THE WHITE HOUSE CONFERENCE ON SMALL BUSINESS ISSUE HANDBOOK THE WHITE HOUSE CONFERENCE ON SMALL BUSINESS -----------------------*-------------------- Foundation for a New Century The following information comes from the 1994 "White House Conference on Small Business Issue Handbook * A Foundation for a New Century." It was prepared by the Office of Advocacy, U.S. Small Business Administration, and this first edition came out in April, 1994. Updates will be added as new information becomes available. Contact The White House Conference for Small Business, at 1800 G Street, NW, Suite 1233, Washington, DC, 20006-4407. Or call (202) 724-0891 for more information. THE WHITE HOUSE WASHINGTON Dear Conference Participant: It is my great pleasure to welcome you to The White House Conference on Small Business. Over the coming months, you and your colleagues will address many important issues and problems. My entire administration values your unique perspective on the role of small business in our nation's economic future, and we will work closely with you to make the Conference a success. As you well know, new forces such as globalization, the rise of new technologies, and the development of new markets are shaping a new American economy. Many experts believe that smaller firms, with their nimbleness, adaptability, and creativity, will play an increasingly important role in that new economy. I agreeşthat is why your leadership through this Conference is so valuable to the nation. I look forward to participating in the National Conference in the summer of 1995, and to reading the Conference's findings and recommendations. Thank you for your important contributions, both through your business success and in this Conference. Sincerely, Bill Clinton Dear Conference Participant: As a venture capitalist and an active supporter of small business firms for more than 25 years, I congratulate you on your decision to join with your peers to map the course of small business prosperity into the 21st century. These conferences will enable members of the small business community to explore new ideas and develop constructive recommendations to facilitate the entrepreneurial process. Having participated in the first White House Conference on Small Business, I know reaching consensus on the most important issues facing small business will not be easy. The interests of small business are as diverse as the businesses themselves. However, the White House Conference on Small Business provides a unique opportunity for the many voices of our community to speak with a shared purpose. Many exciting developments in the areas of information and communication challenge us to seize the day and move forward. The information age has not only changed how people will participate in a work force requiring new skills and new ways of thinking, but it is changing how all of us communicate and view the world. Furthermore, the opportunity to affect government policy on taxation, capital formation, and international trade, to name only a few, gives you an idea about the significance of these conferences. The challenge to all conference participants is to speak openly and constructively to explore the ideas that will help us flourish in the years to come. Again, welcome, and thank you for attending the White House Conference on Small Business. Sincerely, Alan Patricof Chair, White House Conference on Small Business Dear Conference Participant: On behalf of the U.S. Small Business Administration (SBA), we are pleased to welcome you to the 1995 White House Conference on Small Business. This Conference is an opportunity for America's dynamic small business sector to recommend measures that will lead to greater success in the global marketplace. During the past several months, in town hall meetings around the country and in task force discussions leading up to this Conference, we have heard from America's small business owners and advocates. They have shared with us their concerns for American small business and have spoken with hope about their dreams for the future. In a very real sense, your work at this Conference will help us respond to those hopes and concerns. We welcome your good ideas and look forward to working with you to help implement them. To assist you in your discussions, SBA's Office of Advocacy has prepared an Issue handbook that gives background information on more than 100 small business topics. We believe you will find it a meaningful guide to the complex and important issues facing small business today. Please keep in mind that the President and the Congress are eager to hear your candid, constructive suggestions for those policy changes that would be of the greatest benefit to the small business community. Your views reflect your personal experience, hard work, and common sense. We know that we can benefit a great deal from your insight and ask that you give this endeavor your best effort. Thank you in advance for your work in making this Conference a successful one. We value your commitment and assure you that your time and energy will be put to good use. Sincerely, Erskine B. Bowles Administrator U.S. Small Business Administration Doris S. Freedman Acting Chief Counsel for Advocacy U.S. Small Business Administration FROM WILMINGTON TO DEARBORN Tentative schedule of dates and cities for individual state conferences that precede the June 1995 White House Conference on Small Business ----------------------------------------------------------------- 1994 Dates Delegates June 2 - Wilmington, Delaware 10 June 9 - Nashua, New Hampshire 10 June 14 - Casper, Wyoming 10 June 21 - Milwaukee, Wisconsin 22 June 27 - Billings, Montana 10 June 30 - Boise, Idaho 10 July 6 - Sioux Falls, South Dakota 10 July 12 - Bismarck, North Dakota 10 July 14 - Minneapolis, Minnesota 20 July 19 - Charleston, West Virginia 10 July 21 - Columbus, Ohio 21* July 26 - Des Moines, Iowa 14 August 1 - Salt Lake City, Utah 10 August 9 - Omaha, Nebraska 10 August 11 - Wichita, Kansas 12 August 16 - Springfield, Illinois 22* September 1 - Indianapolis, Indiana 24 September 8 - Louisville, Kentucky 16 September 13 - San Juan, Puerto Rico 10 November 9 - Burlington, Vermont 10 November 10 - Portland, Maine 10 November 15 - Danvers, Massachusetts 24 November 16 - Anchorage, Alaska 10 November 17 - Providence, Rhode Island 10 November 22 - Honolulu, Hawaii 10 November 29 - Cromwell, Connecticut 16 December 1 - Washington, D.C. 10 December 6 - Virginia Beach, Virginia 26 December 8 - King of Prussia, Pennsylvania 23* December 13 - Pittsburgh, Pennsylvania 23* December 15 - Buffalo, New York 33* 1995 Dates January 4 - Nashville, Tennessee 22 January 10 - New York, New York 33* January 12 - Baltimore, Maryland 20 January 17 - Columbia, South Carolina 16 January 19 - Atlanta, Georgia 26 January 24 - Raleigh, North Carolina 28 January 26 - Birmingham, Alabama 18 January 31 - Jacksonville, Florida 25* February 2 - Miami, Florida 25* February 7 - Jackson, Mississippi 14 February 9 - New Orleans, Louisiana 18 February 14 - St. Louis, Missouri 22 February 17 - Oklahoma City, Oklahoma 16 February 21 - San Antonio, Texas 32* February 23 - Little Rock, Arkansas 12 February 28 - Arlington, Texas 32* March 3 - Albuquerque, New Mexico 10 March 7 - Phoenix, Arizona 16 March 9 - Las Vegas, Nevada 10 March 14 - Los Angeles, California 54* March 16 - San Francisco, California 54* March 21 - Seattle, Washington 22 March 23 - Portland, Oregon 14 March 29 - Denver, Colorado 16 April 4 - East Brunswick, New Jersey 30 April 6 - Cleveland, Ohio 21* April 11 - Chicago, Illinois 22* April 13 - Dearborn, Michigan 36* * = States with more than 10 million persons will have two state conferences. The number of delegates elected in these states will be equally divided among the two conferences. There will be 695 appointed delegates to the National Conference. Each Governor, Senator, and Member of the House of Representatives will appoint one delegate and one alternate. President Clinton will appoint 100 delegates and 100 alternates. Contents Facts About the White House Conference Facts About Small Business Executive Summary of the Issue Papers Acknowledgments THE ISSUE PAPERS Capital Formation: Investing in the Success of Small Business Availability of Capital Banking Reform Equity Financing through SBICs Innovative Financing Programs/Leveraging Government Dollars Pension Fund Investing Secondary Markets/Securitization Securities and Exchange Commission Issues Securities Laws Small Business Administration 7(a) and 504 Loan Programs Venture Capital: Alternate Sources of Financing Community Development: Revitalizing Our Resources Community Development Financial Institutions Community Revitalization Crime/Violence in the Workplace Defense Economic Conversion Franchising Homebased Business Rural Development SBA Micro-Loan Program SBA Technical Assistance Environmental Policy: Encouraging Environmentally Sound Development Cost-Effective/Efficient Environmental Protection Government Outreach to Small Business Greater Relief from Environmental Regulations for Small Business Impact of Environmental Laws on Access to Capital for Small Business Non-Point Sources of Water Pollution Recycling Reducing Paperwork Required by Environmental Regulation Superfund Tax Incentives for Investing in Pollution Control Equipment Human Capital: Improving the Competitiveness of the 21st Century Work Force Access to Health Care Adapting to Diversity in the Small Business Work Force Americans with Disabilities Act Early Entrepreneurship Program Encouraging Diversity in Small Business Ownership Health Alliances/Health Purchasing Cooperatives Health Care Financing Mechanisms Health Insurance Deduction for the Self-Employed Health Insurance Market Reforms HIV/AIDS Education and Prevention Medical Liability Reform Preparing Students for Work Retirement Plans Social Security Tax Reform State-Mandated Health Care Benefits Substance Abuse Taxation of Health Benefits Work Force Skills Workers Compensation Worksite Health Promotion International Trade: Fostering Small Business Interests in the World Marketplace Development of a Strategy for Export Assistance to Small Business General Agreement on Tariffs and Trade Import Policy North American Free Trade Agreement Trade Finance Procurement: Balancing Public and Private Resources Access to Procurement Opportunities Balancing Private and Public Resources Best Value Procurement Competition from Non-Profit Organizations Labor Laws and Federal Contracting Prompt Payment Act Rights in Technical Data Small Business Set-Asides Small Purchase Threshold Subcontracting Opportunities Surety Bonding Regulation and Paperwork: Reinventing Regulatory Policy Alternative Dispute Resolution Bankruptcy Civil Justice Reform Equal Access to Justice Act Fair Labor Standards Act Line-item Veto Negotiated Rulemaking Occupational Safety and Health Reform Paperwork Reduction Act Product Liability Regulatory Flexibility Act Small Business Size Standards Striker Replacement Legislation Unfunded Mandates Taxation: Stimulating the Growth of Small Businesses Accounting Methods Alternative Minimum Tax Capital Gains Tax Corporate Tax Rates Employee/Independent Contractor Classification Estate, Gift and Generation-Skipping Taxes Fiscal Year Conformity Frequency of Changes in Tax Laws Growth Tax Credit Home-Office Deduction Individual Tax Rates Integrated Tax System Inventory Methods Investment Tax Credit Net Income Theory Net Operating Losses Payroll Tax Reform Subchapter S Corporations Taxpayer Bill of Rights Value-Added Tax Technology and the Information Revolution: Leading the Way in Innovation Capital for Technology Development Commercialization of Technologies Critical Technologies Electronic Commerce Flexibility in Manufacturing Information Superhighway Intellectual Property Protection Marketing New Technologies One-Stop Information Centers Research and Experimentation Tax Credit Small Business and Federal Research and Development Standard Industrial Classification Codes Status of Recommendations from the 1986 White House Conference on Small Business Glossary Acronyms Index Facts About the WHCSB The White House Conference on Small Business is an opportunity for America's small business community to make its views known to the Clinton Administration and Congress. To accomplish this, Congress created an independent commission charged to assemble a representative group of people from small businesses in state and regional conferences from June 1994 to May 1995 and a National Conference in June 1995. In these meetings, thousands of small business owners, corporate officers and employees will come together to increase awareness of the critical role small businesses play in the national and global economy. Delegates at the National Conference will propose a small business "action agenda" to the Clinton Administration and Congress to ensure small business vitality into the 21st century. The Commissioners President Clinton appointed 11 individuals from the small business community to oversee the conference process. Alan Patricof, who owns a firm that invests in small growing companies serves as the commission chairman. Nine of the people on the bipartisan commission are small business owners, one is a university law professor and one is an executive of a small business trade association. Conference History. The two most recent White House Conferences on Small Business (1980 and 1986) resulted in the overall participation of 50,000 small business owners and entrepreneurs from the 50 states, the District of Columbia, Puerto Rico, and the Territories. Recommendations for legislative and executive branch action were formulated during both the 1980 and 1986 state and national conferences. (A summary of legislative actions resulting from the 1986 conference's recommendations is included in this booklet. 