Paying Their Fair Share: How Tax Hikes Crush the Competitiveness of Small Businesses
Summary
The printed record of the House Committee on Small Business hearing "Paying Their Fair Share: How Tax Hikes Crush the Competitiveness of Small Businesses," convened April 18, 2023, Small Business Committee Document Number 118-008. Chairman Roger Williams opposes a proposed additional 5 percent surtax, submits an NFIB petition signed by over 11,000 small businesses, and criticizes $80 billion in new IRS funding in the Inflation Reduction Act. Ranking Member Nydia Velazquez says 8 percent of those taking the 199A pass-through deduction had income over $500,000 yet received two-thirds of the $36.5 billion tax benefit. Witnesses came from Withum, the Texas Farm Bureau, a Pennsylvania accounting firm and Small Business for America's Future. The record adds material from the National Association of Manufacturers and the National Taxpayers Union.
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
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[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
PAYING THEIR FAIR SHARE: HOW TAX HIKES
CRUSH THE COMPETITIVENESS OF SMALL
BUSINESSES
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
APRIL 18, 2023
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-008
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
51-814 WASHINGTON : 2023
-----------------------------------------------------------------------------------
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. Roger Williams.............................................. 1
Hon. Nydia Velazquez............................................. 3
WITNESSES
Ms. Lynn Mucenski Keck, Principal & National Lead, Federal Tax
Policy, Withum, Bethesda, MD................................... 6
Mr. Russell Boening, President, Texas Farm Bureau, Waco, TX...... 8
Mr. Warren Hudak, President, Hudak & Company, Camp Hill, PA...... 9
Ms. Anne Zimmerman, Founder & Owner/Co-Chair of Small Business
for America's Future, Zimmerman & Co CPAs Inc., Cincinnati, OH. 11
APPENDIX
Prepared Statements:
Ms. Lynn Mucenski Keck, Principal & National Lead, Federal
Tax Policy, Withum, Bethesda, MD........................... 41
Mr. Russell Boening, President, Texas Farm Bureau, Waco, TX.. 35
Mr. Warren Hudak, President, Hudak & Company, Camp Hill, PA.. 54
Ms. Anne Zimmerman, Founder & Owner/Co-Chair of Small
Business for America's Future, Zimmerman & Co CPAs Inc.,
Cincinnati, OH............................................. 60
Questions and Answers for the Record:
Questions from Hon. Mfume and Answers from Ms. Zimmerman..... 66
Additional Material for the Record:
American Rental Association.................................. 70
American University.......................................... 74
National Association of Manufacturers........................ 80
National Federation of Independent Business.................. 85
National Taxpayers Union..................................... 219
Small Business Majority...................................... 225
Small Software Business Coalition............................ 227
PAYING THEIR FAIR SHARE: HOW TAX HIKES CRUSH THE COMPETITIVENESS OF
SMALL BUSINESSES
----------
WEDNESDAY, APRIL 18, 2023
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 2:00 p.m., in Room
2360, Rayburn House Office Building, Hon. Roger Williams
[chairman of the Committee] presiding.
Present: Representatives Williams, Luetkemeyer, Alford,
Stauber, Meuser, Bean, Van Duyne, Ellzey, Mann, LaLota,
Velazquez, Mfume, Landsman, Gluesenkamp Perez, Scholten,
Thanedar, Chu, Davids, and Pappas.
Chairman WILLIAMS. I want to welcome everybody here. And
before we get started I want to ask everyone to stand for the
Pledge of Allegiance and a quick prayer.
I pledge allegiance to the flag of the United Sates of
America. And to the Republic for which it stands, one nation,
under God, indivisible, with liberty and justice for all.
Please bow your head.
Heavenly Father, God of all people, thank you for allowing
us to be here today to have dialogue, to have debate about how
to make this great country better. In your name we pray. Amen.
I now call the Committee on Small Business to order.
Without objection, the Chair is authorized to declare a
recess of the Committee at any time.
I now recognize myself for an opening statement.
Good afternoon, and welcome to today's hearing where we
will be examining the tax landscape for small business. First,
I want to thank our witnesses for joining us today. Your time
here is greatly appreciated.
This hearing could not come at a more important time for
Main Street America. Our nation's small businesses are facing
unprecedented levels of inflation, interest rates that are
being raised at the fastest pace since the 1980s, a labor
shortage that has windows plastered with Help Wanted signs
across the country, and now an increasingly uncertain credit
environment.
As a small business deal with these economic headwinds, it
is imperative that our tax code works for our nation's job
creators, not against them. When businesses can keep more of
their hard-earned money, they hire more people and invest more
into their operations.
In 2017, Republicans passed the most significant changes to
the tax code in decades. This legislation allowed small
businesses to save on tax bills and benefitted families of all
income brackets. Today, we will hear firsthand accounts of the
many success stories from this major update to our nation's tax
code for small businesses in a variety of industries.
As this law ages, some of the provisions are beginning to
expire or have their benefits reduced. It is imperative that we
begin looking at this law and find the provisions that helped
main street the most, such as lowering individual income tax
rates that helped 70 percent of all small businesses that are
organized as pass through entities. There are many more
successful provisions such as the one that I hope we explore in
greater depth here today.
This hearing will also highlight the stark tax policy
differences between the two major parties here in Washington,
D.C. My democratic colleagues repeatedly use the phrase ``make
them pay their fair share'' while talking about the tax code.
This simplified talking point dumbs down the intricacies of
some of the most consequential policies that come out of
Washington and ignores many of the unintended costs of any tax
increase that Congress makes. This difference can be seen by
anyone willing to dig through President Biden's proposed
budget. According to the Tax Foundation, if all the changes
were made there would be trillions in new taxes. GDP would
shrink by over 1 percent, and in the long term there would be
fewer jobs for all Americans.
One of the most harmful proposals is an additional 5
percent surtax on small businesses that the White House claims
is closing a tax loophole. This could not be further from the
truth and could be devastating for small businesses. And I am
going to submit this petition right here, led by the NFIB for
the record, with the signatures of over 11,000 small businesses
that put together in a short amount of time that calls the
administration out for this disastrous policy proposal.
Additionally included in the democratic misnamed Inflation
Reduction Act there was an additional $80 billion in new
funding to the IRS. With these new funds, the agency is poised
to be more aggressively toward auditing America's small
business. And today I hope we can dig deeper into what it means
for small businesses when we have an IRS working overtime to
target American job creators.
Here on the Committee of Small Business, I promise we will
be working to create an environment where businesses can thrive
and grow. We are eager to find solutions that will help pave a
path towards success for both now and the future and it starts
by enacting pro-growth policies.
In addition to the NFIB letter, I would like to submit the
following letters and testimony for the record.
A letter from the National Association of Manufacturers
that highlights how manufacturers hired more workers, increased
wages, and invested in their businesses following TCGA;
A letter signed by 597 small software businesses from the
50 states regarding immediate R&D expensing;
And testimony from the National Taxpayers Union
highlighting the TCGA Biden tax increases and the IRS.
I want to thank all of you again for being here with us
today, and I am looking forward to today's conversation.
And with that I will yield to our distinguished Ranking
Member from New York, Ms. Velazquez, for her opening remarks.
Ms. VELAZQUEZ. Thank you, Mr. Chairman, for holding this
hearing.
Main street businesses form the bedrock of our nation's
economy, driving innovation and job creation, even during
periods of economic turmoil and uncertainty. Regrettably,
despite the fundamental importance of small firms, recent tax
reform has catered to the interests of wealthy individuals and
large corporations instead of American entrepreneurs.
Small businesses require certainty and simplicity to
compete. However, our convoluted and onerous tax code creates
an overwhelming burden for these businesses. Small firms
typically do not have tax professionals on staff and must spend
substantial funds on outsourcing their tax preparation.
Unfortunately, the 2017 tax law did little to simplify the
tax code. Instead, it contributed to greater complexity and
diminishing returns for small firms. Even tax provisions aimed
at helping small firms, such as the pass-through deduction,
ended up disproportionately benefiting the wealthy.
While only 8 percent of those who took advantage of the
199A pass-through deduction last year had income over $500,000,
that 8 percent accumulated two-thirds of the $36.5 billion tax
benefit. This is particularly striking given the average income
of a small business owner is roughly $70,000 per year. The 2017
tax law saddled entrepreneurs with more complexity and
uncertainty by making the small business provisions in the bill
temporary while making corporate tax cuts permanent.
The fact of the matter is that when it comes to cutting
taxes, here small businesses are an afterthought.
Over the past several years, evidence has emerged
confirming the warnings that the wealthy benefit
disproportionately from this law. Corporate profits have surged
to record heights, as has corporate tax avoidance, often at the
expense of higher prices for American households.
This abuse has led to a growing concentration of economic
power, fostering corporate monopolies that use their extensive
market share to crush the competitiveness of small firms.
From offshore tax shelters to local economic development
incentives, large corporations leverage these loopholes to
undermine small businesses.
That is why I was encouraged to see that IRS and Treasury
have pledged not to use additional enforcement funds, passed as
part of the Inflation Reduction Act, to increase audit rates of
people that make under $400,000 per year. Instead, they will
focus their efforts on high-income noncompliance, leveling the
playing field for our nation's small employers.
Additionally, I applaud their commitment to using these
funds to help modernize their systems and to help businesses
meet their obligations and access eligible tax incentives. This
is a crucial step in creating a fair and level competitive
landscape for small firms.
Lastly, we should not ignore the budgetary consequences of
the 2017 law, which has significantly contributed to soaring
fiscal deficits. We now find ourselves only weeks away from a
potential default on the national debt, which threatens to
plunge small businesses into uncertainty and potentially
trigger a devastating economic recession.
If Congress truly wants to help small firms, we must start
working with them to simplify the tax code to bring real
reforms that make a meaningful impact to their ability to
comply and operate. It is my hope that today's hearing will
allow us to start a dialogue to start the process of building a
better tax framework for our country's small firms.
I thank the witnesses for testifying and providing their
valuable perspective.
Thank you, Mr. Chairman. I yield back.
Chairman WILLIAMS. Thank you, Ms. Velazquez.
And now we will introduce our witnesses.
And may I call you Lynn to begin with? Can you tell me how
to say your last name?
Ms. MUCENSKI KECK. Mucenski Keck.
Chairman WILLIAMS. Mucenski Keck?
Ms. MUCENSKI KECK. You got it.
Chairman WILLIAMS. Okay. The pleasure this afternoon to
introduce our first witness, Ms. Lynn Mucenski Keck. She has
over 20 years of tax accounting experience and is currently the
National Lead of the Federal Tax Policy at Withum, an advisory
accounting firm. At Withum, she focuses on domestic tax
planning for businesses, and in her previous job she worked on
business implementation practices surrounding major pieces of
congressional legislation, including the 2020 CARES Act and the
2017 Tax Cuts and Jobs Act. She has received her bachelor of
science degree in accounting from St. John Fisher College and a
master's in taxation from the University of Denver. Lynn is a
CPA, licensed in New York, and a Member of the American
Institute of Certified Public Accountants. Previously, she was
an associate accounting professor at St. John Fisher College.
