MSGI Congressional Hearing Recap - House Small Business Committee Hearing "Innovation as a Catalyst for New Jobs: SBA’s Innovation Initiatives"

 MSGI Congressional Recap

Hearing Title: Innovation as a Catalyst for New Jobs: SBA’s Innovation Initiatives

Committee: House Small Business Committee, Subcommittee on Economic Growth, Tax, and Capital Access

Chair: Rep. Sharice Davids (D-KS)

Ranking Member: Rep. Dan Meuser (R-PA)

Date: July 14, 2021

Witnesses

Mr. E. LaVerne Epp
Executive Chair
KU Innovation Park
Testimony

Mr. Benjamin Robert Johnson
Chairman
Innovation Advocacy Council
Testimony

Dr. Gabriel R. Burks
Vice President and Head of Research and Development
FrostDefense Envirotech Inc.
Testimony 

Mr. Jeffrey Maguire
Managing Partner and Co-Founder
Clearly Clean Products, LLC
Testimony

Main Points of Discussion

Growth Accelerator Fund Challenge and Regional Innovation Clusters

• Chair Davids (D-KS) Questions:
• Dr. Burks, what was your experience participating in a growth accelerator? How did it impact your business long-term? 
• Response: It has been a tremendous experience, lots of professionals and resources available. They host events that are in line with early-stage development. We can interact with other companies to build relationships. 
• Mr. Johnson, from your perspective, you spend a decent amount of time talking about a robust regional ecosystem, is there anything else you would like to add?
• Response: Each region is unique, programs like regional innovation clusters allow regions to define what their strength is, it is not one size fits all. We can bring this to rural communities and better engage women and minorities that are left behind. 

Access to Capital

• Chair Davids (D-KS) Question:
• Mr. Epps, venture capital funding is centralized. What approach have you taken to address this challenge?
• Response: We try to cluster investors, like small cluster groups. However, a shortage of capital is a problem for us. An incentive for venture fund capital investment would be very helpful. 
• Rep. Newman (D-IL) Question: 
• Dr. Burks and Mr. Johnson, getting the right people in the right jobs is critical, what if we extended the Community Navigator Pilot Program? Where incubators and business groups could get funding to give companies expertise in specific areas. 
• Response from Dr. Burks: I think that kind of supplement would be tremendous.  
• Response from Mr. Johnson: I think that model is promising for people to connect with SBA resources. For us, the Regional Innovation Cluster was that hub. Bringing additional resources to the Regional Innovation Cluster program is a unique opportunity. 
• Rep. Chu (D-CA) Question:
• I have reintroduced the Investing in Main Street Act, H.R. 4256, that will allow a bank or federal savings association to invest up to 15% of their capital and surplus in SBICs. Mr. Epp, SBICs are backed by SBA and last year they made 1/4 of their investments to underserved businesses. What is the importance of private investment in startups and how can SBIC's help them grow and succeed?
• Response: Small company investors are always looking for match funding, they often don’t want to be the first in. This type of funding “opens the floodgates.” 
• Mr. Johnson, I have also introduced the PROGRESS Act, H.R. 2680, that will create two new tax incentives to address the disparity of women obtaining capital to start a business. Could you talk about how incentivizing third party investment into the smallest of businesses can improve their outcomes? 
• Response: We see the hurdles of hiring the first employee as the main challenge. Anything that can help bring on a hire is important. 
• Rep. Evans (D-PA) Question:
• Dr. Burks, access to capital is a persistent issue for entrepreneurs, particularly for black businesses and women. What types of funding have you used?
• Response: We have used the University of Illinois, the National Science Foundation (NSF) SBIR Program, the Illinois Incubator, and we have gotten investment from private vineyards. This has funded a multitude of things. 
• How does this work? 
• Response: The incubator recognized our idea as having potential. From there, you continue to grow and apply for other funding. If you get the NSF SBIR, you can use that funding to further develop your efforts. The incubator is supposed to give you the support you need so eventually you can leave and become a self-sustaining business.

