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Testimony of Andrew M. Langer

June 6, 2002

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engaging in their business. Clearly, this is problematic, especially for a rule that has a marginal environmental benefit."

Tax Paperwork

NFIB members consistently list the paperwork associated with tax preparation as their biggest regulatory headache. What began in 1913 as a two-page form backed up by 14 pages of law has now become a 17,000-page maze that requires 703 different forms. More than seven times longer than the Bible, the tax code's 5.5 million words have created a nightmare of complexity that saps the economy's strength by punishing work, saving, investment, risk-taking and entrepreneurship. The private sector pays $250 billion just to comply with income tax laws. The average cost of compliance for small and medium-sized corporations is $7,240 for every $1,000 in taxes they pay.

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Congress could make great inroads into relieving tax-related paperwork burdens on small businesses by, for instance, increasing Section 179 expensing limits. A majority of NFIB members exceed the current small-business expensing limits in only three months. The limit currently is $24,000. Congress should immediately raise the threshold to $50,000 and index it for inflation. This will allow additional investments to be expensed, enabling small businesses to expand and create new jobs. This will lower the cost of capital for tangible property and eliminate depreciation record-keeping requirements. This change will also increase small business owners' ability to compete in today's high technology

markets:

Also, Congress could address AMT Relief/Repeal. According to the Joint Committee on Taxation, fewer than one in 150 taxpayers is subjected to the AMT today. By 2007, however, that number is expected to grow to one in 14, with the largest increase coming from taxpayers earning between $50,000 and $100,000. The individual AMT is a remarkably complex and obtuse provision in a tax code not known for its clarity. It requires taxpayers to calculate their taxes twice, and then pay the larger amount. While originally designed to ensure that wealthy Americans pay a reasonable level of their income in taxes, the AMT has the side effect of hitting taxpayers -- increasingly middleclass taxpayers -- when they can least afford the bill. The AMT literally kicks taxpayers when they are down.

Congress should also establish a Standard Home Office Deduction. Business location currently complicates common tax deductions. Home-based businesses incur expenses that would be easily deductible if the businesses were not located in a home. Many business owners do not take legitimate deductions because of the complexity of the

"The Lead TRI rule is discussed in our OIRA comments, appended at Attachment A.

'Dan Mitchell, Time to Sunset the Tax Code, The Heritage Foundation, Executive Memorandum #645, (January 28, 2000).

From the office of the Majority Leader of the House, at http://flattax.house.gov/taxfacts/irsfacts.asp, November 10, 1999, citing information from Commerce Clearing House, Standard Federal Tax Reporter, (1996 and 1997).

Testimony of Andrew M. Langer
June 6, 2002

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paperwork involved in doing so. The complicated record keeping now required by the IRS to qualify for a home office deduction is a barrier to many who would qualify but don't have the time and staff to do the paperwork. That barrier would be removed if a "standard deduction" for home-based businesses were allowed. Like the 1040 standard deduction, the deduction would be optional. Owners could choose to continue to deduct the depreciated amount plus operation costs, as they are currently allowed to do. Or they could choose the new standard deduction.

Finally, we recommend that Congress clarify the Independent Contractor Definition. One of NFIB's top legislative priorities has consistently been to better define who is an independent contractor. The current 20 common law factor test for determining who is an employee versus an independent contractor has for too long handcuffed small businesses. These instructions are at best vague and unclear, making it difficult for small employers to honestly know whether they are complying with the rules.

Understanding and Complying with New Rules

Since most small-business owners play no part in rule development, the first element in the regulatory process for the large majority is discovering or finding out about a regulation that potentially affects them. In this regard, owners can either actively go out and seek new or changed regulatory requirements or they can respond when they encounter previously unknown demands. The overwhelming majority not surprisingly follow the latter course.

In our survey, eighty-two percent of small businesses reported that their approach can best be described as "coming across new rules in the normal course of business. Few claimed to search agency websites (as opposed to the internet in general), or regularly perused publications relating to their business. Many simply waited for the regulatory agency to notify them of new rules or regulations. Unless small-business owners are systematically searching for regulatory information, it is not likely that they would visit such a site.

