THE WHITE HOUSE CONFERENCE ON SMALL BUSINESS ISSUE HANDBOOK THE WHITE HOUSE CONFERENCE ON SMALL BUSINESS -----------------------*-------------------- Foundation for a New Century The following information comes from the 1994 "White House Conference on Small Business Issue Handbook * A Foundation for a New Century." It was prepared by the Office of Advocacy, U.S. Small Business Administration, and this first edition came out in April, 1994. Updates will be added as new information becomes available. Contact The White House Conference for Small Business, at 1800 G Street, NW, Suite 1233, Washington, DC, 20006-4407. Or call (202) 724-0891 for more information. THE WHITE HOUSE WASHINGTON Dear Conference Participant: It is my great pleasure to welcome you to The White House Conference on Small Business. Over the coming months, you and your colleagues will address many important issues and problems. My entire administration values your unique perspective on the role of small business in our nation's economic future, and we will work closely with you to make the Conference a success. As you well know, new forces such as globalization, the rise of new technologies, and the development of new markets are shaping a new American economy. Many experts believe that smaller firms, with their nimbleness, adaptability, and creativity, will play an increasingly important role in that new economy. I agreeşthat is why your leadership through this Conference is so valuable to the nation. I look forward to participating in the National Conference in the summer of 1995, and to reading the Conference's findings and recommendations. Thank you for your important contributions, both through your business success and in this Conference. Sincerely, Bill Clinton Dear Conference Participant: As a venture capitalist and an active supporter of small business firms for more than 25 years, I congratulate you on your decision to join with your peers to map the course of small business prosperity into the 21st century. These conferences will enable members of the small business community to explore new ideas and develop constructive recommendations to facilitate the entrepreneurial process. Having participated in the first White House Conference on Small Business, I know reaching consensus on the most important issues facing small business will not be easy. The interests of small business are as diverse as the businesses themselves. However, the White House Conference on Small Business provides a unique opportunity for the many voices of our community to speak with a shared purpose. Many exciting developments in the areas of information and communication challenge us to seize the day and move forward. The information age has not only changed how people will participate in a work force requiring new skills and new ways of thinking, but it is changing how all of us communicate and view the world. Furthermore, the opportunity to affect government policy on taxation, capital formation, and international trade, to name only a few, gives you an idea about the significance of these conferences. The challenge to all conference participants is to speak openly and constructively to explore the ideas that will help us flourish in the years to come. Again, welcome, and thank you for attending the White House Conference on Small Business. Sincerely, Alan Patricof Chair, White House Conference on Small Business Dear Conference Participant: On behalf of the U.S. Small Business Administration (SBA), we are pleased to welcome you to the 1995 White House Conference on Small Business. This Conference is an opportunity for America's dynamic small business sector to recommend measures that will lead to greater success in the global marketplace. During the past several months, in town hall meetings around the country and in task force discussions leading up to this Conference, we have heard from America's small business owners and advocates. They have shared with us their concerns for American small business and have spoken with hope about their dreams for the future. In a very real sense, your work at this Conference will help us respond to those hopes and concerns. We welcome your good ideas and look forward to working with you to help implement them. To assist you in your discussions, SBA's Office of Advocacy has prepared an Issue handbook that gives background information on more than 100 small business topics. We believe you will find it a meaningful guide to the complex and important issues facing small business today. Please keep in mind that the President and the Congress are eager to hear your candid, constructive suggestions for those policy changes that would be of the greatest benefit to the small business community. Your views reflect your personal experience, hard work, and common sense. We know that we can benefit a great deal from your insight and ask that you give this endeavor your best effort. Thank you in advance for your work in making this Conference a successful one. We value your commitment and assure you that your time and energy will be put to good use. Sincerely, Erskine B. Bowles Administrator U.S. Small Business Administration Doris S. Freedman Acting Chief Counsel for Advocacy U.S. Small Business Administration FROM WILMINGTON TO DEARBORN Tentative schedule of dates and cities for individual state conferences that precede the June 1995 White House Conference on Small Business ----------------------------------------------------------------- 1994 Dates Delegates June 2 - Wilmington, Delaware 10 June 9 - Nashua, New Hampshire 10 June 14 - Casper, Wyoming 10 June 21 - Milwaukee, Wisconsin 22 June 27 - Billings, Montana 10 June 30 - Boise, Idaho 10 July 6 - Sioux Falls, South Dakota 10 July 12 - Bismarck, North Dakota 10 July 14 - Minneapolis, Minnesota 20 July 19 - Charleston, West Virginia 10 July 21 - Columbus, Ohio 21* July 26 - Des Moines, Iowa 14 August 1 - Salt Lake City, Utah 10 August 9 - Omaha, Nebraska 10 August 11 - Wichita, Kansas 12 August 16 - Springfield, Illinois 22* September 1 - Indianapolis, Indiana 24 September 8 - Louisville, Kentucky 16 September 13 - San Juan, Puerto Rico 10 November 9 - Burlington, Vermont 10 November 10 - Portland, Maine 10 November 15 - Danvers, Massachusetts 24 November 16 - Anchorage, Alaska 10 November 17 - Providence, Rhode Island 10 November 22 - Honolulu, Hawaii 10 November 29 - Cromwell, Connecticut 16 December 1 - Washington, D.C. 10 December 6 - Virginia Beach, Virginia 26 December 8 - King of Prussia, Pennsylvania 23* December 13 - Pittsburgh, Pennsylvania 23* December 15 - Buffalo, New York 33* 1995 Dates January 4 - Nashville, Tennessee 22 January 10 - New York, New York 33* January 12 - Baltimore, Maryland 20 January 17 - Columbia, South Carolina 16 January 19 - Atlanta, Georgia 26 January 24 - Raleigh, North Carolina 28 January 26 - Birmingham, Alabama 18 January 31 - Jacksonville, Florida 25* February 2 - Miami, Florida 25* February 7 - Jackson, Mississippi 14 February 9 - New Orleans, Louisiana 18 February 14 - St. Louis, Missouri 22 February 17 - Oklahoma City, Oklahoma 16 February 21 - San Antonio, Texas 32* February 23 - Little Rock, Arkansas 12 February 28 - Arlington, Texas 32* March 3 - Albuquerque, New Mexico 10 March 7 - Phoenix, Arizona 16 March 9 - Las Vegas, Nevada 10 March 14 - Los Angeles, California 54* March 16 - San Francisco, California 54* March 21 - Seattle, Washington 22 March 23 - Portland, Oregon 14 March 29 - Denver, Colorado 16 April 4 - East Brunswick, New Jersey 30 April 6 - Cleveland, Ohio 21* April 11 - Chicago, Illinois 22* April 13 - Dearborn, Michigan 36* * = States with more than 10 million persons will have two state conferences. The number of delegates elected in these states will be equally divided among the two conferences. There will be 695 appointed delegates to the National Conference. Each Governor, Senator, and Member of the House of Representatives will appoint one delegate and one alternate. President Clinton will appoint 100 delegates and 100 alternates. Contents Facts About the White House Conference Facts About Small Business Executive Summary of the Issue Papers Acknowledgments THE ISSUE PAPERS Capital Formation: Investing in the Success of Small Business Availability of Capital Banking Reform Equity Financing through SBICs Innovative Financing Programs/Leveraging Government Dollars Pension Fund Investing Secondary Markets/Securitization Securities and Exchange Commission Issues Securities Laws Small Business Administration 7(a) and 504 Loan Programs Venture Capital: Alternate Sources of Financing Community Development: Revitalizing Our Resources Community Development Financial Institutions Community Revitalization Crime/Violence in the Workplace Defense Economic Conversion Franchising Homebased Business Rural Development SBA Micro-Loan Program SBA Technical Assistance Environmental Policy: Encouraging Environmentally Sound Development Cost-Effective/Efficient Environmental Protection Government Outreach to Small Business Greater Relief from Environmental Regulations for Small Business Impact of Environmental Laws on Access to Capital for Small Business Non-Point Sources of Water Pollution Recycling Reducing Paperwork Required by Environmental Regulation Superfund Tax Incentives for Investing in Pollution Control Equipment Human Capital: Improving the Competitiveness of the 21st Century Work Force Access to Health Care Adapting to Diversity in the Small Business Work Force Americans with Disabilities Act Early Entrepreneurship Program Encouraging Diversity in Small Business Ownership Health Alliances/Health Purchasing Cooperatives Health Care Financing Mechanisms Health Insurance Deduction for the Self-Employed Health Insurance Market Reforms HIV/AIDS Education and Prevention Medical Liability Reform Preparing Students for Work Retirement Plans Social Security Tax Reform State-Mandated Health Care Benefits Substance Abuse Taxation of Health Benefits Work Force Skills Workers Compensation Worksite Health Promotion International Trade: Fostering Small Business Interests in the World Marketplace Development of a Strategy for Export Assistance to Small Business General Agreement on Tariffs and Trade Import Policy North American Free Trade Agreement Trade Finance Procurement: Balancing Public and Private Resources Access to Procurement Opportunities Balancing Private and Public Resources Best Value Procurement Competition from Non-Profit Organizations Labor Laws and Federal Contracting Prompt Payment Act Rights in Technical Data Small Business Set-Asides Small Purchase Threshold Subcontracting Opportunities Surety Bonding Regulation and Paperwork: Reinventing Regulatory Policy Alternative Dispute Resolution Bankruptcy Civil Justice Reform Equal Access to Justice Act Fair Labor Standards Act Line-item Veto Negotiated Rulemaking Occupational Safety and Health Reform Paperwork Reduction Act Product Liability Regulatory Flexibility Act Small Business Size Standards Striker Replacement Legislation Unfunded Mandates Taxation: Stimulating the Growth of Small Businesses Accounting Methods Alternative Minimum Tax Capital Gains Tax Corporate Tax Rates Employee/Independent Contractor Classification Estate, Gift and Generation-Skipping Taxes Fiscal Year Conformity Frequency of Changes in Tax Laws Growth Tax Credit Home-Office Deduction Individual Tax Rates Integrated Tax System Inventory Methods Investment Tax Credit Net Income Theory Net Operating Losses Payroll Tax Reform Subchapter S Corporations Taxpayer Bill of Rights Value-Added Tax Technology and the Information Revolution: Leading the Way in Innovation Capital for Technology Development Commercialization of Technologies Critical Technologies Electronic Commerce Flexibility in Manufacturing Information Superhighway Intellectual Property Protection Marketing New Technologies One-Stop Information Centers Research and Experimentation Tax Credit Small Business and Federal Research and Development Standard Industrial Classification Codes Status of Recommendations from the 1986 White House Conference on Small Business Glossary Acronyms Index Facts About the WHCSB The White House Conference on Small Business is an opportunity for America's small business community to make its views known to the Clinton Administration and Congress. To accomplish this, Congress created an independent commission charged to assemble a representative group of people from small businesses in state and regional conferences from June 1994 to May 1995 and a National Conference in June 1995. In these meetings, thousands of small business owners, corporate officers and employees will come together to increase awareness of the critical role small businesses play in the national and global economy. Delegates at the National Conference will propose a small business "action agenda" to the Clinton Administration and Congress to ensure small business vitality into the 21st century. The Commissioners President Clinton appointed 11 individuals from the small business community to oversee the conference process. Alan Patricof, who owns a firm that invests in small growing companies serves as the commission chairman. Nine of the people on the bipartisan commission are small business owners, one is a university law professor and one is an executive of a small business trade association. Conference History. The two most recent White House Conferences on Small Business (1980 and 1986) resulted in the overall participation of 50,000 small business owners and entrepreneurs from the 50 states, the District of Columbia, Puerto Rico, and the Territories. Recommendations for legislative and executive branch action were formulated during both the 1980 and 1986 state and national conferences. (A summary of legislative actions resulting from the 1986 conference's recommendations is included in this booklet. 1980 Conference The 1980 White House Conference on Small Business was held in Washington, D.C., in January, 1980. Approximately 30,000 small business owners and entrepreneurs participated in the state meetings and more than 5,000 people attended the national conference, including the 1,682 official delegates. 1986 Conference The 1986 White House Conference on Small Business took place in Washington, D.C., in August, 1986. Approximately 4,000 people, including 1,813 official delegates attended the national conference. More than 20,000 small business owners and entrepreneurs participated in the state-level meetings. THE 1995 CONFERENCE: Foundation for a New Century The 1995 White House Conference on Small Business will be preceded by at least one meeting per state. States with populations of 10 million or more will have two meetings. Beginning in June, 1994, the state meetings will consist of a one-day program, including an opening session, issue workshops and delegate elections. Task force meetings were held in November and December, 1993 to outline possible issues and questions for discussion. Issue briefs prepared from these task force discussions are included in the booklet, but are intended to be catalysts for discussion only. The following key issue areas will be discussed at the conferences. * Capital Formation * Community Development * Environmental Policy * Human Capital * International Trade * Procurement * Regulation and Paperwork * Taxation * Technology and the Information Revolution Delegates A total of 1,130 delegates will be elected at the state conferences. A registrant wishing to run as a delegate or vote for delegates and issue recommendations must attend the conference in the state in which he or she resides. In order to run as a dele- to gate or vote for delegates and issue recommendations, an individual must be an owner, corporate officer or employee of a small business employing fewer than 500 people. Delegates also must be able to pay their own expenses to Washington, D.C., and at the National Conference or be prepared to seek reimbursement of such expenses because of financial need. Conference registrants who meet the delegate qualifications may participate fully in the breakout issue sessions and may file as delegate candidates. Conference registrants who do not meet the delegate qualifications may participate as observers. Observers will not be recognized to speak during the breakout issue sessions and will not be allowed to vote for issues or delegates. Regional Conferences Following the state meetings, delegates may attend regional meetings. Regional meetings are designed to foster consensus and sharpen the focus of the National Conference. THE NATIONAL CONFERENCE The National Conference, to be held in Washington, D.C., June 11- 15, 1995, will feature daily sessions, official White House functions, speakers, and social events. In addition to the elected delegates, delegates appointed by President Clinton, will also participate in the conference. The size of the state delegation is equal to twice the states electoral college vote plus appointed delegates, with a minimum of 10 members per delegation. The conference will conclude with the delegates ranking policy recommendations to submit to President Clinton and Congress. CONFERENCE REPORT SUBMITTED TO THE PRESIDENT AND CONGRESS A final report will be submitted to President Clinton and Congress. It will include the findings and recommendations of the delegates, as well as proposals for any legislative and/or executive branch action necessary to implement the recommendations. The report is due no later than four months from the date the National Conference is convened. The Small Business Administration will report to Congress annually for three years following the delivery of the final report on the status and implementation of the findings and recommendations. FACTS ABOUT SMALL BUSINESS Based of research conducted by SBA's Office of Advocacy How many small businesses are there in the United States? In 1992, approximately 21.3 million business tax returns were filed for 4.5 million corporations, 1.6 million partnerships and 15.1 million sole proprietorships. Many of the firms represented by these tax returns are very small, part-time businesses. In fact, fewer than 14,000 would qualify as large businesses if an employment cutoff of 500 employees is used to define small and medium-sized businesses. About 5.7 million businesses are large enough to have employees. Jobs Small businesses employ about 54 percent of the work force, contribute 52 percent of all sales in the country and are responsible for 50 percent of private sector product. During the 1976-1990 period, small firms with fewer than 500 employees provided 65 percent of net new jobs. Jobs generated by small firms are more likely to be filled by younger workers, older workers and women. Many of these workers prefer or are only able to work on a part-time basis, and thus can be more easily accommodated by small employers. During the recent recession, it was the small businesses of the nation that rallied, kept going, and added jobs. From 1988 to 1990, all of the net new jobs in the economy were created by small firms. During this period, the performance of the nation's smallest firms (those with fewer than 20 employees) was extraordinary: they created almost 4.1 million new jobs against a loss in large firms of more than 500,000 jobs and a loss in firms with 20-499 employees of 850,000 jobs. Between December 1992 and December 1993, small-business-dominated industries (those in which at least 60 percent of the work force is employed in firms with fewer than 500 employees) increased employment by 1.3 million (3.2 percent). Growth For the first eight months of 1993, 480,163 incorporations were recorded, an increase of 6.2 percent from the previous year. New and successor firms (existing firms that have changed owners) with employees totaled 949,210 (1993 annual rate based on the first six months), a 2.0-percent increase from the previous year. Business failures (the closing of a business with a loss to at least one creditor) declined 11.4 percent for the first six months of 1993, while bankruptcies declined 10.1 percent. During the first half of 1993, business terminations were down about 2.8 percent. Training and Education New technologies and the challenge of foreign competition make on-the-job training necessary to improve the quality of the nation's work force. Small businesses have historically been a source of training for American workers, providing the majority of workers the general training they require to function efficiently throughout their work lives. A recent study commissioned by the Office of Advocacy, Job Training Approaches and Costs in Small and Large Firms (Dan Black, Mark Berger and John Barron, University of Kentucky) found that small firms provide fewer total hours training to new hires in the first three months of employment than do large firms, yet provide more training to new employees with less than 12 years of schooling, and a comparable amount of training to new hires with no previous work experience. Also, firms with fewer than 25 employees provide twice as many hours of informal management training to employees with less than a high school diploma as firms with 500 or more employees. Financing Overall, small firms rely more on equity capital and less on external debt capital than larger firms and are more dependent on short-term than long term debt. Fewer than 50 percent of small firms borrow once or more during a year. However, small firms experiencing rapid growth or those with high volumes of receivables require frequent use of external financing. The cost of borrowed funds is higher on small firms. Interest rates on bank loans for small businesses average two to three percentage points over the prime rate. Innovation Studies show that small firms produce twice as many innovations per employee as large firms. Innovations coming from small high-tech firms are expected to increase as a result of the Small Business Innovation Development Act, which mandates that federal agencies with large research and development (R&D) budgets direct a designated amount of their R&D contracts to small firms. Fiscal year 1991 was the ninth year of the Small Business Innovation Research Program, in which agencies with $ 100 million or more in extramural R&D obligations are required to set aside at least 1.25 percent of these funds for small businesses. In the first nine years, almost $3 billion has been awarded to small firms for a total of 21,501 projects. International Trade Exports have accounted for 70 percent of the growth in the U.S. economy since 1989. Although smaller businesses generally are not major exporters, many supply large firms with parts and components that go into export products. Strength in manufactured exports means that many small manufacturing firms are able to maintain output levels by continuing to support larger exporting firms. Minority and Women's Business Ownership According to the latest data available, the number of women-owned nonfarm sole proprietorships increased by 7.9 percent from 1988 to 1989, continuing their rapid growth. There were nearly 5 million women-owned firms (including those without employees). In 1987, the latest year for which these data are available, there were 1.2 million minority-owned businesses with total receipts of $77.8 billion. Businesses owned by African Americans numbered 424,000, accounting for the largest share or minority- owned businesses (34.9 percent), and roughly 3 percent of all U.S. businesses. As of 1987, African-American owned businesses posted receipts totaling $19.8 billion(about 1 percent of total U.S. business receipts) and employed nearly one-quarter million American workers. Between 1982 and 1987, the number of Hispanic-owned firms rose from 233,975 to 422,373, an increase of 80.5 percent. As of 1987, Hispanic-owned businesses accounted for roughly 3 percent of all U.S. business and 24.7 billion in business receipts - 1.2 percent of total business receipts. They employed more than one- quarter million American workers. Businesses owned by Asian Americans and Pacific Islanders rose from 187,691 in 1982 to 355,331 in 1987, an increase of 89.3 percent. In 1987, they accounted for the largest share of minority-owned business receipts (42.6 percent) and were also the largest among minority-owned businesses in terms of average annual receipts size, with receipts per firm of $93,221 compared to an average of $64,131 for minority-owned businesses overall. Procurement A decade ago, approximately half of the government awards were for supplies and equipment. By fiscal year 1992, that proportion had dropped to 39.7 percent, and small firms were finding more opportunities for providing services and research and development assistance to the federal government. The overall share or federal procurement that went to small firms in fiscal year 1992 was 30.8 percent. Small businesses were awarded $61.6 billion of a total of 199.8 billion in goods and services purchased by the federal government. Some $39.3 billion was awarded directly to small firms and at least $22.3 billion was awarded through government prime contractors to small subcontractors. In fiscal year 1992, the federal government awarded almost 5.3 billion through the SBA to small disadvantaged businesses in the 8 (a) program, up from 4.3 billion. Overall, minority-and-women- owned businesses were awarded contract worth 8.3 billion and 2.6 billion respectively, in fiscal year 1992, up from 7.0 billion and 2.4 billion in fiscal year 1991. Executive Summary Both the economy and the national agenda have changed considerably in the decade and a half since the first White House Conference on Small Business was held in 1980. In the intervening period, small businesses have seen a number of advances: wider acknowledgment of small firm contributions to the economy and adoption of a variety of federal laws and regulations designed to improve the environment for small business growth. Some of these new initiatives came about as a direct result of the 1980 and 1986 White House Conference on Small Business recommendations. (See the 1986 update). Yet, much remains to be done. Many issues on the small business agenda have yet to be addressed and new concerns emerge continually. Despite their importance as generators of economic activity, jobs and innovation, small firms continue to operate at a competitive disadvantage with respect to their larger counterparts in nearly every areaşfrom access to capital to employee benefit costs to the regulatory and paperwork burden. This Issue Handbook provides a brief summary of 110 small business issues identified by task forces comprising a broad cross-section of the small business community that met in late 1993. The issues are divided into nine major categories: capital formation, community development, environmental policy, human capital, international trade, procurement, regulation and paperwork, taxation, and technology and the information revolution. The issue summaries provided here are for information purposes only: White House Conference participants should feel free to add to or subtract from the list and to identify the issues and constructive solutions they believe to be most important. Capital Formation: Investing in the Success of Small Business In today's economy, the small business community is still largely dependent upon traditional sources of debt and equity capital; however, with the advancement of electronics and computers, types of financing companies and financial instruments are playing a larger role. As small businesses continue to strengthen and grow in the 1990s and into the next century, effective use of new capital formation strategies will be essential. Recent and anticipated changes in federal financing programs are designed to further increase small businesses' and entrepreneurs' access to capital. Community Development: Revitalizing Our Resources Economic renewal for the remaining part of this decade and beyond will depend largely on our ability to develop creative solutions to the most vexing problems facing our communities today - the downsizing of the defense industry, crime, substance abuse and the decaying infrastructure. Some of theses problems may be addressed by government policies and programs that encourage access to procurement opportunities, enhance technology transfer and stimulate rather than inhibit entrepreneurship and small business growth. Environmental Policy: Encouraging Environmentally Sound Development Environmental laws enacted by federal, state and local governments have brought improvements in environmental quality and economic opportunities for some businesses. However, regulatory laws have sometimes had a negative economic impact on the small business community, slowing productivity and job creation and costing several hundred billion dollars annually. Federal policy must set the importance of environmental concerns in balance with the needs of the small business community, a sector particularly vulnerable to burdensome environmental regulatory requirements because of more limited resources. Human Capital: Improving the Competitiveness of the 21st Century Work Force The diversification of the work force is one of the major factors that will influence American businesses in the 21st century. Small and growing companies will also need to offer increasingly costly employee benefits in order to attract and retain good employees. Health care coverage, retirement plans, unemployment compensation, insurance and workers' compensation premiums constitute a growing portion of employer costs. Small employers and entrepreneurs will need to ensure that they and their employees are adequately trained to meet the challenges of the 21st century marketplace. International Trade: Fostering Small Business Interests in the World Marketplace The future success of the U.S. economy will depend largely on America's ability to compete successfully in a global arena. It is estimated that small firms constitute 96 percent of exporting firmsşbut just 15 percent of U.S. exporters account for 85 percent of the value of U.S.-manufactured exports. In an increasingly global marketplace, successful small firms must know their international competition and take advantage of opportunities to export. Procurement: Balancing Public and Private Resources In fiscal year 1992, the federal government purchased approximately $200 billion in goods and services from the private sector. Of this amount, roughly $62 billion, or 31 percent, was awarded prime contracts and subcontracts to small and growing businesses. These firms' participation in federal procurement opportunities creates more competition, saves the government money, stimulates greater innovation and provides jobs for many Americans. The federal procurement rules are complicated, however, and could be improved to provide greater opportunities for the small business community. Regulation and Paperwork: Reinventing Regulatory Policy Federal, state and local governments impose numerous requirements on the operation of businesses. They range from procedures for simply obtaining a business license for a local government to complex federal regulations governing the use of chemicals in the workplace. The burdens associated with these requirements are often exacerbated by substantial paperwork and recordkeeping requirements. In addition to the cost and administrative burdens, small and growing businesses have difficulty simply keeping abreast of the various regulatory and paperwork requirements. Taxation: Stimulating the Growth of Small Businesses Taxes imposed by federal, state and local governments represent one of the most significant costs to small and growing businesses. Most small businesses must expend substantial time and resources to comply with extensive, complex and constantly changing tax laws. Of the estimated 21 million business tax returns filed in 1992, approximately 90 percent were filed by small proprietorships, partnerships and S corporations subject to individual tax rates; the remainder were filed by "C" corporations subject to corporate tax rates. The growth of the economy depends in part on a tax system that meets necessary goals without unduly burdening the smallest businesses. Technology and the Information Revolution: Leading the Way in Innovation Business and technological forces are coalescing in a revolution that promises to have as significant an impact on the 21st century as the industrial revolution had on the mid-19th century. This "information revolution" will transform both how Americans do business and how they spend their leisure time. Small and growing businesses have an important role, not only as users, but as innovators of this technological revolution. Throughout the economy, these businesses create more innovations per employee that large firms, and this inventive capacity will become increasingly critical to our country's global competitiveness. ***************************************************************** ACKNOWLEDGMENTS WHCSB Commission Alan Patricof, Chairman Merle Catherine Chambers Rudolph I. Estrada Peggy Zone Fisher C. Hugh Friedman Brian Lee Greenspun Clark Jones Mary Frances Kelley Josie Natori Larry Shaw Gary M. Woodbury WHCSB Staff Mark Schultz, Executive Director Mary Blazevich Gudrun Briegel Ana Carrion-Sague Steve Cisneros Helene Colvin John Doorlay Nicholas Friendly Kerry Gurtler Thomas Hennessey Gerald Kluempke* Doug Lauen Kelly Lees Chris Mattson Susan McNay Chris Parker Steve Pollock Lisa Rowe-Ralls Victoria Smith Cathy St. Denis Karen Sudbay Jody Wharton Tracy Williams Kevin Winston WHCSB Task Force Chairs Karen Brown Alan Chvotkin Jim Kimsey John Kutler Virginia Littlejohn Aaron Lovejoy Robert McGee Marc Newkirk Carol Parry Robert Pavey John C. (Jack) Rennie Richard A. Shaw, Esq. Frank Swain WHCSB Task Force Resource Experts Mark Bloomfield Dr. Anthony Carnevale Benjamin Cooper Ron Fox Gregory B. Harter Virginia Littlejohn Charles Ludlam E. Colette Nelson Erik Pages JoAnn H. Price John Satagaj Milton D. Stewart David K. Voight U.S. Small Business Administration (SBA) Erskine B. Bowles, Administrator Kathryn M. Broeren, Chief of Staff Richard Hernandez, Counselor to the Administrator John T. Spotila, General Counsel SBA Office of Advocacy Doris Freedman, Acting Chief Counsel for Advocacy SBA Advocacy Staff Contributors Issues Staff - Greg Dean Allison Giles Nancy Ing Gregory Koontz Edward Koos Don Kraft Patricia McBride James O'Connor Barry Pineles Barney Singer Editorial Staff Susan Walthall, Acting Director Sarah Fleming Sue Johnston Kathryn Tobias John Ward * = On detail from the Small Business Administration Economic Research Staff Bruce Phillips, Director David Hirschberg Supriya Kutty Jules Lichtenstein Ray Marchakitus Charles Ou Raymond Rawlinson William Scheirer Edward Starr William Whiston Support Staff Jeanne Bishel Angela Hamilton Lisa Kunze Darlene Moye Sukie Sanders Tonya Smith Publication Design Margaret Bauer Printing Saul's Lithograph Printing of this Issue Handbook has been funded by the U.S. Small Business Administration, through donations from Bell Atlantic, Nynex and Pacific Telesis Group. The cooperation of Bell Atlantic, Nynex and Pacific Telesis Group in this effort does not in any way imply an endorsement by the U.S. Small Business Administration or The White House Conference on Small Business of Bell Atlantic, Nynex or Pacific Telesis Group, their products or their services. PACIFIC TELESIS Group NYNEX Yellow Pages Bell Atlantic Capital Formation Raising capital has always been one of the highest priorities for small and entrepreneurial businesses. Through the 1980s and into the early l990s, small businesses experienced drastic changes in their ability to gain access to capital. Stronger banking legislation and tighter banking regulation enforcement combined with bank failures and the downturn in the economy to create a difficult climate for capital formation. In today's economy, the small business community is still largely dependent upon traditional sources of debt and equity capital; however, with the advancement of electronics and computers, new financing companies and financial instruments are playing a larger role. As small businesses continue to strengthen and grow in the l990s and into the next century, effective use of new capital formation strategies will be essential. Recent and anticipated changes in federal financing programs are designed to further increase small businesses' and entrepreneurs' access to capital. However, with the increasing emphasis on shrinking the federal government bureaucracy, there will be greater reliance on private sector initiatives to support the needs of America's multi-trillion-dollar economy. For related information, see also sections on Community Development Financial Institutions, p. 26; SBA Micro-Loan Program, p. 31; Impact of Environmental Laws on Access to Capital for Small Business, p. 37; Health Care Financing Mechanisms, p. 47; Trade Finance, p. 60; and Capital for Technology Development, p. 93. ------------------------------------------------------------------- Availability of Capital Should Congress become involved in creating new instruments and entities to help small businesses improve their access to capital? BACKGROUND One of small business's major concerns is access to capital. Whether it is start-up, expansion, equipment or maintenance capital, small businesses need debt and equity financing to stay competitive with larger companies in the marketplace. During the 1980s the traditional sources of debt capital-- banks, credit unions, and savings and loans-- became less dominant in the lending market. More non-traditional sources, such as finance companies, credit card agencies and private investment companies, became involved in small business capital investment. Other sources of capital currently being explored include royalty sharing, securitization, and private and public pension funds. Federal government programs exist within the U.S. Small Business Administration (SBA), the U.S. Department of Agriculture, the U.S. Department of Commerce and other federal agencies to assist small businesses in gaining access to debt capital. The Securities and Exchange Commission and banking regulators have programs to help facilitate equity investment in small businesses. STATUS Bills have been introduced in the 103d Congress to alleviate paperwork and regulatory burdens imposed on financial institutions in an effort to facilitate small business lending. The Small Business Guaranteed Credit Enhancement Act of 1993 (Public Law 103-81) was enacted to increase appropriations for the SBA's loan programs. The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) permits a capital gains exclusion for investment in qualifying small business stock. In addition, the President and the banking regulators initiated a Capital Availability Program in March 1993 to facilitate small business lending. DISCUSSION * How can small businesses better prepare themselves for seeking capital for their companies? * What, if anything, should the federal government do to facilitate the process? * Should federal government programs target specific industries or geographic areas for investment (for example, community development financial institutions and emerging growth industries)? * Should non-bank financial lenders be regulated by the federal government for community reinvestment purposes? * Should Congress develop initiatives to encourage private entities to invest in small business? Should these initiatives target specific industries for investment? * Should public or private initiatives target very small businesses? Should the initiatives include technical assistance, education and training components? Banking Reform Should Congress enact legislation to encourage more lending to small businesses by financial institutions? BACKGROUND In 1989, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and in 1991, the Federal Deposit Insurance Corporation Improvement Act (FDICIA). Both of these laws were designed to ensure the safety of the banking industry in light of the numerous failures of banks and savings and loan associations during the 1980s. These laws cover all aspects of banking operations, from establishing guidelines for real estate lending to setting riskbased capital requirements for commercial loans. Arguments have been made that the laws extend too far and are hindering lending by financial institutions, which have already curtailed lending because of previous economic downturns. Two other factors arguably have a disproportionate adverse effect on small business lending: the record level of investment in government securities by financial institutions has decreased the monies available for small business lending, and the large number of mergers and acquisitions of financial institutions has created lenders without strong ties to communities and their small businesses. STATUS Many bills were introduced in the 103d Congress to reduce bank regulatory burdens, permit interstate banking/branching, regulate derivative investments and regulate the mutual fund industry. In March 1993, the Clinton Administration introduced the Capital Availability Program, which is designed to facilitate small business lending by financial institutions. Included in the program are revised banking regulatory policies toward some small business loans and permission for financial institutions to create "character loan" baskets for the regulatory examination of some small business loans. In addition, the banking regulators, on December 21,1993, published in the Federal Register proposed regulations to revise the criteria for the Community Reinvestment Act (CRA). The proposed rules would provide greater access and information . on loans made to small businesses. Small financial institutions would have the opportunity to utilize a streamlined CRA compliance procedure. DISCUSSION * Interstate banking/branching could have an adverse effect on small business lending by reducing the number of community banks and creating larger lenders that do not have strong ties to com- munities and their small businesses. What can be done to facilitate small business lending in financial institutions that have been subject to merger or acquisition? * To help facilitate bank administrative procedures, should smaller loans to small businesses be reviewed in bank examinations in the same manner as consumer loans? * Should Congress address issues of redlining and diversification with respect to small business lending? If so, how? * Should Congress enact banking laws that take into consideration the characteristics of very small businesses? * What, if anything, should be done to facilitate and improve education, training and technical assistance for small businesses to help them become more creditworthy? Equity Financing through SBICs Are modifications needed for the U.S. Small Business Administration's recently restructured Small Business Investment Company Program? BACKGROUND The SBA's Small Business Investment Company (SBIC) Program has supplied millions of dollars of investment capital to small growing companies. Specialized small business investment companies (SSBICs) target investments in socially and economically disadvantaged small businesses. Investments made by SBICs and SSBICs have helped thousands of small businesses since the creation of the SBIC program in 1958. Since their inception, both SBICs and SSBICs have been capitalized through private capital and matching SBA funds. Historically, the primary instrument used for financing is the debenture, a debt instrument. A new law permits the use of an equity financing instrument in the SBIC program. STATUS As directed by the Small Business Equity Enhancement Act of 1992 (Public Law 102-366), the SBA published a proposed rule that would restructure the program to permit the use of an equity financing instrument called a "participating security" (preferred stock, preferred limited partnership or other similar instrument). With the proposed participating security, the SBA will guarantee the payment of prioritized payments on, and the redemption price of, the security. The use of the proposed security instrument would permit investment by tax-exempt investors, such as pension fund investors, who would otherwise incur tax liability if investing in debt instruments. The Omnibus Budget Reconciliation Act of 1993 (OBRA) permits the deferral of recognition of a tax gain by an investor if the gain is from a rollover investment in an SSBIC. In addition, OBRA also grants SSBICs an exemption from the active business requirement of the Internal Revenue Code for the recently enacted capital gains provisions. DISCUSSION * Should the SBIC program be accorded the same tax investment advantages with regard to capital gains provisions that have been granted to SSBICs under the recently enacted Omnibus Budget Rec- onciliation Act of 1993? * Should Congress allow for rollover of gains from the sale of publicly traded securities into small business investment companies, as it does with specialized small business investment companies? * Should greater tax incentives be provided to private investors, including pension funds, in an effort to encourage investment in SBICs and SSBICs? Innovative Financing Programs/ Leveraging Government Dollars Should Congress create a funding mechanism for the establishment of a loan loss reserve fund for use by financial institutions to encourage small business lending? Should this initiative be undertaken in conjunction with existing state programs? BACKGROUND A recent example of a state initiative to make capital more accessible for small businesses is the Capital Access Program. Currently, 11 states have capital access programs, which create state-sponsored loan loss reserve funds for financial institutions' lending to small businesses. The funds are capitalized through small business loan reserves of financial institutions, fees from small business borrowers and matching state funds. If a small business loan goes into default, the financial institution receives compensation from the fund. The institution may not obtain funds greater than the amount it has put into the fund plus the matching state amounts. As the loan loss reserve increases over time for the lender, the lender is able to make incrementally riskier loans. A federal fund could be established to encourage state participation, thereby creating a much larger pool of funds to back small business loans. Or as an alternative, federal, state and local monies could be pooled and designated for small business lending. One pool of funds would enable larger investment amounts to be targeted proportionately to the funds contributed by the state and local governments. Some have pointed out that the Capital Access Program resembles a federal insurance for small business loans. In reality, if a federal program were established it would utilize federal appropriations to match the contributions of the states toward the loan loss reserve fund. There would be no federal obligation other than the initial appropriations. Another private sector small business financing tool is a proposed small business participating debenture (SBPD). This instrument is similar to a bond instrument in that the investor receives regular interest payments from the small business; however, with the SBPD the investor will also receive a share of future profits. A key component of the proposed SBPD is a capital gains rate that is applied to the investor's share of future profits. The participating debenture was a former White House Conference on Small Business recommendation. STATUS The Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275) would establish a federal Capital Access Program, earmarking $50 million to establish a federal fund and to provide incentives for state participation. DISCUSSION * How should a federal program be developed to best leverage funds to facilitate small business lending? * Should a program be developed that works independently of, or in conjunction with, other federal financing programs, such as the U.S. Small Business Administration's 7(a) Guaranteed Loan Program? Pension Fund Investing Should federal pension and retirement plan laws be amended to facilitate small business investments? BACKGROUND Every year, trillions of dollars are invested by public and private pension and retirement plans. Investments in small businesses, however, are typically limited to a small share of venture capital investments and to "economically targeted investments" by public pension plans. Many believe that pooling of small business investments--as is already being done with some venture capital funds--and the pooling of small business loans would reduce the amount of risk and encourage pension fund investment. (See also the discussion of Secondary Markets/Securitization.) STATUS The Community Development. Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275) would permit the Secretary of Labor, in consultation with the Secretary of the Treasury, to revise pension laws to permit pension fund investment in a small business loan secondary market. DISCUSSION * Should federal guidelines be established to encourage pension fund investment in small business loan pools and in venture capital companies investing in small businesses? * Should the federal and/or state governments issue guarantees or insurance bonds for pools of small business loans to encourage pension fund investment? * To facilitate pension fund investing, should pension laws be simplified? Should incentives for investments be created? * Should a federally sponsored information data base on small business lending and investing be created to encourage and help ensure prudent investing by pension plan administrators? * Should Congress amend the U.S. tax code to permit pension funds to extend credit to small businesses as well as to permit pension funds to receive operating income from small business investments without incurring "unrelated business taxable income?" * Should Congress grant preferential capital gains treatment on pension fund distributions to retirees for that portion of the pension fund invested in stock of qualifying small businesses? Secondary Markets/Securitization Should Congress establish or encourage the establishment of a secondary market system for small business loans? BACKGROUND Secondary markets and securitization have been in use for a number of years, particularly in the home mortgage, car loan and credit card receivables industries. A loan-making institution sells loans it has originated to an intermediate bundler of loans. The bundler packages loans and resells the bundle on the secondary market. From the proceeds of the sale, the originating financial institution is able to make more loans. Secondary markets have proven to be extremely successful in certain financial areas. For small business loans, a viable secondary market has been much more difficult to implement. Rarely are small business loans uniform. They are also generally perceived to be riskier than other types of loans. The U.S. Small Business Administration has been successful with the securitization of loans made through its guaranteed loan program; however, these loans come with the federal government's guarantee. To promote a viable secondary market for small business loans, many laws would need to be amended, including tax, banking, securities and pension plan/labor laws. STATUS The 103d Congress has considered a variety of legislative measures with respect to secondary markets for business loans. Some bills would create a government-sponsored entity to facilitate a secondary market. Others would change tax, banking and securities laws, and allow a secondary market to develop through private sector initiatives. The proposed Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275) contains provisions for private sector initiatives to develop a small business loan secondary market. DISCUSSION * Would a secondary market eventually generate considerable amounts of capital for small business lending? * Standardization of small business loans could have a negative effect on small business lending. Would development of a secondary market encourage financial institutions to make only loans that are saleable on the secondary markets? * A government-sponsored entity would require taxpayer funds for initial startup. Private sector initiatives would allow a market to develop at its own pace. Should a secondary market system for small business loans be in the form of a government sponsored entity such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) or should it be established by the private sector? Securities and Exchange Commission Issues Should the Securities and Exchange Commission (SEC) consider further initiatives to facilitate access to the public markets by small businesses? BACKGROUND The Securities and Exchange Commission (SEC) has recently promulgated final rules that will enable small businesses to gain access to the capital markets with greater ease. Historically, small businesses have had difficulty obtaining equity capital. The high costs of entering the public market, together with loss of control of the company, discourage many small business owners from seeking equity capital. The SEC reforms were designed to make the process of going public less costly and burdensome for small businesses. The reforms are as follows: Regulation A, an exemption from the registration requirements of the Securities Act of 1933, now may be used to raise up to $5 million in a 12-month period for a small business issuer. The Small Corporate Offering Registration (SCOR) form--in a question-and-answer format--is currently being used by many states and can be utilized as the disclosure document for Regulation A offerings. The small issuer is also able to "test the waters" for investor interest through broadcasts, advertisements and general mailings before deciding whether to incur the costs necessary to offer these securities. The exemption provided by Rule 504 of Regulation D permits an issuer to sell up to $ 1 million in securities in a 12-month period with no restrictions or conditions. In addition, for small busi- nesses interested in going public, the SEC has implemented a simplified registration and reporting system available to issuers with less than $25 million in revenues and less than $25 million public float. Of concern to a number of small companies is a recent proposal by the Financial Accounting Standards Board to revise the accounting rules for incentive stock options (ISOs). The proposed rules would require the reporting of stock option grants as a charge again ,t earnings and the disclosure of the effect of options on net income. Since stock options are used by some small companies, some believe that the effect of the reporting and disclosure requirements would be to harm emerging and high-growth companies. Others believe that without the accounting of possible future expenditures by companies, the confidence of small business investors will be affected. STATUS The SEC's final rules for its small business initiatives were published August 13,1992 and May 14, 1993 (57 Federal Register 36442 and 58 Federal Register 26509). DISCUSSION * Should the SEC and the state securities commissioners coordinate securities regulations to simplify registration and reporting requirements for small corporations? * Should the SEC adopt new rules or revise current rules to make it easier for small businesses to issue unregistered offerings in a single state or in regional markets and to facilitate secondary markets for small business stock? * If enabling legislation is adopted, should the dollar limits of Regulation A and Rule 504 be raised to make it easier for small businesses to raise capital? Should certain high technology industries be permitted to have higher dollar limits under these or other exemptions? * Should Congress pass legislation directing the SEC to draft regulations to continue current accounting procedures for incentive stock options? Securities Laws Should federal and state securities laws be changed to help small companies gain access to the public markets and to facilitate a secondary market for the stocks? If so, how? BACKGROUND Currently, most small corporations must comply with both federal and state securities laws. Small companies seeking investors from several states must comply with many complex registration and reporting requirements. In recent years, many states have adopted the small corporate offering registration (SCOR) form, which simplifies the registration and reporting requirements. The Secu- rities and Exchange Commission (SEC), as a result of recent amendments to its Regulation A exemption, permits companies to use the SCOR format for offering documents used in that exemption. Not all of the states have adopted uniform laws in using the SCOR form, and small companies still face complicated state and federal requirements. STATUS The Small Business Incentive Act of 1993 (S.479) was passed by the Senate on November 2,1993. The bill, which proposes to expand SEC small business initiatives, has been referred to the House for consideration. DISCUSSION * Should the delineation between federal and state securities laws be better defined? * What should the roles of the SEC and the state securities commissioners be with respect to small business public offerings and small business securities markets? * Should state securities commissioners have complete jurisdiction for public companies having less than $10 million in assets? * Should Congress grant preemptive powers to the SEC over the states with regard to small business public offerings or small business securities markets? * Should the SEC and the state securities commissioners, in a cooperative effort, establish a small business disclosure document to be reviewed by only one regulator? * Should regional regulators be appointed, either by the federal government or through state cooperative efforts, to govern small business securities transactions? * Current laws substantially limit the ability of small businesses to seek investors, especially from metropolitan areas close to state lines. Should regional or metropolitan markets be established to facilitate initial public offerings and to create a liquid secondary market for small business stocks? * Once a small business stock is sold through an initial public or exempt offering, it is difficult to trade eligible stocks on a secondary market. Should incentives be given to broker/dealers or to specialists to help foster a secondary market for small business stock? Should the incentive be in the form of a tax incentive? * An exemption on private placement offerings enacted in the Investment Company Act of 1940 permits offerings to no more than 100 smaller sized investors. Should Congress change this provision? If so, how? Small Business Administration 7(a) and 504 Loan Programs Should the SBA's 7(a) and 504 loan programs be changed? BACKGROUND Through its loan programs, the U.S. Small Business Administration guarantees bank loans to small businesses that the banks would not make on their own. Small businesses that need capital but do not have a credit history or that are involved in a volatile market might qualify for the program. Lenders that would not qualify a small business for a traditional loan may seek to have a portion of the loan guaranteed by the SBA. The most popular program is the Guaranteed Loan Program. The current rate of guarantee in the loan program varies from 70 to 90 percent of the loan, depending on the loan size and term. The maximum loan amount to any small business concern is set at $750,000. The SBA's 504 Loan Program provides long term, fixed-asset financing through Certified Development Companies to further job creation or community development. The 504 financing provides 40 percent of the financing package, while the private lender contributes 50 percent and the small business concern supplies the remaining 10 percent. Financing packages can fund up to $2.5 million in capital for a small business. STATUS Legislation was enacted in August 1993--the Small Business Guaranteed Credit Enhancement Act of 1993 (Public Law 103-81)--to increase the appropriation for the SBA's 7(a) Guaranteed Loan Program to almost $8.5 billion and for the SBA's 504 Program to 1.2 billion for fiscal year 1994. The law also changed the guarantee rate on some types of 7(a) guaranteed loans. Discussion * If the SBA were able to guarantee pools of small business loans, the pool could be sold on the secondary market or to pension investment companies. Should the SBA guarantee expanded to include pools of small business loans, and not just individual loans? * The SBA loan guarantee has typically be granted to small businesses that are unable to obtain capital from traditional sources. Should the SBA target specific industries or geographic areas that have a history of problems gaining a capital? * Should the maximum level of funding by the SBA in its loan programs, currently $750,000, be increased? If so, what should the limit be? * With the recent enactment of the Small Business Guaranteed Credit Enhancement Act of 1993, the guarantee rate on some 7(a) loans has changed and a marketing fee on some sales in the secondary market of SBA guarantees has been established. Should additional changes be made to the program? Venture Capital: Alternate Sources of Financing Should Congress enact legislation to encourage private investors and/or private and public pension funds to invest in small businesses or small business loan pools? BACKGROUND During the past several years, institutional venture capital investments in small businesses have declined from a total of $4.2 billion in 1987 to just over $1 billion in 1991. The investments recovered partially, to $2.5 billion in 1992 and 1993. The decline has been attributed in part to the recessionary climate and to a shortage of willing investors. The U.S. Small Business Administration's Small Business Investment Company (SBIC) Program experienced a downturn in venture capital investments as well. Less information is available on individual investors in small businesses--"angel capital." It is estimated that, in the early 1980s, angel capital invested more than $55 billion in small business ventures. This amount is estimated to have decreased by more than 50 percent by the early 1990s. STATUS The Small Business Credit and Business Opportunity Enhancement Act of 1992 restructured the SBIC program. The U.S. Small Business Administration published final rules for comment on August 5, 1993. The proposed National Competitiveness Act of 1993 would establish a government venture capital program for high technology companies modeled on the SBIC program. The Omnibus Budget Reconciliation Act of 1993 provides a capital gains exclusion for investment in qualifying small business stock by individual investors and a 50-percent exclusion on gains from the sale of qualified small business stock held tow five years. DISCUSSION * Should Congress enact legislation to increase participation by investment companies in small firms and in the creation of a secondary market for small business loans? * Should Congress relax provisions in the Internal Revenue Code that restrict the use of debt instruments by private pension funds to invest in small businesses or small business loan pools? Such restrictions have caused pension funds to incur unrelated business income tax. * Should Congress pass legislation creating incentives for public and private pension funds to invest more venture capital in small businesses? * Should investment tax credits for equity investments be reviewed as an alternative to traditional debt-based financing? * Should SBICs be established to focus on specific industries or geographic areas? * Should royalty or profit-sharing mechanisms be established to encourage venture capital investments? * Should the capital gains exclusion be increased? Should the exclusion be greater for seed capital investments held for more than 10 years? * Should a rollover of capital gains tax incurred be permitted for investors who sell existing investments and reinvest in qualified small companies? Community Development One of the most challenging problems the business community is likely to face in the next decade is the revitalization of America's economically depressed communities. If economic vitality is to be restored to urban and rural areas, small businesses must play a leading role in this effort. Empowerment zones and related state and local programs are designed to serve as catalysts to community revitalization. Economic renewal for the remaining part of this decade and beyond will depend largely on our ability to develop creative solutions to the most vexing problems facing our communities today--the downsizing of the defense industry, crime, substance abuse and the decaying infrastructure. Government policies and programs that encourage access to procure- ment opportunities, enhance technology transfer and stimulate rather than inhibit entrepreneurship and small business growth will help address some of these problems. However, the final answers must come from the communities themselves. Many in the small business community, as influential actors on the local level, are uniquely positioned to help resolve the crises faced by many of our nation's communities. For related information, see sections on Availability of Capital, p. 18; Encouraging Diversity in Small Business Ownership, p. 45; Substance Abuse, p. 53; Work Force Skills, p. 54; Access to Procurement Opportunities, p. 62; Home-Office Deduction, p. 84; and One-Stop Information Centers, p. 99. Community Development Financial Institutions Should the federal government implement a network of community development financial institutions to help promote growth in historically underserved areas? BACKGROUND Currently, four entities provide capital and technical assistance to historically underserved areas of the country: community development banks, community development credit unions, micro-loan funds and community development loan funds (also referred to as community development revolving loan funds). Community development banks are federally insured and regulated depository institutions. Community development credit unions are also federally insured and regulated; in addition, they have access to the community development revolving loan program for credit unions, which provides financial and related services to residents and communities. Micro-loan funds are private entities funded by either government agencies or loans from financial institutions. Most have focused on lending to women and minorities in lower income areas. Community development loan funds are private intermediaries that reinvest funds from social and institutional investors in lower-income communities. Many traditional financial institutions also target lending to communities--directly or through community development institutions--under the provisions of the Community Reinvestment Act. STATUS The Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1'75) and the Regulatory Reform Act of 1993 (H.R.3474) seek to establish a community development financial institutions fund. Community development financial institutions would be able to obtain federal matching funds to lend to busi- nesses in economically distressed areas. DISCUSSION * If the federal government implements a community development financial institution system, should the system be developed using existing financial institutions? * What, if anything, should be done to facilitate and improve education, training and technical assistance for small businesses to help them become more creditworthy? * Should the Community Reinvestment Act requirements of financial institutions be included in any initiatives for community development? * Should Congress address issues of redlining and diversification with respect to small business lending? If so, how? Community Revitalization What role should the federal government play with respect to new and expanding small businesses in distressed communities? BACKGROUND Throughout the nation there are many economically depressed areas-- communities experiencing a lack of access to capital, inadequate infrastructure and a fundamentally untrained work force. Small businesses are vitally important to these communities for jobs, tax revenues and investment. Currently, federal initiatives focusing on specific problems of economically depressed communities are underway in the U.S. Departments of Agriculture, Commerce, and Housing and Urban Devel- opment, and the U.S. Small Business Administration (SBA). In addition, many state and local governments have programs targeted for distressed communities. Some of these programs are coordinated with the federal programs; many operate independently of other efforts. A key difficulty in addressing the problems of distressed communities is the wide variation in the problems to be addressed. Each distressed community is unique, with its own strengths and weaknesses, making it impossible for any broad-based initiatives to effectively address every community's needs. An example of this is the vast difference between rural and urban distressed communities. Rural communities typically lack effective sources of communication and in some instances lack a strong infrastructure, while urban distressed communities are more susceptible to crime and violence. As the needs of distressed communities are different, so are the needs of the small businesses located within them. Small businesses in distressed communities face a variety of problems that can inhibit their survival and growth, among them, lack of access to capital or an adequate labor force, poor general quality of life (including the lack of an adequate infrastructure), and all too often a patchwork of inconsistent and confusing government programs and initiatives. STATUS The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) was enacted "to develop a National Intermodal Transportation System that is economically efficient, environmentally sound, provides the foundation for the Nation to compete in the global economy and will move people and goods in an energy-efficient manner." The law authorized more than $155 billion between 1992 and 1997 for highways, research, highway safety and mass transportation. The Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275) and the Regulatory Reform Act of 1993 (H.R.3474) seek to establish a community development financial institutions fund. Community development financial institutions would be able to obtain federal matching funds to lend to businesses in economically distressed areas. The House of Representatives passed the Regulatory Reform Act of 1993 in November 1993. Title XIII, Subchapter C, of the Omnibus Budget Reconciliation Act of 1993 (OBRA) authorizes the establishment of nine "empowerment zones" and 95 "enterprise communities." Tax incentives and grants are extended to businesses located in these areas. The U.S. Department of Agriculture's Rural Development Administration is currently revising its programs to facilitate access to capital for rural small businesses. In addition, the banking regulators, on December 21,1993, published in the Federal Register proposed regulations to revise the criteria for the Community Reinvestment Act (CRA). The proposed rules would provide greater access to and information on small business lending. Small financial institutions would have the opportunity to use a streamlined CRA compliance procedure. DISCUSSION * What initiatives should be enacted by federal, state and local governments to help facilitate access to capital for small businesses located in distressed communities? * Should legislative initiatives that target specific problems of distressed communities, like the Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275), be enacted or should more comprehensive legislative initiatives be sought? * Should laws such as the Community Reinvestment Act--which requires financial institutions to invest in their surrounding communities--be more vigorously enforced to reduce redlining? Should incentives be granted to financial institutions and insurance companies to encourage greater involvement in distressed communities? * What incentives, other than tax incentives, might be considered to attract and keep businesses in empowerment zones and enterprise communities? * How should federal government programs-- specifically the SBA's Small Business Development Center Program, the programs of the U.S. Department of Agriculture's Rural Development Administration (RDA), and the U.S. Department of Commerce's Economic Development Administration (EDA) and Minority Business Development Administration--be structured to help small businesses in distressed communities? * Currently, the SBA, the EDA and the RDA have micro-loan programs. What, if anything, should be done to facilitate or improve micro-loan assistance to small businesses? * What is the best means to provide expert technical assistance to small businesses in distressed communities? * Should the role of certified development companies be expanded? * What might be done to provide more effective education and job training programs in distressed communities? How should these programs incorporate the unique characteristics of the individual distressed communities? * What legislative or private sector initiatives should be undertaken to stimulate job creation by small businesses in distressed communities? * How should federal, state and local governments coordinate initiatives to build or rebuild the infrastructures of distressed communities? What, if anything, can be done to provide a safe and reliable transportation system? * What, if anything, can be done to provide a safe and drug-free workplace? * What is the best means to establish or to expand advanced telecommunications systems for small businesses in distressed communities? * What education initiatives can be put together by federal, state and local governments to ensure literate and trainable employees? * What is the best means for federal, state and local initiatives to recognize the cultural diversity of distressed communities? * Should federal, state and local governments be required to coordinate initiatives and programs for distressed communities? Should existing programs and policies be made more consistent and comprehensible to small businesses located in distressed communities? * What should be done to encourage the establishment of public/private partnerships with respect to small businesses located in distressed communities? Should more private/public sector initiatives such as small business incubators and mentorship programs be developed for distressed communities? Crime/Violence in the Workplace How does crime and violence affect small businesses and what steps can be taken to reduce this threat? BACKGROUND Whether it is shoplifting, vandalism, assault, armed robbery or even murder by disgruntled employees or customers, small business owners are being victimized by crime. According to a recent survey, an estimated 2.2 million Americans were physically attacked in the workplace during 1992. Moreover, murder is now the third leading cause of deaths in the workplace--trailing only motor vehicle and machinery accidents--according to the National Institute for Occupational Safety and Health. In a recent survey of small business merchants located in high-crime areas of the District of Columbia, nine out of every 10 business owners had been victims of crime. In addition to physical violence, crime can result in an increase in insurance premiums tow business owners. Estimates of the annual cost of crime are as high as $425 billion. STATUS In response to the increasing threat of crime and violence, small businesses are being forced to direct resources to anti-crime and security devices. Small businesses are also working with law enforcement agencies in developing strategies to fight crime and violence against business establishments. In the District of Columbia, police are providing businesses with electronic eavesdropping equipment to combat shoplifting and robbery. DISCUSSION * How does the threat of crime affect efforts to revitalize economically depressed urban neighborhoods? * How does the fear of crime and violence affect employee morale and productivity? * Should the Justice Department undertake initiatives to fight crime in the workplace? * Should business owners be allowed tax credits for installing security devices? * How can local law enforcement agencies work cooperatively and effectively with the small business community to reduce crime? * What steps can small business owners take to improve security in their workplaces? * Are "hate crimes" a significant problem, especially for minority business owners? Defense Economic Conversion Should the federal government help small businesses make the transition to a post-Cold War period, as defense installations are closed and defense industries downsize? If so, how? BACKGROUND Both the private sector and government are grappling with ways to ease the conversion from military to commercial markets that many defense related firms are facing. Both large and small businesses that have depended on defense contracts are severely affected by defense downsizing. Statistics on small business in the defense industry are limited, but the Office of Technology Assessment (OTA) estimates that one-third of the total amount purchased by the U.S. Department of Defense (DOD) from private businesses comes from small business. Total DOD awards to small businesses--the sum of prime contracts and subcontracts--was about $46 billion to $48 billion annually in the five years from 1986 through 199 35 to 37 percent of DOD awards to U.S. businesses. In addition to the small businesses engaged in defense-related work, there are thousands of other small firms that depend on the military, such as service and retail businesses located in communi- ties with concentrations of defense-related employment or in proximity to military bases. Firms of all sizes are coming to the realization that there is little likelihood of big markets for many defense products and services for years to come. The basic strategies that companies are adopting include concentrating on their core defense capabilities through acquisitions and mergers, streamlining their operations, shedding unprofitable defense business segments, increasing exports and diversifying into new markets. Problems likely to prove particularly troublesome for defense-related smaller firms can be expected to manifest themselves in several areas: Management: Compared with large firms, small businesses have limited resources and personnel devoted to management functions. Information: Access to information on the defense market, alternative markets, technology and business assistance programs will be essential to successful adjustment. Technology Transfer: Many high-technology firms in the defense industries will face a choice between adapting their defense technologies to commercial uses or forfeiting valuable assets. Lim- ited experience in managing the undertaking, large cash flow requirements and the lengthy process needed to develop, patent and market technological innovations can be serious barriers to successful technology transfer. Marketing: For many small businesses, the adjustment to reductions in defense outlays is marketbased rather than product- or technology-based. According to a DOD report, successful diversification requires achievement of at least five conditions: (1) top management involvement in the diversification project; (2) transfer of the defense industry firm's unique technology to civilian production; (3) extensive market research; (4) acquisition of new, skilled technical and marketing personnel; and (5) commitment and capital to pursue the conversion project for up to 10 years. STATUS The federal government provides various types of assistance to small firms attempting to adjust from defense-related production to the civilian marketplace. These programs include: the Small Business Administration's loan guarantee and business development programs; the U.S. Department of Commerce, Economic Development Administration's grant assistance and National Institute of Standards and Technology programs; the Department of Labor's Economic Dislocation and Worker Assistance Act job training assistance; Export-Import Bank assistance; and the Small Business Innovation Research grant programs run by individual federal agencies. DISCUSSION * Do defense businesses have unique needs that are not being met by existing government programs? What should be done to meet those needs? Who should deliver the services--the federal government, state and local governments, the private sector? * Should funding and other types of support be targeted to selected regions? * Should federal sources provide the information, coordination and resources necessary to facilitate the development and implementation of innovative state, regional and local efforts? If so, how? * How do the antitrust laws benefit or impede small firms in this effort? * Should the government be in the business of providing direct training assistance or should it spend dollars to create opportunities to allow employers to determine the most effective means to employee training? * Should the government assist the community generally, as well as small businesses, when a military base closes? If so, how? Franchising Should Congress pass legislation to encourage the growth of small franchisors and franchisees within the franchising industry? If so, how? BACKGROUND During the past decade, franchising has become more affordable for entrepreneurs and has expanded into many different business areas. No longer limited to the food services area, many franchise opportunities are available in industries such as preschool education, maid services, computer sales and servicing, and construction contracting. In 1990, there were 533,000 franchised establishments, up 35 percent from 1970. Small franchise companies--those with fewer than 10 franchisees-- are the fastest growing segment of the franchise sector. Between 1978 and 1986, the number of these firms increased by 143 percent, from 304 franchisors to 739; their sales grew by 2,700 percent. Franchising has been largely unregulated except for federal anti-fraud statutes enforced by the Federal Trade Commission and state anti-fraud statutes. Recently, however, states have begun to take a more active role in pursuing abuses in franchising. Areas of the franchise sales process needing improvement, according to some franchise participants and experts, include the cost burden of regulation, the availability of financial information, the limited resources for enforcement of regulations and the non-uniformity of state disclosure rules. STATUS Recently, the state of Iowa enacted legislation that establishes disclosure guidelines for franchisors along with strict anti-fraud measures. Other states are considering similar legislation. Legislation introduced in the 102d and 103d Congresses sought to mandate disclosure requirements for franchisors and would provide for protection of franchisees when a franchise is terminated. No action was taken on the proposed legislation. Legislation proposing additional disclosure requirements tow franchisors was introduced in the 103d Congress and hearings were held by the House Committee on Small Business. DISCUSSION * Should additional franchisor disclosures be implemented, even if they add additional costs to the transaction? If so, which? * Should a federal preemptive statute be enacted to eliminate the state patchwork of laws on franchising--and possibly increase the potential for franchising expansion? * Should the government take any initiatives to encourage small business franchises? If so, what? Homebased Business Should the federal government encourage homebased business ownership? If so, how? BACKGROUND Homebased businesses offer important contributions to communities and the economy. They serve as incubators for new businesses, allow inexpensive testing of new products, provide jobs to those who might otherwise be unable to work because of physical limitations or household responsibilities, and purchase billions of dollars worth of computer equipment, office supplies and business services. Homebased business owners are often selfemployed individuals who operate a business or profession primarily from a home office, while telecommuters are employees who do office work at home during normal business hours. According to a 1990 proprietary survey, there are approximately 7.4 million home business owners, including those with a side business, and 7.2 million freelance workers--a total of 14.6 million homebased business persons out of a work force of 122.7 million. A number of unresolved policy questions affect homebased businesses: There is no formal definition of "homebased businesses." They may be sole entrepreneurships or virtual joint ventures; they may employ one or more workers; their owners may do intermittent work or may work full time, part time, or overtime. The Internal Revenue Service and the U.S. Department of Labor have different regulations governing worker classification. The question remains open whether U.S. Department of Labor and Environmental Protection Agency regulations should apply to home- based businesses. The U.S. government and several major industries are in the process of downsizing and contracting out, encouraging product development through teaming or joint ventures in virtual corporations. Homebased businesses are well positioned to take on this work, but government regulations inhibit companies from sharing new product development ideas. Local zoning laws with respect to homebased businesses vary across jurisdictions. STATUS On January 12,1993, the U.S. Supreme Court ruled that taxpayers could not write off their home office expenses if they spend more time and do more important parts of their business activity outside of their homebased office. The ruling leaves open the question of deductibility for homebased businesses involving consultants, independent contractors, repair people, some doctors and others in service businesses. (For more information, see the Home Office Deduction discussion.) DISCUSSION * How do federal, state and local laws affect homebased businesses? Should laws that place broad restrictions on homebased businesses (such as hiring restrictions) be revised? * Should the definition of homebased business be standardized? If so, what should it be? * Should an effort be made to coordinate Internal Revenue Service and U.S. Department of Labor regulations governing worker classification? * How should homebased businesses be categorized for environmental and other regulatory purposes? * Should regulations governing new product development be relaxed? If so, how? * Should national standard zoning guidelines be developed with respect to homebased businesses? * Should incentives be offered to encourage the startup and growth of homebased businesses? Rural Development Should new efforts be initiated to stimulate the development of small businesses in rural areas? BACKGROUND Economic expansion in rural America depends upon the creation and growth of small businesses, which create jobs and stimulate economic development. Two trends are shaping the rural America of the 1990s: the long-term move away from natural resource "extractive" industries and the increasing competition in international markets. Both trends have tended to draw industry away from rural locations. STATUS The 1990 farm bill established the new Rural Development Administration in an effort to shift the rural focus from agriculture to rural