As a contributor for Forbes, Lynn writes extensively on the
impact that potential congressional legislation would have on
the business community.
I want to say thank you, Lynn, for joining the Committee
today, and I am looking forward to today's important
conversation. So thank you very much.
I now want to recognize my colleague, Representative Ellzey
to briefly introduce the next witness who is appearing before
us today.
Mr. ELLZEY. Thank you, Mr. Chairman.
It is my honor to introduce the Committee's next witness,
my good friend, Russell Boening.
Hi, Russell. I am down here on the end, the new guy.
Russell is a fourth-generation farmer and native of Texas.
He is a full-time farmer and rancher from Wilson County, and he
and his family grow feed grains, cotton, and wheat, have a beef
cattle operation, and a dairy operation. That is no small task.
Russell is president of the Texas Farm Bureau, which
probably represents 535,000 Texas Members. Having been elected
as president of Texas Farm Bureau in 2014, Russell was first
elected to the Bureau's Board of Directors in 2008 and then as
secretary/treasurer in 2011. Previously, Russell was chosen as
the Bureau's Outstanding Young Farmer--that was many years
ago--and Rancher in 1986. He has held every office in the
Wilson County Farm Bureau Board spanning across 30 years, and
of course, it goes without saying, but I will say it, he is an
Aggie. I did not hear the whoop. All right. After graduating
from Texas A&M in 1981, Russell jumped right into his family's
farm business, Boening Brothers Dairy. His work centered on
business management and marketing for the dairy and beef
production side of his family's business. Russell's extensive
experience in family farming and lifelong service to the Texas
Farm Bureau makes him an expert witness in tax policy and
examining its impact it has on everyday small farms in America.
Not just in Texas, but everywhere. He understands firsthand the
contribution farmers and ranchers make to this country in
feeding the world, in fact, and he has dedicated his life to
being one of those and to serving others.
Russell, thank you for joining the Committee this
afternoon, and I am looking forward to our conversation.
Mr. Chairman and Members, welcome Mr. Russell Boening.
Chairman WILLIAMS. I now recognize my colleague,
Representative Meuser, to briefly introduce the next witness
who is appearing before us today.
Mr. MEUSER. Well, thank you very much, Mr. Chairman. It is
my honor to introduce my friend, Mr. Warren Hudak to the
Committee. Mr. Hudak is president of Hudak & Company, small
business accounting firm based just outside of my district in
Harrisburg, Pennsylvania, where he specializes in tax,
accounting, and consulting advice. And he is also involved in a
whole lot of leadership on community projects. In addition to
being a small business owner himself, over 90 percent of Mr.
Hudak's clients are small businesses as well. Mr. Hudak founded
his business after serving in the U.S. Navy and gaining over 20
years of accounting and business consulting experience. He is
also a Penn State graduate and holds a bachelor of science
degree in accounting. As well as being president of his small
business and having served in the Navy, Mr. Hudak has also
served his local community as stated in various ways. He has
held roles as Chairman of the board and president of the
Harrisburg Junior Chamber of Commerce, the Penn State Urban
Youth Development Committee, as a Member of the Pennsylvania
Chamber of Commerce, and various roles within the NFIB and
others. With his vast experience, Mr. Hudak understands
firsthand and can speak to how small businesses are impacted by
higher costs, whether it be through higher taxes or through an
increase in regulatory compliance costs. I thank Mr. Hudak and
all of our witnesses for joining us here this afternoon.
I yield back, Mr. Chairman.
Chairman WILLIAMS. I now recognize my colleague, Ranking
Member Velazquez, to briefly introduce the next witness who is
appearing before us today.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Our final witness is Ms. Anne Zimmerman, Founder and Owner
of Zimmerman & Co. CPAs, a public accounting firm with offices
in Cleveland and Cincinnati. Since the mid-1980s, she has
provided financial and tax services to small businesses and
individuals and acts as the offsite CFO for many businesses.
Since 2017, Ms. Zimmerman has served as Co-Chair for Small
Businesses for America's Future, a nonprofit focused on
ensuring that policymakers prioritize main street by advancing
a just and equitable economic framework that works for small
business owners, their employees, and their community.
Thank you, Ms. Zimmerman. We look forward to hearing your
testimony.
Chairman WILLIAMS. And I would like to say for all of us,
we appreciate again all of you being here today.
I now recognize Ms. Mucenski Keck, Lynn, for your 5 minute
opening remarks.
STATEMENTS OF LYNN MUCENSKI KECK, PRINCIPAL AND NATIONAL LEAD,
FEDERAL TAX POLICY, WITHUM; RUSSELL BOENING, PRESIDENT, TEXAS
FARM BUREAU; WARREN HUDAK, PRESIDENT, HUDAK AND COMPANY; ANNE
ZIMMERMAN, FOUNDER AND OWNER, CO-CHAIR OF SMALL BUSINESS FOR
AMERICA'S FUTURE, ZIMMERMAN AND CO. CPAS, INC.
STATEMENT OF LYNN MUCENSKI KECK
Ms. MUCENSKI KECK. Chairman Williams, Ranking Member
Velazquez, and other Members of the Committee, thank you for
the opportunity to testify today.
My name is Lynn Mucenski Keck, and I help lead the federal
tax policy practice for Withum, a top 25 national accounting
firm with over 2,200 team members. I have been a tax accountant
for over 20 years.
Part of my responsibilities include monitoring and
disseminating information to clients regarding current and
pending federal tax legislation. I appreciate the opportunity
to offer my insights as to how existing and proposed tax
policies are impacting privately owned businesses.
Many business owners today are feeling overwhelmed. They
are still recovering from the pandemic. They are now facing
higher supply costs and growing labor shortage, as well as
rising interest rates. Changes included in the Tax Cuts and
Jobs Act that did not take effect until the 2022 and 2023
taxable year are making things worse. These changes, including
the tightening of the interest expense limitation and the
required capitalization of R&E costs have confused my clients.
Their business operations are the same, yet their taxable
income under these new policies are skyrocketing. Even when a
business's debt structure undergoes no significant changes, its
owners are surprised to learn that they are not allowed to
deduct the full amount of their interest expense. That is
because starting with the 2022 tax year, the 30 percent
limitation now applies after deducting depreciation and
amortization. This change forces businesses to disallow even
more interest expense than ever. And with the rising interest
rates the impact is even worse.
Meanwhile, businesses making R&E investments are baffled by
new rules that allow for only 10 percent of R&E expenses
incurred in the 2022 year to be deducted with the remaining
costs being spread over 5 years if it is domestic research, or
15 years if it is research performed overseas.
This policy is in direct contradiction to the treatment of
R&E expenses in other developed countries. For example, United
Kingdom and China allow a 230 percent and 175 percent super
deduction, respectively.
As reflected in my written testimony, these changes have
drastically increased taxable income of businesses. The example
shows the same operations of a pass-through business owner in
2021 versus 2023, reflected an increase in taxable income over
47 percent and increases federal tax due of 70 percent.
The common reaction from business owners facing these tax
hikes is frustration accompanied by dread on how they will find
the additional funding to pay their tax bills.
To fix this, I strongly encourage Congress to revert to the
2021 Interest Expense Tax Limitation calculation and Congress
should also act to restore the immediate expensing of R&E
expenditures and allow the U.S. to remain the world leader in
innovation and technology.
My clients are confronting these tax increases right now
but they are also fearful of proposed tax legislations being
considered by Congress. One of the most prominent concerns
regards the pass-through deduction. The critical deduction is
scheduled to sunset at the end of the 2025 taxable year. Recent
proposals would limit the business owners to making less than
$400,000 to receive the deduction or just eliminate the
deduction all together.
It is important to remember why the pass-through deduction
exists. It was enacted as part of the TCJA to provide parity
between pass-through entity owners, those who make up the
majority of small businesses, and C corporations. With the C
corporation tax rate dramatically decreasing from 25 to 21
percent, pass-through owners needed relief to remain a viable
option for business owners. This parity was accomplished
through the 20 percent pass-through deduction. The deduction
allows some taxpayers of pass-through businesses to decrease
their tax rate from 37 percent to 30 percent. Not all pass-
through owners receive the 20 percent deduction, and the
application of a pass-through deduction is far more complicated
than the simple tax rate deduction C corporations receive.
Absent the pass-through deduction, however, the effective
tax rate on small business owners will increase as much as 7
percentage points. For small business owners who must
immediately pay tax on their earnings even if they receive no
cash distributions from the company, a 7 percentage point
increase is severe. It is imperative that the pass-through
deduction remains. Instead of threatening to eliminate pass-
through deductions, Congress should make it permanent just like
the C corporation rate.
With all these changes and looming proposals, I fear we are
reaching a tipping point where the government is no longer
incentivizing small businesses to assist in growing the U.S.
economy, but is instead limiting the operations or forcing them
to shut down all together.
Restoring R&E expensing, increasing the interest deduction
cap, and making permanent pass-through deduction would reverse
this trend and help these businesses invest and create jobs in
the United States.
I appreciate the Chairman and the Committee for considering
the impact of tax legislation on small business and I would be
happy to take any questions.
Chairman WILLIAMS. Thank you very much.
And now I recognize Mr. Boening for his 5 minute opening
remarks.
STATEMENT OF RUSSELL BOENING
Mr. BOENING. Chairman Williams, Ranking Member Velazquez,
and Members of the Committee, as stated in my introduction, we
do farm and ranch around southeast of San Antonio, and I really
appreciate the opportunity to be here today on this important
topic.
Farmers and ranchers across our state and across this
country continue navigating challenges that we all face--high
input prices, inflation, weather, volatile commodity prices,
among other things.
When adjusted for inflation, 2023 net farm income is
expected to decrease by $30.5 billion, or 18.2 percent, from
2022. The average age of the American farmer and rancher is 60
years old with more than a third being at retirement age. It is
estimated that more than 370 million acres, or 40 percent of
all farmland, will trade hands over the next 15 years. The men
and women that work hard to provide the food and fiber of this
country and want to pass their operations on to the next
generation. Any additional tax burden on them would put our
national food security at risk, increase consolidation in our
industry, and quite frankly, make America more reliant on
foreign countries.
President Biden's budget puts farmers, ranchers, and small
businesses squarely in the crosshairs. For instance, the
president's budget calls for the elimination of stepped-up
basis and doubling the rate that capital gains are taxed. These
changes combined with the proposed revisions to the death tax
law would result in $280 billion in tax increases over the next
decade.
I am a fourth-generation farmer who has been fortunate
enough to hold on to our family property. We have navigated
challenges over the years. My family, and those before us, have
worked hard to continue operating. Taking away stepped-up basis
would devastate my family and many other farmers and ranchers
across the country. Stepped-up basis has helped us pass our
land from one generation to the next because as we well know,
it values the farm at the time of inheritance. If this tool is
eliminated, and I pass away, my children would be forced to pay
taxes on appreciation from the previous generation.
Taking our state for an example, population pressure has
driven up land values very high, yet left farmers and ranchers
no more liquid than they historically have been. To put a finer
point on the pressure of that land out of production, since
2014, 4 million acres have left ag production in the state of
Texas, a reduction of 3 percent. Nationally, in those 8 years,
nearly 20 million acres have been taken out of production.
