Enabling Success: Examining the Competitive Landscape for Small Businesses
Summary
The printed record of a hearing held September 13, 2023 by the Subcommittee on Economic Growth, Tax, and Capital Access of the House Committee on Small Business, published as Small Business Committee Document Number 118-024. Chairman Dan Meuser presided; his opening statement addresses interest deductibility and the Federal Reserve's Basel III endgame proposal. Ranking Member Greg Landsman states that in 2021 and 2022 over 10 million people filed applications to start new businesses. The witnesses are a Jimmy John's franchisee testifying for the International Franchise Association, the executive director of the NFIB Research Center, and a professor of law at Columbia Law School. The appendix lists their prepared statements and material from organizations including Goldman Sachs and the U.S. Chamber of Commerce.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Full text
[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
ENABLING SUCCESS: EXAMINING THE
COMPETITIVE LANDSCAPE FOR SMALL BUSINESSES
HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH,
TAX, AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
SEPTEMBER 13, 2023
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-024
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
53-364 WASHINGTON : 2024
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MORGAN MCGARVEY, Kentucky
MARIE GLUESENKAMP PEREZ, Washington
HILLARY SCHOLTEN, Michigan
SHRI THANEDAR, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire
Ben Johnson, Majority Staff Director
Melissa Jung, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Dan Meuser.................................................. 1
Hon. Greg Landsman............................................... 2
WITNESSES
James Chung, Franchisee, CEO, Jimmy John's, testifying on behalf
of the International Franchise Association..................... 4
Holly Wade, Executive Director of the NFIB Research Center,
National Federation of Independent Businesses, Washington, DC.. 7
Kathryn Judge, Harvey J. Goldschmid Professor of Law, Columbia
Law School, New York, New York................................. 8
APPENDIX
Prepared Statements:
James Chung, Franchisee, CEO, Jimmy John's, testifying on
behalf of the International Franchise Association.......... 23
Holly Wade, Executive Director of the NFIB Research Center,
National Federation of Independent Businesses, Washington,
DC......................................................... 32
Kathryn Judge, Harvey J. Goldschmid Professor of Law,
Columbia Law School, New York, New York.................... 37
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Engine....................................................... 44
Goldman Sachs................................................ 47
National Association of Manufacturers........................ 49
NFIB Research Center Banking Survey.......................... 53
Small Business & Entrepreneurship Council.................... 65
U.S. Chamber of Commerce..................................... 119
ENABLING SUCCESS: EXAMINING THE
COMPETITIVE LANDSCAPE FOR SMALL BUSINESSES
----------
TUESDAY, SEPTEMBER 13, 2023
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:03 a.m., in
Room 2360, Rayburn House Office Building, Hon. Dan Meuser
[chairman of the Subcommittee] presiding.
Present: Representatives Meuser, Williams, Alford,
Landsman, and Davids.
Chairman MEUSER. Well, good morning. I appreciate you all
being here. The hearing this morning on Enabling Success:
Examining the Competitive Landscape for Small Business will
come to order.
I greatly appreciate our witnesses for being here and
making the trip. And certainly, good morning to everyone, my
colleagues on both sides.
So we will delve into today the critical issue of how
regulatory decisions, particularly by the Federal Reserve, are
impacting our nation's small businesses, which as we all know
are the backbone of our communities and the strength of your
economy. Small businesses are already navigating a maze of
challenges, inflation, regulatory costs, access to capital to
name just a few. And the last thing our small businesses need
is additional roadblocks, particularly from institutions like
the Fed that limit their access to capital and ability to
succeed.
Take for instance the important issue of interest
deductibility. To address inflation brought on by excessively
high levels of spending, the Fed has raised interest rates to a
2 decade high and small businesses are capped at the relief
that they can receive. The current cap on interest rates are 30
percent of adjustable taxable income really unfairly penalizes
small businesses that utilize large capital expenditures to
grow their business and hire employees. This hampers domestic
investment but also erodes the global competitiveness of U.S.
businesses.
The Joint Committee on Taxation estimate in its first year
this change will have approximately $10 billion in fiscal cost
for American businesses. Most developed businesses do not place
such constraints on their companies. Putting this onto American
entrepreneurs creates a disadvantage.
The Federal Reserve also, despite its own data in the Beige
Book and the Senior Loan Officer Opinion Survey is in the
process of implementing stricter capital standards on banks
known as the Basel III endgame proposal.
Now, the proposal will require banks to keep more money on
the sidelines where it will not be utilized to fulfill the
lending needs of particularly small businesses. This move will
exacerbate the already tightening capital access problem for
small business. If banks have to hold back on lending due to
these requirements, it is, again, small businesses that will
suffer.
So larger financial institutions may be able to mostly
absorb these regulatory shocks; not so much for small business.
What happens when a business needs to replace crucial equipment
or repair damages urgently and cannot very simply access
affordable capital.
These are not theoretical concerns. They are real issues
that can close the doors of our small businesses, impacting the
lives and livelihoods of everyday Americans. Due to this
proposal, banks will have less flexibility than ever and again,
small businesses will receive the brunt of the lending
pullback.
We do have a duty on this Committee to address the problems
facing small businesses. Simple measures like restoring the
163J interest deductible and reconsidering the Basel III
endgame can go a long way in ensuring we do not add to the
problems.
Despite the headwinds of inflation and turbulent economic
landscape our small businesses are fighting to thrive. Let's
not allow misguided proposals to tie their hands.
I look forward to hearing the insights of our witnesses
today on all of these topics.
Before concluding my remarks I would like to enter into the
record three separate surveys of small businesses conducted by
the National Federation of Independent Businesses, otherwise
known as FIB and NFIB, Goldman Sachs 10,000 Small Business
Voices and the Small Business Entrepreneurship Council on
detailing the difficulties of small businesses are facing
accessing capital. Thank you.
I now yield to our Ranking Member, Mr. Landsman.
Mr. LANDSMAN. Thank you, Mr. Chair. Thank you all for being
here. This is a very important hearing and discussion about
helping our small businesses with the regulatory landscape but
also as the Chair mentioned, some of the tax issues that our
small businesses are dealing with. So I am echoing some of his
remarks but, you know, over the last several years our small
businesses have faced compounding crises from the initial COVID
shock to the ongoing repercussions involving the labor market
and supply chain issues, the competitive landscape for these
businesses has been a whirlwind.
Over the past 2 years, however, we have seen an
unprecedented growth in small business startup activity. In
2021 and 2022, over 10 million people filed applications to
start new businesses, and small firms are almost entirely
responsible for the strong labor market we see today. An
economic landscape in which the only constant is change, it is
our job as policymakers to give these firms some semblance of
stability and certainty. By making policy decisions that allow
small businesses to gain their footing, we can enable their
success by creating the ability to plan long term and have
confidence in their decision-making.