development. The legislation also prompted the establishment of the National Initiative on Rural America and the creation of state rural development councils, which currently operate in 38 states. DISCUSSION * Should more investments be made in rural roads, bridges, water and waste removal systems to encourage business development? If so, how can such infrastructure investment be stimulated? * Should government programs target more capital and credit to small businesses in rural areas? Should the Community Reinvestment Act be revised to encourage banks to be more receptive to small business credit needs, especially in rural areas? * Should federal funding link job creation with a job training strategy that would encourage rural youth to stay in their communities? * Should the state rural development councils' role be expanded? SBA Micro-Loan Program Should the U.S. Small Business Administration's micro-loan program be made permanent? BACKGROUND The SBA's Micro-Loan Demonstration Program is a pilot program designed to make loans through intermediaries to very small businesses in economically depressed areas of the country. In addition, the program offers grant monies to qualifying entities that offer technical assistance to small businesses. Loans by intermediaries are short-term with fixed interest rates. The loans may be for as much as $25,000; the average loan is $7,500. The grant monies provide marketing, management and technical assistance to low-income individuals who are otherwise unable to obtain private sector financing for their small businesses. The program was first implemented in 1992 and issued loans to 45 intermediary lenders. The program was expanded by the Small Business Credit and Business Opportunity Enhancement Act of 1992, which permitted the SBA to make loans to up to 110 intermediaries. STATUS The Micro-Loan Demonstration Program is scheduled to sunset in 1996. In addition to SBA's micro-loan program, other federal micro-loan programs exist within the U.S. Department of Agriculture's Rural Development Administration (RDA) and the U.S. Department of Commerce's Economic Development Administration (EDA). DISCUSSION * Should appropriations for the intermediary grants be increased to provide for more technical assistance to small businesses? Should rural intermediaries be eligible to subcontract out the technical assistance in areas where their resources must be spread over a wide area? * Should the micro-loan program be changed from its current status as a direct lending authority program to a loan guarantee program, thereby enabling the SBA to make more loans to intermediaries, while reducing the government's costs in administering the loans? * Currently, the RDA, the EDA and the SBA 311 have micro-loan programs. What, if anything, should be done to facilitate or improve micro-loan assistance to small businesses? SBA Technical Assistance What can government do to enhance small business development? BACKGROUND Nearly all--99.7 percent--of the businesses in the United States are small businesses. The U.S. Small Business Administration reports that 54 percent of the private work force was in small firms in 1990 and that 65 percent of the new jobs created between 1976 and 1990 were in small firms. Yet a quarter of new businesses disappear before completing their first two years of operation. Understanding the big picture, as well as finding solutions to immediate problems, has never been more important to the survival of new and existing small businesses. The SBA has several programs through which it provides business development assistance to small businesses: The Business Information Center (BIC) Program offers public facilities designed to address the needs of the small business owner/entrepreneur in business planning. BICs are currently located in Atlanta, Chicago, Houston, Los Angeles, St. Louis and Seattle. Information is available from a variety of sources, including a reference library, video and audio cassettes, electronic bulletin boards, computer simulation models and computerized templates and spreadsheets. In-house business counseling is also available. The Small Business Development Center (SBDC) Program was established by Congress in 1980 to make management assistance and counseling widely available to existing and prospective small business owners. The 1986 White House Conference on Small Business recommended strengthening the SBDC program. The SBDC program cur- rently has 56 primary centers and 935 subcenters. A total of $67 million was allocated in fiscal year 1993, and the same amount has been requested for fiscal year 1994. In 1992,222,497 clients took advantage of SBDCs, and more than 319,000 people attended SBDC training programs. The SBDC program is a cooperative effort of the private sector, the educational community, and federal, state and local governments. The Service Corps of Retired Executives (SCORE) matches retired business executives--volunteers-- with business owners seeking advice on how to operate their businesses more effectively. SCORE volunteers are members of 390 locally organized, self-administered chapters offering services in more than 700 locations throughout the United States, Puerto Rico and the U.S. Virgin Islands. Approximately 12,500 men and women business executives, whose collective experience spans the range of American enterprise, share their management and technical expertise with small business owners and prospective entrepreneurs. SCORE has permanent authorization and was funded at $3.9 million in fiscal year 1993 and at $3.5 million for fiscal year 1994. STATUS The U.S. Congress is considering "competitiveness" legislation (H.R. 820 and S.4) which would add to the network of technical assistance centers experts who could help small businesses adopt or use new technologies. The legislation also would provide grants and loans to businesses for developing new manufacturing technologies. As part of the implementation of empowerment zones under the Omnibus Budget Reconciliation Act of 1993, the SBA has proposed to establish one-stop capital shops in each empowerment zone. These shops would work with state, local and private sources to offer a broad range of information services and technical assistance on gaining access to capital. DISCUSSION * Should new, cutting-edge opportunities be created to help small business owners cope with shrinking markets, technologies and production requirements? * Is the SBDC program effectively meeting the management problems of small business? Should it be strengthened? * SCORE volunteers of ten express concern that their activities are limited because of a lack of funds. Should SCORE receive additional funding to improve its support for small businesses? * Staying on top of business responsibilities and rights with respect to the environment, public health and other issues is a constant challenge for small businesses. How can complete, accurate and current information be accessed by small business owners so that they can manage their businesses effectively and profitably? Environmental Policy Environmental protection has become a major concern in recent years because of an emerging environmental ethic in the business community as well as among the public at large. Environmental laws enacted by federal, state and local governments have brought improvements in environmental quality and economic opportunities for some businesses. However, regulatory laws have sometimes had a negative economic impact on the small business community, slowing productivity and job creation and costing well over one hundred billion dollars annually. Federal policy must set the importance of environmental concerns in balance with the needs of the small business community, a sector particularly vulnerable to burdensome environmental regulatory requirements because of more limited resources. For further information on environment-related topics, see Small Business Size Standards and Critical Technologies. ------------------------------------------------------------------- Cost-Effective/Efficient Environmental Protection What approaches should be implemented to achieve cost-effective and efficient environmental protection? Background Environmental protection (such as that required under the Clean Air and Clean Water Acts and the Endangered Species Act) is performed almost exclusively by command-and-control regulations, by which the government dictates specific behavior or equipment to meet a government-prescribed standard. This method is used in implementing land use prohibitions, as well as permitting requirements for protecting wetlands and endangered species. Small businesses support cost-effective and efficient environmental protection. Some small businesses, especially in the environmental technology industries, have benefited from the current environmental approach. However, many small firms are subject to burdensome requirements, the costs of which may not be adequately considered by governmental regulators during the process of establishing acceptable pollution levels. It has been argued that the command-and-control approach is inherently inefficient and ill-suited for environmental protection. Critics of this approach say that inflexible rules can be imposed from a central location by regulators who often have insufficient information to accurately determine the least costly means of achieving the optimal level of environmental protection for a specific location. Status In its National Performance Review, the Clinton Administration recommended pollution control improvements. The recommendations were to streamline the permitting process, eliminate duplicative regulations and encourage market-based approaches, such as tradable pollution rights. Discussion Measures that could be considered to make environmental protection more efficient and cost effective include the following: * Mandating that good science, realistic risk assessments, comparative risk assessments, net health analyses and cost/benefit analyses be used in drafting environmental rules and legislation. * Establishing a Bureau of Environmental Statistics to permit accurate measurement and assessment of environmental quality and the effects of environmental regulation. * Mandating that environmental requirements be established by an independent, objective body only after assessing the tangible, measurable public health or environmental harm caused by the activ- ity to be regulated; also requiring that the tangible, measurable benefits of the requirements exceed the costs of those requirements. * Relying on market mechanisms, such as using tradable emissions/discharge permits and privatizing natural resources. * Using alternative regulatory approaches, such as regulating through private institutions (for example, relying on industry self-regulation). * Expanding and strengthening private property rights. * Expanding current definitions of "regulatory takings" of private property--that is, significant reductions in the value of property because of regulatory restrictions--and shifting from landowners to the government the burden of proof that land use prohibitions do not constitute regulatory takings. * Allowing cross-media permitting--that is, granting permits for more than one medium (air, land or water)--with greater interaction between trade associations, industry representatives and government agencies. * Strengthening the Regulatory Flexibility Act by permitting judicial review and requiring that the indirect impacts of regulation be measured. * Preempting some state and local requirements with federal requirements. * Improving communication and feedback between the EPA and industry throughout the rulemaking process. * Improving government outreach to small business. Government Outreach to Small Business Is there a need for improvements in the communication between government and small businesses on matters concerning environmental protection? BACKGROUND Small businesses face increasingly complicated and burdensome laws. At the same time, the government may not be doing enough to ensure that small businesses understand environmental requirements or to assist them in complying. STATUS On November 15, 1993, the U.S. Small Business Administration and the U.S. Environmental Protection Agency signed a memorandum of understanding in which they agreed to work together to "encourage, support and enable U.S. small businesses to develop, market, and/or adopt cost- effective environmental (including pollution prevention) technologies to achieve economic growth and environmental compliance." Since fiscal year 1992, the SBA's funding has included between $400,000 and $500,000 for a demonstration program of research and technical assistance to small businesses in complying with some of the air toxics provisions of the Clean Air Act. The project is being conducted at the University of Northern Iowa. DISCUSSION Measures to be considered to improve government outreach to small businesses include the following: * Establishing mechanisms for greater involvement of small businesses in the legislative/rulemaking process. * Supporting effective outreach to small businesses by EPA regional offices through trade associations and other outreach vehicles. * Requiring implementation by the EPA of "one-stop shopping" for environmental regulatory information for small businesses. * Greater outreach by the SBA, utilizing small business development centers (SBDCs) and other organizations. * Increasing small business awareness of environmentally sound voluntary pollution prevention practices. * Supporting better communication about opportunities in the environmental technology business. * Supporting additional resources, including funding, for EPA's Office of the Small Business Ombudsman (OSBO) and increasing OSBO's visibility within the small business community. * Providing small businesses with free or low-cost access to compliance assistance. Greater Relief from Environmental Regulations for Small Business Should measures be taken to improve the flexibility of environmental regulations that apply to small businesses? If so, what measures should be considered? BACKGROUND Small businesses are finding it difficult to comply with increasingly burdensome environmental requirements. Compared with large firms, small firms generally have less time and money available for environmental regulatory compliance and it often takes them much longer to learn about environmental regulations and to obtain the financing necessary to comply with them. A few environmental requirements provide exemptions for small businesses. However, the number and scope of the exemptions are often very limited. For example, small businesses with more than nine full-time employees must file toxic release inventory (TRI) reports under certain conditions even when they do not release or transfer any quantity of a listed chemical from their facility. Also, exemptions are not always appropriate: being small is no excuse for causing tangible harm. Unnecessarily burdensome environmental requirements can be substantially reduced through increasing regulatory flexibility toward small businesses. The Regulatory Flexibility Act (RFA) requires federal agencies to evaluate the effects of their proposed regulations on small entities and, where possible, reduce any disproportionate adverse effects. Administration of the RFA program in the Environmental Protection Agency is in the Office of Policy, Planning and Evaluation (OPPE). Some have argued that more objective oversight and administration might be achieved through the agency's small business ombudsman's office. STATUS In Congress, H.R. 830 was introduced early in 1993 to strengthen the RFA. The RFA can benefit small firms during the regulatory process by bringing public scrutiny to bear on specific proposed regulations. For example, the EPA is considering a petition submitted by the U.S. Small Business Administration's Office of Advocacy to exempt facilities that release or transfer 5,000 pounds or less of a listed chemical from filing TRI reports. DISCUSSION Measures to be considered for increasing the flexibility of environmental regulation may include: * Greater use of de minimis exemptions--provisions exempting companies that discharge very small quantities of chemicals. * Greater use of tiering requirements--allowing more than one standard depending on the facility's size or the quantity or type of chemical discharge. * Greater use of phase-in periods and extended deadlines to allow time for outreach programs and for small businesses to obtain required financing. * Allowing substitution of pollution prevention for enforcement. * Greater flexibility in enforcement in general. * Mandating communication packages to communities affected by environmental regulations. * Using proactive preproposal discussions. * Requiring the EPA to implement a consultation program similar to that of the Occupational Safety and Health Administration. * Better defining "small business" for purposes of applying environmental requirements. * Requiring the EPA, through measures such as a strengthened Regulatory Flexibility Act, to develop less burdensome regulatory approaches that achieve statutory requirements. * Requiring that proposed financial penalties pass a "reasonableness" test to prevent assessing fines on businesses making good-faith efforts to comply with environmental requirements. * Exploring the concept of substituting innovative penalties, such as mandatory audits or mandatory hiring of environmental personnel, for the existing fine scheme. * Requiring agencies having an independent ombudsman program to place the administration of the RFA program under the ombudsman. Impact of Environmental Laws on Access to Capital for Small Business What measures should be taken to reduce or eliminate the adverse impact of environmental laws on access to capital for small businesses? BACKGROUND In recent years, it has been argued that a number of environmental laws have had an adverse effect on small business access to capital. Those with the greatest impact so far have been Superfund and the Resource Conservation and Recovery Act (RCRA). The Superfund program was created to clean up hazardous waste sites. RCRA regulates solid waste, especially hazardous wastes, and imposes technical and financial requirements on owners of under- ground storage tanks. Environmental laws may have affected small business access to capital in several ways. First, investors are increasingly reluctant to invest in small businesses because increasing numbers of investors have been held liable for environmental cleanups. Superfund and RCRA contain exemptions from liability for investors that do not exercise control over the operations of businesses found liable for cleanups. However, over the years, court decisions have substantially eroded these exemptions, holding investors jointly and severally liable without showing that the investor exercised control over business operations. Second, investment is more difficult since uncertainty resulting from even potential liability creates an incalculable risk for investment decision making. Third, the increasing costs of environmental requirements are forcing small businesses to divert their limited resources from generating profits to complying with environmental regulations. Investors are sometimes reluctant to lend capital to purchase pollution control equipment since such equipment does not generate revenue. STATUS Small business investors, including the U.S. Small Business Administration, have been affected by environmental laws, especially by the lack of protection for secured creditors under environmental laws. This situation has further discouraged invest- ing in small businesses. Some attempts were recently made to limit lender liability of investors. In 1992, the Environmental Protection Agency amended regulations of the Superfund Act to delineate more clearly when a secured party would be liable for environmental cleanups, but this change has had little effect. Congress is considering limiting lender liability with respect to environmental laws. Among the bills introduced in the 103d Congress were the Amendments to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 Act of 1993 (H.R. 2462), and the Depository Institutions Regulatory Improvement Act of 1993 (S.l 124). DISCUSSION Measures under consideration for reducing/eliminating the adverse impact of environmental laws on access to capital include: * Making Internal Revenue Service policy consistent with the tax laws, especially with legislative intent. * Significantly limiting lender liability. * Allowing "covenants not to sue" on development projects, especially for urban redevelopment projects. * Educating the lending community on environmental requirements for small businesses. * Establishing an environmental risk insurance program . * Providing greater access to SBA loan guarantees for environmentally sensitive projects. * Amending lender liability to include reasonable protection for equity investors who are not involved in day-to-day management of the business. Non-Point Sources of Water Pollution How will regulation of non-point water pollution sources affect small businesses? BACKGROUND Efforts to reduce or eliminate water pollution have so far focused primarily on "point source" discharges, which are discharges at a specific single location, such as a pipe. "Non-point sources" are diffuse sources of pollution that are not regulated as point sources. Non-point sources are normally associated with land runoff (agricultural, silvicultural, construction or urban), precipitation, atmospheric deposition or percolation. The great attention paid to point sources has significantly reduced point sources' contributions to water pollution problems. Most water pollution now originates from non-point sources, and gov- ernment regulators have recently begun focusing more attention on them. Section 6217 of the 1990 Coastal Zone Management Act Reauthorization Amendments required all states with federally ap- proved coastal zone management programs to submit non-point source pollution control programs to the U.S. Environmental Protection Agency and National Oceanic Atmospheric Administration (NOAA) for approval. Many small businesses are concerned that the non-point source provisions in the reauthorization bill are too rigid, complex and costly to effectively reduce non-point source pollutants. They believe that non-point source proposals may introduce national land use planning and intrude in an area traditionally regulated at the state level. STATUS The Clean Water Act reauthorization bill attempts to implement a major regulatory program for nonpoint source water pollution. The Congress will act on this legislation in 1994. DISCUSSION Issues to be considered in regulating non-point sources include: * Federal land use planning. * Federal regulation in areas traditionally regulated by the states. * Concerns that standards be based on good science and realistic risk assessments. * Avoiding takings of private property without just compensation. (See also the discussion under Cost Effective/Efficient Environmental Protection.) Recycling Are additional measures needed to encourage environmentally sound recycling? BACKGROUND Recycling requirements have created opportunities for some small businesses in the recycling industry. Recycling is sometimes the most cost-effective and efficient approach for achieving waste and pollution reduction. Yet small businesses are sometimes ill-informed about environmentally sound recycling practices. Some argue that promotion of recycling through direct government interventions--for example, by imposing recycling mandates on industry--can distort recycling markets, cause inefficient recycling and even sometimes cause greater environmental harm. Moreover, voluntary recycling by small businesses can be hampered by burdensome government definitions of solid and hazardous waste. Regulatory obstacles to on-site treatment and recycling of wastes can also inhibit small business recycling. STATUS Some state and local governments have imposed recycling mandates on industry. Some in Congress wish to follow suit with nationwide recycling mandates. The U.S. Environmental Protection Agency (EPA) recently assigned a task force the responsibility of modifying its regulatory definition of solid waste under the Resource Conservation and Recovery Act (RCRA). This could affect some recycling practices. The EPA is reforming its regulation of hazardous wastes under RCRA's Subtitle C. The agency recently established a committee of environmental, industry, state and federal representatives to develop hazardous waste regulatory options. This initiative could affect some recycling practices as well. Executive Order 12873, signed in October 1993, imposes recycling mandates on the federal acquisition process. DISCUSSION Policies that encourage efficient recycling may include the following: * Reforming government regulation of waste handling, especially hazardous waste. Government paperwork and permitting requirements for handling waste can discourage market-driven recycling because of the high costs and liability incurred by parties attempting to recycle such waste. * Encouraging local jurisdictions and other parties handling waste collection to charge a collection fee based on the weight or volume of the waste collected. Flat-rate fees provide no incentive for waste generators to separate material for recycling from their waste streams. * Eliminating government intervention in the recycling marketplace. * Providing small businesses with more information on environmentally sound recycling practices. * Allowing small businesses to perform on-site recycling of waste streams in a manner that achieves both reasonable business and environmental goals. Reducing Paperwork Required by Environmental Regulation Should environmental paperwork requirements be reduced for small businesses? If so, how? BACKGROUND The paperwork burdens imposed on small businesses because of environmental regulation have increased substantially over recent years. Small businesses may be required to comply with as many as 100 environmental regulations. The limited resources available to small businesses make it increasingly difficult for them to cope with the added paperwork burden. Moreover, duplicative forms used to solicit information about environmental compliance often force small businesses to answer the same questions repeatedly. STATUS The National Performance Review recommended that the U.S. Environmental Protection Agency's permit program be streamlined in ways that include establishing a permit clearinghouse to serve as a single point of contact and piloting a cross-program permit tracking system. Small business advocates are urging Congress and the EPA to consolidate paperwork requirements. DISCUSSION Measures to be considered for reducing paperwork burdens include: * Allowing filing by computer. * Consolidating or eliminating duplicative reporting required by the EPA and other federal and state programs. * Strengthening and enforcing the Paperwork Reduction Act. * Adopting cross-program permitting. * Allowing greater use of group permitting, such as was utilized in the storm water permitting program. * Improving EPA assistance to small businesses in explaining regulatory requirements and the measures needed for compliance. * Making guidance documents more readily available. * Simplifying formats for providing information. * Mandating that the Occupational Safety and Health Administration (OSHA) finalize its material safety data sheets (MSDS). * Standardizing permitting requirements. * Creating an "emissions bank" that would allow companies to trade emissions "credits" for offsetting purposes under the Clean Air Act. Superfund How should Superfund be reformed? BACKGROUND The Superfund program was created by Congress in 1980 for the purpose of cleaning up the nation's hazardous waste sites. The U.S. Environmental Protection Agency was given broad authority to perform this function. The program established a fund to pay for the cleanup of these sites. Superfund is financed primarily by taxes on crude oil, certain chemical feedstocks and an environmental corporate tax. The fund is used when "responsible" parties cannot be located or are unwilling or unable to clean up the site. However, the ultimate costs of hazardous waste cleanup are borne by anyone associated with a hazardous waste site. The EPA can require not only a generator of hazardous wastes, but any transporter of hazardous wastes to a site, or any past or present owner or operator of the land on which the site is located, to pay for the entire site's cleanup costs. This has meant that parties, frequently small businesses, that had nothing to do with creating the hazardous waste site, have had to pay the full cost of the site's cleanup. A review of the costs and benefits of the Superfund program indicates the following: The EPA is authorized to spend a total of $15.2 billion through 1994 on site cleanup. Superfund accounts for 25 percent of EPA's budget. The EPA recently estimated that the Superfund program will ultimately cost $27.2 billion. However, the General Accounting Office has questioned the reliability of EPA's Superfund cost estimates, projecting that Superfund could cost up to $300 billion. Along with questions about cost, there are a number of questions about the effectiveness of the Superfund program. As of October 1991, about 1,200 hazardous waste sites were scheduled for cleanup. Only 63 sites were cleaned up between 1981 and October 1991. Superfund's liability system ensures that the contributions of various parties toward hazardous waste cleanup stand in little or no discernable relation to their relative responsibility. Moreover, responsible parties are frequently required to clean a site to the point that it is cleaner than the surrounding water and soil. And even after a wastesite has been removed from the list of sites to be cleaned up, the EPA can decide to apply a more stringent cleanup standard in the future and may seek payment from the same parties. A survey conducted in September 1993 at the University of New Hampshire's Center for Venture Research showed that Superfund liability significantly affects small firms' ability to implement investment decisions. Nearly 70 percent of the respondents cited the liability system as Superfund's biggest problem. STATUS The Superfund program was last reauthorized in 1990 and is due for reauthorization in 1994. The Clinton Administration has recognized that changes in the Superfund program are necessary and has promised to require polluters to "pay more" of the cleanup costs. DISCUSSION Measures to be considered for addressing Superfund include: * Eliminating retroactive liability prior to January 1, 1987. * Requiring good science and realistic risk assessments in assessing hazards from waste sites. * Requiring action/cleanup decisions to be based upon real risks only. * Requiring good science and realistic risk assessments in establishing cleanup standards. This would include a realistic consideration of future uses of the site. * Requiring cost-effective remedy selections that have been reviewed by objective, independent professionals. * Eliminating "reopeners"--reopening the remediation process at a site after it has been closed. * Streamlining the de minimis/de micromis process--the process originally intended to provide a quick exit from liability for waste generators that contributed minimum quantities of waste to a site. * Opening the de minimis/de micromis process to input from EPA's small business ombudsman. * Offering alternative funding strategies for site cleanups. Tax Incentives for Investing in Pollution Control Equipment Should tax incentives be available to small businesses for investing in pollution control equipment or other pollution reduction measures? BACKGROUND Small businesses are finding it increasingly necessary to invest in equipment or other property to comply with environmental regulations. Yet pollution control equipment cannot be rapidly written off under current tax laws, nor are tax credits available for such investments. Moreover, American small businesses are finding themselves at a competitive disadvantage because of disparities between U.S. and foreign tax policy with respect to these investments. In Canada, pollution control equipment for air and water pollution can be depreciated over a three-year period, with 25 percent of the investment qualifying for a write-off the first year and the balance written off over the remaining two years. In France, equipment used to purify industrial water or air or to remove odors receives a 50-percent deduction in the first year. Structures used to accomplish these tasks can also be expensed in the first year. STATUS On June 17, 1993, legislation was introduced to provide tax incentives for pollution abatement equipment. DISCUSSION * Should tax incentives (deductions, tax credits) be provided for pollution abatement equipment, remedial costs and/or pollution prevention/reduction measures? If so, what incentives should be allowed? Human Capital Over the next decade, 85 percent of new workers will be women, immigrants and minorities. The diversification of the work force is one of the major factors that will influence American businesses in the 21st century. Small and growing companies will also need to offer increasingly costly employee benefits in order to attract and retain good employees. Health care coverage, retirement plans, unemployment compensation, insurance and workers' compensation premiums constitute a growing portion of employer costs. To alleviate burgeoning costs, federal and state policymakers are considering mechanisms that will better enable businesses to offer comprehensive employee benefits packages. Finally, small employers and entrepreneurs will need to ensure that they and their employees are adequately trained to meet the challenges of the 21 st century marketplace. Serious mismatches between the needs of employers and skills possessed by the work force will greatly affect economic productivity and international competitiveness. A shortage of skilled workers could have a disproportionate impact on the small business community, which generally offers relatively lower salaries and less extensive benefits than larger companies. Smaller firms will be scrambling to compete for--and train--the best workers in a tight market. For related information, see Fair Labor Standards Act; Striker Replacement Legislation; Unfunded Mandates; and Payroll Tax Reform. Access to Health Care Should employers be required to offer and pay for health care coverage for employees, or should individuals be required to enroll in health plans themselves? BACKGROUND While overall access to health care has improved over recent decades, the access picture has worsened for many, particularly the poor and uninsured. Lack of access typically results from economic, supply, distributional and sociocultural barriers. Most Americans receive their health care through private insurance or government programs. However, 38.9 million people--15.4 percent of America's total population--are uninsured, and many more are underinsured. While 16.6 percent of the non-elderly population in urban areas have no health insurance, 34.1 percent of those living in rural areas are uninsured. According to recent thinking, affordable health care costs can be achieved only when universal coverage is achieved. However, the cost of improving access to health care would depend on the extent and generosity of coverage, and the health care demands of those who are unable to pay for coverage. Many critics fear the creation of new entitlement programs because of the history of Medicaid, Medicare and Social Security growing well beyond original financial projections. Some argue that expanding access may cost the American public more money. Others believe that health care costs will decrease for most Americans under universal coverage. Preventive care might be expected to lower emergency room costs, for example. STATUS During the past decade, policymakers have discussed reform efforts that would improve access to health care. Included in the discussions about comprehensive health care reform are an employer mandate to provide health insurance, subsidies and tax credits to assist businesses in providing coverage, an individual mandate to obtain health insurance and a government-run health system. Incremental initiatives that would expand access include tax credits to assist low- and middle income Americans, private insurance market reforms and expanded use of medical savings accounts. DISCUSSION * How can the revenues for America's health care needs be raised? * Should employers be required to provide access to health care coverage to their workers? * What are the elements of small-group market reform and what has been their impact on improving access to health insurance for small firms? * Who are the uninsured and what can be done to improve coverage among this population? * Options include, but are not limited to, the following: Implement or phase in universal health care coverage, meaning coverage would be required for all Americans. Implement or phase in universal access to health care coverage, meaning all Americans would have an opportunity to be covered. Adopt incremental initiatives aimed at improving access and reducing health care costs. Adapting to Diversity in the Small Business Work Force What, if anything, can be done to encourage diversity and multiculturalism in America's small business workplaces? BACKGROUND The concepts of work force diversity and "multiculturalism" seek to recognize, respect and capitalize on the different backgrounds and experiences of employees. The composition of the U.S. work force is changing with the addition of more women and minorities; by the year 2000, these groups will account for more than half the work force. At the same time, new attitudes and legislation are making workplaces more welcoming environments for gay and lesbian Americans and for people with disabilities. Many companies that have implemented diversity programs report results that include a more productive, innovative work force and fewer discrimination-based lawsuits. STATUS Demographic, societal and legislative changes have led to changes in the composition of the work force. DISCUSSION * What, if anything, can the government do to help small businesses adapt to a 21 st century work force? * Is diversity training cost-effective for small businesses? Could such training help prevent discrimination-based lawsuits or the loss of trained, productive workers? * What, if any, research needs to be undertaken to determine what initiatives should be taken by small businesses to ensure that their work forces remain productive and cohesive? * Should schools assist the future work force by educating them about diverse cultures and backgrounds? * Should diversity training include education about HIV/AIDS? Americans with Disabilities Act Should the government provide financial incentives or additional assistance to help small businesses comply with the Americans with Disabilities Act (ADA)? BACKGROUND The Americans with Disabilities Act of 1990 prohibits discrimination on the basis of disability. It is estimated that there are approximately 43 million Americans with disabilities, and this civil rights legislation calls for an end to discrimination in employment, state and local government services, public accommodations operated by private entities, and telecommunications. The ADA has broad implications for businesses. The employment provisions prohibit discrimination against any qualified individual with a disability in all aspects of hiring and employment. They currently apply to employers with 25 or more employees and on July 26, 1994, will apply to employers with 15 or more employees. The public accommodations provisions prohibit discrimination in public access. Any entity that opens its doors to the public may be required to comply with the rules concerning the provision of goods and services and public access. Provisions of the ADA touch on nearly every aspect of workplace life, and full compliance has the potential for being costly for small businesses. Effective implementation of the ADA's goals is likely to require a broadly targeted information campaign, a common sense approach to concepts such as "reasonable accommodation" and recognition of small businesses' financial constraints. STATUS The ADA was passed in 1990. Businesses are now in the process of implementing provisions covering many aspects of workplace life. DISCUSSION * Should tax credits, deductions and training credits be provided to stimulate compliance? * Additional informational materials or resources could include targeted videos, guidelines or seminars. Would such assistance make a significant difference for small businesses in complying with the ADA? * In which areas are small businesses most likely to need help? Early Entrepreneurship Program Should small business and government support entrepreneurial education? If so, how? BACKGROUND Rapid advances in technology, competition from foreign imports, demographic shifts in the composition of the work force and the emergence of a global marketplace have combined to make the business world a complex, highly sophisticated arena. To be successful, small business owners and managers need advanced business management skills and techniques. Three decades ago, entrepreneurship as a career field was virtually non- existent. Few American colleges or universities offered degrees in this discipline. Entrepreneurial education was confined primarily to vocational and technical programs in the public school system. Today, entrepreneurial education is taught in 22 community and technical colleges, 16 high schools, and approximately 90 four-year colleges and universities throughout the United States and Canada. STATUS A recommendation to "encourage entrepreneurial education" ranked sixth on the list of 60 recommendations of the 1986 White House Conference on Small Business. The Office of Advocacy in the U.S. Small Business Administration has awarded a contract to study the incidence of entrepreneurial experience and the correlates of entrepreneurial success. The U.S. Small Business Administration, through the Service Corps of Retired Executives, is conducting a series of youth entrepreneurship programs. DISCUSSION * Should the small business community and government encourage entrepreneurship in American youth? If so, how? * How are work force skills and entrepreneurship skills distinguished from each other? How can young people with entrepreneurial talent be identified and motivated? * What role, if any, should small business leadership play in developing entrepreneurial disciplines? * Are there special needs for entrepreneurial training for women or minorities? If so, how should they be accommodated? * Do entrepreneurial training needs change from one industry to another? Encouraging Diversity in Small Business Ownership Should the government enhance business ownership among women, minorities, disabled individuals, and gay and lesbian Americans? If so, how? BACKGROUND While the percentage of small businesses owned by women and minorities is increasing, they are still underrepresented in the business population. Moreover, business ownership among diverse groups such as disabled individuals and gays and lesbians, while not as well documented, is becoming more visible. Women are starting businesses at twice the rate of men, and make up 32 percent of all small business owners. Between 1982 and 1987, the most recent years for which data are available, the number of women-owned businesses rose from 2,612,621 to 4,112,787, an increase of about 58 percent. This rate of growth is more than four times the rate for