Supporting Small Business

ARSA Position

Small businesses are an integral part of the U.S. economy, yet are often overlooked by Congress and agencies when developing new policies. Minor changes in existing law or regulation, often times innocuous, may well put a heavy strain on small businesses. ARSA supports two pieces of legislation which would ease the burden on these entities. First, the Small Business Regulatory Improvement Act (H.R. 4458) would add teeth to the Regulatory Flexibility Act (RFA) and ensure small businesses are considered during the agency rulemaking process. A second piece of legislation, H.R. 1023, would repeal Section 511 of the Tax Increase Prevention and Reconciliation Act (TIPRA). Section 511 creates a new withholding tax for government contractors.

Discussion

Regulatory Reform

On Dec. 14, 2007, the House Small Business Committee approved the Small Business Regulatory Improvement Act (H.R. 4458). The bill would tighten the Regulatory Flexibility Act (RFA), which requires federal agencies to consider the effects of proposed regulations upon small businesses. Introduced by Rep. Brad Ellsworth (D-IN-8), the bill was co-sponsored by committee Chairwoman Nydia Velazquez (D-NY-12). ARSA’s drug and alcohol litigation and subsequent testimony by ARSA Executive Vice President Christian Klein before the Small Business Committee, helped demonstrate problems with the RFA.

The RFA mandates that federal agencies consider the impact of their rulemaking on small businesses. However, agencies often do not adhere to the RFA provisions, or structure their review to ensure that small businesses are not affected when in actuality, they are.

Changes proposed in H.R. 4458 include:

• A broader definition of the term "economic impact" for purposes of the RFA, which would expand the entities effected; and
• A mandate to ensure agencies conduct a more detailed analysis of proposed rules as well as periodic review of existing rules; and
• A provision to force agencies to directly respond to comments submitted by the Small Business Administration’s Office of Advocacy, an agency that consistently defends small businesses.

Unfortunately, the legislation has attracted critics, namely representatives of organized labor and environmental interest groups. Detractors are effectively claiming that holding federal agencies to the letter of the law will waste budget resources.

ARSA sent a letter of support to Chairwoman Velazquez, stating "ARSA believes that this legislation, along with the watchful eye of Congress, will go far in ensuring that small businesses are treated fairly and accurately accounted for in the rulemaking process."

Section 511 Repeal

Section 511 of TIPRA requires that, beginning in 2011, governmental entities (local, state, and federal) whose annual expenditures exceed $100 million withhold three percent of all payments made to any individual or company that has provided goods or services to the government. These withholding amounts are sent to the federal government and credited against government contractors’ future tax liability.

A broad based coalition of groups, including ARSA, supports repealing Sec. 511 because our members and customers do business directly with state and local government entities.

While doing little good, Section 511 will have a significant negative impact on companies that do business with the government. The new law effectively forces government contractors to make interest free loans to the federal government for amounts that in some cases will exceed contractors’ profit margins. Sec. 511 will dramatically affect government contractor cash flow and reduce the amount of money available for payroll, new business investment, and everyday expenses. Small businesses will be particularly affected, and many may have to take on increased debt to mitigate the impact of Sec. 511. Others will have to change the way they price government contractors or may simply choose to stop serving government customers.

Organizations representing state and local government officials have called the new law an unfunded mandate and said that it will increase the costs of administering contracts at all level of government. This, in turn, will reduce the resources available for critical public services and infrastructure investment.

Sec. 511 was included in TIPRA in conference without any public discussion, debate, or input from affected industries. The provision was added as a cost offset ostensibly to help reduce the “tax gap” (the difference between what taxpayers owe and what they actually pay to the Internal Revenue Service (IRS)). While closing the tax gap may be an admirable goal, the reality is that Sec. 511 will do little or nothing to solve the problem. Tax cheats will still be able to under-report income or over-report deductions. Companies and their owners are already required to make quarterly estimated tax payments toward their tax liability. Congressional efforts to close the tax gap should therefore focus on better IRS enforcement of existing laws rather than costly new mandates on state and local governments and their small businesses contractors.

The Congressional Budget Office (CBO) estimates that the new law will raise $7 billion. However, opponents have questioned that scoring because the majority of the $7 billion represents contractors’ advance tax payments to the government via the three percent withholding (i.e., money that the government would have collected anyway). Based on the 2011 implementation date, the provision will only raise $215 million in 2012 and only slightly more in later years.

Bills to repeal the new law have been introduced in both houses of Congress as H.R. 1023 and S. 777.