefficient
and impossible in many cases.
Health-insurance deductibility for the self-employed also
poses a concern for many entrepreneurs. Big businesses are
allowed to deduct the cost of their health-insurance coverage,
while small businesses are not. Sal Risalvato, owner of
Riverdale Texaco and Precision Alignment Center, testified that
he did not realize he could not deduct his own health-insurance
costs until he was audited and found that he must count his
insurance as income. Mr. Risalvato and Ms. Wiedorfer agreed
that this is unfair because big business can deduct all of
their health-insurance costs, creating a great inequality among
small and large businesses.
``Nomination of Aida Alvarez To Be Administrator of
the United States Small Business Administration''--
Washington, D.C., February 12, 1997
On February 12, 1997, the Committee held a hearing on the
confirmation of Aida Alvarez, whom President Clinton nominated
to be the Administrator of the Small Business Administration
(SBA). In his opening statement, Chairman Bond reviewed Ms.
Alvarez' qualifications to serve as SBA Administrator. In
particular he noted that she had served as the Director of the
Office of Federal Housing Enterprise Oversight (OFHEO) from
1993 to 1997. While noting a few of the relevant differences
between OFHEO and the SBA, including staff size, budget, and
range of influence; Chairman Bond indicated that he and Ms.
Alvarez had discussed how her work at OFHEO, which oversees
Fannie Mae and Freddie Mac, the largest government-sponsored
enterprises, will help her administer the SBA. He stressed that
while the SBA has served the small business community well, no
organization can sustain success without complete assessment of
its operations.
During the hearing Senators Spencer Abraham and Alfonse
D'Amato testified in strong support for Ms. Alvarez. They both
praised her work as the first director of OFHEO and commended
her for being the first person of Puerto Rican heritage and the
first Hispanic woman to hold a Cabinet-level position. Senator
Abraham added that he believed she will be a strong advocate
for small business. Senator D'Amato also voiced the support of
Senator Daniel Patrick Moynihan for Ms. Alvarez' confirmation.
In her testimony, Ms. Alvarez provided the Committee with a
brief description of her personal history. She explained that
her family moved to New York from Puerto Rico and her mother
subsequently started a restaurant in a blue-collar neighborhood
where, Ms. Alvarez testified, she learned both the satisfaction
and frustration of owning a small business. Ms. Alvarez also
described her qualifications and how her time at OFHEO and her
professional career had thoroughly prepared her to lead the
SBA. She explained that rather than listing statistics, she
preferred to describe to the Committee what she had been
hearing from the small business community. She testified that
the small business community wanted an SBA Administrator who
will convey their concerns to the President, and she stressed
that, if confirmed, she would be that voice.
Ms. Alvarez concluded by briefly stating her three-part
vision for the SBA. First, she wants the agency to be on the
leading edge of financial management, which is critically
important to the financial community, taxpayers and
entrepreneurs, and the protection of the public trust. Second,
she reiterated that she will be an effective voice in the
Administration as a strong advocate for small business.
Finally, she added that, if confirmed, she would look to create
additional ways to maximize leveraging opportunities, such as
through partnering with both the government and the private
sector. She concluded her testimony by expressing her
commitment to working closely with the Congress as the SBA
executes its mission of serving the needs of small business.
Following the hearing, the Committee unanimously
recommended to the Senate that Ms. Alvarez be confirmed as SBA
Administrator.
``The President's Fiscal Year 1998 Budget Request for
the United States Small Business Administration''--
Washington, D.C., February 26, 1997
On February 26, 1997, the Committee held a hearing to
review the Fiscal Year 1998 budget request for the Small
Business Administration. The hearing provided a forum for
discussion of the budget requests between the Committee Members
and SBA Administrator Aida Alvarez. Citing the importance of
the Committee's role in passing legislation to empower the
small business community, Chairman Bond requested that Ms.
Alvarez provide an outline of the Fiscal Year 1998 budget
request and its impact on small businesses. Additionally, he
stressed the importance of providing funding to those programs
that achieve their goals and eliminating those that fail to do
so in order to free up capital for the growing small business
community.
During the hearing, Ms. Alvarez testified that the
Administration is committed to providing assistance to small
businesses. The SBA's Fiscal Year 1998 budget request was
$701.6 million, compared to its Fiscal Year 1997 appropriation
of $852.4 million. Ms. Alvarez noted that the figure would
allow the SBA to continue operation of existing programs. She
continued by highlighting the SBA's goals for the agency
reflected in the Fiscal Year 1998 budget. Financial objectives
of the SBA's request include: $18 million to improve the
agency's financial management systems and oversight of its loan
portfolio and participating lenders; $1 million to conduct more
sophisticated analysis of loan performance; $1.9 million to buy
technology and systems, as well as staffing, to reform and
modernize the 8(a) program; $8.5 billion program level for 7(a)
loans; $2.3 billion program level for 504 debentures; $832
million for SBIC debentures and participating securities; and
$44 million for microloans.
In addition to her financial breakdown of the SBA budget
request, Ms. Alvarez pointed out issues that the SBA plans to
address in the upcoming Fiscal Year, including shifting many of
its traditional loan-related activities to the private sector,
continued centralizing of its loan servicing and processing
functions, and meeting deadlines included in ``last year's
omnibus appropriations bill to ensure a timely transformation
of its credit programs.'' She also set out as goals for the
agency assistance to families on welfare in finding work
through the SBA Microloan program and through cooperation with
other Federal agencies. She also stated her objective of
continued education assistance to nearly one million small
businesses by restoring the 7(j) business development
assistance to previous levels. In addition, Ms. Alvarez
committed the agency to expanded business assistance programs
by adding 10 to 12 new Women's Business Centers, increasing the
number of Business Information Centers by 10 to 12, and
continuing support for the Service Corps of Retired Executives
(SCORE) and the Small Business Development Center (SBDC)
program. Ms. Alvarez concluded by promising to follow the newly
created Regulatory Fairness Board and the efforts of the Small
Business and Agricultural Ombudsman to reduce the paperwork and
regulatory burdens on small business.
``S. 208, The HUBZone Act of 1997''--Washington, D.C., February 27,
1997
On February 27, 1997, the Committee held a hearing on the
HUBZone Act of 1997 (S. 208). The hearing, the third in a
series of hearings intended to evaluate the ``nation's failure
to create new job opportunities and economic growth in
distressed inner cities and rural communities,'' provided
testimony from four witnesses who discussed how the Act would
improve these rural and inner city conditions. Chairman Bond
stated that S. 208 would infuse cash into economically
distressed areas to create jobs and move people from welfare to
work. He further explained that to categorize an area as a
HUBZone, it must have an excessively high poverty and
unemployment rate. Chairman Bond encouraged the witnesses to
provide an insight into how the Act would affect their
geographic areas.
The first two witnesses, Barry Corona, President and Chief
Executive Officer, Production Products Manufacturing & Sales,
Inc., and Glynn Loope, Executive Director of the Allegheny
Highlands Economic Development Authority, provided first-hand
accounts of how they made improvements in their distressed
neighborhoods by creating jobs and attracting investments. Mr.
Corona grew up in an inner city where he later opened his own
business and hired most of his employees from the area. As the
owner of a minority company doing business with the Federal
government, he testified that S. 208 is a piece of legislation
that can make a difference in many communities by providing
jobs, which he believes provides an answer to many of America's
social problems.
Mr. Loope based his support for S. 208 on his experience
with the Appalachian area of Virginia. He testified that the
Act could bring the Federal government outside of the Capital
Beltway for procurement opportunities. Mr. Loope stated that S.
208 could provide Federal funds to raise the median family
income to the norm of a state by providing work opportunities.
He also pointed out that technology and telecommunications can
advance the purposes of the HUBZone Act by allowing investors
all over the world to have contact with small businesses with
which they may never have had contact. Both witnesses agreed
that S. 208 could help bring individuals from welfare to work
and improve the areas implementing the Act.
The second panel of witnesses raised some concerns about
the Act, although they too favored many of its goals. Ursula
Powidzki, Managing Director, Baltimore Advisors, Inc., offered
some insight into the dangers of a guaranteed market through
the HUBZone Act. She was concerned that the Act does not cover
heavily represented industries in urban areas and questioned
what effects the Act would have on businesses moving into
HUBZones. Ms. Powidzki also testified about the effects of
changes in Federal defense expenditures and how the
discontinuation of programs could affect HUBZones.
The final witness, Fabio Sampoli, Senior Vice President,
The Greater New Haven Chamber of Commerce, also expressed
apprehension concerning S. 208, while pointing out its positive
aspects. Mr. Sampoli voiced opposition to legislation that
interferes with the working of the free-market economy.
Nevertheless, he testified that unrestrained and unchecked
development leads to suburban growth, which can be detrimental
to economic development in inner cities. Mr. Sampoli stated
that he has seen this in his State of Connecticut and
emphasized that inner cities need economic revitalization by
providing new jobs. He also agreed with the Act's requirement
that, for a small business to qualify, it must draw 35% of its
employee base from a HUBZone.
The hearing provided important information concerning the
feasibility of enacting S. 208. While some witnesses expressed
skepticism about certain aspects of the program, a consensus
existed with regard to the viability of the HUBZone
legislation, specifically in providing for economic
revitalization to impoverished inner cities and rural
communities.
``Entrepreneurship in America: Cultivating Maine Grown Businesses''--
Bangor, Maine, March 25, 1997
On March 25, 1997, the Committee held a hearing in its
series on ``Entrepreneurship in America.'' The hearing focused
on cultivating small businesses in Maine and was held at
Rangley Hall of the Eastern Maine Technical College in Bangor,
Maine. In their opening statements, Chairman Bond and Senator
Olympia Snowe stressed that there are three important forces
for economic growth in Maine and nationwide: home-based
enterprises, women-owned businesses, and family-owned firms.
The first panel of witnesses focused on access to capital
for women-owned businesses, especially in Maine. Patricia
LeBlanc, Owner, Founder, and President, LeBlanc's Food
Enterprises, Inc.; Julia Comeau, President, Downeast Temps
Staffing Services; and Lewis H. Payne, Executive Vice President
and Senior Lending Officer, Bar Harbor Banking and Trust
Company, testified that women business owners generally have a
more difficult time obtaining bank loans than men, although the
situation is continuing to improve. Mr. Payne stated that this
issue is particularly important in Maine because women-owned
businesses are an essential part of the economy in the northern
and eastern parts of the state. The witnesses also noted that
while access to capital is important, small businesses need
assistance with developing good business plans and require
support in making the plans work in order to ensure ongoing
success and growth.
The second panel testified about the needs and concerns of
family-owned businesses. Jinger Duryea, President, C.N. Brown;
Charles P. Garland, President, Garland MFG Company; and Kevin
D. Hancock, Executive Vice President, Hancock Lumber Company,
Inc., focused primarily on the destructive impact of Federal
estate taxes. They stressed that estate taxes are punitive in
nature and discourage businesses from being passed on from one
generation to the next. Mr. Hancock emphasized that there
should be an immediate and significant reform to the existing
law, and he noted that the estate tax law is a perfect example
of Federal laws conflicting with Federal priorities--promoting
the continued growth and development of small businesses.
