Small business issues and priorities

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Small business issues and priorities
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S. prt
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United States -- Congress. -- Senate. -- Committee on Small Business
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Small business -- Periodicals -- United States   ( lcsh )
Small business -- United States   ( lcsh )
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federal government publication   ( marcgt )

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At head of title, <1978->: Committee print.
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by staff members of the Committee on Small Business, United States Senate with representatives of small business organizations

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University of Florida
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Table of Contents
    Front Cover
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    Conference date: November 16, 1978 (Morning session)
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    Appendix
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    Back Cover
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Full Text



95th Congress C.1TTEPRN
2d Sessions COMTEPIN








( ~SMALL BUSINESS ISS E~7~17
PRIORITIES-19






BY STAFF MEMBERS (OF TIME

SELECT COMMITTEE ON SMALL BUSINESS

UNITED STATES SENATE./ WITH


REPRESENTATIVES

OF

SMALL BUSINESS -ORGANIZATIONS











NOVEMBER 16, 1978





Printed for the use of the Select Committee on Small Business


U.S. GOVERNMENT PRINTING OFFICE
40-287 WASHINGTON: 1979




























SELECT COMMITTEE ON SMALL BUSINESS
GAYLORD NELSON, Wisconsin, OChairman THOMAS J. McINTYRE, New Hampshire LOWELL P. WEICKER, JR., Connecticut
SAM NUNN, Georgia DEWEY F. BARTLETT, Oklahoma
WILLIAM D. HATHAWAY, Maine BOB PACKWOOD, Oregon
FLOYD K. HASKELL, Colorado JOHN C. CULVER, Iowa WILLIAM B. CHERKASKY, Executive Director HERBERBT L. SPIRA, Chief Counsel SANDRA K. KLATT, Professional Staf Member CoREY M. ROSEN, Professional Staf Member ROBERT S. STOKES, Professional Staff Member GERALD D. STURGES, Profes8ional Staff Member DENIs R. ZEGAR, Professional Staf Member ROBEnaT J. DOTCHxs, Minority Staff Director
(II)














CONTENTS

Statement of SenatorNelson, Hon. Gaylord, a U.S. Senator from the State of Wisconsin, ?Fage
and chairman, Senate Small Business Committee-----------2
Statement ofBrown, Lee, on behalf of the Smaller Manufacturers Council of
Pittsburgh---------------------------27
Carroll, Frank, Small Business Service Bureau Boston, Mass ---------18
Davidson, Julius, on behalf of the Service corporation of Retired
Executives---------------------------88
DeBolt, Donald------------------------------------------------ 14
Diss, William T., on behalf of the American Institute of Certified
Public Accountants------------------------------------------ 70
Feilar, Frank, director, Action Programs and Administration, National
Restaurant Asoito--------------------94
Grollman, Jack, Association of Independent Corrugated Converters.. 93 Harding, Ralph, president, Society of the Plastics Industry -----------95
Hess, Dr. Earl, on behalf of the American Council of Independent
Laboratories------------------------------------------------- 30
Johnson, Robert, National Cable Televison Association--------------53
Kobell, Ruth, National Farmers Uin--------------95
Leffler, Marvin, chairman of the board, National Council of Salesmen's
Organizations, Inc------------------------------------------- 67
Leonard, Will E., on behalf of the Association of Steel Distributors_.. 80 Levitt, Arthur, Jr ., chairman, American Stock Exchange, Inc------49 Nagy, Gerald, National Home Furnishings Association ---------------50
Richard, Edward H., chairman, Citizens Committee on Paperwork
Redutio----------------------------------------9
Rustin, William, Gastonia, N.C -----------------------------------51
Seeds, George A., first vice president, National Association of Wholesale-Ditriutor-----------------------------------3
Seifert, Randolph J., on behalf of the National Home Improvement
Assoiaton-------------------------------------48
Simone, Joseph, representing the Saratoga Small Business Council,
the New York Regional Small Business Council, and the Greater
Capital Region of Small Business Councils-------------21
Stults, Walter B., executive vice president, National Association of
Small Business Investment Copne--------------16
Unsell, Lloyd, Independent Petroleum Association of America ---------96 Wenning, Tom, of Bison & Wenn~--------------66
Wolf, Steven A., on behalf of the National Family Business Council 90

APPENDIX
Statement of the Independent Bakers Association on the tax bill, H.R.
13511, now the subject of House Senate Conference, October 12, 1978-- 107 Letter dated October 26, 1978, to Senator Gaylord Nelson, chairman,
Senate Select Committee on Small Business, from Daniel T. Kingsley,
executive director, National Venture Capital Association ---------------108
Letter dated October 26, 1978, to William B. Cherkasky, staff director,
Senate Select Committee on Small Business, from Walter M. Kiplinger,
Jr., Washington representative, Cast Metals Federation---------108 Letter dated November 6, 1978, to William B. Cherkasky, staff director,
Senate Select Committee on Small Business, from Jerome L. Dreyer,
executive vice president, AAS-----------------108
Letter dated November 7, 1978, to William B. Cherkasky, executive
director, Senate Select Committee on Small Business, from Louis Micheln, executive vice president, Oshkosh Association of MIanufacturers
and Commerce -------------------------------------------------- 109
(MH)






IV

Letter dated November 8, 1978, to William B. Cherkasky, executive
director, Senate Select Committee on Small Business, from Warren A. P*.* Cole, p resident, National Micrographics Association--------------- III
Letter dated November 9 1978, to William B. Cherkasky, executive
director, Senate Select committee on Small Business, from Leon L.
Lemaire, president, Connecticut Small Business Federation ------------112
Letter dated November 10, 1978, to William B. Cherkasky, executive
director, Senate Select Committee on Small Business, from Dr. Robert W. Pricer, director, Small Business Development Center, University of
Wisconsin-Extension----------------------------------------- 113
Letter dated November 13, 1978 to Senator Gaylord Nelson, chairman,
Senate Select Committee on mall Business, from Gerard P. Panaro associate director, Government Affairs, Associated Retail Bakers of
Amerca------------------------------------- 11
Letter dated November 14, 1978 to Senator Gaylord Nelson, chairman,
Senate Select Committee on mall Business, from Ivan D. Fugate,
president, Independent Bankers Association of America---------------119
Letter dated November 14, 1978, to Senator Gaylord Nelson, chairman,
Senate Select Committee on Small Business, from Phillip R. Chisholm,
director of legislative affairs, National Oil Jobbers Council ----------- 121
Letter dated November 14, 1978 to Senator Gaylord Nelson, chairman,
Senate Select Committee on mall Business, from Basil J. Mesines,
Law Offices of Stein, Mitchell and Mins------------125
Letter dated November 14, 1978, to Senator Gaylord Nelson chairman,
Senate Select Committee on Small Business, from Jimmy ?). Johnson,
Ph. D., executive director, Association of Physical Fitness Centers-------128 A paper on the future potentials for small business, prepared by the Ceda Lettrp., Leonard A. Blackshear, executive director, November 15, 1978--.. 127 Leterdated November 17, 1978, to Herbert L. Spira, chief counsel, Senate Select Committee on Small Business, from James S. Hostetler,
Law Offices of Chapman, Duff and Paul------------------------- 129
Letter dated November 17, 1978, to William B. Cherkasky executive
director, Senate Select Committee on Small Business, from 6tis L. Lee,
Jr., associate director, Center for Small Buies----------145
Letter dated November 17, 1978, to William B. Cherkasky, executive
director, Senate Select Committee on Small Business, from Daniel T.
Kingsley, executive director, National Venture Capital Association------147 Letter dated November 17, 1978, to Senator Gaylord Nelson, chairman,
Senate Select Committee on Small Business, from Duane D. Pearsall, member, Steering Committee, Small Business Council, Denver Chamber
of Commerce------------------------------------------------- 148
Statement of the National Retail Merchants Association, Washington, D.C.. 149 Statement of Wendell 0. Metcalf, International Council for Small, Business,
Washington, D.--------------------- 151
Statement of the Association for Advanced Life Underwriting--------152
CONFERENCE DATE
November 16, 1978:
Morning Ieso------------------------












SMALL BUSINESS ISSUES AND PRIORITIES *1978


THURSDAY, NOVEMBER 16, 1978
U.S. SENATE,
SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C.
The Senate Small Business Committee staff met at 9:40 a.m., pursuant to notice, in room 6226, Dirksen Senate Office Building, William B. Cherkasky, executive director, presiding.
Mr. CHERKASKY. I want to thank you all for coming.
This is our third annual get-together of small business organizations.
Some of you have been through this before. I know that you will find, those of you who have been here before, that some of this is repetitive. The staff of the Small Business Committee feels however that this is a useful session for us.
We have to prepare an agenda for the next 2 years. We are always asked by the Senators on our committee to find out what is on your minds, what is uppermost, and what should be on the agenda for them. to consider in our organizational meeting in January.
We deeply appreciate your taking the time to be here.
I have a statement from Senator Nelson. With my unerring instinct for timing, I picked the one day in the fall season when the Wisconsin IBAW organization has a meeting.
Senator Nelson is speaking to them this noon in Fond du Lac, and is not here for that reason.
I think another half dozen associations told me this is the one date in the entire fall season they couldn't be present. So I have a great knack for picking the wrong date.
Ordinarily, we do this in January, but I prefer to get started early this time, because we have had a great turnover in Congress. You may know that our committee lost three members through defeat in the elections and one through retirement.
The format today is a simple one. We sent out letters to all of you and asked for responses in the form of written comments. Where 1)ossilweaeasigcertain groups to lead the discussion in some 12 or 13 areas. These can be prepared papers.
They will be brief. We will run through them and then open up the meeting for further discussion and comments.
In that way, I hope to keep the meeting structured more so than in previous years so that we can be out of here by 12 o'clock or 12:15.
I do want to read one quick statement from'Senator Nelson for the record.






2

He says:
At the beginning of the past Congress we began to invite active small business organizations to meet with us and to make suggestions for the committee's agenda.
At the first meeting, nearly 30 associations were represented. The community has grown rapidly. Today, about 65 organizations directly representing over 3 million small and independent businesses are present. These meetings are increasingly important to the work of the committee and the Senate.
This is reflected in setting the date well in advance of the forthcoming session. This will enable us to work on developing, refining and documenting your suggestion so that they will be of maximum benefit when the committee meets to formulate its agenda for early 1979.
Much excellent source materials has come to light in past meetings and has been circulated through the record of these proceedings.
By the way, these records will be circulated again. There will be a number of printed copies for each of you.
Again, Senator Nelson says:
Your specialized analyses of various industry and national problems have been shared with us and other organizations. Your recommendations have led to public hearings, and in some instances to remedial bills and legislation or administrative action.
For example, in the first meeting of February 7, 1977, the Venture Capital Association presented a study of the contribution of small, innovative firms and their problems in raising capital.
On February 8, 1978, the committee commenced hearings on capital formation, which focused national attention on the effect of the tax laws on the inability to raise venture capital. As a result, we were able to gain enactment in the Revenue Act of 1978, of a reduction in the maximum capital gains tax from 49 percent to 28 percent.
We appreciate your efforts. Your recommendations also will be closely reviewed and will be of assistance in charting our course for the next 2 years.
[The prepared statement of Senator Nelson follows:]

STATEMENT OF HiON. GAYLORD NELSON, A U.S. SENATOR FROM TIE STATE OF
WISCONSIN, AND CHAIRMAN, SENATE SMALL BUSINESS COMMITTEE
At the beginning of the past Congress, we began to invite active small business organizations to meet with us and make suggestions for the Committee's agenda.
At the first meeting, nearly 30 associations were represented. The community has grown rapidly. Today, about 65 organizations directly representing over 3 million small and independent businesses are present.
These meetings are increasingly important to the work of the Committee and the Senate.
This is reflected in setting the date well in advance of the forthcoming session. This will enable us to work on developing, refining, and documenting your suggestions so they will be of maximum benefit when the Committee meets to formulate its agenda early in 1979.
Much excellent source material has come to light in past meetings and has been circulated through the record of these proceedings. Your specialized analyses of various industry and national problems have been shared with us and with the other organizations. Your recommendations have led to public hearings, and in some instances to remedial bills and legislation or Administrative action.
For example, in the first meeting on February 7, 1977, the Venture Capital Assoication presented a study of the contributions of small, innovative firms and their problems in raising capital. On February 8, 1978, the Committee commenced hearings on capital formation, which focused national attention on the effect of the tax laws on the inability to raise venture capital. As a result, we were able to gain enactment, in The Revenue Act of 1978, of a reduction In the maximum Capital Gains tax from 49 percent to 28 percent.
We appreciate the time and effort that you have put into preparing your recommendations. You may be assured that they will be closely reviewed and will be of substantial assistance in charting our course for the next 2 years.






3
Mr. CiHERKASKY. I think that covers that.
There is now ongoing a series of 57 meetings in .preparation for a White House Conference on Small Business in January of 1980. All of you should be able to participate in one way or the other in those meetings.
Under the resolution we sent to the White House, anybody who wants to go to these regional and State conferences should be entitled to go. You will just have to present yourself, whether you get an invitation or not. If you have been overlooked, go to the one nearest your home.
When it comes to the final conference in Washington, D.C., in 1980, that will be a different story. The people chosen to go to that one are chosen by election at the State forums and the regional meetings, and some by choice through your Congressman and Senators' offices, and, in some cases, the choices will be made by the Administrator of SBA, Mr. Weaver.
So, if you have been overlooked as a delegate and you think you ought to go because you are, indeed, a spokesman for small business, let either Mr. Weaver know, or myself, and we will be glad to help you. The idea is not to restrict people from going, but to include as many as possible.
I would guess the meetings in Washington in 1980 will encompass 9O,500 or 3,000 people, so there should be plenty of room for most all people.
I have not introduced the staff. I want to apologize, because not ,1 the staff is here today. If you have been reading the papers in the last week you will know that SBA has opened up a number of leaks in the dike and we have had to put three of our fingers in New York City on the 8 (a) program.
Are there any questions at this point, or comments?
All right, I-would like, to start off the discussion this morning with the most important problem facing small business in the entire country ,nd that is the matter of inflation.
We have asked the National Association of Wholesaler-Distributors to make the presentation on behalf of that particular point.
Will you identify yourself ?

STATEMENT OF GEORGE A. SEEDS, FIRST VICE PRESIDENT,
NATIONAL ASSOCIATION OF WHOLESALER-DISTRIBUTORS
Mr. SEEDS. I am George Seeds, first vice president of the National Association of Wholesale-Distributors. I have been asked to represent our association this morning.
I would like, first of all, to offer for the record, a document setting forth our recommended priorities for the coming year.
[The prepared statement of Mr. Seeds follows:]
PRIORITIES FOR THE SENATE SELECT COMMITTEE ON SMALL BUSINESS, PRESENTED
BY GEORGE A. SEEDS
I. INTRODUCTION
Since the February 7, 1978, meeting of the Senate Small Business Committee staff with 'representatives of various small business organizations, many longsought goals of the small business community have been realized.






4

NAW welcomes the opportunity to not only make recommendations for the committee's consideration as to goals, priorities and objectives in the 96th Congress, but to also recognize recently enacted legislation which will benefit small business.
The Revenue Act of 1978 is the most significant capital formation legislation enacted by Congress in many years. It represents a recognition by Congress that inflation and unemployment can be most effectively dealt with through changes in tax laws and a strong incentive-oriented private sector. Without the diligent involvement and hard work on the part of the Senate Committee on Small Business and its staff, the provisions addressing small business needs would not have been as significant.
The Act contains a new graduated corporate tax schedule with a maximum rate of 46 percent on earnings over $100,000; a permanent 10 percent investment tax credit extended to cover rehabilitation of wholesaler-distributor and other commercial and industrial structures-; and, a reduction in the maximum corporate capital gains tax rate to 28 percent and in the individal rate to 25 percent Also, the three-year delay of the effective date of the carryover provision relating to inherited property of the Tax Reduction Act of 1976 enhances the perpetuation of family-owned small businesses.
The Senate Small Business Committee is to be commended for the inclusion of the provision which extends the carryback period to ten years for product liability losses in the Revenue Act of 1978. Acceptance of this provision by the Congress is a clear indication of the recognition of the severity of the product liability problem.
Further, credit must be given to the committee for laying the groundwork for the President's Executive Order establishing a White House Conference on Small Business. The conference provides a platform for the nation's small businesses to make recommendations to the federal government for changes in public policies which seriously impede their economic progress.

II. ISSUES OF MAJOR CONCERN TO THE WHOLESALE DISTRIBUTION INDUSTRY
A. Inflation
The principal cause of the high inflation which has plagued our economy over the last decade has been massive, unabated federal deficit spending. Rapidly rising price levels and inflationary wage demands have been a response to, not the prime cause of, inflation. Businesses and workers have been attempting to keep themselves whole against the effects of inflation. If the Administration and/or Congress fail to make the hard choices necessary and do not -move to balance the federal budget, inflation will continue to accelerate into 1979, and public cries for action could result in Congress and the Administration surrendering to demands for mandatory wage, price and profit controls.
B. Capital formation
The capital formation deficiency Is among our most urgent economic problems largely contributable to existing tax policy. Failure to resolve this problem will have profound implications for our industry and the national economy. Further, despite the recognition and awareness on the part of the federal government as to the preservation of a viable small business community in our nation, nothing can stop smaller businesses from dying a gradual death unless reform measures are enacted to ease the impact of inflation on small businesses. C. Product liability
Product liability litigation continues to Incrpase and wholesaler-distributors are not immune under the doctrine of strict liability in tort. Insurance premium rates are rising, but are extremely variable. An ever-increasing number of wholesaler-distributors have difficulty obtaining renewals of their policies, and when cancelled, find it almost impossible to obtain coverage from any other source. The inevitable result of this situation is that an increasing number of wholesalerdistributors have been forced to go "bare"-with no coverage at all. The problem continues to be a major concern of most businesses and will continue to be more serious ss time goes on, unless a remedy is provided soon. D. Federal regulation and the paperwork burden
Federal regulations continue to be a burden for most wholesaler-distriltorq and the majority of smaller businesses. It is estimated that federal relations of businesses in 1979 will cost at least $120 billion. Small businesses certainly pRy a substantial part of this amount. The Commission on Federal Paperwork in its






5

study of the impact of government regulations on small, business estimated that small business bears at least 60 percent of the paperwork costs imposed by governent on all types of businesses. In many instances, small businesses do not have the time nor expertise to comply with federal regulations and, therefore, must hire additional outside help to assist them. A recent NAW survey revealed that the average wholesaler-distributor spends almost $5,700 a year complying with federally mandated paperwork, and expends more than 98.4 days per year filling out federal forms.
31M RECOMMENDATIONS FOR SMALL BUSINESS PRIORITIES IN THE 96TH CONGRESS
A. Measures to combat inflation
The committee should undertake a study which would indicate the specific effects of inflation on small business with a view towards generating recommendations to Congress for legislative measures to offset the debilatating effects of inflation on small business.
NAW is currently undertaking such a study examining the effects of inflation On our industry and will make the results of the study available to the committee upon its completion.
B. Capital formation tax~ incentives
We strongly urge that the committee continue its diligent efforts to seek additional small business tax relief to stimulate economic growth through increased capital formation and retention to supply the needed funds for investment business expansion, and increased employment opportunities.
Further, we urge the committee to seek more adequate and up-to-date depreciation allowances and make appropriate recommendations. Senator Nelson sought provisions for improvement in depreciation methods for inclusion in the Revenue Act of 1978.
C. Product liability relief
The committee should strengthen its efforts to seek a solution which would secure restoration of equity and common sense to our nation's product liability system. The best interests of all our citizens lie in a product liability system in which liability is borne by the parties giving rise to such liabilities. Wholesalerdistributors and others should not be held liable if they are not at fault. D. Easing of regulations and paperwork
The committee should develop recommendations to be made to the Congress which would require the federal regulatory agencies to consider the special operating circumstances of Small businesses when promulgating regulations and continue its efforts to seek adoption of proposals recommended by the Commission on Federal Paperwork to alleviate the regulatory and paperwork burden on small business.
We firmly believe that the above recommendations will provide solutions to the aforementioned problems and we urge their inclusion among the Senate Select Committee on Small Business' priorities for the 96th Congress.

STRUCTURE AND ECONOMtIC SIGNIFICANCE OF THE NATIONAL AssociATION OF'
WH~OLESALER-DISTRIBUTORS AND THE WHOLESALE DISTRIBUTION INDUSTRY

The National Association of Wholesaler-Distributors: is a federation of 108 national wholesaler-distributor associations, which have an aggregate membership of approximately 40,000 wholesale-distributors, with 125,000 places of business. The members of our constituent associations are responsible for 60 percent of the over $700 billion of merchandise which will flow through wholesale channels this year. They employ a comparable percentage, or 2.5 million, of the 4 million Americans who work In wholesale trade. Thus, although the individual firms which our organization represents are small-to-medium size businesses Individually, their collective economic Importance Is most signficant.
The wholesale distribution Industry, in contrast to the manufacturing sector of the economy, continues to be dominated by small-to-medium. size closely-held, family-owned businesses. Of the 202,000 merchant wholesaler-distributor corporations filing tax returns in 1973, 99 percent had assets of less than $10 million. These smaller firms accounted for about 65 percent of the Industry's sales voluime. In contrast, in the manufacturing sector,, approximately 2 percent of the firms controlled about 88 percent of the assets and accounted for approximately 80 percent of sales.






6

The wholesale distribution industry provides year-round employment for 3.5 million individuals. In 1977, average hourly earnings ($6.78) in wholesale trade exceeded those for all private industry ($5.14), while average weekly earnings ($212) were (15 percent) above those in private industry ($185). In short, the wholesale distribution industry provides dependable, well-paying jobs through out the U.S. economy.
Industry sales in 1977 totalled $532 billion and are expected to reach approxinately $665 billion in constant dollars in 1982, according to Commerce Department estimates.
Merchant wholesaler-distributors perform an essential economic function. They make goods and commodities of every description available at the place of need, at the time of need. Wholesaler-distributors purchase goods from producers, inventory these goods, break bulk, sell, deliver, and extend credit to retailers and users.
Wholesaler-distributors are essential to the efficient satisfaction of consumer and business needs. Further, by the -market coverage which they offer smaller supliers and the support which they provide to their customers, wholesalerdistributors preserve and enhance competition, the critical safeguard of our econoitmic system. According to a recent NAW survey, the typical wholesaler-distributor establishes the market connection between 133 manufacturers and 533 business customers. Many of these manufacturers are themselves small businessmen who must rely on wholesaler-distributors to establish, maintain, and nurture markets for their products. The majority of customers are small businessmen also, who look to the merchant wholesaler-distributor to provide merchandise availability, credit, and other critical services.

NATIONAL WHOLESALE DISTRIBUTION ASSOCIATIONS AFFILIATED WITH NAW
Air-conditioning & Refrigeration Wholesalers. American Machine Tool Distributors' Association. American Research Merchandising Institute. American Supply Association. American Surgical Trade Association. American Traffic Services Association. Appliance Parts Distributors Association, Inc. Associated Equipment Distributors. Association of Footwear Distributors. Association of Steel Distributors. Automotive Service Industry Association. Aviation Distributors & Manufacturers Association. Bearing Specialists Association. Beauty & Barber Supply Institute, Inc. Bicycle Wholesale Distributors Assn., Inc. Biscuit & Cracker Distributors Association. Ceramics Distributors of America. Copper & Brass Servicenter Association, Inc. Council for Periodical Distributors Associations. Council of Wholesale-Distributors, American Institute of Kitchen Dealers. Distributors Council, Inc. Door & Hardware Institute. Drug Wholesalers Association. Electrical-Electronics Materials Distributors Assn. Ethical Veterinary Distributors Association, Inc. Explosive Distributors Association, Inc. Farm Equipment Wholesalers Association. Fireplace Institute.
Flat Glass Marketing Association. Fluid Power Distributors Association, Inc. Food Industries Suppliers Association. Foodsorvice Equipment Distributors Association. Foodservice Organization of Distributors. General Merchandise Distributors Council. Hobby Industry Association of America, Inc. International Sanitary Supply Association. The Irrigation Association. Laundry & Cleaners Allied Trades Association. Lawn & Garden Distributors Association.








Machinery Dealers National Association. Mass Merchandising Distributors Association. Material Handling Equipment Distributors Assn. Monument Builders of North America-Wholesale Div. Motorcycle Trades Association. Music Distributors Association. National-American Wholesale Grocers' Association. National Appliance Parts Suppliers Association. National Association of Aluminum Distributors. National Association of Brick Distributors. National Association of Chemical Distributors. National Association of Container Distributors. National Association of Decorative Fabric Distrs. National Association of Electrical Distributors. National Assoiation of Fire Equipment Distrs. National Asso:,iation of Floor Covering Distributors. National Association of Marine Services, Inc. National Association of Plastics Distributors. National Association of Sporting Goods Wholesalers. National Association of Textile & Apparel Whlrs. National Association of Writing Instrument Distrs. National Beer Wholesalers Association. National Business Forms Association. National Building Material Distributors Association. National Candy Wholesalers Association. National Ceramic Association, Inc. National Commercial Refrigeration Sales Association. National Electronic Distributors Association. National Fastener Distributors Association. National Food Distributors Association. National Frozen Food Association, Inc. National Independent Bank Equip. Suppliers Assn. National Indusi rial Glove Distributors Association. National Locksmiths' Suppliers Association. National Marine Distributors Association. National Paint Distributors, Inc. National Paper Trade Association, Inc. National Sash & Door Jobbers Association. National School Supply & Equipment Association. National & Southern Industrial Distributors Assns. National Swimming Pool Institute. National Welding Supply Association. National Wheel & Rim Association. National Wholesale Druggists' Association. National Wholesale Furniture Association. National Wholesale Hardware Association. National Wholesale Jewelers' Association. Northamerican Heating & Airconditioning Whlrs. North American Wholesale Lumber Association, Inc. Optical Laboratories Association. Pet Industry Distributors Association. Power Transmission Distributors Association.
-Safety Equipment Distributors Association, Inc. Scaffold Industry Association. Service Merchandisers of America. Shoe Service Institute of America. Specialty Tools & Fasteners Distributors Assn. Steel Service Center Institute. Toiletry Merchandisers Association, Inc. Toy Wholesalers' Association of America. Truck Equipment & Body Distributors Assn., Inc. United Pesticide Formulators & Distributors Assn. Wallcovering Wholesalers Association. Warehouse Distributors Association for Leisure & Mobile Products. Watch Materials & Jewelry Distributors Association. Wholesale Florists & Florist Suppliers of America. Wholesale Stationers' Association. Wine & Spirits Wholesalers of America. Inc. Woodworking Machinery Distributors Association.







Mr. SEEDS. I certainly welcome this opporuniy to be with you to offer our recommendations on what our members believe the Small Busines Committee's priorities for the next 2 years should be.
Let me start by commending both the committee and its staff for the leadership role which they have taken in encouraging passage of legislation of vital import to wholesaler-distributors and others in the small business community. Very significant and outstanding progress was made toward meeting small businesses' problems during the last Congress as a result of your efforts, and we are most appreciative.
We would like to also call attention to the fact that the idea for a White House Conference on Small Business originated in the Senate Small Business Committee. This has been forgotten by some, but not, I assure you, by our members who remember your efforts in this regard as but another illustration of the committee's commitment to a strong small business sector.
Inflation is the most pressing problem facing our industry today. We have commissioned a study by the Graduate School of Business at the University of Michigan on the effects inflation has on the wholesalerdistributor. We encourage this committee to undertake a study of the effects from the standpoint of inflation on all small businesses and the public policy initiatives necessary to offset these effects. No other issue is so important, yet less understood. Inflation poses special, serious problems for small business. The Small Business Committee can help identify these unique effects and what public policy initiatives should be undertaken in the years ahead.
Thank you for an opportunity to make this statement.
Mr. CIERKASKY. You wouldn't care to summarize some of the points you make in your formal submission, would you ?
Mr. SEEDS. Only to stress that we think that the proposed study of inflation is very important. It would provide a factual basis on which the Congress could act in the area of capital formation and other important areas.
Mr. CHERKASKY. All right. We .will come back to your proposed study. We will run through the subject and come back to the general subjects for a discussion in an hour or an hour and a half.
On the question of regulation as it affects small business, a representative of Home Builders is going to make a statement.
Is that representative here?
[No response.]
Mr. CHERKASKY. Well, I guess we will skip that and come back to it later.
Is Mr. Pinaro here of the Retail Bakers?
A VOICE. He was unable to be here today.
Mr. CIIERKASKY. He was going to make a statement on minimum wagre and social security.
A VOICE. I wasn't prepared to make a statement.
I am sorry.
Mr. CTERIKASKY. I am sorry I called on you. I will talk to my chief counsel in a minute or 2.
We are to item 6, and we have two strikes.
What about paperwork?
Ed Richard? Ed, you are here.
Thank you.






9

STATEMENT OF EDWARD H. RICHARD, CHAIRMAN, CITIZENS COMMITTEE ON rAPERwoRx REDUCTION

Mr. RicHA,D. Good morning.
I axa Ed Richard and I am chairman of the Citizens Committee, on Paperwork Reduction. We have a formal statement which we have prepared and I would appreciate it if you would put it in the record.
Do you have copies of it?
Mr. SpiRA. Yes.
[The prepared statement of Mr. Richard follows:]

STATEMENT OF EDWARD H. RICIIARD, CITIZENS COMMITTEE ON PAPERWORK REDUCTION

As most of you know, I have taken the position as chairmanof the Citizens Committee on Paperwork Reduction, the follow-up group established early this Spring to the Commission -on Federal Paperwork which Senator Mcintrye cochaired. t
We are in the process of reorganizing the Committee and expect to join the activist 96th Congress in the development of new initiatives to cut government paperwork.
We will have the support of many small business groups who are associated with us, as well as big business,. labor, educational institutions and many other groups--including State and local governments.
Since the Committee was established, it has worked directly with several Senate and House offices to develop new legislation. It has monitored the work of the Office of Management and Budget, particularly as the Office has begun to follow the recommendations of the Commission. To date, over 150 of the 810 recommendations have been implemented, but we do not know how well it has been done.
We do know that Federal paperwork is costing private industry between $25 to $32 billion per year, individuals over $8 billion per year and $350 million to the farmer. The Commission on Federal Paperwork's limited investigations found -that should these 810 recomm nations be implemented by the responsible departments and agencies, an estimated $10 billion on first year savings could be realized.
That is on a larger scale. Today, I am here to talk about one specific group, the individuals engaged in small businesses who now find that they are spending more and more time on government demands for information and cutting into own work for their respective livelihoods.
I need not spend this time reiterating the universal dilemmas of the small businessman which have been heard so many times over before this very Committee, but I would like to zero in on a few specifies which can be realized and offer direct relief to small businesses.
Some amount of sensibility and sensitivity must be incorporated into the Federal paperwork requirements imposed upon the small businessman. Ideally, the Citizens Committee suggests that the following areas of concern be considered by this committee.
Regulations.-Just the number of pages in the Code of Federal Regulations has jumped from 2400 in 1938 to over 65,000 today. The number of regulatory agencies has doubled in about the same time period. Each time a new regulation is promulgated, the small businessperson must determine If it affects the business, how it affects the business and then what. information must be collected and maintained in order to comply.
How can we stem this explosion? Thereare several things which can be done.
When Congress first drafts legislation, legislators need to look dowm the road at what this 'particular bill might generate in the way of regulations. Regulations mean compliance and compliance needs paperwork.
If Congress made its legislative language concise, It would interrupt the develoPment of conflicting interpretation by agencies that must implement the new law. That is a significant step forward. That little -phrase, and additional Information which may be deemed necessary by the Secretary." often leaves the door open, for bureaucrats. to drain our companies of information. That beeds to be remove&from, bills as often as possible.






10

Senate Rule 4, requiring paperwork impact statements is another way -to cut paperwork. Significant statements can provide the Senate, and to the same extent the House with a general idea of what additional forms and information requests may be required.
Secondly, agencies collecting the information should view the request from the eyes of the respondent. Write government regulations and other materials so that they can be understood by the people who are required to respond and supply the information.
Consideration by government agencies should be given to several other areas to help reduce paperworki. For iw~lance. is there an alternative source for this inforniation? Has it been previously collected? Coudd sampling provide the needed information rather than an entire industry classification reporting?
The government often does not consider how its programs impact on others. Information requests may appear sensible in Washington, but are unnecessarily costly, confusing and ineffective among the people working with or being served by thle government. Additional attention needs to be devoted to obtaining public comment prior to regulations going into effect.
Ot-criap and duplication.-These words constitute a major small business complaint. We want to comply and we do comply. But it is frustrating to spit out the samwe information to both Federal government agencies and agencies of the State only in a different format. OSHA reporting requirements are famous for this. as are Federal and State tax forms. For the life of me, I can't see why the Y~ederal government and the States can't get together on tax forms-it is provided for in the law. The information requested is essentially the same, but we have to contend with separate instructions, duplication of effort and so forth. You know the answer: Bureaucratic Turf.
Corn runication.-Lack of understanding or confusion on a particular form, reporting requirement or regulation often results in frustration or "guessing" as to what is required and expected by the Government. The Federal government should make every attempt to provide a point of contact (telephone number, address, or name of an agency ombudsman) foi additional clarification or information. This point of contact should be clearly noted with the form or instructions and not buried in a myriad of bureaucratic referrals. Banks do, department stores do, but not the Federal government that Is "here to help !"
I would like to stress just one form, of the Renegotiation Board, which I understand may be phased out of existence. It has an RB-i form which requests costs and pricing data on all products of a company selling over one million dollars to the Federal government. The form has been criticized by large businesses as well, and they certainly have more of a budget to fill it out than do 1. Nevertheless, if that one million dollar floor was raised to three or five million dollars, the small business entrepreneur would have an added enducement to sell more to the Government, knowing the paperwork requirements would be minimal.
These examples are few, and I could go on and on, but I think they show you how some little changes can accomplish both savings in time and money to the 14 million small businessmen and women.
I'll throw this on the table for you to think about:- All agencies have been required to submit a 1978 (paperwork) burden reduction goal. I applaud the goals of agencies as the Civil Service Commission which set a goal of 11.8 percent; the Internal Revenue Service, 5 percent; and the Veterans Administration, 8 percent.
What Is discouraging Is the Environmental Protection Agencys goal of 0)percent, the Office of Management and Budget striving for a 0 percent reduction and finally the Equal Employment Opportunity Commission which simply says their figure is "not available."' NOT AVAILABLE-EEOC's paperwork is always cited as burdensome. That needs oversight.
The small business community is sincerely Interested In cutting down on the paperwork burden not only because of the time consumed in 'handling the work, but also because we do not have the sophisticated staff of large companies to comprehbend and fill out the forms correctly. We can't do it alone.
With representation from all over the country, and from many groups and organizations including state'and local government, we believe that we are not facing an insurmountable problem. However, it is going to take some work.
With sufficient hacking and Interest, the Citizens Committee stands ready to work with this, the leading Committee for small business, to develop the programs.
The time for action is now, and the activist 96th Congress is gQlng to be our workplace.
Thank you.