Taxes and the Current Economy

• Ranking Member Meuser (R-PA) Questions:
• Mr. McGuire, The Tax Cuts and Jobs Act created a more competitive environment for small businesses, what would happen if it was repealed?
• Response: It will impact the amount of money we can reinvest into our expansion. If the tax rates increase, the amount of capital we will have will decrease because the money will go to taxes. 
• The bonus depreciation (which allows for full and immediate expensing of capital investments) is a particular concern to you. How was this advantageous to your company
• Response: We added 5 production lines to our facility, we were able to depreciate the costs against income taxes which allowed us to invest millions of dollars back into our lines and continue to grow our company. The only way to innovate is to have the resources to innovate. Without the tax cuts we would have stopped growing forward. 
• What are your thoughts on patents?
• Response: Patents for small business are very important for growth. 
• Dr. Burks, what is the biggest need for startup companies?
• Response: Biggest challenge is putting an initial team together, assistance early on is important. Also, having flexibility is important. 
• Rep. Young Kim (R-CA) Questions: 
• Mr. Johnson, what would a higher capital tax rate do to early-stage funding? 
• Response: We don’t often hear about tax issues from our entrepreneurs, we hear that they need support - connecting with capital and developing products. The policy environment needs to be two sided, a decrease in regulation as well as developing the entrepreneurial ecosystem.
• Mr. McGuire, would you agree that a higher capital tax rate would put our small businesses at a disadvantage?
• Response: The capital tax rate will affect investment in companies, but it won’t stop it. When you mess with capital gains you will impact small businesses negatively. 
• Mr. McGuire, how will increase in prices or inflation affect you?
• Response: We have seen 15 – 30% increase in raw material costs. 
• Rep. Van Duyne (R-TX) Questions:
• Mr. McGuire, do you think your company’s rapid growth would have been possible today? Is the economic environment today compared to before the pandemic less friendly to business innovation?
• Response: It was easier to hire before the pandemic - we are trying to deal with having the appropriate people. I don’t see the current situation getting better in the next 6 months.
• When you think about the tax proposals coming from this Administration, how would it affect small business capital at large?
• Response: It will be difficult, most small businesses are self-funded. You cannot build a business in an environment with tax increases. 
• Mr. Epp, without sacrificing waste, fraud, or abuse protections, how can we eliminate some of the paperwork for small businesses participating in the innovation programs?
• Response: The accelerator program lacks restrictions and paperwork, and it works very well, we need more of that.

Five Things Small Businesses Want from the New President

By Ann Sullivan

 

1.  An effective vaccination program. Small businesses, especially vulnerable during the pandemic, need to get employees back to work and customers through their doors. Clear communication from the President and public health officials and a robust vaccination plan will accomplish just that.  

 

2. Capital to weather the pandemic. The Paycheck Protection Program (PPP) got lots of things right – the two rounds of loans assisted many small businesses. However, adjusting to changes caused or accelerated by the pandemic are far from over. Businesses have had to make significant changes, such as investments in technology infrastructure. This spans across industries – accommodating working from home or shifting to take out/delivery services, just to name a few. It is unclear if or when the workforce will return to their workplaces five days a week. 

 

While the second round of PPP funding passed in December expanded covered expenses, the need for capital has never been greater. The temptation by government is to simply pile money on top of existing programs. That has not necessarily been successful—women still get just 4% of all commercial capital and businesses in underserved communities were the last to receive PPP funds. Federal loan programs for these businesses need an overhaul.

 

3. Greater access to public sector contracts. During the pandemic, public sector (federal/state/local) contracting is a way to reposition successful commercial businesses. However, the current set of acquisition policies and federal agency initiatives are really designed to keep them out. Citing efficiency, the federal government buys in large quantities from large companies but in the process relegates smaller businesses to providing goods and services through large prime contractors, rather than buying directly from small businesses.  This strategy results in fewer small federal contractors – which has had a ripple effect on the economy. Access, by the way, does not mean a handout. It just means having a fair shot at winning the business.

 

4. Changing the tax code from “one size fits all.” Although the last tax rewrite made some much-needed changes for small businesses that are organized as pass-throughs as opposed to C corporations, considerable work remains. The Treasury Department should review every deduction/tax credit and its impact on small business vis-à-vis large businesses and make regulatory adjustments and recommended changes to the law that require Congressional action.

 

5. Make small businesses stakeholders in the clean energy future. If small businesses are not at the table, the new Administration’s goal to build a “modern, sustainable infrastructure and deliver an equitable clean energy future” won’t get much traction. If involved, they will find ways to create revenue and business growth. Their unique ability to pivot and innovate will give life to the opportunities the new Administration envisions.

COVID-19: Expect New Employer Obligations

By Ann Sullivan

(Update 4/26/20: For more information, check out the DOL FAQ on these provisions here: https://www.dol.gov/agencies/whd/pandemic/ffcra-questions)

Legislation drafted in a hurry, like the Families First Coronavirus Response Act negotiated by Speaker Nancy Pelosi and Secretary of the Treasury Steven Mnuchin, can be confusing.  We are concentrating only on the employer/employee provisions in this comprehensive coronavirus response package. The President signed this bill into law on March 18.