1980 Conference The 1980 White House Conference on Small Business was held in Washington, D.C., in January, 1980. Approximately 30,000 small business owners and entrepreneurs participated in the state meetings and more than 5,000 people attended the national conference, including the 1,682 official delegates. 1986 Conference The 1986 White House Conference on Small Business took place in Washington, D.C., in August, 1986. Approximately 4,000 people, including 1,813 official delegates attended the national conference. More than 20,000 small business owners and entrepreneurs participated in the state-level meetings. THE 1995 CONFERENCE: Foundation for a New Century The 1995 White House Conference on Small Business will be preceded by at least one meeting per state. States with populations of 10 million or more will have two meetings. Beginning in June, 1994, the state meetings will consist of a one-day program, including an opening session, issue workshops and delegate elections. Task force meetings were held in November and December, 1993 to outline possible issues and questions for discussion. Issue briefs prepared from these task force discussions are included in the booklet, but are intended to be catalysts for discussion only. The following key issue areas will be discussed at the conferences. * Capital Formation * Community Development * Environmental Policy * Human Capital * International Trade * Procurement * Regulation and Paperwork * Taxation * Technology and the Information Revolution Delegates A total of 1,130 delegates will be elected at the state conferences. A registrant wishing to run as a delegate or vote for delegates and issue recommendations must attend the conference in the state in which he or she resides. In order to run as a dele- to gate or vote for delegates and issue recommendations, an individual must be an owner, corporate officer or employee of a small business employing fewer than 500 people. Delegates also must be able to pay their own expenses to Washington, D.C., and at the National Conference or be prepared to seek reimbursement of such expenses because of financial need. Conference registrants who meet the delegate qualifications may participate fully in the breakout issue sessions and may file as delegate candidates. Conference registrants who do not meet the delegate qualifications may participate as observers. Observers will not be recognized to speak during the breakout issue sessions and will not be allowed to vote for issues or delegates. Regional Conferences Following the state meetings, delegates may attend regional meetings. Regional meetings are designed to foster consensus and sharpen the focus of the National Conference. THE NATIONAL CONFERENCE The National Conference, to be held in Washington, D.C., June 11- 15, 1995, will feature daily sessions, official White House functions, speakers, and social events. In addition to the elected delegates, delegates appointed by President Clinton, will also participate in the conference. The size of the state delegation is equal to twice the states electoral college vote plus appointed delegates, with a minimum of 10 members per delegation. The conference will conclude with the delegates ranking policy recommendations to submit to President Clinton and Congress. CONFERENCE REPORT SUBMITTED TO THE PRESIDENT AND CONGRESS A final report will be submitted to President Clinton and Congress. It will include the findings and recommendations of the delegates, as well as proposals for any legislative and/or executive branch action necessary to implement the recommendations. The report is due no later than four months from the date the National Conference is convened. The Small Business Administration will report to Congress annually for three years following the delivery of the final report on the status and implementation of the findings and recommendations. FACTS ABOUT SMALL BUSINESS Based of research conducted by SBA's Office of Advocacy How many small businesses are there in the United States? In 1992, approximately 21.3 million business tax returns were filed for 4.5 million corporations, 1.6 million partnerships and 15.1 million sole proprietorships. Many of the firms represented by these tax returns are very small, part-time businesses. In fact, fewer than 14,000 would qualify as large businesses if an employment cutoff of 500 employees is used to define small and medium-sized businesses. About 5.7 million businesses are large enough to have employees. Jobs Small businesses employ about 54 percent of the work force, contribute 52 percent of all sales in the country and are responsible for 50 percent of private sector product. During the 1976-1990 period, small firms with fewer than 500 employees provided 65 percent of net new jobs. Jobs generated by small firms are more likely to be filled by younger workers, older workers and women. Many of these workers prefer or are only able to work on a part-time basis, and thus can be more easily accommodated by small employers. During the recent recession, it was the small businesses of the nation that rallied, kept going, and added jobs. From 1988 to 1990, all of the net new jobs in the economy were created by small firms. During this period, the performance of the nation's smallest firms (those with fewer than 20 employees) was extraordinary: they created almost 4.1 million new jobs against a loss in large firms of more than 500,000 jobs and a loss in firms with 20-499 employees of 850,000 jobs. Between December 1992 and December 1993, small-business-dominated industries (those in which at least 60 percent of the work force is employed in firms with fewer than 500 employees) increased employment by 1.3 million (3.2 percent). Growth For the first eight months of 1993, 480,163 incorporations were recorded, an increase of 6.2 percent from the previous year. New and successor firms (existing firms that have changed owners) with employees totaled 949,210 (1993 annual rate based on the first six months), a 2.0-percent increase from the previous year. Business failures (the closing of a business with a loss to at least one creditor) declined 11.4 percent for the first six months of 1993, while bankruptcies declined 10.1 percent. During the first half of 1993, business terminations were down about 2.8 percent. Training and Education New technologies and the challenge of foreign competition make on-the-job training necessary to improve the quality of the nation's work force. Small businesses have historically been a source of training for American workers, providing the majority of workers the general training they require to function efficiently throughout their work lives. A recent study commissioned by the Office of Advocacy, Job Training Approaches and Costs in Small and Large Firms (Dan Black, Mark Berger and John Barron, University of Kentucky) found that small firms provide fewer total hours training to new hires in the first three months of employment than do large firms, yet provide more training to new employees with less than 12 years of schooling, and a comparable amount of training to new hires with no previous work experience. Also, firms with fewer than 25 employees provide twice as many hours of informal management training to employees with less than a high school diploma as firms with 500 or more employees. Financing Overall, small firms rely more on equity capital and less on external debt capital than larger firms and are more dependent on short-term than long term debt. Fewer than 50 percent of small firms borrow once or more during a year. However, small firms experiencing rapid growth or those with high volumes of receivables require frequent use of external financing. The cost of borrowed funds is higher on small firms. Interest rates on bank loans for small businesses average two to three percentage points over the prime rate. Innovation Studies show that small firms produce twice as many innovations per employee as large firms. Innovations coming from small high-tech firms are expected to increase as a result of the Small Business Innovation Development Act, which mandates that federal agencies with large research and development (R&D) budgets direct a designated amount of their R&D contracts to small firms. Fiscal year 1991 was the ninth year of the Small Business Innovation Research Program, in which agencies with $ 100 million or more in extramural R&D obligations are required to set aside at least 1.25 percent of these funds for small businesses. In the first nine years, almost $3 billion has been awarded to small firms for a total of 21,501 projects. International Trade Exports have accounted for 70 percent of the growth in the U.S. economy since 1989. Although smaller businesses generally are not major exporters, many supply large firms with parts and components that go into export products. Strength in manufactured exports means that many small manufacturing firms are able to maintain output levels by continuing to support larger exporting firms. Minority and Women's Business Ownership According to the latest data available, the number of women-owned nonfarm sole proprietorships increased by 7.9 percent from 1988 to 1989, continuing their rapid growth. There were nearly 5 million women-owned firms (including those without employees). In 1987, the latest year for which these data are available, there were 1.2 million minority-owned businesses with total receipts of $77.8 billion. Businesses owned by African Americans numbered 424,000, accounting for the largest share or minority- owned businesses (34.9 percent), and roughly 3 percent of all U.S. businesses. As of 1987, African-American owned businesses posted receipts totaling $19.8 billion(about 1 percent of total U.S. business receipts) and employed nearly one-quarter million American workers. Between 1982 and 1987, the number of Hispanic-owned firms rose from 233,975 to 422,373, an increase of 80.5 percent. As of 1987, Hispanic-owned businesses accounted for roughly 3 percent of all U.S. business and 24.7 billion in business receipts - 1.2 percent of total business receipts. They employed more than one- quarter million American workers. Businesses owned by Asian Americans and Pacific Islanders rose from 187,691 in 1982 to 355,331 in 1987, an increase of 89.3 percent. In 1987, they accounted for the largest share of minority-owned business receipts (42.6 percent) and were also the largest among minority-owned businesses in terms of average annual receipts size, with receipts per firm of $93,221 compared to an average of $64,131 for minority-owned businesses overall. Procurement A decade ago, approximately half of the government awards were for supplies and equipment. By fiscal year 1992, that proportion had dropped to 39.7 percent, and small firms were finding more opportunities for providing services and research and development assistance to the federal government. The overall share or federal procurement that went to small firms in fiscal year 1992 was 30.8 percent. Small businesses were awarded $61.6 billion of a total of 199.8 billion in goods and services purchased by the federal government. Some $39.3 billion was awarded directly to small firms and at least $22.3 billion was awarded through government prime contractors to small subcontractors. In fiscal year 1992, the federal government awarded almost 5.3 billion through the SBA to small disadvantaged businesses in the 8 (a) program, up from 4.3 billion. Overall, minority-and-women- owned businesses were awarded contract worth 8.3 billion and 2.6 billion respectively, in fiscal year 1992, up from 7.0 billion and 2.4 billion in fiscal year 1991. Executive Summary Both the economy and the national agenda have changed considerably in the decade and a half since the first White House Conference on Small Business was held in 1980. In the intervening period, small businesses have seen a number of advances: wider acknowledgment of small firm contributions to the economy and adoption of a variety of federal laws and regulations designed to improve the environment for small business growth. Some of these new initiatives came about as a direct result of the 1980 and 1986 White House Conference on Small Business recommendations. (See the 1986 update). Yet, much remains to be done. Many issues on the small business agenda have yet to be addressed and new concerns emerge continually. Despite their importance as generators of economic activity, jobs and innovation, small firms continue to operate at a competitive disadvantage with respect to their larger counterparts in nearly every areaşfrom access to capital to employee benefit costs to the regulatory and paperwork burden. This Issue Handbook provides a brief summary of 110 small business issues identified by task forces comprising a broad cross-section of the small business community that met in late 1993. The issues are divided into nine major categories: capital formation, community development, environmental policy, human capital, international trade, procurement, regulation and paperwork, taxation, and technology and the information revolution. The issue summaries provided here are for information purposes only: White House Conference participants should feel free to add to or subtract from the list and to identify the issues and constructive solutions they believe to be most important. Capital Formation: Investing in the Success of Small Business In today's economy, the small business community is still largely dependent upon traditional sources of debt and equity capital; however, with the advancement of electronics and computers, types of financing