From the Office of Senator Kerry

Tuesday, June 4, 2002

WASHINGTON, D.C. - Senator John F. Kerry, member of the Senate Finance Committee, today urged before the committee support of small business legislation designed to aid entrepreneurial growth and stimulate investment. Kerry, who is also Chairman of the Committee on Small Business and Entrepreneurship, made the following remarks:

“I want to thank Chairman Baucus and Ranking Member Grassley for holding this hearing, which is on a subject that I believe is very important if we are to get our economy moving again. As the Chairman of the Senate Committee on Small Business and Entrepreneurship, I understand the needs of the small business owners and entrepreneurs that provide the majority of new jobs in our economy. I hope that the Senate will pass a minimum wage increase this year, and that this hearing will be the first step in the creation of a fiscally responsible “small businesses stimulus bill” that will provide some tax relief to small business owners. Such relief should be designed to stimulate new investment in the segment of our economy that produces the most jobs and generates so many new ideas and technological advances.

“In the 106th Congress, many of my colleagues will recall that the name of my committee was simply the “Senate Committee on Small Business.” In June of 2001, my first act as the new Chairman of the Committee was to add the word “Entrepreneurship” to the name of the Committee, making it the Senate Committee on Small Business and Entrepreneurship. I believe that adding “Entrepreneurship” to the Committee name more accurately reflects the Committee's valuable role in helping to foster and promote the spirit of entrepreneurship in the United States. There is a Federal role in this effort; the key is to determine how and when Federal assistance can be most useful.

“I want to focus my brief remarks on specific legislative proposals that are before the Finance Committee, but first I want to take a moment to highlight for the Committee the critical importance of small businesses to our nation’s economy. Put simply, small businesses keep the U.S. economy moving. They are responsible for employing more than 52 percent of the private workforce; for generating more than 51 percent of the nation’s gross domestic product; and they are the principal source of new jobs. They were also responsible for helping to end the recession of the early 1990s, and with the right programs and assistance, small businesses and a resurgence in entrepreneurship will be a major factor in building a sustained economic recovery.

“So how is it that America has the most dynamic small business sector in the world? Let me tell you, it is not an accident. It is a combination of people and policy. Americans – both those who are born here and those who come here to take part in the opportunities America has to offer – are by nature willing to take risks. Our education system encourages students to ask questions, and our economy encourages competition. The sheer size and diversity of our economy creates many opportunities, and small businesses fill an essential role. Their new ideas become the next big ideas.

“But without public policy to enable those ideas, many of them would die in the parking lot of a bank. Our national policy dating back to World War II fosters the start-up and growth of small businesses. Then, as now, for national security purposes, we needed a diverse economy so that more than one company would supply our armed forces. For the economy, we needed the Federal government to help small businesses where there were gaps in the lending and venture capital provided by the private sector. The Small Business Administration (SBA) has helped meet these needs and continues to do so.

“Additionally, small business play a vital role in providing competition and innovation to our Federal procurement system. In fact, a major reason for the creation of the SBA was to ensure an adequate private sector base for the Department of Defense. It was actually deemed in our national security interests to have a thriving small business sector.

“But what does that mean in practical terms? It means that small businesses were responsible for hiring laid off workers during the economic boom of the mid and later 1990's. It means that small businesses were responsible for many of the technological innovations that resulted in incredible increases in productivity. It means that in 1999, small businesses employed over 68 million people. It means that without small businesses, we would not enjoy the standard of living we have today. I am proud to be an advocate for their interests, both in the Finance Committee and my position as Chairman of the Committee on Small Business and Entrepreneurship.

“Now, let me take a moment to call attention to several issues that I hope the Finance Committee will consider in a future markup. On November 13, 2001, I introduced the “Affordable Small Business Stimulus Act.” My legislation has seven key provisions:

• It increases the expensing limitation for small businesses to $35,000, and it increases the phase-out level, above which expensing is not allowed, to $350,000. Both the $35,000 and $350,000 limits would be increased annually for inflation beginning in calendar year 2003. I know that increasing small business expensing is an idea with broad bipartisan support.

• It modifies and expands a 1993 law regarding new equity investments in small business stock. Under S. 1676, new investments in companies with capitalization of up to $100 million at the time of investment will have a 75 percent capital gains exclusion if the investments are held at least three years. The exclusion for such investments will be 100 percent if they are made in a business involved in certain critical technologies, or for investments in specialized small business investment companies. Both the 75 and 100 percent exclusion levels would be available for investments made by both individuals and corporations. In addition, the rollover period for such investments would be increased from 60 days to 180 days.

• The bill reduces the depreciation recovery period for computers or peripheral equipment from five years to three, and for software from three years to two. This change would be permanent, and in addition to helping small business, it also has the strong support of the high-tech sector.

• The bill would make the health insurance expenses of the self-employed fully tax deductible this year, as opposed to 2003.