The third panel examined the issues facing home-based
business owners. Alice Bredin, President, Bredin Business
Information; James C. Harriger, Independent Sales
Representative; and Daniel T. Crowley, Vice President, Screen
Scene Inc., testified that one of the top concerns of home-
based business owners is that health-insurance costs are not
fully deductible for self-employed individuals. They urged the
Committee to work for full deductibility and offered their
strong support for the Home-Based Business Fairness Act, which
was introduced by the Chairman and Senator Snowe. The witnesses
testified that the provisions of the bill--restoration of the
home-office deduction, full deductibility of health-insurance
costs for the self-employed, and clarification of the status of
independent contractors--would enable current owners of home-
based businesses to reach their potential and help others start
up and expand new home-based businesses.
``Entrepreneurship in America: Impacts of Meat Inspection on Small
Business''--Great Falls, Montana, April 2, 1997
On April 2, 1997, the Committee held a field hearing, part
of its continuing series on ``Entrepreneurship in America,''
dealing with the impact of meat inspection on small business.
As described by Senator Conrad Burns, who chaired the hearing,
its purpose was to focus attention on labeling and inspection
of imported meat and cost sharing of inspection fees. Senator
Burns prefaced the hearing by noting that prior effort to
resolve these issues had not adequately addressed the concerns
of small businesses. He expressed the hope that the hearing
would make progress toward that goal and underscore the need
for legislative changes, which he expected to offer
subsequently.
All of the witnesses testified about the importance of meat
inspection and proper labeling. The first panel of witnesses
consisted of Lynn Cornwell, President of Montana Stockgrowers
Association, George Paul, Legislative Director of the Montana
Farmers Union, and Robert Hanson, Vice President of Montana
Farm Bureau Federation, who testified that imported meat was
not properly labeled as to the country of origin. They also
emphasized the need for improved inspection of meat in the
United States by increasing the percentage of meat inspected in
each batch. Mr. Hanson also raised concerns about the use of
United States Department of Agriculture (USDA) stamps on
imported meat. He pointed out that the inspection quality of
other countries might not be the same as that in the United
States. He proposed changing the inspection stamp to read
``Import Approved but not U.S. Inspected.'' Paul Thompson,
Director of the Western Region Food Safety and Inspection
Service, USDA, agreed with other witnesses that imported meat
should have a higher standard of inspection than the current
level. Mr. Cornwell addressed the issues of cost-sharing
programs and interstate shipping and suggested that consumers
share the cost of improvements to food safety measures so the
fees are not borne by beef cattle producers alone. He also
asserted that interstate shipment of meat and poultry products
should no longer be banned because this prohibition gives
unfair economic advantage to large meat processors and foreign
competitors.
Bonnie Crary, representing the Montana Cattlewomen's
Association, also stressed the importance of proper labeling
and inspection of meat. She pointed out that contamination can
occur on any level. As a result, she recommended that each
batch of meat that leaves the plant be inspected so that if it
gets contaminated later, the contamination can be traced back
to the point of origin. Rick Cook, Vice President of Vaughn
Meat Packing Inc., testified about the financial aspect of meat
inspection. The final witness, Robert Robinson, Director of
Food and Agriculture Issues, Resources, Community, and Economic
Development Division, U.S. General Accounting Office, explained
the inspection process and defended current methods of
inspection by arguing that they adequately protect public
safety.
``Entrepreneurship in America: Solutions for Tax and Regulatory
Fairness for Small Business''--Casper, Wyoming, April 3, 1997
On April 3, 1997, the Committee held a field hearing in its
continuing series on ``Entrepreneurship in America.'' The goal
of the hearing was to bring together small business owners and
government officials to provide input on how government can
best serve America's small businesses. Chaired by Senator Mike
Enzi, the hearing included an examination of regulations facing
small businesses, as well as ways to reduce paperwork and
administrative burdens. In addition, the hearing focused on
balancing environmental regulations with the needs of
businesses and introducing ways to make such laws more
flexible.
Senator Enzi prefaced the hearing in his opening statement
by noting that small businesses create almost ``100% of this
country's new jobs, and they employ more than 65% of Americans
working in the private sector.'' Small businesses today find
themselves buried under mounds of mandates and regulations,
which are often too broad and inflexible for people to
understand. The Committee heard testimony from small business
owners, two Wyoming state representatives, as well as the
Wyoming Department of Environmental Quality.
All of the witnesses testified that there are substantial
regulatory obstacles facing small business owners, which make
it harder for them to survive. In particular, several witnesses
focused on the burdens imposed by the tax laws and regulations.
Eli D. Bebout, Majority Leader, Wyoming House of
Representatives, and President, Nucor Oil & Gas, Inc., along
with several other witnesses, noted that more tax incentives
would help small businesses compete with larger companies. John
J. Hines, Member, Wyoming House of Representatives, emphasized
that changing the estate tax law is critical to helping small
businesses stay in business. Diane Wolverton, State Director,
Wyoming Small Business Development Center, noted that home-
based businesses face many tax obstacles because the IRS views
them with skepticism, and she pointed out that many home-based
business owners believe that if they claim the home-office
deduction, they will most likely be audited. Several witnesses
expressed concern about the self- employment tax, and David R.
Reetz, President, Powell Valley Economic Development Alliance,
First National Bank of Powell, alerted the Committee to the
problems that small businesses face when they use independent
contractors, which are often necessary for specific jobs.
The Committee also received considerable testimony about
the effects of environmental regulations on small businesses. A
number of the witnesses testified about the importance of
striking a balance between cost-effective regulations and
protecting the environment. Representative Bebout and Terry
Oldfield, Vice President, MiniMart Corporation, Casper,
Wyoming, recommended placing more emphasis on the socioeconomic
effects of regulations, and gathering more scientific
information before placing new restrictions on businesses. Bob
O'Neil, Director of Human Resources, Grand Teton Lodge Company,
noted the difficulties small companies face just to keep up
with all of the regulations, as well as differentiating between
the rules administered by Federal and state agencies. Dennis
Hemmer, Director, Wyoming Department of Environmental Quality,
testified about the importance of emphasizing compliance and
compliance assistance for small businesses. He noted that many
small businesses make errors due to ignorance of the law and
that regulators should focus on ways to help businesses avoid
liability while protecting the environment.
Witnesses also expressed concern about the Occupational
Safety and Health Administration (OSHA). Frank S. Galeotos,
Director, Wyoming Department of Employment, discussed the main
problem of enforcing OSHA regulations. He noted that many small
businesses do not know all of the rules, nor do they have the
capacity, in terms of people, skills, and finances to comply
with all of the regulations, which makes full compliance very
difficult. He also testified that not all of the rules apply or
make sense when they are applied on a uniform basis. He
suggested creating incentives, such as a voluntary program
under which a business that volunteers to make a safety plan
will not be subject to fines on inspection. Mr. Galeotos and
other witnesses also suggested implementing incentives for
Workers'' Compensation programs as opposed to fines.
Two final issues raised at the hearing were the non-
deductibility of self-employed health- insurance costs and the
Family and Medical Leave Act. Witnesses noted that large
companies are currently allowed to deduct employees'' health-
insurance costs in full, while owners of small businesses can
only deduct a portion of their cost. In essence, they are
penalized because they are small businesses instead of
encouraged to provide health care coverage. On the issue of
family and medical leave, both Mr. O'Neil and Mr. Oldfield
expressed opposition to broadening the Family and Medical Leave
Act and instead suggested compensatory time and more flexible
scheduling.
``S. 208, The HUBZone Act of 1997''--Washington, D.C.,
April 10, 1997
On April 10, 1997, the Committee held a hearing on the
HUBZone Act of 1997 (S. 208), a bill to help create jobs for
those most in need and stimulate investment in communities that
need revitalization. The purpose of the hearing included
examination of the HUBZone Act, the challenges of implementing
the Act, and the effects it may have on small businesses
currently participating in the 8(a) program administered by the
SBA.
Chairman Bond prefaced the hearing in his opening statement
by commending the SBA's recent inclusion of the first Community
Development Corporation-affiliated company into the 8(a)
program. He noted, however, that it is an important tool the
SBA should use along with other tools, such as HUBZones, to
help create new jobs. The Committee heard testimony from
several witnesses concerning these issues.
All of the witnesses testified that there is a great need
to help the nation's economically challenged urban and rural
communities, especially those in which the labor pool is
greatly underutilized. However, the witnesses' opinions
differed when discussing the best way to help those
communities--either through HUBZones or the current 8(a)
program. Aida Alvarez, SBA Administrator, testified that the
Clinton Administration believes that much work can be done
under the current law to obtain the objectives that the HUBZone
Act seeks to accomplish. While she acknowledged that there is
room for improvement in the current 8(a) program, she noted
that the Administration's empowerment-contracting approach
preserves administrative flexibility, builds on existing
initiatives in empowerment zones and enterprise communities,
and allows testing of new approaches through a phased approach.
Ms. Alvarez, along with several other witnesses, raised
concerns about the difficulties of implementing and enforcing
the provisions of the HUBZone Act.
Another concern expressed by several witnesses was the
effect that HUBZones might have on minority- and women-owned
businesses. Anthony W. Robinson, President, Minority Business
Enterprise Legal Defense Fund, was troubled that the
legislation makes HUBZone small businesses a higher priority
than small businesses owned by socially and economically
disadvantaged individuals. Mr. Robinson also had reservations
that the bill may redirect Federal procurement in ways that
threaten minority- and women-owned businesses across the board.
The Committee also received considerable testimony from
witnesses who viewed the current 8(a) program as not going far
enough to help troubled urban and rural communities and
testified that the HUBZone approach will better aid these
areas. James F. Hoobler, SBA Inspector General, suggested a
pilot HUBZone program for a multi-year period in a carefully
selected, limited number of rural and urban underutilized
business zones. He emphasized that Congress should appropriate
the necessary funds to the SBA for management and oversight of
the program. Sandra Newman, Chief Executive Officer, Raritan
Container Company, testified that the HUBZone Act could benefit
whole communities by creating meaningful incentives for small
businesses to operate and provide employment directly in
America's most distressed areas. Ms. Newman also noted that the
bill will create a new class of small businesses eligible for
Federal government contract set-asides and preferences. Pete
Homer, President and Chief Executive Officer, National Indian
Business Association, provided testimony about the difficult
economic conditions in Native American communities. Mr. Homer
noted that the HUBZone Act may help break the cycle of poverty
by providing contract set-asides, sole-source contracting
opportunities, and an economic incentive for companies to
invest in the Indian business community.
``Oversight of SBA's Non-Credit Programs''--
Washington, D.C., April 24, 1997
On April 24, 1997, the Committee held a hearing on the non-
credit programs of the SBA. Chairman Bond opened the hearing by
emphasizing the importance of SBA's entrepreneurial assistance,
which the agency carries out primarily through the SBDCs,
SCORE, the Women's Business Centers, and international trade
programs. He noted that the witnesses were asked to testify
about their experience with these programs and to share with
the Committee any recommendations for improvement.
To provide a perspective on the SBA's entrepreneurial
assistance programs, the Chairman began the hearing with two
panels consisting primarily of students who testified about the
importance of starting business education at an early age. Jean
M. Buckley, Senior Vice President, Junior Achievement,
testified that Junior Achievement is a non-profit organization
whose mission is ``to educate and inspire young people to value
free enterprise, business, and economics in order to improve
the quality of their lives.'' The organization reaches more
than 2.7 million students worldwide. The student witnesses on
the first panel testified about their participation in Junior
Achievement. Through personal anecdotes, the students testified
that the program is extremely beneficial for learning business
skills and values, and they urged that it be introduced in
every high school in the United States.