all businesses. Women-owned businesses currently employ more than 3 million workers--twice the number employed by women-owned businesses in 1982. According to the Census Bureau's Survey of Minority-Owned Business Enterprises, there were 1.2 million minority-owned businesses with total receipts of $77.8 billion in 1987--8.9 percent of all businesses and 3.9 percent of receipts. Businesses owned by African Americans accounted for the largest share of minority-owned businesses (34.9 percent ), while businesses owned by Asian Americans and Pacific Islanders accounted for the largest share of minority-owned business receipts (42.6 percent). The U.S. Small Business Administration's 8(a) Program is one tool for minority business development. The main purposes of the program are to foster business ownership and the competitive viability of firms owned by individuals who are socially and economically disadvantaged, and to expand their participation in federal procurement. The Business Opportunity Development Reform Act of 1988 was enacted to improve the program's administration and improve the ability of 8(a) certified firms to survive and remain profitable after their exit from the program. STATUS SBA Administrator Erskine Bowles is committed to making SBA's minority business development efforts more effective. His goals for improving the 8(a) Program include: (1) reducing the application processing time, (2) reducing burdensome reporting requirements, (3) improving technical assistance provided to program participants and graduates and (4) encouraging other government agencies to provide greater contract opportunities for 8(a) Program participants. A measure to ensure inclusion of women business owners in the federal procurement contracts process, H.R.2357, is under consideration in the 103d Congress. DISCUSSION * How can access to capital by minority business owners be increased? What, if any, steps should be taken to reduce requirements that may impede minorities from obtaining capital or to enhance access to equity capital? Should greater reliance be placed on state/local/private sector capital formation programs? * Should alliances between large and small businesses be strengthened? Should large businesses be provided with incentives to assist small businesses with capital formation? * How can procurement opportunities for minority business owners be increased? Should procurement goals be increased for government agencies? Should mechanisms be developed to ensure better compliance with goals by government agencies--including local bonding programs? Should research and development contracts be targeted through subcontractors? * Should disabled business owners and/or gay and lesbian business owners be able to qualify under certain circumstances as "socially or eco-nomically disadvantaged" individuals eligible for participation in SBA's 8(a) Program? * Should the definition be changed, as some have suggested, from "socially disadvantaged business" (SDB) to "historically underutilized business enterprise" (HUBE)? * Should the government ensure equal access to government services without regard to gender, race, national origin, handicap, age or sexual orientation? * Should government outreach to community based organizations be enhanced? * To be successful, it has been argued that minority entrepreneurs need not only business startup and development assistance, but greater access to business education resources. Should the federal government facilitate these efforts, and if so, how? * How should the 8(a) Program be improved? Should Congress enact legislation that establishes a specific share of federal contract dollars for 8(a) firms? As the number of participating firms continues to grow, should the 8(a) Program be restructured to assure a more equitable geographic and industrial distribution of 8(a) contracts? How can access to effective technical and business development programs be increased for 8(a) contractors? * Should more assistance be made available to small, minority-owned and women-owned businesses in complying with federal regulations? Should there be greater coordination with state and local regulations? * Women business owners constitute a rapidly expanding segment of the U.S. business population. What public policy concerns, if any, (for example, child care) should the federal government consider to assist this growing sector of our small business economy? * Should the federal government promote exporting by women and minorities, and if so, how? * For statistical purposes, should efforts to determine the business owner's gender, race, etc., be enhanced (for example, through use of a check-off on tax forms)? Health Alliances/Health Purchasing Cooperatives Are health alliances or health purchasing cooperatives effective mechanisms for achieving affordable health care in small businesses? BACKGROUND The concept of regional health alliances or health purchasing cooperatives is central to a number of major health care reform proposals. Through these organizations, large numbers of small employee groups and individuals would combine their purchasing power to negotiate coverage arrangements. These groups would benefit from the economic power of consolidated market share and the cost savings resulting from simplified administration, efficient marketing, and outcomes information. Several state and regional models exist that might validate the fundamental principles on which the alliance concept is based. However, differences exist among the major reform proposals regarding the organization, governance, administrative responsibilities and participation requirements imposed on these structures that might affect their position in the markets and their longterm financial stability. Critics of a large health alliance/health purchasing cooperative fear the market control that could be conferred on a monopoly or oligopoly. They are also concerned that, absent the ability to select preferred carriers or providers, the market would continue to be fractionalized among too many carriers, who will find a way to compete on some risk selection basis. Others suggest that a number of large alliances competing in a geographic area around criteria such as price, delivery system design, quality-based measures and other factors would be a more viable and market-based reform structure. STATUS The health care reform proposals vary according to the size of the health alliance or health purchasing cooperative. Some plans would require employers with up to a given number of employees to join large state-created health alliances, through which employees would choose their health plan. Other proposals would require states to establish health plan purchasing cooperatives (HPPCs), with only one per geographic area. People who work for small businesses or individuals who are unem-ployed or self- employed would be required to obtain coverage through the HPPCs. Other bills would allow employers and individuals to choose to purchase coverage from multiple, voluntary, competing purchasing cooperatives. DISCUSSION * Should participation in health alliances/health purchasing cooperatives be mandatory or voluntary? * If mandatory, should health alliances/health purchasing cooperatives include employers with fewer than 5,000 employees? 1,000 employees? 500 employees? 100 employees? * Should Medicare or Medicaid recipients and early retirees be included in these organizations? * Should these alliances serve as passive brokers or aggressive managers of their health plans? * To what extent would alliances' roles complement or supplement the role of state insurance departments? Health Care Financing Mechanisms To finance the expansion of health insurance coverage, should Congress require employers to pay a portion of their employees' health insurance premiums or, alternatively, impose a wage-based tax on employers? BACKGROUND Many mechanisms are being considered to finance health care reform. One alternative would require employers to pay a portion of their employees' health insurance premiums. The amount of the premium would depend on many factors, such as the extent of coverage and the type of health plan (for example, an individual or family health plan). A second alternative would impose a tax on employers based on employee wages. Wage-based or payroll taxes are currently used to finance programs such as Social Security, unemployment insurance and worker's compensation. Proponents of a mandated premium or payroll tax argue that either would generate funds that could be used to provide health insurance to ap- proximately 85 percent of the uninsured (workers and their dependents) who do not receive health insurance through their employment. Those who favor a premium contend that the premium would not hurt a business's ability to compete because, in general, all businesses would be required to pay the same premium for each employee. Those who support a payroll tax say it would be less disruptive and easier to implement. Opponents argue that such health insurance financing mechanisms bear no relationship to a firm's profitability or ability to pay. In each case, employers would be required to pay regardless of the financial strength or weakness of the business, a factor that may hurt the newest and most marginal firms. Small firms are often more labor-intensive than capital-intensive compared with larger businesses, and some small business owners believe they would be disproportionately affected by either the premium or payroll tax requirement. They say that the effect of imposing either requirement on a per-employee basis would be increased costs for hiring and maintaining workers. Further, either requirement would reduce a small business owner's ability to control costs. This would affect cash flow, which is an acute problem in many small businesses. Some argue that premium or payroll tax requirements would diminish a business owner's flexibility in deciding what benefits to offer--a decision that is usually based on affordability of the benefit, the wishes of the employees and the benefit's impact on the competitiveness of the business. STATUS One current health care reform bill would require employers to pay a portion of their employees' health insurance premiums. The plan would also allow states the flexibility to adopt a "single-payer system" funded by a payroll tax. In such a system, a government or centralized entity collects taxes and pays for its residents' health care, bypassing such intermediaries as health alliances and health insurers. Federal subsidies would be available to small, low-wage businesses based upon their total payroll. A separate proposal would rely primarily on payroll taxes to finance the expansion of health insurance coverage. Modeling the Canadian health system, this proposal would create a national health program financed through a payroll tax on employers and other tax increases on corporate and personal income. Other health care reform proposals would allow employers to continue to pay the health premiums of their employees on a voluntary basis. DISCUSSION * Should employers be required to pay a portion of their employees' health care premiums? * Should a payroll tax be imposed? * How can health care most fairly be financed? Health Insurance Deduction for the Self-Employed Should the federal government allow selfemployed individuals to deduct 100 percent of the health insurance expenses incurred on behalf of the taxpayer, taxpayer's spouse and dependents? BACKGROUND The inability of self-employed individuals to deduct 100 percent of their health insurance expenses, coupled with the increasing cost of health insurance, has helped create a situation in which a significant number of individuals cannot afford to purchase health insurance. While incorporated businesses are allowed to deduct 100 percent of their health insurance expenses, self-employed individuals operating as S corporations, partnerships or sole proprietorships are entitled to deduct only 25 percent of health insurance expenses incurred for the taxpayer, taxpayer's spouse and dependents. Allowing self-employed individuals to deduct 100 percent of their health insurance expenses would eliminate the disparity between C corporations and selfemployed individuals and reduce the number of uninsured individuals. Approximately 89 percent of the more than 20 million businesses that file tax returns are unincorporated sole proprietorships or partnerships. According to data from the 1983 Current Population Survey (CPS), approximately 54 percent of all unincorporated self-employed individuals and 26 percent of the incorporated self-employed were not covered by either their own or another's health insurance plan. Increasing the deduction could therefore have the effect of increasing health care coverage for a significant number of businesses. In instituting such a policy, however, policymakers must also consider the cost in lost tax revenues. STATUS In the 103d Congress, numerous bills have been introduced that would increase the health insurance deduction for the self-employed. Both houses have proposed bills that range from extending the current 25-percent deduction to permanently raising it to 100 percent. The Omnibus Budget Reconciliation Act of 1993 extended the 25-percent deduction through December 31,1993, retroactive to July l,1992. DISCUSSION * Should the deduction be increased to 100 percent as a way of increasing health care coverage among self-employed individuals operating as sole proprietorships, partnerships and S corporations? * If the deduction is increased, should the increase occur all at once or be phased in? Health Insurance Market Reforms What should be the respective roles of the federal and state governments in regulating the health insurance industry? BACKGROUND Health insurance is often a key benefit of employment. However, the high cost of premiums, coupled with restrictive insurance practices, makes it difficult for many small businesses to provide health insurance for their employees. Those employees who do receive health insurance coverage from their employer--and wish to retain it--may find it difficult to change their health coverage, switch jobs or leave to start their own businesses. For most small employers, access to the health care system comes through the purchase of a plan underwritten by a commercial insurer or a Blue Cross/Blue Shield plan. Since the enactment of the Employee Retirement Income Security Act (ERISA), which established federal standards for self- insured and multistate employers, the primary customers for these insurers have been small businesses. Because of increased competition for business, insurers began to depend on creative pricing and medical screening practices designed to minimize the risk of providing coverage to certain individuals, groups and industry segments. These practices include individual medical underwriting, occupational redlining, and a practice referred to as "price baiting and gouging" whereby discounts are offered for the first year of coverage, followed by much higher rates in the next year when pre-existing condition exclusions expire. In response, state legislatures have begun to enact laws designed to encourage the guaranteed issue and renewability of insurance contracts, minimize the use of pre-existing conditions exclusions, establish uniformity in pricing practices, and, to some degree, permit insurers to offer "bare-bones" health care plans free of state-mandated benefits. Because most of these state laws have been enacted since 1990, it is difficult to measure the extent to which these standards have led to increased access or reduced or more stable pricing. State-by-state variations in these reform laws and in the aggressiveness with which they are being enforced have prompted calls for a unified federal reform strategy. States have traditionally shown a great reluctance to permit the federal government to usurp their regulatory authority. While analysts agree that some form of federal standards might be appropriate, there is much debate over whether the standards should be viewed as "floors"--minimum standards on which states would build--or "ceilings"--absolute standards that would replace state regulations. Some have raised questions about the federal government's ability to enforce federal standards without creating a huge new bureaucracy. Many analysts suggest, however, that leaving states to their own regulatory devices will undermine the federal government's ability to establish and enforce a uniform benefits package, since states now have the authority to dictate the number of benefit plans in their states. STATUS Most of the federal health care reform proposals introduced in the 103d Congress would incorporate many of the state reforms. For example, most plans would require the guaranteed renewability of a small group's insurance contracts (except in the case of a company's non-payment or willful deception), prohibit insurers from denying individuals or groups coverage based on their medical conditions, and limit or greatly curtail the use of pre-existing conditions limitations or exclusions. While most proposals would allow some variations in insurers' pricing structures, others would require some form of community rating. DISCUSSION * Are current state-level insurance reforms successfully increasing access to affordable health care coverage for small employers and their employees? * Should the federal government establish operating standards for the insurance industry? * If the federal government has a role, should the federal standards supplement or support states' existing regulatory authority? HIV/AIDS Education and Prevention Should the government encourage businesses to adopt AIDS education/prevention programs in the workplace? If so, how? BACKGROUND A critical issue faced by small employers today concerns the potential impact of HIV infection and AIDS on the workplace. According to the U.S. Department of Health and Human Services' Centers for Disease Control (CDC), one in 10 small businesses has already had at least one employee with HIV infection or AIDS. Among issues of immediate concern to small employers is compliance with the recently enacted Americans with Disabilities Act (ADA), which specifically prevents discrimination against individuals with HIV infection or AIDS in all aspects of employment. Under the ADA, employers must comply with new requirements concerning recordkeeping, hiring and job accommodations for individuals with disabilities. In addition to new legal requirements under the ADA, other small business concerns with respect to HIV/AIDS include insurance and health care access and costs, productivity and work disruption, confidentiality and privacy, disability requests, discrimination, customer concerns, employee morale, and accommodations for job skills or requirements. In addition to the immediate implications of the disease for small businesses and the economy, trends in the data on employment and on HIV/AIDS point to longer-term effects. According to the U.S. Department of Health and Human Services,98 percent of individuals affected by HIV/AIDS are between the ages of 20 and 60, and 80 percent are between the ages of 24 and 40. The findings suggest the premature loss of workers in their productive years, a weakening over time of the tax base, and an increased reliance on public services. STATUS In December 1992, the Business Responds to AIDS (BRTA) Program, sponsored by the CDC, began providing resources and materials to help business and labor meet these challenges. The program's two major components are a resource service and a kit of targeted materials. The materials in the kit cover issues such as the ADA, insurance and workplace policies, and education. A booklet specifically targeted to small business is referred to as the "Small Business Guidelines." The federal government is implementing its own AIDS in the Workplace Program. In a September 30,1993, directive, the Clinton Administration mandated that workplace programs be instituted for all agencies in an effort to make the federal government a "model employer" with respect to this problem. DISCUSSION * Should the government disseminate HIV/AIDS information to small businesses? If so, how can it do so most effectively? * Should the government assist small businesses in handling the effects of AIDS and/or implementing AIDS countermeasure programs? If so, how? Medical Liability Reform Should medical liability reform be included in a comprehensive health care reform package? BACKGROUND The United States faces higher medical costs than any other nation. High- risk medical procedures, coupled with the practice of defensive medicine, have caused a significant increase in the cost of medical malpractice insurance, in part because of the rising number of claims filed for litigation and the cost of settlements and awards. Increased medical malpractice premiums represent 1 percent of total health care costs. However, litigation and defensive medicine--including the costs of duplicative testing--add billions of dollars that translate to higher health insurance premiums for employers and their employees and higher out- of-pocket expenses for health consumers. According to a 1993 Lewin-VHI study, a middle-range estimate of potential defensive medicine savings from comprehensive malpractice reform is $4.3 billion in 1994 and a total of $35.8 billion between 1994 and 1998. Lowering these costs would lower health care costs for small businesses. During the past 15 years, every state has enacted some type of medical malpractice reform initiative. While most states have adopted tort reform, other states have included risk management, practice guidelines and the implementation of alternative dispute resolution mechanisms. At the federal level, enterprise liability is one approach being considered. Under this approach, corporate enterprises that provide health care would be legally responsible for injuries caused by health care provider negligence. STATUS Many federal comprehensive and incremental health care reform proposals have addressed the need for some type of medical malpractice reform in order to reduce overall health care costs. Various proposals incorporate arbitration, risk management, fee schedules, periodic payments and a cap on non-economic damages as instruments of reform. DISCUSSION * Should medical liability reform be included in a comprehensive health care reform package? * Should states establish alternative dispute resolution mechanisms (arbitration) to mediate and resolve cases prior to trial? * Should there be a cap on all non-economic damages? * Should payment of medical malpractice awards be made over time rather than in one lump sum? * Should enterprise liability be adopted? Preparing Students for Work Should the government develop or promote initiatives that would better prepare students for the workforce? If so, how? BACKGROUND The business community is becoming increasingly concerned about a skilled work force. Mismatches between the needs of employers and the skills pos- sessed by the work force could affect economic productivity and international competitiveness. America's current educational system is not closely linked with the world of work: according to the report of the Commission on the Skills of the American Work Force, the educational system is almost wholly oriented toward the needs of the college-bound. Very little is provided for the majority of the nation's youth who leave high school and go directly to work. As a result, typical high school graduates too often move from one dead-end job to another. STATUS The Clinton Administration's Goals 2000: Educate America Act (P.L.103-227) was signed into law March 31,1994. Goals 2000 will codify national education goals; establish a permanent bipartisan national education goals panel; develop criteria for national voluntary content, assessment and opportunity-to-learn standards; and establish a voluntary, national system of occupational skill standards. The proposed School to Work Opportunities Act of 1993 (H.R.2884 and S.1361), also supported by the Clinton Administration, would provide federal grants to state and local public-private partnerships for planning and implementing a school-to-work transition assistance program for all youth. Components of such a system would include school-based learning, work-based learning and intermediary activities between business, government and other community stakeholders. The U.S. Congress is also considering legislation to establish a federal work force preparation and development council of key cabinet members. The federal council would be able to waive provisions of laws or regulations of certain programs at the request of states. This legislation also would create a national advisory board on work force preparation and development, which would provide advice on how to link education and training more closely with economic development and job creation. DISCUSSION * How can awareness of the world of work be more effectively incorporated into America's school systems? What role can small businesses play in this effort? * Should information on existing mentoring, tutoring and informal apprenticeship programs be made more available to small business owners? If so, how? Retirement Plans What should be done to encourage small business owners to establish and maintain retirement plans? BACKGROUND Retirement plans are among the most important fringe benefits offered by employers. They often provide workers with a significant share of their retirement income and can be used as an incentive to attract and retain productive workers. Retirement plan income will take on even greater importance when the "baby- boom" generation begins to retire in the first part of the next century. The Social Security system alone will not be able to meet their needs, and one study estimates that more than half of these individuals will retire with inadequate savings. Despite the benefits of retirement plans,85 percent of U.S. firms do not sponsor retirement plans for their workers. Small employers are less likely to offer retirement plans than large employers. Only 14.9 percent of firms with fewer than 500 employees offer retirement plans, while 87.7 percent of firms with more than 500 employees provide such plans. One reason for the low level of participation among small firms is the high cost of maintaining retirement plans. On a per-participant basis, setup and annual administrative costs, consultant fees and other costs are considerably higher for pension plans offered by small businesses than for those offered by large businesses. Increased maintenance costs and numerous changes in pension laws and regulations over the last 10 years have contributed to the general decline in the number of retirement plans. Internal Revenue Service data indicate that the establishment of new retirement plans has declined by at least 70 percent over the last eight years, while plan terminations have increased by more than 100 percent over the last nine years. There is evidence that the retirement system has been crippled by excessive regulation and legislative changes over the last decade. If complexity is the key problem, then the challenge facing the small business community is to influence Congress to enact simplification legislation that will encourage small business owners to establish and maintain retirement plans. Other evidence, including a study conducted for the SBA's Office of Advocacy, indicates that employee- and employer-related economic factors are the primary determinants of whether a small business will offer a retirement plan. If this is true, proposals advanced to simplify regulations and increase benefits will not have as large an effect as might be anticipated. STATUS Pension simplification language appeared in the 103d Congress in H.R.13, the Tax Simplification Act of 1993. H.R.13 contains a number of simpli- fication provisions, including voluntary design-based "safe harbor" provisions, which would simplify the administration of Section 401 (k) plans. Pension simplification provisions are also included in the proposed Pension Simplification Act of 1993 (S. 762), and measures that would reform the Pension Benefit Guaranty Corporation (PBGC) have been included in legislation (H.R.3396 and S. 1780) introduced in the 103d Congress. The Omnibus Budget Reconciliation Act of 1993 reduced, from $235,840 to $150,00, the amount of compensation that can be taken into account under a qualified retirement plan. DISCUSSION * Should retirement plan laws and regulations be simplified? If so, how? * Should policymakers be encouraged to minimize changes to retirement laws and regulations in order to provide greater certainty for businesses and retirement plan professionals? * Should the costs of establishing and maintaining retirement plans be reduced, particularly for small businesses? If so, how? Social Security Tax Reform Should Congress modify the current Social Security tax rate in order to fund the Social Security system on a "pay-as-you-go" basis? BACKGROUND The Federal Insurance Contributions Act (FICA) imposes a tax on wages in order to fund old-age, survivors and disability insurance--"OASDI"-- otherwise known as Social Security. Social Security is financed by taxing employee earnings (up to a maximum of $60,600 in 1994) at the rate of 6.2 percent. This tax is levied on both employers and employees. Currently, the Social Security tax rate is higher than is needed to meet today's Social Security costs, creating a surplus of Social Security funds. However, according to a 1992 report issued by the trustees of the Social Security program, expenditures are expected to rise rapidly during the 2010-2020 period, when the post-World War II baby-boom generation retires. Social Security expenditures will begin to exceed receipts and, according to the trustees, the Social Security system will deplete its reserves and become insolvent in the year 2036. Social Security surpluses being generated now will avert substantial tax rate increases in the future. The surpluses also enable the government to borrow less money now. Some analysts argue that Social Security surpluses are masking the magnitude of the federal deficit and are being spent on other programs. Social Security taxes reduce available capital, which businesses could use to increase investments and hire additional employees. They are particularly burdensome to labor-intensive and startup businesses because they reduce a business's working capital and, unlike income taxes, must be paid regardless of a business's profits or losses. The 1986 White House Conference recommended reforming the Social Security system. STATUS In the 102d Congress, a bill outlining a "pay-as-you-go" Social Security program was introduced that would have reduced the Social Security tax rate from the current 6.2 percent to 5.2 percent. Beginning in the year 2010, the rate gradually would have been raised, to 8.1 percent by 2050, to keep pace with increased expenditures resulting from the retirement of post- World War II baby boomers. Also under this proposal, the taxable earnings base would have increased in steps to $82,200 by 1996. The bill did not pass. DISCUSSION * Should the current Social Security tax rate be maintained in order to avert substantial increases in the tax rate when Social Security disbursements begin to exceed receipts? * Should the Social Security system be shifted to a pay-as-you-go system, which would reduce the current tax rate but result in future increases in the rate in order to meet increases in Social Security disbursements? State-Mandated Health Care Benefits Should the federal government devise a standard benefits package that would preempt current state-mandated health care benefits? BACKGROUND Virtually every state now mandates certain health care benefits that must be included in an insured group health insurance plan. These mandates were originally intended to ensure a basic level of health care coverage; however, some states now require insurers to cover procedures and services beyond what many consider to be basic coverage. Section 514 of the Employee Retirement Income Security Act (ERISA) preempts all state laws pertaining to employee benefits. While fully insured health plans are regulated, businesses that self-insure are exempt from state regulatory oversight--state-mandated benefits, premium taxes and reserve requirements. Most individuals employed in small firms are enrolled in a fully insured plan that is subject to state regulations. A standard benefits package would make it easier for consumers to use information to compare health plans and force insurers to compete on their ability to provide quality, not different, services. A standard benefits package would make it more difficult for insurers to attract consumers based upon the services covered under a particular plan. STATUS Several of the current health care reform plans include a federal standard benefits package that would, in effect, preempt state-mandated benefits. The federal standard benefits package would define the minimum set of services to which all individuals are entitled. DISCUSSION * Should a federal standard benefits package preempt state-mandated benefits? * If there is no federal standard benefits package, should insurers that offer a basic plan be exempt from any state-imposed mandated benefits? Substance Abuse Should additional steps be taken to help small businesses establish drug- free work environments? If so, what steps? BACKGROUND The U.S. Small Business Administration estimates that approximately 5 million current users of illicit drugs are employed in the nation's small businesses. Moreover, while most large businesses are implementing programs to achieve drug-free workplaces, small firms, more constrained by the costs of such programs, generally are not offering them. As a result, it is likely that substance-abusing workers may be disproportionately employed by small businesses. The high cost of substance abuse in the workplace is a bottom-line issue for the nation's small business owners. Substance abuse (which includes alcohol abuse, as well as illicit drug use) costs the American economy more than $100 billion every year. Research shows that substance abusers are 5 times more likely to file a workers' compensation claim; 2.5 times more likely to have lengthy absences from work; 3 times more likely to be late for work; likely to use 2.5 times more medical benefits; and likely to be one-third less productive. Despite these statistics, many small business owners are unaware of substance abuse problems in their workplace: drug abusers are very skilled at hiding their problems, and the employer is often the last to know. Employee assistance programs (EAPs) are an important component of successful anti-substance-abuse programs. EAPs provide a cost-effective means for helping employees with substance abuse and other problems by offering education, information on treatment centers and short-term, confidential counseling. STATUS To enhance workplace and public safety, federal and state laws require certain businesses to implement drug-free workplace programs. These laws include the 1988 federal Drug Free Workplace Act, which requires all government contractors and grantees to have formal written policies prohibiting workplace drug abuse. More recent legislation requires transportation-related businesses to implement random drug and alcohol testing. DISCUSSION * Should small business owners be made more aware of federal and state laws that require drugfree workplace programs and of the federal resources that are available to assist them with compliance? If so, how? * Should federal, state and local governments undertake initiatives in cooperation with the private sector to ensure that small business owners receive help in implementing anti-substance abuse programs for their employees? * Should the federal government sponsor EAP consortia programs to reduce EAP costs and encourage small business participation? * In setting priorities for the "federal war on drugs," should there be more or less emphasis on demand reduction (which includes treatment and education, as well as prevention in the small business workplace) versus supply reduction (efforts to stop the flow of drugs into the United States)? * Should the SBA provide self-help kits to small business owners that would help them implement drug-free workplace programs? * Should federal, state and local governments provide incentives to small businesses to implement drug-free workplace programs, such as discounts in workers' compensation premiums? * How can the government most effectively disseminate substance abuse information to small businesses? Taxation of Health Benefits Should employers be allowed to continue to deduct 100 percent of health insurance expenses paid on behalf of their employees? Should employees be allowed to continue to exclude from gross income health insurance expenses paid by their employers? Should either the employer deductibility or the employee tax exclusion preference be limited to the cost of the standard benefits package? BACKGROUND Generally, employers are entitled to deduct 100 percent of health insurance expenses incurred on behalf of their employees. In addition, health insurance costs paid by employers on behalf of their employees are not included in the employee's gross income.The Employee Benefits Research Institute estimates that the tax preference of employment based insurance cost $50 billion to $60 billion in lost federal income in fiscal year 1991. To encourage cost-effective health care decisions, some policymakers favor limiting the amount employers can deduct for health insurance expenses and requiring employees to include in income all or a portion of the health care costs that are paid by their employers. STATUS Some plans would allow employer contributions related to the standard benefits package to be fully tax deductible. Other plans would cap the employer's health insurance deduction at the cost of the lowest-priced health plan that meets federal quality and enrollment standards in the employer's area. Finally, other proposals would tie the employer's tax deductibility to the cost of the average of the lowest-priced one-third of the plans offered in an area. DISCUSSION * Should a cap be placed on the amount employers can deduct for health insurance expenses? This would have the effect of increasing a small business's taxable income. * Should employees be required to include in reported income the portion of health insurance expenses paid by their employers? Enacting this provision would reduce employees' take-home pay and put pressure on small businesses to increase their employees' salaries. * Alternatively, should the current preferential tax treatment for health insurance expenses provided to both employers and employees be maintained? Work Force Skills Should the federal government more effectively facilitate workers' attainment of basic and advanced work skills? If so, how? BACKGROUND A shortage of skilled and appropriately trained workers in the adult labor force is affecting small businesses' economic productivity and international competitiveness. According to the Hudson Institute's report, Work Force 2000, more than half of the jobs created during the 1990s will require post-secondary training; only 14 percent of these jobs will be available to workers who have not completed high school. By the year 2000, an even larger percentage of new jobs will require some post-secondary education. Yet about 20 percent of Americans lack a high school diploma; the rate is twice as high for African Americans as it is for whites, and nearly three times as high for Hispanics. Moreover, although most reading material geared toward the workplace is written for at least ninth-grade level, 23 million Americans--20 percent of the nation's workers-- read at no better than an eighth-grade level. Because of declining population growth, fewer workers will enter the labor force over the next decade. Some 85 percent will be women, immi-grants and minorities--groups that are currently less trained, on average, than non-minority men. A shortage of skilled workers will have a disproportionate impact on small business. Small firms, offering relatively lower salaries and less extensive benefits than larger companies, will be scrambling to compete for the best workers in a tight market. The small business community estimates annual losses of $30 billion because of an underskilled work force. Small firms have the larger problem, yet are less able to afford the investments needed to solve it. While there have been some initiatives to develop consortia of smaller companies, there is little chance that a company with 100 or fewer employees can afford to singly launch a skills program. Only 20 percent of all small businesses offer job related training--and most of that training is financed by the employees themselves. A primary adult education and training statute is the Job Training Partnership Act (JTPA), which was initiated in 1982, replacing the Comprehensive Employment and Training Act. JTPA manages programs to train people entering the work force. Services available to qualifying youths and adults include remedial education and basic skills training, vocational training, job search assistance and literacy training. JTPA requires that there be a private industry council for every designated service area to provide policy guidance and exercise oversight of job training activities. Educational groups, businesses and government officials are represented on the councils; one-half of business and industry representatives on the councils are required to be small business persons. STATUS The U.S. Department of Labor has announced creation of a new office, the Office of the American Workplace, which will focus on helping employers, managers and union leaders to improve the quality of American jobs and the long-term performance of companies. The office will help small and midsized companies to adopt state-of-the-art workplace practices by offering grants and technical assistance and pilot programs. The Clinton Administration's National Performance Review report recommends major changes to the work force development system, including the consolidation of more than 30 education and job training programs into flexible grants for job training and education. This was also a proposal of the National Governors' Association and the National Conference of State Legislatures. The report proposes creating a system of competitive, one-stop career development centers for all federal, state and local education and training programs. Core services would be free, but other services would be offered on a fee basis. Any organization, public or private, would be allowed to apply for a charter to operate one or more onestop career centers. The report endorses current legislative efforts by the U.S. Department of Labor to consolidate training programs for dislocated workers. Another proposal is the creation of a national work force development council to eliminate the walls between categorical programs, standardize fiscal and administrative procedures, develop a comprehensive set of results-oriented performance standards, and improve the qualitative evaluation of program performance. The implementing legislation for the North American Free Trade Agreement (NAFTA) includes an interim, categorical program to assist American workers who lose their jobs as a result of the trade agreement. This temporary program is established as part of the existing Trade Adjustment Assistance (TAA) program. The U.S. Congress is actively considering the School-to-Work Opportunities Act of 1993 (H.R. 2884 and S. 1361 ) (see Early Entrepreneurship discussion). The Clinton Administration is formulating a National Workforce Strategy proposal to enhance worker security. Among the key features of the Workforce Security Act: a single, comprehensive employment system, re- employment services, better information, and easier access to help. Also expected to be included are timely labor market information about job openings and relevant training, long-term training and income support for dislocated workers, unemployment insurance flexibility, one-stop career centers, a school-to-work transition system, and voluntary national skills standards. DISCUSSION * The General Accounting Office lists 151 federal job training programs. States and localities have many other programs. Should the government determine the effectiveness of these programs and ensure that they are accessible to employees of small businesses? If so, how? * How can small business needs be equitably represented in government training proposals? * Should the government give employers incentives to invest in lifelong learning for their employees, and if so, what kinds of incentives? Workers' Compensation How can escalating workers' compensation costs be brought under control? BACKGROUND There are currently 55 separate workers' compensation programs in the United States and its territories, covering 93.7 million employees--or 87 percent of the nation's wage-and-salary labor force. Workers' compensation programs vary widely from state to state. In most states, employers are required to carry insurance coverage from commercial insurers or are allowed to qualify as selfinsurers. In some states employers are required to purchase insurance from an exclusive state insurance fund. Three states--New Jersey, South Carolina and Texas--do not require employers to provide any workers' compensation coverage. Medical costs continue to spiral. Between 1980 and 1987, the most recent year for which data are available, medical expenditures under the workers' compensation system increased by 151 percent, compared with a 102-percent increase in overall health care expenses. The average cost of providing workers' compensation coverage for an employee has increased 438 percent since 1972. STATUS To help alleviate the escalating costs of workers' compensation, policymakers are proposing to integrate workers' compensation medical benefits into the new health care system. In the short term, delivery systems would be integrated. Injured workers would receive services through their health plans, which must demonstrate their capacity to treat work- related injuries and meet new standards for quality and efficiency. Current workers' compensation carriers would retain financial responsibility and reimburse health plans for the services they provide to injured workers. In the long term, a federal commission would develop a detailed strategy to fully integrate the financing of workers' compen-sation medical benefits. Such "24-hour" coverage has already been adopted by several states. DISCUSSION * Would small businesses benefit from full integration of the workers' compensation system into the health care system? * How can the workers' compensation system be reformed to reduce fraud? Worksite Health Promotion Should the federal government require businesses to adopt worksite health promotion activities as a means of reducing health care costs? BACKGROUND Worksite health promotion activities are a key element in the national strategy to improve the health of Americans. Research conducted over nearly two decades has demonstrated that these activities can both improve the health of workers and benefit employers. Worksite health promotion can help contain costs, reduce absenteeism, increase productivity and help recruit and retain a quality work force. Many employers already have some form of health promotion activity. A 1992 study by the Office of Disease Prevention and Health Promotion showed that 81 percent of worksites with more than 50 employees have at least one health promotion activity. According to a 1991 study by the Bureau of National Affairs, Inc.,85 percent of employers have some type of smoking policy, up from 54 percent in 1987 and 36 percent in 1986. STATUS The U.S. Department of Health and Human Services has launched a national initiative called "Healthy People 2000" to improve the overall health of Americans and to control increasing health care costs by the end of the decade. The goals of the initiative are to improve access to preventive services, end disparities in health status among Americans and promote enjoyment of a better quality of life through the prevention of disability and disease. DISCUSSION * What are the costs and benefits to firms of health promotion activities? Should businesses be required to provide such activities? * Should worksite health promotion activities automatically reduce employer premiums toward employee health insurance? International Trade In 1990, exports accounted for nearly 84 percent of the record high $394 billion in GNP growth. The result of the increase in U.S. exports in the late 1980s is a significantly lower trade deficit and, more important, 2 million new jobs. The future success of the U.S. economy will depend largely on our ability to compete successfully in a global arena. Because the small business community is the engine driving the U.S. economy, it is imperative that small firms be equipped with sufficient technical assistance, technology and financial wherewithal to expand their presence in global markets. It is estimated that small firms constitute 96 percent of exporting firms. However, it is also estimated that just 15 percent of U.S. exporters account for 85 percent of the value of U.S.