Mr. RuIHARD. The Citizens Committee is a broad- based group representing not oniy small business but big business and labor, elected offi,cials and education on the higher level, the secondary level.
It is the committee that was set up as a recommendation by the Federal Paperwork Commission, charge d with the responsibility of implementing the recommendations of the Paperwork Commission. Just this week we issued a statement on the publication by the Office of Management and Budget, entitled, "Paperwork and Red Tape, New Perspectives, New Directions." We applaud the directions that are being taken, but we calculated that if we wait~ for the length of time that it is taking to see these recommendations implemented' it will be at least 5 years and possibly more before the 810 recommendations are put into effect.
It is not that the agency involved (lid not participate as the recommiendations were put together. They did. They participated in their development, and we would hope that thie committee in its program this year would put a push behind seeing that the various reco-mmendations of the Federal Paperwork Commission are implemented in a speedier way.
Our figures indicate that if these 810 recommendTat ions were implemented, there would be an estimated $10 billion in first-year savings to the Various groups involved.
But I want to talk today about the small busin-.ss people. We now find that we are spending more and more time in supplying information to the Government which leaves us much less time to run our businesses.
I speak as an individual small business perrson who has analyzed this, and who finds that my accounting department, is spending~ more than half of its time filling out in what we think, in many cases. ,ire unnecessary Government forms. We do not have the time to analyze and do the financial planning that we have to do in order to keep our company going in these very difficult times. It is becoming a very major frustration for us.
S.If you look at the number of pages in the Code of Federal Reguilations, you will see the extent of the problem. In 1938, there were 2,400 pages. Today, there are 65,000 pages in the code alone.
The number of regulatory agencies has doubled in about the same period of time. Each time a new regulation is promulgated, the small business person must determine if it affects him, his business, how it affects his business and what information must be collected and maintained, and whether he is complying.
We suggest several specifics. When Congress first drafts legislation, that the legislators look down the road at what this particular bill might generate in the, way of regulations. Regulations mean compliance, and compliance, -unfortunately, always means paperwork. P'When I walked into this room today, I saw a huge truck of paper being unloaded down the hall.
Mr. CHERKAsKY. That was a transcript of today's meeting.
Mr. RicHaARD. ,Yes. I -stopped in, to see the assistant to Senator Bumpers, and I am delighted to hear he would like to be on this committee. He suggested one way to outlaw paper is to outlaw copying machines. We are not against copiers, but they have proliferated this pr-oblem.





12

There is one little phrase that we think your committee should take a look at. It is, "And additional information which may b deemed necessary by the Secretary."
This phrase appears in many pieces of legislation. It apper to be very simple, but it produces some of the most awesome requirements that small business people have ever seen.
We strongly recommend that that phrase be outlawed from futr bills.
Senate rule 4 requiring paperwork impact statements isante way to cut paperwork. Significant statements can provide theSea, and to thie same extent, the House with a general idea of what additional forms and information requests may be required.
Unfortunately, though people talk about Senate rule 4, and ta there are impact statements, but they are weak, watered down,an not terribly effective as far as the small business segment is concerned.
Agencies collecting information should view the requests fromth
eyes of the respondent. I think if each person who had to design a form waS required, himself or herself to fill out that form, the forms would be one heck of a lot simpler.
As an example, just last week, my company received a form from the Department of the Treasury. We are a small public company. We have one foreign shareholder. As a result of that, we are required to fill out a 90-page form because of this one shareholder.
There are 15 pages of the most impossible directions that I think I have ever read. Three people in my company have read them, and each one gets more confused when they read the directions.
Mr. CHERKASK.Y. Which agency is that?
Mr. RICHARD. The Department of the Treasury.
Mr. CHERKAsKY. WillI you send me a copy of that?7
Mr. RICHARD. Yes; I think I will send you the original.
Mr. CHERKASKY. We will fill it out for you.
Mr. RICHARD. You are on.
[Laughter.]
Mr. C irE RKASKY. That is no problem.
Mr. RICHARD. Consideration by Government agencies should be given to several other areas that help produce paperwork. For instance, is there an alternative source for this information? Would sampling provide the needed information rather than an entire industry classification reporting?
Thc Government often does not consider how its programs impact on others. Information requests may appear sensible in Washington, but are unnecessarily costly, confusing, and ineffective amongth people working or being served by the Government.
Additional attention need's to be devoted to obtaining public cm ment prior to regulations going into effect.
I would personally like to commend your committee as one of the few that recognizes this responsibility and has sought to overcome it, but we need more of it, concerning every piece of new paperwork that comes out.
There are two keywords that we in small business, those of us who are specifloa,,lly concerned about paperwork, are very concerned about The, words "overlap" and "dup i cation."
We want to comply and we do comply, but it is f rustrating to spit out the same information to both Federal Government agencies and






13

agencies of the State, only in a different way. OSHA reporting requirements are famous for this, as are Federal and State tax forms.
For the life of me, I cannot see why the Federal Government and the States cannot get together on tax forms.
Communications is a serious problem, lack of understanding or confusion on a particular form, reporting requirements and regulations, which often result in frustration or guessing. We have even been told on occasion that it isn't necessary to put in the information that is correct as long as you fill in the blanks and send them back. That is ridiculous.
In private industry, banks help their clients, and so forth, but in the Federal Government, if you don't understand the form you receive, it is a frustrating experience trying to get help from the Federal Government.
There is one form I would like to call to your attention. It is the form of the Renegotiation Board, RB-i, which requests cost and pricing data on all products of a company selling over $1 million to the Federal Government.
The form has been criticized by large business as well, and they certainly have much more of a budget than we do for filling this sort of thing out.
Nevertheless, if you put forth legislation to increase that floor from $1 million to $3 million or $4 million, the small business entrepreneur would have an added inducement to sell more to the Government knowing the paperwork requirements would be minimal.
These are just a few examples of problems with paperwork.
All agencies have been required to submit a 1978 paperwork burden reduction. We applaud the Civil Service Commission, -which set a goal of 12 percent. The IRS set a goal of 5 percent, and, the VA, 8 percent.
What is discouraging, and what we request that this committee look into, is the Environmental Protection Agency's zero percent; the Office of Management and Budget striving for a zero-percent reduction, and, finally, the EEOC, which simply says their figure is "not available." EEOC's paperwork is always cited by every one of our members in surveys as extremely burdensome. That means oversight from this committee.
Mr. CHERKASKY. EPA, OMB, and EEOC?
Mr. RICHARD. Yes.
Mr. CHERKASKY. OK.
Mr. RICHARD. The small business community is extremely interested in reducing the burden of paperwork. Frankly, from the pragmatic
-poi nt of view, we cannot do it alone. Our committee, which is the focal point of the burden of paperwork, is anxious and willing to be. of whatever assistance we can.
Thank you for inviting us.
Mr. CHERKASKY. We many times hear about the amount of paperwork that is imposed -on businesses by the Federal Government and the State governments and the, counties and locals and all the rest. But what we really need most times is absolute documentation of a particular form which is onerous, such as the form you are talking about that is 90 pages long. Those are the things we would like to see and examine them, and ask the agency, "Why do you need all this information?"
40-28-79-2






14

It is hard to tell the agencies. "Cut your paperwork 10 or 12 per ent, because that leaves them to their own means. They have to be changed bh exact direction. We need direction and criticism to a particular piece of paper.
For example, a year ago. we had to go to the floor of the Senate to reduce one paper, the Department of Labor form on hiring students for less than 20 hours a week. The form was seven pages long and svev pages of instructions. We got the Labor Department to do a one- postcard form, with a half-page directions.
It is that sort of thing we need to have. Even this one will do it.
Mr. RWTIARD. In the new congressional year, we will be working on a list of forms most often coipqflained about by the people we are in touch with. We will try to give you specific answers why they are <1iflicult.
In this limited statement I can make now. we talk more about the problem, but we are anxious to help you develop some of the solutions corning with the specifics that are necessary.
Sometimes when we reach out for information, when we seek ideas from our constituents, we get gross generalizations; we are trying to boil them down into specifics. We had hoped to have some of this for you in the early part of the session.
Mr. CIIERKASKY. I would appreciate that. That goes for everybody else here. If you have a particular piece of paper, or a Government form of some type that you think is onerous, or if you think the inforIation is retrievable somewhere else, let us know what it is.
Mr. RICHARD. The Citizens Committee would like to work with other groups, so if they have forms that their members are complaining about, please let us know.
Thank you.
Mr. CHERKASKY. Thanks, Ed.
Don, you are here, aren't you?
Don DeBolt, you are going to say something on taxes, as I understand it?
STATEMENT OF DONALD DeBOLT
Mr. DEBOLT. The whole tax structure, as it applies to small business, offers a great opportunity in the next Congress and this committee to address itself to directly.
I think we saw the tip of the iceberg in what could be opportunity areas as we show how the Congress responded to the graduated corporate income tax, recognizing the special capital formation needs of small business.
We would encourage the committee to take this track and develop it further, seizing initiatives that will help the small business conmunities, through the tax structure, to achieve some of the goals of capital formation that are so critical to its survival.
In the area of small business and capital formation, I would like to address this and point out an area of opportunity that I don't think has been addressed by the committee or by any agency thinking at this particular structure.
Capital formation has primarily addressed itself to the availability of capital in the existing stream of institutional capital areas, such as the banking system, such as the Small Business Administratio di-





15

rectorate of guaranteed loans and through the SBIC approach, which have been successful as far as venture capital.
However, there is a way to achieve( some of the same objectives that have been attempted in these areas through developing an innovative approach to capital formation that can be used to assure the continued survival of small businesses now that are very successful in all areas of our economic community.
What I am really talkin about is the small buiness that is too small to be bought by a large company where existing ownership and management has reached a point in their career where they no longer are able to carry on the business, because of retirement, because of estate planning needs or other critical factors that affect their own decisionnmaking process.
What we would like to see the committee take a good look at is where there could be some vehicle created for assisting in the buyout of existing small businesses by perhaps employees of those small businesses or a third party interest which has an ability to manage that business successfully and assure the continuity of the employees employed by this business, and also the potential growth of that business.
We can visualize a system that would guarantee and protect the seller of the business if he wishes to carry the contract payout for the purchase of that business, and let me describe a situation that may be very simple and easy to understand that elucidates the problem.
We have a member of the association that has operated his business for 27 years. He has been very successful in his community. It is a community that is too small to be attractive to a shopping center mall. He has a great downtown location, he has owned a building for 15 years and has the mortgage almost paid off. He has $250,000 of assets which he personally has created over the years. He is about 63 years old now. His children are gone, they became doctors or lawyers or employees of the Senate staff committees, or whatever you might want to describe themMr. CHtERKASKY. You took away Walter's speech.
[Laughter.]
Mr. DEBOLT. He has no family member to take on the business. He has an employee who knows the business, and has been with him 12 years. He can control the business and the employees, but the guy has been so underpaid over these years that he hasn't been able to build up a capital base of his own. So he has no capital with which to buy the business, which has a value of $250,000.
Now, our member who started this business, who created it, and trained this young man knows that he is perfectly capable of running this business. He is also aware of the fact that the young man doesn't have the capital and the wherewithal to purchase the business.
He would be more happy to sell that business to this young man, a $250,000 value, with a payout, say, over the next 15 years, which would return to the seller of the business maybe between $23,000 and $27,000 a year, which will enable him to buy the condominium in Phoenix, and he and his wife can golf and relax and hopefully enjoy some of the fruits of the efforts they have created over these years. But his whole retirement is riding on the equity he has built up in the, business, and to take the risk of accepting a long-term contract, without backup with respect to whether that contract will be paid off over a period or time, is a problem for hi.m: ..






16

He is reluctant to take that route. So he has to decide, "I have to money out of this business, and the only way is to have a going-out-ofbusiness sale."
He closes down the business. He has most of his the building, and another small business has gone by the board. Several employees are going to be unemployed as a result of this.
A young man who has the potential of running this business for the next 30 years is denied the opportunity because he doesn't have the capital potential to carry it on.
So we would like the committee to address itself to whether could be a guarantee program developed as a vehicle. It doesn't have to be a 90-percent guarantee. It could be a 60- to 70-percent guarantee where the seller would take some exposure, and the local bank, too, and the young man can probably put a second mortgage on his h to raise some of the money, and you have a very smooth transition of a small business to an entrepeneur.
In summary, we think the next Congress offers the climate for business to perhaps gain some of the most important opportunities to survive that it has ever confronted in its entire history.
We would like to urge this committee as well as the people who are gathered here tay to start thinking terms of initiatives for small business.
Yes; we have the problems with paperwork. Yes; we have the problems with inflation, and with overregulation, but the opportunity exists now as never before to look ahead for the next 50 years and see if we can put on the books in the way of legislative initiative that will give the opportunities to small businessmen that have been sm tant in creating the fabric and fiber of this country, and led us to be one of the superpowers of the world we inhabit.
We commend the committee for taking the time to hear the views of the people assembled here today.
Mr. CHERKASKY. Thanks, Don, on that point.
We discussed this before, and I discussed it with Senator Nelson, and he is very interested in the problem, and we will have a response to you by a member of the staff a little later on that particular point.
Walter, am I correct that you will be speaking on capital formation also ?
STATEMENT OF WALTER B. STULTS, EXECUTIVE VICE PRESIDENT,
NATIONAL ASSOCIATION OF SMAL BUSINESS INVESTMENT
COMPANIES
Mr. STULTS. I will come in from the bullpen.
You asked Don DeBolt to speak about taxes; he talked about capital formation. You asked me to talk about capital formation, so I will talk about taxes.
Mr. CHERKASKY. Good.
Mr. STULTS. Last year, as Don mentioned, the tax bill just passed and signed marks a significant step forward for the small business commvnity in several areas.
A couple of other places you were not successful, however, and we would hope the committee will continue its long-term efforts in the tax field, that were begun, incidentally, back in 1951, when the committee was 6 months old and held a series of hearmins around the countr on taxesand has this past year been most successful.






17

Now about capital formation and continuity of small business: At probably no revenue loss, should you keep fighting for a deferral of ,capital gains, where the securities are issued by a small business and the proceeds are reinvested in another small business.
This is something that is part of your tax package aoer fh
COSIBA tax package I think probably the tieis ripe there. Don
tol on stryandothers heei audience can tell stories of successful small businesses whose owners sold out to big business because that was the only place they could get a tax-free exchange, allowing them to time the tax consequences of that sale.
I think the time must be right to go ahead and push for that.
The second point is that we would hope the committee would be able to convince the Finance Commnittee and the Ways and Means Committee to authorize once again small businesses to issue and grant
-qualified stock options to -attract competent management, a problem that small business faces.
It cannot pay sufficient wages and salaries to induce, a person to leave a large corporation and become executive vice president of the 'Small firm.
Third, the Nelson proposal on 3-year amortization was great and the Senate passed it by more than a 2-to-i vote. It was too b-ad. that the Conference Committee washed it out. We certainly hope you will push for it again.
Finally, in the tax area, and all of this relates to the capital formation, we seek the reinstatement of general jobs tax credit. We recognize that we -are in a period where inflation is the No. 1 problem-not unemployment-and I believe that if the Carter -anti-inflation program takes hold, we will see layoffs around the economy and probably in the 12 months coming up, we will once again have a hue and cry, "Why doesn't somebody hire some of the unemployed?" 1
We all know it is small business that hires them.
Specifically in capital formation, your committee and the Senate approved title IV of 11445i, which was vetoed by the President. We felt that title IV represented a good step toward increasing the -avail,ability of venture capital for small 'business.
Our association believes the equity capital gap exists today as it did 20 years ago when this Small Business Investment Act was passed.
Second, we would hope that you will work as closely with the Securities Subcommittee of the Senate, Banking Committee during the coming year as you have in the past with the Senate Finance Committee.
The Securities Subcommittee, has jurisdiction over the securities laws, the Investment Act of 1940, and the investment rules which pose such tremendous obstacles to new -and growing businesses which are tryin to attract external capital.
We trust that you -will, work with Senator Pete Williams and his staff and get the sort of cooperation from them that you have with the Finance Committee.
IThese are the major points of the statement which I have presented to you.
Thank YOU, very much.
Mr. CHERKAsKY. Thank you.






18

[The prepared statement of Mr. Stults follows :]
NATIONAL ASSOCIATION OF SMALL BUSINEsS INVESTMENT COMPANIES,
WoGashington, D.C., November 15,1978.
Ion. GAYkion NErSOx,
Chairman. Select Committee on Small Business, United States Senate,
Washington, D.C.
DEAR MR. CnAIARMAN : NASBIC appreciates this opportunity to suggest areas of activity for your Committee in 1979.
In large part, we recommend the continuation and expansion of projects which the Committee has already initiated.
1. TAXES
The 1978 Tax Law marks a significant advance for the small business community and the Committee's long-term efforts in taxes lair the necessary ground work for those successes. Congress failed to approve other important amendments to the Code, however, so we hope the Committee will give a high priority to tax legislation incorporating the following proposals:
a. Deferral of capital gains reinvested in another small business or in an SBIC;
b. Authorization for new and small businesses to grant qualified stock options to attract competent management;
c. Three-year amortization for the first $25,000 of depreciable assets with full investment tax credit permitted, as passed by the Senate last month; and
d. Reinstatement of a general jobs tax credit.
2. CAPITAL FORMATION
Here again, your Committee has long been concerned about the shortage of venture capital available to new and growing businesses. The Senate passed Title IV of H.R. 11445 in response to those needs, but the President refused to sign the omnibus legislation which contained a truncated version of Title IV. NASBIC believes the "equity gap" still exists in 1978, twenty years after the passage of the Small Business Investment Act and urges your Committee tocontinue its comprehensive search for solutions to this vexing problem. Specifically, we recommend that you study the negative impact of the Securities Laws, the Investment Company Act of 1940, and SEC rules on the ability of smaller firms to attract capital from the public. We would hope that you could work in harness with the Securities Subcommittee of the Banking Committee on this subject, as you have done so effectively with the Finance Committee on tax legislation.
I trust that it goes without saying that the officers and staff of our Association will cooperate in any way that we can with you and your Committee.
Sincerely,
WALTER B. STULTS,
Executive Vice President.
Mr. CHERKASKY. I would like to call on next, Frank Carroll.
Are you here?
This is the Small Business Service Bureau of Boston, Mass.

STATEMENT OF FRANK CARROLL, SMALL BUSINESS SERVICE BUREAU, BOSTON, MASS.

Mr. CARROLL. Thank you, Bill. Ladies and gentlemen.
Again I want to compliment the Senate Committee on Small Business and its staff for an ou, standing ijob of accomplishment in 19.78.
Mr. CrRKASKY. And 19717, 1976, and 1975. Don't forget. [Laughter.] Mr. CAnRorL. I left some of my documents back in Massachusetts, so that I am not fully prepared to give a comprehensive report this morning, but I do have enough information on hand to, I think, give a quick summary to some of the problems that small business in the





19

United States is going to be faced with and, in fact, are faced with now in 1978, and were faced with and, in fact, are faced with now in 1978, and were faced with them in 1977, and they certainly will be faced with them in 1979.
That is the affordability and availability of all kinds of insurance and, in particular, the health insurance.
We did a survey in 197T on m"easurmng t-e smal busmess commllltv, and we think we had 9 selected States, and we sent out close to 100.100 ballots, surveying the small business community with 10 employees or less. and some of the results we got back we found very interesting.
The States selected were the New England States, New York, New Jersey, Ohio, Michigan, and some of the Southern States.
We found that 65 percent of these responders responded to, "How would you rate the quality of health care you now receive?" And 65 percent of the small business people with 10 or fewer employees rated it from good to excellent; 77 percent responded, "Strongly agree or disagree," to: "Do you think the Government should control hospital finances to try to lower charges."
This is an incredible figure, because bear in mind that you are asking the small businessman whether he is in favor of strono'er Government controls over the cost of health insurance; and 77 percent said yes.
"Do you think the quality of health care will go down or improve if the Government controls it ?" And 31 percent said it would go down.
"If you had to pay a large part of your medical expenses out of pocket.. do you think you would be less likely to see a doctor or get medical care?"
A total of 59 percent would get medical care as often as they do now, while 40 percent would get medical care less than now.
"Do you think there are enough hospitals and special health care facilities?"
Also, 14 percent said too many, 59 percent said the right number., and only 25 percent said no.
"How would you feel about establishing some form of national health insurance ?"
And this we found very interesting, as 44 percent were in favor, strongly in favor; 19 percent were in favor; and only 18 percent strongly opposed, and 10 percent opposed.
So the point that I am making that we found here is that, although small business people, at least the group that we measured. 10 or less, are not necessarily calling for national health. They were calling for stronger Government intervention in the health care field.
Now, these States were selected-by the way. North Carolina was one of them-with the cooperation of Jim Thurber from George
Washington University, who is an expert pollster, HEWY, and our own research staff who have been working on health care for 10 years.
So our survey found, No. 1, the small business community is getting hurt very badly in the case of the health insurance premium.
Second, they do want stronger Government intervention, which is contrary to some feelings. Some researchers have found that they don't want any Government interference.
They are not necessarily in favor of national health, but again they want Govermnent control and, in effect, they want cost control.





20

I think that is something that all of us have to look for in 1978.Te health insurance question is not a dead issue. I don't thinkSeao Kennedy is the only one concerned about it.
Senator Nelson had hearings, and we testified before the eu s
hearings here. and it showed a graphic increase, a large inces in percentage, o! health insurance; the health insurance in thepat1 years.
WWe see no way but up. We talk about inflation and price contos in 1971 for your information. our documentation shows that the h est cost IState in the United States, that would be Massachuetpo the cost of health care.
Yet, throughout the country, our survey, during the last wag n price controls, showed that the-health insurance premiums did ee off and, indeed, the hospitals and the suppliers did control css
So that, although I am not up here asking for wage and price cn
trols, I want to point out that cost controls do work in the health care industry, and I think you are going to find small business peope I know you will find the Small Business Service Bureau-hopfly in the f ront lines leading the fight for strong cost controls in hospitas
I think we have a way to go with the American Hospital Asc~o
and large hospital groups, but all of us here in this room, whether you have 500 employees, or less, look at your increase in premiums over the past 10 years and you will find how they have increased draai cally, and not necessarily have the benefits increased.
In Massachusetts they have a comprehensive program, and inote places, in North Carolina and Georgia, they get very little forth money;- but those premiums are going sky high, too.
In terms of the commercial companies, they only get involve in selected areas of group health insurance; whereas, the Blues are the largest supplier of group health insurance in the country; and. we feel thiey could do a lot more, also. But this is something that is cmn up in the House and Senate, in my opinion, and certainly Presidet Carter is going to be involved in it again; and I believe Senator Nelo will be involved in it. He is concerned about high costs, as I am sure Sen ator Kennedy is.
We are currently working on a research program, interviewing smal businesses, trying to measure the out-of-pocket dollars they are spending on health coverage over the premiums, and trying, to measure the actual percentage of payroll that the small business person pays.
Also, our study revealed by the way, that the largest majority of small business do pay a minimum of 50 percent of the premium.
So, if you were taking a survey, in-some States, as we found, for example, the employers are paying 10 to 25 percent of the payroll for health insurance, and he is gyoing to be happy to pay 5 percent under a national program.
Whereas, if you have an employer who is paying 3 or 4 percent for health insurance now, he is not going to be happy. But, on the other hand, it is a case of some exemptions they try to make for small business, such as credits.
I think this program might be appealing to a lot of the small business people.
By the way, just to make it clear, we are not advocating national health insurance, but I do want to point out that it is out there, it is a






21

problem. A lot of people don't think it is because it is not a very sexy issue, but it is a very serious issue.
We have -thousands of contacts from our members. A lot of them are research programs and projects that are going on throughout the country.
I would urge the committee to keep those factors in mind for

Mr. CHERKASKY. Thank you, Frank.
Joe Califano would love those statistics.
A VOICE,. I wonder if that was the same polling outfit that did Senator McIntyre's Polls. [Laughter.]
Mr. CHERKASKY. I would guess that the Congress and the administration this next time around are going to be tippy-toeing around major national issues with great caution, because they are not sure precisely where the constituency is coming from on matters such as health cost containment, hospital cost containment, and national health insurance.
My reading of the new Congress is that it is going to be a difficult Congress for the administration to deal with and for it to deal with itself.
Mr. CARROLL. We heard testimony the other day, and I was surprised at the approach that was taken. There are those who want a complete takeover of the health care system. We obviously don't support that. But, on the other hand, they are turning around to try to get in the backdoor of national health by trying to maintain the private sector and also trying to have the premiums such that you have an average, maybe 4 or 5 percent. So their program, although we think it is way out, the fact of the matter is that it is gaining momentum, and, when they can go to the Conference of Insurers' Legislators and get some support-that is made up primarily of private sector people--and then I think we have to take another look at national health insurance in terms of what the approach to it is.
Mr. CHERKASKY. Certainly that issue will be looked at very carefully, intensively, and cautiously.
Thanks, Frank, very much.
Joe Simone, did you want to speak about small business development centers ?
The name of the group again?
Mr. SivoNiE. From the Saratoga Small Business Council. And I don't think there is anybody else here from New York State.
-Mr. CHERKAsKY. New York State is not represented today. They collected their welfare checks, I guess.

STATEMENT OF JOSEPH SIMONE,, REPRESENTING THE SARATOG A
SMALL BUSINESS COUNCIL, THE NEW YORK REGIONAL SMALL BUSINESS COUNCIL, AND THE GREATER CAPITAL REGION OF
SMALL BUSINESS COUNCILS
Mr. Sixo~m. I also represent the Greater Capital Region of Small Business Councils, which represents 10,000 firms, and I have a proposal that we would like to offer here. And then I am going over to the SBA and am meeting with Richie Reiman, who is on the staff of the White House.






22

Just a quick comment.
I am happy to see that the individuals who came up here ofer suggestions, and their expertise is a lot better than mine. I am not here as a complex legislator. My report is very, very simple.
As a matter of fact, it is 15 or 16 pages, and it outlines something, I think. that is simple to understand.
The proposal that we are offering-you know, President Carter vetoed the SDDC. What we are calling for on behalf of small business is an alternate plan to that.
Shall I read that? It is 2 or 3 pages.
MFr. CIERKAS-Y. All right.
Mfr. SIMONE.r We propose through the Small Business Development Center Act that the chamber of commerce and the small business councils in the United States-and there are maybe 5,000 of those in the Seates-we wanted them funded the money and they would provide expertise and ideas through their chambers of commerce, and the Small Business Administration, or whatever particular organization is in their home State.
The chambers of commerce, who have a network, would begin the program.
In H.R. 11445, we are willing to comply with all the regulations spelled out in that.
However, if it can't go through the SBA, we would like to have a special program that would allow us to go through all these diferent steps. use our expertise, and the programs, with a budget for less than $2 billion.
With respect to 1982, we figure the estimate for the entire Nation would be $50 million. That is a drastic reduction.
That is the presentation in a very short, very brief form. There are about 4 or 5 pages spelled out, and so forth.
We are asking for that pilot project to take place.
[The l)repared statement of Mr. Simone follows:]
STATEMENT OF JOSEPH R. SIMONE, DIRECTOR, SARATOGA SMALL BUSINESS COUNCIL
"To achieve all that is possible
We must attempt the impossible
To be as much as we can be
We must dream of being more."
THE NEW MANIFEST DESTINY FOR THE 20TH CENTURY
FORWARD
We would like to thank you and the committee for allowing us to make this presentation on behalf of the small businessperson and minority enterprise.
We have been given new hope and confidence, through the recent developments that the government has initiated and through your efforts, to propose bills that will enable a more progressive and enduring small business climate. These factors are slowly freeing the small entrepreneur from economic and regulatory bondage. Government and business, however, cannot totally solve the dilemna and common current of problems facing today's business unless we include the interest of the public which at all times must be foremost. Their concern, welfare and good must be the goal toward which we direct our efforts. Those actions which we propose here today and in next Congress, must not only free the Small businessperson but also help guide the policy of the people whom they serve.
If the Manifest Destiny of Small Business is to allow it to reach its natural fulfillment of success and free trade, we must be sure that the people, as well as the business world and government, are of concern.







23

Let us therefore direct our ideas and suggestions so that what is best for the ,economy and our people becomes best for our cause.
We believe that the common current of problems that face small businesses in our communities are no different than those in other communities in America. What our small business person and minority enterprise faces in the way of prob'lems and regulatory restraintss if faced by every individual.
Our economic system is a marvelous meld of private enterprise, individual initiative and public awareness. This system has demonstrated for over two centuries that, given half a chance, it can produce near miracles of human and economic progress. We are aware however, that the common current of prob*ems facing small business can hinder the progress and contributions they make to American' s society. Small business is the lifeblood, the very fabric that holds our -free enterprise and competitive market together. Without small business the progress of this great nation would not be as successful as it is. It therefore 'becomes vital that small business achieve its economic goals, through the cooperation of government agencies, Small Business Councils, and Chambers of Commerce. To these ends, a new manifest destiny. We have to realize however, that cooperation does not mean the surrendering of individuality.
We find that government agencies overburden, overtax, and over-regulate in such a way that the small business is seriously threatened. A small businessman today in Saratoga Springs, in the mid-northern region of New York State, and in the Capital Region of New York State is no different than a small businessman in ,any other- state. When 'they start in business, -they are in need of five separate
-specialists:- a banker, a lawyer, an accountant, an adviser and an insurance a 'ze?-nut. These needs, along with the heavy demands of complying with governmental relations, are a major burden to small business and are almost insurmountale. Thomas Murphy, Chairman of the Board of General 'Motors, stated "Business
pple are usually ait their best and function at their best when they are making something or selling something or servicing something and competing with other businesses. Business people thrive on competition." Competition and not regialation makes this country work. Let us plan to secure for small business, fair ;,nd Just competition and a right to sustain and take part. Plans and programs tha,-t are now tentative and flexible need not mean short sigh tedness. 'Spending miy developing hundreds of programs, making sure the past is secured, -are not the answers. We must beyond a doubt, look to the future and revise. Our plans must be new, innovative and practical.
One of the things concerning business people today is misdirected and unnecessary government spending, the harmful and wasteful kind that everyone from President Carter on down has denounced. We are faced with a tremendous problem. How do we survive in the midst of governmental regulations in a nation beset by inflation and multi-national competition? We seem to be winning the war but sustaining heavy casualties.
One of the things we think necessary is the re-assessment of goals and definitions. Our emphasis, yours and mine, must be on practicality, cost-effectiveness and ability to do. We need ideas that can be readily implemented and will really work. The process that has begun today is a process of exchanging ideas, ideas that may help government understand what are the needs of small business. The answer lies in asking leaders and people who have been in the business field, their solutions to the issue. The small business person more than anyone, knows firsthand the problems of small business. He more than others, knows the surest and most long lasting remedies, and is concerned with the preservation of the free market.
Ouir suggestions are as follows:
1. We would like to redefine what corporations, associations and partnerships are and how they may be used by and in small business. We would like to see a redefinition of these entities so that they may be allowed to perform and act In the same arena as the sole proprietorship.
II. We would like to see small corporations and partnerships have access to the small claims courts.
III. Governments should, be able to deal more freely and regularly in the saile and disposition of government property, with and to small businesses. These properties, scattered throughout the nation, should be made available to the small business for development. The importance of any suggestion is not only to sustain the small businessman, but to give him incentive to stay in the business. Each year many small. businesses- fail.
IV. We would like to see a lessening of the requirements for small business corporations to elect for sub-chapter S in the Internal Revenue code. In our






24

recent survey, we found -that the highest Issue facing our small businesses is advertising and marketing. Yet at the other end of the spectrum, It emerged as the least understood. Again we would like to see a general review and overhaul of corporations that are excluded in so many laws and acts.
V. Businesses today who are unable -to either take time or have the expertise to handle delinquent accounts turn to collection agencies. The fees for these services can deplete a firm's assets and hinder cash flow. Most charge 30-MI/ for handling these cases. We feel that a bill should be presented that allows a graduated schedule. We have begun through the Small Business Councils, the Chambers of Commerce and the Small Business Movement, a coalition of Americas' Small Entrepreneurs. This association of ideas, of individuals of suggestions Rnd attitudes can greatly help the causes we seek. This unity Is our strength, their diversification, our vitality, their given right to pursue these ends, our creed.
V1. One of the most pressing problems confronting small business and other business is detecting and assimilating complex information about those legislative issues which impact directly on their survival. Many times the interpretation comes by the form of a friend or an associate when it is too late or has already caused some discomfort. We would like to see some system established whereby the Legislative rules and Issues affecting small business can be briefed to outline form and forwarded to all small business in a way that they can be understood and Interpreted. This awareness program could in many ways save costs which are continuously being reflected In the costs of items sold. Everytime a business has to pay for lawyers, accountants, interpreters and agents, the cost of these services are reflected in the overall cost of goods. This in turn raises prices and these raises are passed on to the consumer and as we all know, very simply, Inflation. We are not saying that this will solve inflation but If carried out throughout the business community there could very well be a reduction In price and wage escalation.
Simplicification and deregulation where It is necessary Is of utmost importance.