The tax increases in the president's budget proposal would
leave our children with a tax bill that will likely leave them
no choice but to sell the property or at least part of it. To
make matters worse, this additional tax burden would come on
top of paying the death tax. Of course, this assumes there will
still be an estate left to tax after paying capital gains on
the assets of the estate. That means upon my death, after
paying staggering capital gains taxes, the federal government
would claim up to 40 percent of the taxable estate from my
children. We feel this is a cruel way to generate tax revenue
to pay for the president's budget proposals.
Many people think that the death tax only affects the
wealthy. That is ill advised. We all know that farming and
ranching is a land-rich, cash-poor business model. A farmer or
rancher might be worth several million dollars, but a vast
majority is in land and farming equipment, with only a fraction
being money in the bank.
Thanks to the 2017 Tax Cuts and Jobs Act, the estate tax
exemption was doubled from $11 million per couple to $22
million, which helped prevent most family farms from paying the
tax. The president's budget would cut that exemption rate back
to $11 million per couple, saddling American farm and ranch
families with a devastating tax burden, often forcing them to
sell their property. The lower the exemption level, the more ag
land you put at risk of being sold off to the highest bidder.
To put it simply, death should not be a taxable event.
Texas Farm Bureau advocates for abolishing the estate tax, or
at a minimum, ensuring the current exemption rate set forth by
the Tax Cuts and Jobs Act does not expire.
There are other important provisions in the Tax Cuts and
Jobs Act. This includes reduced pass-through tax rates,
expanded brackets, and the Section 199A 20 percent business
income deduction. We feel like those should be extended.
We call on Congress and the administration to work together
across the aisle to make these provisions permanent and combat
these tax increases. Family farms and ranches are the building
block for a secure America. We must fight for a tax code that
provides for their future, not one that puts them in jeopardy.
Thank you again for the opportunity to be here.
Chairman WILLIAMS. Thank you very much.
And now I recognize Mr. Hudak for his 5 minute opening
remarks.
STATEMENT OF WARREN HUDAK
Mr. HUDAK. Good afternoon, Members of the House Small
Business Committee. Thank you for inviting me to testify on Tax
Day as an accountant.
My name is Warren Hudak. I am president of Hudak and
Company, an accounting and payroll firm in Camp Hill,
Pennsylvania. We have 11 employees and 90 percent of our
customers are small business owners. We provide full resources
small businesses would expect from a large accounting firm,
while maintaining a personal touch.
Our job is to work with small business clients to translate
the complicated Federal tax code and frequently changing tax
provisions. This challenge comes on top of other economic
problems that small businesses are facing, which include high
inflation and pervasive workforce shortages, the inability to
get competent labor. We also face these challenges as our labor
costs are up 40 percent, our software costs have tripled since
the pandemic began.
Small businesses face an uncertain future that makes
business planning extremely difficult. Beginning this year,
certain business provisions of the Tax Cuts and Jobs Act of
2017 expire or wind down. In fewer than 3 years, the vast
majority of the provisions that benefit individuals and small
businesses will also expire. If Congress fails to act, there
will be a detrimental tax increase on millions of small
businesses.
Further, proposals to increase taxes on businesses cloud
optimism and also complicate business planning. Finally, small
business paperwork burden is increasing while the IRS
disproportionately expands enforcement efforts over customer
improvements.
Small businesses received significant tax savings upon
enactment of the 2017 tax law. For the more than three-quarters
of our businesses organized as pass-throughs, the 20 percent
business deduction, also known as Section 199A, combined with
the lower individual tax rates and broader income tax brackets,
provided tax relief that was invested in businesses and
employees. All these provisions expire at the end of 2025.
In 2017, the tax law also contained provisions that
encouraged business investment by allowing for immediate
deduction of equipment and R&D costs. Two of these provisions
expire and wind down this year. R&D expensing is a big deal
when cashflow is tight, which is currently happening due to
inflation and rising interest rates.
The sooner that these beneficial deductions or rates are
extended, the better small businesses will be able to plan.
Further clouding business planning are the proposed tax
increases. President Biden's budget request would increase
taxes on small businesses organized as corporations and pass-
throughs. While small businesses may not be impacted by those
proposed tax changes every year, they will impact when they
have profitable years or when they sell their business to fund
their retirement or when they pass along their business to the
next generation.
The budget request describes certain tax increases
misleading, like closing loopholes. One example of this
mischaracterization is a proposal to expand the 3.8 percent
``Net Investment Income Tax'' (NIIT) to active business and
increase the tax rate to 5 percent. It would deliberate policy
choice to exempt active business income from the tax. As former
President Obama's economic advisor Jason Furman described, it
was not applied to active business income, ``because it could
be demonized as a tax on small businesses and doctors.''
Nothing has changed.
A deliberate policy choice is not a loophole. The proposed
expansion of the tax would more than double the revenue
collected, further demonstrating that the tax increase proposal
is not closing a loophole. If it is enacted, this substantial
tax increase would reduce the ability of pass-through
businesses to invest in their businesses and employees and
leave them further disadvantaged relative to larger
corporations.
The Inflation Reduction Act provided nearly $80 billion in
new funding for the IRS, primarily focused on enforcement.
Unfortunately, only 4 percent of that funding was designated
for customer service, which is in need of significant
improvement.
Small business owners are concerned about increased
enforcement efforts. The continued backlog of tax returns, the
combination of increased paperwork and data privacy, there have
been many improvements in reducing the IRS's historic
processing backlog but it remains considerable. Paperwork
burdens are expanding as Form 100K and beneficial ownership
reporting begin next year. Outreach and education efforts on
these new requirements are lacking. Nobody knows about these.
I also remain concerned about the ability of the IRS to
protect personal information, and I worry about prepopulating
returns could exacerbate privacy risks. I encourage continued
oversight of this IRS expansion and the potential impacts of
small business.
Congress can help mitigate economic challenges by expanding
beneficial small tax proposals, reducing red tape, rejecting
tax increases on small businesses. Certainly will help
businesses plan and increase small business optimism.
Thank you for the opportunity to be here today.
Chairman WILLIAMS. Thank you.
And now I recognize Ms. Zimmerman for her 5 minute opening
remarks.
STATEMENT OF ANNE ZIMMERMAN
Ms. ZIMMERMAN. Good afternoon, Chairman Williams, Ranking
Member Velazquez, and Members of the Committee. Thank you for
the opportunity to speak to you today.
My name is Anne Zimmerman, and I am a CPA and president and
founder of Zimmerman and Co. CPAs, with offices in Cincinnati
and Cleveland, Ohio. I am also the Co-Chair of Small Business
for America's Future, a national coalition of small business
owners and leaders working to give the small business community
a voice at every level of the government.
As a small business owner myself, I take great pleasure in
supporting other small businesses. Every Friday, my grandson AJ
and I have a special tradition of treating ourselves to creamy
whips on our way home from school. For those of you not from
Ohio, creamy whips are soft serve ice cream.
We will not be able to enjoy that fun ritual this week
because that small business we have grown fond of closed on
Sunday.
While unfortunate, this is not uncommon. This experience
highlights the vulnerability of small businesses during their
early years. With a record 10.2 million new small businesses
since 2021, establishing a fair tax code is crucial for their
success and for the country to capitalize on the potential
economic activity that this boom in entrepreneurship could
deliver.
The Tax Cuts and Jobs Act (TCJA) has primarily benefitted
large corporations, offering them a permanent 40 percent cut in
their rate, while small businesses received a temporary 20
percent deduction instead. Extending the current small business
deduction beyond 2025 would permanently enshrine these tax
inequities, maintaining an unfair advantage for large
corporations.
A public opinion poll conducted for Small Business for
America's Future by Morning Consult in 2019 found that changes
in the tax code from the TCJA did not significantly help small
businesses grow or invest. Almost half of small businesses said
the new tax law had no impact on their growth or profitability,
while 24 percent said it had a negative impact. Only 19 percent
of owners said the law had a positive impact on their business.
I have a few ideas about how the tax code can foster small
business success.
First, create a tax credit for hiring the first employee
which would surely foster job growth.
Second, make the first $25,000 in business profits tax free
to strengthen truly small businesses.
Next, let's rebalance the TCJA cuts, reversing a small
portion of big businesses' 40 percent cuts to pay for improved
permanent cuts for small business.
Next, let's simplify tax compliance and improve IRS
customer service, including bringing back support for tax code
technical help for small business owners.
Implement a minimum tax on corporate book income which
would not impact most small businesses but would certainly
level the playing field.
Moreover, it is crucial to avoid destabilizing political
fights, such as using the debt ceiling as leverage. Such
tactics disproportionately affect small businesses and impede
their ability to thrive, create jobs, and drive innovation.
In conclusion, I urge Congress to create a more equitable
tax system that genuinely supports small businesses and fosters
a stable economic environment, rather than merely extending the
TCJA. Ensuring the well-being of small businesses is essential
to this endeavor, and essential to making sure creamy whip
stores, like the one AJ and I loved, can keep serving up smiles
in communities across the country.
Thank you so much for your time and consideration.
Chairman WILLIAMS. Thank you.
We will now move to the Member questions, and I recognize
myself for 5 minutes.
I want to talk about the death tax because it is something
that directly affected me when my father passed away in 1990.
He left me with a bunch of assets but no cash. Shortly after
his passing, the IRS was reaching out to collect the estate tax
which was 55 percent at the time. The tax bill was so high I
considered selling our successful family business in order to
cover the expense. Instead, I hired an accountant to see what
my options were and we made an agreement with the IRS to cover
the tax liability over time. And after over a decade, right
before the start of 2001, I made the last tax payment from his
passing. Imagine what we could have done if we were able to
invest that money back into our business for 10 years. We could
have hired more people. We could have updated facilities. We
could have donated more to schools and churches, but instead it
went to the federal government for a deficit.
So my story is not unique. This tax affects so many
Americans across the country. We have heard that already today.
And success should be rewarded so people can build wealth for
their families to pass along to future generations rather than
be hit with this duplicative tax bill that sends a significant
portion back to the federal government.
So Mr. Boening, my question, can you discuss the
implications that the death has for the many farmers and
ranchers who are Members of the Texas Farm Bureau?
Mr. BOENING. Thank you, Chairman Williams, for that
question.
Yes, I think I can. While the testimony was going on and
the death taxes was one that was mentioned several times, you
know, I mentioned the way things have grown in Texas and we
have seen it, you have seen it in your area, and there are
farms and ranches that are operating in areas that are of high
growth. And it does not take long for--and I am just using
examples that I am familiar with--it does not take long for
land to get to $10,000 an acre, $12,000, $15,000 an acre. We
are talking about ag land and farmers and ranchers that are
farming it. So, you know, it is pretty easy math. A 2,000 acre
farm all of a sudden is worth $20 million. And that sounds like
a lot of money, and it is a lot of money if you want to sell
it, but farmers and ranchers do not necessarily want to sell
it.