Unfortunately, the policy environment is far from a sure
thing. Right now we are facing several changes to tax policy
that undermines small businesses' competitiveness and the
potential for financial market instability as we saw with
Silicon Valley and signature banks. To create more certainty,
it is time to take stock and explore how we can stabilize this
landscape for small business.
Let me start by discussing the lending environment, and
this is where I believe there is real bipartisan support. Over
the last few years we have seen the quickest rise in interest
rates in our nation's history to combat the ongoing issue of
inflation. While this helped to stabilize prices, it has pushed
the cost of capital for businesses out of reach for many of our
small businesses. With the prime rate of over 8 percent, the
small business loans rates upwards of 15 percent, the ability
to deduct interest payments is more important than ever.
Now, some of our small businesses are exempt from these
deduction limitations but others are not and this is an area
where Congress can act to make sure that interest payments are
deductible for all of our small businesses. I am very eager to
work with my colleagues to ensure that our small businesses
have tax policies that reflect how they operate.
Tax relief for businesses should also be paired with tax
relief for workers and families. That is why I believe we
should be expanding, extending the Child Tax Credit which
managed to cut child poverty in half. Many of you saw that
child poverty is up again because this has gone away. This
makes a big difference for our small businesses as they look to
attract and retain workers.
It is crucial that we improve the resilience and stability
of the financial system on behalf of small businesses. Doing so
increases the competitive landscape of our main streets
businesses and allows them to do what they do best, which is
create jobs and invest in our local communities.
I thank all the witnesses for joining us today and look
forward to a very productive discussion.
I yield back.
Chairman MEUSER. Our first witness here with us today is
Mr. James Chung. Pleasure to have you with us. Mr. Chung is a
franchisee and CEO of Atlas, located in Pasadena, California.
Mr. Chung began his franchising journey into the great
Commonwealth of Pennsylvania, Pittsburgh. He now owns and
operates 33 Jimmy John's across four states including a number
of stores in Pittsburgh, Pennsylvania. In addition to serving
as the CEO of Atlas, Mr. Chung was the CEO of Bacix, an
administration organization that provides HR, payroll,
financial services for franchises and professional
organizations. He also currently serves on the Board of Nano
Bank, among the fastest growing banks in the nation. Mr. Chung
is a graduate of the University of Southern California where he
earned a degree in economics. I am glad to see that is being
put to good use. I was an economics major and wondered what I
was going to do with it as well.
Mr. CHUNG. Here we are.
Chairman MEUSER. Here we are.
Mr. Chung, thank you for joining us today, and we look
forward to today's conversation.
Our next witness with us today is Ms. Holly Wade. Ms. Wade
is the executive director of the NFIB Research Center here in
Washington, D.C. Ms. Wade has over 19 years of experience
conducting research on the small business sector focusing on
economic conditions, business operations, and public policy
issues impacting small businesses. In addition to her role at
the NFIB, Ms. Wade is a Member of the Board of Directors of the
Global Interdependent Center and a former Member of the
National Association for Business Economics where she is the
current Co-Chair of the Small Business Roundtable. She is a
frequent media spokesperson on the small business economy and
related policy issues. Ms. Wade is a graduate of the University
of Washington where she earned her Bachelor of Arts in
Political Science and Sociology. Thank you, Ms. Wade for
joining us today, and we look forward to your testimony.
I now recognize my friend, the Ranking Member from Ohio,
Mr. Landsman, to introduce our last witness.
Mr. LANDSMAN. Thank you, Mr. Chair.
Our last witness today is Professor Kathryn Judge.
Professor judge is the Harvey J. Goldschmid Professor of Law at
Columbia Law School. Her research on financial markets and
regulation has been published in top law journals and she has
won accolades from academic peers and from the industry. She
served as a clerk for Judge Richard Posner and Supreme Court
Justice Stephen Breyer. She is a graduate of Stanford Law and
Wesleyan University. Last year she published the book Direct:
The Rise of the Middle Man Economy and the Power of Going to
the Source.
Thank you, Professor Judge, and we look forward to hearing
your testimony. I yield back.
Chairman MEUSER. Thank you. The gentleman yields.
And we have some esteemed witnesses. So we appreciate it
and we want to get right to it.
Before we begin, I would like to remind you all that your
oral testimony is restricted to 5 minutes. If you see the light
turn red in front of you it means your 5 minutes have concluded
and you should wrap up your testimony so I do not have to rap
this too hard.
We now recognize Mr. Chung for your 5 minute opening
remarks.
STATEMENTS OF JAMES CHUNG, FRANCHISEE, CEO, ATLAS; HOLLY WADE,
EXECUTIVE DIRECTOR OF THE NFIB RESEARCH CENTER, NATIONAL
FEDERATION OF INDEPENDENT BUSINESS; KATHRYN JUDGE, HARVEY J.
GOLDSCHMID PROFESSOR OF LAW, COLUMBIA LAW SCHOOL
STATEMENT OF JAMES CHUNG
Mr. CHUNG. Thank you, Chairman.
Chairman Meuser, Ranking Member Landsman, and Members of
the Subcommittee, thank you for the opportunity to appear
before you today to share my perspective on the competitive
landscape for small businesses in America.
I appear before you on behalf of myself and International
Franchise Association, otherwise known as the IFA. The IFA
comprised of franchise companies in over 300 different
industries who support nearly 8.4 million direct jobs. I have
experienced firsthand the remarkable impact that a franchise
business can have on local economies and communities, including
job creation, workforce development, and economic growth.
While attending the University of Southern California, I
was expected to continue my family's medical legacy and study
medicine. However, I made the decision to break from my family
tradition and chase my entrepreneurial dreams. Lacking support
and business knowledge, I decided to pursue a venture that
would allow me to develop a business within an already thriving
brand. Therefore, I created a business plan that redefined how
wireless carriers, such as T-Mobile and their retail partners
supported one another.
Through the program, I was able to develop T-Mobile retail
locations throughout California. Once I hit my 10-year
anniversary in 2018, I made the tough decision to exit wireless
retail. I enjoyed and flourished in an environment where I was
in business for myself, but not by myself, and it gave me the
skills necessary to build my confidence.
After T-Mobile, I made the decision to invest in Jimmy
John's, another well-known brand that built a reputation for
their tenacious culture, fresh baked bread, and delicious
sandwiches. Jimmy John's informed me they needed more stores in
Pittsburgh, and although I knew nothing about the market, or
food for that matter, I was confident that I could make it
happen with the support of the franchise. To further my
chances, I partnered with a mentor of mine, Tony Gressak. His
experience as the VP of Cheesecake Factory Bakery and a Vietnam
vet would prove to be invaluable.
After receiving my first SBA loan, I signed up to open a
Jimmy John's in Pittsburgh. My team and I hit the ground
running and before we knew it we had opened four more in
Pittsburgh and earned the rights to open 24 more in California.