The second panel included students who had also
participated in business education programs, including Future
Farmers of America (FFA), and who had succeeded in their own
business ventures. The students described their experiences in
the business world and testified that access to business
education programs gave them the motivation and guidance
necessary to make their business operations a success. Marilyn
Kourilsky, Ph.D., Vice President, Center for Entrepreneurial
Leadership, Inc., Ewing Marion Kauffman Foundation, testified
about the goals and operation of the student programs that the
Center for Entrepreneurial Leadership conducts, and she noted
that these programs provide not only practical benefits but
also give students the self-esteem, confidence, and the courage
to start a successful enterprise in the business world.
Jeanne Sclater, Acting Associate Deputy Administrator for
Economic Development, SBA, reviewed for the Committee the SBA's
various business assistance programs. She noted that the SBA's
education services are important to the individual small
businesses and to the country's economy as well, because they
serve as a resource for small business owners to develop the
tools they need to succeed. Ms. Sclater also reviewed the
Administration's Fiscal Year 1999 budget request for these
programs and proposed legislative changes to certain of the
SBA's non-credit programs.
The Committee also received detailed testimony on the SBA's
SCORE and SBDC programs. Frederic W. Thomas, President of
SCORE, noted that as an SBA Resource Partner, SCORE gives
entrepreneurs access to seasoned business professionals who can
offer guidance on how to start, operate, grow, buy, and sell
small businesses. He also reviewed various proposals for
improving and expanding the program, which were included in the
Administration's budget request. Sam Males, State Director,
Nevada Small Business Development Center, and President,
Association of Small Business Development Centers, testified
that the SBDCs constitute the largest integrated management
technical assistance program for small businesses in the United
States. He noted that the amount of assistance provided by the
SBDCs has picked up extraordinarily over the past six years,
and he described the various types of assistance that are
available to small business owners through the SBDCs in each
state. Mr. Males also expressed his concerns that the
Administration's budget request called for a significant cut in
funding for the SBDCs.
The final two witnesses testified about the impact of SBA
non-credit programs on sectors of the small business community.
S. Terry Neese, Corporate and Public Affairs Liaison, National
Association of Women Business Owners, provided a historical
perspective on the Office of Women Business Ownership and the
National Women's Business Council. She also stressed the
importance of business education and training to the success of
women business ownership in this country. Ms. Neese noted,
however, that the current Administration's commitment to these
efforts has been lacking. She provided the Committee with
several recommendations for strengthening these efforts. Ms.
Neese and Susan Eckerly, Director, Federal Governmental
Relations--Senate, National Federation of Independent Business
(NFIB), both expressed their support for the SBA's Office of
Advocacy. Ms. Eckerly, however, noted that NFIB's surveys
indicate that a top concern of small business is the burden of
government regulations. She urged the Office of Advocacy to
increase its efforts to address the regulatory burdens and
compliance costs as the advocate for small businesses within
the Administration.
The hearing provided the Committee with valuable
information on the SBA's non-credit programs and served as the
basis for important parts of the legislation to reauthorize the
agency, which the Committee took up later in the session.
``Oversight of SBA's Finance Programs''--Washington, D.C., May 7, 1997
On May 7, 1997, the Committee held an oversight hearing on
the finance programs of the SBA. The hearing was the first of
two hearings to review the operating results of the SBA's
finance programs focusing specifically on the 504 loan program
and the Small Business Investment Company (SBIC) program. In
his opening statement, Chairman Bond emphasized that the
testimony provided by the witnesses would be extremely
important as the Committee prepared to reauthorize these
programs later in the year. The Chairman also focused
considerable attention on the other SBA lending program, the
7(a) loan program, and the Administration's failure to provide
full and complete information to date on that program, which
the Committee addressed in the following hearing.
The first panel of witnesses focused on the 504 loan
program, which provides financing for small businesses to
purchase and improve facilities. Both witnesses emphasized that
the 504 program must be reauthorized if it is to survive. Since
the program relies only on fees charged in relation to 504
loans, Congress must renew the authority to collect the fees if
the program is to continue with a zero subsidy. Mark Barbash,
Vice President of Congressional Relations, National Association
of Development Companies, and Executive Director, Columbus
Countrywide Development Corporation, also urged the Committee
to focus on the subsidy rate calculations provided by the
Office of Management and Budget (OMB). He and Steve Dusek,
Chief Executive Officer, Prairieland Economic Development
Corporation, emphasized that OMB must be held accountable for
accurate subsidy rate estimates in order for the 504 program to
remain stable and continue to provide its valuable financing
assistance for small enterprises. Messrs. Barbash and Dusek
provided the Committee with several legislative proposals to
strengthen the program, including recommendations on the
Premier Certified Lenders program and on multiple borrowers and
the partial lease-out of projects.
The witnesses on the second panel testified about the SBIC
program, which provides critical capital for small businesses
through investment. All three witnesses urged the Committee to
reauthorize the SBIC program for an additional three-year
period with modifications to the authorization levels for
debentures and participating securities issued under the
program. C. Walter Dick, Chairman, National Association of
Small Business Investment Companies, and General Partner,
Pioneer Capital Corporation, Pioneer Ventures, L.P. 1, and
Pioneer Ventures, L.P. 2, provided the Committee with anecdotal
evidence of the SBIC program's success, and he offered several
suggestions for legislative enhancements that would improve the
program.
N. Whitney Johns, Chief Executive Officer, Whitney Johns &
Company, focused on women-owned businesses in particular,
noting that approximately 8 million women-owned businesses in
the country employ one out of every four workers in the economy
and account for $2.3 trillion in sales. She stressed that while
women-owned businesses constitute such a significant portion of
the market, they still face considerable difficulties when it
comes to accessing capital. She recommended program changes
that would enable more women-owned businesses to benefit from
the capital available under the SBIC program. Stanley W.
Tucker, Member of the Board, National Association of Investment
Companies, and President, Maryland Small Business Development
Financing Authority Management Group, Inc., also called the
Committee's attention to the continuing capital gap faced by
minority-owned businesses and asserted that the SBIC program is
an appropriate place to address that issue.
``Oversight of the SBA's Finance Programs--Part II''--
Washington, D.C., May 15, 1997
On May 15, 1997, the Committee held the second part of its
hearing on the finance programs administered by the SBA.
Following on the testimony received on the 504 loan program and
the SBIC program, Chairman Bond focused this hearing on the
SBA's 7(a) Guaranteed Business Loan program. In his opening
statement, Chairman Bond stressed the importance of the 7(a)
loan program for the thousands of small businesses that rely on
it for financing and new business startups.
The Chairman noted, however, his concerns about recent
revelations by the SBA that there would be a funding shortfall
in the 7(a) program, and he expressed his reservations about
the loan cap that the SBA imposed on the program to address
that situation. He urged the SBA Administrator and the Clinton
Administration to provide full and complete information to the
Committee on the situation concerning the 7(a) program, and he
was optimistic that a bipartisan solution could be achieved to
keep this important loan program operating efficiently and
effectively.
The Committee first heard testimony from Aida Alvarez, SBA
Administrator, who focused much of her testimony on the
$500,000 cap on loans under the 7(a) program. She testified
that the loan cap was necessary to assure that the SBA does not
run out of lending authority under the 7(a) program before the
year's end. She explained that the cap was set at $500,000
because available data showed that 90% of the loan applications
would still qualify at that level. She also indicated that
while only about 10% of the loan applications exceeded the cap,
these larger loans would consume 40% of the SBA's available
loan authority. Ms. Alvarez testified that these larger loans
are less likely to go to rural areas, women-owned firms, and
new startup businesses--borrowers who have historically faced
barriers to accessing credit. Instead, the large loans tend to
be those that have longer terms and that are secured by real
estate.
Ms. Alvarez also testified about the Fiscal Year 1999
budget request for the 7(a) program. She noted that the
Administration requested authorization of $10 billion for the
program, an increase of $1.5 billion over the Fiscal Year 1998
appropriations request. She also committed the agency to
identifying improvements to the program to lower its costs and
increase lending to small businesses. Toward those ends, Ms.
Alvarez announced that she would be forming a task force to
review the program and present the Committee with
recommendations for changes that would preserve and protect the
loan program.
The second panel consisted of two witnesses representing
the lenders that implement the SBA's 7(a) program. Both
witnesses agreed that the 7(a) program is one of the most
beneficial programs currently available for small businesses to
grow and create jobs in this country. They also emphasized
their opposition to the loan cap recently imposed by the SBA.
Deryl K. Schuster, President, Mid-America Division, Business
Loan Center, and Chairman, National Association of Government
Guaranteed Lenders, Inc. (NAGGL), pointed out that in addition
to the assistance that the program provides for small
businesses, numerous studies have verified that the 7(a)
program is in fact a net generator of revenue for the Federal
government. He concluded that restrictions, such as the loan
cap, are counterproductive on many fronts.
Anthony R. Wilkinson, President and Chief Executive
Officer, NAGGL, emphasized that the 7(a) program pays for
itself many times over, making it effectively cost free. He
testified that in every year except for one since the Credit
Reform Act was put in place, borrowers under the 7(a) program
have paid fees well in excess of the program's cost. Because of
that fact and in light of the current shortfall facing the 7(a)
program, Mr. Schuster called for a complete revision of the
procedure for calculating the subsidy rate for the loan
program. Mr. Schuster concluded by assuring the Committee that
NAGGL is committed to working with the SBA and Congress to
identify ways to make the 7(a) program more efficient and cost
effective.
``Entrepreneurship in America: The Impact of OSHA and Other
Agencies''--Great Falls, Montana, May 31, 1997
On May 31, 1997, the Committee on Small Business held
another hearing in its series on ``Entrepreneurship in
America.'' The hearing was held in Great Falls, Montana, and
was chaired by Senator Burns. It was intended to examine the
impact of OSHA and other Federal government agencies on small
businesses. Senator Burns stressed that the Federal government
needs to be sensitive to the policies that can hurt small
businesses, and he indicated that OSHA can be a real asset for
businesses in terms of helping businesses provide safe
workplaces. He emphasized, however, that OSHA could work more
cooperatively with small businesses to encourage compliance.
Several witnesses testified about the inefficiency of OSHA
and its negative effect on small businesses. John McFarland,
Owner, Conrad Building Center, conveyed his personal experience
with the evolution of increased government regulations in the
area and the resulting pressures they place on businesses. He
pointed out that highly paid executives must often be hired to
comprehend and administer these regulations, while the blue
collar workers have to be laid off to offset the additional
cost. Sidney Rispens, General Manager and Corporate Secretary,
Intercontinental Truck Body, agreed with Mr. McFarland, stating
that OSHA's effects on small business are deeply felt,
primarily in terms of cost. Mr. Rispens emphasized that the
cost to maintain and follow regulation is astronomical.
Mr. Rispens warned about differences between state and
Federal health and safety regulations, noting that at times
state and Federal inspectors contradict each other on the items
considered to be substandard. Tom K. Hopgood, Executive
Secretary and Counsel, Montana Beer & Wine Wholesalers
Association, acknowledged that regulations by state and Federal
agencies are often extensive and do not correspond to
individual businesses' needs. Mr. Hopgood also testified that
OSHA's efforts to implement strict workplace ergonomic
standards are not based on sound scientific evidence and in
turn will have a disastrous effect on businesses.