There are two different employer requirements: emergency sick leave and emergency family leave.  Let’s talk about sick leave first.  Every employer under 500 employees is required to offer two weeks of paid sick leave to employees who are sick from the coronavirus, taking care of someone who is sick with the virus or are providing childcare due to cancelled school/daycare – without fear of losing their jobs.  Full time employees who are sick are allotted 80 hours of sick leave and part time employees/hourly workers are given the typical hours worked in a two-week period. Employers are required to pay employees their normal wages or the minimum wage at the federal/state/local level, whichever is the higher.  Employees who are taking care of others are entitled to two-thirds of their regular earnings.  As I read the current bill, these two weeks are in addition to an employer’s existing sick leave policy.  The bill allows the Secretary of Labor to issue regulations exempting businesses with fewer than 50 employees from the paid leave requirement if it would jeopardize the viability of the business. 

With respect to emergency family leave, which is an expansion of the Family and Medical Leave Act (FMLA), the bill expands FMLA availability to employers under 50 employees.  As context, the current law requires 12 weeks of FMLA for employees of companies above 50 employees.  In order to make FMLA applicable to dealing with the coronavirus, the bill expands the definition of who is eligible for FMLA by adding employees who are unable to work because they are providing childcare due to closed schools/daycare centers.  This change is effective through December 31, 2020.  Requirements for employers include paying employees two-thirds pay for a little more than 10 weeks.  The first 10 days of the 12-week period do not need to be paid.  Employers with less than 25 employees would be exempt from requirements to restore an employee's original position if it no longer exists due to changes in either economic conditions or a change in operations as a result of this public health emergency. The Labor Secretary is allowed to issue similar regulations as the family leave exemptions regarding businesses with fewer than 50 employees. In fact, DOL is looking for feedback from employers on compliance for these new rules through March 29.

So, how will this be paid for?  Employers offering this emergency sick leave and family leave will be able to get 100% payroll tax credit for these additional costs on a quarterly basis.  Employers may deduct up to $511 per day for sick employees or $200 per day for employees who are taking care of others.  The tax credit for family leave is up to $200 per day, not to exceed $10,000.  For the self-employed, these credits will be applied against the self-employment tax.  

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Employer Obligations in H.R. 6201: Families First Coronavirus Response Act

Emergency Paid Sick Leave:

• Requires private employers with fewer than 500 employees and all public employers to provide 80 hours of paid leave for full-time employees and part time employees/hourly workers are given the typical hours worked in a two-week period without fear of losing their job. 
• Reasons for this leave can be: 
• Comply with a federal, state, or local quarantine or isolation order.
• Self-quarantine per a health-care provider’s advice.
• Obtain a medical diagnosis for coronavirus.
• Care for an individual who is in quarantine or for a child whose school or day care has closed due to coronavirus.
• Bill caps per employee costs are $5,110 for an employee who is taking the leave for their own illness or $2,000 for employees caring for another individual or child.  
• Leave mandate sunsets on December 31, 2020 and commences 15 days after the bill is signed into law. 
• Allows the Secretary of Labor to issue regulations exempting businesses with fewer than 50 employees from the paid leave requirement if it would jeopardize the viability of the business.
• An employer cannot require a worker to use any other available paid leave before using the sick time or require a worker to find a replacement to cover their hours.

Emergency Paid Family Leave: 

• Requires all employers with fewer than 500 employees to provide to up to 12-weeks of job-protected leave under FMLA for employees who are unable to work or telework because they have to care for a child younger than 18 whose school or day care has closed because of the coronavirus.
• First 10 days of leave could be unpaid, though a worker could choose to use accrued vacation days, personal leave, or other available paid leave for unpaid time off.
• Following the first 10 days, workers would receive a benefit from their employers that will be at least two-thirds of their normal pay rate.
• Per employee cap on costs for the leave are set at $200 per day or $10,000 total. 
• Leave mandate sunsets on December 31, 2020 and commences 15 days after the bill is signed into law. 
• Employers with less than 25 employees would be exempt from requirements to restore an employee's original position if it no longer exists due to changes in either economic conditions or a change in operations as a result of this public health emergency.
• Allows the Secretary of Labor to issue regulations exempting businesses with fewer than 50 employees from the paid leave requirement if it would jeopardize the viability of the business. 

Employer Tax Credits:

• Employers offering this emergency sick leave and family leave will be able to get 100% payroll tax credit for these additional costs on a quarterly basis. 
• Emergency sick leave credit:
• For each employee the credit would be for wages of as much as $511 per day while the employee is receiving paid sick leave because they are quarantined, or $200 if they are caring for someone else who is quarantined or their child’s school is closed.
• Emergency family leave credit:
• As much as $200 per day while the employee is receiving paid leave, or a total of $10,000.
• The credit would be in effect for wages through the end of 2020.
• For self-employed, there is a similar credit applied against the self-employment tax.