ALTERNATIVE TO THE SMALL BUSINESS DEVELOPMENT CENTER ACT 1977
We feel that another agency even If within the confines of an established administration will not only duplicate efforts but take away from existing bodies the authority and continuity they have tried to establish. Your Chambers of Commerce are more in touch with the business community than any other group functioning. Small Business Councils, development agencies, Economic Development Corporations have the experts on their boards and on their staffs. We should use these existing organizations to meet the end of specific needs.
Congress should tell us what they want and let us and the business community work toward those ends rather than telling us how to do It. With a President trying to curb inflation, we feel that we can offer helpful suggestions for Development Centers and expanding the SBA if you use the existing structures and expertise. Within the Chambers and the Councils you have three knportant features: (1) Established business expertise and continuity, (2) dissemination of material and information through a capable administrative staff, (3) Follow-up probably the most Important and crucial point of any campaign or effort.
Since Congress is aware of the needs of small business and agreed on a compromise package for HR 11445, we do not feel it necessary to -solicit your cooperation on those Issues. On October 25th, however the President pocket vetoed the bill. We have an alternative and would at this time like to present a proposal on behalf of the Saratoga Small Business Council and the Greater Capital Area Region Small Business Councils of New York State, a pilot project to take affect In this region.
Pilot Project
We would like to see charge given to the Small Business Councils and Chambers of Commerce to effect a program. We suggest that through these agencies, the resources, expertise, qualified administrative staff, promotion and continuity be used, alleviating duplication of efforts and need of another bureau.
We agree that the prior bill HR 11445 put an unneeded burden on the economy and the SBA. It would In effect take away the authority in the Chief Counsel for Advocacy and put him In a policy and administrative capacity which we do not feel was the original purpose.
Within the framework of our Chambers, over 5W In New York State and 35 Small Business Councils, and over 5,000 Chambers in the Nation, we are confident that we can carry out the work and Ideas of Congress, the Small Business Person






25

and. public interest. It will be our responsibility to arrange programs, set policy and directions, survey and monitor results, aid and assist businesses and offer counseling an d expertise. We are doing these things now. Let us expand them. Let the Congress set the goals and we will establish through the businesses, means to achieve them.
This program allows business to work with agencies they are familiar with and have identified with over the year& Who knows business better than the associations of business.
The Advantages
(1) Using an existing service and function, established for the betterment and service of business, (2) administrative staff help already doing the job for what is needed, (3) A. chain of Chamber communication that is 450 to 5W strong in New York State and over 5,000 Chambers and 5W Small Business Councils throughout the nation (4) Dissemenation and thorough follow-up on the progress and advantages of the program.
The duration would be for one year on a special program. Each Chamber and
Small Business Council would work with the existing SBA offices in their area. Goals would be established through a survey of the businesses. It would be up to the business community and the staff and experts to devise the means in which to accomplish these goals in the most feasible and economic way. At the conclusion of the pilot project Congress, the President and the Chambers of Commerce and Small Business Councils with the assistance of the States and the Universities would evaluate the program in light of the results and accomplishments. Of course the input and critique of the businesses are the most important since the public interest is our prime concern.
The proposed budget under the H.R. 11445 would have been close to 2 billion dollars through 1982. We suggest that it can be done more efficiently if we follow these guidelines:
(1) Channel the funds through SBA and their local office in Albany.
(2) A Board of business people from the Chambers and Councils will advise and guide the allocation of funds.
(3) The Chambers and Small Business Cauneffi% will apply for these funds specifically for programs and seminars. and to implement programs that were decided on in part in H.R. 11445.
(4) The SBA office in Washington and the local office will monitor. The Chambers and specifically the S.B. Councils will direct and conduct the activity.
-It is also a fact that the Councils and Chambers have as members; accountant.%. lawyers, scientist.% economists,, budget analysts, counselors and agencies that- are an integral part of operation and usually either volunteer or donate ni ch, of their time. to Improve, assist, guide and direct policy and programs. 'I'f'we go by the guidelines and criteria set up by the Joint Economic Commission, then we in this proposal have met the requirements. The requirements as stated by the JEC are:
(1) The subsidy must correct a market deficiency.
P) It must be efficient in terms of cost required to obtain the desired effects.
It must distribute its benefits to low, middle, and high income beneficiaries in a pattern that is acceptable to society; the public interest.
It is a known fact that despite its disadvantages the U.S. capitalistic, system has produced more benefits to a greater percentage of the population than any other system that has ever been devised. Therefore this proposal is in line with this thinking. We call for a continuance of the incentive system which will protect the standard of living and at the same time ask the government to desist from passing new laws which restrict the free enterprise system. This destroys incentive which ultimately impedes production. We are all well aware however, of the terrible burden regulatory agencies are on business in this nation. In 197T it cost us 100 billion dollars to respond and comply with the government agencies. That is $470 for every person living, in the United Statesi 5 percent of the gross national product, 25 percent of the federal budget. These costs are passed on by business to the consumer. These costs present a potential loss of 200,000 jobs and if that money was put into productive projects for business It could have resulted in I million jobs. Freedom and the free enterprise system work together. Willard Butcher, President of Chase Manhattan bank stated that taking one away paralyzes the other. Our free market system sustains domestic prosperity for our citizens and enables all of us to survive. When regulations shift the decision making power from the people to the State the well being of all Americans is threatened. How much can we absorb and be






26

active in the free system of this nation before we are victims of the very we have selected to achieve, We agree that some sound practices must be lk at by this next Congress. )
We should have economic impact statements that ensure that regulate amine costs and benefits, regulation by regulation; a new approach tot way: these agencies are set up. Set up what the Congress is trying to then set up with the business community and the people of this nation a n accomplish those ends. In all it seems that the potential for business to co its own destiny must be responsibility of that business. In that chore,s and formidability grow and develop; and gains become reality. If we a to insure the viable growth and rescue of the small business we must turn th a of life into the facts of society. We need the 96th Congress to revere t that have been the deciding factors on our trade and free enterprise ssi the last thirty years. What once was established to help protect, reg a assess the needs and directions of business is now controlling the market e flow, the innovations and the progress of business. We need your guidance and bottom line responsibility in giving to the enterprises in this nation a new Manifest Destiny for the 20th Century.
SARATOGA SMALL BUSINESS COUNCIL
Joseph R. Simone, Director.
Joseph WV. Dalton, Jr., Executive Director, Chamber of Commerce. Advisory Committee :
Zimri Smith, Chairman.
John Simone, Legal Advisor.
Frank Laskey.
Jack Minogue.
Paul Montore.
Gail Pastor.
Larry Presler.
Bunny Ward.
Ex-Officio: Edward T. Lawless, Pres., Chairman. Affiliated with : New York State Association of Small Business Councils. Representing: The Central New York Region Small Business Councils-Albany,Troy, Schenectary, Colonie, Saratoga, Gloversville, Glens Falls.
Mr. SimONE. The second thing is, one of the things that NewYork State is looking at was a campaign, a regular advertising campaign with every department of commerce in the Nation. New York State likes the idea. They are going to push for it, and it looks like they are going to implement that in New York State.
We will have bumper stickers, buttons, and rallies for the busine in New York State.
We are going to ask for every commerce department in the Nation to follow suit.
I would like to ask the committee to take that under advisement. Hopefully, when I get back next week, we will have more information on that. That campaign will go in 1979, and we are very, very positive and confident as to its effect.
I have to leave, but I want to thank you. And in that report there are some very, very simple regulations, six of them, that we would like the committee to look at.
I am not a legislator. I am from the very small town of Saratoga. I am here on the issue that you will accept some of these points here.
Thank you.
Mr. CHERKASKY. Thank you, Joe.
I hope you keep us posted on that campaign, especially on, "We.love small business."1
Mr. SiNE. I hope we will have the support of everybody in the room when it comes out.





27
I%
4A1 c
r., i ER "SKY. You'' saw George' MeaAy's- statement on the f ront page of the Washington Post oil Monday, in, which he said President Carter is the most conservative President since Calvin Coolidge. He said, "I have no quarrel with the President being a businessman, but does he have to be a small businessman?"
So George Meany must be reading our I press releases.
-The next speaker will be on chronic liability insurance, Lee Brown of the Small Manufacturers Association of Pittsburgh.

STATEMENT OF LEE BROWN, ON BEHALF OF THE SMALLER MANU.
FACTURERS COUNCIL OF PITTSBURGH
Mr, BROWN. First, I would like to start on a positive note by commending the committee for a rather substantial year of hard work regarding small business and our needs. On the basis of the pocket veto of I-I.R. 11445, 1 must say to you that, we have got to redouble ourefforts in order to accomplish the things we started to accomplish last February when we were with you the last time.
The second thing I would like to say is yesterday the Mellon Bank of Pittsburgh announced a special small business loan system that will basically allow the banks-and by the way, in conjunction with the Pittsburgh National Bank, which will allow them to loan to small businesses business loans at 1.25 percent below the prime rate. This is a brandnew program just announced yesterday.
The Smaller Manufacturers Council of Pittsburgh for the last 3 years has been inviting the chairmen of the boards and presidents of these banks to our directors meetings, to try to move them in the area of small business. I wanted to share with you that something new is starting for small business which is important.
In the area of small business product liability, this in a statement of Paul Hankison. We will be presenting this testimony to you in written form, and I would like to be very short and sweet about it.
[The prepared statement of Mr. Hankison follows:]
PRODUCT LIA13MITY INSURANCE
The fact that Product Liability Insurance is a necessity for those in business need not be proven, that fact has been establish h ed. Rather, the question we propose is how long will small business be able to afford the protection of such insura 'nee? If the present rate of premium increases continues, Product Liability Insurance rates will put small business "out of business." This is a crisis situation and, if allowed to continue' every product a company sells has the potential to -destroy the company itself.
November, 1977, Compressed Air magazine, in an article entitled, "Coping Wit h. the Product Liability Crisis," reported many interesting facts: "Hardest hit'are companies with sales of less than $75 million. In some instances, their premiums have jumped from less than I percent of sales to 15 percent and more jeopardizing their entire profit."' It further stated, "These escalating product liability'cl aims affect customers, as well as manufacturers. Whereas a few may benefit, the average consumer is encountering higher prices and, in some cases, may find products unavailable."
The Havir Manufacturing Company, a maker of industrial punch presses in Minnesota, had $3 million in sales in 1974. 1n 1975, the company was forced to liquidate because it could no longer afford the cost of Product Liability Insurance and the legal costs of claims and suits,
Court decisions have broadened the circumstances under which a consumer can collect damages trom a manufacturer ..or seller of a product.. Because of the





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consumer move and public debate on the subject, the public became aaeo their legal rights. However, large contingency fees are inducing the workes lawyer to encourage suits and seek unreasonably highda ge n4wtth advent of no-fault auto insurance, the trend now indicates thatatonyar turning to the potentiafly more profitable product liability cass.
The April 24, 1978, issue of the Pittsburgh Post Gazete, ran anarilen titled, "A Problem of Insurance." In that article, It stated, "contrary topoua belief, the often enormous awards which manufacturers-actually terisr a-nee companies-are forced to pay out to injured plaintiffs are not pnshet for proven careless behavior. Carelessness--fault-need not beprvdi most product liability actions. All that Is required is that the defectiveprdc be 'unreasonably dangerous' and in essentially the same condition. asa h time of manufacture." Quoting again from Compressed Air, it ctdtecs of a Pennsylvania coal miner who had been crippled on the job. He was awre $500,000 by a jury in Pittsburgh. This award, which came on top of $75,0( in Workmen's Compensation benefits, Was levied against the coal shuttleca nu f acturer, even though other miners testified that the victim was operating the car Improperly.
It is not the Intent of manufacturers to deny the public protection thatPrd
uct Liability Insurance offers to them. But, our purpose and aim Is to keep the public protected to a reasonable degree, thus still allowing manufacturers to continue to stay in business and carry Product Liability Insurance at premiums it can aff ord.
For small companies, the cost of Product Liability Insurance hasbeoei critical problem. A few cases are stated as follows:
Hankison Corp. C3anonsburg, Pa., manufacturer of refrigerated air dryers for 30 years, has felt the crunch of soaring insurance premiums. Fr~om 314 to198 their insurance rates have increased 670%. Hankison's record of claims is oe, in 1963, and it was settled for $3,000.
James Austin Co., Mars, Pa., an old firm established in 1889, manufatuer of bleach products, states that, in 1975, the premium on $500,000 worth of product liability insurance was in the neighborhood of $15,000. This doubled to $30,000) in, 1976 and this figure again doubled in 1977 to $60,000. During those years, they also had a million dollar umbrella policy to support the liability Coveaeyn this cost approximately $2,400 per year, This, effective April 1, 1977,wain creased to $19,000 so that they have been liability costs increase from $32,400 to $79,000 in the past year and, over the pa~st two years, $94,000! The mostthi carrier ever paid out in total payments was less than $8,000 in any given year.
(JBM Industries & Laurel Stone, Inc., Oakmont, Pa., report their product liability premium, in 1976, was $33,400 and, in 1977, $79,400, an increase of $46,00i a twelve-month period! Their maximum annual settlement, over the last 20 years was $6,800.
The April 14, 1978, Wall Street Journal reported that, to cut highprmu
costs, more firms and Institutions are Insuring themselves. However, The Christian Science Monitor, May, 1978, states that most small business group will still not be able to participate. One official of a national small business organization) states in this paper, "This is -a good approach, considering the alternatives, but the problem for many firms is cash flow. Small firms often just don't have the f unds to set up a reserve.",
What do we suggest that government do to help business cope with the problem? Proposed solutions fall into several categories.
Lower the statute of limitations.-'Many suits involve Injuries caused by equi~pment built many years ago, over which the original manufacturer has no control, yet remains liable.
Elimination of punitive damage&.-Intenided to punish a defendant forgrs Misconduct.
Allow evidence of other sources of recovery to 'be permissible..-A defendant cannot submit evidence showing the injured has already received benefits to cover medical costs and wage continuation. Therefore, the majority of injured recover economic losses twice. Health care continues to rise, thus the cost of double payments will become more burdensome.
Regulate attorneys' continpency feeg.-MaTnyV attorneys presently receive 30 to 50 percent of awards made. Medical malpractice reform commonly regulates contingzeney fees, thus limiting abuses, and Injured parties are still assured of counsel and plaintiffs' attorneys would receive adequate compenstion.
Permit the use of substantial alteration or modification of the product 08 a detense.-.1any third-party suits are brought against equipment manufacturers






29

because the purchaser or user of the equipment had removed safeguards or somehow altered the product
Elimination of strict liabilitil.-Product liability would be imposed only in cases where the manufacturer or seller is negligent or has breached a warranty.
The state-of-the art presently judges products made 50 years ago by current standards, not in effect at time of manufacture.
Self insurance reserve8.-Comfpaiiies should be permitted to set aside taxdeductible, income-tax-free reserves to be used solely to pay product liability claims and expenses.
Work place injuries.-Workers' compensation should be the sole remedy for damages arising from work-related injuries or deaths. As a legislation, such a's a minimum federal standard for workers' compensation.
Any or all of the previously-recommended changes would alleviate the present crisis to some extent. We urge immediate action on this vital issue! Legislators can no longer put off changing some of our present laws that are allowing this unfair practice to continue. The crisis hits hard at American productivity, since small business constitutes nearly 500% of the gross national product. What does America, do when its laws have permitted costs, directly or indirectly, to force the heart of its economy out of business?
This urgent problem was summarized very well in Compressed Ait's article by Richard J. Finegan of Liberty Mutual Insurance Company. He said, "Product liability is not just an insurance problem. Control will require the coordinated and combined efforts of the insurance industry, manufacturers, retailers, service industries, contractors, standards writing organizations and our legislators, all working in concert to the ultimate benefit of the customer-the person who is being injured and the person who must eventually pay the cost."
Mr. BROWN. We have presented specific points to you about product liability and the -needs regarding small business. Air.. Hankison goes on to say that at the present rate of premium increases, if they continue, product liability rates will put small business out of business. This is a crisis situation, and if it is allowed to continue, it has the potential to destroy small businesses.
We do have recent experience, and I unequivocally believe that because of the hard work of some of the members of this committee with regard to the Culver bill-well, that is, the provisions for the 10-year carryback and the lifting of accumulated earnings for a post-tax reserve, and again I think the committee is to be commended for the hard work and effort they put into that area this year, and at least we got on the record this year that item.
I1 would like to go on to say that we recognize the difficulty regarding the- Federal Government working in this area. It has historically been a State problem, but we would like to ask this committee to continue to work in the areas of product liability to accumulate information and to disseminate information to the States in order to get all 40 or 50 States to the point where we have product liability bills within the St ate legislatures.
-The items that Mr. Hankison goes on to point out are the requirements for lowering the statute of limitations, the elimination of punitive damages, allow evidence of other sources of recovery to be perm issible, regulate attorneys' continguency fees,, restrict the modification of the product as a defense, the state of the art, self-insurance reserves, -workplace industries, and rather recently a situation has come to our attention as a- result of our study, and that is reporting by insuirance companies.
Present law allows the insurance compDanies to anticipate claims 1and( set the rates on that anticipation basis, and what we need, I believe, iii this country is a review of the actual cases to set the rate for product liability. V
40-287-79-3





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Thank you.
Mr. CIIERKASKY. Thank you, Lee.
We are, in fact, working on some new ideas and some new legislative initiatives on product liability insurance. As you all know, it is a v complex problem, and the mere fact that finally the Co gotten focused on it is itself a major step, even that tiny bill of Se Culver attached to the tax bill. But we are under seige on e ie and we are working closely with the Commerce Department to up with a palatable, reasonable, jumping-off ground for Congress.
That doesn't mean we are going to solve it, but we are going to a good attempt at it. OK?
I want to skip on to technology innovation. The speaker is Dr. Hess of the American Council of Independent Laboratories, who
That doesn't mean we are going to solve it, but we are going to a witness at our August 9 and 10 hearings on the under-uti ion o small business in the Nation's effort.
Dr. Hess.
STATEMENT OF DR. EARL HESS, ON BEHALF OF THE AMERIC
COUNCIL OF INDEPENDENT LABORATORIES
Dr. HESs. Thank you. The material I have to submit to you in writing is not in the form of a written presentation, but rather as an outline of some issues. I would like to spend a couple of iute talking about our industry and some of the problems we encounter.
The American Council of Independent Laboratories is a professional association of over 200 of the leading independent testing and research and development laboratories in the country. Such laboratories fit into the class of high technology professional service firms.
The subject of innovation is front page news, it seems, a daily. I just attended a session last evening at the National Academy of Sciences at which the economic health of our country as it is dependent upon innovation was discussed in depth by some of the Nation's experts.
We were very pleased to have the opportunity to present testimony before the Senate and House Small Business Committees on the subject of small business and technological innovation in August of this year. These hearings for the benefit of those not familiar with them were held, largely I believe, to examine the implications of the OMB report of March 1977.
The report from OMB said something about our industry (small, high technology firms) that we thought we already knew, but it was nice to hear someone else saying it-namely that small business is much more effective and efficient in innovations than are large firms. By innovation we don't mean developing a laboratory product or process, but actually taking that scientific breakthrough and reducing it to the marketplace, where the wheels are turning, jobs are being created and a product or service is coming out the other end.
I say again that I really was very pleased to have had a chance to express our views on this issue. The bulk of my testimony dealt with certain specific problems that our industry is facing. Actually, I guess if one looks at the bottom line, he can say that if small, high tech-






31

nology businesses are indeed as productive as the 0MB report would indicate, then their success strongly affects the success of our Nation as far as innovation is concerned; and the opposite obviously holds true.
In my testimony I offered a general list of items that concern us. I would like to talk about a couple of them here. Our industry faces all the problems that have been discussed here this morning. When we hear our small business friends talk about paperwork and overregulation and product liability (which we call professional liability) these are all problems that cause us grief as well. But there are a couple of un ique problems that we face.
The first is the impact of unfair competition from not-for-profit firms on our industry. There was an article recently in U.S. News & World Report which dealt with this problem broadly. For those interested in tax revenues, it pointed out what a tremendous loss was occurring because of the not-for-profits' gross engagement in commercial activities.
That article did not mention specifically the impact of the abuse of not-for-profit status on high technology small businesses. Its broad language, simply stated, was something like this: Not-for-profits that are chartered for specific purposes-for example-educational who find themselves crossing over into the commercial or proprietary field are competing unfairly with the private sector, and are denying the Government its rightful tax revenue. Under these conditions, there is no way that our industry can be viable.
I could go on a good deal- further in this particular regard. I would simply like to point out that ACIL has expressed its serious concern in relation to Smiall'Business Development Center (SBDC) legislation not disagreeing with the concept, but thinking along lines somewhat similar to those Mr. Simone has just offered, in which the private sector should be part of the technology delivery system to other small businesses.
Mr. CIJERKASKY. That was written into the legislation specifically, that private consultants could be included in any specific State plan. It was specifically stated in the report.. Maybe it wasn't specific enough. We will make sure it gets in there next time.
Dr. HTEss. We are concerned that there be specific directives by whiich the States- could be guided.
Mr. -CHERKAsKY. Let me have something in writing on that later, would you, D)octor?
Dr. HESS. Yes.
-[The supplemental document referred to follows:] Any state, in order to qualify for receipt of Small Business Development Center (SBDO) funds, must identify a capable agency for the program administration. That designated agency must have a developed system for receiving input from the small business community about the needs of small business within the state. Further, it must be capable of designing programs to ipeet these specific need and of locating resources within the state that can deliver the needed services most effectively and efficiently. A major guideline of the state's SBDC program shall be that educational functions and basic research are to be performed by colleges and universities and the actual delivery of the needed services is to be carried out by qualified private professional services firms.
Dr. HE-SS. We in the laboratory community carry the paperwork burden common to all groups who employ people, pay taxes and offer a product or service. I would like, to describe just one of the unique






32

aspects of the "redtape" issue encountered by laboratories; the matte of laboratory accreditation. How many people must come and inspect my laboratory, and how many long forms must I fill out before I am allowed to perform work in one specific area? Government through their lack of reasonable and coordinated action have cream a chaotic situation.
As an illustration-we have gone through a rather long p being certified by the EPA to do water testing in support of ten drinking water regulations. We have a branch laboratory operation Waynesboro, Pa., about 3 miles north of the Pennsylvania-Mary border. I am disallowed from doing work in Maryland, even though I have a Federal certification to do it. Further I am informed thatno .certification program for independent laboratories exists in Mary
Mr. CHERKASKY. Maryland is not in the Union.
fLaughter.]
Dr. HFss. Maybe that is the answer.
J don't want to prolong my presentation. I will turn over my outline ,of some of our ideas, and I will be gladto supply any additional material which you request.
Mr. CHERKASKY. Thank you, Doctor.
[The prepared statement of Dr. Hess follows:]

AMERICAN COUNCIL OF INDEPENDENT LABORATORIES, INC.

1. REFORM OF TAX LAWS GOVERNING COMMERCIAL ACTIVITIES OF ORGANIZATIONS POVIDING LABORATORY AND PROFESSIONAL SERVICES
Despite the consideration in recent years by Congress of a variety of tax proposals affecting small businesses, one major deficiency in existing law has re ceived no serious consideration. That is, the tax-favored treatment non-taxpaying (nonprofit or not-for-profit) organizations receive under existing tax laws and regulations in engaging in commercial activities in direct competition with taxpaying organizations. Congressional investigation and review of this fundamental inequity is overdue as has been compellingly outlined in a recent Special Report on the "Profits in Nonprofit Organizations" which appeared in the November issue of U.S. News and World Report. A copy of this article is attached (Attachment A).
Also provided for the consideration of this Committee are two additional doeuments 1) A summary memorandum dated October 2, 1978, Analyzing the problem of tax-favored competition and making preliminary recommendations to deal with the problem (Attachment B) and 2) A paper on "The Role of Non-Profits" which expands on this theme (Attachment C).
frhe devastatingly negative impact the present laws have on small laboratory and professional services firms and the negative impact this phenomenon has on collection of tax revenues and the proper Federal tax treatment on income from commercial activity require immediate attention.
ACIL is prepared to share with the Senate Committee more detailed infornation about specific aspects of this basic inequity in the present tax laws.
2. PROPER IMPLEMENTATION OF THE FEDERAL GRANT AND COOPERATIVE AGREEMENT ACT OF 1977
Traditionally, only public agencies and nonprofit organizations have been eligible to receive Federal grants. Frequently, a grant award has been made to a nonprofit organization to acquire a service, rather than providing that any qualified organization-nonprofit or taxpaying--compete for a procurement. The recently enacted Federal Grant and Cooperative Agreement Act of 1977 theoretically provides a statutory basis to limit this problem, but the fact is that during the Period when planning and study leading to implementing is occurring, more not less, funds are being awarded on a non-competitive basis by means of grants.
The adverse implications of this method of dispensing Federal funds for small businesses requires this Committee's scrutiny and appropriate measures need






33

to be developed, to assure that small 'businesses can fairly compete for Federal funds.

t. INCREASED USE OF SMALL TECHNOLOGY BASED FIRMS IN FED1FRA RESEARCH AND DEVELOPMENT
In a report dated March 10, 1977, the Office of MianagemeDt and Budget informed the President that "small firms have compiled a striking record of innovation". This report concluded that "small firms are inadequately used" in the Federal government's acquisition of $26 billion worth of research and development, and that "Our country will lose significant high technology capabilities (in the absence of) a concerted effort to increase small business R&D awards . ." The report had ten specific recommendations for accomplishing this goal. Over one year has passed and these recommendations have not been implemented to iny knowledge. Another Presidential study is underway which will not be completed before next spring. No further study is required. We need action now.
4. SMALL BUSINESS DEVELOPMENT CENTERS
The Small Business Administration and the Congress have initiated legislation to estabhsh a number of Small Business Development Centers (SBDCs) at universities around the country to provide management and technical services to small businesses requiring such assistance. We share the goal of strengthening the prospects that new small businesses will succeed. However, we think that the success of the SBDC program, would be enhanced if there were clear and unequivocal criteria and guidelines for the operation of these centers. In particular, ACIL is convinced, that the legislation should spell out the proper roles of the universities and the private sector in addressing the needs of small, businesses. The universities' appropriate function is not to deliver services directly; rather they will serve best in the role of coordinators and catalysts, working cooperatively with small technical and professional services firms, among others, to provide needed help to other small businesses. ACIL is prepared to work on guidelines and criteria to define the proper roles of the interested parties in the SBDC program.
5. CONCLUSION
We support many of the measures others have presented to the Committee for consideration. In this brief presentation, ACIL has endeavored to suggest issues of special concern to small scientific laboratories throughout the United States.


[From U.S. News and World Report, November 6,1978]

ATTAcHMENT A

FOP. MANY, THERE ARE BIG PROFITS IN "NONPROFITS ly

(Tempers are rising over growing numbers of organizations that seem to be
feasting on. tax exemptions, generous donations and citrate postage. It's a
pattern that is prodding Congress, officials into action.)
The word "nonprofit"' strikes a sympathetic chord in the hearts of many people. It conjures up images of charities and service groups that operate on shoestrings, struggling along with volunteer staff members and bare-b-ones offices.
That type of situation does exist in many of the more than 800,000 organizations that now enjoy tax-exempt status as nonprofit institutions. About 37 million Americans donate their services each year to charities and other voluntary organizations that spend about 29 billion dollars annually, the bulk of it for worthwhile causes.
ic But frequently these operations are something else again. Under the label nonprofit" are organizations that are said to-Pay their executives fat salaries and allow them generous fringe benefits.
Award contracts to their trustees and board members.
Serve as fronts for commercial enterprises with which they have "sweetheart" deals.
Enjoy special mailing privileges and property-tax breaks that give them a competitive edge against taxpaying establishments.






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Engage in wasteful and sometimes fraudulent fund raising with little accountability to the public.
Such questions about groups that enjoy special privileges are being asked at a time when taxpayers, catching the Proposition 13 fever, are looking every rock for new sources of money to keep government going.
Says former Internal Revenue Commissioner Sheldon Cohen: "Nonprofits are a whole can of worms that Congress has yet to look at in a broad way. Ive been blowing the trumpet for years to get lawmakers to spell out clearly what should be tax-exempt and what should not."
HELPING HAND OR COMMERCIAL FRONT?
One of the most controversial court cases now pending in Washington, D.C. Involves two of the nation's biggest non-profit organizations: the American Association of Retired Persons (AARP) and the National Retired Teachers ociaation (NRTA). The two groups are accused of serving as covers for a large comniercial insurance company.
In a 27-page complaint, Harriet Miller, former executive director of the AARP, charges that the two associations have been used as vehicles to shunt business to the Colonial Penn Group of Philadelphia, a company that sells insurance as well as travel packages, employment assistance and other services. rd Davis. named in the suit, is a director and principal stockholder of Colonial Penn and was one of the founders of both the AARP and the NRTA.
According to the complaint: .. .. Leonard Davis has become a multimilionaire from the sale of insurance and other services to elderly people who are systematically misled into believing that the primary purpose of the associations is the best interest of the elderly. The fact is that AARP was designed and created to be, and NRTA was turned into, a group for insurance pur "
Colonial Penn is one of the nation's most profitable insurance firms. In the five-year period ending last December 31, the company's after-tax return on invested capital averaged 30.5 percent, placing it in the top three companies with sales of 250 million dollars or more.
Victor Glasberg, an attorney with Hirschkop & Grad, the firm representing Miller, claims that no advertising for Colonial Penn's competitors appears in AARP periodicals. The complaint alleges, too, that only Colonial Penn has access to the mailing lists of the two groups. The Postal Service also is investigating whether the AARP and the NRTA improperly used their cut-rate mailing privileges as nonprofit organizations for the insurance firm.
Attorneys for Davis refuse to comment on the case beyond denying the Miller charges point by point in documents sent to the U.S. District Court in Washington. The AARP also has filed a countersuit, charging that Miller breached a consulting contract by suing Davis and others associated with the retiree groups.
While the courts wrestle with this matter, experts in the tax-exempt field say there are many organizations around the country that are straining the definition of nonprofit" to the limits. That's because the law permits many of these groups to operate commercial enterprises, often with little risk of losing tax-exempt status. Colleges, churches and charities can collect rent on offices and apartment buildings without paying any taxes on that revenue as long as they own those properties outright. Since 1969, nonprofit organizations have been obliged to pay taxes on income from "unrelated businesses" such as restaurants or factories. However, there are exceptions to that rule. and opinions among local IR, examiners vary as to what constitutes an unrelated business.
The 1969 law, for example, contained a provision that lawyers call "the Loyola bailout," which provides that revenues from New Orleans radio and television stations operated by Jesuit-run Loyola University would not be taxable as unrelated business income. Instrumental in securing that provision were two Powerful-Louisiana lawmakers, Senators Russell Long and the late Represent:itive Hale Boggs.
Loyola's WWL, a television affiliate, Is the No. 1 station in the New Orleans market, according to the Rev. Frank Benedetto, a spokesman for the station. "Ninety percent of our profits go to the university instead of 50 percent to Uncle Sam," he says, adding that the proceeds from the station are the main endowment of the school and provide scholarships to many students.
lit others around New Orleans view the matter differently. Says one industry observer: "It's a difficult, competitive situation. They have more readily available money to invest in their product-programming-and In equipment. They're well managed, but they play by different rules."







35

Playing by different rules, too, are the many colleges and universities around the country that operate motels and restaurants and maintain stores that sell refrigerators, motorcycles and other items not related to education. Not only do these establishments sometimes take business away from local merchants, but the revenues are often tax-exempt, depending on the rulings of IRS examiners.
Explains Joseph Tedesco, director of the Exempt Organization Division of the IRS: "It's up to us to determine whether a school can sell a sweat shirt and not a Honda, and we must take responsibility for the decision and answer the complaints from competing stores."
More than 140,000 nonprofit fraternal organizations also operate insurance arms, health programs and other services, which are tax-free as long as sales are directed exclusively to the groups' members. These services often are in competition with tax-paying commercial firms. The Knights of Columbus lifeinsurance program, for example, has about 4 billion dollars' worth of insurance business. Lutheran Brotherhood has about T.7 billion dollars' worth.

MAKING TAX AND POSTAGE BREAKS PAY OFF
Many for-profit companies, feeling the pinch from zooming postal rates and higher taxes, are taking aim at the special privileges given to nonprofits.
Congress now provides the Postal Service with 600 million dollars of taxpayers' money annually to make up for nonprofit organizations' lower postal rates. Leaders of non-profit groups argue that this subsidy is a small price to pay for the services they give the public, services that government might otherwise have to provide.
I Critics, however, see it another way. Says Charles S. Mill, the president of American Business Press: "It is my observation that many nonprofit mailers do not involve themselves solely in charitable or educational work, but instead are engaged diligently in proprietary activities such as mass-cireulation publishing, soliciting advertising of all kinds, and selling services such as insurance policies to their members. In many cases, these proprietary activities consist of unfair competition with tax-paying competitors."
Mill points out that nonprofit organizations that mail subscription or membership solicitations at third-class rates pay only 2.7 cents per letter, compared with 8.4 cents paid by commercial publishers for similar letters. Others add that nonprofit publishers pay no taxes on revenues from subscriptions and are allowed more-generous tax deductions on'revenues from ads that appear in their publi-cations. Many pay no taxes at all on advertising revenues.
Some nonprofit publications have taken out full-page ads in major newspapers to show advertisers how their circulations have grown in comparison with other magazines'-never bothering to acknowledge the special breaks they enjoy. Says Garth Hite, publisher of Atlantic Monthly: "I could double my circulation, too, if I had the advantage of the cheap third-class mailing rates paid by nonprofits."
Thomas Black, advertising sales director for Smithsonian Magazine, a nonprofit publication, plays down these advantages, saying that it is the quality of a publication, not mailing breaks, that wins subscribers. Even so, there are signs that the IRS is getting tougher on nonprofit publishers. It has told the publishers of several scientific journals that it plans to revoke their tax-exempt status. One of the major losers would be the American Chemical Society, which publishes 18 journals with a combined circulation of 300,000. The IRS questions the society's practice of selling subscriptions at a higher rate to nonmembers 10ii the ground that it violates a tax law prohibiting individuals from reaping benefits from net earnings.
The society is contesting the IRS action. The group is also trying to reverse the tax policy that requires it to pay taxes on ads in its publications. Secretary Rod Hader explains that only ads of a scientific nature are accepted and that the in,come from them should therefore not be considered unrelated to the purposes of the group.
The organization has"come under criticism from for-profit publishers in the scientific field who argue that the gathering of information for its lucrative Chemical Abstractg has been enhanced because of millions of dollars in government research grants awarded to the society.
Also studying nonprofit groups is the U.S. Postal Service, which has grown sensitive to increasing complaints about the cheaper rates given to these organizations. The service is beginning a new system to spot changes in the IRS's list of tax-exempt organizations so that special mailing privileges can be revoked as quickly as possible.






36

"There is a lot of whistle blowing by ordinary citizens," says Theodore Troy, director of the Office of Mail Classification. "When people see 2.4 cents stamped on a letter-and they're paying 15 cents-they wonder why."