Chairman WILLIAMS. A lot of people do not understand if you
have an asset it is frozen. It is not liquid. That is the
problem.
Mr. BOENING. And so the death tax is just, you know, and
the way I look at it as well, those are assets that you have
already paid tax on. So, it would be devasting to farmers and
ranchers.
Chairman WILLIAMS. Thank you. Thank you.
One component of the Tax Cuts and Jobs Act that I want to
highlight was the full and immediate expensing provision. For
those that do not know, this allowed businesses to write off
the full cost of equipment at the time it is purchased rather
than throughout the life cycle of the asset. This helps the
small business owner in a variety of ways. It helps suppliers
because it makes businesses more likely to invest in heavy
equipment which in turn helps provide customers the best
products and services from the best equipment. It also helps
workers do their jobs effectively and efficiently.
So briefly, Ms. Mucenski Keck, can you talk about what the
private sector's reaction has been to this provision? And can
you discuss what you expect to happen if this provision
continues to decrease every year until it eventually is down to
zero?
Ms. MUCENSKI KECK. Thank you for the question.
I think it is a very important part of how small businesses
learn to operate. And the fact that oftentimes they may not be
able to afford that piece of equipment for their property or
for their business, but because of the 100 percent expensing
they can indeed use that offset for cash purposes to help them
get to the cash needed to purchase the actual equipment, which
as pointed out would help them operate their business more
successfully and employ more people.
With the increasing reduction of the bonus depreciation of
how we refer to it in the tax world, you are going to
essentially cause a lot more businesses to second guess buying
additional equipment and expanding their businesses because
they just do not have the cash payment to go out and buy the
piece of machinery that they need.
Chairman WILLIAMS. Thank you for that.
Quickly, one of the most well-known components of the tax
bill was the cutting of individual income tax rates. We have
talked about that already today. This helps small businesses
that were organized as pass-through entities and allowed
customers to keep more of their hard-earned money. Consumer
spending drives growth and this provision delivered.
So quickly, Mr. Hudak, can you discuss how your business
benefitted from the tax cuts and what you saw some of your
customers do with their increase in savings? You have got about
34 seconds.
Mr. HUDAK. All of our customers and us invest in property
and equipment. It was a game changer for us. The lower rates
enabled us the cashflow necessary to grow and increase our
business.
I would like to make one comment on your previous question.
We had a shop provider say I can afford the $400,000 piece of
equipment but I cannot afford the $80,000 tax bill.
Chairman WILLIAMS. Thank you very much.
And with that now I recognize the Ranking Member for 5
minutes of questions.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Ms. Mucenski Keck, thank you for your testimony and
pointing out the upcoming tax hikes built into the 2017 tax
law. Just to clarify, I was wondering which political party
drafted the tax codes and Jobs Act? When Republicans wrote this
act, they did it without hearings and they built in a lot of
these tax hikes that you are discussing today, like the
expiration of the individual rate cuts, the deduction for pass-
through entities, and the phase out of bonus depreciation and
179 expensing.
Can you tell me, Ms. Mucenski Keck, why they have to build
in these cliffs and sunsets?
Ms. MUCENSKI KECK. Sure. I believe that both parties have
used the Budget Reconciliation Act to pass tax law, and
unfortunately, it is the people like us on the other side of
the aisle that are faced to deal with the expiring provisions.
So within the budget reconciliation, we know that they cannot
pass the law with the majority needed within Congress so they
have to go through a budget reconciliation process. That
process requires that no additional deficit be added after a
10-year period, and so we have these sunset provisions. And we
have seen both parties, both Democrat and Republican parties
use the budget reconciliation process to pass tax law.
Ms. VELAZQUEZ. The fact of the matter is that people are
talking about how these provisions that are going to expire are
impacting small businesses where those provisions were included
in the bill by the Republicans. They were the ones who passed
this bill.
To pass this law on a party line vote they have to build
tax hikes, which primarily impact small businesses while the
provisions that benefitted the big corporations and the
wealthiest, they were made permanent. That was a choice that
was made by the Republicans. As a result, the original tax law
gave massive tax cuts to the largest corporations.
Can you tell me how this impacts the ability of small
businesses to compete?
Ms. MUCENSKI KECK. I think, I just want to make sure I am
understanding the question. I think the Tax Cuts and Jobs Act
was a good bill for small business. I think 199A, I think the
reduction in the tax cuts I think it was absolutely well
received and still wanted for business. I cannot comment on how
legislation can be bipartisan to make those complete I think is
the question.
Ms. VELAZQUEZ. Well, the issue here is that a choice was
made to make provisions that benefited the large corporations
and the wealthiest permanent while they sunsetted provisions
impacting small businesses. The benefits for small businesses
are coming to an end in 2025.
Ms. MUCENSKI KECK. But I do think there are provisions in
there that do affect large businesses, so the interest expense
limitation is a huge limitation that is also going to impact
large C corporations, and we also had a fair amount of
international tax legislation that was changed, as you know.
That is also impacting large C corporations.
Ms. VELAZQUEZ. Small businesses that by the way, when it
comes to doing business overseas, when it comes to trade, they
only have one client. So those types of changes did not impact
the 70,000 small businesses in our communities.
Ms. Zimmerman, small businesses need certainty to compete
in the marketplace. While corporate rates were made permanent
by the 2017 law, the individual rates and pass-through cuts
expire in 2025. Does this uncertainty affect the behavior of
small businesses?
Ms. ZIMMERMAN. Thank you for the question. Absolutely. The
uncertainty of not knowing what things will look like causes
problems when you are hiring, planning, innovating. The
uncertainty, when you talk about uncertainty, also you have to
look at the issue now with the debt ceiling. There is nothing
that is causing us, me, more uncertainty with my business than
wondering whether we are going to default on our debt. And we
need to resolve that as soon as possible just to let the
economic climate settle down.
Ms. VELAZQUEZ. How does underfunding the IRS hurt small
firms?
Ms. ZIMMERMAN. Well, small business owners try to be
compliant. And they need that support. It is a disproportionate
amount of audits and all for the small taxpayer because it is
too expensive and not enough personnel and training for the
large taxpayers. The funding for the IRS will increase customer
service and educate small business. Even maybe set up a small
business hotline.
Ms. VELAZQUEZ. My time has expired. Thank you so much.
Ms. ZIMMERMAN. Thank you.
Chairman WILLIAMS. Thank you, Ms. Velazquez.
And now I recognize Congressman Luetkemeyer from the Great
State of Missouri for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Ms. Mucenski Keck, you know, you are an accountant and you
followed a lot of folks, I am sure, when the Tax Cuts and Jobs
Act was passed. What did the people do with those dollars? Did
they take them and go to the bar and blow them? Did they go on
vacation? Did they go buy some fancy clothes? What did they do
with those dollars, the small businesses?
Ms. MUCENSKI KECK. So the first thing I would say is a 10-
year window, believe it or not, is significant for taxes. So
knowing that small businesses--not we, but small businesses
would have the availability to have that for a 10-year period
was significant. And there was planning. There was planning in
how they were going to potentially transition to family Members
because oftentimes they are family-owned businesses. There was
planning though more importantly of how to expand, how to
build, how to reinvest. And those dollars allowed them to do
that. And I think that that is the parity we are talking about
when we talk about the difference between pass-through small
businesses and C corporations.
Mr. LUETKEMEYER. Mr. Hudak, how about your customers, your
clients? What did they do with those dollars that they got to
save that they did not remember the tax dollars are actually
their dollars. It is not the government's dollars. It is their
dollars they got to keep. The small businesses got to keep
them. The individuals got to keep them. What did your clients
do with those dollars?
Mr. HUDAK. No small business owner wakes up in the morning
wanting to be a tiny guy; right? They all have dreams, big
dreams, and they want to get to the next rung on the ladder.
And that is what they used the money for, dream bigger than
ever before.
Mr. LUETKEMEYER. Did they use it to hire more people,
expand their business, go out and buy another piece of
property?
Mr. HUDAK. Absolutely. Plant, property and equipment.
Mr. LUETKEMEYER. Buy new equipment, whatever?
Mr. HUDAK. Absolutely. Plant, property, and equipment, 100
percent.
Mr. LUETKEMEYER. They reinvested it. They did not go blow
it on stuff?
Mr. HUDAK. Not a single one.
Mr. LUETKEMEYER. Thank you.
Mr. Boening, when you got your tax cut, what did you do
with your dollars? I will guarantee you as a farmer you did not
go out and buy you a brand new pickup truck and put a whole
bunch of stuff on the outside of it.
Mr. BOENING. Well, to be honest, we might have bought a new
tractor.
Mr. LUETKEMEYER. New tractor, yes.
Mr. BOENING. If you needed a new tractor.
Mr. LUETKEMEYER. That is a piece of equipment you need.
Mr. BOENING. But the second thing, it has been alluded to,
you know, we invested in equipment. You know, and if you can
possibly add some land or something, if you can hire another
person or two, labor is always a tough situation so that is not
always possible. But yeah, we invested back in the business.
Mr. LUETKEMEYER. So the point being that these tax dollars
that were left in the people's pockets, they were left in the
small business pockets, were reinvested. And allowed our
economy to grow at a record pace. If everybody can recall, just
2 or 3 years ago, the government has record revenues coming in,
and still today has record revenues coming in I would argue as
a result of the Tax Cuts and Jobs Act. We had record across the
board wage growth for every single demographic in this country.
Across the board everybody got a nice wage bump. A real growth
as a result of minimum inflation and increased actual real
growth in your wages.
It is nice to see that we had some folks that actually used
those dollars wisely. The American people, I think you can
trust them with their own money. Remember, it is their money by
the way.
Ms. Mucenski Keck, you had a comment a while ago with
regards to an R&D deduction. I would like to go a little bit
farther on that if you would not mind talking about that just a
little bit more because that is really important. Small
businesses are where a lot of innovation is, and the Chairman
has worked hard on this issue to make sure the dollars are
there for the SBA to help support small businesses get started.
Can you help us with that? Explain how important it is to small
business with this R&D deduction.
Ms. MUCENSKI KECK. So for those who might be unfamiliar,
the R&E originally, if you invested in research technology or
expenditures you were immediately take them as a deduction when
calculating taxable income. Under the new law, or the revised
law, if you are conducting that research in the U.S., it has to
be spread over 5 years. If you are conducting that research in
foreign lands, over 15. Personally, we have had companies say
they think they are going to have to go out of business because
they cannot afford their tax bill. It is immensely difficult
and challenging. I cannot tell you on average how many calls I
take a day where this has become an issue where they are
frustrated, cannot believe that it is happening, that we would
put ourselves, the United States, behind other economically
developed countries in placing R&E solo. But also, and the fact
that they are not positive they are going to have enough taxes
to pay their tax bill and they might literally have to shut
down the doors.
Mr. LUETKEMEYER. Okay. Thank you.
I just have a couple seconds left. Let me just make a final
comment here.
What you are saying is that when you raise taxes, to the
extent that the individual or small business cannot even pay
it, it will force them out of business. And then what happens?
You have consolidation. It makes the big guys bigger and all
the little guys go home. And this is exactly what we do not
want to have in this country.