-manufactured exports. In an increasingly globalized marketplace, smaller firms will need to expand their export activities in order to succeed during the upcoming decade. For further information related to international trade, see Availability of Capital, p. 18; Marketing New Technologies, p. 98; and One-Stop Information Centers, p. 99. Development of a Strategy for Export Assistance to Small Business Should the United States develop new programs or modify existing programs to increase exports by small businesses? BACKGROUND According to the U.S. Department of Commerce, exports have accounted for 70 percent of growth in the U.S. economy since 1989. Research indicates that small business products account for approximately 20 percent of all U.S. exports. American small businesses often do not have the necessary bank financing to compete in a global market. Current federal programs assist small businesses in establishing international markets by offering export counseling; workshops, training conferences and seminars; export marketing publications and resource guides; trade delegations and missions; and financial assistance. Great Britain, France and Japan each spend three times as much as the United States on export promotion. STATUS Government assistance is made available through state and local agencies, the U.S. Department of Commerce, the U.S. Small Business Administration and other federal agencies. Congress has directed the SBA to increase its efforts toward making small businesses more aware of international business opportunities. The SBA and the Department of Commerce have opened four pilot "one-stop shop export assistance centers." The centers serve as repositories of information dealing with federal, state and private sector programs to encourage global competitiveness and exporting. DISCUSSION * What type of government assistance is needed to help small businesses take advantage of global export opportunities? * How can the federal government more efficiently blend its resources to help small firms export? * To what extent should the federal government expand the one-stop shop concept if the shops are found to be effective in assisting small businesses? * Should export assistance be targeted to specific sectors of the economy? If so, which sectors? Since the federal government already targets some export assistance to specific industries, should it continue to do so? If yes, which sectors? * Should overseas assistance for exporters be targeted toward specific nations or regions? Since the federal government already targets export assistance to some specific nations and regions, should it continue to do so or should it provide more universal assistance? Should that assistance be reduced if the country or region does not open its markets to U.S. goods and services? * Should overseas assistance for exporters be enhanced by increasing the proportion of embassy personnel dealing with trade matters? * Since the government provides assistance to other countries, should the countries receiving the assistance be required to spend a portion of that assistance on goods and services of U.S. small businesses? If so, can this be accomplished through "buy-American" provisions? * What role, if any, should the federal government, and the SBA in particular, play in assisting small firms to participate in overseas trade shows, missions and joint ventures? * Should the federal government, and the SBA in particular, provide greater assistance to trade intermediaries (such as export management companies, export trading companies, wholesalers and retailers)? If so, what kinds and levels of assistance would be beneficial? * Should government export programs be privatized? * Should small business owners be educated about risks involved in exporting and mechanisms to overcome them? * Should the government help exporting by subsidizing trade missions? * Should language courses be made more accessible to small businesses to help them in their foreign business dealings? General Agreement on Tariffs and Trade What can be done to ensure that small businesses understand and take full advantage of the General Agreement on Tariffs and Trade (GATT)? BACKGROUND The General Agreement on Tariffs and Trade is a multinational agreement promoting world trade through negotiations to reduce trade barriers. GATT provides a forum for monitoring trade activity, enforcing ground rules, and settling disputes among member nations. Twenty-two countries originally established GATT in 1947 as a temporary measure. However, it has evolved into a permanent body consisting of more than 100 members, including the United States, England, France, Germany, Japan and Canada. GATT provides U.S. small businesses with the opportunity to expand into the global marketplace, particularly in high technology industries such as telecommunications, medical instruments and devices, computers and software. On the other hand, GATT makes the domestic market available to foreign competition, particularly with respect to the apparel and textile industries. Under the most-favored-nation (MFN) clause, member countries must treat all GATT members equally with respect to tariff concessions. Exceptions to the MFN clause are given to less developed countries; they also will pay reduced tariffs. STATUS The Uruguay round of negotiations was completed on December 14, 1993, and approved by the 116 participating nations on December 15, 1993, with a congressional vote expected on GATT implementing legislation in 1994. DISCUSSION * American small businesses in general have a limited understanding about international trade. What steps, if any, need to be taken to allow small businesses to have a better understanding of GATT and what it can mean for their businesses? * What industries in addition to high technology can benefit from the passage of the GATT legislation and what, if anything, should the government do to assist such industries to expand into the global marketplace? * Should any action be taken to help industries such as apparel and textiles that will be affected negatively by the passage of GATT? If so, what action? Import Policy Should the U.S. government help small business importers? If so, how? BACKGROUND Many small businesses import foreign products. As a general policy matter, however, governmental trade assistance is not provided to importers because of the perceived negative effect of imports on the country's balance of trade and on domestic industry and employment. Yet imports are a necessary component of many businesses. The American business economy, it is argued, is closely tied to the world economy, and economic success is best achieved through worldwide competitiveness. Free trade is expected to expand further under NAFTA and GATT, as tariff and non-tariff barriers for most foreign goods are reduced. Small businesses need to be prepared to compete and take advantage of the expected growth of free trade. STATUS As part of the North American Free Trade Agreement (NAFTA), the United States agreed to phase out tariff and non-tariff barriers for goods imported from Mexico and Canada. As part of the General Agreement on Tariffs and Trade (GATT), America is expected to reduce tariffs for most foreign goods. DISCUSSION * Should the U.S. government provide trade assistance for small business importers, for example, by providing foreign product and company refer-rals and statistics through trade offices or by disseminating information on trade opportunities under NAFTA and GATT? * What are the costs and benefits to U.S. small businesses from import protections? * Should the government reassess its policy of focusing its trade assistance only on exports? North American Free Trade Agreement Should the government help small businesses take advantage of the North American Free Trade Agreement (NAFTA)? If so, how? BACKGROUND President Bush signed NAFTA on December 17, 1992, and President Clinton signed side agreements concerning labor, the environment and import surges on September 14, 1993. NAFTA will transform all of North America into a free-trade zone, lowering tariffs and removing other barriers to trade. NAFTA member countries are the United States, Canada and Mexico. The area currently produces $6.5 trillion in goods and services and is populated by 370 million consumers--thereby surpassing the economic power of the European Community. According to the U.S. Department of Commerce, a $1 billion increase in exports will translate into 20,000 additional American jobs. STATUS On November 17, 1993, the House of Representatives passed implementing legislation for NAFTA; the Senate passed the measure on November 20. Because the President was granted "fast track" authority for NAFTA, the agreement was voted on without amendments. President Clinton signed NAFTA implementing legislation on December 8, 1993 (Public Law 103-182). DISCUSSION * Historically, free trade has improved the standard of living for U.S. citizens, and it is believed that NAFTA countries will benefit from lower tariffs on imported goods. * What kinds of programs would help small businesses understand NAFTA and the opportunities it offers them? * Should the United States seek free trade agreements with other nations? If so, which nations? Trade Finance Should the federal government make efforts to satisfy the financing needs of U.S. small business importers and exporters? If so, how? BACKGROUND Small businesses account for approximately 20 percent of all U.S. exports. Many small businesses also use imported products. Expansion of international trade assistance certainly will help some small businesses increase global opportunities. However, many small businesses will not be able to take advantage of these opportunities because they lack sufficient financial resources to obtain financing. One of the U.S. Small Business Administration's major programs is the export revolving line of credit. In fiscal year 1992, the SBA set a record for loans to small business exporters: the agency provided 600 loans to exporters for a total of $241 million. Other agencies, like the U.S. Department of Commerce and the Export-Import Bank, offer credit assistance to small firms with international credit needs. STATUS Congress has directed the SBA to increase its efforts to make small businesses aware of international business opportunities. The SBA and the Export-Import Bank are currently working together, at the recommendation of the Trade Policy Coordinating Committee, to harmonize and possibly merge some of their exporting programs. It is hoped that uniform documents and procedures will encourage small firms to seek export assistance. DISCUSSION * Should the SBA and other federal agencies that provide international credit assistance explore ways of leveraging their resources to increase credit availability? * Should government budgetary outlays be increased for programs providing international credit assistance? * Should government loan programs for international trade include a specific small business set-aside? * Should the federal government consider regulatory incentives to encourage lenders to increase the availability of international trade credit? * Should the federal government, and the SBA in particular, provide greater assistance to trade intermediaries (such as export management companies, export trading companies, wholesalers and retailers)? If so, what kind and level of assistance would be beneficial? * Should regional banks be instructed to assist small businesses in advising about exports (such as letters of credit, currency risks and credit analyses)? Procurement In fiscal year 1992, the federal government purchased approximately $200 billion in goods and services from the private sector. Of this amount, roughly $62 billion, or 31 percent, was awarded in prime contracts and subcontracts to small and growing businesses. These firms' participation in federal procurement opportunities creates more competition, saves the government money, stimulates greater innovation and provides jobs for many Americans. The federal procurement rules are complicated, however, and should be improved to provide greater opportunities for the small business community. Unfortunately, as government spending decreases, particularly in Department of Defense procurement, competition for limited funds will intensify. "Reinventing" federal procurement to balance several conflicting goals will be the challenge of the 1990s. For related information, see also sections on Defense Economic Conversion, p. 28; SBA Technical Assistance, p. 32; Encouraging Diversity in Small Business Ownership, p. 45; Commercialization of Technologies, p. 94; and Small Business and Federal Research and Development, p. 100. Access to Procurement Opportunities Do businesses need greater access to Federal procurement opportunities? If so, how can it be provided? BACKGROUND Each year, billions of dollars in government contracts are awarded to prime contractors and subcontractors. Approximately one-third of the aggregate value of goods and services purchased under contract by the federal government goes to small firms. In fiscal year 1992, according to the Federal Procure- ment Data Center (FPDC) and SBA sources, small businesses were awarded $61.6 billion (or 31 percent) in prime contracts and subcontracts initiated by the federal government. Of the overall total, approximately $22.3 billion, or 11.1 percent, was awarded to small firms in subcontracts. STATUS The 1986 White House Conference on Small Business recommended that the small business share of federal procurement be raised to 40 percent. During that fiscal year, the small business share of federal procurement was approximately 30 percent. Since then, the share of federal procurement for small firms has risen only slightly, to 31 percent in fiscal year 1992. Some argue that a higher percentage has not been achieved because small firms have insufficient access to federal procurement opportunities. Streamlining procurement is the subject of several legislative proposals and a key focus of the Clinton Administration's National Performance Review (NPR) as described in the NPR report, From Red Tape to Results: Creating a Government that Works Better and Costs Less. DISCUSSION * What is the likelihood that small firm opportunities might be foregone for the sake of procurement simplification and reform? What can or should be done? * Should federal procurement officers receive better training concerning the capabilities and special needs of small business contractors? Should they be trained in basic business skills to improve their understanding of contractors' needs and concerns? * Should federal procurement officers be held more accountable for their actions? If so, how? Should part of their annual performance reviews include feedback from contractors? * What training and outreach efforts, if any, should be developed to make small businesses aware of the electronic data interchange (EDI) procurement system recently instituted by the Clinton Administration? * Some small firms do not bid on federal contracts because they feel they do not have sufficient current and historical information. Should the EDI procurement system include enhanced abstract and debriefing information? * When the federal government provides grants to states and other entities, the grants do not carry the same small business subcontracting standards as federal procurements. Should such grants require a flow-down for subcontracts and set-asides to small and small disadvantaged businesses? * Small business set-aside and subcontracting programs are increasingly being blunted by procurement bundling. What should be done to strengthen the subcontracting program and enforce compliance with set-aside requirements? What restrictions, if any, should be imposed on bundling? * Should the government encourage government agencies to use innovative programs (e.g., partial set-asides) to get more small businesses involved in federal contracting? If so, how? * The Procurement Automated Source System (PASS) is a centralized, computer-based inventory and referral system of small businesses interested in being federal prime contractors or subcontractors. How can PASS be improved? Should this program be expanded? If so, how? * Should the offices of small and disadvantaged business utilization within federal agencies help small firms take advantage of federal procurement opportunities? Should the employees of these offices be held more accountable? If so, how? * What, if anything, should be done to allow government technical specialists more freedom to discuss actual contracts with bidders? Balancing Private and Public Resources Should the federal government develop a more disciplined system for defining what is an "inherently governmental "function and for balancing private and public resources? BACKGROUND For nearly 40 years, the federal government has had a procurement policy of relying upon the private sector to provide services and products whenever possible. Some experts believe that the private sector can deliver a better product or service at a better price than the public sector. In addition, they believe that increased privatization will result in more small business opportunities and private sector jobs. The Office of Management and Budget (OMB) Circular A-76 requires federal agencies to conduct cost comparison studies with the private sector and to contract with the most efficient sources. However, many argue that implementation of this policy has been uneven. STATUS In December 1992, the White House issued a report prepared by OMB which revealed that government contracts are not always properly supervised by federal agencies. As a result, many private companies take advantage of the government. In September 1993, the Clinton Administration's National Performance Review called for OMB to review Circular A-76 for potential changes that would simplify the contracting process and increase the flexibility of federal managers. The report specifically recommends that the U.S. Department of Defense implement a comprehensive program of contracting "non-core logistics" functions competitively. DISCUSSION * It has long been held that the government should not compete with the private sector and that only inherently governmental functions should be undertaken by federal employees. Is the definition of "inherently governmental" clear and how should it be applied in federal contracting? * Should government entities, like the Federal Prison Industries, be given advantages or preferences over other businesses competing for federal contracts? What, if anything, should be done to create a more level playing field in conducting competitions between public and private vendors? Are there functions now being performed by government that could be more effectively and inexpensively performed by the private sector? If so, what steps should be taken to privatize them? * Should OMB Circular A-76 be revised so that it provides more detailed instructions and stronger compliance mandates for agencies to follow? If so, how? * Should federal acquisition policies be modified so that they can be more readily understood and complied with by contractors, while still protecting the government's interests? If so, how? * Do the same standards imposed on contractors by government contract administrators apply to the government itself, in terms of meeting the requirements of the contract and the limits of funding? Best Value Procurement Should governmentwide guidelines be established outlining how federal agencies should apply "best value" procurement practices? BACKGROUND Best value practices for federal acquisitions are intended to help government agencies receive the best overall value in the contracts they award. Under such practices, contracts are awarded by considering a combination of price and technical factors, with technical factors taking precedence. The concept removes the super-preference for low bid proposals and puts best value negotiated solicitations on equal footing with sealed bid solicitations. A key focus of best value procurement is to give preference to contractors who consistently demonstrate good performance on production contracts and who have the ability to deliver on time, while consistently improving quality. STATUS More and more federal agencies are applying best value practices. DISCUSSION * Do best value practices help or hurt small firms in obtaining federal contracts? * What checks and balances, if any, should be put in place to assure that government agencies apply best value practices consistently and fairly? * ISO 9000 is a standard of quality management, very popular in Europe, that is rapidly taking hold in the United States and around the globe. Some federal agencies are revising their quality specifications to harmonize with ISO 9000 standards. What, if anything, should be done by the government to help prepare small U.S. businesses for tougher global standards and increased world competition? Competition from Non-Profit Organizations Should Congress enact legislation that would restrict tax-exempt entities from engaging in commercial activities that are in direct competition with for-profit small businesses? BACKGROUND Many small businesses are increasingly finding that they must compete with tax-exempt organizations in providing goods and services to the public. It is virtually impossible for private firms to be competitive with such tax-exempt entities, which receive many benefits not available to for-profit businesses. These benefits include exemptions from federal, state and local taxation, freedom from payment of customs duties on imported equipment and other items, access to non-profit mailing privileges, and volunteer or inexpensive labor. These benefits add up to a substantial cost advantage for the tax-exempt provider. Non-profit competition was a major issue raised at the 1986 White House Conference on Small Business. In response, the Budget Recon- ciliation Act of 1987 included several provisions that limited certain non-profit activities. STATUS Although small businesses continue to be concerned about competition from tax-exempt organizations, federal, state and local governments appear to be expanding revenue-generating efforts that also often compete with private entities. Further, cutbacks in government grants and other funding have forced non-profit entities into for profit unrelated business activities. The unrelated business income tax (UBIT), which is supposed to level the playing field, does not appear to be working. DISCUSSION * Should the Internal Revenue Service be given more resources to enforce violations of unrelated business income tax laws by non-profit entities? * Many universities and other tax-exempt organizations compete directly with for-profit small businesses. What, if anything, should be done to limit such competition? * What regulatory changes, if any, should be made to restrict government agencies from competing with private firms? * Should the IRS or another federal agency establish an advisory committee to review current IRS regulations and tax forms affecting the non-profit sector? * If a private firm is available to provide a product or service, could there ever be a time when it would be in the public interest or justifiable for a tax-exempt organization to be competing in the same marketplace, offering the same goods and services? If not, should such activities be further restricted by law? * Many argue that the "substantially related" test for determining what constitutes an "unrelated trade or business" of a non-profit entity is ambiguous. Should this ambiguity in the tax code be clarified? If so, how? Labor Laws and Federal Contracting Should Congress reform labor laws that inhibit small firms from participating in federal contracts? BACKGROUND Increasingly, the business community is asking whether some of the older federal labor laws should be reconsidered to determine whether they are still necessary and whether the burdens they impose on the procurement system are reasonable. The Davis-Bacon Act of 1931 requires contractors for federal and public works projects to pay workers the local prevailing wage rate, usually union wages. The act was intended to prevent con- struction companies offering substandard wages from underbidding local companies. The threshold for coverage under the act was set at $2,000 in 1931 and remains the same today. The Service Contract Act of 1965 covers service contracts similar to those of the Davis-Bacon Act for construction. It applies to contracts in excess of $2,500. It requires contractors to pay the minimum prevailing wage and specified fringe benefits. The Walsh-Healy Public Contracts Act requires contractors that supply materials to the federal government through contracts in excess of $10,000 to pay all workers the federal minimum wage, to agree that no employee is required to work more than 40 hours a week, and to avoid using workers under the age of 16. Most of the provisions of the Walsh-Healy Act have been superseded by other federal legislation. STATUS The Clinton Administration's National Performance Review recommends sweeping changes to federal labor laws, including the Davis-Bacon Act, the Service Contract Act and the Walsh-Healy Act. DISCUSSION * Should Congress repeal or reform the Davis-Bacon Act? * Should Congress repeal or reform the Service Contract Act? * Should Congress repeal or reform the Walsh-Healy Act? Prompt Payment Act Should the federal government make new efforts to improve its timeliness in paying its bills? BACKGROUND In fiscal year 1991, the federal government spent approximately $211 billion for the acquisition of needed goods and services. These federal acquisitions provide an opportunity for participating businesses to expand and for new companies to be created. The government also benefits from private sector competition, which typically results in lower costs, greater efficiency and better quality. However, the government does not always pay its bills on time. The Prompt Payment Act of 1982 was enacted to provide incentives and requirements for the federal government to pay bills on time and to become a reliable business partner. Despite the requirements of the 1982 law, payment on time continues to be a problem. Prompt payment of contractors by the federal government was a significant issue raised at the 1986 White House Conference on Small Business. In 1987, the SBA surveyed federal contractors and found that 45 percent of small firms and 55 percent of large firms believed that federal agencies "seldom or never" lived up to the Prompt Payment Act of 1982. STATUS In 1988, the Prompt Payment Act was amended to clarify and strengthen the original law and to ensure that vendors supplying goods and services to the government are paid in a predictable and timely manner. Many of the recommendations made at the 1986 White House Conference were included in the amended Prompt Payment Act. The Clinton Administration's National Performance Review recommends that the executive branch create a coherent financial management system, clarify responsibilities and raise the standards for financial officers. DISCUSSION * Government contractors maintain that work performance by a federal contractor should be matched by payment performance on the part of the government. Should the current Prompt Payment Act be broadened and required to apply to federal contracts and grants at all levels? * Should the use of electronic payments to contractors be encouraged by federal agencies? If so, how? * Should the Prompt Payment Act be amended to include federal grant programs, all forms of progress payments, the judicial and legislative branches, and subcontractors on federal non-con- struction projects? * Should proposals to extend the discount period be rejected and the current discount policy retained? * Will the National Performance Review recommendations be sufficient to improve the government's payment performance? If not, what other measures should be taken? * Should the government's prompt payment policy include prompt action and payment on undisputed change orders? * What measures, if any, should be taken so that contracting officers can be held at least partially accountable for prompt payment actions to contractors? * Should small firm access to financing for government receivables through banks and other lending institutions be increased? If so, how? Rights in Technical Data Should the federal government relinquish ownership rights of technical data for which it pays? BACKGROUND When the government relinquishes its technical data rights to prime contract and subcontract developers, access to the data is no longer available to other firms wishing to compete in related areas; the result is that fewer opportunities are available for other firms interested in manufacturing spare and replacement parts. Competition may be inhibited and the number of contracting opportunities for small businesses reduced. In the early 1980s, abuses in spare parts procurement and the need to comply with statutory competition requirements prompted the U.S. Department of Defense (DOD) to seek greater rights in technical data. The result was the proliferation of new DOD policies which, as a condition of contract, favored the government acquiring unlimited technical data rights. Congress echoed DOD's concerns by enacting new statutory requirements aimed at acquiring adequate technical data to allow for competitive procurement of spare parts. The most formative was the Competition in Contracting Act of 1984 (P.L.98-525). These actions were subsequently modified by P.L.99-661 in 1986 to ensure that the implementing regulations provide a balance between the government's needs for technical data and the developing contractor's needs for protection of its proprietary data. In October 1988, the DOD published interim regulations implementing the statutory requirements. Since publication, the interim rule has been vigorously disputed. Numerous attempts at resolving data rights issues with industry representatives have been unsuccessful. In November 1991, the FY 1992-1993 National Defense Authorization Act was enacted. Section 807 of the law required the formation of a government-industry committee to develop recommendations that would resolve government and industry disputes regarding rights in technical data. STATUS The government-industry (Section 807) committee is charged with developing a technical data rule that is equitable to all participants in defense related contracts. The committee completed its work at the end of 1993. Numerous small businesses have criticized the final recommendations; other small companies, especially those with development capabilities, have supported the committee's recommendations. The key recommendations of the committee include: . Elimination of "required for performance" criteria. . New treatment of indirect costs. . Creation of "fixed government purpose rights." The U.S. Small Business Administration filed comments with the advisory committee asking for more analysis of how these recommendations would affect small firms. DISCUSSION * Should the government maintain a strict policy on retaining most technical data rights when it contracts for the development of a product and funds all or part of the development costs? * Is it fiscally prudent for the government to limit competition by relinquishing technical data rights? * What, if anything, can be done to ensure that data, which the government has the right to release for reprocurement purposes, is made available easily and efficiently to small firms? Small Business Set-Asides What, if anything, should be done to increase set-aside awards to small and small disadvantaged businesses? BACKGROUND Small business set-asides are government procurements restricted exclusively for small business participants. The purpose of set-asides is to ensure that a fair proportion of total federal contracts is placed with small firms in each industry group. Small business set-asides are mandatory when a contracting officer from a federal agency determines that, for a particular procurement, there is a reasonable expectation that offers will be obtained from two or more responsible small businesses. Set-asides may be total or partial and can be further restricted to only small firms located in a particular labor surplus area. STATUS In 1988, Public Law 100-656 established the Small Business Competitiveness Demonstration Program. The purpose of the program is to examine and measure the need for small business set-asides in certain industry groups. Results of the program after several years of operation were inconclusive. In 1992, the program was extended through September 30, 1996. DISCUSSION * Some industry analysts suggest that a disproportionately large number of federal contracts in certain industries are being set aside for small businesses. Do set-asides in certain industry categories provide an unfair advantage to small businesses? * What, if anything, should be done to ensure the continued success of firms that recently expanded above their size standard? * What, if anything, should be done to help graduating 8(a) firms continue to grow? Should the government establish a business assistance program specifically for graduating firms? * Should small business participation be increased in industries where such participation is low? If so, how? * Should set-asides be eliminated when small business utilization goals are met or exceeded in particular industry groups? * With regard to meeting set-aside requirements, should the current percentage test (51 percent rule) for small businesses to contract with large businesses be retained or changed? Should the percentage test for small businesses to contract with other small firms be retained or changed? * Should changes be made in how size standards are determined and applied in small and small disadvantaged business set-asides? * To protect the health and welfare of the small business community, should the current goals for awarding set-asides to small and small disadvantaged businesses be changed? * What changes, if any, should be made to improve the government's efficiency and effectiveness in collecting small business data relative to federal procurements? * Should the government enhance its procurement planning and forecasting processes so the small business community can be better informed with regard to upcoming contracts and set-asides? If so, how? Small Purchase Threshold Should new procedures and protections be established for acquisitions under the small purchase threshold? BACKGROUND In 1947, Congress established a "small purchase threshold" of $ 1,000 to help assure small business participation in government contracting. In the intervening years, Congress has raised the threshold several times, most recently to $25,000 in 1986. The significance of the threshold is as follows: . Procurements of less than $25,000 can follow simplified and streamlined procedures. The government is not required to publish a Commerce Business Daily notice describing the upcoming procurement opportunity. . Current law requires that all procurements under the small purchase threshold of $25,000 be set aside for small businesses when there is a reasonable expectation that two or more responsible small firms will submit bids. This is known as the small business reserve. It has been proposed that the small purchase threshold be increased to $100,000. Increasing the small purchase threshold will simplify the government's procurement process, but may hurt small firms if acquisition opportunities are not adequately publicized. A threshold that is increased too rapidly, without corresponding agency changes to improve notification procedures for procurement opportunities, could minimize competition, sanction sole source awards and preclude opportunities for many small businesses. STATUS There is significant legislative and administrative activity to increase the small purchase threshold to $100,000. DISCUSSION * What processes, if any, should be put in place to ensure that small firms have ample notice and sufficient information, and can readily bid on federal acquisitions under the small purchase threshold? * If the small purchase threshold is raised, should the small business reserve be raised to the same level? * If the small purchase threshold is to be automatically adjusted within specified time frames, what indices or factors should be used to determine the change? * If the threshold is increased, what safeguards can be incorporated to prevent infringement or loss of contract opportunities for 8(a) program participants? Subcontracting Opportunities Should the current percentage goals established for small business subcontracting opportunities be retained or changed? BACKGROUND Subcontracting with small firms is an integral part of the performance of federal government contracts. Subcontracting also provides significant opportunities for small businesses to participate in contracts that may otherwise be out of their reach. Each year, billions of dollars in government acquisitions are made through prime contractors, who often subcontract with other firms. The government, through the U.S. Small Business Admin- istration and other federal programs, supports subcontracting efforts as a way of increasing competition and providing more contract opportunities for small businesses. Approximately one-third of the aggregate value of goods and services purchased under contract by the federal government goes to small firms. In fiscal year 1992, according to the Federal Procurement Data Center and SBA sources, small businesses were awarded $61.6 billion of an aggregate total of $199.8 billion in prime contracts and subcontracts initiated by the federal government. Of the overall total, approximately $22.3 billion, or 11.1 percent, was awarded to small firms in subcontracts. STATUS Participants in the 1986 White House Conference on Small Business recommended that the small business share of federal procurement be raised from the then current 30 percent to 40 percent. In fiscal year 1992, the small business share of federal procurement, including both prime contracts and subcontracts, was 31 percent. DISCUSSION * Public Law 100-656 requires federal agencies to establish specific