THE DEBATE OVER PROPERTY TAXES
People are concerned, too, about exemptions on property taxes given to nonprofit groups, a practice that critics say has put more of a burden on homeowners and businesses.
An example of how such exemptions can get out of hand is found in the tiny community of Hardenburg, N.Y., situated in the Catskills. There, 213 homeowners, facing soaring tax bills as a result of exemptions given to big landowners, had their homes declared churches to get them off the tax rolls. The residents became ministers of the Universal Life Church, a California-based organization that mails out divinity degrees for a $20 offering.
Robert Kerwick, the community'A tax assessor, says he does not blame the residents and has no intention of forcing them to pay unless the courts or the state rule that the Universal Life Church is not a bona fide religious group. "I saw people join this church who were about to lose their homes because of taxes," says Kerwick, who insists that the only solution is for New York and other states to impose stricter limits on the amount of property owned by non-profit groups that can be exempt from property taxes.
Kerwick points to several examples in his area of large tax-exempt holdings by nonprofit organizations. An 8,000-acre farm owned by the Jehovah's Witnesses is able to sell food it raises to state institutions at lower prices than ordinary farmers charge because of the tax break, says Kerwick. Also nearby are taxexempt sites of 1,300 acres owned by 13 Zen Buddhist monks and 1,776 acres owned by the Nassau County Council of Boy Scouts. Then, too, there is a local group of well-to-do residents who donated 3,900 acres of property to a tax-exempt conservation group. Not only did they enjoy a healthy tax write-off for their donation, but they swung a deal to retain timber, water and farming rights to the land.
Says Kerwick: "If everyone else can get economic benefits by playing around with exemptions, the townspeople believe they can, too. But their real purpose is to create a crisis that will force action in the Legislature."
The situation in Hardenburg is an extreme example; yet other communities find it tough to ferret out tax dodgers hiding behind the nonprofit label. Says Robert Gustafson of the California State Board of Equalization: "When is a commune a religious commune? It's up to the Legislature to plug that hole."
The equalization board has denied some applications for exemption from religious groups, but has usually lost in courts. As a result, Gustafson says, many groups are amassing large holdings under religious exemptions. The Sino-American Buddhist Association bought the Mendocino State Hospital in Ukiah, Calif., and turned it into a spiritual center. Nyinga Institute, another religious group, owns 920 acres of Sonoma County. That's just a small sampling.
Some communities are urging nonprofit organizations to pay something for services they receive. In Boston, where almost 50 percent of the real estate is tax-exempt, universities are now required to pay the city a percentage of the revenue obtained through the renting of sports arenas and other facilities. Wesleyan University pays Middletown, Conn., for water, sewerage and sanitation services. And Cornell University makes an annual payment to Ithaca. N.Y., for police and fire protection. Most of the time, however, pleas by city officials are largely ignored.
THE PUBLIC'S RIGHT TO KNOW
The extent to which nonprofit organizations take unfair advantage of their privilefod stts is not easy to pinpoint, says a tax specialist in Congress, "because it's so hard to get information out of them." Church-related groups are not required to publish details on their finances. Other nonprofits file annual information returns with the IRS. These returns are public information, but it often takes weeks for the IRS to respond to a request to view them.
Congress in 1 9 took strong steps to stop conflicts of interest in foundations but did not require public disclosure of their operations. The result, says James Abernathy of the National Committee on Responsive Philanthropy, is that fewer than 500 of the 26,000 private foundations pulish annual reports.
One consequence: Many abuses go undetected. A report issued last year by the Twentieth Century Fund, a New York research group, stated that "boards of






37

trustees that rigorously maintain army's-length relationships and pursue the best interest of the endowment fund above all tend to be more the exception than the rule."f
Chris Welles, who prepared the report, points out that a number of foundations hold the majority of their assets in share of their major donors' firms. Another tendency is to use the services of banks controlled by foundation trustees.
The 1969 legislation orderd stiff fines for foundation officials engaging in "'selfdealing," that is, benefiting personally from business transactions with their foundations. The IRS since then has audited about 25,000 foundations. States have also stepped up their surveillance.
That law, however, did not prohibit conflict-of-interest situations in other kinds of nonprofit groups. For example, the Cousteau Society, a New York conservation group founded by Jacques Cousteau, the underwater explorer, has an officer and a board member who both belong to the law firm that handles the society's legal work. In the past, the society has also paid. a firm owned by a board member to handle fund solicitations and has purchased services from for-profit operations controlled by Cousteau. These practices, while frowned on by the Better Business Bureau and other charity watchdogs, are legal under current law. The society last year raised about 3.2 million dollars.
In Texas, Samuel Harwell, a former invstment analyst with the University of Houston, was sentenced on October 23 to four years in prison on federal mailfraud charges. He also was named as "co-schemer" in an arrangement in which he allegedly shunted university investment business to Covington-Knox, a brokerage firm owned in part by his former businss partner Roger Knox. The firm is accused by the Texas attorney general of selling securities to the university at prices righer than market value and buying securities from the institution at prices below value. Knox and Aubrey Covington, the firm's principals, denied the charges.
LIVING HIGH ON THE HOG
Usually escaping notice, too, are the salaries and expenses paid by foundations and other nonprofit organiations. The directors of many large charitable trusts, such as the Ford Foundation, make more than $100,000 a year, not counting generous travel allowances and other fringe benefits.
Many organizations also maintain sprawling offices and large staffs to disburse moneys. Not long ago, one -newspaper reporter, asked to attend a Ford Foundation session on crime, recalled how awed he was at the sumptuous 12-story headquarters and at being wined and dined during his stay.
The Ford Foundation last year approved 92 million dollars in grants, and officials there contend that the responsibilities involved in disbursing that kind of money justify the paying of a good salary to the group's president. Still, Chris Welles, author of the Twentieth Century study, contends that nonprofits can spend more freely than commercial firms do. "High salaries and offices with substantial trappings are fairly common in nonprofit organiations. If you don't have to report to shareholders, there's much less pressure to keep costs down," he says.
A case in point is John McCabe, who earns $121,000 a year as president of Blue Cross and Blue Shield of Michigan, a nonprofit organization. In addition, he is given the use of a Ford Thunderbird and other expensive fringe benefits. For example, the company paid his $900 initiation fee to the Detroit Athletic Club, as well as a $7,500 initiation fee to the Oakland Hills Golf and Country Club.
A board member critical of this compensation says: "These are symbols, and they are not symbols of an organization trying to hold down health-care costs."'
However, McCabe maintains that he belongs to the clubs for business purPoses and because executives of other firms do. "We're following rather than leading," he says.
MNcCabe's salary comes from an organization that took in 1.8 billion dollars in premiums last year, and one consulting group hired by Michigan Blue suggested that he was underpaid. However, much smaller nonprofit groups, including charities, pay their officers quite well. The Arthritis Foundation, which received about 4 million dollars in contributions in 1976, pays its chief officer about $60,000 a year. The Disabled American Veterans, which collected more than 20 million dollars in contributions in 1977, had five officers who made more than $49,000--the top man earned nearly $63,000.
Much more lavish examples have been uncovered in recent years. M. C. Van de Workeen, executive director of the National Information Bureau, which moni-






38

tors charities, says one group that operated internationally took its board members onl world tours three times a year. Another Midwest-based charity built a hiome complete with stables for the use of its executive director and also provided him with a yacht in Florida.
Ani official with New York's Office of Charities Registration, which regulate$ fund raising in the state, says far too little attention has been given to salaries and administrative expenses of nionprofit organizations. One problem is that, in financial reports, these expenses are often included as part of program spending rather than broken out separately. "Under this setup, spending for lavish offices an~d big salaries miak~es an organization look better," he explains, "because it boosts the amount of money listed for programs."

PROPOSED: TIGHTER CONTROLS
-Public charities-the religious, health and educational organizations that solicit funds from the public-are among the chief targets of those who want to bring reform to nonprofits. At stake is much of the 36 bililon dollars raised for philanthropy each year.
Still unregulated by many states are the fund-raising practices of these nonprofits, aid examples, of excessive spending and other abuses are rampant.
In Georgia, for example, Tim Ryles, head of that state's Consumer Agency, says there is "no documentation" that money raised by the Georgia Police Benevolent Association goes to widows, orphans and other needy people cited by telephone solicitors contracted by the PI3A. He claims that as much as 80 percenit of the money went to solicitation contractors and that the rest was used "to pay for funds for insurance premimumis for police members, for collective bargaining and for litigation."
Atlanta homicide detective Sidney Dorsey, president of the Georgia PBA, says that his group never endorsed any of the statements about widows or children, but that telephone solicitors deviated from previously agreed-on scripts.
In Florida, abuses by police associations have prompted a new law that limits professional solicitors to 25 percent of revenues collected, instead of the 40 to 80 percent now common.
Also under fire for alleged fund-raising abuses is the Congress of Racial Equality, which has been investigated by states such as North Carolina, Massachusetts, Alaska and New Jersey. Mary Joann Reedy, the attorney who handled the case for the Massachusetts attorney general, explains that telephone solicitors working for CORE miscrepresented the group as a federal agency connected wvithi the Equal Employment Opportunity Commission. She notes, too, that CORE was billing businesses for ads-in its magazine that the firms never authorized. Prospective donors also claim to have been harassed by CORE fund-raisers. In June, CORE agreed, without admitting guilt, to a consent decree in the Massachusetts case, promising not to engage in misleading fund-raising practices.
The attorney general of California in a recently settled suit ordered the executive director of the Animal Protection Institute to resign from the board of that group and to account for $17,000 in unauthorized spending. The state alleged that the API, based in San Francisco, misused more than $100,000 in donations and spent more than 90 percent of its income for administration. salaries and fund raising. The executive director, for example, is paid $4,000 a month.
Consenting to a judgment by the New York State Supreme Court in. July was the Richard Viguerie Company, a professional fund-raising outfit based in Falls Church, Va. The firm agreed to limit its fees to 35 percent of the funds it collects for New York charities. The state atorney general had charged the firm with retaining as much as 75 percent of moneys raised for various charities. Among the company's clients, were the Children's Relief Fund of the Korean Cultural and Freedom Foundation.
Fund-raising,- literature for that charity Included such statements as the followIng: "As I write you this letter, thousands of little boys and girls are suffering from the terminal forms of malnutrition." In this case, less than 6.3 percent of 1.5 million dollars collected went to the children, according to the attorney general, while more than $920,000 went to the Viguerie firm. Most experts say that well-establishied charities should spend no more than 25 percent of the donations they receive on fund raising.
Abuse of program funds also is cropping up In various nonprofit poverty agencies around the country. The Puerto Rican Community Development Project







39

was taken over this year by New York City's Community Development Agency. That action followed an audit of the project's books that showed what investigators described as "millions of dollars" of waste through "chronic mismanagement." The city also conceled a 1.2-million-dollar contract with another poverty group, the Hunts Point Community Corporation, after finding evidence of possible fraud. Found in the agency's offices were pads of blank bills from private comipanies, such as supply stores, which could be used as vouchers to account for the Spending of poverty funds.

AHEAD: CLOSER SCRUTINY OF NONPROFITS?
There are signs of a new campaign to stamp out such abuses and to clip the wings of some nonprofits.
Representative Charles Wilson (D-Calif.) has introduced a bill that would require charities to make public the percentages of their contributions that go to the causes they represent.
Also aimed at helping the public to understand better the finances of nonprofits is a new audit guide soon to be introduced by the American Institute of Certified Public Accountants. These new standards will apply to charities, foundations, museums and churches, which up until now have lacked uniform accounting procedures.
The IRS is stepping up its review of nonprofits, particularly in the area of unrelated business income. Congress in 1974 established a separate IRS office to monitor tax-exempt organizations. Funds and manpower for that operation are increasing. A major examination of the 1,500 largest tax-exempt organizations is just being completed, and nonprofits are already feeling the heat.
Says Rod Hader of the American Chemical Society: "The IRS is looking for anything it can attack in large nonprofit organizations in order to collect more revenue."
Former IRS Commissioner Cohen argues that what is really needed is a broad review by Congress of nonprofit institutions. "So far, actions taken have followed a Band-Aid approach," he explains. "Congress simply enacts statutes as a response to individual scandals."
Meanwhile, there is no letup in the flood of new organizations seeking taxexempt status. That number has increased from 33,556 in 1974 to 50,649 last year, a growth that alarms people who are skeptical about the benefits given to these groups.
Says Robert Kerwick, the harried tax assessor from Hardenburg: "We just can't go on giving nonprofit status to every fly-by-night organization that comes down the pike. That has to stop, especially the way economic pressures are building on people."

ATTACHMENT B
OCTOBER 2, 1978.
TAX-FAvORED COMPETITION: AN ANALYSIS OF THE PROBLEM AND RECOMMENDED ACTIONS To DEAL WITH IT
This memorandum reviews ways in which non-taxpaying (nonprofit) organizations are favored under the present tax laws and regulations in competing with taxpaying (for-profit) firms providing identical or similar services and makes recommendations to eliminate such unfair competition. Present tax laws and regulations
Section 501 (c) (3) of the Internal Revenue Code of 1954 provides, in part, for exemption from Federal income tax for a corporation organized and operated exclusively for scientific research and testing for public safety purposes.
Section. 511 of the Code imposes a tax on the unrelated business income of organizations described in Section 501 (c) (3). Section 513 of the Code defines the term "unrelated trade or business" as any trade or business the conduct of which is not substantially related to the exercise or performance by an or ganization of its exempt function. Under section 512(b) (7), (8) and (9), there is excluded from unrelated business taxable income, all income derived from research for Federal or state governments; in the case of a college, university or hospital, all income derived from research performed for any party, and all income derived from research performed by an organization operated primarily for the






40

purpose of carrying on fundamental research, the results of which are freely available to the general public.
Analysis of inequities under etarsting law
The private professional services industry consists of thousands of firms en gaged in research and development, testing, design, planning, data sing formation services and consulting work of clients in both the private and publ sectors. Over 90 percent of such firms are small businesses. Several kinds of ntaxpaying organizations are in direct competition with taxpaying profeona services firms.
First, "captive" nonprofit research institutes known as Federally Funded Re search and Development Centers (FFRDCs) or Federal Contract Research Centers (FCRCs) provide professional services. The IFRDCs or FCRCs normally work principally for a particular Federal department or agency and receive a bstantial portion of their funding pursuant to a long-term, open-ended master tract with the sponsor department or agency. These captive nonprofits also provide services for other Federal departments and agencies, state and local governments, commercial and industrial clients. In 1973, there were 59 nonprofit captiv FFRDCs and FCRCs, including RAND Corporation, Mitre Corporation and others.
A second category of nonprofit research institutes are the "non-captive" nonprofits such as Southwest Research Institute, Franklin Institute, Battelle Memorial Institute, Stanford Research Institute and others. While these organizations' sources of funding are more diverse, at least 65 percent of their income results from the performance of professional services for various Federal, state and local governmental agencies.
A third group of nonprofit organizations engaged in providing professional services is the universities and colleges. Approximately eleven percent of the Federal research and development budget for fiscal year 1977 ($23.5 billion) was allocated to research and development performed at universities. Of this amount, 89 percent was "applied" and "development" activity, directly competitive with similar services available from the professional services. Universities and colleges are providing professional services to commercial and industrial clients as well
Private professional services firms, nonprofit research institutes and universities, when engaged in the same enterprise activity of providing professional services are treated differently under the present tax laws. Examples of this lack of uniformity and equity include:
1. The blanket exclusion from the unrelated business income tax of applied
research work performed for governmental agencies or in the case of universities for anyone;
2. The inadequate guidelines defining when scientific research work performed for a private sponsor is not carried on in the public interest and is
therefore subject to taxation; and
3. The imprecise distinctions as to when activities are of a type ordinarily
carried on as an incident to commercial or industrial operations and are
therefore subject to taxation even if performed for the government.
These and other deficiencies in the existing tax law, regulations and enforcement policies result in large amounts of income received by nonprofit organizations from professional services not being subiect to taxation.
An examination of the legislative history of section 301 (a) of the Revenue Act of 1950 (64 Stat. 947) which first established the "unrelated business income" provisions of the Internal Revenue Code illustrates the fact that these provisions are no longer adeqiiate. Section 301 was intended to deal with "unfair competition" by tax-exempt organizations engaged in commercial activities. The exceptions for research work were not based on a judgment by the Congress that this policy against unfair competition should not be extended to this particular market. Rather, Congress appeared to conclude that since few profitmaking organizations were regularly performing contract research for the government at that time, there was no competition in research services, fair or unfair, which needed to be addressed.
By 1978, the characteristics of the marketplace have drastically changed with taxpaying firms competing directly with non-taxpaying entities for governmentsponsored research contracts. Whatever rationale existed in 1950 for the statutory exceptions in the unrelated business income tax, no longer applies.
These gaps in present law hurt both the government and the taxpaying pro fessional services sector. While the non-taxpaying sector could argue that the government acquires research assistance at a reduced cost, the facts do not support this allegation.






41

First, almost all contracts for research and development and for other professional services arecost reimbursement type contracts. The exemption provided by these two sections does not reduce the costs incurred by the tax-exempt performer, and the government in turn does not realize any cost savings. Second, available evidence indicates that when tax-exempt performers seek or accept "fees" under such contracts these fees are not reduced to reflect fairly the impact of the tax exemption. The tax-exempt organization is likely, for the most part, to choose to maintain competitive price levels and thus to retain a large margin of extra profitability. It is this "surplus" resulting from the tax exempfion which constitutes the fundamental competitive advantage accruing to the tax-exempt nonprofit firm. It constitutes, in effect, a subsidy from the Federal government to these organizations, to be utilized as their governing officials determine. These revenues can be used for investment in improved physical plant and capital facilities, or for offering high salaries and fringe benefits to attract personnel. If the performing unit is a subsidiary of a larger charitable enterprise., part of these revenues may also be siphoned off to support those charitable activities.
In addition, the tax-exempt organization remains free to engage in unfair price competition in those circumstances where it perceives that such behavior may result in a particularly desirable contract. In short, as a result of this hidden Federal subsidy, the exempt organization enjoys considerably greater flexibility in the business environment in which both must operate. Recommendations
Unfair competition from non-taxpaying organizations affects a broad range of private sector organizations and firms at present. A number of major national associations are deeply concerned about the adverse impact of present tax laws, regulations, rulings and policies on private professional services.
As a consequence, it is recommended that immediate consideration is warranted of how present laws and regulations could be modified to assure equitable tax treatment of all organizations engaged in providing similar services. Such measures might include:
1. Elimination from present law of the broad exemptions contained in seetion 512(b) (7) and (8), and
2. Stricter enforcement of the 501(c) (3) exemption and limiting the extent to which such an organization can engage in unrelated business without
losing its exemption.

ATTACHMENT 0

THE ROLE OF NONPROFITS

(By John F. Magnotti, Jr., and James S. Hostetler)
L An opportunity
This conference is a welcome opportunity for a divorce group of individuals to seek to define, understand and develop guidelines for different kinds of organizations when they engage in enterprise activity-in this case, the provision of professional services needed by the Federal government.
The services being offered by the Manpower Demonstration Research Corporation (MDRC) are professional services. There is confusion about what profesSlonal services are and where professional services capabilities reside. This confus-ion is reflected in the arbitrary and chaotic practices of government in determining when to "contract-out" for services.
Private organizations, whether for-profit or -nonprofit, share a common interest in assuring that government enterprise activity in professional services does not expand in ways that are detrimental to the public interest and the private sector. Private organizations, whether for-profit or nonprofit, share an uncommonly common set of internal business and functional characteristics when engaged in enterpilse activities. It is the external rules formulated and implemented by the government as they affect for-profit and nonprofit performers which are not common and which create inequities and distortions which are damaging to the public's interest in enhanced competition and the productive use of public resources.
'Until these larger questions relating to the proper roles of the Federal, Government, the nonprofit sector and the for- profit sector 'are effectively addressed,






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ad hoc arrangements with no overriding logic will continue to characterize the acquisition of professional services by the Federal Government. In the h that with greater factual knowledge will come increased clarity in the relationships of these sectors, we make the following observations. I. Defining the professional 8crvices
One of the few public efforts to define professional services occurred the deliberations of the Commission on Government Procurement which lished its final report in December of 1972.1 In this report, professional are defined as relating "to such fields as accounting, management, mar economics, and systems analysis; program evaluation; industrial engine g and operations res(arch. The product furnished generally is a report forth findings and recommendations for solutions to problems, suggestions fr improving operations, evaluation of program results, suggestions for alternatve means to achieve agency objectives, etc... For some time, government agency have engaged professional firms to perform such services in order to supplement iii-house capabilities. The types of firms engaged are companies, pa or corporations--both profit and nonprofit". 2 (Emphasis added).
We would suggest that the definition offered by the mission on Government Proceurement can be expanded to include firms engaged in research and development, testing, information and data processing, design, analysis, evaluation, education and training, and management consulting for clients in both the public and private sectors. These organizations are not usually engaged in the physical aspects of manufacturing. Most are small businesses. The pofesionals who work in these firms usually are trained in one or more of the recognized academic disciplines, and academic degrees are an essential part of the -professional services.
It is clear that both profit and nonprofit organizations are viewed by the Commission on Government Procurement as providing essentially the same services to government customers, and that these services are considered by government managers to be professional services.
The nature and scope of professional services is not nearly so clear to members of the current Administration. A series of attacks have been mounted recently against a group disparagingly labeled by President Carter, ex-Office of Mangewent and Budget Director Lance and other Federal officials as "consultants." Confusion as to who and what "consultants" are is rampant. In the on-going debate about the use of consultants by the Federal Government, many of the Federal participants either imply or state that the term "consultant" includes professional services firms. A Presidential memorandum of May 12, 1977, states that, "There has been evidence that some consulting services, including e and advisors are being used excessively, unnecessarily, and improperly".3 This sweeping generalization is expanded further if necessary for the development of a good story. As an example, in the March 19, 1978 issue of the Washington Star, in an article entitled "Rail Improvers Laying Out $30 Million for Consultants." the writer characterized consultants as "ranging from archaeoe s and public relations firms to helicopter pilots and the National Urban LeAgue."'
In OMB Bulletin No. 78-11, issued May 5, 1978, guidelines for the use of consulting services are established. "Consulting services" are defined as meaning "those services of a purely advisory nature relating to the governmental functions of agency administration and management and agency program management." Included as a specific example of such services are "policy and program analysis evaluation and advice." Such services are subject to specific limitations on use. Without exploring in depth the application of these guidelines, it should be emphasized that further definitional uncertainties and complexities have been introduced into the procurement of certain kinds of professional services. Assuming that this new inhibition on the use of outside sources of expertise does not apply, then it is necessary to note the confusion in the Federal Government's policy of "contracting-out for services."
HIf. Contracting-out
Government policy requires the use of the private sector to provide ne ry goods and services. This policy is published in OMB Circular A-76, "Policies for

I Report of the Commission on Government Procurement (U.S. Government Printing Office. Washington. D.C. 1972).
2Ibid.. volume 1. p. 97.
Presidential memorIDdum dated May 12, 1977.
4 Washington Star, March 19, 1978 issue.






AQ
ITO

Acquiring Commercial or Industrial Products and Services for Government Use." Currently undergoing extensive revision, the policy still states that "Federal agencies will not operate an activity to provide a product or service that is obtainable from a private source unless that activity has been justified in the national interest."
Qualified nonprofits and for-profit firms share a common interest In the uniform and fair implementation of this Federal policy of reliance on private enterprise. The nonprofits which traditionally have received substantial assistance by means of grants will -find A-76 increasingly important as the requIrements of the Federal Grant and Cooperative Agreement Act of 1978 dictate more utilization of contracts with nonprofit organizations. A sharper understanding of when the government should go private (profit or nonprofit) in procuring services is fundamentally important.
Unfortunately, Congress is confusing the issue of "contracting-out" with legislation which draws lines on DOD contracting-out which run contrary to A-76. Under the DOD Authorization Act of 1978, new broad limitations are imposed on acquisition by the Federal Government of professional services.
These developments simply underscore that before a proper Tole can be defined for nonprofit and for-profit private organizations, the government must understand when it should utilize private capabilities instead of building up in-house government capabilities.
IV. General factual profiles of profit and nonprofit professional services firms
In understanding how to utilize nonprofit and for-proflt organizations, it is necessary to describe generally their evolution. Although based upon the classical areas of engineering, architecture and management consulting-the latter actually an outgrowth of industrial engineering-tbe private profit professional services -sector, under the impetus of World War II, now includes a wealth of scientific, social and technological talent. All in the private sector, all very much for-profit, and all essentially non-manufacturing. We estimate that the private, profit, professional services sector now encompasses over fifty thousand firms with formal payrolls, and generates between fifteen and twenty billion dollars of services, about equally divided between industry and government of all kinds.
Free enterprise exists with a vengeance in the professional servIces industry. A quote from "The Nature of Competition" by Claire Wilcox 5 serves as a basis for supporting this assertion.
_The requirements of perfect competition are five: First, the commodity
dealt with must be supplied in quantity and each unit must be so like every other unit that buyers can shift from one seller to another in order to obtain a lower price. Second, the market in which the commodity is bought and sold must be well organized, trading must be continuous, and traders must be so well informed that every unit sold at the same time will sell at the same price. Third, sellers must be numerous, each seller must be small, and the quantity supplied by any one of them must be so insig nificant a part of the total supply that no increase in his output ean appreciably affect the market price. Buyers likewise must he numerous, each buyer must be small, and the quantity bought by any one of theba must be so insignificant a part of the total demand that no increase or decrease in his purchases can appreciably affect the price.
. Further, there must be no restraint upon the independence of any
seller or buyer, either by customer, contract, collusion, the fear of reprisals by competitors, or the imposition of public control. Each must be free to act in his own interest without regard to the interests of any of the others.
Fifth, the market price, unfair at any instant of time, must be flexible over a Period of time, constantly rising or falling in response to the changing conditions of supply and demand . Finally, there must be no obstacle to elimination from the market: bankruptcy must be permitted to destroy
those who lack the strength to survive."
Wilcox continues by stating that perfect competition does not exist,
never has existed, and never can exist." But his concept is useful in providing a standard by which competitive realism can be measured. In defining pure competition as coming close to the ideal of perfect competition without attaining It, Wilcox is describing the situation which by and large prevails in the profit sector of the Professional services industry.

"'Competition and Monopoly In American Industry" (TNED Monograph 21), 1941, reprinted in Dean, Joel, Managerial Economics. Englewood Cliffs, N.J. : Prentice-Hall, Inc,






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A surprising number of these conditions exist insofar as the for-profit professional services are concerned. Over 90 percent are small businesses, andt firms are ordinarily independently owned by highly trained, profit motvae entrepreneurs and managers whose choice it was to begin and maintain a forprofit professional services business.
Even the larger firms in the profit group are small when compared to he manufacturing side of industry. Computer Services Corporation, for currently operates at an annual billing level of over 200 million dolars a Planning Research Corporation. Booz Allen & Hamilton enjoys an annual of about 80 million dollars, while Camp, Dresser & McKee and the BDM poration operate in the 40 to 50 million dollar range. The number of firms is small also when compared to the thousands of firms in the profe i services industry classified as small businesses under any of the current fication criteria. Our experience in the late sixties confirms the fact that te is no obstacle to elimination from the market. Bankruptcies among profit pr sional services firms during the period were numerous and frequent.
The fact that the output from these firms In many cases is absorbed by the government or the fact that the overall market is monopolistic in no way detracts from this freedom of choice. Also, a commonly held monolithic perception of the Federal Government should not detract from the reality of thousands of service procurements ranging in size from a few thousand dollars to many million. Specifically excluded are the many individuals who are utilized by government agencies as consultants at negotiated daily rates.
During this same period. there has been an explosive growth of nonprofit organizations which also provide a broad range of professional services. Initially, these organizations were established under favored circumstances to fill a vacuum in providing systems analyses and technical expertise not available in the private for-profit sector. As the private for-profit sector developed similar capabilities, these organizations did not lose their favored status, but simpy continued and enjoyed a competitive advantage by virtue of Federal laws and policies.
Several kinds of nonprofit organizations are in direct competition with profit professional services firms. First, "captive" nonprofit research institutes known as Federally Funded Research and Development Centers (FFRDCs) or Federal Contract Research Centers (FCRC's) provide professional services. The FFRDC's or FCRC's normally work principally for a particular Federal department or agency and receive a substantial portion of their funding pursuant to a long-term, open-ended master contract with the sponsor department or agncy. These captive nonprofits also provide services for other Federal departments and agencies, state and local governments, commercial and industrial clients. In 1973, there were 59 nonprofit captive FFRDC's and FCRC's, including RAND Corporation, Mitre Corporation and others.
A secondd category of nonprofit research institutes are the "non-captive" nonprofits such as Southwest Research Institute, Franklin Institute, Battelle Memorial Institute, Stanford Research Institute and others. While these organizations' sources of funding are more diverse at least 65 percent of their income results from the performance of professional services for various Federal, State and local government agencies.
A third group of nonprofit organizations engaged in providing professional services is the universities and colleges. Approximately 11 percent of the Federal research and development budget for fiscal year 1977 ($23.5 billion) was allocated to research and development performed at universities. Of this amount, 89 percent was "applied" and "development" activity, directly competitive with similar services available from the professional services. Universities and colleges are providing professional services to commercial and industrial clients as well.
1'. Similarities in internal characteristics
All professional services organizations, profit and nonprofit alike, are in the business of selling professional labor, generally to solve specific problems using available technology. Professional services firms, if properly chosen and utilized by the government managers, can substantially improve the policymakers nderstanding of available alternatives and of the probable impact of various policies if implemented. The spectrum of problems addressed by these firms, plus the ability to use individual consultants as required provide a capability and flexibility difficult to duplicate in the government.
When the particular job for which the professional services firm is engaged
has been completed, the expense to the government terminates. There is no






45

necessity for the government to create new problems to be solved by a new unutilized work force. The cost to the government of acquiring the assistance of a professional services firm can be specifically and easily determined. It is the bottom line dollar number on the contract. There are no hidden pension costs, and there are no hidden costs of continuing employees on the payroll after the job is completed.
In a recent study, the General Accounting Office established that profit and nonprofit firms generate equivalent profits when providing services to the Federal Government. This contradicts the widespread view held by many that nonprofits are in fact nonprofit-making. A similar conclusion was reached in a 1976 study by eminent sociologists Dr. Amitai Etzioni and Dr. Pamela Doty of the Center for Policy Research in New York.' Although the prima ry focus of the study was health-related not-for-profit corporations, the authors assert that their findings "are the same for all not-for-profit corporations." They contend that "existing laws and regulations governing not-for-profit corporations are insufficient to safeguard the underlying legitimate purpose of these corporations."
Etzioni and Doty state .. omissions, -ambiguities and loopholes in the laws and regulations governing -not-for-profit corporations presently make it possible for the trustees and staff of not-for-proft corporations to engage in a variety of financial practices which bring them personal profits over and above fees, salaries and fringe benefits due them for work performed." The authors hasten to add that the practices in question cannot be generally termed "fraud," but are "forms of profit-making which are at odds with the underlying rationale of not-for-profit corporations, not as currently written in existing laws and regulations but as widely held and understood as legitimate expectations by members of society."
According to the authors, such practices have not been perceived as prob-. lematic and statutory language has remained imprecise due in part to "the strength of the philanthropic tradition in America and the trust long placed in the unselfish motivations of those associated with not-for-profit corporations."
In order to 'correct the ambiguities, omissions and imprecision, the authors recommend:
A revision of the law covering not-for-profit corporations to explicitly
exclude any form of compensation of the staff other than salary or fee-forservice.
Persons having potential "conflicts of interest" be required to sever the
relationship in question before permitted to serve on the board or as an
official or staff member for a not-for-profit entity.
SPenalties be enacted from any member or trustee of a not-for-profit
institution engaged in any such conflict of interest transaction.
Where not-for-profit institutions draw on public funds, the government
regulatory apparatus should examine fees, salaries and fringe benefits as compared to similar institutions, and refuse to certify or recertify for participation in government programs those institutions providing income
grossly above the norm.
The marketing process throughout the professional services is uniform. In order to survive as an organization, the professional services firm, profit or nonprofit, must generate a relatively constant flow of contracts or grants. Although organizations vary in the detailed approach to marketing, all engage in intensive customer interaction, the development of "leads," and the preparalion of technical and cost proposals for appropriate projects and programs.
IProposals for grants and contracts vary in administrative detail, but in every cease, include organizational qualifications, specific technical staff, a technical and management approach, and a price to complete the project. In previous years, grants used to acquire professional services were not monitored nearly as closely as were contracts. As the perception of profits and nonprofits merge, however, most Federal agencies are beginning to establish performance regulations for grants approaching the detail and intensity of regulations dealing with contracts.
Personnel management among Professional services firms is identical. Few if any Professionals choose to work in a profit or nonprofit firm because of ideological concerns of one kind or another. The 'kind of work determines job choice in many cases, but is not relevant in terms of choosing a profit or nonprofit since both groups compete essentially in the same markets. Competition among organizations for professional talent is intense, so salary structures and benefit programs vary little from company to company. Because of the similarities in persEtziont, AmItal and Doty, Pamela, "The Profit In Not-For-Profit Institutions," Center for Policy Research, New York, N.Y.
40-28T---79--4






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sonnel management, professionals move freely among firms primary inr to demands of the job market.
There is little difference among firms in the approach to program pe aice. A program hierarchy is established, headed by a program manage. AU firms, with varying degrees of success, establish controls designed to successful program completion within the cost allocated in the contract or nt. All firms find it equally difficult to constantly charge the bulk of their sionals against existing contracts or grants.
The only rational conclusion is that both types of organizations are in enterprise activities in the same way. Entrepreneurs inhabit both and both types of organizations are strikingly similar internally. Ho r, both appear to be operating by the same internal rules, external rules and (lures, a product of inadequate and grossly unfair Federal laws and po are strikingly different.
VI. Disparitie8 in external rules
When not-for-profit research institutes compete with taxpaying the rules of the competition vary drastically. While the for-profit or anaon pays taxes, "nonprofit" or "not-for-profit" organizations are tax-exemp ve governmental grant subsidies not available to for-profit firms, and pay reduced l)ostage rates.
More specifically, consider how private professional services firms, nonprofit research institutes and universities, when engaged in the same enterprise activity of providing professional services are treated differently under th present tax laws. Examples of this lack of uniformity include:
(1) The blanket exclusion from the unrelated business income tax of
applied research work performed for governmental agencies by nonprofit research institutes or in the case of universities for anyone;
(2) The inadequate guidelines defining when scientific research work performed for a private sponsor is not carried on in the public interest and is
therefore subject to taxation; and
(3) The imprecise distinctions as to when activities are of a type ordinarily carried on as an incident to commercial or industrial operations and
are therefore subject to taxation even if performed for the govl ent.
These and other deficiencies in the existing law, regulations and enforcement policies result in large amounts of income received by by nonprofit organizations from professional services not being subject to taxation.
An examination of the legislative history of Section 301(a) of the Rev4nue Act of 1950 (64 Stat. 947) which first established the "unrelated business income" provisions of the Internal Revenue Code illustrates the fact that these provisions are no longer adequate. Section 301 was intended to deal with "unfair competition" by tax-exempt organizations engaged in commercial activities. The exceptions for research work were not based on a judgment by the Congress that this policy against unfair competition should not be extended to this particular market. Rather, Congress appeared to conclude that since few profitmaking organizations were regularly performing contract research for the government at that time, there was no competition in research services, fair or unfair, which needed to be addressed.
By 1978, the characteristics of the marketplace have drastically changed with tN xpaying firms competing directly with non-taxpaying entities for government SPonsored research contracts. Whatever rationale existed in 1950 for the statutory exceptions in the unrelated business income tax, no longer applies.
We believe that government is the loser in its failure to bring anal clarity to its use of the nonprofit. Some have argued that the government acq research from the nonprofit at a reduced cost, but the facts simply do not support this allegation.
First., almost all contracts for research and development and for other professional services are cost reimbursement type contracts. The exemption provided by these two sections does not reduce the costs incurred by the tax-exempt perfomer. and the government in turn does not realize any cost savings. Second, available evidence indicates that when tax-exempt performers seek or accept "fees" under such contracts these fees are not reduced to reflect fairly the impact of the tax exemption. The tax-exempt organization is likely, for the most part, to Choose to maintain competitive price levels and thus to retain a large margin of extra profitability. It is this "surplus" resulting from the tax exemption which constitutes the fundamental competitive advantage accruing to the tax-exempt iionl)r4,tit firm. It constitutes, in effect, a subsidy from the Federal Government







47

to these organizations, to be utilized as their governing officials determine. These revenues can be used for investment in improved physical plant and capital facilities, or for offering high salaries and fringe benefits to attract personnel. If the performing unit is a larger charitable enterprise, part of these revenues may also be siphoned off to support those charitable activities.
In addition, the tax-exempt organization remains f ree to engage in unfair price competition in those circumstances where it perceives that such behavior may result in a particularly desirable contract. In short, as a result of this hidden Federal subsidy, the exempt organization enjoys considerably greater flexibility in the business environment in which both must operate.
Congress recognized that unfair competition existed in the disparate tax treatment of for-profit and not-for-profit organizations when it enacted the "iunrelated business income" tax provisions applicable to nonprofit organizations in 1930. Unfortunately, the unrelated business income tax is extremely limited in its scope and largely ineffective in eliminating unfair competition. For example, any research performed by a nionprofit organization for a government unit is not covered by the unrelated business income tax. The nonprofit has excessive leewvay in determining how much of its overhead is to be allocated to the particular activity which may be subject to the tax. What is research intended to be exempt is often whatever the nonprofit says it is.
During the 1960's and 1970 ,s, there has been an explosive growth in Federal grant programs which provide financial assistance principally to public agencies and nonprofit organizations. These grant programs take many forms, including research grants, institutional support grants, project grants in-aid, formula grants in-aid, organizational support grants, block grants and general revenue sharing. These grant programs create a major problem for private professional services in that eligibility is almost always restricted to public agencies or nonprofit organizations. These public subsidies make it infinitely more difficult for taxpaying organizations to compete effectively with their nonprofit competitors.
Beyond demonstrable financial and tax advantages which make is possible for the nonprofit to market its services at lower costs than taxpaying organizations, there is abundant evidence of government "favoritism" in awarding contracts to nonprofits. A nonprofit mystique which believes that the work of the nonprofit must be superior since it is not-for-profit and consequently independent and pure is, of course, simply not grounded in fact. There are good nonprofits .and bad nonprofits, just as there are good taxpaying organizations and bad taxpaying organizations. When both types of organizations are engaged in enterprise activities, then the rules must be the same at a minimum. VII. The proper role of the nonprofit
In the absence of equitable rules governing taxpaying and non-taxpaying organizations engaged in enterprise activity, several conclusions are apparent:
(1) Nonprofits should compete for contract opportunities rather than
receiving sole source awards.
(2) Government should'be reserved about contracting with new nonprofits unless they represent a unique capability or resource not available
from existing private organizations.
(3) Special analysis is required to assure that a nonprofit is evaluated
on a basis which does not extend unfair advantages to it when competing
with a taxpaying organization.
The corruption of the procurement process, the 'blurring of distinctions, and the aggressive marketing of services has made a sham of an integral part of our Pluralistic economy: the nonprofit. This symposium is an opportunity to recog-nize the development of the enterprise capacity' of the nonprofit at the expense of its original mission and to chart ways to create new rules, which are fair. Success in this effort will assure that each type of organization is used for its highest and best use and fair competition will flourish to the benefit of everyone in the public and private sectors.
Mr. CHIERKASKY. I would now like to call on Randv Seifert of the National Home Improvement Council, who will speak on new legislation in 1979. prl