With that, Mr. Chairman, I yield back.
Chairman WILLIAMS. Thank you.
I now recognize Ms. Gluesenkamp Perez for 5 minutes, from
Washington. From Washington State.
Ms. GLUESENKAMP PEREZ. Thank you, Mr. Chairman.
Ms. Zimmerman, I am very pro corporation. I have owned two
of them, an auto repair and a machine shop. And like many small
business owners with eight employees, I worked hard every year
to figure out how much taxes I paid and how to do it the right
way. I think we can all agree that our tax policies should be
based in fairness. Small businesses and working people have
something to contribute. They work hard to pay their fair
share. Corporations and the wealthy should also pay their fair
share. But what we see is a system that rewards certain kinds
of work over other kinds of work. Small business owners are out
here busting our knuckles making things, getting things from A
to B, and making payroll. Yet, the wealthy earn their income in
ways that are taxed differently and often more favorably than
the backbreaking work done by small businesses. This is unfair
and it is demoralizing frankly to small business owners who are
playing by the rules and doing everything right.
What reforms should Congress consider to level the playing
field for small businesses and ensure the wealthy pay their
fair share?
Ms. ZIMMERMAN. In my oral testimony I did suggest a few and
I can tell you part of this is because of the different size of
small business. The SBA recognizes a small business as less
than 500 employees. We represent and work with small businesses
who have, like you have, eight. I have 10. Maybe up to 50. A
few of them are 100 if they are manufacturing. And they are not
getting rich off these tax codes. They are not, we are not able
to save enough to even reinvest. Why did I, a small business
owner, get half the tax cut of the large corporations in 2017?
And if you just renew that as is, you are just making prominent
that inequity. It makes absolutely no sense to me why I got
half. So that is why things like a credit for the first
employee hired or the first $25,000 tax free. A minimum tax on
book income. Make it low but make it fair so small business can
survive. True small business.
Ms. GLUESENKAMP PEREZ. Are there any other key provisions
you think should be prioritized in tax reform to better support
small businesses and help them grow? Particularly the many
millions of new businesses that started during the pandemic?
Ms. ZIMMERMAN. Well, when you look at the 10 million that
have started since the beginning of the pandemic, they did not
start with 500 employees relying on R&D credits to survive.
They are mom and pop shops starting up and that sort of thing.
I think funding the IRS. It is so unfunded. Their technology is
behind the private sector continually. Not to date myself, but
we used to be able to call the IRS and talk about tax law and
discuss how we are handling something. You cannot do that
anymore. All you can do is say did I pay my tax? Did my client
pay my tax? What about a small business hotline? Small business
owners want to be compliant. Help them.
Ms. GLUESENKAMP PEREZ. Thank you so much.
Mr. Chairman, I yield back.
Chairman WILLIAMS. I now recognize Mr. Meuser from the
Great State of Pennsylvania for 5 minutes.
Mr. MEUSER. Well, I thank you very much, Mr. Chairman.
Again, thank you to our witnesses. Very important hearing we
are having here today.
I spent a fair amount of time, over 20 years, helping grow
a small business into a larger business, and all of my
customers were businesses, much like my friend Warren, just
dealing with and working with small businesses for most of my
adult life.
Small businesses, and all of you deal with a lot; right?
Not just taxes. I mean, you deal with workforce shortages. You
deal with the creditworthiness of your customers. You deal with
training and skill development, hiring, insurance, cost of
goods, purchasing, payables, inventory needs, cash flow,
dealing with the banks, access to capital, new higher interest
rates. The list goes on. Today, we are here talking the effect
of small businesses. And it seems that the TCGA, the Tax Cuts
and Jobs Act is coming up quite a bit.
So I work with a lot of chambers all the time and certainly
being on this Committee and within my district. And I have not
had one small business tell me that, boy, that Tax Cuts and
Jobs Act was somehow burdening me in some way. You know,
lowering my taxes. So I want to get into this, and also, I have
not had anyone tell me that the IRS increase was adding,
doubling the size of the IRS was something in their interest. I
am also the former revenue secretary for the Commonwealth of
Pennsylvania and that was not the answer to increase, not at
all to increase revenues. The answer is driving tax compliance,
and definitely processing and systems which we did. Not 87,000
new IRS agents.
Mr. Hudak, do you think all these new IRS agents is going
to be something that is somehow help your business?
Mr. HUDAK. Well, to be clear, just a few years ago I
testified in this very Committee on increasing funding for the
IRS. They destroyed 13 million information tax returns. When
the inspector general said where did they go? They said we were
shorthanded. We knew we would never get to them. When my client
put in an installment agreement directly with the IRS and they
put it together improperly, poor training. There are a lot of
great people at the IRS. Congress has asked them to do too
much. The tax code is for collecting taxes. The more we dilute
their ability to do that function the more problems we are
going to have. It is compliance. We need simplicity of
certainty. Not more rules. Not more laws. And to be clear, I
testified on the House Ways and Means Committee right after the
2008 crisis and we were trying to repatriate trillions of
dollars. That did not happen until we reduced corporate rates.
Mr. MEUSER. Exactly.
Mr. HUDAK. And it deployed trillions of dollars into our
economy with the efficiency of the private sector. We need more
of that kind of policy.
Mr. MEUSER. Well said. And also more management. Fifty-two
percent of the IRS agents have yet to show up for work. They
continue to work remotely, which certainly does not help all
the backlogs that exist.
And also, just onto the C corps that we are referring to
here, how they got a better share of the taxes, you obviously,
small businesses very often sell to larger corporations and the
fact that they have been repatriated and they are domesticated
more so than before, a 21 percent rate only allowed us to be
competitive on a worldwide scale where Ireland, where the
president just got back from and touted how wonderful their
economy is doing, has a 12 percent corporate tax rate.
But anyway, because there is reality and then there is the
fictional side of things. So let's just get back to what is
important to you all. That is what we are here for. We have
depreciation that is currently being sunsetted and being phased
out. We have the small business tax cut. We have the R&D tax
credit that has now been phased out for this year. That has
been extended, by the way, for 2023 is my understanding. What
portion of taxes do you need us to pass in a bipartisan way,
because that is the only way you get things done. Okay, so the
Tax Cuts and Jobs Act does not increase taxes it has been
alluded to, so we must keep those small business taxes. Which
ones, Ms. Keck, would you like us to see?
Ms. MUCENSKI KECK. I would like to see the pass-through
deduction for small business owners be kept. It is imperative
for them to receive that 7 percentage points as it exists now.
It would be even greater if the individual income tax rate goes
up to 39.6. It is imperative for them to utilize that savings
to keep their businesses afloat.
Mr. MEUSER. Thank you. And certainly within your testimony
as we saw--my time has expired and I yield back, Mr. Chairman.
Chairman WILLIAMS. Thank you.
I now recognize Ms. Chu, from the Great State of
California, for 5 minutes.
Ms. CHU. Well, I know how the Tax Cuts and Jobs Act came
about because in addition to serving on the Small Business
Committee, I am also a Member of the Ways and Means Committee,
which is responsible for writing our nation's tax laws. And I
was there in 2017 when Republicans pushed through their rushed
partisan Tax Cuts and Jobs Act with no hearings, just a markup,
and the text revealed only at the last minute. And it was when
we saw that text that we saw firsthand that their goal was to
lower taxes for the wealthiest individuals and the largest
corporations. And that is why TCGA made the corporate tax cut
permanent while provisions for small businesses and individuals
were only temporary.
And even the Republicans said that some provisions were
targeted at main street and small businesses because of the
burdensome requirements this 20 percent qualified business
income deduction for pass-throughs benefitted main the top 1
percent of the businesses. In fact, the Joint Committee on
Taxation estimates that in 2024, 61 percent of the benefits
will go towards the top 1 percent which is about like those
businesses with incomes above $500,000. And businesses in the
bottom two-thirds of income will only get 4 percent of the
benefit. That is because TCGA made it harder for small
businesses to navigate the tax code and take advantage of these
deductions.
So it is time for us to move past TCGA and create a fairer
tax code that works for small businesses, workers, and
families, instead of the wealthy and large corporations.
And Ms. Zimmerman, I truly appreciate you talking about
some provisions that could actually help small businesses. And
I especially thank you for mentioning the Progress Act because
I am actually the sponsor of it and I will introduce it,
reintroduce it in the coming months. It would support the
smallest businesses, those without any employees by both
helping them expand and incentivize third-party investment.
Specifically, it would create a refundable payroll tax credit
for nonemployer firms that hire their first full-time employee.
Nonemployer firms are more likely to be owned by women and
female entrepreneurs on average start out with roughly half the
capital as male entrepreneurs.
So Ms. Zimmerman, can you talk about how using the tax code
could help nonemployer firms hire their first employee and how
that could improve the outcome for workers in small businesses?
Ms. ZIMMERMAN. Certainly. It is a big leap of faith to hire
your first employee and to move forward. I remember when I
first moved out of the house and added a person. It is scary.
Getting a credit for that makes it possible to perhaps do it a
little sooner.
And the TCJA, we were added as an afterthought for the 20
percent deduction. And they did not even consider that the
smallest C corporations got a tax rate increase when that law
was passed.
We have one client that I can tell you about that earns
about $45,000. They are a C corp. That is their profit. The
owner makes about $85,000. The TCJA increased their federal tax
bill $2,700 because it eliminated the graduated rates. They
used to be at a 15 percent rate. Now they are at a 21 percent
rate. So the flat tax, all the money went to the upper side and
the wealthy. And small businesses were left out.
The credit for hiring your first employee, the standard
deduction for a business, the IRS education to help small
businesses be compliant without having to hire accountants and
lawyers is what is going to take it to the next level so that
small businesses can thrive and innovate for this country. And
we brought us out of the last recession. We, small businesses.
We created 75 percent of the new jobs. And the Wall Street
Journal just recently said that small business is actually
responsible for 100 percent of the new employment in this
country since the pandemic. We cannot be an afterthought next
time. We need to do the work and change the law before you
reenact.
Ms. CHU. Thank you for those eloquent words.
And I yield back.
Chairman WILLIAMS. Thank you.
I now recognize Mr. Hunt from the Great State of Texas for
5 minutes.
Mr. HUNT. Thank you, Mr. Chairman. And I want to thank the
witnesses for being here. Thank you so much for your time.
It is my opinion that the federal government needs to get
out of your way as much as possible to allow you to do your
jobs, to allow you to provide for America, to allow you to
provide for the world. And at this point we are living in a
world to where we are trying to punish our hardworking
Americans every single day with more onerous government taxes.
It is my opinion that the federal government should be taxing
you as little as possible because we are, We the People, this
is our money and we are investing it back into the government
and we should allow you to keep it so you can invest back into
your businesses.
That is just an overall principle that I believe in, and I
feel like it differs from many of my friends on the left. Also,
if you are a rancher and a farmer in this country, God bless
you. Thank you. Thank you for providing for this country. I
cannot thank you enough.
And so my first question is actually for my fellow Texan,
Mr. Boening. If Congress fails to act and lets the provision of
the 2017 Tax Cuts and Jobs Act expire, what will be at stake
for Texas farmers and ranchers, sir?