numerical goals for the award of contracts to small business concerns. Should changes in the law be made to increase the number of subcontracts awarded to small and disadvantaged businesses? * Should the training of federal procurement officers concerning the capabilities and special needs of small business contractors be improved? If so, how? * What improvements, if any, should be made regarding the timely payment of subcontractors for work performed and the resolution of disputes between prime contractors and subcontractors? * Women-owned small businesses typically receive less than 2 percent of subcontract awards. Should changes in the law be made to increase the number of subcontracts awarded to women-owned businesses? * What improvements, if any, should be made to increase the level of awareness by small firms of subcontracting opportunities? * Should prime contractors be required to list their subcontractors in their bids or proposals? * Should subcontracting goals be made an evaluation factor in award procedures? * What, if anything, should be done to enforce subcontracting plans? * Should changes be made to improve the enforcement of liquidated damages due from prime contractors to subcontractors? * Should annual performance evaluations of contracting officers consider compliance by prime contractors with subcontracting plans? Surety Bonding What, if anything should be done to make certain that sufficient bonding capability and capacity are available to qualified small business contractors? BACKGROUND The Miller Act requires that for any federal construction contract worth $25,000 or more, the contractor must be bonded. The U.S. Small Business Administration's surety bond guarantee program was created to help small contractors meet bonding requirements. The program assists small contractors in obtaining bid, payment and performance bonds. STATUS Some experts argue that legislative and regulatory changes are needed. DISCUSSION * Should the SBA strengthen its surety bond guarantee program by raising applicable size standards and dollar amounts available for bonding? * What alternatives or innovations to the current bonding requirements or program would protect and assist small business contractors in obtaining bid, payment and performance bonds? * Should Congress enact legislation that would apply the same non-discrimination and disclosure rules to surety credit as apply to other types of credit? * Should the SBA surety bond programs be improved? If so, how? Regulation and Paperwork Federal, state and local governments impose numerous requirements on the operation of businesses. They range from procedures for simply obtaining a business license from a local government to complex federal regulations governing the use of chemicals in the workplace. The burdens associated with these requirements are often exacerbated by substantial paperwork and recordkeeping requirements. In addition to the cost and administrative burdens, small and growing businesses have difficulty simply keeping abreast of the various regulatory and paperwork requirements. A number of research studies have demonstrated that the small business community is disproportionately affected by government regulation. Small business advocates argue that efforts must be made to regulate only when necessary and to adopt only those methods that achieve regulatory objectives at the lowest possible cost. Proper analysis of proposed regulatory standards and associated paperwork burdens, they say, will help to ensure that the success of small business owners and entrepreneurs is determined by the marketplace and not by government regulators. For related information, see also sections on Greater Relief from Environmental Regulation for Small Business, p. 36; Reducing Paperwork Required by Environmental Regulation, p. 39; Medical Liability Reform, p. 50; Labor Laws and Federal Contracting, p. 60; Prompt Payment Act, p. 65; Frequency of Changes in Tax Laws, p. 83; and Standard Industrial classification Codes, p. 101. Alternative Dispute Resolution Should small businesses support federal alternative dispute resolution (ADR) programs? BACKGROUND Commercial disputes that cannot be settled informally by the businesses involved are usually settled through litigation. Litigation is time-consuming and expensive. More significantly, given the backlog in both federal and state courts, resolution of these disputes is often delayed for months or even years. For small businesses that have not been paid because of a dispute, a long delay in resolving the dispute may have significant adverse effects on business operations and credit ratings. Thus, experts say, some faster mechanism to resolve commercial disputes is needed. Given these problems, many businesses, including small businesses, seek alternative mechanisms to resolve disputes. There are three major alternative dispute resolution methods currently used to replace full-scale litigation. First, some complex commercial disputes are settled using mini-trials before judges instead of a jury trial. These trials involve less use of discovery (the pretrial procedure designed to uncover evidence related to the dispute) and are less formal because they are tried before a judge. The results, as with a more conventional trial, are binding on the participants. Second, arbitration, both binding and nonbinding, is used to resolve commercial disputes. Arbitration uses an independent third party to review the dispute and determine which party is correct. In binding arbitration, the arbitrator's determination is final and unappealable. Nonbinding arbitration permits the parties, if unsatisfied with the outcome, to seek resolution in the courts. Many commercial contracts now have clauses requiring binding arbitration to settle disputes. In certain instances, such as disputes between stockbrokers and their customers, binding arbitration is mandated by federal statute. Finally, some disputes are resolved through mediation. Mediation uses a third party to initiate negotiations and reduce friction between parties. Mediation is a common technique to resolve labor disputes and is increasingly used to settle commercial disputes. In mediation, unlike arbitration, the mediator does not force a settlement on the parties, but may suggest solutions that attempt to bridge the gap. On October 12,1993, the U.S. House of Representatives passed an alternative dispute resolution bill, entitled the Court Arbitration Authorization Act of 1993 (H.R.1102). The act under consideration amends the Judicial Improvements and Access to Justice Act, reinstating the authority of U.S. district courts to authorize the use of arbitration in civil actions in which less than $100,000 ($150,000 in some district courts) in damages is claimed. However, the arbitration is not binding and the litigants retain their right to a trial in federal court. DISCUSSION * If ADR resolves disputes more quickly than conventional litigation, should attempts to settle the dispute through ADR be mandatory before litigation can be brought in federal district courts? * Should the arbitration be binding? * Should the damages-claimed value be set higher? Bankruptcy Should Congress change the U.S. bankruptcy code to create a more expedient and less costly reorganization process for small businesses? BACKGROUND In recent years, small businesses have filed for bankruptcy in record numbers. Other small businesses have failed without filing for bankruptcy, closing their doors with at least one outstanding debt. Because more than 90 percent of bankruptcies and failures occur in small businesses, it has been proposed that a small business reorganization chapter be created in the U.S. bankruptcy code. As it stands, the reorganization process under Chapter 11 of the code is lengthy and costly. Small businesses could benefit from a system that provides for a shortened reorganization timetable, allows the owner to retain control of the day-to-day operation of the business and is less costly. Some states are experimenting with small business bankruptcy provisions. The Eastern District Court for North Carolina is currently utilizing the principles of a small business reorganization chapter to benefit small businesses and creditors and to ease court congestion. The current bankruptcy code included a small business bankruptcy section before major revisions were made in 1978. Chapter 11, which currently permits business reorganizations, could be modified to streamline small business reorganization proceedings. Some argue that the current system is adequate but is not being implemented properly by the creditor committees and the court system. Others maintain that as the economy improves, small businesses will not have a need for a special bankruptcy provision and that a new chapter would take years to implement properly. STATUS Legislation has been introduced in the 103d Congress that would establish a pilot Chapter 10 for small business reorganizations-- the Bankruptcy Amendments Act of 1993 (S.540). DISCUSSION * Should loss carry forward provisions be granted for small business bankruptcies? * The recently enacted Omnibus Budget Reconciliation Act of 1993 eliminated the special tax treatment permitted when businesses exchanged a debt to a creditor for stock. Should this provision be reinstated for small business reorganizations? * Should a separate chapter of the bankruptcy code be adopted for small business reorganizations? * Should the bankruptcy code be revised to provide better protection for small business creditors, many of whom are unsecured and thus have lower priority in being repaid? Civil Justice Reform Should Congress enact reforms to the civil justice system? BACKGROUND For small businesses, litigation is both expensive and time consuming. While alternative dispute resolution techniques may alleviate some of the costs associated with litigation, some disputes may have to be decided by the courts. The additional costs associated with settling disputes through litigation are a hidden tax assessed on almost every business transaction. Executive Order 12778, which took effect January 21,1992, mandates that lawyers for the federal government attempt to resolve disputes before trial, use expeditious practices in the acquisition of pretrial information, and, when possible, narrow the focus of the litigation. STATUS Legislation introduced in the 103d Congress seeks to require all U.S. district courts to have mandatory arbitration programs for cases in which less than $100,000 in damages is claimed. The pro- posed bill is titled the Court Arbitration Authorization Act of 1993 (H.R.1102). The bill passed the House in October 1993. Reform plans are being implemented in Delaware under the Summary Procedures Act. The act addresses the evidentiary and decision making inconsistencies of arbitration by moving commercial litigation through an expedited discovery process, setting limitations on the filing of motions, accepting written reports and arguments in lieu of testimony, and avoiding unpredictable juries and crippling punitive damages. No legislation has been introduced to extend the principles announced in Executive Order 12778 to private litigation in federal courts. DISCUSSION * Before considering reforms, should Congress hold hearings that involve small business constituents to learn about the problems small businesses face in the civil justice system? * Should Congress enact reforms to increase the pace at which disputes are resolved by the civil justice system? * Should other civil justice reforms be considered, such as increasing the use of sanctions against lawyers and clients who bring frivolous lawsuits, reforming the rules of evidence to guard against the use of "junk science" in the courtroom, and adding more trial judges in order to reduce the backlog of court cases? Equal Access to Justice Act Should Congress amend the Equal Access to Justice Act of 1980 (EAJA) to enhance small business protections against frivolous government lawsuits? BACKGROUND Under the Equal Access to Justice Act, some small businesses (those with fewer than 500 employees and net worth below $7 million) and individuals (those with a net worth below $2 million) who prevail in litigation against the U.S. government may recover costs and attorneys' fees when the government's position in the litigation cannot be substantially justified. Attorney fee awards are cur- rently limited by statute to $75 per hour. Courts will consider inflationary factors to increase the $75 statutory presumption in appropriate cases. STATUS The Administrative Conference of the United States held informal hearings on the EAJA during 1992. Legislation introduced during the 102d Congress that proposed a uniform method for determining attorney fee awards was not acted upon. DISCUSSION * Does the EAJA effectively protect small businesses? * Should Congress amend the act, with particular emphasis on reducing litigation that concerns fees and awards? Fair Labor Standards Act Should Congress amend the Fair Labor Standards Act to alleviate the burdens on small businesses? BACKGROUND The Fair Labor Standards Act (FLSA) was enacted in 1938 and has been amended on numerous occasions. Significant provisions of the FLSA specify a universal minimum wage schedule for all covered workers and require an employer to pay overtime for excess hours worked. Other provisions affect leave policies, thresholds for coverage and compensatory time. A number of provisions and legislative actions related to FLSA, in addition to the proposed minimum wage increases, affect small firms. In 1989, legislation was passed by Congress amending the FLSA, principally to raise the federal minimum wage to its current level. One issue addressed during debate on the legislation in 1989 was the liberalization of the FLSA's threshold for application--the so-called small business exemption. The annual dollar volume test for FLSA coverage of businesses was raised to $500,000, and has not been raised since that time. Also, however, a specific minimum wage and overtime pay exemption for small retail and service businesses was eliminated. As a result, despite the passage of the uniform $500,000 level, individual employees of small businesses became subject, for the first time, to minimum wage and overtime requirements for any work week in which they were engaged in interstate commerce. STATUS Legislation was introduced during the 102d Congress to restore an exemption for businesses grossing less than $500,000 annually. Three bills calling for an increase in the minimum wage rate (cur- rently $4.25 per hour) have been introduced in the 103d Congress. The U.S. Department of Labor is currently enforcing an interpretation of the FLSA that effectively prevents employers from having flexible leave policies allowing partial day absences. The DOL has held that employers who allow partial day absences, but who do not provide unlimited paid leave for such absences, are treating those employees like hourly, not salaried, employees. The effect is that these employees lose exempt status and are eligible for overtime pay for up to three years back. Under the FLSA, employers are usually required to pay time and a half for each hour worked over 40 hours during a work week. Compensatory time in lieu of time and a half is not permitted. Legislation is being proposed to give employers and employees the choice, mutually agreed upon, to elect time-and-a-half pay during the work week in which the time was accrued or straight compensatory time during a later work week. DISCUSSION * Should the small business exemption level be raised? To what level? * Should the minimum wage and overtime pay exemption for small retail and service businesses be reinstated? * Should the DOL policy regarding partial day absences be addressed? If so, how? * Should legislation permitting employers and employees to elect compensatory time in lieu of time and a half be adopted? * Outside sales personnel are exempt from the overtime provisions of the FLSA. However, inside sales personnel are not, as a rule, considered exempt. Should this provision be considered for amendment? Line-item Veto Should the President have the authority to veto line items out of enacted legislation? BACKGROUND Currently, when Congress passes legislation, the President has the option of signing the legislation or vetoing it. Legislation passed by Congress is usually a compilation of various bills. Often, many of the items are not related to the main provisions of the bill. Line-item veto authority would give the President the ability to veto a particular section of a bill that is unrelated to the main provisions without vetoing the entire piece of legislation. Congress would still be able to override a line-item veto. STATUS Many bills and resolutions have been introduced in the 103d Congress to grant the President line-item veto authority. Currently, none of these bills have been reported out of committee. DISCUSSION * Would line-item veto authority help the President cut government spending and reduce legislative gridlock? * Is a line-item veto unconstitutional, as opponents believe, violating the rights and powers of Congress? * Should the President be able to veto line items not germane to the primary subject matter of the legislation passed by Congress? Negotiated Rulemaking Should the government implement specific negotiated rule making procedures for agencies to follow? BACKGROUND Although the purpose of government regulation is to promote the safety and general welfare of the American public, many argue that the current rulemaking process tends to discourage parties from meeting and communicating with each other. This lack of communication leads to general misunderstanding, conflicting and antagonistic positions toward agency rules, and sometimes expensive and time-consuming litigation. Negotiated rulemaking is a process through which the parties most likely to be affected by a rule have a chance to negotiate with the agency developing the regulation before it is published for comment. Instead of the agency and the affected parties expending their time and resources litigating a proposed rule, they could devote their energies to constructively developing the rule together. As a result, the affected parties would have ownership in the rule and, rather than challenging it, may be more likely to comply with the rule once it is final. STATUS It has been argued that legislative and regulatory changes are needed. DISCUSSION * Should the government require all agencies to follow negotiated rulemaking? How could groups of small businesses best be represented in such a process? Occupational Safety and Health Reform Should Congress reform the nation's safety and health laws? BACKGROUND The Occupational Safety and Health Act (OSH Act) was enacted originally in 1970 to protect the safety and health of the nation's workers through the promulgation of standards and programs. Additional technical assistance and outreach to the small business community by the Occupational Safety and Health Administration (OSHA) may be a way to encourage greater compliance without fear of citation or penalty. The U.S. Department of Labor has a small business consultation service that could assist in this effort. STATUS In 1992, both the House of Representatives and the Senate considered legislation to amend the OSH Act. New legislation was introduced in the 103d Congress. Reformation of the act is a priority for the U.S. Department of Labor and the National Economic Council, and an interagency working group is studying ways to reform the act. DISCUSSION * Options for change to existing law include: - Establishment of a joint labor-management safety and health committee for employers with 11 or more full-time employees, with an extensive list of committee "rights." - Establishment and maintenance by employers of written safety and health programs. Expansion of the OSH Act's present criminal penalties. - Allowing employees to challenge aspects of citations, penalties and settlement agreements currently between OSHA and the employer. - Creation of a new, expedited time frame for the issuance of OSHA standards. - Requiring that OSHA engage in explicit cost-benefit analyses when promulgating regulations. - Use of incentives, such as tax credits and reductions in mandatory inspections, to encourage voluntary adoption of health and safety programs and joint labor-management committees by employers. - Provision of a model injury prevention program and a condensed version of regulations for small businesses. * Should additional funding be made available to OSHA's small business consultation service to provide more technical assistance? Should this service be expanded to accommodate the needs of small employers in low-hazard industries, which have had limited access in the past? Paperwork Reduction Act Should Congress reform the Paperwork Reduction Act? BACKGROUND During the 1970s, a regulatory explosion occurred in the United States. Congress recognized that the associated paperwork and recordkeeping requirements could impose undue burdens on businesses and enacted the Paperwork Reduction Act of 1980 (PRA), which took effect on April 1,1981. The PRA was based on the principle that the government should, to the extent possible, reduce both the recordkeeping requirements and the amount of paperwork that businesses are required to generate and maintain. The PRA targeted several classes of the public for relief, in particular, small businesses. The Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget (OMB) is responsible for review of federal agency collection-of-information requests (the statutory term for both reporting and recordkeeping requirements). With several exceptions, the PRA requires federal agencies to obtain OMB approval before conducting or sponsoring a collection of information. In order to limit paperwork, OIRA is required to determine that paperwork requirements have practical utility, that they are the least burdensome necessary, and that they do not duplicate information otherwise available. By virtue of the PRA, OIRA is uniquely positioned to assess federal burdens and to ensure government sensitivity to the needs of the small business community, which are not always considered by the regulating agencies themselves. STATUS The power of OIRA to oversee collections of information was severely limited in a recent Supreme Court decision interpreting the PRA. OIRA disapproved OSHA's collection of information on the use of dangerous chemicals in the workplace as being too burdensome. But the Supreme Court held that the PRA applies only to records maintained by the employer or those provided to the government--not to those provided by the employer to some third party. This interpretation enables agencies to impose substantial paperwork burdens without review by OIRA. In recent years, a number of bills have been introduced to strengthen the original PRA, allow for increased public participation in the regulatory process, and restore the review of third-party collection of information requests. Legislation has been introduced anew in the 103d Congress addressing these issues. DISCUSSION * Some concern has been raised over the length of the paperwork review process. Should the duration of the process be limited? * Should OIRA's oversight be strengthened with respect to the effects of the paperwork burden on small business? * Should third-party information collections be covered by the Paperwork Reduction Act? Product Liability Should Congress enact a national uniform product liability law? BACKGROUND Product liability reform was one of the top 10 recommendations of the 1986 White House Conference on Small Business. Product liability law obligates suppliers of defective goods to compensate users for injuries resulting from those goods. Differing state product liability laws impose widely varying statutes of limitations and create uncertainty for businesses selling in a national marketplace, often allowing unreasonably large judgments. Numerous small businesses have withdrawn products from the market because of liability concerns. Small businesses may be affected more negatively than large businesses by non-uniform product liability laws. Small firms do not enjoy economies of scale in production and litigation costs, they are less able to bargain with potential plaintiffs, and their limited assets increase their need to rely on market insurance. Proponents of a uniform product liability standard believe it will reduce litigation and insurance costs. Goods will be more marketable because their prices will not have to cover such expenses. Others believe that product liability laws are a matter of state concern, and should not be preempted by federal law. Some consumer groups claim that a national law that imposes a uniform statute of limitations period on suits against manufacturers will adversely affect injured parties. STATUS Under consideration in the 103d Congress is a national uniform product liability bill titled the Product Liability Fairness Act/Fairness in Product Liability Act of 1993 (S.687/ H.R.1910). DISCUSSION * Should a national uniform product liability law be enacted? Regulatory Flexibility Act Should Congress amend the Regulatory Flexibility Act by providing mechanisms to force improved agency compliance? BACKGROUND The Regulatory Flexibility Act of 1980 (RFA) requires federal agencies to examine the impact of their proposed and final rules on small businesses. After this examination, agencies either certify that the proposed rules will not have a significant economic impact on a substantial number of small entities (the act also includes small non-profits and governmental jurisdictions) or perform a regulatory flexibility analysis. The certification statement must be accompanied by a succinct statement explaining the rationale for the certification. The critical element of a regulatory flexibility analysis is the examination of alternatives that will reduce the burden of a regulation on small business or enhance a rule's beneficial effects on small business. The Regulatory Flexibility Act provides an essential tool for reasoned agency decision making, yet agencies often use exceptions to avoid their analytical responsibilities. The Internal Revenue Service, for example, claims that its rules simply interpret statutes and need not be issued for notice and comment. Because the IRS issues its rules as interpretations, it is not required to comply with the RFA. In other circumstances, agencies sometimes do as little as necessary to comply with the RFA. Each agency has its own process for complying and no uniform guidelines exist. Moreover, the RFA requires agencies to examine whether their proposed rules duplicate existing rules but does not require an assessment of the cumulative impact of regulations. No actions taken to comply with the act are directly challengeable in court. Regulatory flexibility analyses, but not certifications, become part of the record reviewed by the court to determine whether a rule is arbitrary and capricious under the Administrative Procedure Act. The U.S. Small Business Administration's Office of Advocacy has the authority to file amicus curiae briefs in court but has only used that authority once. A dispute between the Office of Advocacy and the U.S. Department of Justice concerning the constitutionality of the amicus authority has never been definitively settled. STATUS Bills introduced in each of the past two Congresses to address RFA issues died in committee. Legislation again has been introduced in the 103d Congress proposing amendments to the Regulatory Flexibility Act. On November 18,1993, the House Judiciary Subcommittee on Administrative Law held a hearing on the RFA. As of February 1994, 245 members of the House of Representatives had signed on as co-sponsors to the bill. In March 1994, the Senate voted to add RFA amendments to S.4, the National Competitiveness Act of 1993. The Clinton Administration's National Performance Review recommended that agency compliance with the RFA be subject to judicial review. The National Performance Review task force also recommended that the Office of Advocacy be authorized to draft governmentwide guidance on compliance with the RFA. DISCUSSION * Would an alternative to judicial review ensure that agencies comply? For example, should legislation require that regulations not reviewed under the RFA or its 10-year review provision (the RFA requires review of agency regulations every 10 years) be invalidated? Or should the President issue an executive order declaring that regulations not affirmatively readopted every 10 years after examination under the RFA be eliminated? * Should the President mandate that uniform guidelines be drafted by the Office of Advocacy and require that federal agencies adopt those guidelines to comply with the RFA? * Should agencies or the Office of Management and Budget be required to assess the cumulative impacts of their regulations-- within agencies or governmentwide? Small Business Size Standards How should the government define a small business? Should the definition be the same for all purposes? BACKGROUND The Small Business Act defines a small business as one that is independently owned and operated and not dominant in its field. To carry out its responsibilities under the Small Business Act, particularly in relation to government procurement, the U.S. Small Business Administration (SBA) has established size standards for most industries classified under the Standard Industrial Classification system adopted by the U.S. Department of Commerce. The Regulatory Flexibility Act ( RFA) permits agencies to use a definition of small business other than that utilized by the SBA for purposes of performing analyses pursuant to the RFA. Only a few agencies actually have established separate size standards for compliance with the RFA. In 1992, Congress amended the Small Business Act's size standard provisions. Now the size standards apply not only to SBA programs but to all other federal regulatory programs unless an agency undertakes rulemaking to adopt a different size standard for the regulatory program. The amendment also requires that the SBA Administrator concur in the size standard developed through rulemaking. Two exceptions to this amendment exist: (1) if Congress specifically provides for a definition of small business in a statute; or (2) if Congress specifically delegates to a particular agency the authority to define a small business for its regulatory programs. The disparate size standards that the federal government may use to define a small business can create problems for all businesses. The fact that a business is considered small by the SBA for purposes of procurement may have no correlation to a business's need to comply with environmental standards. While a uniform standard for purposes of regulation may reduce uncertainty for small businesses, the reduction comes at a cost. A non-uniform definition enables Congress and federal agencies to tailor their legislative and regulatory efforts to an appropriate business measurement. For example, Congress in 1993 modified the small business exemption from the requirements of the Nutrition Labeling Education Act. The standard not only examined employment but the amount of a particular food product produced. A uniform size standard would not capture the diversity in food product output and might be inappropriate. STATUS In August 1993, the SBA Administrator requested comments on the best methods for implementing the amendments to the RFA. A follow-up letter was sent to agencies that did not reply to the original notice. Final regulations are being developed by the SBA's Office of Size Standards in conjunction with the SBA's Office of General Counsel. DISCUSSION * Should there be a uniform definition of small business? * How should the policymaking bodies in the federal government (agencies and Congress) balance the need for uniformity against the benefits of tailoring size standards? * Would proper utilization of the Regulatory Flexibility Act alleviate some of these concerns? Striker Replacement Legislation Should Congress enact legislation to prohibit the use of permanent replacement workers for economic strikers? BACKGROUND Legislation has been introduced in Congress to prohibit the use of permanent replacement workers for economic strikers in all industries in the private sector. This would be accomplished by amending the National Labor Relations Act and the Railway Labor Act. Proponents of this type of legislation argue that it is necessary to restore the balance of power between employers and employees, which they claim has been lost; opponents argue that this would be a fundamental change in the current balance, which they maintain is fair. Employers also are concerned that such a change might affect the lines of distribution--customers, suppliers and manufacturers-- as well as businesses directly, regardless of whether or not a work force is unionized. Thus, there may be significant indirect effects. Proponents last year argued in favor of compromise provisions to restrict the change to union environments only and to add a moratorium provision. STATUS Striker replacement legislation is under consideration in the 103d Congress. DISCUSSION * How should the issue of permanent replacements for economic strikers be handled with respect to small businesses? Unfunded Mandates Should the federal government impose unfunded mandates on small business? BACKGROUND Federal unfunded mandates are federal requirements placed on small businesses (or on state and local governments) without provision of money for compliance. The mandates call for the small business to conduct a specific task; failure to do so may result in civil or criminal penalties. For example, the government imposes limits on the amounts of pollutants that may be discharged into lakes, rivers and streams. These restrictions generally apply with equal force to any business discharging pollutants irrespective of size. Yet the legislation and regulations that impose these requirements do not provide funds for businesses to purchase equipment or modify their operations to meet these requirements. Unfunded mandates impose substantial direct and indirect costs on businesses. In the water pollution control example, small businesses must obtain capital to pay for water pollution equip- ment. At the same time, small businesses face increased state and local taxes to pay for unfunded mandates imposed on those governmental entities by federal policymakers. STATUS A group of trade associations representing businesses and governments have formed an Unfunded Mandate Caucus to educate Congress about the issue. Numerous bills have been introduced in the 103d Congress to address various aspects of the unfunded mandate problem. DISCUSSION * Unfunded mandates often address important societal issues such as safe drinking water, access to medical care and treatment of Americans with disabilities. How should the federal government pri- oritize these various issues to avoid imposition of unfunded mandates? * State and local governments have been at the forefront of the unfunded mandate problem, yet the costs of meeting these mandates are often passed on to small businesses. What consideration should be given by federal policymakers to both the direct and indirect costs of unfunded mandates on small business? Taxation Taxes imposed by federal, state and local governments represent one of the most significant costs to small and growing businesses. Most small businesses must expend substantial time and resources to comply with extensive, complex and constantly changing tax laws. When discussing tax issues and proposed remedies, however, it is important to bear in mind the effect any proposal will have on federal revenues. In order to pay for an initiative that may be a "revenue loser," Congress may be forced to enact revenue-raising measures or eliminate other tax incentives. Businesses face a variety of tax issues depending on the form of organization they choose. Most small businesses and entrepreneurs are organized as sole proprietorships, partnerships or "S" corporations, which are subject to individual rather than corporate tax rates. Of the estimated 21 million business tax returns filed in 1992, approximately 90 percent were filed by these "pass-through" entities, while the remainder were filed by "C" corporations subject to corporate tax rates. The complexity of the tax system makes it one of the key areas for reform and fresh thinking. The growth of the economy depends in part on a tax system that meets necessary goals without unduly burdening the smallest businesses. For related information, see sections on Tax Incentives for Investing in Pollution Control Equipment, p. 41; Health Insurance Deduction for the Self-Employed, p. 48; Social Security Tax Reform, p. 52; Taxation of Health Benefits, p. 54; Unfunded Mandates, p. 77; and Research and Experimentation Tax Credit, p. 99. Accounting Methods Should all small businesses be allowed to use the cash method of accounting? BACKGROUND Small business owners must choose a method of accounting that clearly reflects income. However, there are restrictions on the types of accounting methods businesses may use. Under the cash method of accounting, income is reported in the year it is actually or constructively received and expenses are deducted when paid. The cash method of accounting is available only to service firms with average annual gross sales of less than $5 million. Businesses with gross sales in excess of this amount, along with retailers, wholesalers, manufacturers or any business where inventory is a material factor, must use the accrual method of accounting. Under the accrual method of accounting, generally income is reported in the year in which it is earned and expenses are deducted when incurred. As a result, the accrual method requires businesses to include in income amounts that have been billed to customers, even if payment has not been received. The accrual method can be very complicated to administer and may generate substantial administrative and accounting expenses for a small business. Because small businesses typically finance growth from internally generated earnings, the high costs that may result from following the accrual method may increase the cost of capital for small businesses and restrict their ability to increase both capacity and work force. In practice, the accrual method may often reflect business income more accurately than the cash method. However, attaining this accuracy can be both expensive and time-consuming to small businesses. Experts maintain that the cash method of accounting would relieve small businesses of the administrative costs and burdens associated with the accrual method. It is feared, however, that some business owners would take advantage of the cash method to unfairly lower their tax liability. STATUS No legislation is pending on this issue. DISCUSSION * Should all businesses with revenues below a prescribed threshold be permitted to use the cash basis of accounting? Alternative Minimum Tax Should Congress enact legislation reducing or eliminating the alternative minimum tax paid by small businesses? BACKGROUND The alternative minimum tax (AMT) is intended to prevent taxpayers from reducing or eliminating their tax liability by claiming certain adjustments and tax preference items. The AMT liability generally equals 26 percent or 28 percent (for individuals) and 20 percent (for corporations) of the amount by which the taxpayer's alternative minimum taxable income (AMTI) exceeds a prescribed exemption amount. The taxpayer must pay the greater of the "regular tax" or the AMT. Before the Omnibus Budget Reconciliation Act of 1993 (OBRA) was enacted, corporations were required to make two different depreciation calculations to determine their AMT liability: one to determine their AMTI and one to calculate adjusted current earnings (ACE) to determine the amount by which their AMTI must be increased. OBRA eliminated the depreciation component of the ACE adjustment for tangible personal property placed in service after December 31, 1993. STATUS Legislation introduced in the 103d Congress would provide that qualified small businesses do not have to take into account specified adjustments and tax preference items when computing AMTI. Qualified small businesses would include any business with average annual gross receipts of less than $1 million for the three previous taxable years. DISCUSSION * Should the AMT be reduced or eliminated for small businesses? * Should certain tax preference items be exempt from the AMT for small businesses Capital Gains Tax Should Congress reduce the capital gains tax on investments in small businesses? BACKGROUND The Tax Reform Act of 1986 eliminated the 60-percent deduction for long-term capital gains. Capital gains are now taxed at regular income tax rates, subject to a maximum tax rate of 28 percent. The Clinton Administration proposed and Congress passed the Omnibus Budget Reconciliation Act of 1993 (OBRA,, which included a capital gains provision targeted at individuals investing in original-issue stock of qualified small businesses. A qualified small business is defined as a "C" corporation with less than $50 million of aggregate capital. Subject to limitations, investors who hold such stock for at least five years may exclude 50 percent of the gains realized on the disposition of the stock. The 1986 White House Conference recommended restoring and improving favorable capital gains tax treatment. Opponents of preferential capital gains treatment contend that the current tax treatment, which defers tax until the capital asset is sold, already provides favorable treatment for capital gains. They maintain that reducing the tax on capital gains would primarily benefit the wealthy. Proponents of preferential capital gains treatment argue that the current tax rate on capital gains compels taxpayers to hold capital assets rather than sell the assets and pay taxes on both the real and inflated gain. STATUS A number of bills introduced in Congress have proposed to expand preferential capital gains treatment. Some proposals calculate the rate of tax on the capital gain based on the length of time the taxpayers hold the capital asset. Other proposals seek to index capital gains for inflation, and still others propose to allow only certain assets preferential capital gains treatment. DISCUSSION If it is determined that the capital gains exclusion should be expanded, a number of ways have been proposed in which the exclusion could be modified to benefit small businesses: * Expand the targeted capital gains provision contained in OBRA. This could be accomplished by increasing the capitalization limit to $100 million and/or indexing it to inflation; allowing C cor- porations to be eligible for the exclusion; eliminating or increasing the limit on the amount of gain eligible for the exclusion; deferring tax on capital gains that are rolled over into qualified investments; reducing the capital gains rate to zero for "seed" capital investments held for 10 or more years; and/or applying the capital gains exclusion to investments in S corporation stock. * Allow the gain on the sale of a capital asset used in a trade or business to be deferred if the proceeds from the sale are reinvested in the business. * Provide the owner/operator of a small business a one-time, $125,000 capital gains exclusion on the sale of the business. * Index the basis of capital assets to inflation. * Permit increased write-off of capital losses. Corporate Tax Rates Should the corporate tax rate structure be modified to facilitate small business capital formation? BACKGROUND A tax is imposed for each taxable year on the taxable income of every "regular" or "C" corporation. Corporations are subject to