Unfortunately, the stores in California opened producing
half of the sales we expected. We bared down, close
underperforming stores while acquiring cash-flowing franchisees
in other states and started to turn the corner.
The day we became profitable, shelter in place mandates
were announced. I was sure this was the end. But thankfully,
our government had the foresight and grace to provide programs
that restaurants relied upon to make it through the numerous
COVID shutdowns and restrictions. Because of the grit of my
team and their devotion to our vision, we are now on the path
to owning and operating 100 Jimmy John's across six states that
would employ more than 2,000 employees.
Entrepreneurs cannot leave their teetering businesses to
engage and participate consistently in regulatory and political
matters. However, the current political climate is making it
too difficult, litigious, and expensive to operate. I am deeply
concerned that the American dream is being threatened by the
current political landscape.
One headwind is an aspect of tax policy. The limitation on
the deductibility of interest imposed by the expiration of a
provision in the Tax Cuts and Jobs Act hinders small business
growth, and at the beginning of last year it got worse. Prio to
January 1, 2022, business interest expense deductions were
limited by Section 163J to 30 percent of their earnings before
interest, tax, depreciation, amortization, otherwise known as
EBITDA. Interest deductions are now limited to 30 percent of
earnings before interest and tax, otherwise known as EBIT, a
much stricter limitation, especially for businesses with a lot
of depreciable equipment such as restaurants. This change,
combined with rising interest rates, is proving to make
incremental investments by small businesses much more
expensive. On average, a restaurant affected by change could
see a threefold increase in its incremental tax burden facing
both higher interest rates and higher tax rates.
Restaurants famously offer entry level jobs with high upper
mobility. In fact, one in three Americans begin their jobs or
their careers in a restaurant. Most of my managers and district
managers started as simple delivery drivers.
The EBITDA based interest limitation would allow us to keep
creating jobs and open this opportunity for countless more
Americans.
I am consistently hearing from franchisees who want to
delay restaurant openings because of the cost of funds. This is
hurting job creation in America.
Fortunately, there is a bipartisan legislation, H.R. 2788,
to permanently preserve the EBITDA standard and ensure that the
Tax Code does not penalize job creating investments. In
addition, H.R. 3398, the Build It in America Act includes
retroactive extensions through 2025, and was approved by the
Ways and Means Committee earlier this year.
I would urge Congress to take either of these approaches to
address this critical issue as soon as possible but certainly
before the end of 2023.
Finally, I would like to highlight an issue that has
potential to completely dismantle the franchise business model.
Any day now, the NLRB is planning to issue the final rule on
joint employer standard that would reverse its course back to
the harmful 2015 version. This rule will take away the equity
and independence of franchise small business owners and will
put their success and livelihoods, including mine, in jeopardy.
Franchisers will move to hire numerous attorneys to oversee
employment issues across the network of independently owned
franchises where the franchisor has no control. Ultimately, the
additional cost to the franchisor will translate into
additional cost to independent owners like me.
Additionally, the increased scrutiny by the franchisor
would put into question accountability regarding the success of
the franchise which would make the franchise model untenable.
Mr. Chairman, thank you for your invitation to speak on
behalf of small business owners everywhere. I look forward to
any questions you may have. Thank you.
Chairman MEUSER. Thank you, Mr. Chung. I provided some
leeway so I will do the same for our other witness.
Yeah, Washington time tends to be extended. California time
I understand might be as well but we are going to try to stay
within the limits.
Mr. CHUNG. Thank you, Chairman.
Chairman MEUSER. Ms. Holly Wade, your testimony, please.
Thank you.
STATEMENT OF HOLLY WADE
Ms. WADE. Good morning, Chairman Meuser, Ranking Member
Landsman, and Members of the Subcommittee. My name is Holly
Wade. I am the executive director of the NFIB Research Center.
NFIB is the nation's leading small business advocacy
organization, advocating on behalf of nearly 300,000 small
business owner Members in Washington, D.C., and all 50 states.
NFIB's mission is to promote and protect the right of our
Members to own, operate, and grow their business.
Small businesses appreciate the invitation to discuss
opportunities for Congress to create an environment for small
businesses to grow and flourish. Small businesses continue to
face economic headwinds, including stubbornly high inflation,
supply chain disruptions, and pervasive workforce shortages.
These headwinds all affect the competitive landscape for small
businesses.
Small business owners' ability to grow and successfully
operate their business are also constrained by unprecedented
growth of burdensome regulations and red tape under the
administration and the looming expiration of the 20 percent
Small Business Deduction (also known as Section 199A) at the
end of 2025.
Small businesses face many challenges. Many of these
challenges are familiar to small business owners but others are
quite new, namely inflation and rising interest rates. NFIB
Research Center's August Banking Survey found that the cost of
credit is small business owners' biggest financial concern.
According to the survey, small businesses' access to credit is
currently not a major problem, which is consistent with the
findings of NFIB's monthly Small Business Economic Trends
Survey. The Banking Survey found most small business owners are
generally satisfied with their ability to borrow, however,
increased cost of financing is a problem. In fact, 58 percent
of those owners accessing credit in the last 3 months reported
interest rates a significant issue.
The increasing cost of financing associated with high
interest rates is a growing concern for many small business
owners. If interest rate costs continue to increase, more small
business owners will be priced out of traditional financing
options.
Unfortunately, small businesses face many other significant
economic headwinds in addition to rising interest rates. One of
the biggest concerns for small businesses is the expiration of
the 20 percent Small Business Deduction (Section 199A) at the
end of 2025. Without Congressional action, millions of small
businesses across the country face a massive tax increase. This
looming tax increase threatens the ability of small business
owners to plan and grow operations, as nearly half of small
business owners (48 percent) reported the uncertainty of
expiring tax provisions is impacting their current or future
business plans.
It will also reduce their primary source of financing,
business earnings. Small business owners' primary source of
financing for their business are profits, and a tax increase
will directly impact that source at a time when access to
credit is more costly.
Additionally, the historic regulatory burdens and red tape
of the administration are another significant problem facing
small businesses. Since 2021, the Biden administration has
imposed more than $403 billion in regulatory costs and added
more than 233 million hours in paperwork burdens for
businesses. These unprecedented burdens are crushing small
businesses and there does not appear to be a regulatory
slowdown in sight. Regulations are not only costly but require
small business owners to allocate valuable time of themselves
and often their employees to understand and implement the
regulations.
On January 1, 2024, one of the most expansive small
business regulations in history will go into effect. This
substantial new reporting requirement, known as beneficial
ownership information reporting, will affect 32.6 million small
business owners in the first year and 5 to 6 million small
businesses each year thereafter. The cost of this regulation is
a staggering $22.7 billion in the first year, and $5.6 billion
per year moving forward. Failure to file completed and updated
reports could result in civil penalties up to $10,000 and
criminal penalties of up to 2 years in prison. In total, this
burdensome regulation smothers the smallest small businesses in
America with more than $73 billion in compliance costs, and it
only applies to small businesses with 20 or fewer employees and
$5 million or less in annual revenue.