Mr. BOENING. Thank you for that question, Congressman Hunt.
I guess quite simply, more and more of them will be at risk
of going out of business. Their tax bill will go up and if you
cannot pay your taxes, and it was pointed out earlier by other
folks here on the panel, I mean, you choose from paying the tax
bill or going out of business. And those things that we have
talked about today, the stepped up basis and where your capital
rate is taxed and the death tax, they are hugely important in
agriculture. They will make the difference between that
operation continuing or not continuing quite frankly.
Mr. HUNT. And so, you talk about this death tax, and I
oftentimes hear, you know, last year I heard a company or an
industry, they had record profits. The first thing I think to
myself is, hot damn, that is really good. Yeah, that is called
capitalism. And oftentimes these record profits make up for
losses in previous years. And so I think that is kind of what
you are getting at if I am not mistaken; right, sir?
Mr. BOENING. Yes, sir. Yes, sir.
Mr. HUNT. Could you also please kind of talk about what
audits do. Audits from the IRS, do they help spur economic
growth? And do they allow small businesses to flourish?
Mr. BOENING. You know, I guess we all will agree that
audits are necessary at times.
Mr. HUNT. Of course.
Mr. BOENING. And we are not going to, but no, they take
away resources and time that the owners of the business would
be spending on their business. You know, both time resources
and money resources. So no, they do not spur economic growth.
You know, there is no way that that would work. But again, they
are not something that we look forward to. We know they are a
necessary evil. But no, they do not spur economic growth.
Mr. HUNT. Again, I just want to thank you all for being
here. Greatly appreciate it. Those are my only questions but I
am blessed to have you all around here. I am blessed to have
you in my presence. I want to work, and we want to continue to
work as much as we can for you. It is not the other way around.
We work for you; not the other way around. It is my goal and
our goal, at least on this side, to make sure that we allow you
to keep as much in your own pockets so you can reinvest in your
own lives, in your own families, in your own companies moving
forward for the future.
And with that, Mr. Chairman, I yield back. Thank you very
much.
Chairman WILLIAMS. Thank you.
I now recognize Mr. Pappas from the Great State of New
Hampshire, for 5 minutes.
Mr. PAPPAS. Thank you very much, Mr. Chairman. I appreciate
the conversation here today.
And Ms. Mucenski Keck, I wanted to start with you with a
question. I appreciate the way that you highlighted the change
in the Tax Cuts and Jobs Act as it pertains to research and
experimentation expenses. I have heard directly from businesses
in my home state of New Hampshire on this including one in
Hanover. It is a small business that has seen their tax
lability more than double in this tax year. And obviously,
there are implications to that sort of a change on their
operations and their ability to innovate over time.
Just to underscore, this is a change in tax law that
contradicts 70 years of prior law where all R&E expenditures
were immediately expensed in the year accrued. And so
discouraging the risk-taking needed for innovation will
certainly have negative impacts on entrepreneurial startups and
small technology businesses.
Clearly, the time to address this was before today, which
is Tax Day. That is why you have certainly been hearing about
it as businesses have been filing their taxes this year. But I
know that legislation will soon be introduced in the house, a
bipartisan bill that I will cosponsor because I am hopeful that
we will be able to address this in this tax year and
potentially even make it retroactive to help provide some
predictability to this issue moving forward.
Could you just, you have already addressed it, businesses
that might be forced to close their doors over this. But talk
about the environment around innovation and technology in the
United States and how crucial this particular provision is.
Ms. MUCENSKI KECK. Thank you. I appreciate the question.
It is absolutely vital that we continue with the research
and experimental expenditures. I do not think everyone actually
realizes how expansive they are across industry groups. We are
not just talking about pharmaceutical companies or tech
companies. We are talking about engineering companies. We are
talking about agriculture, plant growers. It is really
something that if we want to keep in the United States at the
top of our game for lack of better terminology, we need to give
them at least the tax deduction while a variety of other
economically developed companies are giving them much, much
more. And so if we want to attract and maintain our research in
the United States, it is going imperative that that deduction
goes back to 100 percent.
Mr. PAPPAS. Well, thank you for those comments, and I
certainly hope that Congress will focus on this issue and find
a fix to it this year.
Ms. Zimmerman, maybe I could turn to you. I am the co-owner
of a fourth generation family business in New Hampshire. We
have been open 106 years. It is certainly a challenging
environment to operate a small business. We have lived through
a global pandemic. We are seeing supply chain disruptions,
workforce challenges. And obviously, as we move forward, we
need to ensure that the tax code is fair, t hat it encourages
small business growth and sustainability.
One provision that I have worked to address is eliminating
the federal excise tax that is levied on heavy duty trucks and
trailers. It is something that I have heard from small
businesses in my district. It stifles their ability to be able
to procure new equipment and cleaner and safer trucks out on
the roadways.
But I am just wondering more generally if you could talk
about the tax environment for our small main street businesses
and where we should be looking this Congress to help make
things a little bit easier.
Ms. ZIMMERMAN. Thank you. Yes.
Where I would be looking is to give us certainty. That
matters. To level the playing field rather than just renewing
what is already out there. Again, small business
proportionately should have the same advantages that large
businesses do. And as a CPA, I think the IRS funding, we need
better customer service. We need modernization. And audits,
while a necessary part of life, they spur compliance. There is
no question. The lower the rates go, the more we believe that
we are losing into the coffers, which means we need higher
rates for those of us that are honest. And I believe most small
business owners are honest and try to be compliant and are not
necessarily afraid of that. I do not see a huge increasing
worrying them.
Mr. PAPPAS. Well, thanks for those comments. I think every
congressional office increasingly hears from constituents,
including small business owners that are struggling with issues
around the IRS. They have been asked through the pandemic
period not just to do more with less but to do it at an
extraordinary time in our history. And certainly, we have got
to make sure that customer service improves, that people get
their returns processed, and get their refunds and tax credits
when they need them. That is really important for the small
business world. So thanks for those comments and I yield back
my time, Mr. Chair.
Chairman WILLIAMS. I recognize now Mr. Alford from the
Great State of Missouri for 5 minutes.
Mr. ALFORD. Thank you, Mr. Chairman, and thank you Ranking
Member Velazquez for holding this important hearing today.
Good to see you all, especially from Texas. I am a native
Texan, so glad to have you. I have not seen this many Stetsons
in one room since Leddy's down in the Fort Worth Stockyard. So
good to see you all today.
I firmly believe that America experienced its greatest
economy in my lifetime under President Trump. And it was no
coincidence, really. It was thanks to the Tax Cuts and Jobs Act
of 2017. The TCJA allowed Americans to take the leap,
businesses to flourish. It allowed our country to move forward
as one nation under God. It ushered in hope. It ushered in the
reality of the American dream once again, as small business
owners around the country were all living their own version of
that American dream.
But now, just after really 2 years of the Biden
administration it has turned into a nightmare. Small businesses
are struggling with record inflation, labor shortages, supply
chain issues, and all these factors severely hurt the
competitiveness of our small businesses.
The 2024 budget proposal has no intention of waking us up
from this nightmare. It proposes another $1.8 trillion in new
taxes and fails to address the TCJA's expiring provisions.
Allowing those provisions to expire and increasing taxes will
only hurt the competitiveness of small businesses. It will
crush them, the jobs that they provide, and the communities
that they serve. It is going to chill the hope and reality of
the American dream once again that we all saw was a real
possibility just a few years ago.
So I want to get to the question. I wanted to start with
Mr. Boening. Thank you so much for being here today. Thank you
for your service as the president of the Texas Farm Bureau.
Missouri, I am proud to say, has the second highest number of
farms in the nation, 95,000, but we are outdone with Texas
there. I am also proud to sit on the House Ag Committee along
with Aaron here and some other Members. And it is great because
farmers are small business owners. And this Biden proposal
calls for $77 billion in death tax increases. All right? How do
you see this impacting family farms and ranchers?
Mr. BOENING. Thank you. Thank you for the question,
Congressman.
You know, I alluded to it earlier. Agriculture, you can go
ahead and use the words land-rich, cash-poor business model. It
is. It always has been. And whenever, land is one of your most
important capital investments. You know, often you lease land
when you are getting started normally in your operation, and if
you are able to acquire land you do that over the years. And
then like I said, land in Texas, as it has in many other parts
of this great country has increased dramatically.
Mr. ALFORD. Skyrocketed.
Mr. BOENING. And to have the size operation that is a full-
time farmer ranch that will support maybe your family, some
extended family, and then a few employees, it takes quite a bit
of land. And then if you want that operation to continue, how
does it continue if it is going to be taxed at 40 percent when
you pass away? It just does not make sense. We go back to the
same mantra; death should not be a taxable event. So that would
be my comment.
Mr. ALFORD. Well, I hope it is not the death knell on
family farmers because that is what it is looking like if we
revert to this.
Mr. Hudak, your firm focuses on small business accounting
in addition to farming. We have a lot of other small businesses
in our district in the Great State of Missouri. And I met with
a lot of those business owners, listened to their concerns. It
is really heartening to hear all they do through the
investment, the time, money, the energy they put into being a
success. They reinvest in our community every day and every
chance they can get.
From what you have seen, do businesses typically just sit
on a pile of money when they pass, when they pay less taxes? Or
what do they do with that money?
Mr. HUDAK. They invest in plant, property, and equipment
always. But it is not about the tax bill. When we are talking
about the death tax, what we are doing is we are preserving a
way of life. A small business owner wakes up every single day,
and some days he is the only one who thinks it is going to work
out. Not the wife, not the dog, not the in-laws. They wake up
and everybody says you have got to stop. This is crazy. What
are you doing to yourself? They believe every single day. They
are the only ones who believe. They have heart. They have soul.
They are the backbone of America. We are not talking about
taxes. We are talking about preserving a way of life. On the
left and the right. And I hear both sides agreeing on all of
this stuff. Forget about the personalities. Let's focus on what
we agree on. Because without agreement, there can be no
certainty.
Mr. ALFORD. Thank you, sir. Thank you, Mr. Chairman.
Chairman WILLIAMS. I now recognize Mr. Thanedar, I am
sorry, from the Great State of Michigan for 5 minutes.
Mr. THANEDAR. Thank you, Chairman.
Since, and again, this discussion is music to my ears
because I am a former small business owner and serial
entrepreneur. So I am just excited to be here.
But since the Tax Cuts and Jobs Act of 2017, small
businesses have been placed at a disadvantage, especially in
paying higher taxes and navigating the cumbersome tax code.
Contrary, the tax cuts were a gift to large corporations. They
have leveraged their resources and fleet of lawyers from paying
their fair share and routinely exploit loopholes. As a result
of the Inflation Reduction Act, the IRS will be bolstering
through increased funding to mitigate tax cheats and ensure
that fairness is omnipresent in our business environment.
So I have a question, Ms. Zimmerman, if I may. Most would
agree the tax code should not pick winners and losers.
Unfortunately, it seems that the 2017 tax law did just that.