48

STATEMENT OF RANDOLPH 1. SEIFERT ON BEHALF OF THE
NATIONAL HOME IMPROVEMENT ASSOCIATION
Mr. SEIFERT. I would like to address myself, MAIr. Chairman, to two specific areas and one conceptual approach that might be of interest to your work for the small business community. Preliminarily, the National Home Improvement Council is the trade association representing more than 40 national members who are primarily enfaed in manufacturing products for the construction industries. These national members also include a number of publications dealing with the home and the many concerns of the homeowner.
The council has 42 local chapters extending from New York and Washington, D.C., to Seattle and Los Angeles. The chapters number more than 2,400 contractors engaged in home remodeling and improvement. The chapter membership also includes lending institutions, utilities, and wholesalers.
First, a word of commendation is due the committee. I do not think that any of us working on the independent contractor-employee tax issue had any notion at the first of the year that congressional legislation would be forthcoming in this session. Such action is a very real tribute to the work of this committee and to a more articulate small' business community.
The independent contractor-employee issue was handled by Congress very promptly. It is a matter of real concern to many in the small business community that they function as independent contractors; that they not be characterized as "employees."
Section 530 of the 1978 Revenue Act recognizes those concerns. The hill directed that a long-term solution for the definition of "employee' be worked out by Congress, not by IRS. I hope that this committee, Mr. Chairman, will pursue this matter so that the ultimate handling of that problem reflects the concerns of this community.
Second, it was most unfortunate that the Dispute Resolution Act,. which was passed in the Senate almost without opposition and which obtained a substantial majority vote in the House didn't make it because of the two-thirds rule in effect at the time. The proposed legislation would offer an opportunity to explore and establish realistic ways of handling so-called "small disputes," outside of the traditional judicial process. It would offer viable alternatives to the small business community for prompt and economic resolution of disputes that too often in the past have been dropped simply because of the disproportionate costs involved. That legislation would have farreaching impact on the population in general and the small business community in its handling of a whole host of business disputes. I hope that your committee, and this community, support that legislation in the next session.
Finally, there is a broad-based conceptual approach that I would ask you to consider: A "Small Business Board of Review," a Federal agency with basic rulemaking authority to amend existing statutes and to rant, after hearing and upon proper showing, exemptions from Federal statutes for certain defined small businesses, after notice qind appearance by the particular Federal agency concerned.
The Federal Trade Commission has rulemakin. authority that permits it to change commercial marketplace practices several hundreds




49

of years old (holder Iin due course rule); establish standards for advertising and labeling of insulation materials; regulate TV advertising for children; and to operate in a host of other widely dispersed areas.
If a single review board could do the reverse, specify exceptions which might exclude small businesses from the operation of certain Federal statutes that really should have no application, then the onerous smother of the regulatory process could be softened considerably.
The National Home Improvement Council very much appreciates this opportunity to share these views with this committee staff, and salutes you for making this forum an annual occasion to which many of us in the business community look forward with keen anticipation.
Thank you.
Mr. CHERKAsiiy. Thank you, Randy.
I would like to skip back to the question of capital formation.
.2irthur Levitt, president of the American Stock Exchang has come into the room. He is also chairman of the Advisory Commission to the White House Conference on Small Business, and he, has been
' a witness on our hearings on capital formation in New York City in May of 1978.
I would like to call on Arthur Levitt at this time.
STATEMENT OF ARTHUR LEVITT, JR., CHAIRMAN, AMERICAN STOCK EXCHANGE, INC.
Mr. LEviTT. Thank you very much.
Unfortunately I haven't had the opportunity of being here for what I understand has been a very productive morning's session, but I
-would like to sav that since becoming, chairman of the American Stock Exchange almost a year ago, I have become persuaded that the country's No. 1 economic problem is the problem of capital formation, and it is a problem that attacks more significantly the interests of smalland medium-sized business, in my Judgment, than it does the larger, traditional companies of America.
Unfortunately, our kind of companies lacks the sort of representation the larger and traditional companies have. There is no roundtable for our companies. There is no National Association of Manufacturers that represents our interests. Very often our interests are different than those of the traditional companies, and sometimes adversarial. I think we see that particularly with respect to tax policy, but in a number of other areas as well.
I think the problem of communications among ourselves lies at the core of this. By that 11 mean the decision made by General Motors this morning is known by senior officials of duPont within minutes or seconds, but a decision made by the Dillard Department Stores in Arkansas may not ever be known by the Smith Drug Co. in Bangor or Palo Alto.
I think the upcoming Tnite House Conference on Small Business
Z"5
offers us a very -unique and special opportunity. I would encourage people in this room and others that have an interest to take p r in this v ery unique process. As many of you may know, the Commission appointed by the President will be holding hearings in some 57 loca-





50

tions throughout the United States to which a broad group of small business interests have been invited, and at those meetings delegates to the White House conference itself, which will take place in 19R( will be elected by the participants.
I think it is terribly important that the work of the conference be carefully coordinated with the legislative process. What we are concerned with this morning and what I hear at so many of these meetings are very compelling tactical arguments. I think that they are compelling and they are urgent, but I think we must develop a strategic sense as well. Small business, almost by definition, is concerned more with tactics than with strategy, and I think that is a shortcoming and a problem.
We have to plan for the future. We have to devise a legislative plan which involves coordination of interest. So I am hopeful that the work of the Commission will be coordinated with the Congress and that your influence will certainly be brought to bear.
I appreciate your calling on me and I would like to give credit to the work of this committee, and particularly to Senator Nelson, who I think is doing an outstanding job.
Thank you.
Afr. CTTrKASKy. Thank you. May T ask one question please?
You did say the fall of 1980 for the White House Conference?
Mr. LEVITT. Yes.
Mr. CITERKASKY. I thought it was going to be in January or Februar-v of 1980. Am I Mfistaken? I just wanted to make sure we are talking about the same date.
MNr. L vrr. It is the same conference. Perhaps the dateMr. CITERKASKY. I want to make sure we are not going to two conferences.
Thank you for joining us.
Gerald Nagy of the National Home Furnishings Association will speak.

STATEMENT OF GERALD NAGY, NATIONAL HOME FURNISHINGS ASSOCIATION
Mr. NAGY. I wasn't a regulary scheduled speaker. I hope you don't mind if I take 41/2 minutes.
Mr. CTIERKASKY. I will time you.
Mr. NACY. I expect inflation is going to be a high priority item for the committee in the next year. I would like to offer a hypothesis on this for you to work on.
The hypothesis is: Why is it that a small retailer can't do anything to hold down prices and thus support the President's voluntary guidelines program?
That hypothesis is obviously my conclusion, and I will tell you how I got there.
Back this summer the Washington retailing community thought that something was going to happen in the administration with respect to voluntary, or perhaps even mandatory, wage-price guidelines.
We formed two task forces to work on wage-price guidelines, the position we should take, and where we should be.
The reason for the two task forces is that basically we recognize retailers are in a terribly vulnerable position when it comes to inflation and voluntary or mandatory price controls.








People tend to blame retailers for the high cost of living. After all, that is where we go to buy food, furniture, cars, and so forth.
If a Government program is going to demonstrate that it is tough on controlling prices, the program tends to come down hardest on the retailer because that is the most visible example of where the high prices come from.
This is what we learned in the Nixon controls back in 1971 to 19 74. So we established these task forces in August, and without giving a day-by-day description of the many meetings we have attended and the many programs we have undertaken, we are coming to the conclusion that there is very little that an independent small, hometown store can do to reduce the rate of inflation by holding down prices.
We are coming to the conclusion that we are price-takers, not pricemakers. We are the end result of a long line of inflationary pressures.
We have to accept high prices from manufacturers. We have to deal with other outside cost increases such as increases in minimum wagesQ and social security, and we are going to see major increases in thies-e costs on January 1. In the midst of all these pressures, a retailer tries hard not to let these pressures force him into a spiral of ever-increasing prices.
Retailing is a highly competitive field. You pick up the paper any day and you can see numerous advertisements on any product. It is a highly competitive industry, and no one store can afford to be higher in price than any other store, unless hie is a bona fide ripoff artist and we don't recognize that as the right way to do business.
What we have come to is the conclusion that we are under very intense pressures. We really have little option in the way of cutting out, the fat in a retail operation to hold down the prices.
In the home furnishings industry our net profit after taxes is only 2 or 3 percent of annual sales. There is very little we can do to cut down extra profits.VWe are in a very difficult position.
I think if you were to hold hearings on inflation from the small retailer point of view to find out why that small retailer really can't co-ntribute to the anti-inflation fight you would begin to branch out and find inflationary pressures that are almost generic to our economy, particularly inflationary pressures due to the Government sources suich1 as minimum wages, social security, and other regulations.
I think this approach will jell with another topic you may consider as an agenda item, which is the cost of regulation.
By studying inflation from the small retailer perspective you may g~et to the cost of regulation through the back door.
I hope that was 41/,4 minutes.
M r. CHERIKAsiKY. That was 4 minutes 40 seconds. You owe me 10.
'Bill iRustin would like to speak a few minutes on the White House Conference.

STATEMENT OF WILLIAM RUSTIN, GASTONIA, N.C.
Mr. RusTYN. I am Bill Rustin, from Gastonia, N.C.
I am just curious about what you all think about what is going on ',t these small business conferences. How do you see it happening in the local area?
Mr. CHERKASKY. Have you been to one yet?





52

Mr. Rus'r-. Yes, sir.
Mr. CIERKASKY. What are your comments?
Mr. RUSTIN. Eighty percent of it is lobbying, I think, by small businesses who already have loans and guarantees; 20 percent of it is business input.
Mr. CLEIKASKY. That is an interesting comment. I have no that before.
Ed, do you want to make a comment on this?
Mr. RIcHARD. Yes. The Cleveland Conference, which I t was excellent, had about 200 small business people in attendance. It was on a beautiful Saturday, and that is an amazing turnout.
Frankly, we found just the opposite. We were all very impressed at the input, the specific input that was made by small p who talked about their problems, who came up with some soluti It was a very meaty session.
We were somewhat concerned that it would be cosmetic, and many of us walked away feeling that it really developed some pretty speific inputs.
I personally was much more impressed with it than I expected to be. I don't know what is happening around the country, but we had a very representative turnout. We did not see lobbying for people who had loans. We saw a lot of people who wanted things, but they representing all areas, minority business, women in business, areas, banking.
We had many leading bankers in the community there. We had a lot of opinionmakers there, who were very impressed by the needs of the small businesses.
Mr. CiJERKASKY. Thank you for the comment.
I spoke to about 30 people yesterday at the Small Business Legislative Council Executive Committee board meeting, whateier it was, and one fellow said he had just been to the Cleveland, Ohio, Small Business Conference, and he thought it was a fiasco. I hope that was the same one.
Small businessmen are independent in their thoughts, too.
Mr. RusriN. I am suggesting to you, sir, that with all the 11 businesses represented through these associations, if they would their independent members out it would make the conference t much stronger when it reaches the White House in January, and I am a delegate. For the first 4 or 5 hours of the meeting I attended w never got to speak. This is not criticism, sir, of you, but it is something I wanted to bring up.
There were two sides. One wanted to spend more money, Government money, and the other side wanted to hold down spending. I think it was a good exchange. But, if we don't do a job of getting our members out, it is not going to be as good a program as it should be.
Mr. CiTERK% SKY. Thank you for the comment.
Does anyone have a comment on any of the forums on regional meetinrrs they went to? And do they want to make these points now?
It is a good time to do so.
[No response.]
Mr. CTERKASIKY. I would like to throw the meeting open for another 20 minutes for anybody who has not been called upon to speak who has comments to make.
Yes, sir.





53

STATEMENT OF ROBERT JOHNSON, NATIONAL CABLE TELEVISION ASSOCIATION
Mr. JOHiaNSON. I am Bob Johnson, and I represent the National Cable Television Association.
One concern I would like to bring before the committee is the question of whether or not the committee will get involved in regulation that passes under the guise of protectionism for one business over the other.
I am talking particularly about the competition between cablecasters
and broadcasters.
As most of you know, cable provides a retransmission of broadcast systems, and also program origination.
For the 20 years that we have been regulated by the Federal Communications Commission, it is our feeling that that regulation has been imposed on the cable television industry not to serve the public interest or to encourage competition, but simply to protect the existing broadcasting industry.
While we recognize this may bring you in conflict with a number of other subcommittees who have primary jurisdiction over communications, we in the cable telev iion industry, and most cable operators are small businessmen, this is the kind of issue that is really on the cutting edge of competition, and we feel that competition best serves the public interest.
Our feeling is that regulation should exist only where competition is insufficient to protect the public interest, and this is the kind of regulatory question that we would like the committee to address itself to.
Thank you.
Ma. CHERKASKY. Mr. Ferris, the Chairman of the FCC has stated he is interested in competition, and is moving toward deregulation?
Mr. JoHasoN. He is a zero-based regulator.
The FCC has never had the empirical data to establish the regulation to protect broadcasters from cablecasters. It has been based on speculation and intuitive models.
If the facts demonstrate no need to protect broadcasters, nor the profits of a broadcaster, then the regulations should be designed to protect the public interest. We have not seen that happen in a number of important areas. I will give you one example.
There is a cable operation being built in Arlington County. The cable operator wanted to import distant signals, Channel 2 from Baltimore. There is also a Channel 9, CBS affiliate in Washington. If you are in Arlington. you can get Channel 2 through an antenna. FCC regulations prohibit the importation of that signal on the basis that they want to protect Channel 9. The broadcasters argue that local Channel 9 will suffer in its ability to provide public service to the Washington area. There has never been any empirical evidence or data presented to show that this kind of injury would occur to a broadcacter, and subsequently to the public interest.
The Arlington comp any had to file a waiver, which cost $70.000 in legal fees. to get the FCC to look at the waiver.
It is still being considered by the Commission.
These are the problems that face cable operators all across the country, and we encourage such issues to be placed before the White House Conference.






54

Mr. CIERKASKY. Let mie ask you a wife-beating question.
Would you like to see the FCC abolished, or not?
Mr. JoiiNsoN. We would like to see the FCC take a new look at cable regulations.
We feel there is a role for Federal coordination of cable regulations, because cable regulations and the broadcast and telephone regulations are areas of interstate communications.
I think there has to be some meshing of the various areas.
There is a bill introduced in the House that would change the name and, somewhat, the scope of the Commission. But the regulation should be based upon the empirical data that is necessary to protect the public interest and not based on the history of protecting broadcasters vis-a-vis cable.
Mr. CHEMRKASKY. You ought to run for public office.
Thank you very much.
[The supplemental information of Mr. Johnson follows:]
NATIONAL CABLE TELEVISION ASSOCIATION, PAY CABLE DEPARTMENT, November 15, 1978.
Mr. WILLIAM B. CITERKASKY, Staff Director, Senate Select Committee on Small Business, Wash ington, D.C.
DEAR MR. CITERKASKY: Enclosed for your review is a briefing book prepared by the National Cable Television Association, the principle trade association representing the cable television industry, that summarizes some of the regulatory and legislative concerns of cable operators.
I hope this information will be useful to you in the discussions that will take place at tomorrow's meeting.
I look forward to seeing you at 9:30.
With warm regards,
BoB JOHNSON, Vice President. Enclosure.
TABLE OF CONTENTS I. Introduction:
(1) Definition of cable television.
(2) Cable television as a small business.
(3) Background of Federal regulation. II. Summary of FCC cable regulation:
(1) Signal carriage.
(2) Syndicated exclusivity.
(3) Network nonduplication.
(4) Channel capacity.
(5) Access.
(6) Forms and reports.
(7) Technical standards.
III. Pending FCC regulatory action affecting cable television:
(1) FCC economic inquiry into cable/broadcast competition.
(2) FCC Telco/Cable cross-ownership rulemaking. IV. Congressional legislation affecting cable television:
(1) Rewrite of the 1934 communications act.
(2) Federal funding for Broadband Communication Systems.
INTRODUCTION
C,7 e television (a working definition)
The Federal Communications Commission (FCC) defines a cable television system as any non-broadcast facility that distributes signals of television broad.st st:itions Systems with fewer than 1,000 subscribers are subject to a reduced level of FCC regulation. Cable operators as small businessmen
There are 4.000 cable systems serving about 14.5 million Americans in nearly 9,000 communities. Most systems serve less than 1,500 subscribers and 3,300 or







55

85 percent of all CATY systems serve fewer than 5,000 subscribers. On an average monthly subscriber fee of $7, most cable systems generate about $126,000 in annual receipts. It Should be pointed out that the SBA defines a small business engaged in cable television services as one generating less than 3 million dollars in annual receipts.
Background of Federal regulation of cable television
The cable television industry is regulated by the Federal Communications Commission through a series of complex and confusing rules. This regulation has been based on cable's supposed impact on over-the-air broadcasting. This "impact" has been the assumption that cable television would adversely affect broadcast television. The result of this FCC regulatory policy has been to shelter broadcasting instead of encouraging competition between broadcasters and cable.
SUMMARY OF FCC CABLE REGULATIONS
1. Signal carriage.-FCC rules limit the number of television broadcast signals which may be carried by a cable television system. The FCC assumed, without any supporting evidence, that the importation of "distant" TV signals into a community would injure 'the local broadcaster.
NOTA Comiment: Cable television has the technological capacity to provide multiple channels of entertainment and information Yet, FCC regulations artifically restrict allowable signals to handful. These regulatory barriers deny service to the public and severely hamper the growth of the developing cable television industry
2 Syndicaie exltsivity.-In the top 50 markets FCC rules prohibit cable systems from importing any syndicated programming for one year from the date it is first sold anywhere in the country. In addition, the cable system may not import any syndicated programs which are under contract to a local TV
-station for the life of that contract.
NCTA comment: These complex regulations were -adopted as a copyright substitute and are totally unjustifiable now that cable television has been included in the copyright law.
3. Network nonduplication.-Cable systems must black out all network programs on an imported station whenever those programs are broadcast simultaneously by a "local" top 100 market station within 35 miles of the cable system.
NOTA comment: Once again, competition is being thwarted by FCC regulation in order to perpetuate a broadcast monopoly and with no factual basis to support the alleged harm to the local station.
4. Channel capacity.-All cable television systems with 3500 or more subscribers commencing operations in a major television market 9fter March 31, 1972, (or commencing operations outside of a major television market after March 31, 1.977) must have 20 channel capacity and two-way capability. Older systems with at least 3500 subscribers must meet this requirement by June 21, 1986.
5. Access.-Cable television systems with 3500 or more subscribers must provide four access channels (public, educational, local government, and leased) if the system has sufficient activated capability and demand for full time use has been made. Systems with insufficient activated channel capacity to provide for Channels must dedicate at least one composite access channel if technically possible, and must expand access availability to the limits of technical capacity upon sufficient demand. Furthermore, such systems must make equipment available for local production and presentation of cablecast programs. Access channels must be made available On a first-come, nondiscriminatory basis. Lottery information and -obscene or indecent matter is prohibited.
6. Forms and reports.-Cable television systems with over 3500 subscribers must submit the following reports to the FCC eachz year:
A. Form 325--Annual Report of Cable TV Systems.
B. Form 326-Cable TV Annual Financial Report.
0. Form 326A-Computation of Cable TV Annual Fee (suspended pending litigation).
D. Form 395-Annual Employment Report (EEO).
D. Annual Report of Subscriber Complaints.
NCTA comment: Cable operators are faced with an incredible paper work burden, which is compounded by the fact that many operators serve several "communities" from one system, hence substantially identical forms must be filed for each community served.
7. Technical standards.-Cable television operators are required to meet rigid federal technical standards regarding signal strength, interference, leakage, noise,






56

etc. Annual performance tests must be conducted to insure that these standards are complied with.
1he Commission has preempted the area of technical performance requireent to prevent establishment of non-uniform requirements which might hinder sstern interconnect ability and impede the developments and marketing of new cable services and equipment.
dIistc
PENDING FCO REGULATORY ACTIONS AFFECTING CABLE TELEVISION
1. FCC economic inquiry into broadoast/cable coin petition.-The inquiry into the economic relationship between broadcasting and cable television was instituted by the Commission to gather the Information necessary for an ide ent reassessment of the regulation of cable television.
Attached in this section is a summary of the NCTA's response to the FCC Economic Inquiry.
2. FCC Telephone/Cable Crossownership Rulemaking.-The FCC is re-examining its policy regarding ownership and operation of broadband facilities by loca telephone companies. The purpose of the rulemaking is to determine whether the FCC should change its present policy which requires telephone companies seeking to operate broadband facilities In their service area to apply for a "waiver" of present FCC rules.
Attached In this section Is a summary of NCTA's response to the FCC Telephone/Cable Crossownership Rulemaking. t

SUMMARY OF NCTA COMMENTS IN THE ECONOMIC INQUIRY
This Inquiry Into the economic relationship between broadcasting and cable television was instituted by the Commission in order to gather the information necessary for an independent reassessment of the regulation of cable television.' The primary Commission interest in this inquiry was noted to be a determination of the impact of cable television on local broadcast station operation. The Corn mission admits that previous regulation has been based on an "intuitive model" of cable's impact, which assumed, without evidence, that the increased viewing options available on cable would cause a decline in local station audience, a d corresponding loss of revenue and an eventual decline in local station service, particularly local programming. The information submitted by the National r Cable Television Association in these comments demonstrates that this "Intuitive model" is a totally inaccurate representation of the relationship between cable and broadcasting.
The research submitted by NCTA in these comments provides a definitive. substantive statement on the relationship of cable television to broadcasting and the degree to which federal intervention is legitimate.
NCTA submits that:
(1) Restriction of cable television development through regulation of signal carriage is completely unwarranted. All regulations governing the number and type of television signals carried on cable television systems should be eliminated.
(2) There is no evidence that restriction on cable television is necessary to protect the broadcast or programming sectors or the public interest. Research undertaken by NCTA completely refutes the Commission's "intuitive model," showing that:
(a) Audience loss due to cable is minimal, averaging less than 8 percent.
(b) UHF stations, particularly independents, benefit through the increased
audience levels resulting from cable.
(c) The assumption of a direct one-to-one relationship between audience
and revenue is completely invalid.
(d) Local broadcast programming is the least vulnerable to any assumed
impact from cable since it delivers higher revenue per viewer and per
minute compared to other programs.
(e) Cable competition will, contrary to the assumptions of the state
"intuitive model," have a positive impact on broadcasting by forcing them
to make a greater effort to serve the public.
(3) Cable development, particularly in the major (Top 100) television markets. has been seriously inhibited by the Commission's regulatory program. Cable system development In the major television markets' during the years 1972-1977 accounts for anly 12 percent of total industry growth during that period. 'Notice of Inquiry In Docket No. 21284, FCC 2d -, FCC 77-407, para. 2. (hereInafter Inquiry).
2It should be noted that the 100 major television markets account for 86% of all tele. vision households.






57

(4) Relaxation or elimination of restriction of signal importation would provide (an environment conducive to cable development, both in new markets and through expansion in existing markets. This would result in a diversity of choice in new markets and would enhance the public interest. New major market cable systems must achieve a 50 percent subscriber penetration rate in order to ensure financial viability. Mature systems in major markets have achieve nya average penetration rate of slightly over 30 percent carrying the full. quota of distant signals authorized under current FCC regulations.
In view of these findings, NCTA submits that elimination of all regulations serving to specify the number and type of signals (or programs) carried by cable television systems is warranted. Regulation must be based on hard economic evidence that absent such restriction, the public would be harmed. No such evidence exists and, as a result, current regulation of cable television harms broader public interest considerations by unnecessarily restricting freedom of choice.
BEFORE THE FEDERAL COMMUNICATIONS COMMISSION, WASHINGTON, D.C.
In the matter of revision of the processing policies for waivers of the Telephone
Compny-ableTelvisin "ros-ownership", Sections 63.54 and 64.61 of the Commission's Rules and Regulations-CC Docket No. 78-219.
In re Position of National Telephone Cooperative Association for a General "Waiver in Rural Areas of the Telephone Company-Cable Television Cross-ownership Rules, Sections 63.54 and 64.,601 of the Commission's Rules and Regulations-File No. W-602-58.
To the Commission:
COMMENTS OF THE NATIONAL CABLE TELEVISION ASSOCIATION
The National Cable Television Association hereby submits its comments on the above captioned Clarilcation and Notice of Proposed Rulemaking regarding the telephone company-cable television "cross-wnership rules",, released August 15, 1978.
I. Introduction and summary of position
NOTA is the principal trade association representing the cable television industry. We commented previously on the National Telephone Cooperative Association's original petition for a general waiver of the telco-cable cross-ownership rules and will, at this time, comment. on the Commission 's response to that position.
Much attention has focused on the question of how to expand telecommunications facilities and services in rural areas. Cable television, with its broadband ability to provide services ranging from specialized health and educational programming to transmission of broadcast signals, is the only single vehicle able to meet the diverse communications demands of rural areas.
The question before the Commission at this time concerns ownership and operation of broadband facilities by local telephone companies. In 1970 the FCC prohibited telephone companies from constructing and programming cable television systems in their service area.' 'Waiver process was established to consider special cases where cable service would not be possible except through a telco operated system. The basis for the Commission's action was the history of abusive and predatory conduct by the telephone industry in its past involvement in broadband service.
The National Telephone Cooperative Association (NTCA) argued that the waiver process was unduly burdensome for small, rural telephone companies and that the public would be well served by a general waiver of the rules for areas with density of under 30 homes per mile. NTCA argued that these areas were not feasible for independent cable systems, and that telco broadband facilities should therefore be permitted without a waiver.
The National Cable Television Assoication (NOCTA) is deeply concerned about the ramifications of telco entry into the broadband market. While we believe that easier access to certain very low density areas might be warranted, these areas must be very tightly defined and limited to those cases where a competitive market situation truly could not exist.

'Telephone companies are, however, permitted to construct broadband facilities and lease capacity to independent nonaffiliated companies in their service areas. Final Report and Order in Docket NO. 18409, 21 FCC 2d 307 (1970).






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NCTA strongly believes that a federal policy which promotes a competitive marketplace will result in the widest possible range of services to rural area NCTA has reviewed the various options for improved rural communications service and conducted extensive research to determine the most effective means of insuring maximum service while protecting the competitive nature of the market.
As a general policy, telephone companies or cooperatives must continue to be prohibited from extending their monopoly power into the provision of nonmonopoly services. There is no evidence that the current FCC policy limiting teleo cross-ownership of cable systems is contrary to the public interest or has deterred cable development in rural areas. To the contrary, the distortion of the competitive market by monopolistic telephone companies which provi the basis for the original cross-ownership han continues to be a valid concern and must be fully considered in current deliberations, as well as the effect of the present waiver procedure on telco provision of broadband service. Analysis of the waiver petitions submitted since the inception of the cross-ownership ban demonstrates that, contrary to NTCA's contention, waivers are processed relatively quickly, burdensome showings are not required, and a liberal grant policy is in effect.
NCTA submits that telephone companies wishing to construct and operate broadband facilities must be limited to low density areas not feasible for independent cable development and receiving inadequate television service. Except in the lowest density situations, the telco must bear the burden of proving that no alternative means of service is available. NCTA recommends the following tiered approach to cross-ownership waiver petitions:
(1) Telco's seeking a waiver to construct and operate broadband facilities in areas with up to six homes per mile should be authorized to do so without an extensive waiver process.
(2) Telcos seeking a waiver to construct and operate broadband failties in areas with a density of 6-20 homes per mile must demonstrate that their entry into the provision of broadband service is necessary to insure its availability.
(3) Waiver for telco construction and operation of broadband facilities inareas with over 20 homes per mile should be.strictly 'limited, with the tilco bearing a considerable burden of proving that no alternative service is available.
NCTA believes that its tiered approach to the cross-ownership question meets the Commission's goal of "encouraging competition In broadband transmission facilities, yet relieving telephone companies of the burden of preparing expensive and unnecessary showings".2 Certain additonal provisions must, however, be included in any modification of the cross-ownership restrictions in order to protect the competitive market wherever possible. These provisions include:
(1) Limiting the size of the community to be served and the size of the parent company of the telco requesting cross-ownership waiver;
(2) establishing a process for divestiture of either broadband facilities or program functions as a possible course of action to be considered when population or density exceeds recommended ceilings or the waverede" telco is acquired by a parent of over one million telephone subscribers;
(3) limiting the reduced showing waivers discussed herein to telephone c panies planning to offer services in areas! not currently receiving adequate t vision service
(4) processing cross-ownership waivers expeditiously, with a liberal grant policy for unopposed waivers to serve areas with under 20 homes per mile;
(5) relaxation of FCC cable regulations in low density rural areas; and
(6) requirements for telcos holding cross-ownership waivers to file annual reports with the Commission, similar to the FCC Forms 325 and 326 filed by cable operators.
NCTA believes that adoption of the recommendations offered here will result in substantial increases in the level of communications service available in rural areas. The policies suggested attempt to remove those regulatory and economic barriers which have deterred cable growth in rural areas. By limiting telco construction and operation of broadband facilities to those areas where construction of a stand-alone cable system would not be feasible, the competitive marketplace, with its vastly superior service alternatives, is protected.

2 Clarifleation and Notice of Proposed Rulemaking, FCC 78-516, Aug. 15, 1978, para. 27, (hereafter Notice).






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PENDING CONGRESSIONAL LEGISLATION AFFECTING CABLE TELEVISION

1. The rewrite of the 1934 Communications Act.-On June 7, 1978, House
Communications Subcommittee Chairman, Lionel Van Deerlin, (D-Calif.) and lie former ranking Minority Member, Louis Frey (R-Fla.), introduced the Comnmunications Act of 1978. (H.R. 13015)
to Hearings were held on the legislation by the Subcommittee during 1978. Mr.
Van Deerlin has stated that a revised bill will be reintroduced in the 96thi
Congress.
The Chairman of the Senate Subcommittee on Communications, Ernest F.
lt Holliigs (D-S.C.) has also announced plans to introduce legislation to amendn"
Lp the 1934 Communications Act. Senator Hollings is expected to introduce his 1A bill at the beginning of the 96th Congress.
ho Enclosed in this section is a brochure titled "A Review of Cable Television and
Ofthe Communications Act of 1978" that has been prepared by the NCTA. It provn~ ides the NCTA's response to H.R. 13015 and sets forth the cable industry's
objective in any legislation designed to up-date the Communications Act of 1934.
2. Federal funding for Broadband Communications Systemns.-Congress and
-the Federal Communications Commission are increasingly concerned with exile panding the telecommunications services available to rural areas underserved
1 by conventional broadcast television. The construction of rural cable television 'lt systems is one obvious solution, and several members of Congress have proposed
legislation which would extend federal low-interest, long-term utility construction loan programs to include cable television construction.
In 1962 Congress amended the Rural Electrification Act to exclude funding
for the: construction of commercial cable TV facilities, taking specific action, to
-naddress the potential for monopolistic abuses of telephone control over cable TV
service. It was clear from the beginning of the rural telephone program that Congress specifically intended that telephone companies keep' out of non-teleryphone business.
On February 6, 1978, a bill, H.R. 10769 was introduced by Representative Ed
Jones and on April 24, a companion measure, S. 3003,,was introduced, by Senator John Melcher (D-MT) 'that proposed to provide, low interest REA loans to, telephone companies to construct cable television and other broadband services in
rural areas.
On another legislative front, the Communications Act of 1978 proposed the esyetablishment of a National Telecommunications Agency, as part of the Executive beBranch, which would establish a program for the provision of low-interest loans
for rural telecommunications facilities, services and systems.
Grants, loans, and loan guarantees for the construction of broadband facilities vn in rural areas have, at one time or another, been offered through such federal
agencies as Rural Electrification Administration, Farm Homes Administration, or Small Business Administration, and the Economic Development Administration
and Office of Minority Business Enterprises of the Dep~artment of Commerce.
ed NCTA comment: As the Jones/Melcher Bills are presently structured, menibers of the, cable -television industry would be specifically excluded from eligibility for these federally assisted loans. Additionally, the bills would also provide rural telephone companies an unfair and anti-competitive advantage. over cable firms which must compete for their funds in the investment market at
at higher rates. Such legislation is also contrary to the intent of Congress in its iniitial authorization of federal assistance to telephone companies, and is in conflict with the current federal communications policy which prohibits telcos from
owning cable TV outlets.
NCTA has proposed that:
Federal funding should be made available to independent (non-telco) cable
ut companies desiring to expand existing systems or begin new service in rural
areas,
Federal support for telco construction and operation of broadband facilities
must be limited to those telephone companies holding FCC cross-ownership
waivers and subject to the same controls included in the waiver,
Cross-ownership waiver should be awarded on a case-by-case basis and limited
to areas with under 20 homes per mile. Except for very low density (under 61 homes per mile) situations, telcos requiring a waiver must demonstrate the
inavailability of alternate service options,
Federal funding for telco, construction of broadband facilities to be leased
to independent programmers should be limited to rural areas with a density of
less than 20 homes per mile, and






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The various federal funding programs should be coordinated through a lead agency and be made available to all qualified parties consistent with the obj tive of achieving the broadest range of communication service through a com petitive market. Safeguards must be in place to insure equitable treatment of industries.
Tile objective of any funding program should be the promotion of m telecommunications service and presentation of a competitive market with an emphasis on service rather than any single technology or industry.

A REVIEW OF CABLE TELEVISION AND THE COMMUNICATION ACT 0F 19
ISSUES AND COMMENTS
Introduction
On June 7, 1978, House Communications Subcommittee Chairman Van
Deerlin (D-Calif), and ranking Minority Member Louis Frey (R-Fla), iutmduced the Communications Act of 1978 (HR 13015).
This legislation is intended to replace the 1934 Communications Act, the Federal law under which the Federal Communications Commission has been regulating telephone, television, radio and other communications Cable television is not mentioned in the 1934 Act for the simple reason did not exist when the Act was written. Nevertheless, cable television has regulated by the FCC as "ancillary to broadcasting," and, as a result, subjected to regulation designed to limit consumer choice and protect tel broadcasters from competition.
NCTA supports the efforts of Congressmen Van Deerlin and Frey to updte national communications policy. However, there are provisions wi e
current legislation that demand careful review. The following topics related to the new Communications Act are of great significance to the future of cable television:
A Federal Purpose for Cable Television;
Federal/State/Local Regulation of Cable Television;
Telephone/Cable Television Cross-Ownerships;
Separate Subsidiaries-Cross Subsidization; and
Prohibiting Cable Operators from Programming Their Systems.
The majority of quotations in this overview are from the Hearings o 13015 conducted by the House Communications Subcommittee. It is the Subcommittee's intent to re-draft this legislation after evaluating infortion presented at these hearings, and introduce new legislation, after the first of year.
For further, more detailed information on the cable television industry's response to this legislation, contact NCTA's Government Relations De

A FEDERAL PURPOSE FOR CABLE TELEVISION
Background
1R 13015 (Section 102(b)), provides that the new CommunicationsR tory Commission (CRC) will not have jurisdiction over "any intrastate communications facility" which does not utilize the electromagnetic spctum in the direct distribution of its service to consumers. As a result, there is no Federal recognition or role for cable television, while the communica entities with which cable competes are dealt with on the Federal level.
NOTA Position
Cable television currently provides service to one out of every five ho holds in the United States. It is projected that by 1981, 30 percent of all households will be served by cable television.
Today, cable television systems are interconnected by satellite and terrestrial microwave in order to provide the public multiple program options from national distributors. In fact, the cable television industry is now the nation's leading user of domestic communications satellites with nearly 800e stations in use or nearing completion.
Cable television is an interstate, national medium which also has a unique capability of serving local communities. As such, a baseline Federal policy should be established. This Federal purpose should provide a coordinated na p)licy. The absence of such a Federal purpose would inevitably lead to coiflicting non-Federal regulations based on parochial, not national, interests.