Small businesses need certainty to successfully invest,
grow, and operate their business. Congress can help mitigate
the many economic challenges facing small businesses by
providing relief from burdensome regulations and eliminating
the threat of tax increases.
I appreciate your time and attention to these concerns, and
thank you for the opportunity to testify today.
Chairman MEUSER. Thank you, Ms. Wade. We appreciate your
testimony very much.
Now, Ms. Kathryn Judge for your testimony. Thank you for
your opening statement.
STATEMENT OF KATHRYN JUDGE
Ms. JUDGE. Thank you, Chairman Meuser, Ranking Member
Landsman, Members of the Subcommittee. It is a great pleasure
to be here today to be able to address two topics that are
close to my heart. One is how to build a healthy banking system
that is capable of supporting businesses in good times and bad.
And second, how to make sure small businesses have access to
the financing they need to survive and thrive. I am going to
focus my opening remarks on three key points.
First, the proposal known as Basel III endgame reforms are
an important step in efforts to promote a more resilient
banking system and a healthier economy.
Two, the proposed reforms should enhance the ability of
small businesses to access financing during periods of distress
when they often most need it, while likely having limited
adverse effect on their ability to access capital at other
times.
And three, small businesses do face very real challenges,
including with respect to their ability to access outside
financing on reasonable terms and more can and should be done
to help in that regard.
First, I will do Basel II endgame. What we are really
talking about here is a host of different reforms that are
largely designed to enhance the accuracy and transparency with
respect to how the largest and most complex banks in the
country calculate their risk exposures for regulatory purposes.
For example, the reforms introduce more standardization and
reduce the ability of banks to rely on internal models for
assessing risk. Sheila Behr, Republican Chair of the FDIC
during the 2008 financial crisis recently explained in a
Financial Times piece supporting the reforms. The so-called
internal ratings based system failed spectacularly during the
2008 financial crisis. This is just one of many different ways
that the proposed reforms are efforts to learn the lessons of
the past and build a more resilient system.
Second, the proposed reforms are not intentioned with a
very important aim of helping small businesses. First, we can
see this by looking at where the reforms actually have bite.
The great majority of the reforms are really focused on the
largest, most complex banking organizations. By contrast, they
will have no impact on community banks. And this matters
because traditionally it is the smaller community banks that
have done the best job really helping to support small
businesses. We can look at the Federal Reserve surveys and our
resources and we know small businesses still say they have a
better experience when they are borrowing from a smaller bank,
and they have a higher likelihood of actually getting at least
some of the financing they need, whether it is a loan or credit
line when they are going to a small bank as opposed to a large
bank. And again, the community banks that are the vital
lifeline for credit for small businesses are not going to be at
all affected by these reforms.
Just as importantly, the proposed reforms could actually
really help small businesses. Research shows that one of the
most important impacts of having a better capitalized banking
system is that banks remain more willing and more able to lend
after a financial crisis. And this is doubly helpful for small
businesses.
First, it is great news for small businesses because it
means they are more likely to be able to access credit after a
crisis sets in when they most need credit and it is otherwise
hardest to obtain.
But second, the research also shows that you have a
significantly shorter and shallower recession. And actually
great research by the NFIB really looked at what small
businesses, how much they struggled after 2008. And if you look
like years after that, there was research from 2012 showing
that the uncertainty and the lingering effects of the recession
continued to adversely impact small businesses, and it is going
to make those types of deep recessions after crises less
likely.
Third, the title of the hearing captures exactly what is
needed: enabling success, examining the competitive landscape
for small businesses. Right now small businesses do not face a
level playing field. They have a harder time accessing
financing. They have to pay more for that financing. And they
face a host of disadvantages in other ways as well.
And again, there are two different ways to try to help this
out. One, you level the playing field from the top down. So you
use the full suite of tools that are available, that Congress
has given to regulators through competition policy to try to
make sure that the largest companies are not abusing the power
that they have.
But second, we can also think about really innovative ways
to try to from the bottom up address some of the frictions and
the challenges that small businesses face. And again here, a
lot of those opportunities lie in helping to support that nexus
between small businesses and small banks that often have
received the most relationship lending. They did a good job
with things like the Paycheck Protection Program, which my
fellow witness referred to as a really critical component of
how Congress really helped small businesses get through the
challenges of the pandemic, so I would love to see Congress do
more in those regards. There are a lot of opportunities that
exist, but allowing the largest, most complex banks to game the
system and not have regulations that adequately reflect the
risk that they pose the entire economy is not going to be the
best way of achieving that aim.
Chairman MEUSER. Thank you, Ms. Judge, very much.
Before we begin our questioning from our Members I will now
recognize the Chairman of the Full Committee, Mr. Roger
Williams from Texas, for his opening statement.
Thank you, Chairman Williams for participating with us
today.
Mr. WILLIAMS. Thank you. And good morning.
I would like to start off by thanking Chairman Meuser for
holding this hearing and thank all of you for the witnesses for
being here today.
I am a franchisee holder. I am a car dealer in Texas and
small business owner.
There is no doubt small businesses are the backbone of our
communities and the engines of our economy. Entrepreneurs have
faced many challenges over the past few years from labor
shortages to crippling inflation, yet still prevail while our
nation's job creators have faced and overcome countless hurdles
as the Committee has heard prior, access to capital has
remained a top concern for small business owners.
In order for a business to get off the ground, small
businesses must invest their time and financial resources. This
means taking out a loan and accruing interest. Currently,
interest deductibility is capped and this cap may very well
impact the number of investments a company decides to make.
To make matters worse, in the current state of our economy
we are raising interest rates at record rates, at record
numbers. With access to capital being the top issue for our
nation's small business owners, the introduction of the new
Basel III rule would be disastrous for our primary job
creators, and if implemented, this rule would make it more
costly to give out small business loans.
So despite tough times right now, small businesses are
still finding ways to thrive because that is what we do, just
as they always do and can. This Committee is focused on making
sure our nation's small businesses have a fighting chance at
success, and I am glad we are going to be looking at these
issues today.
So lastly, I ask unanimous consent to submit a letter for
the record from the National Association of Manufacturers,
regarding interest deductibility.
So thank you again to Chairman Meuser, and I yield back.
Chairman MEUSER. The Chairman yields back. Thank you,
again, very, very much.
And now we will move to Member questions under the 5-minute
rule. And I recognize myself for 5 minutes.
So we have got some interesting views, some interesting
experiences. We hope to all benefit by that.
Mr. Chung, I would like to begin with you. You offered a
lot of information there. I think your story is not atypical of
a small business and growth and setbacks and whether it is
mistakes or not there are setbacks and I know that very well
from my 20-plus years in small business and perhaps into the
larger business world.