companies and financial instruments are playing a larger role. As small businesses continue to strengthen and grow in the 1990s and into the next century, effective use of new capital formation strategies will be essential. Recent and anticipated changes in federal financing programs are designed to further increase small businesses' and entrepreneurs' access to capital. Community Development: Revitalizing Our Resources Economic renewal for the remaining part of this decade and beyond will depend largely on our ability to develop creative solutions to the most vexing problems facing our communities today - the downsizing of the defense industry, crime, substance abuse and the decaying infrastructure. Some of theses problems may be addressed by government policies and programs that encourage access to procurement opportunities, enhance technology transfer and stimulate rather than inhibit entrepreneurship and small business growth. Environmental Policy: Encouraging Environmentally Sound Development Environmental laws enacted by federal, state and local governments have brought improvements in environmental quality and economic opportunities for some businesses. However, regulatory laws have sometimes had a negative economic impact on the small business community, slowing productivity and job creation and costing several hundred billion dollars annually. Federal policy must set the importance of environmental concerns in balance with the needs of the small business community, a sector particularly vulnerable to burdensome environmental regulatory requirements because of more limited resources. Human Capital: Improving the Competitiveness of the 21st Century Work Force The diversification of the work force is one of the major factors that will influence American businesses in the 21st century. Small and growing companies will also need to offer increasingly costly employee benefits in order to attract and retain good employees. Health care coverage, retirement plans, unemployment compensation, insurance and workers' compensation premiums constitute a growing portion of employer costs. Small employers and entrepreneurs will need to ensure that they and their employees are adequately trained to meet the challenges of the 21st century marketplace. International Trade: Fostering Small Business Interests in the World Marketplace The future success of the U.S. economy will depend largely on America's ability to compete successfully in a global arena. It is estimated that small firms constitute 96 percent of exporting firmsşbut just 15 percent of U.S. exporters account for 85 percent of the value of U.S.-manufactured exports. In an increasingly global marketplace, successful small firms must know their international competition and take advantage of opportunities to export. Procurement: Balancing Public and Private Resources In fiscal year 1992, the federal government purchased approximately $200 billion in goods and services from the private sector. Of this amount, roughly $62 billion, or 31 percent, was awarded prime contracts and subcontracts to small and growing businesses. These firms' participation in federal procurement opportunities creates more competition, saves the government money, stimulates greater innovation and provides jobs for many Americans. The federal procurement rules are complicated, however, and could be improved to provide greater opportunities for the small business community. Regulation and Paperwork: Reinventing Regulatory Policy Federal, state and local governments impose numerous requirements on the operation of businesses. They range from procedures for simply obtaining a business license for a local government to complex federal regulations governing the use of chemicals in the workplace. The burdens associated with these requirements are often exacerbated by substantial paperwork and recordkeeping requirements. In addition to the cost and administrative burdens, small and growing businesses have difficulty simply keeping abreast of the various regulatory and paperwork requirements. Taxation: Stimulating the Growth of Small Businesses Taxes imposed by federal, state and local governments represent one of the most significant costs to small and growing businesses. Most small businesses must expend substantial time and resources to comply with extensive, complex and constantly changing tax laws. Of the estimated 21 million business tax returns filed in 1992, approximately 90 percent were filed by small proprietorships, partnerships and S corporations subject to individual tax rates; the remainder were filed by "C" corporations subject to corporate tax rates. The growth of the economy depends in part on a tax system that meets necessary goals without unduly burdening the smallest businesses. Technology and the Information Revolution: Leading the Way in Innovation Business and technological forces are coalescing in a revolution that promises to have as significant an impact on the 21st century as the industrial revolution had on the mid-19th century. This "information revolution" will transform both how Americans do business and how they spend their leisure time. Small and growing businesses have an important role, not only as users, but as innovators of this technological revolution. Throughout the economy, these businesses create more innovations per employee that large firms, and this inventive capacity will become increasingly critical to our country's global competitiveness. ***************************************************************** ACKNOWLEDGMENTS WHCSB Commission Alan Patricof, Chairman Merle Catherine Chambers Rudolph I. Estrada Peggy Zone Fisher C. Hugh Friedman Brian Lee Greenspun Clark Jones Mary Frances Kelley Josie Natori Larry Shaw Gary M. Woodbury WHCSB Staff Mark Schultz, Executive Director Mary Blazevich Gudrun Briegel Ana Carrion-Sague Steve Cisneros Helene Colvin John Doorlay Nicholas Friendly Kerry Gurtler Thomas Hennessey Gerald Kluempke* Doug Lauen Kelly Lees Chris Mattson Susan McNay Chris Parker Steve Pollock Lisa Rowe-Ralls Victoria Smith Cathy St. Denis Karen Sudbay Jody Wharton Tracy Williams Kevin Winston WHCSB Task Force Chairs Karen Brown Alan Chvotkin Jim Kimsey John Kutler Virginia Littlejohn Aaron Lovejoy Robert McGee Marc Newkirk Carol Parry Robert Pavey John C. (Jack) Rennie Richard A. Shaw, Esq. Frank Swain WHCSB Task Force Resource Experts Mark Bloomfield Dr. Anthony Carnevale Benjamin Cooper Ron Fox Gregory B. Harter Virginia Littlejohn Charles Ludlam E. Colette Nelson Erik Pages JoAnn H. Price John Satagaj Milton D. Stewart David K. Voight U.S. Small Business Administration (SBA) Erskine B. Bowles, Administrator Kathryn M. Broeren, Chief of Staff Richard Hernandez, Counselor to the Administrator John T. Spotila, General Counsel SBA Office of Advocacy Doris Freedman, Acting Chief Counsel for Advocacy SBA Advocacy Staff Contributors Issues Staff - Greg Dean Allison Giles Nancy Ing Gregory Koontz Edward Koos Don Kraft Patricia McBride James O'Connor Barry Pineles Barney Singer Editorial Staff Susan Walthall, Acting Director Sarah Fleming Sue Johnston Kathryn Tobias John Ward * = On detail from the Small Business Administration Economic Research Staff Bruce Phillips, Director David Hirschberg Supriya Kutty Jules Lichtenstein Ray Marchakitus Charles Ou Raymond Rawlinson William Scheirer Edward Starr William Whiston Support Staff Jeanne Bishel Angela Hamilton Lisa Kunze Darlene Moye Sukie Sanders Tonya Smith Publication Design Margaret Bauer Printing Saul's Lithograph Printing of this Issue Handbook has been funded by the U.S. Small Business Administration, through donations from Bell Atlantic, Nynex and Pacific Telesis Group. The cooperation of Bell Atlantic, Nynex and Pacific Telesis Group in this effort does not in any way imply an endorsement by the U.S. Small Business Administration or The White House Conference on Small Business of Bell Atlantic, Nynex or Pacific Telesis Group, their products or their services. PACIFIC TELESIS Group NYNEX Yellow Pages Bell Atlantic Capital Formation Raising capital has always been one of the highest priorities for small and entrepreneurial businesses. Through the 1980s and into the early l990s, small businesses experienced drastic changes in their ability to gain access to capital. Stronger banking legislation and tighter banking regulation enforcement combined with bank failures and the downturn in the economy to create a difficult climate for capital formation. In today's economy, the small business community is still largely dependent upon traditional sources of debt and equity capital; however, with the advancement of electronics and computers, new financing companies and financial instruments are playing a larger role. As small businesses continue to strengthen and grow in the l990s and into the next century, effective use of new capital formation strategies will be essential. Recent and anticipated changes in federal financing programs are designed to further increase small businesses' and entrepreneurs' access to capital. However, with the increasing emphasis on shrinking the federal government bureaucracy, there will be greater reliance on private sector initiatives to support the needs of America's multi-trillion-dollar economy. For related information, see also sections on Community Development Financial Institutions, p. 26; SBA Micro-Loan Program, p. 31; Impact of Environmental Laws on Access to Capital for Small Business, p. 37; Health Care Financing Mechanisms, p. 47; Trade Finance, p. 60; and Capital for Technology Development, p. 93. ------------------------------------------------------------------- Availability of Capital Should Congress become involved in creating new instruments and entities to help small businesses improve their access to capital? BACKGROUND One of small business's major concerns is access to capital. Whether it is start-up, expansion, equipment or maintenance capital, small businesses need debt and equity financing to stay competitive with larger companies in the marketplace. During the 1980s the traditional sources of debt capital-- banks, credit unions, and savings and loans-- became less dominant in the lending market. More non-traditional sources, such as finance companies, credit card agencies and private investment companies, became involved in small business capital investment. Other sources of capital currently being explored include royalty sharing, securitization, and private and public pension funds. Federal government programs exist within the U.S. Small Business Administration (SBA), the U.S. Department of Agriculture, the U.S. Department of Commerce and other federal agencies to assist small businesses in gaining access to debt capital. The Securities and Exchange Commission and banking regulators have programs to help facilitate equity investment in small businesses. STATUS Bills have been introduced in the 103d Congress to alleviate paperwork and regulatory burdens imposed on financial institutions in an effort to facilitate small business lending. The Small Business Guaranteed Credit Enhancement Act of 1993 (Public Law 103-81) was enacted to increase appropriations for the SBA's loan programs. The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) permits a capital gains exclusion for investment in qualifying small business stock. In addition, the President and the banking regulators initiated a Capital Availability Program in March 1993 to facilitate small business lending. DISCUSSION * How can small businesses better prepare themselves for seeking capital for their companies? * What, if anything, should the federal government do to facilitate the process? * Should federal government programs target specific industries or geographic areas for investment (for example, community development financial institutions and emerging growth industries)? * Should non-bank financial lenders be regulated by the federal government for community reinvestment purposes? * Should Congress develop initiatives to encourage private entities to invest in small business? Should these initiatives target specific industries for investment? * Should public or private initiatives target very small businesses? Should the initiatives include technical assistance, education and training components? Banking Reform Should Congress enact legislation to encourage more lending to small businesses by financial institutions? BACKGROUND In 1989, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and in 1991, the Federal Deposit Insurance Corporation Improvement Act (FDICIA). Both of these laws were designed to ensure the safety of the banking industry in light of the numerous failures of banks and savings and loan associations during the 1980s. These laws cover all aspects of banking operations, from establishing guidelines for real estate lending to setting riskbased capital requirements for commercial loans. Arguments have been made that the laws extend too far and are hindering lending by financial institutions, which have already curtailed lending because of previous economic downturns. Two other factors arguably have a disproportionate adverse effect on small business lending: the record level of investment in government securities by financial institutions has decreased the monies available for small business lending, and the large number of mergers and acquisitions of financial institutions has created lenders without strong ties to communities and their small businesses. STATUS Many bills were introduced in the 103d Congress to reduce bank regulatory burdens, permit interstate banking/branching, regulate derivative investments and regulate the mutual fund industry. In March 1993, the Clinton Administration introduced the Capital