The 1 Glaring Question in Every Congressional Hearing on Infrastructure

By MSGI Policy Analyst Andrew Lautz

There were no less than three hearings on Capitol Hill last week concerning the great white whale of this era, for Congress and the White House: an infrastructure bill. These were not the first hearings of the 116th Congress on infrastructure either. Numerous Committees have spent hours discussing how to invest the trillions of dollars needed to update the nation’s roads, highways, bridges, and tunnels. 

This week’s hearings were held by Committees with different focus areas, underscoring just how many aspects of the American economy would be impacted by an infrastructure package:

1. The House Small Business Committee held a hearing on how to include small businesses and contractors in an infrastructure bill
2. The Senate Environment and Public Works Committee considered how to balance the need for fast permitting of Federal projects with the need to protect the environment
3. It was the House Ways and Means Committee, though, that pondered the central question hanging over these and all other infrastructure hearings: how to pay for it?

There is still quite a gap between Republican and Democratic Congressional leaders over just how to pay for an infrastructure bill that could cost over $1 trillion, without putting more debt on the nation’s credit card.

Republicans, who control the Senate and White House, are wary of proposals to increase the Federal gas tax. House Transportation Committee Ranking Member Sam Graves (R-MO) is proposing a new kind of tax, on Vehicle Miles Travelled (VMT). Graves has yet to get his party on board, though, and there are privacy concerns about how to actually track and collect a VMT tax.

Some prominent Democrats, like House Transportation Committee Chair Peter DeFazio (D-OR), are behind a gas tax hike, but he doesn’t have consensus in his party either. Ways and Means Committee Chair Richard Neal (D-MA) has not committed to any one idea to raise money for an infrastructure bill, but where he falls on the issue could end up being a major signal to other House Democrats.

It seems that President Trump, the Republican-led Senate, and the Democratic-led House all agree that infrastructure spending is a necessity, not an option, for the 116th Congress. Until a consensus develops on how to pay for infrastructure, though, there will be more questions about what emerges from this Congress than answers.

More Taxes? No Taxes? How About Fair Taxes

By: John Stanford

WIPP recently submitted testimony to the House Small Business Committee on comprehensive tax reform. This blog gives an overview of WIPP’s advocacy efforts. For more details, I encourage you to read the testimony. Our government relations team strives to make official communications as easy-to-read as possible, but should you have questions please reach out to WIPP.   

Women entrepreneurs deserve a tax system that rewards the effort, tenacity, and risk it takes to start and grow a business. Moreover, they deserve a system of revenue collection (because that’s what taxes are) that is simple and fair.

In testimony submitted to the House Small Business Committee, WIPP said just that. Citing reports from the IRS National Taxpayer Advocate as well as the SBA Office of Advocacy, the testimony documents what women business owners already know: the tax system is broken, failing under the weight of complexity, uncertainty and outdated policies. But more importantly, the testimony addresses the impact of possible reforms – and the need for any overhaul to be comprehensive.

What does that mean? It means that the idea to lower the corporate tax rate, favored by the White House and some in Congress, must not happen independently of adjusting individual rates in a similar manner. This distinction matters because so many businesses, including almost 9 in 10 women-owned businesses, are structured as “pass-through” entities paying taxes as individuals (including S-Corps, Sole-proprietorships, partnerships, and LLCs).  

Corporate-only reforms would be unfair to these businesses – and for that reason WIPP has always supported comprehensive (corporate + individual) reform. The testimony underscored this important point.

In addition, WIPP identified tax policies that, absent major reforms, would benefit women entrepreneurs. This includes making more small business tax credits and deductions permanent. In recent years, these tax “extenders” have been extended (hence their name) at the last minute, or even retroactively – not a good way for business owners to plan their budgets.

WIPP also asked Congress to consider tax credits that benefit new businesses, helping offset the costs of launching a new company. Another policy request was to avoid changing the Employee Stock Ownership Plan (ESOP) provisions in the tax code, as these have proven to be both popular and good tools to incentivize productivity and long-term business health.

In agreement with the idea that simple businesses (sales – costs = income) should have simple taxes, WIPP also supports simplifying the cash accounting method and expanding its optional use to more small businesses. Finally, with healthcare costs an always-growing burden on employers, WIPP continues its support of expanding the Small Business Health Care Tax Credit so more women entrepreneurs minimize the cost of providing healthcare to employees.

More ideas for reforming the tax system to incentivize entrepreneurship and innovation are out there. WIPP will continue working to identify policies that let women business owners focus more on their business and less on complex tax requirements. At the end of the day, all of these decisions should be made with the basic principles of simplicity and fairness in mind. And that’s exactly what we asked Congress to do.