So let's just talk a little bit about some of the
challenges; right? I mean, Goldman Sachs, 10,000 Small
Businesses Voices put out that 70 percent of small businesses
have difficulty accessing capital. Of course, NFIB offers the
same. States that only 19 percent of small businesses have
adequate access to capital. The concern of the lack of
predictability in taxes moving forward, i.e., costs on small
business is a concern from 20 percent small business deduction
to R&D to the interest deduction to the bonus depreciation. So
the list goes on of what changes could occur and the type of
preparation. Small businesses. And we need to address that.
Where are the small business advocates here in the U.S.
Congress? And we need to act vigorously in that way for you.
So that on top of the regulations that you mentioned, Ms.
Wade.
So Mr. Chung, those lack of certainty, the challenges, the
interest deductibility, access to capital, expand a little bit
further. What are the things that are of concern to you that
can be the difference between your growth, more employment,
being built to last, and survival?
Mr. CHUNG. Thank you for the question, Chairman.
I think you guys hit it on the head. The first thing is
predictability. We are in an everchanging environment where
when we go to work with a bank when they are underwriting any
requests for access to capital, the unpredictability causes or
makes it difficult for the bank to consistently underwrite our
business.
In terms of specifically what we are discussing today in
regards to the deductibility with interest rates, it would
further reduce ultimately cashflow, for any type of cashflow
analysis for underwriting.
Another issue that came to mind as one of my fellow
witnesses was discussing some of the programs that were rolled
out during COVID is also the EIDL loans. A lot of these small
businesses have EIDL loans sitting on their balance sheets as
well. These EIDL loans are taken into consideration by the
banks and are becoming difficult for these businesses (1) to
pay off, and also to reach or to access additional capital due
to the balance sheets holding these EIDL loans.
Chairman MEUSER. Thank you.
Mr. CHUNG. I yield back.
Chairman MEUSER. Yeah, I appreciate that.
So NFIB, of course, you mentioned, Ms. Wade, a number of
concerns. Is access to capital something that comes up often?
And as well, I would like to just ask you both and get to Ms.
Judge as well. When you are dealing with these costs, when you
are dealing with this lack of predictability, when you are
dealing with the inability to invest more in capital
investments so you can grow your business, your profitability
will decrease due to the added costs and such and the lack of
growth. Revenues will be mixed. Your margins will be squeezed.
But also your tax revenues are squeezed. It is one thing that I
think government does not recognize enough. Are you finding
that your sales might be going up but your margins are tighter?
Mr. CHUNG. Margins are definitely tighter for a multitude
of reasons. You know, our businesses right now are in a vice.
We are facing actually a multifront battle. One is the tax
increases that we are facing. Two is the deductibility we are
facing. Three is, well, ultimately the rising cost of funds.
And four is the rising cost of labor. So we are fighting a
multifront battle right now and we are trying to find ground
that we can win on. And it has been very difficult.
Chairman MEUSER. I want to address one thing with Ms.
Judge. It was interesting how you related to the Basel III.
Now, our concern is that the number of small businesses seeking
loans from the larger banks, over $100 billion that would be
affected by the Basel III will overflow into the smaller banks
because there simply is not enough capital to go around, if you
will, and creating more competition perhaps for the banks but a
more challenging market for the small businesses, and as well
at higher costs. So that will happen. So yes, it might benefit
actually in the short-term the community banks but it will not
in my view anyway, and you can respond to that afterwards, I am
over my time, create the type of environment for access to
capital that we want for small businesses.
And by the way, after the '08 financial collapse, capital
requirements were raised significantly at that time. Basel III
is asking for as much as a 20 percent increase, 19 percent to
be exact. That is excessive. I yield back.
And I now recognize the Ranking Member for 5 minutes for
his questions.
Mr. LANDSMAN. Thank you, Mr. Chair.
So let's stay with you, Ms. Judge. Many opponents of the
financial regulation blame greater regulation for the continued
consolidation of the banking sector. We talked a little bit
about this already. Can you discuss how deregulation has
created this wave of mergers that have taken place and taken
over much of the community banking? This is really a question
about consolidation and the impact it is having on lending and
what can be done to revitalize community banking that
encourages more small business lending?
Ms. JUDGE. It is precisely the right question to ask. And
we have seen an incredible wave of consolidation that has now
been in place for over 40 years. We went from having more than
16,000 community-oriented financial institutions that were
really focused on serving businesses and families in their
communities, to having massive consolidation. So we have now
fewer than 4,000 community banks depending on how you are
measuring. And more importantly, a disproportionate share of
the banking assets are really held in the top four or top six
banks depending on how you look at it that engage in a whole
variety of different activities, many of which have little to
do with lending or supporting even the domestic economy. And so
the core question going forward is how do we make sure we
continue to have a robust community banking system?
And so when we look historically, actually, the highest
rate of consolidation was during the late 1980s and really
throughout the 1990s where we had a significant period of
deregulation. The last couple of years where there was an
effort to build in a more robust system we actually saw a much
slower rate of consolidation among the banks and kind of more
viability for the community banks.
So the question gets at the core issue which is what does
the structure of the banking system look like? And what does
that tell us about who they are really going to serve? And it
was actually during the periods of deregulation that we saw
changes in the structure that reduced the orientation to really
serving the needs of small businesses and communities.
Mr. LANDSMAN. You mentioned that at one point it 16,000
institutions, banks, now four. So is it fair to say that the
consolidation has, you know, reduced the number of lenders by,
what is that, I mean----
Ms. JUDGE. Yeah. They were shrinking and they were growing
at the same time because we did have a new entry for a while
and we have had more credit unions. But it has reduced it by a
massive fraction. And again, it has also changed dramatically
the composition of the banks that are in the market.
Mr. LANDSMAN. Then this gets at the Chairman's question.
The smaller banks, as you mentioned, provide the bulk of
lending to small businesses in their area. And there is
concerned that the new proposed regulation may impact these
small banks. Can you explain how this proposed regulation will
have a limited impact on small banks? You talked a little bit
about it in your testimony but if you can expand a little bit
more.
Ms. JUDGE. Of course. So the regulations really only kick
in for banks that have at least $100 billion in assets and
their insured subsidiaries. The only exception to that is for
slightly smaller banks that engage in a lot of trading
activity. So it is not the banks that are actually focused on
lending; it is the banks that are focused on trading that might
be caught that are slightly smaller. And disproportionately,
the real impact is going to be found among the most global and
systematically important institutions. And again, they do
provide important services and it is not going to stop them
from being able to provide loans to small businesses, loans to
businesses of all size. But instead it is going to recalibrate,
for example, how their GSIB surcharge, the surcharge they face
because of the threat they pose to the rest of the economy gets
calculated in ways that better calibrate the risks that they
are actually posing.