Availability Program, which is designed to facilitate small business lending by financial institutions. Included in the program are revised banking regulatory policies toward some small business loans and permission for financial institutions to create "character loan" baskets for the regulatory examination of some small business loans. In addition, the banking regulators, on December 21,1993, published in the Federal Register proposed regulations to revise the criteria for the Community Reinvestment Act (CRA). The proposed rules would provide greater access and information . on loans made to small businesses. Small financial institutions would have the opportunity to utilize a streamlined CRA compliance procedure. DISCUSSION * Interstate banking/branching could have an adverse effect on small business lending by reducing the number of community banks and creating larger lenders that do not have strong ties to com- munities and their small businesses. What can be done to facilitate small business lending in financial institutions that have been subject to merger or acquisition? * To help facilitate bank administrative procedures, should smaller loans to small businesses be reviewed in bank examinations in the same manner as consumer loans? * Should Congress address issues of redlining and diversification with respect to small business lending? If so, how? * Should Congress enact banking laws that take into consideration the characteristics of very small businesses? * What, if anything, should be done to facilitate and improve education, training and technical assistance for small businesses to help them become more creditworthy? Equity Financing through SBICs Are modifications needed for the U.S. Small Business Administration's recently restructured Small Business Investment Company Program? BACKGROUND The SBA's Small Business Investment Company (SBIC) Program has supplied millions of dollars of investment capital to small growing companies. Specialized small business investment companies (SSBICs) target investments in socially and economically disadvantaged small businesses. Investments made by SBICs and SSBICs have helped thousands of small businesses since the creation of the SBIC program in 1958. Since their inception, both SBICs and SSBICs have been capitalized through private capital and matching SBA funds. Historically, the primary instrument used for financing is the debenture, a debt instrument. A new law permits the use of an equity financing instrument in the SBIC program. STATUS As directed by the Small Business Equity Enhancement Act of 1992 (Public Law 102-366), the SBA published a proposed rule that would restructure the program to permit the use of an equity financing instrument called a "participating security" (preferred stock, preferred limited partnership or other similar instrument). With the proposed participating security, the SBA will guarantee the payment of prioritized payments on, and the redemption price of, the security. The use of the proposed security instrument would permit investment by tax-exempt investors, such as pension fund investors, who would otherwise incur tax liability if investing in debt instruments. The Omnibus Budget Reconciliation Act of 1993 (OBRA) permits the deferral of recognition of a tax gain by an investor if the gain is from a rollover investment in an SSBIC. In addition, OBRA also grants SSBICs an exemption from the active business requirement of the Internal Revenue Code for the recently enacted capital gains provisions. DISCUSSION * Should the SBIC program be accorded the same tax investment advantages with regard to capital gains provisions that have been granted to SSBICs under the recently enacted Omnibus Budget Rec- onciliation Act of 1993? * Should Congress allow for rollover of gains from the sale of publicly traded securities into small business investment companies, as it does with specialized small business investment companies? * Should greater tax incentives be provided to private investors, including pension funds, in an effort to encourage investment in SBICs and SSBICs? Innovative Financing Programs/ Leveraging Government Dollars Should Congress create a funding mechanism for the establishment of a loan loss reserve fund for use by financial institutions to encourage small business lending? Should this initiative be undertaken in conjunction with existing state programs? BACKGROUND A recent example of a state initiative to make capital more accessible for small businesses is the Capital Access Program. Currently, 11 states have capital access programs, which create state-sponsored loan loss reserve funds for financial institutions' lending to small businesses. The funds are capitalized through small business loan reserves of financial institutions, fees from small business borrowers and matching state funds. If a small business loan goes into default, the financial institution receives compensation from the fund. The institution may not obtain funds greater than the amount it has put into the fund plus the matching state amounts. As the loan loss reserve increases over time for the lender, the lender is able to make incrementally riskier loans. A federal fund could be established to encourage state participation, thereby creating a much larger pool of funds to back small business loans. Or as an alternative, federal, state and local monies could be pooled and designated for small business lending. One pool of funds would enable larger investment amounts to be targeted proportionately to the funds contributed by the state and local governments. Some have pointed out that the Capital Access Program resembles a federal insurance for small business loans. In reality, if a federal program were established it would utilize federal appropriations to match the contributions of the states toward the loan loss reserve fund. There would be no federal obligation other than the initial appropriations. Another private sector small business financing tool is a proposed small business participating debenture (SBPD). This instrument is similar to a bond instrument in that the investor receives regular interest payments from the small business; however, with the SBPD the investor will also receive a share of future profits. A key component of the proposed SBPD is a capital gains rate that is applied to the investor's share of future profits. The participating debenture was a former White House Conference on Small Business recommendation. STATUS The Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275) would establish a federal Capital Access Program, earmarking $50 million to establish a federal fund and to provide incentives for state participation. DISCUSSION * How should a federal program be developed to best leverage funds to facilitate small business lending? * Should a program be developed that works independently of, or in conjunction with, other federal financing programs, such as the U.S. Small Business Administration's 7(a) Guaranteed Loan Program? Pension Fund Investing Should federal pension and retirement plan laws be amended to facilitate small business investments? BACKGROUND Every year, trillions of dollars are invested by public and private pension and retirement plans. Investments in small businesses, however, are typically limited to a small share of venture capital investments and to "economically targeted investments" by public pension plans. Many believe that pooling of small business investments--as is already being done with some venture capital funds--and the pooling of small business loans would reduce the amount of risk and encourage pension fund investment. (See also the discussion of Secondary Markets/Securitization.) STATUS The Community Development. Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275) would permit the Secretary of Labor, in consultation with the Secretary of the Treasury, to revise pension laws to permit pension fund investment in a small business loan secondary market. DISCUSSION * Should federal guidelines be established to encourage pension fund investment in small business loan pools and in venture capital companies investing in small businesses? * Should the federal and/or state governments issue guarantees or insurance bonds for pools of small business loans to encourage pension fund investment? * To facilitate pension fund investing, should pension laws be simplified? Should incentives for investments be created? * Should a federally sponsored information data base on small business lending and investing be created to encourage and help ensure prudent investing by pension plan administrators? * Should Congress amend the U.S. tax code to permit pension funds to extend credit to small businesses as well as to permit pension funds to receive operating income from small business investments without incurring "unrelated business taxable income?" * Should Congress grant preferential capital gains treatment on pension fund distributions to retirees for that portion of the pension fund invested in stock of qualifying small businesses? Secondary Markets/Securitization Should Congress establish or encourage the establishment of a secondary market system for small business loans? BACKGROUND Secondary markets and securitization have been in use for a number of years, particularly in the home mortgage, car loan and credit card receivables industries. A loan-making institution sells loans it has originated to an intermediate bundler of loans. The bundler packages loans and resells the bundle on the secondary market. From the proceeds of the sale, the originating financial institution is able to make more loans. Secondary markets have proven to be extremely successful in certain financial areas. For small business loans, a viable secondary market has been much more difficult to implement. Rarely are small business loans uniform. They are also generally perceived to be riskier than other types of loans. The U.S. Small Business Administration has been successful with the securitization of loans made through its guaranteed loan program; however, these loans come with the federal government's guarantee. To promote a viable secondary market for small business loans, many laws would need to be amended, including tax, banking, securities and pension plan/labor laws. STATUS The 103d Congress has considered a variety of legislative measures with respect to secondary markets for business loans. Some bills would create a government-sponsored entity to facilitate a secondary market. Others would change tax, banking and securities laws, and allow a secondary market to develop through private sector initiatives. The proposed Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275) contains provisions for private sector initiatives to develop a small business loan secondary market. DISCUSSION * Would a secondary market eventually generate considerable amounts of capital for small business lending? * Standardization of small business loans could have a negative effect on small business lending. Would development of a secondary market encourage financial institutions to make only loans that are saleable on the secondary markets? * A government-sponsored entity would require taxpayer funds for initial startup. Private sector initiatives would allow a market to develop at its own pace. Should a secondary market system for small business loans be in the form of a government sponsored entity such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) or should it be established by the private sector? Securities and Exchange Commission Issues Should the Securities and Exchange Commission (SEC) consider further initiatives to facilitate access to the public markets by small businesses? BACKGROUND The Securities and Exchange Commission (SEC) has recently promulgated final rules that will enable small businesses to gain access to the capital markets with greater ease. Historically, small businesses have had difficulty obtaining equity capital. The high costs of entering the public market, together with loss of control of the company, discourage many small business owners from seeking equity capital. The SEC reforms were designed to make the process of going public less costly and burdensome for small businesses. The reforms are as follows: Regulation A, an exemption from the registration requirements of the Securities Act of 1933, now may be used to raise up to $5 million in a 12-month period for a small business issuer. The Small Corporate Offering Registration (SCOR) form--in a question-and-answer format--is currently being used by many states and can be utilized as the disclosure document for Regulation A offerings. The small issuer is also able to "test the waters" for investor interest through broadcasts, advertisements and general mailings before deciding whether to incur the costs necessary to offer these securities. The exemption provided by Rule 504 of Regulation D permits an issuer to sell up to $ 1 million in securities in a 12-month period with no restrictions or conditions. In addition, for small busi- nesses interested in going public, the SEC has implemented a simplified registration and reporting system available to issuers with less than $25 million in revenues and less than $25 million public float. Of concern to a number of small companies is a recent proposal by the Financial Accounting Standards Board to revise the accounting rules for incentive stock options (ISOs). The proposed rules would require the reporting of stock option grants as a charge again ,t earnings and the disclosure of the effect of options on net income. Since stock options are used by some small companies, some believe that the effect of the reporting and disclosure requirements would be to harm