• S. 1676 includes the Single Point Tax Filing Act, which will simplify the tax filing process for employers by allowing the Internal Revenue Service and State agencies to combine, on one form, both State and Federal employment tax returns. There is a successful model program in the Chairman’s home state, and my bill would take it nationally.

• It extends the existing income averaging provisions to cover fishing as well as farming, another issue that I know the Chairman and Ranking Member both support.

• Finally, it modifies the tax treatment of investments in debenture small business investment companies (SBICs), so they are less likely to create unrelated business taxable income (UBTI) liability. In so doing, the bill will encourage greater investment in SBICs, which provide critically needed venture capital to emerging small businesses. These venture capital funds are sorely needed in today’s stalled economy. This simple change is very important to the SBICs and it has very little revenue cost.

“I would also like to call the Committee’s attention to S. 1903, a bill introduced this past January by Sen. Snowe and myself. It is called the BRIDGE Act, for “Business Retained Income During Growth and Expansion,” and it is a new idea that I strongly encourage the Committee to consider. The BRIDGE Act fills an important gap in capital financing for growing entrepreneurial companies. I want to thank one of our witnesses today, Patrick Von Bargen of the National Commission on Entrepreneurship, for his early and enthusiastic support of the bill.

“When first starting out, an entrepreneur takes earnings and reinvests them into the business. If the firm grows rapidly, these revenues may be insufficient to allow the entrepreneur to hire new people, make capital investments, create new marketing channels, and the like. In response, firms often seek outside funding. Finding external financing, however, is difficult and frequently impossible – particularly in today’s economy. In addition, new entrepreneurs generally need small amounts of funding, somewhere between $250,000 and $1 million – yet few venture capital funds provide this level of financing, and most banks require collateral or a more extensive track record than the new entrepreneur can provide. The end result is that an entrepreneur may be capable of expanding his or her business, but unable to amass the necessary funding to do so.

“The BRIDGE Act addresses this financing gap by allowing rapidly expanding, entrepreneurial businesses to access new capital by temporarily deferring a portion of their federal income tax liability. The two-year deferral would be limited to $250,000 of tax, which would be repayable with interest over a four-year period. The tax-deferred amount would be deposited in a separate trust account at a bank or other approved intermediary, and the firm could borrow against the deferred amount for business purposes. Partnerships, C corporations, and S corporations would all be eligible if they meet particular criteria.

“Our bill authorizes these BRIDGE accounts for five years. Because deferred taxes would be repaid, the bill actually generates revenue over the ten-year budget window. During the final six years, the proposal would raise $24.1 billion for a net gain, over ten years, of $1.1 billion. Of course, if the program is successful at filling the capital gap, it is our hope that it would be reauthorized. But because it is a deferral of tax rather than an outright tax cut – and because it allows firms to use their own money as working capital – Sen. Snowe and I believe that this is an idea worthy of the Committee’s support.

“I would like to bring one final issue to the Committee’s attention, which I hope Mr. Von Bargen will address in his testimony – the need for a change in how the individual Alternative Minimum Tax (AMT) treats the exercise of incentive stock options. In the year 2000, thousands of employees in Massachusetts and around the country were hurt when the exercise of their options generated tax liability, but the value of the options declined. Many workers around the country find themselves now owing thousands of dollars in taxes on income that they never actually had in hand. The tax code does a lot of crazy things, but it shouldn’t tax people for income they never actually had.

“I bring this up at this hearing because the use of stock options has received a lot of attention in recent weeks as a result of the Enron scandal and other accounting irregularities. However, today’s entrepreneurs rely on incentive stock options as a key tool – in many cases, the most important tool – to attract talented and qualified employees. Without stock options, it would be very difficult for entrepreneurs to build their teams.

“I was pleased to work with Sen. Grassley at the end of last session to try to craft a response to this problem that would help employees all across the nation. Unfortunately, because the stimulus package stalled, we could not enact our solution into law. However, this issue is still very important to me, and I look forward to continuing to work with Sen. Grassley, Chairman Baucus, and others on a reasonable and bipartisan solution.

“Senator Kerry recently hosted a Roundtable discussion, Unleashing the Power of Entrepreneurship: Investing in America’s Small Businesses, that gave the entrepreneurial community the opportunity to discuss the BRIDGE Act and the Affordable Small Business Stimulus Act, as well as other issues facing the high-growth small business community. “In addition to legislation designed to help small businesses and entrepreneurial companies, Senator Kerry will co-host with Senator Bond (R-MO) a Homeland Security Expo in July that will bring small companies who develop and market innovative homeland security devices together to showcase their product to Senators and procurement representatives from across the country. The Expo is part of Kerry’s ongoing effort to encourage both government and private utilization of small businesses and emphasize the valuable role they play in a healthy economy.

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