Mr. LANDSMAN. So as I understand it, this will, or at least
your testimony is that the regulations will probably increase
the lending done by these community banks. I mean, more and
more folks are going to look to community banks for loans. What
will that do to the cost of capital. I am just trying to get at
the Chairman's question.
Ms. JUDGE. Yeah. So getting to the Chairman's question, I
think one of the ways we can try to get at it is, well, let's
look at what happened the last time we really increased capital
requirements. As the Chairman accurately noted, we really did
increase capital requirements after 2007 and 2008. We realized
they had been too low. So if you look at some of the key years,
the 2013 through the 2016-2017 period which is when the post
Dodd-Frank reforms were actually implemented and where you look
statistically bank capital levels were actually going out, if
you look at my written comments, a couple of economist have
done a really nice job of saying, well, what actually happened
to credit access during that period of time? Credit access
remained robust and the banking system played more of a role in
providing that credit.
Mr. LANDSMAN. Thank you.
I yield back.
Chairman MEUSER. Okay. The gentleman yields back.
I now recognize the Chairman of the Full Committee, Mr.
Williams, from the Great State of Texas, for 5 minutes of
questions.
Mr. WILLIAMS. Thank you, Mr. Chairman.
As we have discussed at length today, earlier this year the
Federal Reserve unveiled the Basel III proposal that changes
capital requirements for financial institutions. These proposed
changes will dramatically affect the banking community, and
there is concern that the revisions will have broad impacts on
small businesses' ability to access reliable credit and
increase overall borrowing costs.
So small businesses that rely heavily on loans and credit
lines from the banks of all sizes in order to sustain and
expand their operations. Implementing additional regulatory
capital requirements will slow economic growth and ``hinder
financial institutions'' ability to lend and quite frankly make
it easier maybe on banks not to make loans as to make loans.
So Ms. Wade, how will lending access to capital affect the
small business community?
Ms. WADE. Certainly. So small businesses rely on the
flexibility, a ``one size fits all'' regulation or regulatory
environment. It also includes the banking industry. Well,
certainly it impacts small firms' ability to access credit.
One of the areas of concern is also the added paperwork
burden and the process by which they are applying for credit
and that the process is being lengthened, the amount of
paperwork being required is increasing, and all of this affects
small business owners' ability to access credit.
Mr. WILLIAMS. No question. They find themselves hiring more
compliance officers than officers to do business.
Now, when businesses get to keep more of their hard-earned
money they reinvest it into their business, employees, and the
broader community. Excessive taxation prevents all the positive
things from happening.
The interest deductibility tax provision is a perfect
example of making it harder for business owners to make
strategic decisions when they are forced to treat interest as a
business expense.
So Mr. Chung, can you talk about some of the things that
you have been able to do for your employees or with the
strategic investments when you were able to keep more of your
profits instead of sending them to Washinton in taxes never to
be seen again?
Mr. CHUNG. Sure. And thank you for the question.
One of my mantras is ``People over profits.'' And my team
knows that. And so the profits that we generate in the company,
we reinvest within the team and within the business.
One of the programs we are currently evaluating right now
is an EAP program which will give our staff access to mental
health programs. However, one thing we have to take into
consideration or the reason we have not rolled out the program
as of yet is simply because of the uncertainty with the tax
provisions that are under discussion today.
Mr. WILLIAMS. Okay. The government does not understand if
we make money we do not save money; we spend money. And that is
why we need this.
As a small business owner for over 52 years I can tell you
that the Biden administration is completely out of touch with
Main Street America. Inflation is at a record high. Supply
chain disruptions leaving stores helves empty. Worker shortages
that are hindering business operations, and the constant threat
of tax hikes coming from democrats in Washington have business
owners concerned that they will not be able to compete in the
future.
So yet this administration, the Biden administration,
continues to create new and unnecessary regulations which
overwhelm businesses with more red tape and administrative
burdens. We cannot except small business owners whose resources
are already stretched thin to handle increased costs and
manhours that have come with increased regulations and
businesses are already working within tight margins and
compliance costs can be their tipping point.
So Ms. Wade, while we have time left, how have NFIB Members
been dealing with the massive web of new regulations coming out
of the Biden administration?
Ms. WADE. Certainly. It has been a huge challenge for small
business owners to navigate the new regulatory system that they
are required to comply with. And a lot of this is the time that
is required for the owner but also their employees. And
oftentimes, their most valuable employees to divert time into
figuring out how to comply and what they need to do to adjust
business operation. And time is one of the most valuable
resources of a small business owner and it is very limited
these days, especially in light of the labor shortage that many
are having to deal with.
So the regulatory environment, it is costly in a number of
ways. The dollar amount but also the time that is devoted
towards compliance and understanding what they need to do.
Mr. WILLIAMS. Well, the fact of the matter is--let the
competition work and let the consumer drive it, not the federal
government.
So I appreciate you being here. And with that I yield back.
Chairman MEUSER. The Chairman of the Full Committee yields
back.
I now recognize Representative Davids from Kansas for 5
minutes.
Ms. DAVIDS. Thank you, Chairman Meuser. And thank you to
you and to Ranking Member Landsman for holding the hearing
today.
Tax and capital access policy absolutely have a major
impact not just on small business owners' ability to make money
but their ability to hire, upgrade their company, and enhance
their products as well.
As financial regulations change and provisions from the Tax
Cuts and Jobs Act expire it is definitely important for our
community to understand how the nation's small businesses are
going to be impacted. It is also important that we do that in a
bipartisan way to continue supporting the financial stability
of these small businesses.
I have met with a lot of small businesses, with Chambers of
Commerce, and others in the greater Kansas City Metro area
which is where the Kansas 3rd District is. And certainly I have
heard a lot about the uncertain tax landscape facing many
business owners right now. Some of the provisions that would
specifically have a significant impact on main street companies
include, we have heard a bit about it already today, the
decrease in the accelerated deduction rate for major purchases,
how the adjusted taxable income is calculated, and then also
changes that small businesses are going to be facing with the
deduction of research and development expenses.
So there have been a number of us working on this. I have
been working with my Republican colleagues, particularly Tracy
Mann, who sits on this Committee as well, who serves on the
Small Business Committee as a whole, to try to figure out how
we can help address some of these uncertainties. And I know
small businesses are out there trying to figure out ways to get
capital, to hire new folks, and you know, some of what you guys
have been saying has really been resonating today.
So I wanted to ask a question of everyone. I am curious
what effects specifically we can expect for small businesses
when it comes to the tax provisions from the Tax Cuts and Jobs
Act that are about to expire.
Mr. Chung, I would very much like to hear from you first
about what specifically you are anticipating with those
expirations.
Mr. CHUNG. Thank you for the question.
To be clear, you are asking in terms of our strategic
growth what are we anticipating or what are we forecasting?