David Folsom, Safety and Health Supervisor, Safety Bureau,
Employment Relations Division, Montana Department of Labor and
Industry, noted that the Safety Bureau offers workplace safety
and health assistance to Montana businesses. In particular, the
Bureau's Assistance to Business Clinics extend formal training
sessions on OSHA's General Industry and Construction Standards.
The purpose of these clinics is to provide a forum in which
interested employers and employees can obtain information on
workplace safety and health issues. They also conduct training
programs that help interested parties receive hands-on
experience. Elaine Demery, President, Nelson, Coulson, &
Associates, Inc., and Chair, Small Business Fairness Board,
Region VIII, agreed that clearer interpretation of OSHA's
regulations would ensure equal enforcement and fairness when it
comes to small businesses. Ms. Demery testified about the
Ombudsman program and Fairness Boards created by the Small
Business Regulatory Enforcement Fairness Act (SBREFA), one goal
of which is to help government and small businesses work
together more efficiently. She emphasized that the Fairness
Boards hold regional meetings that are open to the public to
hear concerns and complaints about agency conduct and
enforcement actions.
Bart Chadwick, Regional Administrator, Region VIII, OSHA,
testified about the new OSHA and how it is different and more
efficient than the agency has been in prior years. He noted
that OSHA serves a vital purpose of preventing employers from
taking advantage of their employees. He also pointed out that
the agency ensures access to means, methods, and procedures
that can help reduce injury and provide an acceptable workplace
for every worker.
``Small Business Perspectives on Mandates, Paperwork, and
Regulation''--Washington, D.C., June 4, 1997
On June 4, 1997, the Committee held a hearing on small
business perspectives on mandates, paperwork, and regulation.
Chairman Bond convened the hearing during Small Business Week
to explore the Federal government's efforts to reduce or
eliminate unfunded mandates, excessive paperwork requirements,
and Federal regulations that burden small businesses.
Specifically, the hearing reviewed the implementation of the
Paperwork Reduction Act of 1995 and discussed the Mandates
Information Act of 1997, a bill designed to complete the work
of the Unfunded Mandates Reform Act of 1995.
Chairman Bond opened the hearing by commending Senator Dirk
Kempthorne and his Unfunded Mandates Reform Act, which provides
Congress with the valuable information on legislation and
agency rules that would impose unfunded mandates on state and
local governments and the private sector. He noted, however,
that more needs to be done to ensure that Congress has
sufficient information on private sector mandates, especially
regarding the costs imposed on consumers and small businesses.
Senator Spencer Abraham testified about the Mandates
Information Act of 1997, legislation he introduced to force
Congress to take into account the costs of unfunded mandates on
the private sector. Senator Abraham noted that the bill is
intended to identify and reduce unnecessary costs on American
workers, consumers, and small businesses. The Mandates
Information Act of 1997 would establish a new parliamentary
point-of-order against any bill that will impose private-sector
mandates exceeding a $100 million cost threshold.
Representative Gary Condit, the sponsor of the bill in the
House of Representatives, testified that the bill would require
the Congressional Budget Office (CBO) to estimate the impact of
such unfunded mandates on consumer costs, worker wages, and the
availability of goods and services.
All of the witnesses testified that while the Unfunded
Mandates Act of 1995 was a beginning, more needs to be done to
help control the costs of mandates imposed by Congress. Angela
Antonelli, Deputy Director for Economic Policy Studies, The
Heritage Foundation, provided testimony on implementation of
the Unfunded Mandates Reform Act of 1995, and noted that while
it has had limited success, it needs to be strengthened. Ms.
Antonelli expressed her support of the Mandates Information Act
of 1997. Bob Spence, Vice President and Chief Financial
Officer, Faultless Laundry Company, representing the United
States Chamber of Commerce, testified that the Chamber is in
full support of the Mandates Information Act, and hopes that it
will lead to full disclosure and better accountability by the
Federal government.
David Marsh, Owner, Marsh Plating Corporation, testified
about his involvement with the EPA's Common Sense Initiative
and the agency's compliance with Chairman Bond's Red Tape
Reduction Act [i.e., Small Business Regulatory Enforcement
Fairness Act of 1996 (SBREFA)]. Mr. Marsh commented on the
benefit of the Red Tape Reduction Act's requirement that EPA
sit down with small businesses and receive their comments on
draft regulations before the regulations are proposed by EPA.
He stressed that this process improves the likelihood of the
regulated community understanding the agency's objectives and
the agency developing a rule that is better suited to
compliance by small businesses. Mr. Marsh noted that EPA did
not comply with the law when developing its National Ambient
Air Quality Standards for ozone and particulate matter.
Michael Brostek, Associate Director, Federal Management and
Workforce Issues, General Government Division, General
Accounting Office (GAO), testified about the government's weak
efforts under the Paperwork Reduction Act of 1995. The Act
requires the Federal government to set goals to achieve at
least a 10% paperwork burden reduction in 1996 and also in
1997, and then 5% reductions in each year through 2001.
Chairman Bond noted that the OMB apparently decided to rewrite
the law to suit the regulators better by ignoring the 1996 and
1997 levels and shooting for an aggregate 25% reduction by the
end of Fiscal Year 1998. The GAO confirmed that the government-
wide reductions will not even come close to the target set by
Congress.
Philip Hauck, President, Counselor Publishing Company,
testified that in order for agencies to achieve a reduction in
paperwork, their leadership at every level must develop a plan
that achieves the goal rationally, but makes sure the goal is
attained. Mr. Hauck noted the importance of holding specific
individuals responsible, not just the entire agency.
``Oversight of SBA's Microloan Program''--Washington, D.C., June 12,
1997
On June 12, 1997, the Committee held an oversight hearing
on the Microloan Demonstration Program administered by the SBA.
Chairman Bond opened the hearing by noting that the Microloan
program, established as a pilot program in 1992, provides
critical capital for small businesses. The program focuses on
borrowers seeking no more than $25,000 who are not normally
served by other SBA credit programs or traditional lending
sources. Chairman Bond also discussed the ongoing controversy
surrounding the SBA's imposition of a lending cap on loans
under the 7(a) program, and he noted that efforts were underway
to resolve questions about the shortfall in the program as well
as questions about its subsidy rate.
The first panel consisted of witnesses who had a long
history of experience dealing with the Microloan program.
Several witnesses offered anecdotal evidence of the program's
benefits for small businesses, and the panel urged the
Committee to make the program permanent. Prathiba Mathews-
Wheeler, Microloan Program Manager, Center for Business
Innovation, Inc., and Katherine McKee, Associate Director,
Center for Community Self-Help, explained that the program
helps micro-businesses that are typically too high a risk for
conventional lenders and that cannot obtain essential capital
for growth and development from other sources. Ms. Mathews-
Wheeler testified that a critical component of the Microloan
program is the technical assistance that each borrower receives
in the areas of management, marketing, human resources,
finance, and accounting. She noted that this assistance helps
borrowers be successful and is a contributing factor to her
company's low loan-loss rate for Microloans. The witnesses also
offered a number of suggestions for improving the program,
including modification of the loan loss reserve rate, and
greater flexibility in structuring loans and providing
technical assistance under the program. Several witnesses also
urged the Committee to target minority and disadvantaged
entrepreneurs through the program and to evaluate the program
as an option for helping low-income individuals to transition
from welfare to work.
Angela Fair, Loan Officer, Arkansas Enterprise Group, led
the second panel with several additional success stories of
small businesses that received Microloans. One of the Arkansas
Enterprise Group's borrowers, George White, Delta Vending
Enterprises, also testified, and described how he would not
have been able to start his vending machine business and employ
three people without the loans he received under the program.
John F. Else, Ph.D., President, Institute for Social and
Economic Development, testified that his organization focuses
primarily on welfare recipients and low-income individuals. Dr.
Else noted that through Microloan funding, the Institute for
Social and Economic Development has been able to help these
individuals start their own businesses and develop enterprises
that employ other low-income people and welfare recipients. The
witnesses also offered a number of suggestions for improving
the program and expanding its benefits to help more people
start their own businesses.
``Entrepreneurship in America: Fairness in Regulatory Enforcement''--
Kansas City, Missouri, August 19, 1997
On August 19, 1997, Chairman Bond and Representative James
Talent, Chairman of the House Committee on Small Business,
presided over a joint hearing of the Senate and House
Committees in Kansas City, Missouri. The field hearing
continued the ``Entrepreneurship in America'' series of
hearings, which highlights the experiences of small business
owners across the country. Chairman Bond focused this hearing
on the Red Tape Reduction Act [also known as the Small Business
Regulatory Enforcement Fairness Act (SBREFA)], and in
particular the provisions of the Act that address agency
enforcement actions. The Committees' goals were to learn
whether the messages heard from agencies in Washington,
regarding compliance with the Act, were being carried back to
their regional offices and reflected in the treatment received
by small businesses that interact with the agencies.
The first panel consisted of small business owners, and
witnesses described their recent and notable experiences with
various Federal agencies. On behalf of the Kansas City Chamber
of Commerce, Bob Spence, Vice President and Chief Financial
Officer, Faultless Laundry Company, testified about his
company's experience with the Immigration and Naturalization
Service (INS). Because of his interaction with the INS in 1994,
Mr. Spence was not inclined to contact the agency for
compliance assistance and was hesitant to trust other agencies'
offers of assistance. His reluctance to seek a cooperative
relationship with Federal agencies stems from the INS raid of
his company and the issuance of a penalty despite the company's
cooperation and prior assurances by the INS that no penalty
would be imposed if the company cooperated. Chairman Bond noted
that earlier inspections by INS-trained auditors did not
discover problems with the same paperwork that led to the raid
in 1994. If the INS' own inspectors did not detect problems
with the paperwork, Chairman Bond noted, it is hard to
understand how the average employer is expected to grasp such
subtleties.
Sherman Titens, President, Coordinating Committee for
Automotive Repair (CCAR), and Executive Director, CCAR-
GreenLink, testified about the positive experience his trade
association and industry is having with the EPA. Based on an
EPA grant, CCAR-GreenLink has established an Internet site to
provide compliance assistance information to the auto repair
industry. The reception from the industry has been tremendous.
Mr. Titens noted that CCAR-GreenLink does not heavily advertise
its support from an EPA grant because of concerns that such an
association might discourage members of the industry from
seeking assistance from the organization. Chairman Bond
commended CCAR-GreenLink and stressed the importance of the
availability of such information so that employers can know
what is expected of them by a regulatory agency and be able to
comply.
The first panel also included Ed Hatfield, Human Resources
Manager, Cook Brothers Insulation, Inc., who testified on
behalf of the Associated Industries of Missouri (AIM), a
statewide trade organization that had formed a special task
force in response to member companies' concerns about
enforcement practices at OSHA. In 1996, OSHA announced a
targeted inspection strategy for Missouri employers called
Missouri 500. The program was flawed in its design, and
statements of Joseph Dear, then-head of OSHA, implied that
employers targeted by the program had bad safety and health
programs. Following pressure from Chairman Bond and other
members of the Missouri Congressional delegation, OSHA withdrew
the program and offered public apologies to employers. More
recently, OSHA advised employers in Missouri of a new national
initiative, called the Cooperative Compliance Program. Mr.
Hatfield alerted the Committee to employers' concerns with the
program, namely its close similarity to the program withdrawn
in 1996. In response to this initiative, AIM and its members
have met with OSHA and sought improvements to the program. As
of this hearing, AIM had offered an alternate proposal to OSHA
and was awaiting a response from the agency.