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W,1hat Others Have Said
Charles D. Ferris, Chairman, Federal Communications Commission: "If cable
television provides new services for the public it could have a significant impact on national telecommunications policies . HR 13015 would preclude Ira Federal cable regulation, presumably in order to stimulate new services, but the
lh bil would not pre-empt non-Federal cable regulation . .I wonder, however,
if it is consistent for the bill to endorse regulation by the marketplace and to de-emphiasize Commission regulation, while ignoring potential state regulation."-July 18, 1978.
James Quello, FCC Commissioner: "It is my frank opinion that total abdication of jurisdiction over cable television may be ill-advised .. it seems to me that rather than deleting all Federal jurisdiction over cable television, the bill might well provide for assertion of jurisdiction in specified areas or under
certain circumstances"-July 18, 1978.
Abbott Washburn, FCC Commissioner: "I also share his doubts (Ferris)
about the wisdom of removing all Federal regulation from cable television. This could end up subjecting the cable television industry to a crazy quilt of state
and local regulations. "-July 18, 1978.
it I Dean Burch, Former FCC Chairman: "I do not agree that cable is not part
of the national scheme. I think cable is an important part of our telecommunications system."-July 19, 1978.
Fred Ford, Former FCC Chairman: "It is my view that cable television is
engag-ed in interstate commerce under the provision of this bill despite the
te language of Section 102 (b)."
I have a very strong feeling that in order to have a unified national system to Ithe Congress should exercise its prerogative to regulate this national business."e July 119, 1978.
Sister Angela Ann Zukowski, Communications Office of the Archdiocese of
Cincinnati: "We support the concerns raised by many over the neglect of cable TV in the current draft of the proposed Communications Act. The prediction is that cable television will someday revolutionize communications and television ,is we know it today. In their rush to Federal deregulation, the drafters of this bill should have paid much closer attention to this rapidly growing industry."R September 15, 1978.

Lin FEDERAL/STATE/LOCA&L REGULATION OF CABLE TELEVISION
ie Background
a Section 102(b) of HI.R. 13015 prohibits Federal regulation or oversight of
cabl1e television Additionally, the bill establishes no guidelines for cable regulation at the state or local level, nor does it limit the number of levels of government which may regulate or the manner of regulation that may exist at the
non-Federal level.
Y CTA Position
HR 13015 will generate the same kind of restrictive regulation at the local
level that it abolishes at the Federal level.
0 The bill would permit a state or local governing body to repeal the regulatory
Mistakes which have previously been made in Washington and are now recognized as ill-conceived and anti-competitive. Under H.R. 13015, non-Federal governments would be allowed to develop restrictive rules for the purpose of retarding cable service in order to protect broadcasters from competition.
NCTA has presented to the Communications Subcommittee documented examiples of states and/or local communities that have restricted either cable
entry or particular services, beclause of cable-competitor pressure.
Current Federal standards have been the major barrier preventing burdensomne mmn-Federal regulation. Even at present, cable television is; subject to threetier regulation-local, state and Federal. There are issues of national policy that warrant Federal cable television guidelines. Likewise, there is a role for nonie Federal oversight-either at the state or local level, but not both on identical
issues.
If the Congress determines that a national communications medium such
Las cable television should be, deregulated at the Federal level, the Congress -should also assure that a competitive environment free of unnecessary regulation
also exists at -the non-Federal level.
What Others Have Said
Newton~ Minow, Former FCC Chairman: "In the case of cable, that is a place
where the technology is changing so fast that I don't see why we would want
40-287-79---5






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to transfer that out to 50 states, each having its own rules, which I thinkwol tend to impede a very rapidly changing technological advauce."-Jiuy 19, 198 Abbott Washburn, FCC Commissioner: "I think it subjects the cable tlvso industry to kind of a never-never land of perhaps even as many as 50dffrn state sets of regulations. There are elements that need regulation atthFera level"-July 18, 1978.
Edward Hayes, National Conference of Black Lawyers: I repetfll suggest that in its effort to correct the past difficulty, the new Actgostofr Total Federal deregulation such as that contemplated in HR 131Ianol cause chaos in the cable industry and not further the publics need for tesrie which could be provided "-July 20,1978. Rep. John Murphy, D-New York: "There are those of us who fao the development of cable, because it can provide the public with a muiplctyo channels for a wide variety of programs and services ... but if nationlitr connection is to become a reality, a Federal administrative agency must set the technical standards for compatibility among systems to insure thatcalprgramming can flow through the nation."-July 27, 1978.
Jack Corman, National Rural Center: "I have some questions, but no ases
about whether Federal deregulation, particularly of cable television, ma nt result, perversely, in more regulation and less diversity. It is posbl ta h regulatory vacuum will be filled by a bevy of State and local rules analoust the situationi produced when Title XX of the Social Security Act simlfe 11ia services delivery. "-July 20.1978.
Dean Burch, Former FCC Chairman: "I am not suggesting.. that the Comission should have detailed regulatory power over cable, but I dothnter should be a point at which the Commission, through the Congress, shudgvte Commission authority to pre-empt certain of these areas f rom the Statan local government, if State and local government interferes with the national scheme."-July 19, 1978.

TELEPHONE/CABLE TELEVISION CROSS-OWNERSHIp
Background
Section 332 of HR 13015 permits any telephone common carrier to created separate subsidiary to operate any service which the CRC determines to b "telecommunications" including cable television. Thus, all current provisions of law designed to insure fair competition by the telephone company are repealed, including the Federal Communications Commission's ban on cable/telephone cross-ownership, arnd the Justice Department's 1956 Consent Decree, in which AT&T agreed not to engage in non-common carrier communications services such as cable television.
NCTA Po8ition
Empirical evidence was presented at the hearings on HR 13015 demonstrating that entry of the telephone company into the cable business means the edo competition and the inequitable and inefficient expansion of a new monopl service. The FCC in 1970 banned telephone. companies from provdiycal television services in areas where they maintained telephone operations because of a documented record of telephone company anticompetitive conduct.
Additionally, it has been demonstrated in a number of administrative andl legislative proceedings that marketplace forces cannot function where one industry (telephone) has a total monopoly over the gateway (poles) to which another industry (cable television) must gain entry in order to do buies HR 13015 repeals the 1978 pole attachment law which provides a Federal or State forum for resolution of pole attachment disputes as a means of preserving competition in telecommunciations services.
Tlie result of letting the telephone companies Into the cable television buines
would be simple: telephone companies would be able to cross-subsidize from their monopoly services into cable television, making It impossible for indepedn cable companies to compete and survive, thus resulting in an expansion of the telephone monopoly.
The cable television industry is not seeking protection from any technoloy
If telephone carriers, can provide a "one-wire" communications capability with fiber optics, coaxial cable or any other facility that is more technically ;efcin for delivering video services than cable television, there is nothing incurn law to prevent them from doing so, nor does the cable industry seek limitations on their right to do so. It is essential, however, that the telephone Monopoly not be expanded into the competitive area of programming video servcs






63

dIt is one thing to allow the telephone monopoly to build the communications
facility with the capability of serving the Nation's telecommunications needs of the future, it is yet another to allow this everexpanding monopoly to control
at the programming over this facility.
What Others Have Said
IS John Shenefield, Assistant Attorney General for Antitrust, U.S. Department
of Justice: "In the absence of some Federal regulation, and in the absence of 5 the now existing Consent. Decree .. one can't simply allow the telephone cornpany to move into new areas without at least satisfying an assumption that the telephone company wouldn't automatically take over, in effect, all of the
cable television business."
01 "It does seem to me that you cannot blindly assume that the rules that apply
across industries of an average sort in this country will inevitably work out when you are dealing with a corporation the size of AT&T against the kind of
regulatory background that we have seen over the past year."-July 19, 1978.
'The IFiCC, after reviewing the evidence, concluded that telephone cornpanies should be limited in their franchise areas to providing only the hard01 ware for lease to CATV operators. The Antitrust Division strongly supported that rule, and I haven't seen any evidence that this limitation on telephone to company involvement in CATV no longer makes sense. "-August 3, 1978. at Rep. John Murphy, D-New York: "Precisely how far should we permit AT&T
to invade other and competitive fields? It is a doubly important question before us, because this bill would authorize AT&T, through a separate entity, to eengage in telecommunications activities and in activities 'incidental to teleecommunications.' This is a very stretchable authority. Cable would clearly be d open to AT&T, as would the present shadowy area dividing communications tand data processing, but how far should AT&T be unleashed? It seems to me
the bill as written is vague. "-July 27, 1978.
Howard Gan, Cable Television Information Center, The Urban Institute:
"If you are letting the telephone company into this business, you have to seriously consider the limitations on what the phone company can do and what a it can serve, because the cable industry may talk from its own vested interest
)e point of view in terms of an 'elephant dancing with a flea,' but the fact is, the )f phone company is a giant."9
i, "If you don't provide some limitation, some restrictions or some oversight to le where they can serve, you may very well have a one-wired Nation, which in some respects could conceivably be good, but I think the Orwellian implications of this should be considered by the Subcommittee."-July 20, 1978.
Sister Angela Ann Zukowski, Communications Office of the Archdiocese of
Cincinnati: "We believe there is a serious need to clearly define the rights of the suppliers of programming (cable TV) and the suppliers of transmission g facilities ...We recognize AT&T and others are already super-power Industries. Such super powers should not be permitted to monopolize potentially coin[5 petitive communication facilities by serving as supplies of both pro graniming
eand transmission' facilities. We would therefore suggest that regulation be established to protect the rights of the growing local cable industry in this
dregard."'-September 15,1978.
t SEPARATE SUBSIDIARIES/CROSS SUBSIDIZATION
hi Back ground
i. As previously discussed, Section 332 of HR 13015 allows any common carrier
r to provide, thru a' separate subsidiary, any service which the Communications
g Regulatory Commission determines to be telecommunications, or "Incidental to
telecommunications." This provision opens the door to the telephone company
Using the monopoly profits from its switched voice service to subsidize new entries
into competitive services until all competition is eliminated.
IWTA Position
The cable television industry has dealt with the telephone company's "separate
subsidiaries" for 20 years, and knows that the creation of a separate subsidiary
ii does not prevent unfair practices. The Inherent power of the parent monopoly is
passed on to the subsidiary, making fair competition impossible.
't The Justice Department brought suit against AT&T because it was using its
monopoly position in voice communications as the basis for squelching comnpetition in other non-common. carrier services. The 1956 Consent Decree, which forbids AT&T from offering non-common carrier services, was the result of that






64

suit. Even today, the Justice Department's Antitrust Division has a suit AT&T for alleged anticompetitive practices, and there are numerous civii currently pending. There is no reason to believe that the telephone mon iot return to its abusive anti-competitive practices if safeguards suh at Consent Decree are eliminated.
Additionally, the threat of this giant corporation using revenues obtained from monopoly services to cross-subsidize other, competitive telecom ices is real. The telephone company argues that a uniform sy of will protect against cross-subsidization. However, it ha, been dem this is a meaningless safeguard for the marketplace.
The cable television industry is not alone in realizing the dangers of a the telephone company into all other areas of telecommunications the following remarks by other industry and public policy representatives. What Other8 Have Said
John Shenefield, Asst. Attorney General, Antitrust Div., U.S. Depa Justice: "Essentially, we allege that AT&T currently controls too many straec bhottlenecks,' and has used them tactically in combination to eliminate petition unlawfully. Thus, for example, AT&T has maintained its equ t monopoly by denying firms other than Western Electric a fair chance to sel the 80 percent of the potential market AT&T and its operating companies Similarly, AT&T has successfully blocked competition in long-distance ma by denying competitors access to the 80 percent of local exchange facilities controls. And it has sought to block potentially competitive local distribution systems including cable television and mobile radio by denying them to necessary local facilities or the national intercity network AT&T control"August 3, 1978.
Walter Hinchman, Former Chief, FCC Common Carrier Bureau: "I am itually convinced, from my various involvements over the decade, that the (Bel) s system is largely beyond the effective reach of both Federal and State regulation and may therefore be impervious to most attempts to competition as well, over the long haul."-May 15, 1978.
Charles Ferris, Chairman, Federal Communications Commission: "These nearmonopolies and the opportunities afforded to AT&T for anti-competitive conduct have created a variety of new problems which the Commission has addressed using the tools available under the 1934 Act. These problems will continue to have to be addressed since the bill, even with its emphasis- on competition, is not likely to have any immediate impact on AT&T's existing market power."-August 9, 1978.
Joseph Fogarty, FCC Commissioner: "When an industry is dominated by one firmn which owns the vast bulk of all facilities used for telecommunications transmission, the marketplace forces may not operate as economic theory teaches us they should. AT&T's own tariff data filed at the FCC admit this. If AT&T anfI another carrier offer similar services at similar rates, AT&T will get 100 percent of the business, according to its own figures. Only when the diferential in rates exceeds 10 percent will the competitor begin to attain a substantial market."
"Without retention of extensive regulatory control over rates and practices. it is inconceivable that companies of such disparate size can compete on an equal footing. The possibilities for cross-subsidization are simply too great."
"... the Bell System is a very efficient. well-run organization which provides excellent telephone service to this country. However. competition has always been antithetical to AT&T's philosophy."-Aug-ust 9, 1978.
Daniel Grove, Telecommunications Association: "Another issue of importance to users is cross-subsidization, an issue which, we believe, the Congress would confront more squarely. So long as a carrier is providing both competitive and niionmpetitive services, the possibility is real for a carrier to subsidize -l on comlpetitive services with income earned from services against which no competition exists. Even the threat of such cross-subsidy undercuts the growth of co1 etitive marketplace."-August 10, 1978.
L. C. Whitney, National Data Corporation: "It appears likely that the end
result will be that Section 332 will unshackle a giant in the belief that co ition is the panacea. This will be the result in spite of antitrust laws or in spite of the 1956 Consent Decree, in spite of the history of practices at least questioned enough for the Justice Department to again be involved in a major antitrust action against AT&T, in spite of the FCC's years of frustrating effort to have






65

legal tariffs filed, in spite of the statements made by the Chief of the Common Carrier Bureau to the effect that they had lost effective regulatory control of AT&T. I see this section opening the floodgates for AT&T to enter the areas of4' data processing, computer product lines, and other such areas previously prohibited, entering not as a true competitor, but unregulated monopoly. "-August 10, 1978.
Orville Wright, Ad Hoc Committee for Competitive Telecommunications (ACCT) : "Studies have documented that AT&T, for instance, has not only the opportunity to cross-subsidize its competitive offerings with revenue derived from monopoly service customers, but indeed, that it has strong incentives to do so."-August 10, 1978.
Fred S. Lafer, Association of Data Processing Service Organizations: "ADAPSO's concerns with this provision (Section 332) are many. To begin with, this section appears to grant carriers blank immunity from the antitrust laws. If enacted, Section 332 would surely have an adverse impact on competition. Rather than compete, carriers could simply acquire their competitors . Conspicuously absent from this section are any provisions which would assure that the competition offered by carriers and their affiliates is not supported by monopoly power and resources or by control over essential communications services."August 1, 1978.
Vico Henriques, President, Computer & Business Equipment Ma nufa ctuirers Association: "The consensus is that accounting is not sufficient in and of itself. The accounting system that is in place has not provided, from its inception, adequate safeguards or even measures the possibility of cross-subsidy."-August 1, 1978.

PROHIBITING CABLE OPERATORS FROM PROGRAMMING THEIR, SYSTEMS
Background
AIlthough HR 13015 is silent on the issue, of divorcing the owner of the caAble facility from the programming aspects (known as "Iseparations"), there are those who propose such a measure if cable television is to be considered as a national medium and included in a redraft of HR 13015. IVOTA Position
A policy, separating cable hardware from software should not be implemented during the developmental stages of cable television. The keys to the development of cable television are the wiring of additional communities and the provision of new and diversified services. Outside program suppliers have been unwilling or unable to provide this program diversity for cable television. Thus, cable ,operators hatve been forced to enter into the programming, business themselves. Artificial restraints placed on the cable industry's ability to finance and implement such efforts would only serve to hinder such services being provided to the public.
It may be suggested that the cable industry's position in favor of keeping the telephone company out of communications software is inconsistent with the position that the cable industry should offer both hardware and software. As explained previously, if the cable industry does not involve itself in programming, then there is no new programming. In addition, there is no reason to believe that the regulatory policy applicable to the giant telephone company Should be imposed on the comparatively small. cable television industry. There is a proven record of telephone company anticompetitive abuses, there is no similar record on the part of the cable industry.
-One alternative, some suggest, is to implement separations "within ten years or so." Such a policy mandated without a demonstrated need is yet another example of regulation for the far distant future, without any basis in present day needs, problems or facts-it would be "regulation on theory."
Congress should be extremely wary of restricting the normal flexibility of the marketplace at a time when cable technology is changing so rapidly.

WHAT OTHERS HAVE SAID
John Shenefield, Assist. Attorney General, Antitrust Division, U.S. Department of Justice: "I suppose one might begin to think about the issue (of c40ble concentration and separations). at least in the present framework as one in which you have control over one possible set of communications options, but the viewer has a range of possibilities that he hos Pecess. to ... given present status of cable





66
television, I wouldn't feel strongly about it one way or the other."-Augutl 3, 1978.
Henry Geller, Asst. Secretary, U.S. Dept. of Commerce, National Te m cations & Information Agency: "At one point in the Staff Report we pr (separations) 7 years after enactment of that particular proposed I think all such figures are arbitrary and that you really have to allow to the CRC or the FCC to decide when. It may be that there is never a sity for it... it would be a judgment that would have to be made on the August 1, 1978.
Mr. CmIIXASKY. Is there a comment back there?
STATEMENT OF TOM WINNING, OF BISON & W
Mr. IVENNING. I am Tom Wenning, partner in the law firm of B & Wenning. I am here representing two trade associations in the industv. One is the National- Food Brokers Association (N, representing independent local sales agents for manufacturers of oroery, and related products. Mr. Mark Singer, president, sent a letter earlier.
Ono primary concern that NFBA would like to urge you to ta look at, and one of the gentlemen from the Homewares Assoii mentioned earlier, that is inflation in general, and in particula the increased burden of the social security taxes are doing to small business employers and employees.
As you know, in the coming year, this is going to be the that a drastic increase in the social security taxes, resulting fron 1977 amendments, is going to be felt by both employers and employ NFBA believes that some time around January 1, 1979, there is going to be a tremendous rise in the blood pressure of employees and employers.
Second, in regard to the tax policy, food brokers are, in order increase their business efficiency and perform functions for their principals, are having to turn to more technological advancement; ily, computer ordering and so forth.
NFBA would urge you to continue your fight for the small busin man to retain more of their earnings for this type of investment, in capital formation.
Third, NFBA would like you to take a more effective look at the enforcement of Federal and State antitrust laws, especially against discriminatory pricing practices.
NFBA believes more could be done in this area to engage in oversight activities.
As far as the National Association of Retail Grocers of the United States (NARGUS) is concerned, President Frank Register regrets previous commitments prevented his attending today, NARGUS represents primarily local owners and operators of retail foodstores, th that operate primarily in the local communities in most of the United States.
Of major concern to NARGUS is the wage and price guidelines that are being implemented now. Retail grocer members are particularly c{)ncerned with how the minimum wage and social security increases, effective Januar 1, 1979, are going tobe reflected in those guidelines.
There are going to be substantial increases both in the minimum wage and the social security areas. In addition, health insurance to 1proide pregnancy disabllty coverage will be increasing. In talking





67

with one company the other day, they said it would represent a 15percent increase in their health costs.
Food retailing is a labor-intensive industry, and these are Governmuent policies that are being. factored into their labor costs that are going to have a tremendous affect in the coming year.
In addition, retail grocers are concerned about food labeling legisl ation proposals that are being fostered before the Congress.
The Food and Drug Administration, at the same time they want more power to regulate food retailers, push more authority over onto the States. FDA really is asking for more power than it can exercise at this time.
NARGUS thinks the whole area of regulatory reform and inflation would be good areas for this committee to follow in the coming year, andI would be glad to assist in that.
Thank you for this opportunity to express these views.
Mr. CHERKASKY. Thank you very much.
[The supplemental information of Mr. Wenning follows:]
NATIONAL FOOD BROKERS ASSOCIATION,
W~askington, D.C., November 3,1978.
GAYLORD 'NELSON,
Chairman, Select Committee on Small Business, U.S. Senate, W~ashington, D.C.
DEAR SENATOR NELSON: Thank you for your letter about meeting with the staff of the Senate Small Business Committee on Thursday, November 16, 1978. A previous commitment will prevent my attending this meeting, but I have requested a representative from our law firm Bison and Wenning to appear on our behalf.
We appreciate the fine work the members of your Committee and staff have done for small business especially in the field of taxation. A large share of the progress in reducing federal taxes on small concerns has been due to your Committee' s efforts.
For 1979, we suggest the following issues be given attention:
(1) Appropriate action to reduce the burden of increased social security taxes on small business employers and on employees.
(2) Consider changes in current tax policy that will allow small business to retain more earnings to help meet its growing need for capital.
(3) Develop more effective enforcement of federal and state antitrust laws, especially against discriminatory pricing practices.
The year 1979 will be a time of great challenge for small business. We look forward to working with your Committee in helping to meet this challenge.
Sincerely,
MARK SINGER, President.
Mr. CHERKASKY. Next is Marvin Leffler of the National Council of Salesmen's Organizations.

STATEMENT OF MARVIN LEFFLER, CHAIRMAN OF THE BOARD,
NATIONAL COUNCIL OF SALESMEN'S ORGANIZATIONS, INC.
..N[r. LrEFLRm. Thank you, Bill. I appreciate this committee, because I think that it provides an opportunity for us to realize that the small business community is not monolithic in structure. I think we are falling into a pattern that we say "small business," like some people say "bigy business," and -we evoke an image of small business being a totally united group and agreeing on everything.
I think it is important for us to get together once in a while and realize we don't agree on everything. For example, our group would not wholly agree with the gentleman who was interested in -the inde-





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pendent contractor issue. There are times when people in our organization are truly employees. They work for only one individual, but they are compensated solely on commission, and as a result of t form of compensation have to pay their own social security and are not protected by pension plans and other matters.
So that those people in our organization would tend to be .. to any definition that did not take their problems. into ,
more especially in view of the present social security schedule, which was touched upon by the previous speaker, where the differece is rather significant.
We are looking at a social security figure which by 1987, present projections, will be $3.045.90-that would be the employ 's share of the tax. If he is an independent contractor, is operating in a corporate status, and has a cQrporation of as few as two people, he is in for a $6,090 tax.
Now, when you get into those kinds of numbers, there is going to be some tremendous resistance.
The other thing that I would like to touch on very briefly is that in thinking of small business, once again, it comes in sizes-reall small, median, and large. There is very, very small small b medium small business, and large small business, and the problems not always focused in the same direction. Some in the larger segment of the small business community are delighted with the p with having the product liability insurance tax roll back m the last bill. and we are delighted for them, but it doesn't do any good for us or the smaller manufacturers that we represent who don't have the pr even if they search back 10 years and ahead 7. They aren't oigt find enough profit to handle an award of $300,000 or $400,000.
What they need is the insurance. They need a way for the Government to underwrite or support the insurance along the lines of the Nelson bill last year. What they need is for the Federal Gover ent to do something, if at all possible, to prevent some of the liability occurring in the first place by some of the legislation that was touched on before.
I would like to direct your attention to the problems with the IRS plans, which obviously do not directly concern this committee. It is a tax matter, but when we are making recommendations in terms of pension plans for the small business community, I think it would be useful for us to think about those people in that community who are providing for their own pension and who are limited to a maximum of $1,500, whereas on the Keogh the limitation is $7,500, and where on the corporate business plans, the limitation is 25 percent of salary in a regular corporate plan.
So what we are doing is effectively discriminating against a whole segment of the community that is not capable of having any other pension provision other than IRA, and we have limited the amount they can contribute.
Thank you very much for your time.
Mr. CHERKASKY. Thank you. Our tax counsel says there is no rationale for the various pension plans, except the larger corporations have more clout and also have a better tax situation.







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[The supplemental information of Mr. Leffler follows:]
THE NATIONAL VOICE OF SALESME N,
NATIONAL COUNCIL OF SALESMEN'S, ORGA-NIZATION. INC.,
New York. N.Y.. Novewmber' 8, 1978.
31r. WILLIAM B. CHERKASKY,
Executive Director, Senate Committee on Small Business, Wash inyton, D.C.
DEAR BILL: Senator Nelson's letter of October 11th inviting us to the agenda session on November 16th, suggested that we send in advance a brief outline of the items that we wish brought up.
Accordingly, I am attaching the following memorandum for the use of the Committee.
I shall be looking forward to seeing you.
Sincerely yours,
MARVIN LEFFLER,
Chairman of the Board.
Enclosure.

To STAFF OF SENATE SMALL BUSINESS COMMITTEE FROM MARVIN LEFFLER, CHAIRMAN OF THE BOARD OF NATIONAL COUNCIL OF SALESMEN'S ORGANIZATIONS, INC..

DRAFT PROPOSALS FOR DISCUSSION WITH SMALL BUSINESS COMMITTEE STAFF, THURSDAY, NOVEMBER 16, 1978
National Council of Salesmen's Organizations believes the following matters require priority treatment by the Smnall Business Committee when it sets its agenda for the 96thCongress;
Social security taxes
The pressure on the small businessman which will result if the 1977 schedule of Social Security rates is not amended will be worse in many instances than that engendered by the Federal income tax itself.
In fact, the fine effort of the Small Business Committee in getting rates reduced for profits under $100 million dollars can more than be wiped out by Social Security taxes which will rise to $3,045.90 for employees in the maximum bracket by 1987.
We would like a study made to study the practicality of other solutions to the Social Security problem such as a small surtax on income tax. It is apparent that the 1977 bill was enacted hastily and must be reconsidered. I.R.A. plans
Small Businessmen are frequently unable to provide for a corporate pension plan particularly with some of the ERISA restrictions. Mostly, though, there is an absence of sufficient profit. The I.R.A. plan thus becomes an excellent vehicle for management and employees of small business concerns to set aside tax deferred pension funds.
However, the limitation of $1,500, as a maximum contribution is unfair. The Keogh plan has a $7,500 ceiling and corporate plans can go to 25 percent of salary. It is not equitable to limit I.R.A. contributions to $1,500 and the Committee might wish to study this matter in preparation for any tax bill which might be introduced in 1979.
Douible taxation of dividendls
Lack Of sufficient cash is a frequent reason for small business corporations to omit dividends, but even where cash is available, the penalty to the small businessman is too great when he must declare dividends from an after-tax surplus and then be taxed again personally on the proceeds.
We realize this matter is complex, but it should certainly be studied. Product liability insurance
Congress made an effort to help small business by providing for a ten-year carryback and accumulating earnings relief in the 1978 tax bill section dealing
-with product liability exposure. Further action should be taken In 1979 to provide for a tax deductible product liability reserve.
It should also review the standards for determining liability resulting from product-related injuries.





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Small business depreciation regulations
Senator Nelson's bill to speed deprecation for small firms should be reintroduced in 1979 and its passage sought by small business advocates.
Mr. CHERKASKY. Would you identify yourself please?
STATEMENT OF WILLIAM T. DISS ON BEHALF OF THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Mr. Diss. My name is William T. Diss, and I represent the American Institute of CPA's.
We have an extensive report that we have presented before, and it will shortly be revised and ready for the convening of Congress.
As broad highlights, we also compliment the committee on its efforts in two areas that did emerge in the Revenue Act of 1978. First, the partial improvements in the allowance of ordinary deductions for small business stock losses, and second, further alleviation of subhapter S corporation pitfalls.
We believe legislation in the small business area should focus philosophically on a small business that meets the tests and is owned by direct investors; that is, people who have a 10 percent or larger stake, and by employees of the business.
With regard to tax benefits that should be extended to this type of enterprise, we agree more attention should be given to losses sustained on both the original investment in the business, and also for "cleanup" investments that are made when the business has failed, all to the effect of allowing ordinary deductions rather than the restrictive capital loss treatment which now applies.
Seconding the remarks of another speaker: The preservation of small business does argue for a rollover provision under which profits can be deferred on the sale of a small business. There is the inducement under the present tax law for the disappearance of the small business firm by a tax-free merger into a publicly held company.
In the tax accounting area we were disappointed that the depreciation measure did not succeed, either simplified depreciation or elimination of salvage from the ADR regulations.
Next, with respect to inventory accounting we recommend expansion of the concept that now applies to department stores, and that is the Government-published index which would simplify the calculations for LIFO inventories.
In the area of capital formation, we believe the limitation on ordinary losses in a failing enterprise is significant. also the present ERISA scheme which imposes prudent fiduciary rules which have a tendency of taking funds from the small business and requiring that they be invested in securities issued by large business enterprises to meet these fiduciary rules.
We recommend that the rules be waived as accounts in the pension or profit-sharing plans. held for the benefit of shareholder-employees, so as to be available for reinvestment in the small business involved.
Finally, we recommend that the area of business investigation expense deductions be liberalized. We believe this also is important for capital formation.
Again, we remind the committee of our larger report on subchapter S improvementR, and particularly the provisions that would allow a small blIusiles investment company to become a shareholder in a subchapter S







71

corporation. Presently, subchapter S corporations are foreclosed from this financing source because SBJC's prefer to make a loan with some form of equity, either current or potential.
Thank you.
Mr. CuHERKAsKY. Thank you very much.
[The supplemental information of Mr. Diss follows:]
AMERICAN INSTITUTE OF CERTIFIED PUBLIc ACCOUNTANTS,
Washington, D.C. November 14, 1978.
Afr. HERBERT L. SPiRA,
Chief Counsel, Select Committee on Small Business, U.S. Senate, Washington, D.C.
DEARI HERB: In Senator Nelson's letter of October 11, 1978, he asked those who planned to attend the meeting with the staff on November 16th to submit an Outline of their suggestions several days in advance of the meeting. Enclosed is a summary of the topics which our Small Business Taxation Subcommittee is currently considering. This list has not been updated for changes made by the recently enacted Revenue Act of 1978.
As we mentioned in our luncheon meeting with you earlier in the year. a major area in which we are interested is LIFO inventory indexation. Bill Diss. who testified at Senator Haskell's jobs tax credit hearings in Denver in February and who attended last year's meetings with the staff, will accompany me to the staff meeting. If time permitis, I believe that Bill would like to say a few words about LIFO indexation and about some of the other small business tax issues which we believe are of primary importance.
Sincerely,
WILLIAM R. STROMSEM,
Manager, Federal Tax Division.
Enclosure.

FEDERAL TAX DIvIisIoN, SMALL BUSINESS TAXATION SUBCOMMITTEE, TAX REVISIONPROPOSALS
The Small Business Taxation Subcommittee has studied materials obtained from small business interest groups, tax practitioners, legislative proposals. previous AICPA tax policy statements, and the Small Business Administration Task Force Report on Venture and Equity Capital for Small Business. This review, and intensive discussions at Subcommittee meetings, indicate that the present income, gift, and estate tax system poses significant disadvantages for the small business enterprise compared to the large publicly held enterprise.
Our analysis addressed the areas of (1) losses from unprofitable business operations, (2) disposition of profitable enterprise, (3) continuity of family ownership in the enterprise, (4) operation of a profitable business, and (5) capital formation for the enterprise.
The Subcommittee recommends that selected proposals for small business tax revision be addressed by the next Congress. This report specifies and explains the more significant small business tax revisions which should be considered.
Reference is made to the separate proposal of the AICPA Tax Division for comnplete revision of the Subchapter S provisions.

I. RECOMMENDATIONS
A. Losses from unprofitable business operations
1. Small business enterprise.-Eligibility for the small business tax revisions should be related to an enterprise (proprietorship, partnership, or corporation) which is more than 50 percent owned by direct and employee investors. Furthermore, the enterprise must not have registered any securities under statutes administered by the Securities and Exchange Commission, or made an offering of Securities under "Regulation A". Finally, the firm must not be a personal holding company, or a partnership which, if incorporated, would be a personal holding company.
2. Direct investor.-A qualifying direct investor should be defined as an individual, a grantor trust of an individual, a decedent's estate, or a small business investment company, who owns, directly or by family attribution, 10 percent or more of the business enterprise.