emerging and high-growth companies. Others believe that without the accounting of possible future expenditures by companies, the confidence of small business investors will be affected. STATUS The SEC's final rules for its small business initiatives were published August 13,1992 and May 14, 1993 (57 Federal Register 36442 and 58 Federal Register 26509). DISCUSSION * Should the SEC and the state securities commissioners coordinate securities regulations to simplify registration and reporting requirements for small corporations? * Should the SEC adopt new rules or revise current rules to make it easier for small businesses to issue unregistered offerings in a single state or in regional markets and to facilitate secondary markets for small business stock? * If enabling legislation is adopted, should the dollar limits of Regulation A and Rule 504 be raised to make it easier for small businesses to raise capital? Should certain high technology industries be permitted to have higher dollar limits under these or other exemptions? * Should Congress pass legislation directing the SEC to draft regulations to continue current accounting procedures for incentive stock options? Securities Laws Should federal and state securities laws be changed to help small companies gain access to the public markets and to facilitate a secondary market for the stocks? If so, how? BACKGROUND Currently, most small corporations must comply with both federal and state securities laws. Small companies seeking investors from several states must comply with many complex registration and reporting requirements. In recent years, many states have adopted the small corporate offering registration (SCOR) form, which simplifies the registration and reporting requirements. The Secu- rities and Exchange Commission (SEC), as a result of recent amendments to its Regulation A exemption, permits companies to use the SCOR format for offering documents used in that exemption. Not all of the states have adopted uniform laws in using the SCOR form, and small companies still face complicated state and federal requirements. STATUS The Small Business Incentive Act of 1993 (S.479) was passed by the Senate on November 2,1993. The bill, which proposes to expand SEC small business initiatives, has been referred to the House for consideration. DISCUSSION * Should the delineation between federal and state securities laws be better defined? * What should the roles of the SEC and the state securities commissioners be with respect to small business public offerings and small business securities markets? * Should state securities commissioners have complete jurisdiction for public companies having less than $10 million in assets? * Should Congress grant preemptive powers to the SEC over the states with regard to small business public offerings or small business securities markets? * Should the SEC and the state securities commissioners, in a cooperative effort, establish a small business disclosure document to be reviewed by only one regulator? * Should regional regulators be appointed, either by the federal government or through state cooperative efforts, to govern small business securities transactions? * Current laws substantially limit the ability of small businesses to seek investors, especially from metropolitan areas close to state lines. Should regional or metropolitan markets be established to facilitate initial public offerings and to create a liquid secondary market for small business stocks? * Once a small business stock is sold through an initial public or exempt offering, it is difficult to trade eligible stocks on a secondary market. Should incentives be given to broker/dealers or to specialists to help foster a secondary market for small business stock? Should the incentive be in the form of a tax incentive? * An exemption on private placement offerings enacted in the Investment Company Act of 1940 permits offerings to no more than 100 smaller sized investors. Should Congress change this provision? If so, how? Small Business Administration 7(a) and 504 Loan Programs Should the SBA's 7(a) and 504 loan programs be changed? BACKGROUND Through its loan programs, the U.S. Small Business Administration guarantees bank loans to small businesses that the banks would not make on their own. Small businesses that need capital but do not have a credit history or that are involved in a volatile market might qualify for the program. Lenders that would not qualify a small business for a traditional loan may seek to have a portion of the loan guaranteed by the SBA. The most popular program is the Guaranteed Loan Program. The current rate of guarantee in the loan program varies from 70 to 90 percent of the loan, depending on the loan size and term. The maximum loan amount to any small business concern is set at $750,000. The SBA's 504 Loan Program provides long term, fixed-asset financing through Certified Development Companies to further job creation or community development. The 504 financing provides 40 percent of the financing package, while the private lender contributes 50 percent and the small business concern supplies the remaining 10 percent. Financing packages can fund up to $2.5 million in capital for a small business. STATUS Legislation was enacted in August 1993--the Small Business Guaranteed Credit Enhancement Act of 1993 (Public Law 103-81)--to increase the appropriation for the SBA's 7(a) Guaranteed Loan Program to almost $8.5 billion and for the SBA's 504 Program to 1.2 billion for fiscal year 1994. The law also changed the guarantee rate on some types of 7(a) guaranteed loans. Discussion * If the SBA were able to guarantee pools of small business loans, the pool could be sold on the secondary market or to pension investment companies. Should the SBA guarantee expanded to include pools of small business loans, and not just individual loans? * The SBA loan guarantee has typically be granted to small businesses that are unable to obtain capital from traditional sources. Should the SBA target specific industries or geographic areas that have a history of problems gaining a capital? * Should the maximum level of funding by the SBA in its loan programs, currently $750,000, be increased? If so, what should the limit be? * With the recent enactment of the Small Business Guaranteed Credit Enhancement Act of 1993, the guarantee rate on some 7(a) loans has changed and a marketing fee on some sales in the secondary market of SBA guarantees has been established. Should additional changes be made to the program? Venture Capital: Alternate Sources of Financing Should Congress enact legislation to encourage private investors and/or private and public pension funds to invest in small businesses or small business loan pools? BACKGROUND During the past several years, institutional venture capital investments in small businesses have declined from a total of $4.2 billion in 1987 to just over $1 billion in 1991. The investments recovered partially, to $2.5 billion in 1992 and 1993. The decline has been attributed in part to the recessionary climate and to a shortage of willing investors. The U.S. Small Business Administration's Small Business Investment Company (SBIC) Program experienced a downturn in venture capital investments as well. Less information is available on individual investors in small businesses--"angel capital." It is estimated that, in the early 1980s, angel capital invested more than $55 billion in small business ventures. This amount is estimated to have decreased by more than 50 percent by the early 1990s. STATUS The Small Business Credit and Business Opportunity Enhancement Act of 1992 restructured the SBIC program. The U.S. Small Business Administration published final rules for comment on August 5, 1993. The proposed National Competitiveness Act of 1993 would establish a government venture capital program for high technology companies modeled on the SBIC program. The Omnibus Budget Reconciliation Act of 1993 provides a capital gains exclusion for investment in qualifying small business stock by individual investors and a 50-percent exclusion on gains from the sale of qualified small business stock held tow five years. DISCUSSION * Should Congress enact legislation to increase participation by investment companies in small firms and in the creation of a secondary market for small business loans? * Should Congress relax provisions in the Internal Revenue Code that restrict the use of debt instruments by private pension funds to invest in small businesses or small business loan pools? Such restrictions have caused pension funds to incur unrelated business income tax. * Should Congress pass legislation creating incentives for public and private pension funds to invest more venture capital in small businesses? * Should investment tax credits for equity investments be reviewed as an alternative to traditional debt-based financing? * Should SBICs be established to focus on specific industries or geographic areas? * Should royalty or profit-sharing mechanisms be established to encourage venture capital investments? * Should the capital gains exclusion be increased? Should the exclusion be greater for seed capital investments held for more than 10 years? * Should a rollover of capital gains tax incurred be permitted for investors who sell existing investments and reinvest in qualified small companies? Community Development One of the most challenging problems the business community is likely to face in the next decade is the revitalization of America's economically depressed communities. If economic vitality is to be restored to urban and rural areas, small businesses must play a leading role in this effort. Empowerment zones and related state and local programs are designed to serve as catalysts to community revitalization. Economic renewal for the remaining part of this decade and beyond will depend largely on our ability to develop creative solutions to the most vexing problems facing our communities today--the downsizing of the defense industry, crime, substance abuse and the decaying infrastructure. Government policies and programs that encourage access to procure- ment opportunities, enhance technology transfer and stimulate rather than inhibit entrepreneurship and small business growth will help address some of these problems. However, the final answers must come from the communities themselves. Many in the small business community, as influential actors on the local level, are uniquely positioned to help resolve the crises faced by many of our nation's communities. For related information, see sections on Availability of Capital, p. 18; Encouraging Diversity in Small Business Ownership, p. 45; Substance Abuse, p. 53; Work Force Skills, p. 54; Access to Procurement Opportunities, p. 62; Home-Office Deduction, p. 84; and One-Stop Information Centers, p. 99. Community Development Financial Institutions Should the federal government implement a network of community development financial institutions to help promote growth in historically underserved areas? BACKGROUND Currently, four entities provide capital and technical assistance to historically underserved areas of the country: community development banks, community development credit unions, micro-loan funds and community development loan funds (also referred to as community development revolving loan funds). Community development banks are federally insured and regulated depository institutions. Community development credit unions are also federally insured and regulated; in addition, they have access to the community development revolving loan program for credit unions, which provides financial and related services to residents and communities. Micro-loan funds are private entities funded by either government agencies or loans from financial institutions. Most have focused on lending to women and minorities in lower income areas. Community development loan funds are private intermediaries that reinvest funds from social and institutional investors in lower-income communities. Many traditional financial institutions also target lending to communities--directly or through community development institutions--under the provisions of the Community Reinvestment Act. STATUS The Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1'75) and the Regulatory Reform Act of 1993 (H.R.3474) seek to establish a community development financial institutions fund. Community development financial institutions would be able to obtain federal matching funds to lend to busi- nesses in economically distressed areas. DISCUSSION * If the federal government implements a community development financial institution system, should the system be developed using existing financial institutions? * What, if anything, should be done to facilitate and improve education, training and technical assistance for small businesses to help them become more creditworthy? * Should the Community Reinvestment Act requirements of financial institutions be included in any initiatives for community development? * Should Congress address issues of redlining and diversification with respect to small business lending? If so, how? Community Revitalization What role should the federal government play with respect to new and expanding small businesses in distressed communities? BACKGROUND Throughout the nation there are many economically depressed areas-- communities experiencing a lack of access to capital, inadequate infrastructure and a fundamentally untrained work force. Small businesses are vitally important to these communities for jobs, tax revenues and investment. Currently, federal initiatives focusing on specific problems of economically depressed communities are underway in the U.S. Departments of