Two members of the Regional Fairness Boards, Scott George,
General Manager, Mid America Dental, Hearing & Vision Center,
and Elaine Demery, President and Chief Executive Officer,
Nelson, Coulson, and Associates, Inc., testified on the status
of their efforts. Despite the slow start, the Board members
were glad to be a part of the process, and they indicated that
change in agency attitudes and conduct toward small businesses
have been noticeable. Mr. George stressed that the fear of
retaliation from Federal agencies is continually cited by small
businesses as a reason not to come forward and participate in
the process. Chairman Bond agreed with the Board members that
more needed to be done to remove this fear from chilling
participation and providing an honest assessment of agencies'
performance with respect to small business.
The last panel included Peter Barca, Small Business and
Agricultural Ombudsman (Ombudsman), as well as representatives
from the Kansas City regional offices of the EPA and OSHA. Each
of the witnesses spoke of efforts being undertaken by the
agencies to implement the Red Tape Reduction Act and to create
a more cooperative relationship between small business and the
Federal government. Mr. Barca concurred with the Fairness Board
members that fear of retaliation is a recurring theme. All
witnesses agreed that more needed to be done to advise small
businesses of the tools provided by the Red Tape Reduction Act
and to improve communication between small business and the
government.
Marcia Drumm, Deputy Regional Administrator, Region VII,
OSHA, noted that while OSHA has historically focused on
citations and penalties, it is now reinventing itself and
developing new programs with substantial input from employers
and workers. For example, OSHA's consultation program is a
primary vehicle for assisting small businesses. A company may
receive free, confidential consultation, available upon
request, without the fear of an OSHA inspector showing up at
its door. Ms. Drumm also testified that OSHA reduces penalties
depending on the size of the establishment, good faith of the
employer, and history of previous violations. William Rice,
Deputy Regional Administrator, Region VII, EPA, testified about
the EPA's ongoing commitment to work with small businesses to
address their special needs. He noted that the EPA has
implemented programs that are intended to minimize the
regulatory burden and serve as an incentive for compliance. Mr.
Rice pointed out that Region VII has excellent technical
assistance programs that a small business can contact without
fear that the information will be passed on for possible
enforcement. He also stressed that outreach is extremely
important and that his Region has a wide variety of work under
way to get the information out, both about existing regulations
as well as identifying more cost-effective methods for
complying with them.
``Small Business and Fundamental Tax Law Reform''--Washington, D.C.,
October 22, 1997
On October 22, 1997, the Committee held a hearing on
fundamental reform of the Federal tax law from the perspective
of small business. The hearing sought to elicit the views of
national small business groups on what the optimal tax system
would be for small business if Congress could start from
scratch. The witnesses were also asked for suggestions on
meaningful steps that Congress should take to lessen the tax
burden on small businesses in the short run, while Congress
creates and implements a ``small business friendly'' tax code
for the long run.
Chairman Bond prefaced the hearing by stressing that a
growing problem in this country is the complexity of the tax
system and the need for fundamental reform. He noted that while
the IRS is in desperate need of reform and taxpayer's rights
must be strengthened, the underlying problem is that the
current tax law is too complicated and burdensome on taxpayers.
In fact, small businesses spend an estimated 5% of their
revenues just to comply with the tax laws; that does not
include the revenues required to pay their taxes. Chairman Bond
stressed that the only way that the current, overly complicated
tax code is going to change is if the citizens and
entrepreneurs of this country call on Congress and the
President to prepare, draft, and implement a better solution.
The Committee heard from a panel of seven witnesses
representing small businesses across the country and in a
variety of industries. In general, the witnesses agreed that
the current tax law is too cumbersome simply to be ``fixed,''
and it should be replaced with a simpler and fairer tax system.
While there was no clear consensus among the witnesses on what
form the new tax system should take, Jack Faris, President and
Chief Executive Officer, NFIB, urged Congress to sunset the
current tax code. He suggested that Congress then craft two
replacement plans--a flat tax and a national sales tax--and
allow the American taxpayers to decide on the optimal system
through a national referendum during the presidential election
in the year 2000. Terry Neese, Past President and Corporate and
Public Consultant, National Association of Women Business
Owners, and Chief Executive Officer and Founder, Terry Neese
Personnel Services, recommended as an alternative that Congress
establish five working groups, including one representing small
business, to develop a proposal for restructuring the current
tax system that would be presented to Congress for
consideration.
Charles E. Kruse, Member, Board of Directors, American Farm
Bureau Federation, and President, Missouri Farm Bureau
Federation, pointed out that the current tax code is
particularly onerous for farmers and ranchers. He noted that
the law taxes some income multiple times because of the
individual income tax, the corporate income tax, the
alternative minimum tax, the capital-gains tax, and the estate
tax. Mr. Kruse stressed that whatever form a new tax system
takes it must eliminate multiple taxation of the same income.
John S. Satagaj, President and General Counsel, Small
Business Legislative Council, stressed that small businesses
derive consider
able benefits from provisions of the current tax law, and a new
tax system may require that small businesses give up some of
those benefits. He emphasized that Congress should give careful
consideration in reforming the tax code to ensure that small
businesses do not ultimately face an even greater tax burden.
Mr. Satagaj noted that the flat tax and the sales tax have
their benefits but both also have significant problems. With a
flat tax, individuals may be able to fill out their taxes on a
postcard, but there are still going to be rules on the business
side concerning what is income and what expenses can be
deducted to arrive at taxable income. With a sales tax, the
characterization issues may be eliminated, but small businesses
will face a new set of complexities and burdens as they are
forced to be the nation's tax collectors.
Karen Kerrigan, President, Small Business Survival
Committee, and other witnesses offered a number of principles
to guide the creation of a new tax law. Ms. Kerrigan advised
that the new law should: (1) produce a low tax rate to promote
economic growth, not tax capital; (2) factor in the detrimental
effects of inflation; (3) be clear and simple to understand;
(4) minimize the incentives for tax avoidance; and (5) limit
the government's ability to increase expenditures. She also
stressed that in developing a new tax law, attention must be
paid to the transition rules to avoid causing individual and
business taxpayers undue harm as they move to a new tax system.
Ms. Neese emphasized that simplifying the tax code must focus
in large part on eliminating the thresholds, phase-ins, phase-
outs, limitations, differing treatment, exceptions, exemptions,
exclusions, and effective dates that pervade the current law.
Two witnesses focused particular attention on the issue of
payroll taxes. Todd McCraken, President, National Small
Business United (NSBU), described the results of NSBU's annual
survey of small business owners, which revealed that the
payroll tax is the greatest burden for small businesses. He
noted that payroll taxes are a fixed expense for small
businesses and can be reduced only if the business fires
employees or cuts their wages. Mr. McCraken also pointed out
that payroll tax reform is connected with resolving the
difficulties facing the Social Security system, and he asserted
that the debate on fundamental tax reform must also focus on
Social Security restructuring. Bennie L. Thayer, President and
Chief Executive Officer, National Association for the Self-
Employed, emphasized that the self-employed are especially hard
hit when it comes to payroll taxes because they must pay both
the employee's and the employer's share of the taxes. He also
noted that self-employed individuals are the least likely to
have a private retirement plan. As a result, the self-employed
are the most vulnerable to proposals that would reform the
Social Security system by raising taxes and cutting benefits.
The witnesses offered a number of suggestions for improving
the current tax code as Congress develops a replacement tax
system. Most of the panelists stressed the need for reforming
the IRS to provide better service for taxpayers and the need
for improving taxpayer rights. Other recommendations included
accelerating the deductibility of health insurance for the
self-employed, decreasing the capital-gains tax rates,
expanding the estate-tax exemptions, clarifying the status of
independent contractors, and extending income averaging for
farmers.
``IRS Reform: What America's Taxpayers Need Now''--Washington, D.C.,
February 12, 1998
On February 12, 1998, the Committee held a hearing on the
need to reform and restructure the IRS. The purpose of the
hearing, summarized by Chairman Bond, included examination of
the challenges small businesses face when dealing with the IRS
and the tax laws, suggestions on ways to improve taxpayers'
rights, and observations about the impact of the IRS on the
lives of women business owners. In addition, the hearing
focused on ways to improve the customer service focus of the
IRS.
Chairman Bond prefaced the hearing in his opening statement
by commenting on the difficulties small businesses face when
dealing with the IRS because they are expected to comply with
the same rules and regulations as large companies. Small
businesses, however, cannot afford to hire lawyers and
accountants to help guide them through the regulatory process.
Chairman Bond also stated his intention to introduce the
``Putting the Taxpayer First Act'' (S. 1669), which would
provide relief for a wide range of taxpayers, from single
mothers to small business owners.
All of the witnesses testified that there is a great need
to restructure the IRS and improve the rights of taxpayers.
Virginia Kirkpatrick, President/Owner, CVK Personnel Management
& Training Specialists, shared personal testimony of the
difficulties she encountered with the IRS, and stressed the
importance of improving communication between taxpayers and the
agency. Ms. Kirkpatrick, along with several other witnesses,
noted the importance of having IRS personnel recognize that the
vast majority of citizens want to pay their taxes properly and
on time, and she stressed that they should be treated with
respect.
Ron Morgan, Partner, Husch & Eppenberger, LLC, emphasized
that taxpayer clinics for low-income individuals would go a
long way toward improving the current system. He recommended
broadening the criteria for funding such clinics to allow them
also to represent small businesses. Mr. Morgan provided the
Committee with examples of the difficulties that small
businesses face when being audited while trying to keep their
businesses running. Mr. Morgan, along with Edith Quick,
Principal, Quick Tax & Accounting Service, commended the
Chairman's proposal to allow judicial review before the IRS
seizes a taxpayer's property, noting it will ensure that the
agency has followed the proper procedures.
Roger Harris, President, Padgett Business Services,
commended the Committee for understanding that the proposed IRS
oversight board can be effective only if it can review the
examination and collection policies of the IRS. Mr. Harris
recommended organizing the IRS along customer lines and
providing specialized training for IRS personnel so they
understand the issues relevant to specific groups of taxpayers
like small businesses. He also suggested creating a separate
appeal process that will work independently of the audit
function, which would give taxpayers a better opportunity for a
fair hearing. Jack Doll, President, Marjon, Inc., dba Hertz
Rent-A-Car, provided personal testimony on the complications
that arose at his company when the IRS employees conducting the
audit were not trained on the particular issues relevant to the
field they were examining.
The Committee also received testimony about the impact of
the IRS on the lives of women business owners. Nancy Workman,
Vice President, Workman Construction Co., noted that home-based
businesses, many of which are owned by women, face many tax
obstacles because the IRS views them with skepticism. For
example, she pointed out that many home-based business owners
believe that if they claim the home-office deduction, they will
most likely be audited. Ms. Workman expressed her belief that
most women are very intimidated by the IRS and its collection
methods. Elizabeth Nielson, CPA, President, Nelson &
Associates, P.C., reiterated the belief of many witnesses that
the tax system is simply too complicated and needs to be
simplified. Ms. Nielson also testified that the IRS lacks in
service and responsiveness to its customers and needs to be
held accountable for its actions.