3. Employee investor.-A qualifying employee investor should be defined as an individual, who would be eligible (except for minimum age) under ERIA rules to participate in a tax qualified retirement plan of the investee business enterprise, or a common control affiliated employer, if there were such a plan, and irrespective of the size of the investment.
4. Ordinary investment losses.q-An ordinary loss deduction up to$150,000 should be allowed to each direct or employee investor, for each of his taxable years, as to losses sustained by such investor upon his capital investment in, direct loans to, or guaranty losses upon, a small business enterprise.
.5. Additional current investment los8ses.-Losses sustained by a direct or employee investor respecting a small business enterprise stock, loan,. or guaranty, in excess of the $150,000 annual limitation, should be fully deductible in the year sustained, after first being reduced by a 50 percent adjustment.
6. Operative facts con trol.-The legal formalisms under the present section 1244 small business stock provisions should be eliminated. The ordinary loss allowance entitlement should be based upon the actual qualification of the firm as a small business enterprise and the taxpayer as a direct investor or employee investor.
7. Business loss.-Both the full 100 percent direct and employee investor loss deduction and the 50 percent adjusted additional direct and employee investor losses respecting a small business enterprise should be considered business losses, eligible for net operating loss carryback and carryover on the investor' individual or fiduciary returns.
8. Inrestn ent tiniting.-'These loss deductions should be allowed for stock and loan investments and guaranties made or honored at any time during the Inception, operation, or termination of the small business enterprise. B. Disposition of a profitable enterprise
1. Tax-deferred sale.-Gainl realized by a direct investor or employee investor upon the sale of an interest in a small business enterprise should not be recognized except to the extent that such investor does not acquire a qualified replacement investment within 12 months before or 24 months after the sale of such interest. The adjusted basis of the investment should be reduced by the non-recognized gain.
2. Qualified replacement investment.-An eligible replacement should include investment in another small business enterprise, or a small business rollover account (SBRA). The SBRA must be invested in voting stock of corporations (other than personal holding companies, regulated investment companies, or real estate investment trusts) and limited temporary cash holdings.
3. SHRA earnings and i rthdfrawals.-The SBRA holder should be taxed currently, as in the manner of a simple trust, upon the SBRA earnings, including capital gains. Withdrawals from the SBRA should be tax-exempt to the extent they are reinvested in a small business enterprise. Other withdrawals from the SBRA, to the extent they exceed the original basis to the SBRA holder and previously taxed earnings, should be taxed as a long-term capital gain.
4. ('ollapsible asset exceptions,.-These tax deferral (rollover) provisions should not apply to the gain realized upon the sale of collapsible corporation stock, or the ordinary income portion realized upon the sale or liquidation of a partnership interest.
5. Personal service employer.-Thliese tax deferral (rollover) provisions should not apply to any interest in a professional service employer.
G. Dividend equivalents.-These tax deferral (rollover) provisions should not family to any stock disposition or sale proceds which would be considered equivalent to a dividend distribution.
7. Basis of qualified replacement investment property.-The individual's (direct investor or ellmployee investor) basis in the replacement small business enterprise investment or SBRA should be the cost of this replacement property reduced by the untaxed gain on the sale of his business interest.
S. Minimum tax.-The long-term capital gain deduction applicable to gain realized upon the sale of a small business enterprise interest, or SBRA withdrawal, should not be a tax preference item for the minimum tax. ('. Family ownership continuity
1. Death tar stock redemnption.-The eligible redemption proceeds should be enlarged to include the capital gain tax payable upon the redemption of stock or an SBRA which constitutes carryover basis property, the stock ownership threshold should he decreased to include stock constituting 25 percent of the







73

decedent's adjusted gross estate, and the threshold for aggregation of plural corporations should be reduced to include corporations ovned at least 25 percent in value by the decedent.
2. Stock redemptions from fiduciary.-The termination of interest "safe harbor" for a stock redemption should be expanded to permit cancellation of the stock ownership attribution rules, under the 10-year reacquisition notice procedure, for stock held by the decedent's estate or an intervivos or testamentary trust of the decedent.
3. Estate tax installment payments.-Tbe legal formalisms now required for installment payments should be repealed. Any estate tax reported on a return, or deficiency in estate tax, should be payable in equal annual installments over a period through a terminal year ending 15 years after the date of the decedent's death. This installment privilege should relate to the estate tax attributable to a small business enterprise interest by a direct investor or employee investor. D. Operation of a profitable business
1. Simplified LIFO inventory.-The Internal Revenue Service or Department of Commerce should publish indexes to permit a simplified dollar value LIFO inventory computation by all business enterprises. Month-end index data should he provided to facilitate the computation of quan-tity increases in terms of the taxpayer's base year dollar investment, and should be usable by an electing taxpayer for a taxable year ending up to six months after the month selected.
2. LIFO elections.-The taxpayer's election to use the simplified government index should be irrevocable. A separate election should l)e provided to use the prior year-end index to price a quantity increase during the current taxable year.
E. Capital formation for small business
1. Employee retirement plan investments.-The present ERISA prudent fiduciary restrictions on employer investments should be liberalized by administrative interpretation or legislation to permit purchase of employer real property or employer stock in a small business enterprise. Furthermore, the former law permission of secured loans to an employer should be reinstated. However. no purchase of a partnership interest in the employer should be permitted.
2. Participant consent.-Investments in employer real property, employer's stock, or secured loans to the employer, should be permitted from funds of an individual account plan (profitsharing or money purchase pension) from account balances held for a proprietor, partner, or (5 percent) shareholder employee.
3. Fiduciary review procedure.-Investment in employer real property, stock, or secured loans should be permitted in other cases. i.e., defined benefit plan funds, or individual account balances for other participants, after review and approval of the investment by a fiduciary independent of the plan trustee and the employer.
4. Employer real property.-The present requirements of multipurpose structure and diversified geographic locations should be repealed, and a prudent businessman (not prudent fiduciary) standard substituted.
5. Employer stock.-An employee retirement plan, other than an ESOP, should be entitled to invest up to one-half of its trust fund in employer stock, subject to -the participant consent and independent fiduciary review procedures stated above. The prudent businessman standard should also apply to an investment in employer stock.
6. Employer secured loan.-A prudent businessman rule should be provided in lieu of the old administrative rule of collateral value equal to at least 200 percent of the loan balance. The Internal Revenue Service should publish a safe harbor interest rate range for employer loans, and these loans should provide for a changing interest rate to reflect the periodic IRS interest promulgations.
II. PRESENT LAW TAX DISADVANTAGES
A. Losses from unprofitable business operations
Instances of tax disadvantages under present law, particularly for the small business compared to the large business enterprise, include the following:
1. The filing of a voluntary bankruptcy petition by a shareholder in a Subchapter S corporation disqualifies the corporation's election, per Revenue






74

Ruig -64-9. This disqualification will create hardships for all the sare holdiers if they have anticipated individual return deductions for thepas through oif corporation operating losses. Thus, the bankrupt sharehodrI deprived of the net operating loss deduction on his return, which might ohr
wis hve been carried back to obtain refunds of taxes paid in the prcdn three years.
2. T'he Internal Revenue Service has also concluded, in Revenue Ruling74 240. thait no individual return loss deduction could be claimed by a txae upon is, transfer of assets to the bankruptcy trustee. The ruling contains an example Inivolving a taxpayer who delivered his real estate and Investment stocks to the bankruptcy trustee after the corporate creditors had otie judgmrient against the taxpayer as a corporate officer. The ruling foloe h ease (, of Homier A4. M1artiti, Jr.. 56 T.C. 1294 (1971), where a deducto was denied to the taxpayer, who turned over his proprietorship inventory to the hankriiptey trustee, reasoning that the trustee would report any gain or ls upon final disposition of the assets received.
3. The Internal Revenue Service, supported by the courts, has pursued~ a 1eg1istio interpretation of the small business stock loss provisions in section 1244 of thie Internal Revenue Code. Thus, small business stock qualification, and the con-sequentiail ordinary loss deduction, have been denied where the stock pa was evidenced only in memoranda prepared by the corporation's accountn and attorney; where the 2-year limitation on the plan was not expressly stated, even through the stock in fact was issued within the 2 years; where the 2-ya limit was specified only in the State corporation commissioner stock issue permit: where the stock was paid for before the plan adoption and stock issue; where the $.500,000 offer limit was not expressly stated; where the written pln dlid not contain an explicit reliance upon section 1244; and Where the corporationi conducted an active loan business (interest income disqualification).
4. Perhaps most important, use of the small business stock loss provisions has been denied for funds invested by the stockholders in a financiallyemarsd corporation in order to permit the corporation to repay corporate creditors, o the ground that Gongress, intended to confine this relief provision to newly organized businesses.
5. Guaranty losses and direct loan bad debts are routinely treated as nonbusiness bad debts, reportable as short-term capital losses, with only a $2,000' ($3.000 in 1978) deduction allowed from ordinary In-come. The courts rao that a guaranty should be treated in an identical fashion to a direct loan, and that a direct loan should be considered an investment with capital gain potential (by reference to the usually associated capital stock of the lender), and gen erally find that loans are made for the purpose of reinforcing a stock investment rather than for obtaining ordinary income, whether this income be interest on the note itself, or salary or rental income from the borrowing corporation.
6. The effect of this interpretation is to restrict the deduction of a loss if the entrepreneur's guaranty or direct loan is unsuccessful, while requiring full ordinary income taxation of any interest income received on the direct loan or any premium received from the borrower for the entrepreneur'sgurny Furthermore, the strict legalisms on the stock investment loss, and the failure to increase the $50,000 loss ceiling to reflect inflation since section 1244 was enacted in 19538, produces a full capital gain tax if the stock investment 18 successful, and frequently a nearly unusable capital loss if the stock investment is unsuccessful.
7. The Internal Revenue Service, both by ruling and by consolidated return reg ulations, approves the acquisition of profit businesses by a taxpayer which Intends to utilize its net operating loss carryover against profitable operations of the acquired business. Generally speaking, only the larger loss corporation can survive long enough, and has sufficient working capital, to purchased requisite profitable activities. The small loss corporation does not haveth necessary time or resources, and, under both the present and the pending section 13812 provisions, finds It difficult to locate a purchaser for its own. loss carryover.
8. The Internal Revenue Service and the courts have followed a strict rule of requiring capitalization of business Investigation and pre-operating expenses. In the case of the small business, no deduction Is allowed for a business investigation outlay where no business is acquired or commenced. If the bui~sness is commenced, capitalization Is required, with no amortization deductions because a definite life is absent. This may be compared with a large business enterprise, which routinely is allowed ordinary deductions for studies and expenses involving expansion or diversification of existing activities.






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B. Disposition of a profitable enterprise
1. Under present law, the owner of a small business desiring to dispose of it at retirement or otherwise is faced with the fact that a sale for cash or notes, as would typically be the case in a sale to another entrepreneur, will result in immediate taxation of any gain realized on the sale. On the other hand, the taxpayer may cause his corporation to be acquired by a large publicly held corporation, in a transaction primarily or exclusively for stock of the public corporation, and obtain a deferral of taxation under the reorganization provisions of the Internal Revenue Code. While there are certainly economic differences between the forms of consideration received in these different types of transactions, the tax law creates a bias in favor of the acquisition of privately held corporations by large conglomerates, thus encouraging the movement of small businesses out of the small business sector. Such acquisitions may result in changes in management approaches, locations of plants and offices, and location of personnel, and otherwise disrupt the acquired company. Small businesses provide approximately 52 percent of the private employment in the country, and disruptions of employment and other relationships are significant both to those directly involved and to the surrounding communities.
2. The minimum tax on "items of tax preference" was designed to insure that individuals who take advantage of various incentives in the Internal Revenue Code not be permitted by the aggregation of such incentives to completely avoid Federal income taxation. The gain on the sale of a small business is generally treated in whole or in part as capital gain. It appears, however, that the inclusion of all capital gains, including those arising from the sale of a small business owned for a long period of time, goes beyond the intent of Congress in enacting the minimum tax.
3. The gain on the sale of a small business is often comprised to a substantial extent of inflated valuations because of the extremely long holding periods often involved in the ownership of such enterprises.
0. Family ownership continuity
In addition to the discriminatory tax treatment afforded losses in small business enterprises compared to those sustained by large business enterprises, and the inducement under present law for the entrepreneur to transfer his business to a large, publicly held company for its stock, related in A. and B. above, the present law creates unnecessary obstacles to continued ownership of a small business enterprise following the death of its founder. In addition, these dimculties have been increased by the IL976 Tax Reform Act. The particulars are as follows:
1. The 1976 Tax Reform Act has made operation of many existing "buy-sell agreements" more difficult, if not impossible. The carryover income tax basis rules for property acquired from a decedent produce a capital gain tax upon sale of the founder's stock, or partnership interest, by his estate, whether to the business enterprise or to the remaining principals. Congress, however, made no provision to include such capital gain tax in the qualified proceeds entitled to- the decedent's stock redemption Code section 303 provision. Further to aggravate matters, the Act general increased the stock'ownership ratio required to qualify for the section 303 provision. In addition, the law makes it difficult for a decedent's estate to aggregate ownerships in several corporations by requiring that the decedent have owned more than 75 percent of the stock of each corporation involved.
2. The present law provides capital gain tax treatment to the owner of stock in a closely held corporation who sells all of his stock back to the corporation. The selling stockholder, by filing a reacquisition notice agreement, can secure a waiver of the indirect ownership attribution rules so that ownership of other stock by his relatives can be disregarded in determining whether he has retired all his stock. There is considerable uncertainty as to whether a decedent's estate can sell all of 'his stock back to the corporation under similar circumstances. The Internal Revenue Service refuses to follow the Tax Court decision in this respect, and with the new carryover basis rules, the IRS position is that ordinary income taxation will apply on the corporation's redemption of the decedent's stock in these cases.
3. Continuity of family ownership was often achieved under pre-1977 law through a systematic program of large stock or partnership interest gifts by the founder of thesmall business enterprise to his children and their spouses who had become active in the business. The 1976 Tax Reform Act, by requiring inclusion of post-1976 lifetime gifts in the estate tax computation, has, in effect, created a regime of prepaid estate taxes, and discouraged such gifts.






76

4. Severe inflationary trends in the economy, often stimulated by governmental action, significantly increase the impact of estate taxes on closely held business interests held at death, and capital gains taxes on interests sold by the founder during his lifetime. The 1978 Tax Reform Act mitigated somewhat the inflationary effect through adoption of an extremely complicated special valuation system for certain real property used in a farm or other business. These special valuation rules, however, do not reach the inflation problem directly, and operate only where the capitalized earnings value is lower than property trading values.
5. Under present regulations, the estate tax installment privilege is allowed fo a deficiency in estate tax, i.e., one resulting from an increase for values in a closely held business acquired after IRS examination of the estate tax return, only if the estate had made an actual or provisional installment election with the return. The installment privilege is not allowed for a deficiency in the absence of such an election, even though the business values as adjusted upon IRS examination satisfy the threshold requirements of the Code. D. Operation of a profitable busincs
1. A taxpayer may adopt the LIFO method of computing inventories, but many small businesses fail to do so because of the complex record keeping requirements which attach to this election. Accordingly, they continue to recognize as part of taxable income elements of inflation which the LIFO method is especially designed to eliminate. Particularly onerous in using the dollar-value approach to LIFO computations is the need to price the current inventory twice each year. The current inventory is to be priced both in terms of base prices and current prices in order to arrive at a percentage to be applied to the current year's iventory increment.
2. The profitable small business corporation faces numerous other tax disadvantages compared to the large business enterprise. These include the cplexities pf the Class Life Asset Depreciation Range System (whic can e mastered by the large enterprise, thus achieving a 20 percent decrease in useful lives and 25 percent increase in allowable depreciation) ; IRS scrutiny of, and occasional imposition of penalties upon, earned surplus accumulations; IRS scrutiny of, and occasional disallowance of, officer/stockholder salaries; the numerous Subchapter S complexities and reporting pitfalls; the restrictions on investment credit for used assets; the inability to employ workable nonqualified stock option plans; and the IRS position that the controlled corporation group restrictions should apply to companies where otherwise unrelated stockholders do not meet both the "'control" and "financial" common ownership tests.

III. DISCUSSION
A. Losses from unprofitable business operations
The Task Force considered recommendations for tax law changes in the bankruptcy, net operating loss carryover, and business investigation and pre-operating expense areas, but decided to omit all three areas, the first because of the comprehliensive review being made elsewhere for all bankruptcy provisions, the seeond because of the perceived political difficulties in securing recognition by the Administration and Congress that the present rules generally impinge upon small rather than large businesses, and the third because the Task Force believes further study is required of definitional and administrative aspects.
However, important improvements in the tax law should be feasible now, are recommended by the Task Force, and are discussed below, as follows:
1. Small business enterprisc.-The indispensable ingredient of all p proposals involves the definition of a small business enterprise. The Task Force proposal defines the qualified enterprise as one more than 50 percent owned by its enployees, and/or significant (direct) investors, which conducts an active business operation. Furthermore, the business firm must not have offered securities to the public or made any filing with the SEC; i.e., a publicly held enterprise is never considered to be a qualifying small business.
2. Direct investor.-The overall theme of a small business should be one conducted and owned by full time employees or persons having a substantial finan cial stake in the enterprise. The purpose is to continue the American small business ideal of persons actively involved and interested in the formation. conduct, and continuity of the firm and its relations with employees, suppliers, customers, and the community. Accordingly, a qualifying direct investor should be either an individual, a revocable trust created by him, or his estate. Put another way. a corporation, or syndicate of investors, does not qualify, even though in the aggregate such combination owns more than 10 percent of the






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enterprise. Furthermore, this ownership should lbe either actual or attributed to family relatives, i.e., without attribution through partnerships, fiduciaries, or other corporations.
3. Employee investor.-The employee investor should be a person who devotes the preponderance of his time to conduct of the business. This objective is achieved by following the ERISA rules for eligibility, under the hypothesis that a tax qualified retirement plan is maintained by the enterprise. Thus, an emnployee would be -an eligible stockholder if he meets the one year of service and 1.01-X hours of compensated time rules. However, the 25-year minimum age ERISA rule should not be applied for this purpose.
4. Ordinary investment losses.-The large business enterprise can deduct in full, as an ordinary expense, the loss sustained from an investment in an unsuccessful venture, whether conducted as a branch, division, or wholly owned subsidiary. The same full deduction should he allowed for investments in a qualifying small business enterprise. Even though a full deduction, regardless of dollar amount, can be claimed by a large enterprise, the Task Force proposes a $150,000 limitation for the full deduction allowable to each direct or employee investor. If revenue considerations permit, this ceiling should be eliminated in a subsequent law change. The ordinary deduction should be allowed for any unrecovered basis by the investor in his partnership interest, or corporation stock. The full deduction should also be allowed for bad debt losses upon direct loans to the partnership or corporation, and losses sustained when the investor honors guaranties made to other lenders to the partnership or corporation.
.5. Additional current investment losses.-Losses described in 4., but in excess of the $150,000 ceiling, should be allowed as a current deduction, subject to a 50 percent adjustment, in a manner similar to a long-term capital gain. If the enterprise had been successful, and the investor realized a gain upon sale of his partnership interest or corporation stock, such gain would be fully taxable, subject to a 50 percent adjustment. The same should be true of his losses when the enterprise is unsuccessful.
6. Facts versus formalisis.-If the corporation or partnership in fact qualifies a- a small business enterprise, the ordinary loss treatment should be allowed. No formalities such as written plans, election filings with the IRS, or sequential technicalities should apply.
7. Business, loss.-The loss sustained by the direct investor or employee investor should qualify as a business loss, eligible for net operating loss carryback and carryover on the investor's returns, the same as the small business sthxek loss treatment under present law. The failure of a business enterprise in many cases will create losses for the investors in excess of their current year income, and this loss should be available over the carryback and carryover period as an operating loss.
8. Loss tinting.-Frequently investors are required to commit additional funds to the failing enterprise in order to meet legal or moral obligations to suppliers and other creditors. An ordinary deductions should be allowed for these "cleanup" funds, just as they are allowed for the initial funds committed to form the enterprise. The present distinction imposed by IRS administrative interpretation for small business stock losses should be eliminated. B. Disposition of a profitable enterprise
1. Tax deferral on the sale of a small business.-In appropriately limited circumistances, the seller of a closely-held corporation should be permitted to reinvest the proceeds from the sale or a small business in another small business and be permitted (a) non-recognition of gain on the sale with (b) a corresponding adjustment to the basis of the ownership interest in the new business to insure eventual recognition of the gain. This proposal is designed to yield substantially the same tax results as would have been accomplished had the business been a party to a tax-free reorganization.
Since "small businesses"~ include both incorporated and unincorporated entities. the following conditions are to be applied in determining the applicability of the proposed nonrecognition provisions:
(a) Generally, either a stock investment or a partnership interest, owned by a direct investor or an employee investor, qualifies.
(b) If the business disposed of was incorporated, the non-recognitiorn provision does not -apply: (i) ito the extent that the stock was disposed of in a traiisaction in which the proceeds would be considered equivalent to a dividend; and
(ii) if the corporation was "collapsible."

40-287-79-6








(c) If the business interest disposed of was a partnership interest, the nonrecognition provision does not apply to so much of the gain as i described in soution 751 of the Internal Revenue Code.
(d) Dispositions of interests in personal service employers, as defined In Section 4021(c) (2) (A) without regard to the existence of employes, do n qualify for non-rec-ognition, and
(e) Reinvestment of the proceeds in stock of a corporation whi-s ap holding company or regulated investment company, or in an interest in a nerslhip which, if incorporated, would be a personal holding company or investment comnpay, doe not qualify for non-recognition, and sub sonal holding company or regulated investment company status (or cor "s if" status of a partnership) would be considered a disposition of the or partnership interest.
2. Tax prefcrcnces.-The long-term capital gain deduction applhable to realized upon the sale of a small business enterprise should not be a tax ence item for purposes of the minimum tax.
3. Inflation adju.tmNents.-After lengthy consideration, the Task Force no seific eomendation with regard to adjustments to basis, capital gains taxes, or adjustments to the long-term capital gain ded compensate for the effect of inflation due to the substantial complexities would be inherent in each of these often discussed alternatives. The which follows, however, is intended to provide commentary regarding tis majo problem area.
C. Family ownership continuity
As mentioned above, the Task Force makes no current recommendations on inflation adjustments for the sale of a small business. The same argue also for further study of such adjustments in the family owners continuity area. In addition, the Task Force recognizes that it is not politically feasible to recommend a repeal of the recently adopted "adjusted taxable (prepaid estate tax) provision. However, important changes can be made in tax laws to encourage more family ownership continuity in the small busin enterprise. These are discussed as follows:
1. Death tax stock redemption.-The purpose of Congress in enacting setion 303, concerning redemptions of a decedent's stock, was to facilitate buyagreements which make available funds of a closely-held corporation to a deceased stockholder's estate for estate settlement cost. Under present laws, the settlement costs which qualify for redemption proceeds include funeral and administration expenses and federal and state death taxes. Requirement of transfer of a decedent's carryover basis to the estate in many case will involve significant capital gain taxes for post-1976 estates upon the stock redemption. Pursuit of the Congressional logic inescapably requires that corporate funds also be made available to the estate for funding of these capital gain taxes. The qualifying proceeds amount should include such taxes.
In a pre-1977 estate, the ownership threshold for a section 303 red typically was 25 percent of the decedent's adjusted gross estate. This ownership threshold was available when the business founder dies leaving a surviving spouse and providing a maximum marital deduction bequest to her. In addition, the specific exemption was considered in arriving at the threshold amount. Specifically, the 50 percent of taxable estate threshold reduced the qualifying ownership portion in the decedent's estate by the marital bequest (50 percent of adjusted gross estate after debts and expenses) and the $60,000 exemption. For post-1976 estates, the 50 percent of adjusted gross estate threshold more than doubles the ownership ratio required in the decedent's estate, i.e., the tion of the corporation value to the total estate.
The old law should be restored to permit continued feasibility of existing buysell agreements (formed in reliance upon the pre-1977 law). Furthermore, in order to provide the same threshold level in the contingency of the founder's dying after his spouse, a flat 25 percent of adjusted gross estate threshold is proposed. This also avoids any complications with the substitu of the unified credit for the specific exemption.
On occasion, sound business reasons dictate conduct of a business operation in multiple corporations. The tax disadvantages of operation have been eliminated by the controlled corporation group rules. Often, where multiple corporal are involved, the entrepreneur will join hands with other investors or key en pl)oyees who will hold significant majority or minority interests in some or al of the corporations.






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The present law, in determining the 50 percent of adjusted gross estate threshold, permits aggregation of the decedent's multiple corporation ownerships only. if each exceeds 75 percent of the corporation involved. In practice, this often makes fulfillment of the threshold, and eligibility for a corporate buy-sell agreemnent, impossible. The aggregation level should be reduced to no more than 25 percent ownership by the decedent in each corporation.
2. Stock redemiptions from a flduciary.-A business founder or entrepreneur can arrange for a redemption by his corporation of all stock directly owned by him. and qualify for capital gain treatment upon the resulting profit, even though his relatives own the remaining stock (provided such ownership was not created within ten years before such stock redemption for tax avoidance purposes). In order to achieve this treatment, the seller must file a reacquisition notice agreement covering the ensuing 10-year period. A counterpart provision should be added to clarify the entitlement of the decedent's estate (or a trust created by the decedent) to sell all of its stock back to the corporation where beneficiaries, or a trust or estate, hold other stock in the corporation, The law change proposed will overcome'the uncertainty created by the Internal Revenue Service refusal to follow the case of Lillian M. Crawcford, 59 T.C. 830 (1973) nonaicq. 1974-2 C.B. 5.
3. Differing estate tax installment payments rules are applied under present law for a 10-year estate tax installment payment plan and a 15-year plan (5-year tax payment moratorium and up to 10-year payment plan). In addition, under present regulations, installment payments are not permitted for a deficiency created by an increase in value for a closely-held business interest unless a provisional installment payment plan election was filed-with the original estate tax return. In the case of any direct investor or employee investor, the estate tax should be automatically payable upon his partnership interest or corporation stock in the small business enterprise over the new law 15-year payment plan. D. Operation of a pro fitfable business
1. Presently, retailers operating department stores are afforded special treatment by being permitted to use indexes prepared by the Bureau of Labor Statistics in determining the LIFO inventory increment each year. Other taxpayers, however, are not provided with, nor generally permitted to use, such indexes. (See TIR-1342, January 27, 1975) In using the dollar value method of inventory, they are required to price the current inventory in terms of both base year and current prices, or to construct their own indexes. For many small businesses these are extremely complicated bookkeeping procedures, beyond the abilities of in-house accounting personnel. Accordingly, many small businesses which could avail themselves of the LIFO method fail to do so.
2. Various published indexes might appropriately be used by taxpayers to price annual increments of inventory for dollar-value LIFO purposes. Alternatively, the Internal Revenue Service or the Department of Commerce might publish specific indexes applicable to particular industries. In any event, it is recommended that taxpayers be permitted to choose from the various indexes available whatever index they believe to be most appropriate for their businesses so long as the use of an index is elected irrevocably. It is contemplated, of course, that should the Service or the Department of Commnerce subsequently publish a specific Index for a taxpayer's industry, procedures would be initiated to permit a change to the more appropriate index. Furthermore, it is contemplated that the taxpayer would be allowed to use the prior year-end index to price a quantity increase during the current taxable year, as this approach would be roughly equivalent to using earliest costs during the year.
3. Inability of the small business enterprise to use LIFO inventory accounting under the existing double extension complications aggravates the working capital needs of the business from income tax upon inflation in inventories. Often the business enterprise must borrow from the bank to replace the same quantity of inventory items which has been sold because taxes have been paid on the increased inventory replacement investment.
4. The Task Force perceives a number of other areas which deserve legislative attention, including simplified depreciation, revision of the surplus accumulation tax rules, simplification of the used asset investment credit rules, addition of a practical nonqualified employee stock option procedure, and a more realistic definition of a brother-sister controlled group of corporations.
Mr. CHERIKASKY. I would like to touch on export problems and import problems of small business for a minute or two by Will Leonard,





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former chairman of the International Trade Commission and now the Washington counsel for the Association of Independent Steel Distributors.
STATEMENT OF WILL E. LEONARD ON BEHALF OF THE ASSOCIATION OF STEEL DISTRIBUTORS
Mr. LEONARD. I think that perhaps I could give you a ase study of how a group of small businessmen become interested in public policies and governmental issues. The group is the Association of Steel Distributors, and it is exactly what the name implies. The members distribute steel products which they purchase, both from domestic steel mills and from foreign steel mills, to a variety of customers here in the United States--contractors, automobile companies, other fabricators of products from steel, pipelines and others.
They have had an organization for probably 30 years or more, and have had their regional meetings, their national conferences, and njoyed the good cameraderie among themselves without a great deal of collective interest in what was going on in Washington and in the Fedoral Government until the U.S. Government decided that something had to be done about imports of steel into the United States, and as a result came out with what is called the trigger price mechanism.
That is a means for attempting to stem the tide of steel imports into t1he I nited States. As a result of this being thought about and then being put into effect by the U.S. Government. these small businessmen across the Nation, the Association of Steel Distributors, decided they had better do something about their contacts in and with Washington. They feared what would happen. They have now seen that this parficular formula or trigger price mechanism is doing them, they feel, great harm, and they even feel that it could bring about the demise of their organization because the TPM has not necessarily stemmed the tide of imports into the United States. Indeed, import levels are greater than they had been previously, but the problem for these steel distributors is the means by which those imports are now coming into the United States. Rather than independent steel distributors getting their share of the distribution system of imported steel, as they do on domestic steel, they find that more and more the steel is coming into the United States through what are called related parties, that is, organizations in the United States that are owned or controlled by foreign steel mills, and indeed that was a problem, I guess, faced in former years to an extent because of the distribution process of domestic steel mills.
As a result of their concern over the TPM, this organization has become interested in other things that Washington may be doing, or not doing. They formed within their organization a government relations committee. They hired me. They finally enunciated some positions on a broad range of governmental issues, and I would like to submit their recent policy statements to the committee.
With respect to the international economic policy though that got them interested in Government doing something about steel imports, these small businessmen did not know what was transpiring, what was taking place, but the Government, in this case the Treasury Department, was given the responsibility by the President to come up with some sort of an import program to help the U.S. steel industry. and Treasury and the rest of the Government agencies, the Special Trade Representative's Office, the Department of State, the Depart-




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ment of Commerce, and others, did not tune in, and probably had never heard of the Association of Steel Distributors. So when these agencies decided to construct a program, they obviously consulted with the large steel mills, they obviously consulted with the representatives of the steelworkers, but they did not consult with the representatives of an integral part of the whole steel system in the United States, those folks who distribute steel products, and that unfortunately is continuing to go on.
TPM, as it is called, the trigger price mechanism, is promulgated and is in being, but in addition the Government decided to form a tripartite committee, a committee composed of Government people, of people representing labor and people representing industry. However, thus far, and despite the intervention and, we feel, very helpful support of this committee, and of Senator Nelson, the administration has not seen fit to include among its membership on that tripartite committee someone representing the independent steel distributors.
Likewise, another committee is being formed internationally under the auspices of the OECD. which will be called the International Steel Committee. The U.S. Government will be a member of that committee and the U.S. Government is going to form an advisory group from the private sector to help it in enunciating its positions at the OECD International Steel Committee. We are hopeful that the independent steel distributor segment will be represented among those advisers to the U.S. delegation to that Steel Committee.
This is one example of how small business became interested in Government. It is also one example of how the formerly esoteric concerns of international economic policy and international trade can get translated into a dollar and cents problem of immediate impact to small businessmen.
So I guess what I am saying is that perhaps among their myriad concerns, the small business private and public communities should begin or perhaps continue to keep abreast of international economic developments, international trade developments in particular, and particularly as those developments are reflected by Federal Government actions or inactions.
Thank you very much.
Mr. CHERKASKY. Thanks. We will try again on behalf of the independents to get them on the board.
[The supplemental information of Mr. Leonard follows:]
ASSOCIATION OF STEEL DISTRIBUTORS, INC., Cleveland, Ohio, October 30, 1978.
Mr- DARWIN B. WILKOF,
President, Wilkof-Morris Steel Corp., Canton, Ohio.
DEAR DARWIN: With regards to the U.S. Senate Small Business Committee Meeting on Thursday, November 16, 1978, I have placed your name on the attendee list. You will represent ASD at this meeting. The Small Business Committee will be held from 9:30 A.M. to 12:30 P.M. in the Caucus Room (Room 318) of the Russell Senate Office Building. I suggest that you identify yourself to Bill Cherkasky and Herb Spira upon arrival. Enclosed is the information packet that was sent to my office. It outlines some subjects for discussion.
If you require further information, please contact me at your convenience. If not, I look forward to your report on the meeting.
Cordially,
TIMOTHY F. ANDRASSY,
Executive Director,
Association of Steel Distributors, Inc.
Enclosure.






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PUBLIC POLICIES ON WHICH TIRE ASSOCIATION OF STEEL Di8TRIBuTons H~s TAE4 A POSITION, EFFECTIVE OCTOBER, 20, 1978

I. TRIGGER PRICE IMECIIANIS'M AND INTER-NATIONAL TRADE IN STEL
A. summaryy
Steel imports have increased, absolutely and as a share of the U.S.mrkt World steel capacity and production have grown faster than demand. U.S te producers have had reduced or non-existent profits and closed facilitieSwhc therefore created significant unemployment. U.S. steel producers cited4more steel. particularly at dumping prices, as a major cause of their polm.Te tiled actions under the Antidumping Act and rallied the support ofsutail numbers of Congressmen and Senators. The Carter Administrationrepnd with a report from a Task Force headed by Undersecretary of TreasuryAnhy Solomon recommending various ways to help the steel industry. Thecetrie of the Solomon report was the Trigger Price Mechanism (TIPM), whc created reference prices for a variety of imported steel products based on Jaans costs of production plus transportation costs. Importation below a triggr price would possibly cause Treasury to institute antidumnping proceedings.
Other than the TP.M, methods pursued by the Administration to make the U.S. steel industry healthier and more competitive with imports included gvrmn loans to revitalize domestic steel facilities or to help the communities anid wokr hurt by the closing of steel plants and pursuance of an international ste are nient to monitor the industry and trade developments and to consult on emergn problems.
B. Position
1. The TPMX is not working. Imports have continued to increase although sources of and distribution patterns for imports have been altered. Non-Japns imports have increased and more foreign steel has entered the United States through importing and distributing outlets related to foreign producer and exporters. The TP.M has had an inflationary effect, increasing prices on stel Avoidance of the TPM.% is possible not only through the related party vehicle b~ut also through the importation of fabricated products not covered by h TPM, which means more foreign value added to the detriment of U.S. companies and workers. As long as the TPM remains in effect, ASD will support the elimination of the abuses of TPMN such as via the related party transaction and fabricated steel imports.
2. Government and industry should use the various trade laws on the bos to attack unfair trade. Supporting free trade does not mean endorsing fair trade. ASD calls for strong government action against steel imported into the United States by unfair means-at less than fair value, by virtue of government, bounties or grants, from countries which impose import restrictions o U.S. exports or which subsidize their exports. There are U.S. laws to prevent unfair trade. Domestic producers should avail themselves of these laws and the Federal Government should vigorously enforce them. For example, investigations should be instituted and quickly acted upon under antidumiping and countervailing duty laws. Estimated dumping duties should be required to be deposited at the time of dumping findings. If the U.S. International Trade Commiission finds unfair trade practices in its investi gation of fabricated steel imports, the President should not interfere with the imposition of the remedy.
3. The International Steel Committee should have teeth. The International S teel Committee should work to bring about more orderly trade in steIn reduce market disruptions, keeping in mind traditional trade patterns, and to open foreign markets to U.S. steel exports. lIt should be a committee with power to enforce its conclusions, not just to express pious hopes. To make sureth United States delegation to the Committee has the best information upon which to act, advisors from the private sector should be named and should include a representative of independent distributors, expressly the ASD.
4. Taxpayer money should not be used in the hopeless task of trying to modernize antiquated U.S. steel facilities. Government incentives should be po vided for new steel facilities which can compete with the latest facilitiesfon in the steel industries of other countries and to help former steel employees and communities adjust to the shutdown of outdated steel plants.






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A. Summary
Inflation is usually thought of as an increase in prices, most often measured by the Consumer Price Index. No attempt will be made here to give an extensive analysis of inflation to which libraries of books and articles are currently being devoted.. However, a few general thoughts may be of interest.
Inflation at what most people consider unacceptable rate has persisted for about ten years. It is generally thought that what starts inflation are excess aggregate demand and a variety of supply shocks such as food shortages or an OPEC oil price boost. The rate of inflation as measured by the Consumer Price Index is again in the double digit range, that is, approaching ten percent for the first nine months of 1978. Methods of dealing with inflation include monetary policies such as tighter credit; fiscal policies such as higher taxes and lower spending; wage and price controls; wage and price guidelines and jawboning; increasing conditions of competition such as through deregulation and more aggressive enforcement of antitrust laws; and a tax-based incomes policy providing high and/or lower taxes to hold down prices. B. Position
1. Obviously, it is like being for "God, country, and motherhood," not to mention "apple pie," for ASD to urge that the rate of inflation be reduced, if not
-eliminated. But it is more difficult to enunciate policies that should be followed or enacted to achieve the goal of reducing or eliminating inflation. Almost every recommendation for battling inflation has harmful direct or side effects.
2. ASD, rather than taking on inflation as a separate public policy and propounding recommendations on that public policy, will consider the inflation aspect in reaching its position on other public policies. In other words, the inflationary effect will be one of the guidelines by which ASD evaluates an issue before taking a stand. Whether the issue is one of trade, tax, labor, or almost anything else, the alternative positions will have varying inflationary effects. Note will be taken on the inflationary effect of each alternative position in determining which is the best position for ASD.
3. The President is about to issue his program to fight inflation. The Goveri ment Relations Committee may wish to take a stand on the President's program to fight inflation at a subsequent meeting. Therefore, a subcommittee of the Committee will analyze the President's program and make recommendations to the full Committee.
III. PRODUCT LIABILITY
A. Summary
In recent years there has been an explosion of litigation in the product liability area. The result of the increasing number of cases and the large judgments awarded the plaintiffs in these cases has been a corresponding explosive increase in product liability insurance rates. Additionally, a growing number of companies have found that product liability insurance is unavailable at any price. The causes of the increase in product liability suits included relatively recent changes in tort law making it easier to pursue a successful suit against the distributor as well as the manufacturer of a product, the increasing cost of medical care, certain insurance rate making practices, the manufacture of unsafe products and the relatively low level of state administered workers' compensation awards.
Long-range proposals for alleviating, if not curing, the product liability problem include creating a uniform product liability law, providing new, higher worker compensation benefits, developing the appropriate Federal role in product liability insurance and making more effective state regulation of such insurance, promoting better manufacturing practices to provide safer products, and improving the coordination of accident compensation. But what has received the most attention in Congress and is of most immediate concern is what can be done in the short run by way'of tax relief to reduce the difficulties faced by business because of the high rates of product liability insurance or the unavailability of such insurance at any cost.
The House Small Business Committee and a number of trade associations, including the Small Business Legislative Council and the National Association of Wholesaler Distributors (ASD is a member of both), advocate legislation to allow companies to insure themselves against product liability risks by establishing a reserve fund exempt from taxation and to which payments would be tax deductible. The sole purpose of the fund would be to pay the company's product liability claims and expenses.