Ms. DAVIDS. Yeah. And I think specifically when we think
about some of the Tax Cuts and Jobs Act provisions that are
going to expire, what does that impact look like to you and how
are you anticipating navigating that if Congress is unable to
address that?
Mr. CHUNG. Sure. Well, I will put it in real-world
decisions. And real-world decisions would be simply we were
looking to build 30 more stores over the next 5 years. We have
now trimmed that down to five stores. And that is going to be
spread over 5 years until we understand what the landscape
looks like, which ultimately is a difference in about 500 jobs.
As I was explaining to another Member of the Committee as
well, we will also be looking at when and how we roll out
various programs for our employees, such as the EAP program.
Because of the constraints with budgets we will probably push
that back until we have some definition hereinto.
With that I yield back.
Ms. DAVIDS. Thank you.
Ms. Wade, do you have----
Ms. WADE. Yeah. So one of the biggest factors again is
their primary source of financing and reinvesting in their
business's profits. And so a huge tax hike for many small
business owners when this, if it expires, it will impact their
ability to grow their business and use those dollars to finance
their business.
One of the areas that I also think is going to be really
important are a lot of, especially the smaller businesses are
not going to be aware of the expiration and this huge tax hike
that they are going to have to absorb. And so it will be a
shock for them to have a larger tax liability at the end of the
year that they were not anticipating. So the uncertainty
element I think is very critical in understanding how this is
going to impact small firms and their inability to plan going
forward. But it will certainly limit their ability to invest in
their business.
Ms. DAVIDS. Thank you.
I am short on time so I will yield back. Thank you,
Chairman.
Chairman MEUSER. Thank you, Representative Davids, very
much for your questions. And thanks again to our testifiers.
I now recognize the fact that we are going to--what I think
we are going to do is pursuant to Committee rules, we are going
to do a second round for those who would like to participate at
any length of time under 5 minutes.
So to our Members, if you have one or two questions or if
you want to utilize your entirety of your 5 minutes, you are
free to do so.
I will start with myself. And I will recognize myself for 5
minutes.
So Mr. Chung, I want to come back to you. You mentioned you
were planning on 30 stores if it was a more vibrant economy and
you saw the returns and opportunities in a brighter manner.
What would you like to see that would create such a brighter
outlook for you from a tax regulation, access to capital
standpoint?
Mr. CHUNG. Thank you for the question, Chairman.
In regards to the deductibility standpoint, EBIDTA would
still be the status quo for considering what portion of
interest was deductible. That is how it was previously and that
is what we might need to maintain.
In regards to access to capital, we do need a vibrant
economy that does provide access to capital, simple
underwriting at various levels, whether it be large
institutional banks or smaller community banks. So access to
capital, stability in terms of the tax provisions, and keeping
the status quo.
Chairman MEUSER. Has your bank or banks and the bank that
you are a board member of, do you find that the so-called
banking crisis from a few months ago had any systematic effect
on smaller community banks?
Mr. CHUNG. Absolutely. In regards to deposits, we saw
deposits vacate some of the smaller community banks and be
consolidated into larger banks which caused many banks to make
tough decisions one way or the other. A very strategic
conditions one way or the other.
Chairman MEUSER. Okay. Yeah. I mean, we saw some of that
initially throughout my district, for instance, and banks that
I speak with. But it seems that it has kind of balanced out.
However, since those deposits have been lost, those assets have
been lost, making loans from community banks to our small
businesses, that much more selective; right? I mean, they will
certainly be more diligent for secure loans and perhaps because
the opportunity is there, where there is great demand, prices
go up. And so they can loan at higher costs, higher interest
rates even above and beyond where the Fed has gone with the Fed
rate. So that will happen. I mean, that is happening with
automobiles and it is certainly having an effect on where we
had a boom in automobiles. I mean, and now it is at 7, 8
percent interest rates. People are turning away from it. Our
housing market is really being struck hard in that manner.
So here we had a bailout. We will call it that of three
banks. We had a special assessment to make up for the $44
billion when the bailout occurred. So that is a whole another
story that larger banks are going to be facing. Interest rates
due to inflation and the causes of inflation are relatively
obvious. But the continued increase in energy costs, gasoline
is $4 a gallon. I mean, and such. So the interest rates. Now we
throw in there the increased capital requirements. So there is
a squeeze that will be taking place. We have 19 percent, Ms.
Wade, your Members, access to capital is something that is at
the top of the list particularly lately. And so the idea of
having capital requirement increases on banks to me just adds a
significant burden or additional obstacle for accessing such
capital. So they are going to be turning nontraditional lenders
where that is not as regulated and usually with higher
penalties for missing payments and all.
So Ms. Wade, why do you not comment on what your Members
think of a tighter lending environment.
Ms. WADE. Certainly. Well, they are currently facing a lot
of headwinds and challenges. And a lot of that is related to
cost increases in business operations. So the inflationary
pressures that they are experiencing right now, if there are
additional costs related to financing that is just another part
or a piece of absorbing higher costs in operating their
business that they will have to navigate.
Chairman MEUSER. Right.
Ms. WADE. And all of this makes it very challenging and
difficult for a small business owner to navigate, first,
because the business owner is the one who is having to make all
these decisions themselves generally speaking. So any increase
in costs on the financing front will certainly be a factor in
their ability to operate their business effectively.
Chairman MEUSER. Right. And banks over $100 billion need to
tighten up by 19 percent. Okay? That is not a small amount. It
will clearly drive those looking for such business loans to the
smaller banks who will then be more selective and be able to
charge stronger fees, so creating more competition, which tends
to be good, but when we are advocating for small business, and
small banks are small businesses, that competition, increased
demand increases prices. And more selective; right? Banks will
have the opportunity to be that much more selective in who they
extend loans to which again might be good but not so much for
our small businesses. And simply, less opportunity.
And Ms. Judge, later on perhaps you want to comment on that
but I am over my time and I yield back.
I will now yield to the Ranking Member, Mr. Landsman.
Mr. LANDSMAN. Thank you, Mr. Chair.
Ms. Judge, just a couple of questions.
The Basel III has been, you know, implemented in other
countries. Can you just talk a little bit about what that has
looked like? And then I am going to ask the questions and then
just hand it over time.
One is what the experience has been in other countries.
Number two is a little bit more focused on these regional
banks. So Ohio is home to three regional banks, Fifth Third,
Huntington, and Key Bank, who as a result of the proposal will
largely face the same capital standards as global systemic
banks. So from what I can see, we have got this ecosystem in
Ohio that is one to envy. So what changes would you suggest for
the proposed rule that could avoid any negative impacts from
the current draft as it relates to the regional banks?
So one, it has been implemented globally. Wha have we seen?
Two, you know, as I am looking out for our regional banks,
advice in terms of proposed changes.