graduated tax rates. A recent history of corporate tax rates is as follows: ________________________________________________________________ Taxable Corporate Tax Rate (%) % Change .................................... Income 1975-78 1979-81 1982-86 1987-93 post-1986 $0-25,000 20 17 15 15 0 $25-50,000 22 20 18 15 -16.67 S50-75,000 48 30 30 25 -16.67 575-100,000 48 40 40 34 -15.00 over $100,000 48 46 46 34 -26.09 Currently, the tax on corporate taxable income exceeding $ 100,000 is increased by the lesser of 5 percent of the excess, or $ 11,750. The Omnibus Budget Reconciliation Act of 1993 (OBRA) established a new 35-percent marginal tax rate on corporate taxable income exceeding $10 million. In 1985,79 percent of corporate capital was raised internally, primarily through retained earnings. A study by the Harvard Business School found that corporate income taxes restricted busi- ness growth in three ways: by discouraging risk, by depriving firms of funds needed for expansion and by making outside capital more difficult to obtain on reasonable terms. Studies by the Securities and Exchange Commission conclude that businesses must generate approximately $500,000 in profits in order to sell their stock in a regional offering, and approximately $ 1 million in profits to offer their stock nationally. Until this level of earnings is attained, most businesses must rely on internally generated capital. Although corporate tax rates on income of less than $75,000 have been reduced substantially since 1975, the lower corporate tax brackets have not been adjusted for inflation. As a result, growing firms are subject to the 34-percent tax rate when their taxable income reaches $75,000, well short of the half million dollars they must generate to reach public capital markets. The Tax Reform Act of 1986 eliminated many business deductions claimed by small corporations, but did not reduce the lowest corporate tax rate. Because many deductions were eliminated, many small corporations reported greater taxable income and paid more in corporate taxes. The increase in taxes is particularly burdensome to undercapitalized startup corporations. Proponents of further graduating the corporate rate structure maintain that this will increase small business access to capital. They believe this will result in job creation, overall economic growth, and increased tax revenues at the federal, state and local levels. Opponents contend that owners of small businesses may use the tax savings for personal rather than business purposes. Others believe the current budget situation does not permit reducing the revenues from small businesses because there is no guarantee that benefits will exceed the costs of such a policy. STATUS The 1980 White House Conference recommended that corporate tax rates be graduated up to $500,000, with no recapture provision. In 1980, Representative Dan Rostenkowski, chairman of the House Ways and Means Committee, sponsored legislation to expand the corporate tax brackets and graduate rates up to $200,000. This legislation was not enacted. During the 1986 White House Conference on Small Business, a frequent recommendation of state conferences was to expand the corporate tax brackets to $500,000. No legislation is currently pending on this issue. DISCUSSION * Should the corporate tax rate structure be modified by expanding the corporate tax brackets, modifying tax rates and making adjustments for inflation? * Should Congress reduce the lowest corporate tax rate, or create a zero percent tax bracket for the first $20,000 in corporate income? Employee/Independent Contractor Classification Should Congress clarify and codify the definition of "independent contractor"? BACKGROUND Under current law, workers are classified as employees or independent contractors in one of three ways: (1) explicit statutory classification; (2) statutory "safe harbors"; or (3) the "20-factor commonlaw test." The 20 common-law factors are consid- ered by many to be subjective and inconsistently applied by the Internal Revenue Service. As a result, businesses that unintentionally misclassify workers are often subject to back taxes and severe penalties. In fiscal year 1989, the IRS reclassified 76,000 workers from independent contractor status to employee status and imposed $93.8 million in assessments. From 1987 to 1991, proposed assessments from IRS reclassification totaled $467 million. The General Accounting Office estimates that the U.S. Treasury loses more than $ 1.6 billion in taxes each year because of employee misclassification. Classification of workers is critical because businesses are required to withhold income taxes and pay FICA (Social Security and Medicare) and FUTA (unemployment) taxes for employees, but not for independent contractors. In addition, the classification may also affect workers' compensation, labor relations and health insurance. STATUS Worker classification legislation has been introduced in the 103d Congress. The issue was the topic of hearings held by the House Government Operations Subcommittee on Commerce, Consumer and Monetary Affairs (June 8, 1993) and the House Ways and Means Subcommittee on Select Revenue Measures (September 21, 1993). DISCUSSION * Should Congress clarify the definition of an independent contractor? A clear definition would allow businesses to correctly classify their workers and thus avoid potentially severe reclassification penalties. * Should Congress provide a uniform definition of an employee for fringe benefit, qualified retirement plan, labor relations and workers' compensation purposes? * Should Congress simplify and clarify the 20-factor common-law test currently used to determine employee and independent contractor status? Additional safe harbors could be provided to limit penalties imposed as a result of inadvertent mis- classifications. * Should the IRS develop an education program to explain and increase the public's awareness of the tax obligations imposed on employers, employees and independent contractors? * Should the IRS place greater emphasis on compliance measures, such as matching the amounts provided by businesses on Form 1099s to the amounts reported by independent contractors and increasing the penalty for those failing to file Form 1099s? * Should Congress lift the ban that currently prohibits the IRS from issuing regulations in the independent contractor area? * To help small businesses classify workers with greater accuracy, should the IRS explain in greater detail how it applies the present 20-factor common-law test and provide additional examples? * Should the IRS eliminate back taxes for misclassification when Form 1099s are filed and there is no evidence of fraud? The IRS could provide that classification determinations by field agents be prospective, including classifications for required participation in retirement and fringe benefit plans. Estate, Gift and Generation-Skipping Taxes Should Congress modify or repeal the estate, gift and generation-skipping ("transfer") taxes? BACKGROUND An estate tax is imposed on the transfer of the taxable estate of every decedent who was, at the time of death, a citizen or resident of the United States. Taxes on bequests to spouses may be deferred until the spouse's death. The graduated estate tax rates increase to a maximum rate of 55 percent. In 1987, the estate tax credit was increased from $47,000 to $ 192,800, allowing the first $600,000 of a decedent's estate to be free from the estate tax. A gift tax is levied on taxable gifts exceeding $10,000 per donee per year. The gift tax rates are the same as the estate tax rates. An additional flat 55-percent generation skipping tax is imposed on gifts or bequests to grandchildren exceeding $ 1 million. The current estate tax exemption may be insufficient to cover the value of many family businesses. As a result, the heirs to a family business may be forced to sell, liquidate or scale down the business in order to satisfy the estate tax liability. Only 30 percent of family businesses are passed intact to a second generation; only 13 percent are passed to a third generation. Under the current transfer tax system, an asset received from a decedent's estate receives a "stepup in basis" equal to the value shown on the estate tax return. As a result, those who inherit an appreciated asset may be able to immediately sell the asset without realizing any gain on the sale. If the transfer tax laws were repealed, the decedent's basis in the asset, rather than a stepped-up basis, would be applied. As a result, gain would not be recognized until the asset was sold and funds were on hand to pay the resulting tax. The transfer tax system forces many estates, as well as the Internal Revenue Service and the U.S. Department of Justice, to expend substantial funds to comply with and administer this system. In 1992, transfer taxes accounted for only 1.1 percent of revenues taken in. Administrative expenses may offset as much as 75 percent of the revenues generated by these taxes. The 1986 White House Conference on Small Business recommended eliminating estate and gift taxes on the transfer of small business assets to family members. STATUS Legislation introduced in the 103d Congress includes bills that would increase the estate and gift tax exemption to $770,000 plus cost-of-living adjustments (HR. 567), to $850,000 plus cost-of- living adjustments (H.R. 1475), to $1 million (S. 531) and to $ 1.2 million (H.R. 1110). Other legislation (H.R. 2717) introduced in the 103d Congress would repeal estate, gift and generation-skipping taxes. DISCUSSION * Should Congress increase the amount of both the estate and gift tax exemptions to more accurately reflect the effects of inflation? * Legislation that would defer estate taxes on the transfers of small businesses to family members would allow more businesses to be passed intact to family members. Should Congress exempt small businesses from the estate tax as long as the business continues to be owned and managed by a family member? * Should Congress repeal transfer taxes in their entirety? Fiscal Year Conformity Should Congress enact legislation to allow partnerships, S corporations and personal service corporations (PSCs) to adopt a tax year different from that of the principal owners? BACKGROUND The Tax Reform Act of 1986 generally required all partnerships, S corporations and PSCs to adopt the same tax year as the principal owners. The calendar year is the required tax year for all S corporations, PSCs and most partnerships. Congress enacted this requirement, referred to as the "fiscal year conformity rule," to prevent the principal owners of these entities from deferring income. The Omnibus Budget Reconciliation Act of 1987, the Technical and Miscellaneous Revenue Act of 1988 and the Omnibus Budget Reconciliation Act of 1989 created and subsequently modified a statute that permits, under certain circumstances, partnerships, S corporations and PSCs to elect a tax year different than that of the principal owners. However, partnerships and S corporations that make such an election must make a "required payment" by April 15 of the following calendar year. PSCs electing a different tax year are subject to prescribed deduction limitations. Because of these restrictions, few eligible businesses have elected to use a tax year other than the one required. STATUS No legislation is pending on this issue. DISCUSSION * The fiscal year conformity rules for partnerships, S corporations and PSCs have created gridlock for taxpayers, return preparers and the Internal Revenue Service by requiring the tax returns for both the entities and principal owners to be compiled in the short time allotted and filed by the same due date. * Should Congress enact legislation to allow partnerships, S corporations and PSCs with less than $1 million in assets or less than $10 million in gross revenues to adopt a tax year different from that of the principal owners, without the restrictions currently imposed? * Should this rule apply only when the deferral of income to the owners would be three months or less? Frequency of Changes in Tax Laws Should Congress enact major changes to the tax laws less frequently? BACKGROUND Beginning in 1939, Congress enacted major changes to the Internal Revenue Code every 15 years. Recently, major tax law changes have been occurring with much greater frequency. For example, from 1981 to 1993, 10 major tax bills were enacted and approximately 9,400 Internal Revenue Code subsections were changed. Changes in tax laws and regulations also generate numerous additional Internal Revenue Service regulations and lesser pronouncements. The number and frequency of these changes have created a 12-year backlog in IRS regulation projects. The IRS estimates that a third of its budget, in terms of both financial and human resources, is used to adminis- ter the changes to the tax laws. Proponents of changes in the tax laws say they are necessary to reflect shifts in economic and tax policy. They maintain that Congress should enact major tax law changes as often as needed to reflect these changes. On the other hand, it is argued that frequent changes in the tax laws make it difficult for small business owners and tax practitioners to stay abreast of the laws. Moreover, frequent and numerous tax changes, coupled with the delay in IRS regulations, may reduce a small business owner's ability to undertake successful tax planning and increase the owner's risk in tax disputes. STATUS Although a number of bills seeking to revise the tax code have been introduced in the 103d Congress, no legislation has been introduced that would limit the frequency of tax changes. DISCUSSION * Should Congress limit the enactment of major tax law changes to every 5, 10 or 15 years? * Should Congress bar retroactive changes to the tax code or delay the effective date of changes until regulations have been implemented? Growth Tax Credit Should Congress enact legislation providing a growth tax credit (GrC)? BACKGROUND A growth tax credit is a general credit based on a company's percentage rate of growth in sales over the previous year. Increased sales ultimately translate into additional jobs and increased capital expenditures. Since 1979, approximately 20 million new jobs were generated by the entrepreneurial segment of the economy. Growth companies are paying an increasing portion of the employment taxes and corporate income taxes collected each year. After paying these taxes, the businesses are often unable to retain capital for growth and expansion. Advocates of a GTC maintain that it would provide cash flow relief for successful entrepreneurial companies at precisely the point when cash flow problems are most acute. The credit would require no additional government administration. The credit would be offered to all privately held companies and therefore would be a direct and non-discriminatory public investment in the future tax base and employment base of the country. STATUS A GTC proposal has been submitted to the House Banking, Finance and Urban Affairs Subcommittee on Economic Growth and Credit Formation. However, no legislation regarding the GTC has been introduced. DISCUSSION * Should a GTC be enacted? If so, should the credit be equal to a percentage of sales growth, should there be a cap on the amount of the credit, and should the credit apply to all businesses, or should it be limited to businesses with sales greater or less than a prescribed level? Home-Office Deduction Should Congress pass legislation to clarify or modify the current test that a taxpayer must pass in order to deduct home-office expenses? BACKGROUND Prior to 1976, home-office expenses could be deducted whenever they were considered "appropriate and helpful" to the taxpayer's business. Congress, believing that this standard resulted in wide- spread abuse, enacted legislation as part of the Tax Reform Act of 1976 to prevent the conversion of non-deductible personal, living and family expenses into deductible business expenses. Generally, the Internal Revenue Code provides that no deduction otherwise allowable shall be allowed with respect to the business use of a dwelling unit that is used by the taxpayer during the taxable year as a residence. However, a deduction is allowed to the extent that expenses are allocable to a portion of the dwelling unit that is exclusively used on a regular basis: (1) as the principal place of business for the taxpayer's trade or business; (2) as a place of business that is used by patients, clients or customers in meeting or dealing with the taxpayer in the normal course of his trade or business; or (3) in the case of a structure not attached to the dwelling unit, in connection with the taxpayer's trade or business. On January 12, 1993, the U.S. Supreme Court ruled in Commissioner of Internal Revenue vs. Soliman that a taxpayer was not entitled to a home office deduction because his home office did not serve as his "principal place of business." To determine the taxpayer's principal place of business, the court undertook a comparative analysis of the activities conducted by the taxpayer in his home office and elsewhere. In its analysis, the court focused on two primary factors: (1) the relative importance of the functions performed at each business location; and (2) the time spent at each location. The Supreme Court's test abolished the facts and cir- cumstances test adopted by the United States Tax Court and the Court of Appeals for the Fourth Circuit, which provided that a home office may qualify as the taxpayer's principal place of business if: (1) the home office is essential to the taxpayer's business; (2) the taxpayer spends a substantial amount of time there; and (3) no other location is available for performance of office functions. The Supreme Court's holding in Soliman will not affect taxpayers who meet clients in their home office and those who work only out of their home office, such as freelance writers. However, the Supreme Court's failure to articulate a more precise test may make it difficult for other taxpayers to determine whether they are entitled to a home office deduction. Those who do the majority of their work outside of their home office, but do administrative tasks at home--such as doctors, repair people, consultants, personal trainers, teachers and contractors--may find it difficult to meet the Supreme Court's new test. Many small business owners begin their businesses in their homes prior to moving to other facilities, while others choose to run their businesses out of their homes for convenience and other personal reasons. It is argued that business owners should not be denied legitimate ordinary and necessary business deductions merely because they operate their businesses out of their homes. Legitimate deductions, such as mileage for local travel, may be denied as a consequence of not qualifying for a home-office deduction. STATUS During the 103d Congress legislation was introduced in the Senate (S. 1116) and in the House of Representatives (H.R. 687,2291,2444 and 3407) to clarify and reverse the impact of the Soliman decision. DISCUSSION * Should Congress enact legislation to repeal the current test used to determine a taxpayer's principal place of business? If so, what requirements should be included in a new test? Individual Tax Rates Should Congress provide tax relief to small businesses that are subject to individual tax rates? BACKGROUND Income earned by businesses formed as pass through entities, such as sole proprietorships, partnerships, S corporations, and limited liability companies, is taxed to the owners of the business using individual tax rates. The income is taxed in the year earned, regardless of whether it is actually distributed to the individual owners. Small business owners frequently elect a pass through entity form of business because, unlike regular or "C" corporations, income earned by pass-through entities is not subject to double taxation. Since most small business owners rely on debt financing rather than equity financing, the regular corporate form of doing business is not necessary. Businesses that incorporate to avoid unlimited liability may be eligible to elect to be taxed as an S corporation. The Omnibus Budget Reconciliation Act of 1993 (OBRA) created a new top individual tax bracket of 36 percent on taxable income exceeding $140,000 for taxpayers filing joint returns and $115,000 for taxpayers filing single returns. OBRA also imposed a 10-percent surtax on taxpayers with taxable incomes exceeding $250,000. The tax rate changes are retroactive to January 1, 1993. Studies of small business financing reveal that retained earnings are the primary source of growth capital for small businesses. For some businesses, individual tax rate increases, coupled with the erosion of business tax deductions, have lowered after-tax profits and made it more difficult to accumulate retained earnings. As a result, some businesses have been forced to postpone plans to expand or hire additional employees. STATUS In the 103d Congress, legislation was introduced but not passed to repeal the individual tax rate increases and to prevent the increases from being applied retroactively. DISCUSSION * Should income earned by small pass-through entities be subject to lower tax rates? * Should taxes on income earned by small pass through entities be deferred when the earnings are reinvested in the business? Integrated Tax System Should the United States implement an integrated tax system? BACKGROUND Under the current U.S. tax system, corporate earnings are taxed at two different levels. Corporations are subject to a corporate tax on their taxable income, while corporate shareholders are taxed on dividends received. Unlike the deduction allowed for interest payments, corporations do not receive a deduction for dividends paid. Most of the major trading partners of the United States have adopted measures that integrate individual and corporate taxes. In eliminating or reducing the double taxation of corporate earnings, these countries have sought to reduce the cost of capital for domestic investment. Double tax on corporate earnings raises several tax policy issues and may result in a number of serious economic distortions, such as (1) reducing the incentive for equity investment in U.S. corporations because of the increased cost of capital; ( 2) favoring debt financing over equity financing by allowing a deduction for interest expense without permitting a similar deduction for dividends; (3) misallocating resources between corporate and non-corporate sectors because investment decisions are likely to be made on the basis of the respective tax burdens; (4) negatively affecting capital accumulation and the savings rate, with a resulting decline in economic growth; (5) encouraging earnings retention at the corporate level to fund operations, resulting in the potential misallocation of resources; and (6) increasing the use of tax avoidance methods to minimize the effect of the double tax, resulting in additional controversies between taxpayers and the Internal Revenue Service. STATUS Since 1975, the federal government has made several attempts to adopt some measure of integration. The concept of an integrated system was proposed by previous administrations, but the idea was never formally included in legislation. Integration proposals were included in the 1984 study titled Tax Reform for Fairness, Simplicity and Economic Growth: The Treasury Department Report to the President, in the 1985 study titled President's Tax Proposals to the Congress for Fairness, Growth and Simplicity, and in the January 1992 Treasury Department study, Integration of the Individual and Corporate Tax Systems: Taxing Business Income Once. The 1986 Tax Reform Act directed the Treasury Department to undertake a study of different approaches to achieve integration. In the 103d Congress, a bill (S. 1700) was introduced that would allow corporations to deduct 50 percent of the dividends paid to shareholders. In addition, for all but the smallest corporations, the bill would reduce from 100 percent to 80 percent the portion of interest payments corporations could deduct. The legislation is intended to encourage corporations to shift from debt to equity financing. S. 1700 is pending in the Senate Finance Committee. DISCUSSION * To mitigate the economic distortions and inequities inherent in the present system, Congress could consider integrating the individual and corporate tax systems. Integration may: ( 1 ) lower the cost of capital, resulting in increased domestic corporate investment in the United States; (2) reduce the tax bias toward debt financing, which should help establish more stable capital structures; and (3) lessen the incentive to retain earnings. * Specific integration proposals include: ( 1 ) eliminating the corporate income tax; (2) for tax purposes, treating corporations like partnerships in order to allow all net income and losses to be passed directly to shareholders; (3) allocating corporate net income, but not net losses, to shareholders; (4) excluding dividends from shareholders' taxable income; and (5) continuing to tax corporations, but allowing shareholders to deduct both dividend and interest payments. Inventory Methods Should Congress enact legislation to allow small businesses to use a simplified inventory method? BACKGROUND The Tax Reform Act of 1986 implemented the uniform capitalization (UNICAP) provision, which generally requires resellers with average annual gross receipts in excess of $10 million and all man- ufacturers to capitalize or include in inventory, rather than deduct, certain direct costs and allocable indirect costs. Some costs that must be included in inventory are storage, purchasing, processing and repackaging costs, along with the general and administrative costs related to these activities. However, certain small businesses are allowed to elect simplified methods of accounting for resale and production costs. Pursuant to a 1986 Joint Committee on Taxation directive, the Internal Revenue Service considered creating a simplified inventory method for small businesses. Nothing has been implemented. The American Institute of Certified Public Accountants conducted a survey of small businesses and found evidence that the level of additional costs included in inventory under UNICAP often amounted to less than the costs businesses incurred to comply with the provision. Many small businesses maintain that UNICAP has created significant compliance burdens. If properly structured, some believe the complex application of cost allocation currently required under UNICAP could be eliminated for many smaller businesses with no change in tax revenues. Reduced complexity would promote greater taxpayer compliance. STATUS No legislation is pending on this issue. DISCUSSION * Should the UNICAP provision be amended to exempt small businesses with assets of $10 million or less? * Alternatively, should simplified safe-harbor guidelines for small businesses be provided? Investment Tax Credit Should Congress restore the investment tax credit? BACKGROUND Prior to 1986, businesses received an investment tax credit (ITC) limited to 10 percent of the amount invested in certain tangible depreciable property. The amount of the credit was based on the Accelerated Cost Recovery System (ACRS) recovery class to which the property was assigned. Generally, the ITC was claimed for the taxable year in which the qualifying property was placed in ser- vice. The Tax Reform Act of 1986 repealed the ITC. Proponents of the ITC contend that reinstatement of the ITC would reduce the cost of capital, encourage investment and promote economic growth. Some believe the ITC would be particularly helpful to small businesses, which often cannot finance capital expenditures as easily as large businesses. Opponents contend that the loss in revenues from restoring the ITC would exceed the revenues generated from ITC investments. STATUS Under a February 1993 proposal by the Clinton Administration, small businesses would have been eligible for a permanent ITC, set at 7 percent for 1993 and 1994, and 5 percent thereafter. Small businesses would have included those businesses with average annual revenues-of less than $5 million in the preceding three taxable years. Those businesses that did not qualify as small businesses would have been eligible for a temporary 7-percent incremental ITC for 1993 and 1994. The ITC provision was not included in the Omnibus Budget Reconciliation Act of 1993. DISCUSSION * If the ITC is reinstated, should it be: ( 1 ) limited to investments in certain assets; (2) available for all qualifying investments or only for those investments that exceed a predetermined percentage of the prior year's investments (i.e., an "incremental" ITC); (3) limited to investments made by small businesses; and/or (4) made temporary or permanent? * As an addition or alternative to an ITC, should the Section 179 expensing limitation be increased from its current level of $17,500? Net Income Theory Should the Internal Revenue Code be amended so that the "taxable income" of a business more closely reflects its "net income"? BACKGROUND Generally, a taxpayer may deduct all of the ordinary and necessary expenses paid or incurred in carrying on any trade or business. However, a number of provisions in the code restrict or prohibit the deduction of many expenses that would otherwise fit within the general rule. For example, some sections prohibit deductions based upon public policy, such as fines and penalties and treble damage payments under antitrust laws. The Omnibus Budget Reconciliation Act of 1993 amended the code to deny a deduction for lobbying expenses, club dues and deductions for travel expenses of spouses, dependents or other individuals accompanying a person on a business trip unless, among other requirements, the person is an employee of the taxpayer. It also reduced the deductibility of meal and entertainment expenses from 80 percent to 50 percent. The basis of the net income theory is that a business should pay income tax only on its net income, which is determined after all costs incurred to produce that income have been deducted. Proponents of this theory argue that neither Congress nor the Internal Revenue Service should attempt to determine what business expenses may be deductible. Proponents also argue that artificial limitations on the deductibility of expenses incurred to promote a business often tend to unfairly favor large businesses. For example, many small businesses use meals and entertainment as their primary method of marketing since they often cannot afford mass media advertising. While mass media advertising is fully deductible, only 50 percent of meal and entertainment expenses may be deducted. It has been argued that limitations such as these also have a substantial adverse effect on certain industries. Opponents argue that Congress and the IRS must guard against the deduction of expenses that are too personal in nature or that would otherwise tend to convey a tax-free benefit. Similarly, many people have argued that allowing deductions for certain "disfavored" expenditures (for example, cigarette advertising, pollution cleanups, etc.) are inappropriate taxpayer subsidies. STATUS No legislation is pending on this issue. DISCUSSION * Should Congress continue to disallow or limit certain business expenses, such as lobbying expenses and meals and entertainment, or should these and other business expenses be deductible in their entirety? Net Operating Losses Should Congress enact legislation to ease the current restrictions on net operating losses (NOLs) that result from changes in corporate ownership? BACKGROUND In general, a business is entitled to carry back a net operating loss to each of the three taxable years preceding the year of the loss, and to carry forward a NOL to each of the 15 years following the taxable year of the loss. A deduction is allowed for an amount equal to the aggregate of NOL carrybacks and carryforwards for a taxable year. Net operating losses may be a corporation's most valuable asset. However, Section 382 of the Internal Revenue Code limits NOL carryforwards following certain changes in corporate ownership. The Tax Reform Act of 1986 enacted a complex set of rules limiting NOL carry forwards in the case of any substantial change in ownership of a loss corporation. A substantial change in ownership may result from either a purchase or a tax-free reorganization. If a substantial change in ownership occurs, NOLs ma.v be disallowed in their entirety, or the rate at which they can be utilized may be limited. Some believe restrictions in NOL carryforward rules have had a disproportionate adverse effect on transactions involving small corporations. Easing or eliminating the current corporate NOL restrictions may enable small corporations to attract additional investors and sources of capital. STATUS No legislation is pending on this issue. DISCUSSION * Should a targeted exemption to the change in ownership rules be enacted so that small companies (those with $50 million or less in capital) do not lose their NOLs when they obtain additional capital from new investors? * Should a partial refund of unused NOLs be made available to companies that continue to incur losses? The refund, which would be limited to current year losses, could enable some companies to continue operations and become profitable in the future. * Changes made to Section 382 by the Tax Reform Act of 1986 have restricted "trafficking" in NOLs, which penalizes small corporations that require equity capital to finance costs. Should changes be made to provide that defined small business transactions (such as mergers between small businesses) and increases in paid-in capital would not trigger "change in control" limitations on the use of NOLs? Payroll Tax Reform Should Congress enact a payroll tax exemption for small businesses? BACKGROUND Employers are subject to payroll taxes imposed by the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). FICA taxes are used to fund old-age, survivors and disability insurance ("OASDI" or Social Security) and hospital insurance ("HI" or Medicare). The Social Security portion is computed on employee wages, subject to a cap or "wage base" ($60,600 in 1994), at the rate of 6.2 percent. For the Medicare portion, all employee wages are taxed at the rate of 1.45 percent. FICA taxes are levied on both employers and employees. Individuals with income from self employment are subject to Social Security and Medicare tax rates of 12.4 percent and 2.9 percent, respectively. The combined rate for Social Security and Medicare increased by 7 percent from 1986 to 1993. During the same time period, however, the maximum tax due from employees and employers increased by 84 percent because of the increase in the wage bases. In addition to FICA taxes, employers are subject to the FUTA tax, which is used to fund unemployment insurance. The FUTA tax rate of 6.2 percent is applied to the first $7,000 of employee wages. Employers in some states are given a tax credit of up to 5.4 percent, resulting in a minimum net federal unemployment tax rate of 0.8 percent. Experts maintain that increases in the wage bases have been particularly burdensome to labor-intensive and startup businesses because the increased payroll taxes reduce working capital and, unlike income taxes, must be paid regardless of a business's profits or losses. As a result, some businesses may not have the capital necessary to increase investments and hire additional employees. STATUS Currently, no legislation is pending on this issue. DISCUSSION * Should startup businesses be exempt from payroll taxes during a startup period? * Should payroll tax rates and/or wage bases be reduced for small businesses? Subchapter S Corporations Should Congress reform the rules for establishing and maintaining Subchapter S corporations? BACKGROUND Subchapter S of the Internal Revenue Code was enacted in 1958 to help remove some of the tax considerations from small business owners' decisions to incorporate. Subchapter S provides tax advantages to eligible corporations that elect to be taxed as S corporations. Both S corporations and regular or "C" corporations are entitled to limited liability. However, S corporations avoid the double taxation encountered by C corporations, which are subject to taxes at the corporate level and at the shareholder level when dividends are distributed. Generally, income earned by S corporations flows through to shareholders, where it is taxed at individual income tax rates. S corporations are subject to a number of limitations and technical requirements. Enactment of the Subchapter S Revision Act of 1982 substantially revised Subchapter S provisions to remove some of these requirements and obsolete restrictions. Additional changes were included in the Tax Reform Act of 1986. Today, more than 1.5 million small businesses--42 percent of all corporate tax return filers--are S corporations. STATUS The S Corporation Reform Act (S.1690), introduced in the 103d Congress, includes 26 separate Subchapter S proposals designed to accelerate capital formation, preserve family-owned businesses and remove "traps for the unwary." For example, shareholder limitations would be eased by increasing the S corporation shareholder limitation from 35 to 50 and by counting all shareholders in a sin- gle family as one shareholder. Tax-exempt organizations, financial institutions and non-resident aliens--not eligible for S corporation status under current law--would be permitted to own S corporation stock, and the types of trusts that are allowed to own S corporation stock would be expanded. For fringe benefit purposes, S corporation shareholders would receive the same tax treatment as owners of C corporations. In addition, S corporations would be permitted to issue "plain vanilla" preferred stock and own more than 80 percent of another corporation's stock. Some of these proposals have also been included in other proposed legislation. DISCUSSION * Should Congress enact legislation, such as S. 1690, to broaden the eligibility rules for S corporations and shareholders, enhancing the availability and desirability of S corporation status? * Should Congress simplify complex rules for S corporations and shareholders, removing technical provisions that amount to compliance traps for the unwary? * Should Congress expand capital formation techniques available to S corporations in order to create a more level playing field with C corporations? * Limited liability companies (LLCs), another form of pass-through entity, are being organized by an increasing number of small businesses. Should LLCs be preserved and developed as an alternative to S corporations? Taxpayer Bill of Rights Should taxpayers be afforded greater protection from potential abuses of power by the Internal Revenue Service? BACKGROUND The Taxpayer Bill of Rights (TBR), which was part of the Technical and Miscellaneous Revenue Act of 1988, gave taxpayers a number of new rights in dealing with the IRS and placed new responsibilities on the IRS to proceed fairly in taxpayer disputes. For example, the TBR allows taxpayers to sue the IRS for damages caused by the IRS's disregard of the Internal Revenue Code and generally requires the IRS to abate any portion of any penalty or addition to tax that is attributable to erroneous written advice furnished by the IRS to the taxpayer. The TBR also made many changes to previous law, including: ( I ) expanding the ability of taxpayers to recover professional fees and costs that result from unreasonable demands by the IRS; (2) at interviews, requiring the IRS to recognize qualified tax representatives in place of taxpayers; (3) increasing, from 10 days to 30 days, the time that the IRS must wait before collecting taxes through property seizure; and (4) requiring the IRS to provide more complete explanations in deficiency notices sent to taxpayers. The Taxpayer Bill of Rights 2 (T2) was included in legislation (H.R. 11 ) passed by the 102d Congress in 1992. T2 included provisions, among others, to expand the IRS's authority to abate interest, establish the position of Taxpayer Advocate within the IRS, limit the retroactive application of temporary and proposed regulations, and increase to $1 million the cap on damages resulting from reckless or intentional acts committed by IRS employees. The bill was vetoed. STATUS In the 103d Congress, taxpayer rights legislation similar to T2 has been introduced in the House of Representatives (H.R. 22) and the Senate (S. 542). S.542 includes proposals that would create the Office of the Taxpayer Advocate within the IRS to assist taxpayers in dealing with the agency and to identify problem areas within the IRS and develop appropriate legislative changes to rectify such problems. Currently, the taxpayer ombudsman, a career civil servant, reports directly to the commissioner of the IRS. Some taxpayer rights advocates believe that an independent taxpayer advocate office reporting directly to Congress would better protect taxpayer rights. The proposed legislation also makes several technical changes to IRS procedures. In the House of Representatives, additional taxpayer rights legislation ( H.R. 3261 ) has been introduced that would: ( 1 ) make IRS employees who are found guilty of arbitrary, capricious or malicious misconduct personally liable for a portion of the taxpayer's litigation costs; (2) increase to S I million the limit on the amount a taxpayer may recover for unauthorized IRS collection actions; and (3) in tax fraud cases, place the burden of proof on the IRS. Currently, IRS regulations can be applied retroactively. Subject to certain exceptions, proposed taxpayer rights legislation would limit the retroactive application of regulations by requiring that temporary and proposed regulations issued by the Treasury Department be effective prospectively from the date of filing with the Federal Register. DISCUSSION * Should proposed taxpayer advocate legislation be enacted? * While expanded taxpayer rights could curtail taxpayer mistreatment by the IRS, they could also result in greater taxpayer abuse of the system and increased taxpayer non-compliance. What would be a proper balance between taxpayer rights and appropriate IRS enforcement authority? * Should IRS employees who are found guilty of arbitrary, capricious or malicious misconduct be held personally liable for a portion of the taxpayer's litigation costs? * Should the limit on recovery of civil damages for unauthorized IRS collection actions be increased? * Should the IRS be required to provide greater detail in the notice of deficiency? * In limited circumstances, should the burden of proof be placed on the IRS? Value-Added Tax Should Congress enact legislation establishing a value-added tax or other consumption-based tax? BACKGROUND A value-added tax (VAT) is a general tax on consumption collected in stages as goods and services are produced and sold. The United States is one of the few Western industrialized countries without a VAT, and the only one without a VAT or a national sales tax. Foreign VAT systems, which are often used in conjunction with some type of an income tax system, typically impose a tax on sales of goods at each stage of production and distribution and on the sales of services as they are rendered. Although a VAT can be structured in a variety of ways, the credit-invoice method used in Europe is the most popular method. Under this method, the tax imposed on domestic sales generally is equal to the difference between the tax charged on sales (output tax) and the tax payable on purchases from other businesses (input tax). Another form of consumption tax is a national sales tax, which operates in a manner similar to a state sales tax. A national sales tax is levied on the retail price of taxable goods and services. Proponents