``Entrepreneurship in America: Focus on the IRS''--
Marietta, Georgia, March 2, 1998
On March 2, 1998, the Committee held a field hearing in its
continuing series on ``Entrepreneurship in America'' dealing
with the impact of the IRS on small business. The purpose of
the hearing, summarized by Senator Paul Coverdell who chaired
the hearing, was to focus attention on the random audit
practices of the IRS and its adverse effect on small business.
Senator Coverdell prefaced the hearing by discussing the ``IRS
Accountability Act'' (S. 2008) that he introduced in 1997,
which would limit the agency's ability to undertake random
audits. He expressed the hope that the hearing would make
progress toward the goal of IRS reform and underscore the need
for legislative changes.
Millard Choate, Chief Executive Officer, Choate
Construction Company, shared personal testimony about the
hardships he endured when the IRS wrongfully accused his
business of tax evasion in both 1992 and 1993. For each year,
he was found to have been in complete tax compliance, but his
business suffered from the publicity and legal fees that he
incurred with respect to the trial. He testified that he
supports the collection of taxes but proposed limitations so
the IRS would focus on true tax evaders. Ronald Blasi,
Professor of Law, Georgia State University College of Law,
testified that some low-income individuals are paying
substantially more taxes than they actually owe. He suggested
that the government should provide more funding for pro bono
law clinics so taxpayers with limited education, skills, or
financial resources can receive qualified representation in tax
disputes with the IRS.
The final witness, Gerry Harkins, General Manager, Southern
Pan Services Company, and Member, National Commission on
Restructuring the Internal Revenue Service, testified that the
vast majority of IRS employees are conscientious, hard-working,
and caring individuals concerned with their jobs and the
taxpayers. The problem lies in the tax code that is nearly
impossible to administer. Mr. Harkins proposed reforms that
would clarify the tax law and make it easier to follow. Given
its complexity, he warned against over-reform by trying to
micromanage the IRS.
``The President's Fiscal Year 1999 Budget Request for
the Small Business Administration''--Washington, D.C.,
March 18, 1998
On March 18, 1998, the Committee held a hearing to review
the President's Fiscal Year 1999 budget request for the SBA.
Chairman Bond opened the hearing by stressing that because the
SBA's budget is relatively small, each program must be examined
closely to guard against unnecessarily large programs or
misguided expenditures that will cause other programs to be cut
out or suffer from a lack of funding. He also noted the
importance of providing the SBA with the time and funding
necessary to design, develop, and implement a modernized
information management system for the agency.
SBA Administrator Aida Alvarez provided the Committee with
an overview of the agency's Fiscal Year 1999 budget. She
discussed several areas of the proposed budget, including the
growth in the General Business Loan Guarantee program, also
known as the 7(a) loan program, noting that for 1999 the SBA is
proposing an $11 billion program level. This increase of
roughly $1.8 billion would be the highest level ever for the
program. She also illustrated the historical pattern for the
Economic Development Loan Guarantee program, also know as the
504 loan program, and noted that the new budget estimates of $3
billion for 1998 and 1999 show significant growth over the 1997
level. The new budget also proposes to lower the fees for the
504 loan program for the second straight year.
With respect to the Women's Business Centers, the 1999
budget would more than double their funding. With the $9
million budget request, which is $1 million over the current
authorization, Ms. Alvarez projected that the SBA would be able
to set up an additional 30 new centers, reaching the goal of
establishing a Woman's Business Center in every state. She also
recognized the continuing need for government-sponsored
business development and training, especially in the
procurement area. The SBA requested $9.5 million for the
business training program through which the SBA provides
specialized training and executive development assistance to
firms in the Minority Enterprise Development program, also
known as the 8(a) program. Ms. Alvarez confirmed that the
agency is on track to initiate the HUBZones program, and the
budget includes 31 new positions for its implementation.
The Members of the Committee raised a number of issues
about the SBA's Fiscal Year 1999 budget proposal. Chairman Bond
expressed concern about his understanding that little or no
carryover from Fiscal Year 1998 would be available to support
the Fiscal Year 1999 SBIC program. Ms. Alvarez responded that
to date the SBA expected a $10 million carryover for next
year's budget. She indicated that the SBA is counting on using
only $972 million of the $1.3 billion available in 1998, and
that $10 million is included in that estimate. However, she
admitted that using all of the $1.3 billion would eliminate any
carryover.
Chairman Bond, along with other Committee Members, was also
apprehensive about the SBA's proposed increase in interest
rates on disaster loans because the Committee has consistently
declined to approve recommendations from the Administration to
increase interest rates over the years. Ms. Alvarez testified
that the SBA requested $901 million for disaster loans in 1999.
She also stated that the agency's proposal to set the rates
charged to borrowers at the Treasury cost of funds and to cap
the rate at 6% would not increase the monthly loan payments for
most borrowers because the SBA can lengthen the terms of the
loan. She noted that the proposal would reduce subsidy rates
from 22.36% to 5.93%. Ms. Alvarez expressed her belief that the
Fiscal Year 1999 budget proposal would have less of a negative
impact on the borrower than any other similar proposal offered
in the past.
In response to Senator Kerry's questions regarding
technical assistance and welfare-to-work initiatives, John
Gray, Associate Deputy Administrator for Capital Access, noted
that the SBA's goal is to get two or three different sources of
funding for technical assistance and target the funding to both
welfare-to-work recipients and recipients not connected with
that program. Currently, the overall program funding is $72
million, but the SBA has determined it will need an additional
$20 million if the agency is to reach a target of 23% technical
assistance. He noted, however, that 14% to 20% is a reasonable
level of technical assistance.
The hearing record also includes statements for the record
offered by private sector witnesses as well as their responses
to post-hearing questions posed by Chairman Bond. Ellen Golden,
Senior Program Officer, Microenterprise and Women's Business
Development, Coastal Enterprises, Inc. (CEI), provided several
examples of how CEI has coordinated with the SBA and its
resource partners in Maine to develop services that complement
rather than duplicate those already available in the state. W.
Kenneth Yancey, Jr., Executive Director, Service Corps of
Retired Executives (SCORE) Association, furnished information
on SCORE's efforts to coordinate with Women's Business Centers
at the local level. Currently, proposals for new Women's
Business Centers require that both SCORE and SBDCs act as local
resource partners, and SCORE chapters and members are
encouraged to use the Centers as a resource.
James L. King, President, Association of Small Business
Development Centers, and State Director, New York State Small
Business Development Center, noted that 36.4% of the SBDCs'
clients nationwide are women, and he pointed out that SBDCs
incorporate the assistance of SCORE volunteers and the services
of Women's Business Centers whenever possible. He also
commented on the useful and valuable purpose of the Women's
Business Program of providing intensive services to women
entrepreneurs. The success of the SBDC program was highlighted
by a report written by James Chrisman, Ph.D., Venture
Development Faculty of Management, University of Calgary,
entitled ``The Economic Impact of Small Business Development
Center Counseling Activities in the United States: 1994-1995.''
C.W. Dick, Immediate Past Chairman and Member, Board of
Governors, National Association of Small Business Investment
Companies, and General Partner, Pioneer Capital Corporation,
Pioneer Ventures, L.P. 1, and Pioneer Ventures, L.P. 2,
testified that legislation enacted to make five-year
commitments available to SBICs has made a sizable improvement
in the SBIC program and one that will continue to have a major
impact on the amount of private capital that will be invested
in SBICs. Mr. Dick also suggested that the SBIC program level
ceilings for Fiscal Years 1998, 1999, and 2000 be raised to $1
billion for both the participating securities and debenture
programs. Paula Klepper, Vice President for Congressional
Relations, National Association of Development Companies, and
President, Mid-Atlantic Business Finance Co., stressed that,
while the 504 loan program recovery rate is expected to decline
in Fiscal Year 1999 from 34.27% to 30.67%, greater effort
should be put into improving loan recoveries in the 504
program. Ms. Klepper suggested that the SBA be given the
authority to expand and administer the Certified Development
Companies (CDC) liquidation pilot program and make it
permanent. She also recommended that the SBA and CDC staffs
undertake a joint effort to increase the recovery rate.
Christopher Sikes, Executive Director, Western
Massachusetts Enterprise Fund (WMEF), commented on the
Microloan program. He stated that WMEF does not use the
Microloan guarantee pilot program, but instead finances loans
with its own money to save on administrative costs and to gain
a sense that the fund ``owns'' the loans. Mr. Sikes also
recommended that technical assistance grants not be tiered so
that such grants are lowered on a loan-by-loan basis as a loan
matures. He stressed that microloan programs do not work on a
loan-by-loan basis but on a program-wide basis.
``Environmental Compliance Tools for Small Business''--Washington,
D.C., April 28, 1998
On April 28, 1998, the Committee held a hearing on
environmental compliance tools for small businesses. The
hearing included an examination of environmental compliance
tools for small businesses, the effectiveness of existing
compliance tools, and the experience of small businesses
seeking assistance in their efforts to comply with
environmental regulations. In addition, the hearing focused on
environmental audits and how this tool can be used by small
business owners. This hearing followed up on issues raised at
the August 1997 field hearing held jointly with the House
Committee on Small Business to obtain testimony from small
business owners about regulatory enforcement actions.
Chairman Bond opened the hearing by noting the differences
in perception of compliance assistance between small businesses
and policymakers. To help clarify the meaning of compliance
assistance, the Red Tape Reduction Act requires Federal
agencies that regulate small companies to create and implement
informal compliance assistance programs. Chairman Bond noted
that the EPA has one of the most extensive programs to provide
compliance assistance to the regulated community, including its
small business programs. He noted that this was a ``mixed
blessing'' because it illustrates the complexity of
environmental regulations and the difficulty small businesses
face in trying to comply.
All of the witnesses testified that small businesses need
compliance assistance programs to comply fully with
environmental regulations. The witnesses also agreed that the
ultimate goal should be voluntary compliance. Benjamin Cooper,
Senior Vice President, Government Affairs, Printing Industries
of America, testified that under the EPA's Small Business
Assistance Program (507 program), each state that has to submit
a state implementation plan must have a small business
assistance program; however, not every state has implemented
these programs to the extent it should. Mr. Cooper testified
that this is partially due to a lack of funding, and he
recommended grant programs instead of the current use of permit
fees. Elizabeth Glass Geltman, Professor of Environmental Law,
George Washington University, testified that because small
businesses do not have as much money, manpower, or resources as
large businesses to comply with environmental regulations, they
must be handled differently. She noted that many states are
trying alternative regulatory styles including partnerships
between governments and businesses, voluntary cleanup programs,
no-action letters, and pay-as-you-go advice from state
agencies.
Jim King, State Director, New York State Small Business
Development Center, along with other witnesses, testified that
most small business owners want to obey the law but cannot
always do so due to a lack of information, expertise, time,
staff, and money. He also noted that Federal environmental laws
and regulations are often applied differently within various
regions, and small business owners are frustrated by the
confusing and conflicting answers they often receive. Scott
Orr, Montana House of Representatives, Vice Chair, Energy,
Environment, Natural Resources and Agriculture Task Force,
American Legislative Exchange Council, and President/Owner,
S.J. Orr Services, Inc., expressed his belief that the EPA has
accomplished the big tasks, in terms of water and air cleanup,
and the remainder of its goals can be completed with half the
budget and half the employees.