That by cutting the corporate tax rate from 35 to 21 percent,
would you say that the structure of the tax cuts is more
beneficial to corporations as opposed to small businesses? And
what impact does it have on inequity, inequality?
Ms. ZIMMERMAN. Absolutely. I, like you, am a serial
entrepreneur. It is in my blood. And that is why I talk about
the unlevel playing field. That we did not get the same
reductions. The answer is it hurt equity. It means that the gap
between the truly wealthy and middle class has widened. Most
small business owners, and again, there are a lot of
definitions of small business, but most small business owners
from the Small Business for America's Future, I told you that
we concentrate on smaller businesses. They are almost all
middle-class. They are lifestyle businesses. They are working
to support their families, feed them, maybe send them to school
if they get lucky. And they did not get near the break. They
did not get near the break that the large corporations did. And
I am asking that we rebalance that. We restore, reverse just a
slight portion of the larger corporation rates to be able to
give a fairer rate to small business.
We also got a very complex law that was thrown on us at the
last minute because they said, oh, no, we forgot the little
guy. Right? And so it became so complex, it limits who can take
it. Right? It takes more work to get it. It is not just a rate
cut.
Mr. THANEDAR. Thank you, Ms. Zimmerman.
Also, the 2017 law affected different businesses in
different ways. However, as someone who is preparing returns
for small firms, what are some common themes you hear from your
clients about the law's impact on their business, especially
people of color who are business owners?
Ms. ZIMMERMAN. Well, I have been told that the extra
complexity has wiped out their savings because they have to pay
more to an accountant to get it done.
Mr. THANEDAR. And everyone on this panel that does tax will
agree that our lives changed when that law came through. We had
to learn about 163Js and 199As and the pandemic was upon us and
all that. So, my client, as I mentioned before, a small C
corporation asked me, why did my tax go up? I thought this was
a tax cut.
Now, a number of them benefited and had lower taxes. There
is no question. It was not unhelpful. It was just that it was a
complex way to throw a smaller bone to small business while
allowing big business to get the burden, the majority of the
savings.
Thank you. Thank all of you for being here and for your
testimony.
And Mr. Chairman, I yield back.
Chairman WILLIAMS. I now recognize Mr. Bean from the Great
State of Florida for 5 minutes.
Mr. BEAN. Thank you very much, Mr. Chairman. Good afternoon
to you, and good afternoon to Small Business.
To those in the audience, who here owns a small business?
Raise your hand. Look at that. Thank you for coming. It is
great to have a crowd in this audience, Mr. Chairman. It is
much more exciting in person than watching C-SPAN, especially
when you know what we are talking about. We are talking about
your business and we are talking about how changes up here
affect your small business.
So I am going off script, Mr. Chairman. And that is this: I
have heard this phrase several times, even during this
Committee, ``Pay your fair share. People are not paying their
fair share.''
Can anybody tell me what a fair share is? Anybody? It is a
tossup question for our all-star panel.
Mr. Hudak, jump in.
Mr. HUDAK. I could not reach the button fast enough.
Well, we keep on talking about the 2017 tax law
complicating the tax code. Does anybody believe it was simple
before? Who lived here through URISA? This is crazy. When you
start talking about audits and compliance, one-third of all the
audits have to do with the earned income tax credit. The
program is not working. By the IRS's own admission, one out of
every $4 is paid improperly. They say it is because of lack of
understanding of a complex tax code. Well, simplify it. More
than that, those dollars for the earned income tax credit are
supposed to be helping families lift them up out of poverty. It
needs to be tied to other programs. Do not do it through the
tax code. It causes and motivates honest people who are willing
to pay Caesar what Caesar is due to game the system for a
variety of reasons.
We have tied health care to that. Instead of paying a
$10,000 bill, if they file their tax return and did not game
the system it would be $20,000. They want to pay their tax bill
but they do not want to pay the $20,000 health care bill. Stop
using the tax code for other things other than the tax code.
People need help. The earned income tax credit, fine. You want
to help people, lift them up? Tie it to a program that will
help them get the skills they need.
Mr. BEAN. Well said. We have got a quick lightning round.
Ms. Mucenski Keck, what say you to fair share?
Ms. MUCENSKI KECK. [Audio malfunction]
Mr. BEAN. Gotcha. Here is a quick question. I already want
to jump in but I have got another question.
Why is anybody worried if you make under $400,000?
President Biden has said so many times he is not going to raise
taxes on anybody making under $400,000. So why is everybody
worried?
Mr. Hudak, are you saying, Mr. Hudak, that that is
incorrect? That taxes have gone up on people making less than
$400,000? Or should I not be worried if I am making less than
$400,000?
Mr. HUDAK. You should be worried. There are a lot of
unintended consequences. Just yesterday we talked about having
a tax bill that they cannot afford. A guy just was bought out
of his business. He has got hundreds of thousands of dollars of
income. He received not a dime of it. Not a dime of it.
Mr. BEAN. So Mr. Hudak, I do not mean to interrupt you but
the time is going, the clock is going. Are you saying before
this Committee and before all these small business owners right
now before us that they should be worried if they make under
$400,000 in spite of what the president is saying? Are you
saying that before this Committee today?
Mr. HUDAK. I am. And I believe the president. It is
everybody else I have a problem with.
Mr. BEAN. 10-4.
Mr. Russell, are we in danger of losing family farms
because of unfair tax bills?
Mr. BOENING. Yes. But I did want to address the ``my fair
share.''
Mr. BEAN. Go right back to it. Yeah, sure.
Mr. BOENING. Sitting on a panel with three CPAs, my fair
share is whatever my CPA tells me I owe.
Mr. BEAN. Amen. Amen. Amen.
Thank you each for being part of our panel today.
Mr. Hudak, thank you. And your passion. We need a fair,
easier way to go and it should not take a rocket scientist to
fill out taxes. So thank you very much for coming.
Mr. Chairman, I yield back.
Chairman WILLIAMS. Thank you very much.
And now I recognize Ms. Scholten from the Great State of
Michigan for 5 minutes.
Ms. SCHOLTEN. Thank you, Mr. Chairman. And thank you so
much to our panelists for joining us today.
It is Tax Day. I love this theme. We are keeping on the
continued questioning about some of the complexity of the tax
code. And I wonder, and this is for Mr. Hudak and Ms.
Zimmerman, if you can talk specifically about the most complex.
I hear from small business owners all the time. In addition to
some of the unfairness, it is the complexity, the density, the
difficultness, unnecessarily so of understanding this tax code.
If you could talk about particularly some of those portions
that you find most unnecessarily complex. And what you would
like to see us in Congress do to resolve that. And particularly
make filing more accessible for small businesses who are not
themselves tax experts.
Ms. ZIMMERMAN. All right. I will jump in and go first.
I believe small businesses, a number of them have to file
their own returns. A number of them, most of them do not have a
team of lawyers and accountants. Many of them, I believe
Ranking Member Velazquez told us that the average small
business makes $75,000. With that as your profits, you very
possibly are not even hiring an accountant to do your taxes.
So the IRS, with their modernization, needs to have
education and communication out to the small business
community. Use the existing networks that are there. We have
chambers. We have groups of accountants like this panel that
can help the IRS reach these small businesses. Add a hotline
where they can call and ask questions. And try to figure out
how do I calculate this 199A, which sounds simple but I need to
know if I am a specified service business, and I need to know
how much I have in assets and how much I have in W2 wages if I
make more, and that sort of thing. Consumer centric.
Ms. SCHOLTEN. Thank you.
I have a second question. Last year the Inflation Reduction
Act included $80 billion in funding for the IRS to hire
personnel, modernize systems, and increase enforcement actions.
Mr. Zimmerman, Ms. Zimmerman, excuse me. In your testimony,
you talked about how the IRS needs better customer service. You
talk now about, you know, a more consumer friendly approach. Do
you expect this IRA funding to make the agency more responsive
to the needs of small businesses and CPAs like yourself?
Ms. ZIMMERMAN. Well, I do not think at this point they can
be less responsive. It has been a real nightmare through the
pandemic. And I recognize they had their issues also. But when
I call, and I have a practitioner's hotline that we can call.
And get people that are supposed to be even better trained. But
we cannot get through to that anymore. And when we call and
they have to jump from one computer program to another because
that one has this information and this one has that, and oh, we
do not have a copy of that in front of us, how can they handle
that? How can they be an advocate, part of the team instead of
the adversary? They cannot. We need that modernization.
Ms. SCHOLTEN. Agreed. Do you have any suggestions or
examples from your experience for ways in which this investment
could be best, most efficiently utilized to make a more
consumer friendly approach?
Ms. ZIMMERMAN. Certainly. You know, have a number that I as
a business owner, not the CPA in me but the business owner in
me, can call and discuss with the agent on the other end, so do
you think I qualify for this deduction? And where do I take it?
Oh, I do not take it on the business page; I take it over here
on my personal return. And that is not a conversation that can
even be had now with the IRS. So that to me is part of the
customer service I am talking about that we need.
Ms. SCHOLTEN. Thank you.
What about using some of these IRS funds to focus on
education and tax literacy for small businesses? Do you think
something like that would be beneficial?
Ms. ZIMMERMAN. Absolutely. The report that was released
recently really focused on education and leveraging technology
so they can put it out there as webinars and common things that
small businesses have questions about.
Ms. SCHOLTEN. Thank you so much. I yield back the remainder
of my time.
Chairman WILLIAMS. I now recognize Mr. LaLota from the
Great State of New York for 5 minutes.
Mr. LALOTA. Thanks, Chairman. And good afternoon,
everybody. I represent the 1st District of New York, and New
York State has the dubious distinction of having the highest
taxes in the nation at 12.47 percent. New York's average income
sales and property taxes are almost twice as what Florida's
are. And they are the catalyst for so many New Yorkers leaving
for states like Florida.
We also lead in another category. We led in out of state
migration. Said simply, more people leave our state than any
other state in the nation. And unfortunately, President Biden's
proposed tax plan would only worsen a New Yorker's tax burden
and thus exacerbate my state's loss of population. The
president's Tax Plan is riddled with policies which will
further financially burden my constituents. In fact, according
to the tax policies, centers 20, 22 to 20, 32 analysis. The
average New Yorker's tax burden will increase by about $17,000.
Likewise, many small businesses in my district will be negative
imply impacted by these new tax proposals as well. These taxes
are especially harmful as they will target the taxpayer's
assets and not their income.
I am also concerned about the tax penalty on research and
development. My district is home to the Brookhaven National
Laboratory and the Stoney Brook Neuroscience Institute to name
a few. These entities and small businesses which support them
depend on the ability to expense their research and development
costs. I am tired of Washington treating places like Long
Island like a piggybank. I have only been on the job for a few
months here but some folks in this town are competing with the
folks in my state's capitol for taking my constituents' money.
This frustration has motivated me to serve on this Small
Business Committee and to ensure that we are doing our part to
cap and cut taxes, to ease regulations, and where grant money
exists, to ensure that it gets to the right people.
My first question is for Mr. Boening. Sir, in your
testimony you laid out the grim but realistic future for family
businesses if the stepped up basis provision is removed. Like
Texas, many of the small businesses where I am from on Long
Island are land-rich and cash-poor. If more families have to
sell their companies to the highest bidder, how would this
affect the local communities in your opinion, sir?