of a consumption tax believe it would stimulate investment, encourage savings and strengthen U.S. international competitiveness. Proponents also contend that such a tax would, if structured correctly, result in a simplified tax system. Opponents of a VAT or a national sales tax claim that either would require a new and complex system that would be costly to implement and create substantial paperwork and administrative burdens. They argue that, because of economies of scale, a new tax system would impose greater compliance burdens and costs on small businesses. STATUS In the past, previous administrations and Congress have considered and rejected VAT and other consumption-based tax proposals. A consumption-based tax proposal that may be introduced in the 103d Congress would replace both the individual and corporate income tax systems with a "savings-exempt income tax" (SEIT). Under the SEIT, individuals and companies would be taxed on their consumption rather than on their income. The Clinton Administration is studying the feasibility of a VAT system as a means to simplify the tax code. While there are no immediate plans to implement a VAT, the Administration may consider moving to a VAT at some time in the future. DISCUSSION * What, if anything, could be done to ensure that a new tax system would not impose greater costs and burdens per dollar of revenue on small businesses? * If a consumption tax were enacted, the tax could replace one or more current taxes, such as payroll or corporate income taxes, or might be considered an additional source of revenue. If a consumption tax were imposed to generate additional revenue, the revenue could be used to reduce the deficit or to fund specific government programs. * If Congress decides to establish a VAT or other broad-based consumption tax, a number of fundamental questions would have to be addressed, such as: - How would the tax be collected, and what, if any, aspects of the current tax system would require changes? - How would the system apply to service businesses as opposed to manufacturing businesses? - What, if any, transactions would be exempt from the tax? . Would small businesses with revenues below a certain threshold be exempt from the tax? If so, what should the threshold be? - Who would administer the tax system and how would it be phased in? Technology and the Information Revolution Business and technological forces are coalescing in a revolution that promises to have as significant an impact on the 21st century as the industrial revolution had on the mid-19th century. This "information revolution" will transform both how Americans do business and how they spend their leisure time. Small and growing businesses have an important role, not only as users, but as innovators of this technological revolution. Throughout the economy, these businesses create more innovations per employee than large firms, and this inventive capacity will become increasingly critical to our country's global competitiveness. Advocates say it is imperative that the U.S. government establish consistent federal policies promoting the development and commercialization of new technologies, that the government and the private sector increase the availability of capital for technological innovations, and that the government organize itself to maximize the potential of small and entrepreneurial firms in technological initiatives. For related information, see sections on Venture Capital: Alternate Sources of Financing, p. 24; Rights in Technical Data, p. 65; and Growth Tax Credit, p. 84. Capital for Technology Development What, if anything, should the government do to improve the availability of affordable, long-term domestic equity and debt capital to assist small firms in developing and commercializing new technologies? BACKGROUND One of the biggest obstacles confronting small firms is access to sufficient domestic capital for developing and commercializing new technologies. Some argue that this is a problem of critical national importance because without such development capital, the industrial foundation of the country is being eroded. Many new technologies developed in the United States are being commercialized by foreign entities. America's international competitors are succeeding, not because they do better research, but because they focus their attention on technology areas of commercial relevance and getting to market sooner with higher quality products. Many American industries are now predominately controlled by large corporations that are often concerned primarily about quarterly results so that they can maintain or increase current stockholder value. As a result, decisions are often focused on short-term profits. This pattern will adversely affect the ability of many U.S. companies to be competitive in the future. American venture capital groups often look to fund primarily companies that can produce short term rapid profits and that can go public quickly. This is also true in the banking industry, where longterm "patient capital" is not readily available to small firms. For many U.S. lenders, short-term, high-collateral, personally guaranteed loans are the rule. Small technology-based businesses pay significantly more for capital than larger companies, in part because of the long-term nature of such investments, their lack of liquidity, the risks associated with commercialization, and the lack of significant tax incentives since the passage of the 1986 tax bill. Some experts maintain that the availability of patient capital must be increased to encourage technological investment and the commercialization of new technologies. STATUS Experts maintain that new policies and technologies are needed. One concept being considered in Congress is small business technology corporations (SBTCs). These technology corporations would be housed in U.S. Department of Commerce facilities, but their licenses would be issued jointly by the U.S. Department of Commerce and the U.S. Small Business Administration. DISCUSSION * Should more incentives be established so that American small businesses can commercialize American technology? * Should programs that would help lenders understand the unique needs of borrowers with regard to new technologies be profiled, improved and expanded? Should loan programs targeted for specific technological investments be made available? * Should tax incentives, such as indexing capital gains tax rates and loss carryforward allowances for investments in critical technologies, be made available to increase the availability of patient capital? Should other tax laws be revised to allow for greater capital gains incentives in small high-tech businesses? * Should the government facilitate the establishment of a Civilian Technologies Corporation to help fund the development of new technologies? This would be a federally chartered corporation that would take minority equity positions in promising small firms involved in developing new technologies. * Should the SBA develop a guaranteed loan program targeted at technology-based small businesses? Such a program could be designed to address the special difficulties faced by technology companies in obtaining debt capital. It could be modeled after the SBA 7(a) guaranteed loan program, with loans initiated through banks and nonbank lenders. The program would likely include special requirements, such as allowing for a higher guarantee fee and interest rate. * Banks and venture capital firms often need help in understanding and evaluating unfamiliar technologies. Could federal laboratories be used in a structured way to provide technical assistance to banks and venture capitalists? Commercialization of Technologies Should the government enhance the movement, application and commercialization of new technologies? If so, how? BACKGROUND Technology transfer is a process through which technology is developed in one place. then applied elsewhere as, for example, when new technologies are transferred from federal laboratories to the private sector. However, some experts maintain that the real issue is how to move, apply and commercialize advanced technologies from private and public sources to improve the overall economic strength of the U.S. economy. Technology transfer may be effected in a number of ways: through the licensing of a government-owned patent to a small company, the informal exchange of information through casual person-to-person encounters, the movement of people from one organization to another, or the formal agreement of government-owned labs to apply their expertise to help small business. The objective of the technology transfer process is to develop and produce marketable products and services. thus increasing American productivity and competitiveness. Technology transfer is most effective when technology is combined with private and technical resources in projects designed to meet specific industry needs. Despite the known benefits, technology transfer between the public and private sectors has been limited. Impediments to the formation of cooperative agreements and relationships include commercialization costs and the amount of time, energy and communication it takes to complete the process and make it work. STATUS Some experts believe that new progressive policies are needed to encourage the movement, application and commercialization of new technologies. DISCUSSION * Should federal laboratories be prohibited from competing with private companies? Should the government establish a "laboratory closing commission" to review federal laboratories and determine whether what they do is necessary and whether they are competing with the private sector? * Should the government eliminate the cost sharing requirements for small business in cooperative research and development agreements (CRADAs) and eliminate any government rights in intellectual property developed solely by a small business? Should more funds at the national labs be allocated for small business CRADAs and should the labs be required to respond in a more timely fashion? * Should the government recognize commercialization expenses (sales, marketing, travel, etc.) as allowable expenses in small business contracts including Small Business Innovation Research (SBIR) contracts, CRADAs, Advanced Technology Program (ATP) agreements and others? * Are small businesses sufficiently aware of the possibilities for business and economic growth contained in the application of new technologies? * What additional steps, if any, should the federal government take to promote technology transfer? * Should all federal research grants include a small business preference? Critical Technologies What expanded role, if any, can small businesses play in helping the U.S. government develop and commercialize critical technologies? BACKGROUND The development and commercialization of critical technologies is crucial to the growth of the national economy. Technologies represent a broad continuum from the discovery of scientific knowl- edge to the making of a final product. Small businesses are prominent innovators and inventors of new technologies and could play an influential role with the government in developing and commercializing critical technologies. The role of the National Critical Technologies Panel, as required by a 1990 amendment to the National Science and Technology Policy Organization and Priority Act of 1976, is to identify and report on technologies critical to the satisfaction of national needs. The law stipulates that the panel is to prepare an updated report biennially on critical technologies. STATUS In January 1993, the National Critical Technologies Panel issued its second biennial report. This report identified nine industrial sectors as making particularly significant contributions to technology and to the economy. The sectors are applied molecular biology, distributed computing and telecommunications, flexible integrated manufacturing, electricity supply distribution, materials synthesis and processing, microelectronics and opticalectronics, pollution minimization and remediation, software, and transportation. These nine industrial sectors cover all the industrial activities served by the 22 technologies identified in the panel's first report. DISCUSSION * Long-term economic growth and technological excellence are national priorities. How could incentive systems be developed and expanded to achieve these goals? * It has been suggested that the government's role with respect to critical technologies should be to develop long-term national strategies and goals that are based on current and future industrial and technological needs. What role, if any, should the government play in identifying critical technologies? * Should small businesses' role in identifying critical technologies be expanded? What actions, if any, should the government take to ensure that this happens? * Should the U.S. Small Business Administration's role in helping small firms develop and commercialize critical technologies be expanded? * Some would argue that the United States has an obsolete federal technology policy tied to scientific breakthrough with less emphasis on commercial follow-through. Should anything be done to break this cycle and place new emphasis on commercialization? If so, what? * Should the U.S. government establish a strict national policy restricting the sale of technology to foreign entities? What guidelines, if any, should be established to prevent the sale of American technology at bargain prices? Electronic Commerce Should government facilitate the use of electronic information, particularly electronic commerce? If so, how? BACKGROUND Electronic commerce involves the transfer of data through direct links between computers. Common examples of electronic commerce include direct deposit of funds to bank accounts and verification of credit card transactions. One growing aspect of electronic commerce is electronic data interchange (EDI). EDI involves the use of electronic transfer of information as a substitute for normal paper transactions, such as the issuance and fulfillment of purchase orders by computers instead of paper sent in the mail. For small businesses, EDI represents an opportunity to reduce paperwork flows, speed processing of transactions, and ultimately improve customer relations through a more efficient operation. Standardization of electronic commerce, especially EDI--through the actions of either private organizations or the federal government--may resolve some security and legal concerns, but may raise others. Thus, small businesses must be aware of not only the technical implementation issues, but also the implications of electronic commerce for their businesses. Firms that do not adopt electronic techniques run the risk of losing market share and customers from missed opportunities and the iriability to provide appropriate service. STATUS The federal government is a primary promoter of electronic commerce, including EDI. The National Performance Review called for greater use of electronic purchasing and commerce by the federal government, and the Clinton Administration issued a memorandum to commence this process. The memorandum requires, among other things, the establishment of an electronic bulletin board for small business contracting opportunities. Some agencies, such as the U.S. Department of Agriculture, now issue electronic cards with food stamp allotments that must be processed by grocers. Many other federal agency procurements will soon utilize EDI. It will become increasingly important that the government's trading partners, including small contractors, become conversant in the technology in order to continue doing business with the federal government. DISCUSSION * How does electronic commerce, such as EDI, affect small business? * Given that the information utilized in electronic commerce is sensitive and is being sent over telephone lines, what mechanisms, if any, are needed to protect the commerce and privacy of the information? * How do legal issues governing commercial transactions affect electronic commerce? * What further actions, if any, should the government take to facilitate small business participation in electronic commerce? Flexibility in Manufacturing Should incentives be provided to encourage small business owners to adopt systems that yield greater efficiency and flexibility in manufacturing and other processes? BACKGROUND Flexibility in manufacturing refers to the ability to produce various product models or styles without costly new investments or long shutdown periods. It is sometimes envisioned as involving the use of computer and robot controls to produce desired variants through simple program changes. More often, however, flexible manufacturing involves simple replacements of plug-in assemblies, new processing efficiencies, or redirections of the product flow. methods of producing such flexibility involve a number of disciplines, such as flexible design (common features and components), groupings of products, groupings of product requirements, mechanical and electronic plug compatibilities, quality systems covering broad families of products and processes, quick change-over tooling, and many others. STATUS In 1993, the federal government dramatically increased the number of manufacturing extension centers operating around the country. These centers provide small businesses with technical assistance and information about advanced manufacturing processes. Experts contend that new policies and legislative actions are needed. DISCUSSION * Should existing resources such as the National Institute of Standards and Technology (NIST), Small Business Development Center (SBDC) Program, Manufacturing Technology Center (MTC) Program and others help small firms move through transition stages to achieve greater efficiencies and flexibility in manufacturing and other processes? If so, how? * Should national policy address the economic potential of flexibility in manufacturing? If so, how? * Should small businesses receive tax credits and other financial incentives to encourage investments in the application of new and advanced technologies? * Should small businesses and other firms be allowed to sell net operating loss (NOL) tax assets? It has been argued that investments in critical technologies, Hexible manufacturing processes and marketing and commercialization of new technologies would be significantly increased if tax assets could be sold. Information Superhighway Who should pay for the use of and access to information--users or taxpayers? BACKGROUND During the 1950s, the federal government began one of the most massive infrastructure development projects ever undertaken--the construction of the interstate highway system. The system provided tens of thousands of construction jobs, modified economic development--particularly in those areas bypassed by the superhighways--and altered the way Americans live. The United States stands on the verge of a similar infrastructure revolution--the information superhighway. What the interstate system was to the car-addicted 1950s, the information superhighway will be to the information-addicted 21st century. The information superhighway will most likely consist of fiber optic cables linked into individual houses and businesses. These high-capacity cables will provide access to voice, video and data transmission through a single wire. Information and technology that was accessible only to large corporations and the government will become available to most Americans, including small business persons. The potential uses of the superhighway will be limited only by imagination and access to it. Funding mechanisms for the information superhighway will help determine the accessibility of information: a system funded by taxpayers will be more widely accessible than one funded by users. STATUS Vice President Albert Gore, while a U.S. Senator, sponsored legislation to finance the construction of an information data network that would link various institutions of higher learning. Although that proposal was not enacted, the Clinton Administration supports the development of an information superhighway. In a major address concerning telecommunications policy on January 11, 1994, the Vice President spoke about the incentives for building an integrated voice, video and data network. The policy announced in that speech would remove legal and regulatory barriers in order to foster competition in the provision of the information superhighway. A number of bills introduced recently in Congress would support these goals but achieve them differently; for example, by restricting telephone company entry until further competition exists in the local telephone market. The fact that a number of telephone companies have either sought mergers (AT&T with McCaw Cellular or Bell Atlantic and TCI) or proposed substantial regulatory initiatives (Ameritech and PacTel) increases the likeli- hood that the superhighways will be built. DISCUSSION * Should the government facilitate affordable access to information? If so, how? * Should small businesses expend resources for information, either through tax dollars or outright purchases of information and the technology to access it? * Should the government assist small businesses by increasing awareness of the benefits of information technology? If so, how? * What is the government's role, if any, in determining who will pay for the use of and who will have access to the information transported on America's information superhighway? Intellectual Property Protection Should the intellectual property laws be reformed? BACKGROUND The United States depends upon the creativity of its small enterprises for the development of new products. When technology is pirated despite intellectual property laws, small business innovators lose the opportunity to earn a reasonable return on investment. According to one estimate, U.S. industries lose as much as $60 billion in annual revenues because of intellectual property theft. A study commissioned by the U.S. Small Business Administration found that the costs of intellectual property infringements are especially burdensome to small businesses. Small innovators are forced to choose between absorbing the competitive and financial losses typically sustained by victims of piracy, or paying the enormous legal fees required for a court battle. In the SBA study, 81 percent of small enterprise infringement disputes and 83 percent of large enterprise disputes in the previous five years were with domestic-owned organizations. Moreover, a 1986 International Trade Commission report indicates that intellectual property infringement was directly related to the loss of 130,000 jobs. Among the measures that might be instituted to assist small businesses in defending their intellectual property against infringement are the following: - A requirement of binding arbitration. - A relaxation of the burden-of-proof test to make it easier to prove infringement. - The establishment of a mechanism for providing financial assistance to defray legal costs incurred by small companies engaged in litigation against infringers. Some contend that the U.S. patent system should be changed from a first-to-invent to a first-to-file system. Some small companies are concerned, however, that a change from the current system would deny the inventor the opportunity to test and develop the invention before committing the time and expense required to obtain a patent. Further, big companies have the wherewithal to respond to a first-to-file system by submitting applications, even if the patent never produces a worthwhile product. Small firms have no such capability. STATUS While a number of patent-related bills were introduced in both the House of Representatives and the Senate during the 102d Congress, the most notable developments have occurred in the international trade area, through progress on the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT). In these agreements, protection of intellectual property rights is increased and made more universal. A bill introduced in the 103d Congress (S. 149) would require that any country not meeting or applying certain intellectual property right standards be treated under unfair trade practice laws by the U.S. government. DISCUSSION * Should S. 149 or similar legislation be enacted? * Should the government institute binding arbitration, a burden-of-proof test and/or legal financial assistance to assist small businesses in defending their intellectual property against infringement? Given that there is often a trade-off between intellectual property protection and the expansion of technology, which goal should assume the highest priority? * Should the U.S. patent system be changed from a first-to-invent system to a first-to-file system? * Many believe the ability of foreign entities to obtain intellectual property rights from American universities and other U.S. sources should be inhibited. Should the Bayh-Dole Act be amended to strengthen small business retention of intellectual property rights? * Should the U.S. government seek a worldwide "doctrine of equivalence" of technologies? This prevents one "inventor" from obtaining a patent by making only trivial changes to someone else's patent. * What should be done to give small businesses greater influence in determining national technology policies, especially with regard to intellectual property rights? * Should tax law be amended to allow patent costs to be fully expensed? Current accounting standards allow only for the capitalization and amortization of such costs over the life of the patent. * Should the government offer training programs and materials to better educate small businesses on how to protect their markets and products? * What measures, if any, should be taken to expedite the Patent Office's processing of patent requests? How can processing goals and accountability measures be put in place? Should the "customer service" recommendations outlined in the Clinton Administration's National Performance Review report be established as policy? * What should the federal government do to help reduce the costs associated with patent searches and patent applications? Should the federal government assist individuals and small firms in obtaining foreign patent rights? Marketing New Technologies Should small business play a larger role in the commercialization of U.S. technology, and what steps, if any, should the government take to assist them? BACKGROUND The Congressional Research Service reports that commercialization of technology in the United States often lags behind that in other countries where governments actively promote it as part of their economic policies. The timely market introduction of new technologies can greatly enhance U.S. productivity, growth and competitiveness. Failure to bring ideas to market quickly means that foreign companies will take advantage of American investment in research by commercializing the results. Over the long term, the effect may be to reduce American global competitiveness. STATUS On February 22, 1993, the Clinton Administration unveiled a comprehensive initiative entitled Technology and America's Economic Growth: A New Direction to Build Economic Strength. The initiative has three central goals: ( 1 ) long-term economic growth that creates jobs and protects the environment; (2) making government more efficient and more responsive; and (3) world leadership in basic science, mathematics and engineering. DISCUSSION * Small business owners face many impediments in the effort to commercialize. Which are the most difficult to overcome--financial, legal or other competitive barriers? * What steps, if any, should the government take to create an environment that encourages the commercialization process? * Should additional incentives be created for research organizations and small businesses to form partnerships to convert ideas into marketable products? * Should the government allow sales and marketing expenses to be treated as overhead costs in government projects? Should more bid preparation (proposal) costs be treated as indirect expenses? Should indirect and overhead costs be allowable in the Advanced Technology Program in order to eliminate the cost-sharing burden on small business? * Should the government help expand and facilitate marketing of new technologies? Should it consider establishing regional marketing centers, provide a pool of funding for extensive marketing training, and/or establish global export marketing centers to help small firms explore new markets? If so, how? * Should the government provide marketing grants to small businesses interested in commercializing new technologies? Should such grants be structured to be competitive, peer-reviewed and paid back to the government as the company can afford to pay? One-Stop Information Centers Should the U.S. Small Business Administration be the gateway for government information about businesses, including technical assistance for complying with new laws and regulations? If so, how should that information be made available--electronically, in print media or in some combination? BACKGROUND In the complex weave that is the American republic, federal, state and local governments all have their own requirements for doing business. The vast number of legal requirements makes it difficult for small businesses to determine whether they are in compliance. At the same time that governments of all jurisdictions are imposing restrictions or requirements for conducting business, they are also establishing programs to assist small businesses. However, small businesses may have as many difficulties discovering this type of assistance as they have learning about new regulatory requirements. Without access to consultants, lawyers and other professionals, small businesses may not be able to take full advantage of these programs. Establishment of one-stop information centers would enable small businesses to gather information on business development, capital availability, and legal or regulatory requirements at one location. The one-stop shop would receive information from federal, state and local agencies on a continuing basis to ensure up-to-date information. For more business-specific information, the shop could be used as a gateway for access to the appropriate agencies. Businesses could access the centers electronically and even download applications and other forms to be completed. All levels of government have limited resources. The establishment of one-stop shops will require resources that governments may not be able to fund completely; however, private entities may be willing to assist. STATUS The Export Enhancement Act of 1992 authorized the creation of one-stop shops for federal exporting programs. The export assistance centers are intended to provide the U.S. exporting community a single point of contact for all federal export pro- motion and finance programs. The centers will include representatives from the U.S. Department of Commerce, the U.S. Small Business Administration and the Export-Import Bank. The first of the shops is expected to open in 1994. The SBA operates business information centers and small business development centers, which provide information to small businesses but do not attempt to serve as all-inclusive information clear- inghouses. DISCUSSION * Should the government work with the private sector to establish one-stop shops? * Should the SBA be given more latitude in creating public/private partnerships and co-sponsorships so that it can better leverage its resources and those of other agencies to create one-stop shops? Research and Experimentation Tax Credit Should Congress enhance the research and experimentation tax credit so that it applies to more small, research-intensive businesses? BACKGROUND In 1981, Congress provided an incremental tax credit for research expenditures. The justification for the incremental structure was to encourage research that would not otherwise be conducted, as well as to lower the cost of the credit. Initially, the credit was equal to 20 percent of the amount by which the taxpayer's qualified research expenditures for a taxable year exceeded its base amount, which was determined by taking the average of the three prior years' qualifying research expenditures. In 1988, upon the urging of small business, the credit was extended for the first time to startup firms and the base amount calculation was restructured. Currently, the base amount is calculated by taking a ratio of expected research expenditures to sales over a historic period and applying that ratio to a measure of recent sales receipts. The changes were intended not only to enable new firms to take the credit, but also to shift the benefit to smaller firms. Research conducted by the U.S. Small Business Administration has shown that small firms are more innovative per employee than large firms, yet they enjoy far less of the credit's benefits. Growing, capital-intensive companies that have no current tax liability cannot take full advantage of the research credit. They can, however, carry the credit forward, although this may be of limited value. Another factor that reduces the effectiveness of the research credit is its temporary, rather than permanent status. Because research projects often require long-term investments, the lack of a permanent research credit inhibits some companies from undertaking extended research projects. Additionally, a temporary research credit reduces a firm's ability to plan its research programs. Business owners and policymakers generally agree that the research credit should be made permanent so businesses can plan and budget their research based on this incentive. However, since its enactment in 1981, the research credit has been extended only temporarily, often during the final hours of budget negotiations. During these negotiations, little consideration has been given to whether the current incremental form of the credit effectively encourages small firm research and whether changes should be made to improve the credit's effectiveness, particularly for small manufacturing firms. One change being considered would modify the research credit to allow a flat 20-percent credit for research conducted through consortia. This "collaborative" research credit modification is intended to encourage teams to participate in research that would otherwise be too costly, risky or long-term to engage in individually. Such collaboration is also intended to encourage the immediate dissemination of research results to a larger pool of companies, including companies otherwise precluded from taking the credit. STATUS The omnibus Budget Reconciliation Act of 1993 extended the research tax credit through June 30, 1995. retroactive to July 1, 1992. The Research and Development Enhancement Act of 1993 (S.666), introduced in the 103d Congress would restructure and permanently extend the research tax credit. The bill would simplify the credit for small businesses by allowing them to take a flat 10-percent credit instead of the current 2-percent incremental credit. Taxpayers would be allowed to update their base periods and could use the research credit to offset part of their alternative minimum tax liability. The bill, which is pending in the Senate Finance Committee, also would encourage companies to engage in collaborative research projects. DISCUSSION * Aside from permanently extending the research credit, what changes can be made to make the credit more beneficial to small businesses? * Should small businesses be allowed to take a flat, rather than incremental, research credit? * Should a flat 20-percent credit be provided for collaborative research? * Should the research credit be partially refundable? Small Business and Federal Research and Development Should the Small Business Innovation Research (SBIR) Program be improved? What other initiatives, if any, should be taken to encourage small business participation in federal research and development? BACKGROUND The SBIR program, administered by the U.S. Small Business Administration, is designed to stimulate technological innovation by using small businesses to meet federal research and development needs. All government agencies with outside research budgets of more than $ 100 million are required to set aside a specified percentage for bid by small companies. The SBIR program as originally designed has three phases. In Phase 1, agencies grant initial awards averaging $50,000 to small companies on a competitive basis to evaluate the scientific and technical merit and feasibility of an idea. In Phase II, the agencies award $500,000 or less to the Phase I projects with the greatest potential. In Phase III, the small company participants attempt to bring their innovations to the market through support from private investors or federal funds outside of SBIR. Available research indicates that small businesses' share of federally funded R&D is less than their share of privately funded R&D, even after SBIR is taken into account. STATUS During the 102d Congress, S.2941, the Small Business Innovation Research (SBIR) Program Reauthorization Act of 1992 was enacted. The law contains the following provisions: reauthorization of the SBIR program for seven additional years, through fiscal year 2000; an increase in the Phase I award limit from $50,000 to $100,000; an increase in the Phase Il limit from $500,000 to $750,000; an increase in the set-aside share to 1.5 percent in fiscal years 1993 and 1994,2.0 percent in fiscal years 1995 and 1996, and 2.5 percent thereafter; and establishment of the Small Business Technology Transfer (STTR) Pilot Program. The STTR program authorizes (but does not require) agencies with more than $1 billion in extramural research and development budgets to allot .05 percent in fiscal year 1994, .1 percent in fiscal year 1995 and .15 percent in fiscal year 1996 to fund joint R&D projects conducted by small businesses and nonprofit research institutions or federally funded R&D centers, where not less than 40 percent of the work is being performed by the small firm. DISCUSSION * Small businesses are becoming increasingly concerned because federal agencies are placing more emphasis on using consortia and cost-sharing processes in government technology programs. Should amendments to the Small Business Act be enacted that would level the playing field and allow small firms to compete equally with large firms in cost-sharing requirements? A sliding scale based on size could be applied. * If cooperative research and development agreements with large businesses are used, how should small businesses obtain access to the technology emanating from such ventures? * What changes can be made to the SBIR program to encourage more small firms to participate? * What measures, if any, should be instituted to accelerate the SBIR topic decision process and payment of awards by agencies? * Participants in SBIR have said that the length of time between the completion of a Phase I award and the go-ahead for Phase 11 is too long. Should corrective adjustments in this process be made? * Should bid proposal costs be considered an allowable expense under SBIR guidelines? * Should the SBIR act be amended to provide funds for program administration costs in addition to the funds already legislated for SBIR awards? * Should the SBIR program be modified to place greater emphasis on the development and commercialization of critical technologies and related technological innovations? Examples of modifications include: Giving industries more flexibility in developing projects in response to critical technologies, versus the specific topics emanating from the agencies themselves. Including past SBIR winners as reviewers of the proposals' scientific, technical and commercialization potential. * Should a system be developed to track outcomes of SBlR-funded research and commercialization? Standard Industrial Classification Codes Should the Standard Industrial Classification (SIC) system be overhauled to more adequately represent the continuing changes in the structure of the economy? If so, how? BACKGROUND The Census Bureau's current surveys, quinquennial economic censuses and the Standard Industrial Classification system on which they are based, must evolve almost simultaneously with the indus- tries they cover in order to be effective. Often, new and growing industries emerge so rapidly that the censuses cannot capture them. These industries go unmeasured until the census can be changed in its next round. Thus, valuable information on emerging industries is unavailable for five years or more. The SIC is a major statistical classification system used to promote the comparability of establishment data describing various facets of the economy. The SIC system's basic classification unit is the establishment--an economic unit where business is conducted or where services or industrial operations are performed. The SIC system covers the entire field of economic activities by defining industries in accordance with the composition and structure of the economy. Government procurement and eligibility for designation of government contract set-asides are based on SIC codes. For example, if the government needs metal bolts, a contract will be requested from companies that fall within the SIC code for manufacturers of metal bolts. Set-aside contracts will be awarded only to those entities that list their business as predominantly in that SIC code; if their primary business is something else, they will not be eligible to obtain a set-aside for the metal bolt contract. The latest version of the SIC system was prepared in 1987. For the most part, changes to the SIC codes have resulted in adding new and growing industries, deleting or combining declining industries, and rearranging industries within the existing industry groups. STATUS Participants in the 1986 White House Conference on Small Business recommended that a commission be established to study the impact on the American economy of the services, information and technology sectors and to review the existing SIC codes to ensure that the categories reflect the current state of the industries. The Standard Industrial Classification Manual was subsequently pub- lished in 1987 with updated SIC codes. In the process of being developed is a successor to the SIC codes that will evolve with the continuing growth of the American economy. A study completed under contract by the U.S. Small Busi- ness Administration in 1986 and updated in 1989 compares the federal procurement system of product service codes with the SIC codes. Papers presented at the 1991 International Conference on the Classification of Economic Activities in Williamsburg, Va., indicated that the time had arrived to take a fresh look at the concepts, methodologies, procedures and uses of economic classifications for statistical purposes. In July 1992, the Office of Management and Budget established an Economic Classification Policy Committee chaired by the Bureau of Economic Analysis, U.S. Department of Commerce. The committee is conducting a public outreach effort. To facilitate public comment, the committee has prepared issue papers on eight key areas of decision leading to a new classification structure: conceptual issues, aggregation structures and hierarchies, collectibility of data, criteria for determining industries, time series continuity, service classifications, international comparability and detailed product code classifications. A new SIC classification system is to be in place by 1997, with tentative new classifications to be tested in 1996. DISCUSSION * Should the SIC system be modified to enable the government to classify businesses and identify emerging industries without restricting businesses to a particular SIC code for procurement purposes? * What other changes to the SIC system, if any, should the government address?