Agriculture, Commerce, and Housing and Urban Devel- opment, and the U.S. Small Business Administration (SBA). In addition, many state and local governments have programs targeted for distressed communities. Some of these programs are coordinated with the federal programs; many operate independently of other efforts. A key difficulty in addressing the problems of distressed communities is the wide variation in the problems to be addressed. Each distressed community is unique, with its own strengths and weaknesses, making it impossible for any broad-based initiatives to effectively address every community's needs. An example of this is the vast difference between rural and urban distressed communities. Rural communities typically lack effective sources of communication and in some instances lack a strong infrastructure, while urban distressed communities are more susceptible to crime and violence. As the needs of distressed communities are different, so are the needs of the small businesses located within them. Small businesses in distressed communities face a variety of problems that can inhibit their survival and growth, among them, lack of access to capital or an adequate labor force, poor general quality of life (including the lack of an adequate infrastructure), and all too often a patchwork of inconsistent and confusing government programs and initiatives. STATUS The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) was enacted "to develop a National Intermodal Transportation System that is economically efficient, environmentally sound, provides the foundation for the Nation to compete in the global economy and will move people and goods in an energy-efficient manner." The law authorized more than $155 billion between 1992 and 1997 for highways, research, highway safety and mass transportation. The Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275) and the Regulatory Reform Act of 1993 (H.R.3474) seek to establish a community development financial institutions fund. Community development financial institutions would be able to obtain federal matching funds to lend to businesses in economically distressed areas. The House of Representatives passed the Regulatory Reform Act of 1993 in November 1993. Title XIII, Subchapter C, of the Omnibus Budget Reconciliation Act of 1993 (OBRA) authorizes the establishment of nine "empowerment zones" and 95 "enterprise communities." Tax incentives and grants are extended to businesses located in these areas. The U.S. Department of Agriculture's Rural Development Administration is currently revising its programs to facilitate access to capital for rural small businesses. In addition, the banking regulators, on December 21,1993, published in the Federal Register proposed regulations to revise the criteria for the Community Reinvestment Act (CRA). The proposed rules would provide greater access to and information on small business lending. Small financial institutions would have the opportunity to use a streamlined CRA compliance procedure. DISCUSSION * What initiatives should be enacted by federal, state and local governments to help facilitate access to capital for small businesses located in distressed communities? * Should legislative initiatives that target specific problems of distressed communities, like the Community Development, Credit Enhancement and Regulatory Improvement Act of 1993 (S.1275), be enacted or should more comprehensive legislative initiatives be sought? * Should laws such as the Community Reinvestment Act--which requires financial institutions to invest in their surrounding communities--be more vigorously enforced to reduce redlining? Should incentives be granted to financial institutions and insurance companies to encourage greater involvement in distressed communities? * What incentives, other than tax incentives, might be considered to attract and keep businesses in empowerment zones and enterprise communities? * How should federal government programs-- specifically the SBA's Small Business Development Center Program, the programs of the U.S. Department of Agriculture's Rural Development Administration (RDA), and the U.S. Department of Commerce's Economic Development Administration (EDA) and Minority Business Development Administration--be structured to help small businesses in distressed communities? * Currently, the SBA, the EDA and the RDA have micro-loan programs. What, if anything, should be done to facilitate or improve micro-loan assistance to small businesses? * What is the best means to provide expert technical assistance to small businesses in distressed communities? * Should the role of certified development companies be expanded? * What might be done to provide more effective education and job training programs in distressed communities? How should these programs incorporate the unique characteristics of the individual distressed communities? * What legislative or private sector initiatives should be undertaken to stimulate job creation by small businesses in distressed communities? * How should federal, state and local governments coordinate initiatives to build or rebuild the infrastructures of distressed communities? What, if anything, can be done to provide a safe and reliable transportation system? * What, if anything, can be done to provide a safe and drug-free workplace? * What is the best means to establish or to expand advanced telecommunications systems for small businesses in distressed communities? * What education initiatives can be put together by federal, state and local governments to ensure literate and trainable employees? * What is the best means for federal, state and local initiatives to recognize the cultural diversity of distressed communities? * Should federal, state and local governments be required to coordinate initiatives and programs for distressed communities? Should existing programs and policies be made more consistent and comprehensible to small businesses located in distressed communities? * What should be done to encourage the establishment of public/private partnerships with respect to small businesses located in distressed communities? Should more private/public sector initiatives such as small business incubators and mentorship programs be developed for distressed communities? Crime/Violence in the Workplace How does crime and violence affect small businesses and what steps can be taken to reduce this threat? BACKGROUND Whether it is shoplifting, vandalism, assault, armed robbery or even murder by disgruntled employees or customers, small business owners are being victimized by crime. According to a recent survey, an estimated 2.2 million Americans were physically attacked in the workplace during 1992. Moreover, murder is now the third leading cause of deaths in the workplace--trailing only motor vehicle and machinery accidents--according to the National Institute for Occupational Safety and Health. In a recent survey of small business merchants located in high-crime areas of the District of Columbia, nine out of every 10 business owners had been victims of crime. In addition to physical violence, crime can result in an increase in insurance premiums tow business owners. Estimates of the annual cost of crime are as high as $425 billion. STATUS In response to the increasing threat of crime and violence, small businesses are being forced to direct resources to anti-crime and security devices. Small businesses are also working with law enforcement agencies in developing strategies to fight crime and violence against business establishments. In the District of Columbia, police are providing businesses with electronic eavesdropping equipment to combat shoplifting and robbery. DISCUSSION * How does the threat of crime affect efforts to revitalize economically depressed urban neighborhoods? * How does the fear of crime and violence affect employee morale and productivity? * Should the Justice Department undertake initiatives to fight crime in the workplace? * Should business owners be allowed tax credits for installing security devices? * How can local law enforcement agencies work cooperatively and effectively with the small business community to reduce crime? * What steps can small business owners take to improve security in their workplaces? * Are "hate crimes" a significant problem, especially for minority business owners? Defense Economic Conversion Should the federal government help small businesses make the transition to a post-Cold War period, as defense installations are closed and defense industries downsize? If so, how? BACKGROUND Both the private sector and government are grappling with ways to ease the conversion from military to commercial markets that many defense related firms are facing. Both large and small businesses that have depended on defense contracts are severely affected by defense downsizing. Statistics on small business in the defense industry are limited, but the Office of Technology Assessment (OTA) estimates that one-third of the total amount purchased by the U.S. Department of Defense (DOD) from private businesses comes from small business. Total DOD awards to small businesses--the sum of prime contracts and subcontracts--was about $46 billion to $48 billion annually in the five years from 1986 through 199 35 to 37 percent of DOD awards to U.S. businesses. In addition to the small businesses engaged in defense-related work, there are thousands of other small firms that depend on the military, such as service and retail businesses located in communi- ties with concentrations of defense-related employment or in proximity to military bases. Firms of all sizes are coming to the realization that there is little likelihood of big markets for many defense products and services for years to come. The basic strategies that companies are adopting include concentrating on their core defense capabilities through acquisitions and mergers, streamlining their operations, shedding unprofitable defense business segments, increasing exports and diversifying into new markets. Problems likely to prove particularly troublesome for defense-related smaller firms can be expected to manifest themselves in several areas: Management: Compared with large firms, small businesses have limited resources and personnel devoted to management functions. Information: Access to information on the defense market, alternative markets, technology and business assistance programs will be essential to successful adjustment. Technology Transfer: Many high-technology firms in the defense industries will face a choice between adapting their defense technologies to commercial uses or forfeiting valuable assets. Lim- ited experience in managing the undertaking, large cash flow requirements and the lengthy process needed to develop, patent and market technological innovations can be serious barriers to successful technology transfer. Marketing: For many small businesses, the adjustment to reductions in defense outlays is marketbased rather than product- or technology-based. According to a DOD report, successful diversification requires achievement of at least five conditions: (1) top management involvement in the diversification project; (2) transfer of the defense industry firm's unique technology to civilian production; (3) extensive market research; (4) acquisition of new, skilled technical and marketing personnel; and (5) commitment and capital to pursue the conversion project for up to 10 years. STATUS The federal government provides various types of assistance to small firms attempting to adjust from defense-related production to the civilian marketplace. These programs include: the Small Business Administration's loan guarantee and business development programs; the U.S. Department of Commerce, Economic Development Administration's grant assistance and National Institute of Standards and Technology programs; the Department of Labor's Economic Dislocation and Worker Assistance Act job training assistance; Export-Import Bank assistance; and the Small Business Innovation Research grant programs run by individual federal agencies. DISCUSSION * Do defense businesses have unique needs that are not being met by existing government programs? What should be done to meet those needs? Who should deliver the services--the federal government, state and local governments, the private sector? * Should funding and other types of support be targeted to selected regions? * Should federal sources provide the information, coordination and resources necessary to facilitate the development and implementation of innovative state, regional and local efforts? If so, how? * How do the antitrust laws benefit or impede small firms in this effort? * Should the government be in the business of providing direct training assistance or should it spend dollars to create opportunities to allow employers to determine the most effective means to employee training? * Should the government assist the community generally, as well as small businesses, when a military base closes? If so, how? Franchising Should Congress pass legislation to encourage the growth of small franchisors and franchisees within the franchising industry? If so, how? BACKGROUND During the past decade, franchising has become more affordable for entrepreneurs and has expanded into many different business areas. No longer limited to the food services area, many franchise opportunities are available in industries such as preschool education, maid services, computer sales and servicing, and construction contracting. In 1990, there were 533,000 franchised establishments, up 35 percent from 1970. Small franchise companies--those with fewer than 10 franchisees-- are the fastest growing segment of the franchise sector. Between 