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The other short-term tax relief proposal is that of the Administration, which would extend the carryback period for net operating losses attributable to uct liability and related costs from three to ten years. The Administrati against the so-called self-insurance idea because it would: permit a tax d a and, therefore, he costly to the revenues of the government; allegedly resul ina less favorable use of a business' capital; and supposedly be more to administer. The extended carryback proposal of the Administration was in the Senate to the tax cut bill; it survived the end of session conference n House and Senate: and it thus is in the bill which President Carter will btedly sign into law soon.
B1. Position
1. The two tax relief measures are not mutually exclusive. The Adm tion proposal to extend the loss carryback to ten years thereby allowing as business facing a liability claim to recoup that loss from refund of years' taxes will become law. The-self-insurance reserve proposal will p he re-introduced in the next Congress. ASD supports it. As opposed tot tended loss carryback provision, the self-insurance concept would resolve problem of many businesses in obtaining any liability insurance at all and would help businesses to meet a large liability judgment out of a reserve that it would have on hand rather than from taxable profits of preceding years.
2. ASD, through a Government Relations Committee subcommittee, will tinue to focus on the product liability problems and will be prepared to take tions in the future on the longer range proposals that have been and will be de to solve the problem.
IV. LABOR LAW REFORM
A. Summary
The House of Representatives passed the Labor Reform Act of 1977. The Sena after lengthly debate and several efforts to stop a filibuster on the bill recommi the bill to the Senate Human Resources Committee. That Committee worked o a revision of the original bill which it called the National Labor Relations Procedures and Remedies Act of 1978; but that bill was not passed by the Senate and therefore there was no so-called Labor Reform Bill sent to the President for signing into law. However, this subject is likely to come up again during the nex (ongress. It stems from an effort on the part of organized labor as supported by the Administration to secure changes in the National Labor Relations Act. Te changes are designed to strengthen the enforcement provisions of the Act, expedite procedures of the National Labor Relations Board, and in the eyes of organized labor bring more balance to labor-management relations.
Provisions of the bills considered by this last Congress concerned expediting union representation elections, granting access to employer facilities for unions as well as employers to talk to employees, providing penalties for employers r ing to bargain, awarding back pay to employees dismissed for union activity, barring companies from Federal government contracts or fining them for ce willful violations of the law, and empowering the National Labor Relations Board to enjoin employers for certain activities.
The bill became a battleground for opposing points of view. Organized labor had the bill at the top of its 1978 legislative agenda and felt that it was ne ry to get at certain unfair labor practices. On the other hand, business organiao including small business groups, such as the Small Business Legislative Council to which ASI) belongs, opposed the legislation vigorously.
B. Position
1. ASD supports any legitimate reforms of labor law which would truly add balance to the struggle between management and labor. But, ASD does not sup,)ort the bills thus far presented to Congress because those so-called reforms appear to weigh too heavily in favor of unions and against small business.
The rights of small businesses to communicate fairly to their employees the advantages and disadvantages of unionization and to manage legitimately their businesses even during an organizing campaign by the union should be protected.
The bills offered thus far give unions an unfair advantage over small ilnesses which have neither the time nor the expertise to walk the very thin compliance line proposed by the bills. Since the penalties for non-compliance are so severe, most small businesses confronted with a union organization drive will likely give up in advance rather than risk any action which might be construed later to have been illegal. This will result in unnecessarily increased costs which small businesses are least able to pass on to consumers and, of






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course, projected further this means more small businesses going out of business.
9. If similar legislation comes before Congress again, ASD will support an amendment to exempt small businesses. Such an amendment would allow the exempted small businesses to continue to operate under the present law.
V. INCREASING EXPORTS
A. Summary
The large trade deficits the United States has experienced in recent years have weakened the value of the dollar, intensified inflationary pressures tn our own economy and heightened instability in the world economy. These trade deficits have been caused by a number of factors, one of which is the, relatively slow growth of American exports. U.S. exports have grown at a rate much less than that of other industrial nations. This is part of the reason why the United States has lost its share of world markets. Both business and government in the United States have accorded exports a relatively low priority. This has been due ht part to the traditional self-sufficiency of the U.S. economy where pr(KIlletion was geared to internal consumption and where in most sectors there wa', little need to export or to import. Because of the increased interdependence of the world economy and the shrinking of the world brought about by rapid transportation and instantaneous communication, the situation is changed. It is becoming extremely important to the economic health of the United States to raise the level of our exports. To do that in part means to raise the level of consciousness of the public and private sectors toward exports.
Last month the President announced certain measures intended to provide
-new Government incentives and remove existing Government disincentives to exporting and to secure a fairer international trading system for U.S. exporters. The Administration's program to improve U.S. export performance includes the following:
1. The Export-Import Bank's loan authorization is increased and the Bank is to be more accessible to smaller exporters.
2. The Small Business Administration will direct loan guarantees to small business exporters.
3. The Departments of Commercul and State will expand their assistance of U.S. firms, particularly small and medium sized ones, in marketing abroad.
4. The Domestic international Sales Corporation (DISC) is retained (because Congress has refused to eliminate it) but an effort will be made to make it simpler, less costly, and more effective.
5. Export consequences will be considered in making government regulations and in dMding upon the use of export controls,
6. The Department of Justice will advise business on what is and is not permitted tinder the foreign antibribery statute.
7. Justice and Commerce will explain how American firms can export under cooperative arrangements and in joint ventures without violating antitrust laws.
8. An Executive Order will be issued clarifying and easing environmental requirements with respect to exports.
9. The United States will press at the MTN in Geneva and in an expansion of the international arrangement on export credits for the reduction of foreign trade barriers to U.S. exports and of foreign government subsidies on their exports to the United States.
B. Position.
1. ASD supports the Administration's program for expanding U.S. exports. Except that some provisions of the program will require additional funds, the proposals do not appear detrimental to U.S. citizens in general, to ASD mcalbers in particular.
2. Further, ASD encourages its members to investigate the possibilities of entering the export business themselves. Expanded markets.. via exports, can improve members' profit pictures. A Government Relations Committee subcommittee will be created to investigate, the possibilities for exporting the kinds of products ASD members handle. If there is a potential for ASD members to export and particularly if that potential is limited by conditions which government can alleviate, the subcommittee will recommend how best to maximize -_o%-ernment assistance in the export effort. The subcommittee will, for example. determinewhether a Webb-Pomerene export cartel is possible and feasible for ASD members.






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VI. PRODUCTIVITY IN THE UNITED STATES
A. ~umnmary
Productivity is a measure of what you get out for what you put in. Increased productivity is a larger output of goods and services from the same input of lal)or, capital, and energy. Another way to say it is, to improve productivity, there has to he a continuing ability to produce more in less time and with fewer resurces.
Productivity increases could mean to the United States a higher standard of living, economic growth. control of inflation, international competitiveness more leisure and better health. Conversely, stagnant or declining productivity means living standards fall, taxes rise, prices soar, jobs decline, and conceivably t he entire American way of life, including its institutions, crumbles.
What has happened to U.S. productivity lately is discouraging. As measured by
output per hour, productivity increased at an average annual rate of 1.6 percent from 1967 to 1977, which was half the annual rate of 3.2 percent experienced between 1947 and 1967. If national productivity over the past ten years had increased at that same 3.2 percent rate of the previous two decades, it would have meant an additional $100 billion in terms of real gross national product at the 1977 employment level. The United States had the lowest average annual rate of change in manufacturing productivity among six major industrialized nations over the period 1967 to 1977 (2.3 percent compared to Japan's 6.8 percent).
The decline in the rate of growth of productivity in the United States has been attributed to a number of factors including a changing age and sex com sition of the labor force with a trend toward less experienced workers, a slowdown in the rate of growth in the capital/labor ratio, a leveling off of research and development expenditures, government regulations, particularly for health, safety and environment, changes in workers' attitudes, and a decline in the shifting of output and workers from low-productivity to high-productivity sectors.
In 1975 the National Center for Productivity and Quality of Working Life was established within the Federal government to serve as a focal point for productivity improvement efforts. That agency folded this year because the government decided that as it was presently funded, organized and supported, the Center could not do the job that should be done. The Administration has apparently decided that the functions of the Center should better be assigned to existing agencies of the government.
B. Position
1. ASD supports some government mechanism to replace the National Center for Productivity and Quality of Working Life. That mechanism could be the use of existing agencies-we don't necessarily need any additions to the bureauracy-hut the important thing is to see that productivity is not put on the government's back burner but rather that it is given prominence and importance.
Although the profit motive and competition in free markets should serve as a stimulus to economic progress and productivity growth, the government plays an important role in setting the framework for private enterprise through such areas as economic policies, tax laws, regulations and funds expended to support productivity advances. The government can aid productivity improvement by accelerating technological innovation; stimulating capital investment, for example, through tax policies; reforming the regulatory process; and enhancing this country's valuable human resources by acting as a catalyst in bringing together labor and management for the improvement of work conditions.
2. A Government Relations Committee subcommittee will follow efforts being made by government and in the private sector to increase productivity and wl disseminate such information to the membership of ASD. For example, there is a nonprofit American Productivity Center at Houston headed by C. Jackson Grayson, J.r.. former head of the Price Control Commission. It may be appropriato for Grayson to address an ASD function. Productivity is not at present a glamour issues before the American public. Yet. it is an issue that must be graswd by those in leadership positions in government, business and labor if the Unitled States is to prosper. ASD ean he in the forefront in bringing this issue to the attention not only of our members but also of the American public.






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[From the Post-Gazette, Nov. 15, 19781

MELLON, PNB TO CUT RATES FOR SMALL BUSINESS LOANS

(By Jack Markowitz)
Mellon Bank beginning tomorrow will shave 11/4 percent from its base loan rate for small businesses for the duration of the high-interest crunch, and Pittsburgh National Bank says it will "meet the competition."
The two major Pittsburgh lenders thus appear to be taking a stand ahead of the banking industry generally in recognizing a particular squeeze on small business firms when interest rates push to historically high levels as they have in recent weeks.
Both Mellon and Pittsburgh National, like most major commercial banks in the U.S., charge 10/ percent as their prime rate on loans to top-rated corporate borrowers, though First National of Chicago's move to 11 percent on Monday is widely expected to be followed before week's end.
The new Mellon program was announced yesterday at a press conference iby Board Chairman James H. Higgtns, who said that small businesses are being squeezed not only by the higher cost of financing working capital, inventory and capital equipment but by the "heavy burden of government regulation."
Under the Mellon program, effective tomorrow, a small business--defined as one with assets no larger than $1.5 million-will have its rate on a new or renewed loan keyed to a new small business base 114 percent below prime rate, but not below 9 percent. As the prime rate rises, the small business rate also will rise in tandem, maintaining the 14 percent differential. When the prime declines below 10% pereent-and Higgins offered no prediction when that mizht be-the differential will narrow until prime reaches 9/2 percent. At that point, the program will terminate.
Higgins and Craig G. Ford, senior vice president in charge of Mellon's metropolitan department, said the new program will affect only "a very small percentage" of the big bank's $5.4 billion total loan portfolio but is especially designed to help tide small businesses over what Higgins termed "our inflationary age."
The program affects new loans and renewal loans and is available only in the six-county area served by Mellon's 108 offices.
Edward V. Randall, Jr., senior vice president of community banking at Pittsburgh National Bank, told a caller. "We will meet our competition." He said that a similar program will be explained to PNB's small business customers and that it also will take effect tomorrow, but he said there would be no public announcement of details. "It will be a more flexible plan," he said, indicating, however, that it would also involve a differential below prime rate.
"We'll take anything we can get," Higgins said with a grin when asked if the program should spur new business, but Ford said the primary aim is to serve the customers who have dealt with the bank "through good times and bad."
An Equibank spokesman said that the city's third largest commercial bank has not adopted what it called a "dual prime rate" for small and large business customers but plans to continue to set rates "according to the specific need- and requirements of our borrowers." Equibank has "traditionally supnorted the small business community in our market area and will continue to do so," the spokesman said.
'Mellon's Craig Ford said small businesses typically have no choice but to borrow, especially at this season of inventory-building in advnnce of the Christnmas shopping season. The average small business loan is $40.00. "We're hoping to help them cope not only with the high rates but the rapidity with which they have risen," said Ford.
1-e added that the bank has seen "no slowing of economic activity in the Pittsburzh area-and we're hoping to keep it that way."
Hifgins said the new small business rate is the first, so far as he knows., to be established by a bank in the current spate of rising interest rNtes. hut the Federal Reserve ordered all banks to take similar action in a previous credit crunch in 1973.
If the Federal Reserve holds firm on its current course of restraining the growth of the money supply, Higgins said, "interest rates may go even hi-gher and the degree of hardship in the small business community would simply






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increase." lie declined to predict when rates will hit their peak, but said that much depends on the actions of foreign holders of dollars. "They have got to be convinced of the credibility of the U.S. fight against inflation," said H i s, who ternm the Carter administration's moves so far "commendable but too little and too late."
lie said that small business loans should continue to be "Proitable" f the bank. Many small businesses pay 1 to 3 percent above prime rate and
even with a rate differential will continue, in fact, to pay more tha r borrowed money. A small business customer now -borrowing at3 pve prime would pay on a new or renewed loan beginning Thursday, theall business rate plus 3 percent.
Firmly scotching a reporter's inference that the new program puts Aeon in the position of seeking "higher-risk" credit-s, Ford said some smal possess a balance sheet whose ratios would be envied by some of the leading corporations. "But if we don't take care of them at a time liketh he said. "they've got a problem."
The bank is making no adjustment to its consumer loan rates, whicF said have held, unbudging, at Pennsylvania usury law ceilings for as l :10 years. Thus, a 48-month car loan remains at approximately 11 per a 36-month personal installment loan at about 13.5 percent, and a homei nient loan at about 12 percent. A 91/4 to 9%y percent range was cited for cvetional home mortgages, and Ford said that in all these consumer a are actively being made.
Mr. CH1ERKASKY. Yes, sir?

STATEMENT OF JULIUS DAVIDSON ON BEHALF OF THE VIC
CORPORATION OF RETIRED EXECUTIVES

Mr. DAVIDSON. My name is Julius Davidson, representing the v
ice Corporation of Retired Executives, known as SCORE.
The SCORE organization now has filed a brief supporting many of the positions taken this morning, and it has been submitted for the record.
My comments will be limited to just one item, and that is the White House conference.
Those who are involved in the regional, State, and local neetinaS, I want to remind them that SCORE is a nationwide organization consisting of 342 chapters located in every State in the Union and in Puerto Rico. Call on them for help.
SCORE enthusiastically supports the White House conference. As a matter of fact, I think that it would be highly advisable to have a representative of SCORE on the Advisory Council to the White House conference itself. I think that is of the greatest importance.
SCORE, I would remind you, has only one purpose, and that is its dedication to the overall welfare of the small business community. Call on it.
Thank you.
Mr. CIHERKASKY. Thank you, Mr. Davidson.
[The supplemental information of Mr. Davidson follows:]
SERVICE CORPS OF RETIRED EXECUTIVES, NATIONAL SCORE COUNCIL,
November 10, 1978.
Hon. GAYLORD NELSON,
U.S. Senate, Senate Office Building, Washington, D.C.
DEAR SENATOR NELSON: Thank you for your letter inviting small business organizations to meet with the Committee staff at 9:30 a.m. on Thursday, November 16, 1978, to advise the Committee of our views as to what your program might include for the two years of the 96th Congress.







89

Due to the inability of Joseph G. E. Knight, President of the Service Corps of the Retired Executive Association to attend the meeting, Mr. Julius Davidson, Chairman, Budget Committee, National SCORE Council, will accompany me to present the views of the National SCORE Council at the meeting.
Enclosed ar 20 copies of Mr. Knight's statement.
Sincerely,
WALTER P. O'ROURKE,
Chairman, NSC Legislative Affairs Committee.

My name is Walter P. O'Rourke and I am the General Counsel of the Service Corps of Retired Executives Association perhaps better known by the acronym 'SCORE. With me is Mr. Julius Davidson, Chairman Budget Committee, National SCORE Council. We are privileged to be able to appear before this committee and to have the opportunity of presenting the views of the National SCORE Council, the governing body of SCORE.
Much of the legislation that has been prepared for review by this body is strongly supported by SCORE; however, there are some areas in which we believe some other thought or additional viewpoints should be considered as well as some ideas that were not included in the Government Affairs Update sent us.
We are still very concerned about the refusal of banks all over the country to entertain applications for loans under 10 thousand dollars on the grounds that the handling is too costly, and the problems to great. This causes us special concern when one realizes that the Small Business Administration is charged with and constantly striving to improve the entrance of women into the business community.
We have on several occasions in the past months been sharply reminded in the process of workshops for Women Going into Business, that women are being denied their chance because funds in such small amounts are being refused by banks.
It seems highly illogical to us to enter upon a national program to encourage %%-omen on the one hand to enter the mainstream of business and on the other f ai I to provide adequate funds to make that possible.
SCORE has on several occasions now, suggested that since there is a dearth of direct money available through present legislation to women who plan to start a truly small business, that it is imperative that ways and means be found to make it both profitable and attractive to banks to make these small loans, and that the banking industry be the main source of such funds rather than a Federal direct money approach which invariably overlooks the geographic location of women in favor of the total population of a state, the basis which for example makes direct money to Rhode Island much less available than it does to California, thus denying the Rhode Island women and women of equally small states their chance as opposed to their chance if they are residing in a populatively larger state.
In connection with any loan program in which SBA is involved, we feel very strongly a retirement that all such small loans for owners-to-be require the taking and completion of a pre-business workshop in order to fully expose these entrepreneurs to the potential hazards prior to any expenditures for a new busiiiess by anybody. A pre-business workshop is generally full day session in which owners to be and recent owners are provided with the basic principles of good management. There have been far too many business failures that could have been prevented had there been such a requirement in the past.
On the stibject of the Small Business Development Centers, SCORE has supported the concept as originally outlined to us some years ago when the idea was first introduced. Unfortunately there has not always been the execution of the original idea along the lines which included SCORE as an integral part of the plan.
We are aware that the bill which would have furthered this project has been vc-toed by the President, and that plans are afoot for the presentation of another ))Hl in the spring that may overcome the objections stated. We in SCORE do strongly recommend that there be an advancement of the Small Business Development Centers, but not along the lines of current thinking.
In the matter of Senator Lugar's amendment to the bill S_ 1010 in which he ,tiggests that there be a 13 member Bank Board, we feel that the suggested membership does not fully or adequately represent Small Business and that a member of the National SCORE Council should be one of the appointees to that Board so that all small business interests may be fully represented.






90

It became very clear at the Region One White House Confer Business held as a prelude to the eventual White House Confe t
there needs to be a redefinitlon of the size of standards of small bi that this should be a matter of committee study and report long before Washington Conference takes place.
There are inherent problems in the Equal Employment Oppor that
have already produced some "backlash" effects.
For example, the Carroll County Independent, a weekly New Hampshire paper, not long ago had a sub headline that asked, "Where do we find an Eskimo?". On reading the body of the text it was noted that a small New H c
unity had in some way become involved in Federal funding, and as a ment had to provide 10 percent of the labor to minorities.
In this community, and in fact in much of the county, there are no as defined by Federal regulations, and as ui result they were humorously in as to where they could find and import for the purposes of the law some such as an Eskimo, keeping in mind no doubt that in that part of the only an Eskimo could or would be able to stand importation to a
climate.
SCORE recommends that there be those alterations in the regular no longer prevent a community from benefitting by Federal funding ply because there have been no minorities in that community. It seems pttly unfair that the good citizens of such a community should be denied their fair share simply because of the types of population or ethnic background they
SCORE strongly supports the elevation of the Administrator of the Smal Business Administration to the Executive Level One, and hopes that serious cosideration will be given to that move.
Lastly, the problems that are being encountered by small manufacturers who are subject to the Product Liability laws are of sufficient severity as to su t that a very hard look and swift revision is required in order to prevent those businesses from facing enormous increases in premium cost as well as the t of and actual cancellation of policies such as were described by a machnery manufacturer in Connecticut who is faced with either becoming completely uncompetitive because of the increased insurance cost or going out of bus ness, and this after being in business for over 40 years (this was a public statement at the Boston White House Small Business Conference and is contained in tie record of that meeting). The constraints imposed by these insurance regulations are in danger of becoming the death knell for small business owners, with resultant loss of employment and potential increase in imports, as foreign trade without the insurance requirements can quickly become the source for our lost business in a market that does not recognize the problems but is painfully aware of the price.
In closing it must be made clear that the statements made here are those of the National SCORE Council on behalf of SCORE nationally and have been neither approved nor disapproved by the Small Business Administration altbougli a copy has been given to the agency.
JosEPH G. E. KNIGHT,
Chairman, National SCORE Council.
Mr. CHERKASKY. Yes, sir?

STATEMENT OF STEVEN A. WOLF ON BEHALF OF THE NATIONAL FAMILY BUSINESS COUNCIL

Mr. WOLF. I am Steve Wolf, government affairs chairman of the National Family Business Council. This is a group of men and women working to perpetuate their family businesses.
We like to look upon ourselves as a professional society of entrepreneurs. The purpose of the National Family Business Couniil is to insure the survival of those working in family businesses and the survival of family business within our free enterprise system. It is our belief that the family business is important to the survival of the free enterprise system.
The areas of concern of family business are its perpetuation in our generation and generations to come. The other area is the perpetuation






91

of the small private business sector within our econom y anid t he perpetuation of the free enterprise system.
The areas that we think should be investigated is the role that these family businesses play in the small business sector. If you perpetuate family business, you will have saved the small business sector, we believe, because over 99 percent of the small businesses are closely held. If one-half of all the family businesses close or sell out in, one generation, then the small business sector will suffer.
The other area that we think is of prime importance is the attitude of Government toward this sector.
With a positive attitude by Government toward the small private business sector in the areas of capital formation, capital preservation, relief from Government regulations for small business, plus all the issues that the National Small Business Association or Small Business Legislative Council are in favor of in the White House Conf erence for Small Business-that would also help perpetuate the small business sector.
Also the ease of restrictions in Government procurement for small business would help. The issue that we are most interested in is the estate and gift tax laws and the effects those laws have on the family business. We think the current estate and tax laws are no longer relevant because of the increasing rate of inflation from year to year.
By the year 1981, $175,000 exemption will probably cover most of our fathers homes, and that is about it. We also feel there should be a differentiation between the personal and business assets in one's estates. There should be more help for the heir of the family business as there is for the surviving spouse. More help in this area would help.
Many family businesses are unfortunately uniquely penalized because they must use their working capital to fund the payment of these estate taxes. The current laws also are something that should be looked into because of their inflationary force that they have upon the small business sector and family businesses within that sector.
The suggestions that the National Family Business Council would like to propose are, one, to support and assist in the efforts of the White House Conference on Small Business; two, to help maintain the free enterprise system by keeping the entrepreneurial spirit alive in generations to come; three, we specifically plan by 1980 to complete a study and make specific recommendations to you for the creation of a National Family Business Act.
Family business is an integral and vital component of our economy atid society. It is worth saving as a source of entrepreneurial talent. It is a means of insuring individuality, a personal sense of freedom and pride and ownership. Those are values on which this country traditionally placed a premium.
Family businesses serve as a means of holding together the family unit, which is the vanguard of stability, moral fiber, and providing for incentives and keeping things moving f orward.
One other thing that came up last weekend was a catchy saying that we kind of borrowed from someone's advertising campaign, but it kind of gives you an indication of how we feel all family business fits in, and we look on it as baseball, hot dogs, apple pie, and family business.
Thank you for this opportunity.
Mr. CITTERKAsKY. Thank you.






92

[The supplemental information of Mr. Wolf follows:]

OUTLINE OF PRESENTATION

BY

THE NATIONAL FAMILY BUSINESS COUNCIL

BEFORE

SENATE SELECTr CO'MrJ.EE ON SMALL BusiNEss

HOLDING MEETINGS ON

SMALL BUSINESS PROGRAM FOR THE 96TH CONGRESS

NOVE-MBER 16, 1978

1. INTRODUCTION
A. Brief explanation of who the National Family Business Council (N.F.B.C.) is 1. A group of young men and women working to perpetuate their Fml Businesses; 2. Chief Executive Officers of closely-held businesses; and 3. A profess,-iou~al society of entrepreneurs. Bi. The Purpose of N.F.B.C. is 1. To insure the survival of individuals workinglin family businesses, and 2. The survival of Family Businesses working withinou free enterprise system.
II. AREAS OF CONCERN FOR FAMILY BUSINESS
A. The perpetuation of our Family Businesses in our generation and the gn erations to come.
B3. The perpetuation of the small private business sector of our economy.
C. The perpetuation of the free enterprise system.

III. AREAS TO BE INVESTIGATED
A. TIhe role family businesses play in the small business sector.
1. If you save and perpetuate Family Business, you will save the small bui ness, sector because over 99% of small businesses are closely held.
2. If one-half of all family businesses last only one generation and either hv to sell out or close their doors; then the small business sector will suffer.
B. The continuation of the free enterprise system through positive government attitudes toward the small private business sector.
1. Positive government attitudes toward capital formation.
2. Positive government attitudes toward capital preservation.
3. Relief from government regulations for small businesses.
4. Ease the restrictions in government procurement for small business.
5. Review the current estate and gift tax laws and their effect on the perpetuiation of Family Businesses.
a. The current estate and gift tax laws are no longer pertinent because of
changed economic conditions and the inflationary increase in the consumer
price index,
b). There should be a differentiation between personal and business assets of
one's estate.
c. There should be as much help for the heirs of a family business as there
is for the surviving spouse.
d. Family businesses are uniquely penalized because they must use working
capital to f und the payment of estate taxes.
e. The current laws are inflationary because they force small busnse to
pass on these costs to the consumer.

IV. N.F.B.C. PROPOSED ACTION
A. To support and assist in the efforts of the White House Conference on Small

B1. To help maintain our free enterprise system by keeping the entrepreura spirit alive.






93

C. By January, 1980, we plan to complete our study and make specific recommendations toward the creation of the National Family Business Act.
V. SUMMARY
Family business is an integral and vital component of our economy and society. It is worth preserving as a source of entrepreneurial opportunity, for the many contributions family firms have made in all fields of technology, innovation and social betterment. It is a means of insuring individuality, a personal sense of freedom and pride in ownership-all values on which this country has traditionally placed a premium. Additionally, family business serves as a means for holding together the family unit, a sociological phenomena generally considered as being the vanguard for stability, moral fiber, and for providing the incentive to I-eel) moving forward.
MAr. CHERKASKY. We did not take a break this morning, so we are going to lock up the doors at 12 noon.
Are there f urther comments?
Please, back here ?

STATEMENT OF JACK GROLLMAN, ASSOCIATION OF INDEPENDENT CORRUGATED CONVERTERS
Mr. GROLLNMAN. I am- Jack Groilman of the AICC.
So as not to have any sense of complacency, I will dispense with further comment to the committee on the work it has done. I would like to concentrate on one subject. We would like to see an increase in the amount the Government presently allows for tax investment credit with respect to purchase of used machinery.
At the present time, this maxinmm amount is $1,00,000. We would like to see this increased to a limitless amout-tlie same as for new equipment.
I suppose I should say our interest is typical of many other industries in this country, small manufacturing industries, being machinery intensive, but rather minimal in labor. Even being minimal in labor, our average company, of which there are 750 in this country, employs about 50 employees per company.
The equipment we use, the equipment to manufacture our product, is quite expensive. In the fields in which we are engaged, we must compete with the largest corporations of this type in the country.
There are major integrated companies who control forest lands as well as the finished products. The area in which we compete is finished products-boxes.
-In order to produce such a finished product,. we must have equipme~nt that is quite expensive. By "quite expensive," the minimal type of new equipment today will rin into moderate six figures.
It is not uncommon for small companies to purchase well in excess of $100,000 worth of used equipment each year. We are competing against the giant companies who do not normally buy used equipment.. They buy new equipment for the manufacture of corrugated cartons.
A modern hi gh-speed corrugator today is close to a $2 million cost 1!halled.
A used piece of equipment comparable to a new one is in the range o~f ()()()Cto ,500.060. Tl-lis~is quite common. 0An ordinary press used to manufacture the shipping container is in the range of $500,000 new. This is a vital piece of equipment, and
40-2ST-96-7





94

in its used form, the same piece of equipment can cost $150,000 to $200,000.
If we must compete in a very vigorous marketplace, we feel we should be allowed greater tax credit for the purchase of used equipment.
The machine products industry and others also have parallel situations. Food processors have the same situation. I believe a wi segment of small business would be represented. We are talking about small business in the area of $1 million to $25 million in sales per year.
I feel if this tax inducement is given to small business for it on purchase of used equipment, it would help to perpetuate small business and as such provide many jobs to the economy.
Mr. CHERKASKY. Thank you.
Mr. Feilar ?

STATEMENT OF FRANK FEILAR, DIRECTOR, ACTION PROGR S
AND ADMINISTRATION, NATIONAL RESTAURANT ASSOCIATION Mr. FEILAR. My name is Franklin Feilar, and I am with the National Restaurant Association located here in Washington, D.C.
We appreciate this opportunity to address this body, and we would like to identify the fact that our organization represents some 8 million employees across the country, and the total collective number of 535,000 business establishments of which 90 percent are small businesses.
This very week, our subcommittee on Small Business meant to discuss the issues of vital concern in 1979 to our industry.
While we are not prepared today to offer solutions to some of these issues and concerns, I am here to tell you of these concerns with documentation to be submitted in a very short period.
While these are not in order of importance that they were presented, the five top issues of concern to our industry are as follows:
Paperwork and regulatory agency proceedings.
Minimum wage and Social Security increases, which collectively exceed about 10 percent, effective January 1, 1979.
Labor or law reform.
Tax credits as they affect remodeling for small businessmen; and, finally, the financing of a national health care plan is of great concern to small businessmen.
These are certainly not all of the issues of concern to our gigantic industry, but needless to say, these are more vital ones, and we would like to have the opportunity to come back and address you again.
Mr. CITERKASKY. Thank you, Frank.
I would like to say one thing. The National Restaurant Association is a very strong, viable ongoing group that is organized State by State, chapter by chapter, and is very valuable, and it is a very vital lobbying force because they are organized that way.
I said to their group a couple of days ago that the effectiveness of the efforts of small business in lobbying could be seen by the way the labor law was defeated in Congress last year.
I will say again that if small business wants to get what it wants, it has to organize on a chapter-by-chapter, State-by-State, district-bydistrict basis, so when you make your phone calls to your Senators






905

and. Congressmen, they know who you are, and, therefore, you have that much more force when you speak. 'We talked about that before, Frank. I want to, say that the rallying cry for any small business group is to be very well organized. That is one reason why we had a graudated corporation income tax to the tax bill the last time around and why we almost won on the simplified depreciation.
It won on the Senate floor, was defeated in this committee, and because of the support, we went back to the floor and won on the floor, but were defeated in conference. We will try again.
Next.

STATEMENT OF RUTH KOBEL, NATIONAL FARMERS UNION
Ms. KOBELL. I am Ruth Kobell. Our organization represents 300,000 independent commercial family farmers, who are certainly, I think, an important segment of small business in the Nation.
We want particularly to commend this committee and Senator Nelson for what is called the "widow's tax" provisions in the recent tax bill, which provides estate tax credits through recognition of the contribution that farm women and other women involved in small family businesses make to the value of that business in terms of labor and management.
We believe this will be important down the road in helping maint'ain family farm operations on the death of a spouse, and the' ability to transfer that operation to the next generation.
We believe this is extremely valuable in the whole process of the food and fiber policy in this Nation.
The operation of family farmers have been demonstrated as the most efficient in terms of food and fiber production. Yet we note a majority of our farm operators are over 50 years old and escalation in land value ha's made it extremely difficult for young people or new farmers to come into the business.
We appreciate the hearings you have had here in terms of the use of alternate energy. Farmers are major users of energy, and must be assured an adequate and reliable supply.
W~e hope that you would have some overview of the ways in which we can transfer farm operations to a new generation. Thank you.
Mr. CHERKA4sKRY. Thank you.
On that point, I wanted to be sure that you realize before you go that we do have a specialist on family farms on our staff. We are conducting our family farm hearings as we did in the past, and we will have another one on December 11.
Yes, sir.

STATEMENT OF RALPH HARDING, PRESIDENT, SOCIETY OF THE PLASTICS INDUSTRY
Mr. HARDING. I am Ralph Harding, president of the Society of the Plastics Industry, an association representing about 14 countries.
I had not intended to speak today, but I find the record is going to be incomplete when you lock the doors at 12 o'clock unless there is a little more emphasis on overregulation.





96

I would hate to have this committee record not to include that, and I can say that I am speaking particularly, of course, of the environmental reulations, and I think it has to be carefully dealt with.
One: These are needed. Most of the people who are involved with them will readily agree. We must have more careful regulation on variois environmental issues.
Two: I don't believe there should be an automatic small business exemption per se, because the toxic material is just as toxic in a small business as it is in a large business. But there has to be some method of care and restraint and consideration in drawing up the regulation to make it possible for the small businsses to stay in business.
This affects not just our industry, the plastics industry, but a great
many others. The dry cleaning industry could readily shut down, for example, and can you go through a long list of the potential horror stories, brought about largely by a lack of understanding of the fallout in the writing of these laws, first, and the regulations which follow.
I think there needs to be much more input from qualified, responsible representatives in small business in the development of these laws, and of these rules which are needed, but which need to be practiced.
I thank you.
Mr. CHERKASKY. Sir, on that point, we would like to know about some of these particular onerous regulations that affect any part of your industry.
If you will, send those to us in writing. We have a bill called the Regulatory Flexibility Act, which calls for input by small business in the making of regulations. It is a long process in getting the bill passed, to say nothing of overseeing the regulations that occur after any bill is passed.
I want to be sure that anybody here though knows those regulations that particularly impact upon their industry or business, we would like to know about that.
I am asking, of course, for a deluge, but we will pick and choose where we can be helpful. We are working on one with respect to small realtors who are attacked by the HUD regulation on interstate and intrastate land sales.
Thank you, sir.
1r. Unsell.
STATEMENT OF LLOYD UNSELL, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA
Mr. UNSELL. I am Lloyd Unsell, Independent Assbciation of America.
There hasn't been a problem mentioned here this morning that I cannot associate with, Mr. Chairman. Overregulation, and paperwork, and I don't think there is an industry in America today that is as overregulated and deals with such a blizzard of paperwork as the small oil and gas producers in this country.
I won't bring you our specific problems, but I would like to leave with you a folder which summarizes more than 50 ongoing regulatory proceedings before an even dozen agencies of the Federal Governinent in which our small staff of 16 professional people are directly involved through testimony and other means, trying to represent th.e viewpoint of the small oil and gas industry of this country You