Mr. BOENING. Well, I think for one thing, it would
accelerate ag land turning into something else. I mean, we all
love our shopping malls and our strip centers and those type of
things. But, you know, agriculture is still very important in
this country. And when those things would d happen, if farmers
and ranchers are forced to sell, many times they are not going
to sell to another farmer or rancher because I have just
discussed what land values have done. So, you know, progress is
great. And you know, one of those states that are getting some
of your folks as well from New York and other places. But it
will definitely accelerate the loss of the agricultural land.
Mr. LALOTA. Yeah, the agricultural issue is not as big of a
one, although it is on the east end of my district. Any time a
change of use of a piece of land happens in Suffolk County
where I am from, the community often gets quite excited,
rightfully so, about it. So I appreciate you turning our radar
onto that.
Ms. Mucenski, in your testimony you stated the failure to
restore the research and experimental expenditures provision
will significantly decrease innovation in the United States and
even hindered new business from forming here.
In our opinion, how would this affect small businesses
which serve entities in the community. In mine, like I
mentioned earlier, the Brookhaven National Lab and higher
institutions of learning, like Stoneybrook University.
Ms. MUCENSKI KECK. I think they are going to either have to
scale back the research that they are involved in or they are
going to have to let go of certain divisions all together. So
currently, it is just not palpable for them to keep paying
these taxes related to R&E capitalization, especially when
previously they are used to having zero taxes. And a normal
grant life, if you were given a grant and you are told that you
have to spend all the grant money on certain expenditures, then
the grant's income and all the expenditures or expenses. And it
is zero taxable income. And now by pushing that out and saying
you can only--you still have to include all the income, the
grand income, but you have to spread the expenses out. They are
not going to be able to operate at the expansion or the growth
model that they would have prior to that.
Mr. LALOTA. Thanks. And thinking more globally, you
mentioned in your statement about other nations' approach to
this particular issue. How would you rate the president's
proposal compared to some of our strategic competitors like
China with respect to R&D?
Ms. MUCENSKI KECK. You see most companies want the research
and experimental expenditures and the patents and the
intangibles in their country because ultimately that brings an
income stream in for you to actually tax even more. They are
encouraging it through not only saying take the deduction, they
are hyping the deduction. They are allowing you 180, 200
percent. And then they go even further to develop something we
do not need to get into today but patent boxes where all the
income coming in will be subject to much smaller tax rates.
They want it. They are striving for it. They are going for it.
They are incentivizing for it. We are doing the exact opposite.
Mr. LALOTA. Thank you very much. I yield, Chairman.
Chairman WILLIAMS. Thank you.
I now recognize Mr. Landsman from the Great State of Ohio
for 5 minutes.
Mr. LANDSMAN. Thank you, Mr. Chairman.
Let me just start with the earned income tax credit because
you mentioned, Mr. Hudak, that it was not tied to a program. It
is tied to work. I mean, it is tied to work. And in a question
about whether or not there are certain people who pay their
fair share and those who do not, how quickly we got to the
earned income tax credit and low-income working families is
pretty astonishing. When we know that there are companies who
find all kinds of ways out of paying what on paper they are
supposed to pay in taxes, and the same is true for millionaires
and billionaires who have accountants that can find all of the
loopholes and deductions and all kinds of different things to
ensure that they do not pay what I pay or what you pay or what
my sister who is a teacher pays. And from the part of the
country I am from, and Anne is from the same place, we are
neighbors, which is a pretty cool moment for at least me. Okay,
for both of us. Republicans, Democrats, Independents, we do
want folks at the top who have been doing really, really well
for a long time to pay what they had in the 1990s. That I think
is the fair share. Because it allows us to balance a budget. It
allows us to do what we are supposed to do on behalf of small
businesses and working families.
So the two big tax cuts that were in the 2017 bill that
have sunsetted and it does seem like with the majority these
should be something we can both agree on. One is the R&D piece,
the tax deduction for R&D for small businesses, and the other
one is interest payments, which I have to imagine have only
gone up; right? To be able to use both interest payments as tax
deductible and the R&D, those are two very significant, correct
me if I am wrong, but those seem to be two very significant tax
benefits that small businesses have now lost, that Republicans
and Democrats could come together on and put back on the table,
would it make a big difference or am I speaking out of turn
here?
And since I picked on you a little bit I will let you
start.
Mr. HUDAK. Every tax payer should pay exactly what they
owe. Okay? For every $1 that we spend improperly, and on the
IRS website they clearly state one out of every $4 spent in
this program is paid improperly. It serves no good purpose to
talk about the big corporations who maybe are taking advantage
of the tax code in ways we did not contemplate. But likewise,
for every $1 in the earned income tax program that is spent
improperly by the IRS and the taxpayer advocate's own
admission, that is $1 we do not have for someone who really
needs it.
Mr. LANDSMAN. It is a dollar that is in the economy though.
Mr. HUDAK. Okay. We are talking about collecting taxes. We
are talking about fairness. Fairness means every taxpayer pays
their fair share. What they owe. We are not talking about,
well, it is $1 in the economy. We are talking about paying what
is owed. The IRS admits it. It is a fact. Twenty-three percent
is paid improperly. They are abusing the tax code. It is not
working.
Mr. LANDSMAN. These are for folks who do not pay. They do
not have tax liabilities. We are supplementing what are very,
very poor private sector wages so that they can pay their
bills. That is it. So instead of focusing on all of the
billions and trillions of dollars over 10 years that we could
be security if people paid their fair share at the top, we are
talking about all these low-income working families that are
struggling to make ends meet does not make sense to me. But I
guess the question is on R&D and interest payments, that seems
like something we could all agree on should be back on the
books. No?
Ms. MUCENSKI KECK. I am just jumping in. I think from a
bipartisan standpoint R&E is a no brainer. I think everyone
supports keeping research and innovation in the United States.
I think you are never going to get away from the interest
expense calculation, but it can definitely revert back to 2021.
And I think it would be a welcomed response due to the rising
interest rates.
Mr. LANDSMAN. Yeah. On that last piece it does seem like it
is going to hit small businesses very hard this year. And it is
something I would assume both parties would agree on, put it
back in play and maybe make it retroactive so that people can
get the relief that they missed out this year.
Anne?
Ms. ZIMMERMAN. Agree.
Mr. LANDSMAN. Okay. Well, then I yield back. Thank you.
Chairman WILLIAMS. Next I want to recognize Mr. Stauber
from the Great State of Minnesota for 5 minutes.
Mr. STAUBER. Thank you very much, Mr. Chair.
Ms. Zimmerman, why did the ice cream shop close? What was
the reason?
Ms. ZIMMERMAN. Struggling with their finances. Struggling,
I think part of it was the location. I mean, there are a lot of
things that cause a small business to close.
Mr. STAUBER. Would one of those things, would one of the
causes maybe be the additional $320 billion of additional
regulations on small businesses and farms since this
administration has taken over the White House?
Ms. ZIMMERMAN. They did not mention any of that when they
told me they were closing.
Mr. STAUBER. Do you think that is good for small
businesses? As a former small business owner myself I thought
the regulations, any regulations that were not necessary would
be detrimental to us.
Ms. ZIMMERMAN. I absolutely agree that we should simplify
things for small business owners. We are on the same page.
Mr. STAUBER. Yes. And so one of the things that we have to
do is we have to push back on those types of regulations that
are hurting small businesses like the new definition of the
WOTUS rule for our small businesses and farmers. It is going to
be devastating. And it was just this administration that
changed the definition without going through Congress. And
small businesses, we always talk about small businesses being
the engine of our economy. They are not only the engine; they
are the innovators of our economy. So let's treat them like
that. Let's treat them with respect. I do not see that
necessarily coming from this administration.
So Mr. Hudak, do any proposals in the president's budget
stick out to you as particularly harmful for small businesses?
Mr. HUDAK. The pass-through deductions, UBI, the capital
gains. We just rain into that recently. The capital gains
problem; right? A guy wanted to sell a business to trade in his
old digs for new digs. He is a seasoned entrepreneur. He wants
to grow his business and sell his business to the new guy;
right? One out of five small businesses succeed. The rest fail.
Why? Inexperience. A whole bunch of reasons. We cannot not
reward success. Business churning is a healthy thing. I want
the seasoned entrepreneur to dream a bigger dream and trade out
that old dream. But let's not prevent him from doing that
because he has got a capital gains bill that he cannot afford.
He cannot afford closing on that new thing. That just happened
to one of our clients recently. Well, okay, I am sorry,
American. There is one business that is not going to grow. One
entrepreneur is not going to realize his dream.
Mr. STAUBER. Mr. Hudak, President Biden has also repeatedly
stated that he will not raise taxes on anyone making less than
$400,000. Do you think that is true?
Mr. HUDAK. I believe President Biden when he says that. It
is not his promise. I remember a certain election. There was
not going to be any new taxes, George Bush. Anybody remember
that? Right? Both sides break their promises on this. Both
sides. Codify it. Put it in the law and I will buy it.
Mr. STAUBER. I love that answer. Put it in the law.
Exactly. Because in my humble opinion, the current president
has been bloviating on Capitol Hill for 51 years now. I have
always said you will have to watch what he does, not what he
says. Because in 2020 he said he was going to mine domestic
critical minerals. In Northern Minnesota we have the biggest
copper nickel find in the world and he will not mine there. He
changed after he became president which upsets me.
Ms. Mucenski Keck, there you go. Can you elaborate eon some
of these new reporting requirements that have effects or could
have effects on our small businesses, 1099Ks, for example?
Ms. MUCENSKI KECK. Oh, sure. The 1099Ks are going to be an
administrative burden on our small businesses. So under
previous law they used to say you could have to report a 1099
Miscellaneous or K if you use a different type of company that
helps you transact payment or acceptance. And they have lowered
the threshold, or they are proposing to lower the threshold to
$600. So if you pay or you receive $600 from a third party you
should have to fill out a form and send it to the person who
you have paid or you have received money from.
Mr. STAUBER. Is that good for small businesses?
Ms. MUCENSKI KECK. I cannot imagine the administrative
costs that they are going to have to pay to comply with that
rule. It is going to be very overwhelming and it is not great
for small businesses as was already pointed out by many. They
are struggling already preparing their tax forms. Now you are
adding an additional compliance layer that they probably had
very little to any actual experience with.
Mr. STAUBER. As I said earlier, small businesses are the
engine and the innovators in our economy and we have to treat
them as such. And I see the devastating effects of this
administration and their rules and regulations that they are
forcing upon our innovators and entrepreneurs.
And I yield back.
Chairman WILLIAMS. Thank you. And I would like to say
thanks to our witnesses today for their testimony, for
appearing before us. And I think through a lot of testimony,
there is a lot that we do agree on. And that is encouraging.
So without objection, Members have 5 legislative days to
submit additional materials and written requests 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 other further business, without objection
the Committee stands adjourned.
[Whereupon, 4:08 p.m., the committee was adjourned.]
A P P E N D I X
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