1978 and 1986, the number of these firms increased by 143 percent, from 304 franchisors to 739; their sales grew by 2,700 percent. Franchising has been largely unregulated except for federal anti-fraud statutes enforced by the Federal Trade Commission and state anti-fraud statutes. Recently, however, states have begun to take a more active role in pursuing abuses in franchising. Areas of the franchise sales process needing improvement, according to some franchise participants and experts, include the cost burden of regulation, the availability of financial information, the limited resources for enforcement of regulations and the non-uniformity of state disclosure rules. STATUS Recently, the state of Iowa enacted legislation that establishes disclosure guidelines for franchisors along with strict anti-fraud measures. Other states are considering similar legislation. Legislation introduced in the 102d and 103d Congresses sought to mandate disclosure requirements for franchisors and would provide for protection of franchisees when a franchise is terminated. No action was taken on the proposed legislation. Legislation proposing additional disclosure requirements tow franchisors was introduced in the 103d Congress and hearings were held by the House Committee on Small Business. DISCUSSION * Should additional franchisor disclosures be implemented, even if they add additional costs to the transaction? If so, which? * Should a federal preemptive statute be enacted to eliminate the state patchwork of laws on franchising--and possibly increase the potential for franchising expansion? * Should the government take any initiatives to encourage small business franchises? If so, what? Homebased Business Should the federal government encourage homebased business ownership? If so, how? BACKGROUND Homebased businesses offer important contributions to communities and the economy. They serve as incubators for new businesses, allow inexpensive testing of new products, provide jobs to those who might otherwise be unable to work because of physical limitations or household responsibilities, and purchase billions of dollars worth of computer equipment, office supplies and business services. Homebased business owners are often selfemployed individuals who operate a business or profession primarily from a home office, while telecommuters are employees who do office work at home during normal business hours. According to a 1990 proprietary survey, there are approximately 7.4 million home business owners, including those with a side business, and 7.2 million freelance workers--a total of 14.6 million homebased business persons out of a work force of 122.7 million. A number of unresolved policy questions affect homebased businesses: There is no formal definition of "homebased businesses." They may be sole entrepreneurships or virtual joint ventures; they may employ one or more workers; their owners may do intermittent work or may work full time, part time, or overtime. The Internal Revenue Service and the U.S. Department of Labor have different regulations governing worker classification. The question remains open whether U.S. Department of Labor and Environmental Protection Agency regulations should apply to home- based businesses. The U.S. government and several major industries are in the process of downsizing and contracting out, encouraging product development through teaming or joint ventures in virtual corporations. Homebased businesses are well positioned to take on this work, but government regulations inhibit companies from sharing new product development ideas. Local zoning laws with respect to homebased businesses vary across jurisdictions. STATUS On January 12,1993, the U.S. Supreme Court ruled that taxpayers could not write off their home office expenses if they spend more time and do more important parts of their business activity outside of their homebased office. The ruling leaves open the question of deductibility for homebased businesses involving consultants, independent contractors, repair people, some doctors and others in service businesses. (For more information, see the Home Office Deduction discussion.) DISCUSSION * How do federal, state and local laws affect homebased businesses? Should laws that place broad restrictions on homebased businesses (such as hiring restrictions) be revised? * Should the definition of homebased business be standardized? If so, what should it be? * Should an effort be made to coordinate Internal Revenue Service and U.S. Department of Labor regulations governing worker classification? * How should homebased businesses be categorized for environmental and other regulatory purposes? * Should regulations governing new product development be relaxed? If so, how? * Should national standard zoning guidelines be developed with respect to homebased businesses? * Should incentives be offered to encourage the startup and growth of homebased businesses? Rural Development Should new efforts be initiated to stimulate the development of small businesses in rural areas? BACKGROUND Economic expansion in rural America depends upon the creation and growth of small businesses, which create jobs and stimulate economic development. Two trends are shaping the rural America of the 1990s: the long-term move away from natural resource "extractive" industries and the increasing competition in international markets. Both trends have tended to draw industry away from rural locations. STATUS The 1990 farm bill established the new Rural Development Administration in an effort to shift the rural focus from agriculture to rural development. The legislation also prompted the establishment of the National Initiative on Rural America and the creation of state rural development councils, which currently operate in 38 states. DISCUSSION * Should more investments be made in rural roads, bridges, water and waste removal systems to encourage business development? If so, how can such infrastructure investment be stimulated? * Should government programs target more capital and credit to small businesses in rural areas? Should the Community Reinvestment Act be revised to encourage banks to be more receptive to small business credit needs, especially in rural areas? * Should federal funding link job creation with a job training strategy that would encourage rural youth to stay in their communities? * Should the state rural development councils' role be expanded? SBA Micro-Loan Program Should the U.S. Small Business Administration's micro-loan program be made permanent? BACKGROUND The SBA's Micro-Loan Demonstration Program is a pilot program designed to make loans through intermediaries to very small businesses in economically depressed areas of the country. In addition, the program offers grant monies to qualifying entities that offer technical assistance to small businesses. Loans by intermediaries are short-term with fixed interest rates. The loans may be for as much as $25,000; the average loan is $7,500. The grant monies provide marketing, management and technical assistance to low-income individuals who are otherwise unable to obtain private sector financing for their small businesses. The program was first implemented in 1992 and issued loans to 45 intermediary lenders. The program was expanded by the Small Business Credit and Business Opportunity Enhancement Act of 1992, which permitted the SBA to make loans to up to 110 intermediaries. STATUS The Micro-Loan Demonstration Program is scheduled to sunset in 1996. In addition to SBA's micro-loan program, other federal micro-loan programs exist within the U.S. Department of Agriculture's Rural Development Administration (RDA) and the U.S. Department of Commerce's Economic Development Administration (EDA). DISCUSSION * Should appropriations for the intermediary grants be increased to provide for more technical assistance to small businesses? Should rural intermediaries be eligible to subcontract out the technical assistance in areas where their resources must be spread over a wide area? * Should the micro-loan program be changed from its current status as a direct lending authority program to a loan guarantee program, thereby enabling the SBA to make more loans to intermediaries, while reducing the government's costs in administering the loans? * Currently, the RDA, the EDA and the SBA 311 have micro-loan programs. What, if anything, should be done to facilitate or improve micro-loan assistance to small businesses? SBA Technical Assistance What can government do to enhance small business development? BACKGROUND Nearly all--99.7 percent--of the businesses in the United States are small businesses. The U.S. Small Business Administration reports that 54 percent of the private work force was in small firms in 1990 and that 65 percent of the new jobs created between 1976 and 1990 were in small firms. Yet a quarter of new businesses disappear before completing their first two years of operation. Understanding the big picture, as well as finding solutions to immediate problems, has never been more important to the survival of new and existing small businesses. The SBA has several programs through which it provides business development assistance to small businesses: The Business Information Center (BIC) Program offers public facilities designed to address the needs of the small business owner/entrepreneur in business planning. BICs are currently located in Atlanta, Chicago, Houston, Los Angeles, St. Louis and Seattle. Information is available from a variety of sources, including a reference library, video and audio cassettes, electronic bulletin boards, computer simulation models and computerized templates and spreadsheets. In-house business counseling is also available. The Small Business Development Center (SBDC) Program was established by Congress in 1980 to make management assistance and counseling widely available to existing and prospective small business owners. The 1986 White House Conference on Small Business recommended strengthening the SBDC program. The SBDC program cur- rently has 56 primary centers and 935 subcenters. A total of $67 million was allocated in fiscal year 1993, and the same amount has been requested for fiscal year 1994. In 1992,222,497 clients took advantage of SBDCs, and more than 319,000 people attended SBDC training programs. The SBDC program is a cooperative effort of the private sector, the educational community, and federal, state and local governments. The Service Corps of Retired Executives (SCORE) matches retired business executives--volunteers-- with business owners seeking advice on how to operate their businesses more effectively. SCORE volunteers are members of 390 locally organized, self-administered chapters offering services in more than 700 locations throughout the United States, Puerto Rico and the U.S. Virgin Islands. Approximately 12,500 men and women business executives, whose collective experience spans the range of American enterprise, share their management and technical expertise with small business owners and prospective entrepreneurs. SCORE has permanent authorization and was funded at $3.9 million in fiscal year 1993 and at $3.5 million for fiscal year 1994. STATUS The U.S. Congress is considering "competitiveness" legislation (H.R. 820 and S.4) which would add to the network of technical assistance centers experts who could help small businesses adopt or use new technologies. The legislation also would provide grants and loans to businesses for developing new manufacturing technologies. As part of the implementation of empowerment zones under the Omnibus Budget Reconciliation Act of 1993, the SBA has proposed to establish one-stop capital shops in each empowerment zone. These shops would work with state, local and private sources to offer a broad range of information services and technical assistance on gaining access to capital. DISCUSSION * Should new, cutting-edge opportunities be created to help small business owners cope with shrinking markets, technologies and production requirements? * Is the SBDC program effectively meeting the management problems of small business? Should it be strengthened? * SCORE volunteers of ten express concern that their activities are limited because of a lack of funds. Should SCORE receive additional funding to improve its support for small businesses? * Staying on top of business responsibilities and rights with respect to the environment, public health and other issues is a constant challenge for small businesses. How can complete, accurate and current information be accessed by small business owners so that they can manage their businesses effectively and profitably? Environmental Policy Environmental protection has become a major concern in recent years because of an emerging environmental ethic in the business community as well as among the public at large. Environmental laws enacted by federal, state and local governments have brought improvements in environmental quality and economic opportunities for some businesses. However, regulatory laws have sometimes had a negative economic impact on the small business community, slowing productivity and job creation and costing well over one hundred billion dollars annually. Federal policy must set the importance of environmental concerns in balance with the needs of the small business community, a sector particularly vulnerable to burdensome environmental regulatory requirements because of more limited resources. For further information on environment-related topics, see Small Business Size Standards and Critical Technologies. ------------------------------------------------------------------- Cost-Effective/Efficient Environmental Protection What approaches should be implemented to achieve