Mr. King testified that the SBDC program works with nearly
600,000 small businesses across the country each year, and many
of those businesses do not have the employees or the staff to
handle compliance issues. He noted that small business owners
need quick and understandable answers to come into voluntary
compliance. Mr. Cooper and other witnesses expressed their
support for the SBDC program and emphasized that there could
potentially be a positive role for the SBDCs to play in
compliance assistance. David Marsh, Owner and Chief Executive
Officer, Marsh Plating Corporation, however, expressed his
belief that while the SBDCs offer hands-on assistance for new
businesses in terms of planning and financial advice, they are
not an appropriate source for expert compliance information.
The Committee also received testimony on environmental
audits and confidentiality. Mr. King noted that business owners
are afraid to go to the environmental agencies and discuss
information with the regulator who may later turn around and
perform an audit. He recommended a non-regulatory third party
that can provide confidential environmental assistance to small
businesses and allow them to reduce their pollution emissions
voluntarily without the fear of possible punitive action as the
result of the request for help. Mr. Marsh added his concern
that because firms fear enforcement, they may not take the
necessary steps to uncover violations and correct them. Mr.
Cooper testified that small businesses should conduct
assessments and reviews, not audits, and should be able to ask
for confidential help to fix any problems they may find. Ms.
Geltman encouraged Congress to enact legislation encouraging
environmental audits.
``Nomination of Fred P. Hochberg To Be Deputy Administrator of the
SBA''--Washington, D.C., May 14, 1998
On May 14, 1998, the Committee held a confirmation hearing
on the nomination of Fred P. Hochberg to be Deputy
Administrator of the SBA. The purpose of the hearing was to
review Mr. Hochberg's qualifications and to examine his views
on the SBA and its role in assisting small businesses. Chairman
Bond opened the hearing by reiterating the importance of the
SBA Deputy Administrator position, and he noted that in 1990
the Committee voted to make it a presidential appointment
subject to the advice and consent of the Senate. He stressed
that, due to the major responsibilities involved in being
second in charge of the SBA, a thorough review of Mr.
Hochberg's credentials was necessary.
Senator Alfonse D'Amato and Representative Steve Forbes
introduced Mr. Hochberg as their constituent and expressed
their support for his nomination as Deputy Administrator of the
SBA. They expressed the belief that his practical experience in
small businesses will serve him well in this position. Aida
Alvarez, SBA Administrator, testified that Mr. Hochberg's
experience and his concern for small business customers will
help the SBA prepare small businesses for success in the 21st
century.
The Members of the Committee expressed several areas of
concern about Mr. Hochberg's nomination. In response to
questions regarding irregularities in his campaign
contributions in 1996, Mr. Hochberg explained that certain
contributions were incorrectly attributed to him by the
Democratic National Committee (DNC), and that other
contributions were improperly classified as soft money, causing
him to exceed the Federal campaign contribution limit. He
advised the Committee that the DNC has corrected its records
and has transferred the relevant contributions to a soft dollar
account.
Several Members of the Committee questioned Mr. Hochberg
about specific SBA programs, including the recently enacted
Historically Underutilized Business Zone (HUBZone) program. As
a general response to the concerns raised, Mr. Hochberg
testified that the HUBZone program is a ``key ingredient in the
arsenal of tools that the SBA has to advance the small business
community, to advance jobs in depressed areas, and to ensure
that small businesses get their fair share of Federal
contracting.'' Another area of concern to several Members of
the Committee was the availability of technical assistance to
help small businesses. Ranking Member Kerry noted the
importance of technical expertise in the Microloan program and
raised concerns over the lack of funding to provide more
technical assistance. Mr. Hochberg agreed that technical
assistance is an essential part of microlending, and he noted
that the SBDC program is also a form of technical assistance.
He reaffirmed his commitment to work with the Administrator and
the Senate to increase technical assistance. Mr. Hochberg
expressed his belief that the SBA can help bring the outside
resources, consultants, and support small businesses need to
grow and succeed.
In response to Senator Snowe's questions regarding programs
to help women-owned businesses, Mr. Hochberg noted that the
Administration's Fiscal Year 1999 budget requests $9 million so
that the SBA can open a Women's Business Center in every state
in the country. The money would provide specific technical
assistance, guidance, and counseling to women-owned businesses.
Senator Snowe also questioned Mr. Hochberg on the SBA's
progress in providing assistance to small businesses to deal
with the Year 2000 (Y2K) computer problem. Mr. Hochberg
discussed the SBA's website, which provides information on Y2K
and how to deal with the problem, and he stated that the SBA is
committed to making sure small businesses in every community
are aware of the problem before the year 2000 so they have time
to make the necessary changes.
At the conclusion of the hearing, the Committee unanimously
voted to recommend that the Senate confirm Mr. Hochberg as
Deputy Administrator of the SBA.
``E-Commerce and Y2K: What's Ahead for Small Business?''--Washington,
D.C., June 2, 1998
On June 2, 1998, the Committee held a hearing on two
related issues--the expansion of the use of electronic commerce
(e-commerce) among small businesses and the potential effects
of the Year 2000 (Y2K) problem on small businesses. The purpose
of the hearing, summarized by Chairman Bond, was to examine the
dependence of small businesses on e-commerce and how the
evolution of e-commerce is likely to affect small businesses.
Moreover, the hearing examined the challenges small businesses
may face on January 1, 2000, from the Y2K problem, when many
computers will interpret the date ``1/1/00'' as January 1,
1900, due to a programming error in older software. The hearing
also focused on the role that the Federal government should
play in solving the Y2K problem and evaluated the efforts of
the SBA to raise awareness among small businesses about the
potential problems that may occur.
Chairman Bond opened the hearing by emphasizing the
important role that small businesses play in our economy--99%
of all businesses in the United States are small, and over 50%
of all workers are employed by small businesses. Chairman Bond
addressed the growing role of e-commerce among small business
operations, observing that many small businesses use e-commerce
to generate demand for their products and services, fulfill and
manage orders, simplify payment, and supply ongoing product
support. Chairman Bond then addressed the Y2K problem and its
likely effect on small businesses. Y2K awareness has been slow;
many small businesses do not realize they may have a problem.
Originally the SBA thought Y2K would not be a problem for small
businesses. The agency, however, recently revised its position
and has set up a Y2K website and started an awareness campaign
about the Y2K problem for small enterprises. Chairman Bond
expressed his concern about a recent Wall Street Journal
article, which states that 40% of small businesses say they
have no plans to do anything about the possibility of computer
glitches resulting from the century date change.
Several witnesses testified as to the great opportunities
for small businesses to compete and expand through e-commerce.
James Yasso, Vice President of Intel Architecture Business
Group, and General Manager, Reseller Products Division, Intel
Corporation, stressed that high performance personal computers,
in conjunction with the Internet will put small businesses on
equal ground with big businesses by increasing efficiency and
improving competitiveness. Mr. Yasso noted, however, that the
computer industry must develop products and services that are
designed for small business and that will simplify the
installation and use of connected computers and the Internet,
as over two-thirds of small business owners believe they lack
the expertise to use existing technology effectively. Tom
Luedtke, Deputy Associate Administrator for Procurement,
National Aeronautics and Space Administration (NASA), testified
that one of NASA's main goals is to make e-commerce easier for
small businesses that do business with that agency, especially
businesses that have not traditionally done business with the
Federal government. The cornerstone of the agency's program is
the NASA Acquisition Internet Service, a web-based service that
provides immediate access to advance procurement notices,
solicitations, backup information, regulations, and other
policy information.
While e-commerce and the Internet can help small businesses
expand and compete, the Committee learned that the Y2K problem
can prove disastrous to those companies that do not update
their computers. Harris Miller, President, Information
Technology Association of America, testified that the companies
most at risk are small and medium companies, many of whom
believe that they are immune to the problem, or that it has
already been fixed. Unfortunately, this is not the case, and
those companies that ignore the problem risk losing their
businesses as a result of this computer anomaly. To combat this
problem, Mr. Miller suggested that the SBA go beyond its
current efforts and launch a national public service
advertising campaign, educating both businesses and consumers.
He also suggested that the SBA offer incentives and assistance,
such as low interest loans to small businesses to fix their Y2K
problems, and that the Federal government should lead by
example and fix its own Y2K problems.
David Eddy, President, Software Sales Group, Inc.,
acknowledged the tremendous reluctance to tackle this
``unplanned, unbudgeted, and unwanted'' problem. Mr. Eddy
agreed with Mr. Miller's suggestions and recommended a massive
national educational and training curriculum to train teams
with the skills to help a small business in each aspect of Y2K
compliance--from assessing a problem to reporting on its
progress.
David Schaefer, Vice President, Armfield, Harrison &
Thomas, Inc., provided the Committee with the perspective of a
small business owner, a property and casualty insurance agent
and a risk management advisor for small- and medium-sized
businesses. Mr. Schaefer offered personal testimony about the
amount of preparation and expense his own agency has endured to
prepare for Y2K, and he expressed grave concerns about the
state of American businesses with respect to the Y2K issue. Mr.
Schaefer noted that, while a company may update its own
systems, many external risks can affect them as well as
liability factors. He was very concerned that existing
indifference and general ignorance about the extent of the
problem will make the situation much worse for our economy.
``Oversight of the Small Business Innovation Research (SBIR)
Program''--Washington, D.C., June 4, 1998
On June 4, 1998, the Committee held a hearing on the Small
Business Innovation Research (SBIR) program. The hearing
examined the strengths and weaknesses of the SBIR program,
which requires Federal agencies with extramural research and
development (R&D) budgets of $100 million or more to set aside
no less than 2.5% of that amount for small businesses. The SBIR
program is divided into three phases. Phase I is designed to
determine the scientific and technical merit and feasibility of
a proposed research idea, with funding for individual Phase I
awards limited to $100,000. Phase II considers the idea's
commercialization potential, with individual awards up to
$750,000. Finally, Phase III entails the use of non-Federal
funds for commercial application of the technology or non-SBIR
funds for continued R&D under government contracts.
Chairman Bond opened the hearing by noting the
accomplishments of the SBIR program since its inception in
1982. He observed that when the program began only 0.2% of the
covered agencies' R&D budgets were set aside for SBIR awards,
and by 1992 that percentage had increased to 2.5%, which
allowed the number of small businesses participating in the
program to multiply. Chairman Bond noted a study by the GAO
indicating that only one-third of the states receive 85% of the
SBIR awards. States such as Missouri, Montana, Idaho, Maine,
and others received 11 or fewer awards in Fiscal Year 1996,
while California and Massachusetts received 628 awards or more.
Chris Busch, Ph.D., SBIR Consultant, agreed with Chairman
Bond's concerns and asserted that many rural states are the
ones with the fewest awards, only two out of every 100
submitted. He recommended that the SBIR program become more
aggressive and take action to help small businesses overcome
these barriers.
All of the witnesses testified that the SBIR program was a
great asset to small businesses and that the program should be
continued. The witnesses also agreed that the ultimate goal of
the program was to involve more small businesses and thereby
expand the program. While highlighting the success of the
program, the witnesses also noted several areas for
improvement. Charles W. Wessner, Ph.D., Program Director, Board
on Science, Technology, and Economic Policy, National Research
Council, proposed that the process for awarding Phase II grants
needs to be accelerated. He pointed out the commercially useful
time horizon of an idea may be shorter than the time it takes
for an SBIR application to be processed. Robin Frank Risser,
Vice Chairman, Small Business Technology Coalition, and Co-
Founder and Chief Executive Officer, Picometrix, Inc.,
testified that significant delays, between the time proposals
are submitted and the time contracts are awarded, can harm both
the proposing company and the project.