Ms. JUDGE. Both great questions. I will take them in
opposite order. And again, I think the ecosystem in Ohio is
wind envy. I mean, I think you have a robust set of different
size banks and I think that is critical to providing a whole
variety of services to different types of businesses.
I actually think a lot of the reforms are meant to maintain
the health of that ecosystem over time. So if you think about
what California is going through right now, there are areas of
California where the two biggest regional banks imploded
precisely in an environment where credit standards are already
tightening and access to credit is becoming more strict and
more expensive. And so right when they need it they are dealing
with like the greatest disruptions.
So part of what they are really doing through all of the
different reform proposals, all of which are implemented very
incrementally over time, many of them not taking into full
effect for 5 years, others on a 3-year timeframe. 1:07:04xx
allow banks to use the capital they already have, to use their
accrued earnings so that there is no disruption even among
necessarily what large banks are doing. Certainly, not what
regional banks are doing to be able to become stable and
resilient. So we do not have huge losses to deposit 1:07:19xx,
but also so the banks continue to be there so they can continue
to service the small businesses and the other businesses. So I
would say when you are taking a longer term perspective, I
think the real aim here is to maintain that healthy ecosystem
and not have the unexpected disruptions that create uncertainty
and fear for small businesses and for others that has been a
concern running throughout the hearing.
And with respect to other countries, they have not
implemented, and it actually really goes to the process through
which the standards were promulgated. These are standards that
came out of discussions as part of the Basel Committee. And
part of what is really interesting there is it is an effort
among different jurisdictions that say let's really learn what
is the best thing that we can do. And yes, the U.S. has a huge
voice there. Europe also has a huge voice there. Europe is
actually more reliant on small- and mid-size enterprises. They
are a bigger part of the economy and they are more reliant on
banks. And so these were standards that through years of
research and testing were decided to be like these are the best
overall standards that we can come up with to try to balance
out the need for resilience while also wanting to make sure the
banks have the freedom that they need to be able to really make
loans in good times and bad and to support the real economy.
So I think what we have really seen is there is actually no
easy answers in terms of impact but on a whole it looks like it
has been able to be completely consistent with ongoing and
important support for businesses.
Mr. LANDSMAN. And you have got a minute left.
On the regional banks as I am thinking about them, are
there proposed changes to the rule that you would offer? And
this could be just generally speaking. It does not have to
apply just to regional banks.
Ms. JUDGE. No. I think the real key is going to be what is
the timeframe for implementation because it is true as has been
alluded to numerous times, you do not want to tighten
expectations during periods of distress. But you also do not
want to not adopt the rules that are actually going to have the
healthiest banking system possible. I think right now there is
probably adequate leeway and I bet on calls where a lot of bank
analysts have said that given the timeframe there is the
ability for the market to absorb the type of changes that lie
ahead. That being said, you do want to make sure that you are
not doing this in a way that could adversely impact lending. It
does not seem likely but I think paying close attention to that
is going to be important.
Mr. LANDSMAN. Thank you very much. And I yield back.
Chairman MEUSER. The Ranking Member yields back.
I now recognize Representative Alford from Missouri for 5
minutes.
Mr. ALFORD. Thank you, Mr. Chairman. I appreciate it. And
thank you to the witnesses for being here today.
A very important hearing for our Subcommittee. I have said
it before, and I am going to say it again that America's
greatest economy in my lifetime really under President Trump
thanks to the Tax Cuts and Jobs Act. A record number of small
businesses were opening. The American dream was in reach for
many more people than now. A crucial component for small
businesses is capital and access to capital has been a
challenge for a lot of people. This is especially true for the
rural small business community in Missouri's 4th Congressional
District. Simply put, we have banking deserts there. I have
seen it firsthand. In our Small Business Committee hearing
earlier, I was proud to have a rural small business owner
sitting where you are now. Her name is Jennifer Cassaday. She
testified about starting up her business and financial
resources, they just were not available to her when she was
first starting out. So she had to turn to family for financial
support. By the way, she has a great business thriving right
now but it could have been a lot different. She could have had
help from financial resources.
Unfortunately, the landscape for small businesses
continually worsens as we see the TCJ provisions expiring and
supervisors making borrowing more difficult and less
affordable. The latest from Basel III will increase capital
requirements and therefore tighten lending during a time that
small businesses need it the most in America.
Ms. Wade, thank you for being here today. You note in your
testimony that H.R. 4721, the Main Street Tax Certainty Act
will provide relief and tax certainty to small businesses. This
bill would make permanent a provision in the TCJA that helps
small businesses. I am a proud cosponsor of this bill.
You also mention that regulatory burdens and red tape from
the Biden administration and using the SBA Offices of Advocacy,
you touch on that. Can you expand on that? Just how important
is H.R. 4721?
Ms. WADE. It is incredibly important for the ability of
small business owners to continue to operate and grow their
business. They are under some really challenging headwinds
right now with inflation and worker shortage and all of that.
And having some certainty that their taxes will not increase in
a couple years will go a long way to allow them the room to
grow and operate their business. The Tax Cuts and Jobs Act was
a huge help for small business owners to retain more of their
profits to then use those profits to invest in their business.
And that was where we saw, you know, some huge optimism that we
track in our Small Business Economic Trend Survey, and small
business owners, you know, felt confident going forward that
they would be able to maintain business operations and even
grow their business if they found the opportunity. But those
expirations of those key provisions, especially the 20 percent
small business deduction that they are able to benefit from now
will be a huge tax increase for them if it does expire and will
impair their ability to reinvest in their business and grow.
Mr. ALFORD. You also talked about the cost of borrowing,
the concern of small business owners. Can you talk about how
the cost of financing can really inhibit small business growth?
And also talk about in the minute 20 that we have left, what
does this mean for people wanting to start a business, much
less those who are already committed their family's time and
treasure to get a business going in America?
Ms. WADE. Absolutely. So the increased cost of financing
will be another hurdle that they will have to absorb those cost
increases. But then also, you know, having to figure out
whether it is worth the increased financing costs to purchase
that new equipment or purchase that other building and whether
that return on investment is worth it in this higher interest
rate environment. And so the cost of financing is going to
impact their decisions on how to grow and expand their business
or reinvest in their business.
For those starting out, capital is paramount. And so their
inability to afford financing if available to them to start a
business is a huge hurdle for those who want to bring their
ideas and creativity to the marketplace. In starting a
business, financing will be a crucial role in that.
Mr. ALFORD. Ms. Wade, thank you. And I yield back.
Chairman MEUSER. The gentleman yields back.
Well, I think that concludes our hearing. I would like to
thank our witnesses for your testimony and for certainly making
the trip and appearing before us today.
Without objection, Members have 5 legislative days to
submit additional materials and written questions for the
witnesses to the Chair which will be forwarded to the
witnesses. I ask the witnesses to please respond promptly.
If there is no further business, without objection, this
Committee is adjourned.
[Whereupon, at 11:11 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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