We are encouraged that the SBA is taking proactive steps to assist small business owners in their ability to find out about and comply with new rules and regulations. According to my colleagues there, they are working on a new internet-based portal system which will allow these employers to search for, understand, and learn how to comply with new regulations-a one-stop shopping place for small business to learn about new rules and regulations. Once the system's effectiveness has been evaluated, NFIB will most likely steer its members and other interested parties towards it.

OIRA

NFIB is very pleased with the interest taken in small business issues by OIRA. Their formalized relationship with the Office of Advocacy at the SBA is a key step in ensuring that the regulatory burden faced by small businesses will be taken into consideration when new regulations are being addressed. Overall, OIRA's commitment to openness

Testimony of Andrew M. Langer

June 6, 2002

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and transparency can only serve to benefit the small business community, which continues to view the federal regulatory state as a near-impenetrable morass of laws and regulations, hard to understand, difficult to deal with, and costly.

NFIB is in favor of the decision to once again utilize "Return Letters" as part of OIRA's regulatory toolbox. We agree that agencies must take their responsibilities seriously in creating quality analyses of regulations—and "Return Letters" should prove effective in helping to bring this about. We are also encouraged by the public availability of these "Return Letters", and their easy access on OIRA's website. We hope to see OIRA continuing to rely upon this tool in coming years.

We also applaud OIRA's efforts to be more proactive, and use "Prompt Letters" to "suggest regulatory priorities". It is incredibly helpful for regulatory stakeholders to gain a sense of OIRA's priorities for agency decisionmaking, and the openness of the "Prompt Letter" approach is vastly more informative than the former, informal approach. While we understand the hesitation OIRA faces due to potential legal ramifications, we believe that the benefits far outweigh the risks involved.

We are encouraged by OIRA's efforts to bring a scientific approach to its overall regulatory review efforts. In the same way that unbiased fact-based analyses by other agencies have been beneficial in mitigating the impact of onerous and unnecessary regulations on the economy, the use of truly scientific cost-benefit analyses by OIRA can have extraordinary results. We believe it is absolutely essential to determine whether the benefits of regulations clearly outweigh their costs. We hope that OIRA will exercise careful oversight in the selection process for your Scientific Advisory Panel, and bring together esteemed professionals for reviewing OIRA's various interests. We also hope that small businesses are consulted in this process as well.

Conclusion

The NFIB appreciates the opportunity to share its concerns with Congress. With the cost of regulation being such a high priority for our 600,000 members, we are glad that we could bring our perspective to the Committee, and we are even more glad that you recognize the tremendous impact the regulatory state has on our members and the small business community in general. I would also like to thank William Dennis and Bruce Phillips on the NFIB staff, whose research serves as the foundation of this testimony.

I would now be happy to answer any questions the committee members might have.

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Before the House of Representatives Committee on Small Business, Subcommittee on Regulatory Reform and Oversight Subcommittee on Workforce, Empowerment and Government

Programs

June 6, 2002

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Chairman Pence, Chairman DeMint, and other Members of the Subcommittees on Regulatory Reform and Oversight and Workforce, Empowerment and Government Programs:

Thank you for inviting me to testify today. I am Raymond Arth, the president of Phoenix Products, a producer of faucets for the manufactured housing and recreational vehicle industries. Phoenix is the largest single supplier of faucets to the manufactured housing industry and a major supplier to the recreational vehicle manufacturers industry. We have earned this position by providing innovative and cost-effective product designs to meet the specialized needs of our customers. Our company enhances its reliable product line with short lead times and excellent fill rates. In fact, our organization has been designed from the shop floor to its outside sales staff to provide our customers with reliable products and excellent service at competitive prices. I have about 60 employees and we are located in Avon Lake, Ohio.

I am the current chair of the Legislative Action Council of National Small Business United, and am a member of its Board of Trustees. NSBU is the nation's oldest bipartisan advocacy association for small business representing over 65,000 small businesses in all fifty states. In addition to individual small business owners, our membership includes local, state and regional small business associations across the country. I am a member and past chair of the Council of Smaller Enterprises (COSE), a division of the Greater Cleveland Growth Association, located in Cleveland, OH. COSE represents over 16,000 businesses in the Cleveland area and is the largest regional affiliate of National Small Business United.

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