Susan D. Kladiva, Associate Director, Energy, Resources and
Science Issues, Resources, Community, and Economic Development
Division, GAO, pointed out that some agencies are using
different interpretations of the extramural budget definition,
which may lead to incorrect calculations of their extramural
research budgets. She recommended that the SBA provide
additional guidance to participating agencies on how to
calculate their extramural budgets. Arthur P. Brigham, III,
Chairman of the Board, High Performance Materials, Inc., dba
HPM, Inc., urged the Committee to consider greater absolute
funding, which is currently capped at 2.5% of the external R&D
budget. Mr. Brigham stated that if both internal and external
funds are considered, 2.5% is a very small portion of an
agency's overall R&D budget. He also suggested that contract
limits be expanded to $150,000 in Phase I and $1.25 million in
Phase II, and he recommended that the set-aside percentage be
increased significantly above the existing 2.5%. In addition,
he stressed that these percentages should be adjusted for
inflation.
``Entrepreneurship in America: Expansion of Microlending''--Boston,
Massachusetts, July 13, 1998
On July 13, 1998, the Committee held a hearing in its
series on ``Entrepreneurship in America,'' in Boston,
Massachusetts. The hearing, chaired by Senator John Kerry, the
Committee's Ranking Member, examined the microlending program
and its effect on small businesses. Senator Kerry emphasized
the strengths of the SBA's microlending program on small
companies, noting that since it's inception in 1992, more than
7,000 microloans have been extended to entrepreneurs, with the
majority going to women and minorities. Ranking Member Kerry
acknowledged weaknesses in the program, and he pointed out that
the program is currently offered only in certain areas, with a
handful of states having no SBA microlending programs. He
concluded that the microlending program was a valuable asset to
small businesses, and it should be expanded to cover every
state.
All of the witnesses testified that the microlending
program provides critical assistance for many small businesses.
Some witnesses, however, expressed frustrations with the
program. John Gray, Associate Deputy Administrator for Capital
Access, SBA, noted that one of the biggest frustrations with
the program is the lack of technical assistance. The program
consists of only 35 intermediaries and two non-lending
technical assistance providers. He indicated that the low
number of intermediaries is directly correlated to the small
number of technical assistance programs. Mr. Gray also
demonstrated that the number of microlending programs has
decreased since its height in 1995.
David F. Westgate, President, Fall River Office of Economic
Development, and President, South Eastern Economic Development
Corporation (SEED), emphasized that the real need for
microloans and technical assistance is to increase small
business growth and development. The SEED program has assisted
30 new and expanding microloan enterprise businesses in the
South Eastern community. He stated that one major problem was
the lack of technical assistance not only in the South Eastern
community but everywhere microloans are distributed.
Christopher Sikes, Executive Director, Western Massachusetts
Enterprise Fund, and Board Member, Association for Enterprise
Opportunity, stressed the need for technical assistance and
noted an acute awareness of the impact of any reduction in
technical assistance below the 20% level. He recommended that
the percentage be moved to 25% for more support. Mr. Sikes
stressed that, due to their highly technical and highly
competitive nature, many businesses need to be extremely savvy,
which puts a premium on the availability of technical
assistance.
James C. Kaddaras, Executive Director, Working Capital
Inc., provided the Committee with anecdotal information about
the Microloan program and small businesses. His company
provides customers, many of whom have no other source of
capital, with credit, education, and training. Mr. Kaddaras
stressed a real need for technical assistance to ensure that
every business has a chance to succeed.
Eugene Severens, Director, Nebraska Microenterprise
Partnership Fund, raised the idea of state intermediaries to
assist business owners better. He urged the Committee to
consider having the SBA provide lending capital and technical
assistance grants for state-level intermediaries, asserting
that such assistance will result in more comprehensive
geographic coverage. Mr. Severens stated that state-level
intermediaries not only further the SBA's objective of serving
entire states but also insure a higher level of performance and
accountability. Joseph Kriesberg, Deputy Director,
Massachusetts Association of Community Development
Corporations, and Chair, Public Policy Committee, Massachusetts
Micro Enterprise Coalition, agreed with the state
intermediaries recommendation. He testified that state
intermediaries could allow for some standardization and
consistency across the field but not in a rigid ``one size fits
all'' way. He asserted that having state intermediaries would
allow microlending to reach more people and reach deeper into
the communities, which would provide all entrepreneurs with
better service.
``Home-Health Care: Can Small Agencies Survive New Regulations?''--
Washington, D.C., July 15, 1998
On July 15, 1998, the Committee held a hearing on new
regulations promulgated by HCFA on the home-health care
industry. The purpose of the hearing, as summarized in Chairman
Bond's opening statement, was to examine the impact of the
Interim Payment System (IPS) and the surety bond regulations on
small home-health care businesses and to elicit suggestions for
ways to improve the regulations. In addition, the hearing
explored whether HCFA had followed the requirements under the
Regulatory Flexibility Act and the Small Business Regulatory
Enforcement Fairness Act in developing the new regulations.
In his opening statement, Chairman Bond noted that
according to HCFA's own data, 85% of home-health agencies are
small businesses. While he expressed his support for rooting
out fraud and abuse in the Medicare and Medicaid programs, he
emphasized that HCFA's IPS and surety-bond regulations are
driving honest, ethical, high integrity, quality providers out
of business. Chairman Bond stated that, in his view, HCFA's
surety-bond rule goes far beyond the intent of Congress and
that HCFA is seeking to use surety bonds to insure against
overpayments rather than prevent fraud and abuse. He also noted
that Medicare's and Medicaid's cost-reimbursement systems
should not force small businesses to subsidize the cost of
their patients' care. Chairman Bond advised the Committee that,
due to the Senate's intervention, HCFA had agreed to suspend
the deadline for home-health agencies to comply with the
surety-bond requirement and to revisit this rulemaking.
All of the witnesses testified that HCFA's new regulations
are having devastating effects on small home-health care
providers all over the country and that something must be done
before more businesses close their doors. Carole Burkemper,
R.N., B.S.N., Chief Executive Officer, Great Rivers Home Care,
Inc., testified that funding to agencies like hers has been
reduced by 31% to 81% below the actual cost of providing care.
She stressed that, due to these drastic IPS funding cuts, many
elderly people are being denied reasonable and necessary home
care. Ms. Burkemper stated that prior to the IPS, Great Rivers
Home Care consistently operated at nearly $1 million below its
cost limits, but under the IPS the agency will be reimbursed
$1.5 to $1.8 million less than the actual cost of providing
care. Delia Young, President, Delia Young & Associates
Healthcare Consultants, praised Congress for attempting to
abolish waste and fraud in the Medicare system, particularly as
it is administered through home-health agencies. She testified,
however, that HCFA has overstepped its boundaries and is
placing the future of the home-health care industry in danger.
Ms. Young voiced her belief that home-health care and teaching
prevention techniques has been extremely effective, especially
in rural and urban inner cities.
Lynn Hardy, R.N., Executive Director, Duplin Home Health
Care & Hospice, provided the Committee with anecdotal evidence
of the burdens that the new regulations have placed on home-
health care agencies. Due to the implementation of IPS,
patients have to be assigned a priority to ensure that
resources can be matched with needs, thus rationing care. Ms.
Hardy explained that current reimbursement for Medicare home-
health services is based upon the lower of cost or charges at
or below the Medicare cost cap limit or a per beneficiary cap
limit. She recommended splitting the beneficiary limit into two
components or blending the cap computation. Ms. Hardy also
stressed the need for legislation that will ensure access to
care for the beneficiary that requires skilled care on an
ongoing basis. Bonnie Matthews, Vice President, Post Acute
Services, South Shore Hospital System, requested that Congress
pass reform legislation that provides fair and equitable
reimbursement to the home-health care industry. She noted that
Medicare currently does not reimburse for pre-filling
prescriptions, monitoring chronic illnesses, or for personal
care services by a home-health aide unless a skilled service,
such as nursing, is associated with the care.
Bob Reynolds, Resident Agent, Medicare Surety, Franey &
Parr, spoke on behalf of the National Association of Surety
Bond Producers, and expressed concerns about the surety bond
requirement for home-health agencies participating in the
Medicare and Medicaid programs. Mr. Reynolds explained that a
home-health agency has difficulty obtaining the surety bond
currently required by HCFA because it is basically a financial
guaranty bond that will cover the overpayments that HCFA often
makes to home-health agencies. HCFA does not allow these
agencies to make a profit, and they usually cannot acquire a
significant amount of net worth with little or no business
outside the Medicare and Medicaid programs. He stressed that
insurance companies do not want to risk losing money by writing
financial guaranty bonds to agencies operating at cost or even
at a loss. Mr. Reynolds suggested that Congress intended for
HCFA to issue an anti-fraud bond that would cover financial
losses to the Medicare and Medicaid programs resulting from the
dishonest activities of a home-health care agency.
Jere W. Glover, Chief Counsel for Advocacy, Small Business
Administration, expressed the SBA's concerns that HCFA did not
follow the Regulatory Flexibility Act and the Small Business
Regulatory Enforcement Fairness Act. He testified that the
agency failed to study the impact that the regulations would
have on small businesses, and he noted that in his four years
as Chief Counsel for Advocacy, HCFA's regulations have had the
most detrimental impact on small businesses to date, as defined
by the number of businesses that have closed their doors. The
SBA hopes this hearing will send a strong message to HCFA that
the agency must comply with the law and realize the devastating
impact its regulations are having on small businesses across
the country.
``Can Small Business Compete With Campus Bookstores?''--Washington,
D.C., September 24, 1998
On September 24, 1998, the Committee held a hearing on
unfair competition by campus bookstores operated by tax-exempt
educational institutions. Senator Lauch Faircloth, who presided
over the hearing, noted real problems with campus bookstores
having a monopoly over off-campus businesses. He stressed the
need for a more competitive environment and described a bill
(S. 2490) he introduced to address this problem by prohibiting
Federal aid from being received by colleges that directly or
indirectly discriminate against off-campus businesses.
All of the witnesses testified that a monopoly against off-
campus businesses exists and each emphasized the need for
change. The witnesses also agreed that those paying the
greatest price for this monopoly are the students and their
parents. Graham Gillette, President, Pinnacle Communications,
LLC, testified that off-campus retailers are denied access to
freshman mailing lists because colleges and universities
consider them confidential information. These lists, however,
enable on-campus stores to advertise and build customer loyalty
before students realize that there is an alternative. He also
testified that universities such as Iowa State are implementing
university debit-card programs for students to purchase their
books, but only at on-campus stores. He warned that programs
like this one could virtually eliminate any off-campus
competition. Anthony Samu, President, United States Student
Association, agreed that the debit-card program available on
some campuses harms small business.
William D. Gray, President, Gray's College Bookstore, and
National Chairman, Campus Area Small Business Alliance,
expressed strong support for S. 2490. He added that the bill
should also cover all campus business enterprises such as
restaurants, laundries, and bookstores. He concluded that the
legislation will put an end to favoring on-campus over off-
campus bookstores. Rob Karr, Vice President, Government and
Members Relations, Illinois Retail Merchants Association,
emphasized the need for this legislation and testified that
Illinois has already begun to implement amendments to dissuade
universities from their anti-competitive practices. He also
observed that the school debit-card program truly hindered off-
campus businesses by barring them from participation.