cost-effective and efficient environmental protection? Background Environmental protection (such as that required under the Clean Air and Clean Water Acts and the Endangered Species Act) is performed almost exclusively by command-and-control regulations, by which the government dictates specific behavior or equipment to meet a government-prescribed standard. This method is used in implementing land use prohibitions, as well as permitting requirements for protecting wetlands and endangered species. Small businesses support cost-effective and efficient environmental protection. Some small businesses, especially in the environmental technology industries, have benefited from the current environmental approach. However, many small firms are subject to burdensome requirements, the costs of which may not be adequately considered by governmental regulators during the process of establishing acceptable pollution levels. It has been argued that the command-and-control approach is inherently inefficient and ill-suited for environmental protection. Critics of this approach say that inflexible rules can be imposed from a central location by regulators who often have insufficient information to accurately determine the least costly means of achieving the optimal level of environmental protection for a specific location. Status In its National Performance Review, the Clinton Administration recommended pollution control improvements. The recommendations were to streamline the permitting process, eliminate duplicative regulations and encourage market-based approaches, such as tradable pollution rights. Discussion Measures that could be considered to make environmental protection more efficient and cost effective include the following: * Mandating that good science, realistic risk assessments, comparative risk assessments, net health analyses and cost/benefit analyses be used in drafting environmental rules and legislation. * Establishing a Bureau of Environmental Statistics to permit accurate measurement and assessment of environmental quality and the effects of environmental regulation. * Mandating that environmental requirements be established by an independent, objective body only after assessing the tangible, measurable public health or environmental harm caused by the activ- ity to be regulated; also requiring that the tangible, measurable benefits of the requirements exceed the costs of those requirements. * Relying on market mechanisms, such as using tradable emissions/discharge permits and privatizing natural resources. * Using alternative regulatory approaches, such as regulating through private institutions (for example, relying on industry self-regulation). * Expanding and strengthening private property rights. * Expanding current definitions of "regulatory takings" of private property--that is, significant reductions in the value of property because of regulatory restrictions--and shifting from landowners to the government the burden of proof that land use prohibitions do not constitute regulatory takings. * Allowing cross-media permitting--that is, granting permits for more than one medium (air, land or water)--with greater interaction between trade associations, industry representatives and government agencies. * Strengthening the Regulatory Flexibility Act by permitting judicial review and requiring that the indirect impacts of regulation be measured. * Preempting some state and local requirements with federal requirements. * Improving communication and feedback between the EPA and industry throughout the rulemaking process. * Improving government outreach to small business. Government Outreach to Small Business Is there a need for improvements in the communication between government and small businesses on matters concerning environmental protection? BACKGROUND Small businesses face increasingly complicated and burdensome laws. At the same time, the government may not be doing enough to ensure that small businesses understand environmental requirements or to assist them in complying. STATUS On November 15, 1993, the U.S. Small Business Administration and the U.S. Environmental Protection Agency signed a memorandum of understanding in which they agreed to work together to "encourage, support and enable U.S. small businesses to develop, market, and/or adopt cost- effective environmental (including pollution prevention) technologies to achieve economic growth and environmental compliance." Since fiscal year 1992, the SBA's funding has included between $400,000 and $500,000 for a demonstration program of research and technical assistance to small businesses in complying with some of the air toxics provisions of the Clean Air Act. The project is being conducted at the University of Northern Iowa. DISCUSSION Measures to be considered to improve government outreach to small businesses include the following: * Establishing mechanisms for greater involvement of small businesses in the legislative/rulemaking process. * Supporting effective outreach to small businesses by EPA regional offices through trade associations and other outreach vehicles. * Requiring implementation by the EPA of "one-stop shopping" for environmental regulatory information for small businesses. * Greater outreach by the SBA, utilizing small business development centers (SBDCs) and other organizations. * Increasing small business awareness of environmentally sound voluntary pollution prevention practices. * Supporting better communication about opportunities in the environmental technology business. * Supporting additional resources, including funding, for EPA's Office of the Small Business Ombudsman (OSBO) and increasing OSBO's visibility within the small business community. * Providing small businesses with free or low-cost access to compliance assistance. Greater Relief from Environmental Regulations for Small Business Should measures be taken to improve the flexibility of environmental regulations that apply to small businesses? If so, what measures should be considered? BACKGROUND Small businesses are finding it difficult to comply with increasingly burdensome environmental requirements. Compared with large firms, small firms generally have less time and money available for environmental regulatory compliance and it often takes them much longer to learn about environmental regulations and to obtain the financing necessary to comply with them. A few environmental requirements provide exemptions for small businesses. However, the number and scope of the exemptions are often very limited. For example, small businesses with more than nine full-time employees must file toxic release inventory (TRI) reports under certain conditions even when they do not release or transfer any quantity of a listed chemical from their facility. Also, exemptions are not always appropriate: being small is no excuse for causing tangible harm. Unnecessarily burdensome environmental requirements can be substantially reduced through increasing regulatory flexibility toward small businesses. The Regulatory Flexibility Act (RFA) requires federal agencies to evaluate the effects of their proposed regulations on small entities and, where possible, reduce any disproportionate adverse effects. Administration of the RFA program in the Environmental Protection Agency is in the Office of Policy, Planning and Evaluation (OPPE). Some have argued that more objective oversight and administration might be achieved through the agency's small business ombudsman's office. STATUS In Congress, H.R. 830 was introduced early in 1993 to strengthen the RFA. The RFA can benefit small firms during the regulatory process by bringing public scrutiny to bear on specific proposed regulations. For example, the EPA is considering a petition submitted by the U.S. Small Business Administration's Office of Advocacy to exempt facilities that release or transfer 5,000 pounds or less of a listed chemical from filing TRI reports. DISCUSSION Measures to be considered for increasing the flexibility of environmental regulation may include: * Greater use of de minimis exemptions--provisions exempting companies that discharge very small quantities of chemicals. * Greater use of tiering requirements--allowing more than one standard depending on the facility's size or the quantity or type of chemical discharge. * Greater use of phase-in periods and extended deadlines to allow time for outreach programs and for small businesses to obtain required financing. * Allowing substitution of pollution prevention for enforcement. * Greater flexibility in enforcement in general. * Mandating communication packages to communities affected by environmental regulations. * Using proactive preproposal discussions. * Requiring the EPA to implement a consultation program similar to that of the Occupational Safety and Health Administration. * Better defining "small business" for purposes of applying environmental requirements. * Requiring the EPA, through measures such as a strengthened Regulatory Flexibility Act, to develop less burdensome regulatory approaches that achieve statutory requirements. * Requiring that proposed financial penalties pass a "reasonableness" test to prevent assessing fines on businesses making good-faith efforts to comply with environmental requirements. * Exploring the concept of substituting innovative penalties, such as mandatory audits or mandatory hiring of environmental personnel, for the existing fine scheme. * Requiring agencies having an independent ombudsman program to place the administration of the RFA program under the ombudsman. Impact of Environmental Laws on Access to Capital for Small Business What measures should be taken to reduce or eliminate the adverse impact of environmental laws on access to capital for small businesses? BACKGROUND In recent years, it has been argued that a number of environmental laws have had an adverse effect on small business access to capital. Those with the greatest impact so far have been Superfund and the Resource Conservation and Recovery Act (RCRA). The Superfund program was created to clean up hazardous waste sites. RCRA regulates solid waste, especially hazardous wastes, and imposes technical and financial requirements on owners of under- ground storage tanks. Environmental laws may have affected small business access to capital in several ways. First, investors are increasingly reluctant to invest in small businesses because increasing numbers of investors have been held liable for environmental cleanups. Superfund and RCRA contain exemptions from liability for investors that do not exercise control over the operations of businesses found liable for cleanups. However, over the years, court decisions have substantially eroded these exemptions, holding investors jointly and severally liable without showing that the investor exercised control over business operations. Second, investment is more difficult since uncertainty resulting from even potential liability creates an incalculable risk for investment decision making. Third, the increasing costs of environmental requirements are forcing small businesses to divert their limited resources from generating profits to complying with environmental regulations. Investors are sometimes reluctant to lend capital to purchase pollution control equipment since such equipment does not generate revenue. STATUS Small business investors, including the U.S. Small Business Administration, have been affected by environmental laws, especially by the lack of protection for secured creditors under environmental laws. This situation has further discouraged invest- ing in small businesses. Some attempts were recently made to limit lender liability of investors. In 1992, the Environmental Protection Agency amended regulations of the Superfund Act to delineate more clearly when a secured party would be liable for environmental cleanups, but this change has had little effect. Congress is considering limiting lender liability with respect to environmental laws. Among the bills introduced in the 103d Congress were the Amendments to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 Act of 1993 (H.R. 2462), and the Depository Institutions Regulatory Improvement Act of 1993 (S.l 124). DISCUSSION Measures under consideration for reducing/eliminating the adverse impact of environmental laws on access to capital include: * Making Internal Revenue Service policy consistent with the tax laws, especially with legislative intent. * Significantly limiting lender liability. * Allowing "covenants not to sue" on development projects, especially for urban redevelopment projects. * Educating the lending community on environmental requirements for small businesses. * Establishing an environmental risk insurance program . * Providing greater access to SBA loan guarantees for environmentally sensitive projects. * Amending lender liability to include reasonable protection for equity investors who are not involved in day-to-day management of the business. Non-Point Sources of Water Pollution How will regulation of non-point water pollution sources affect small businesses? BACKGROUND Efforts to reduce or eliminate water pollution have so far focused primarily on "point source" discharges, which are discharges at a specific single location, such as a pipe. "Non-point sources" are diffuse sources of pollution that are not regulated as point sources. Non-point sources are normally associated with land runoff (agricultural, silvicultural, construction or urban), precipitation, atmospheric deposition or percolation. The great attention paid to point sources has significantly reduced point sources' contributions to water pollution problems. Most water pollution now originates from non-point sources, and gov- ernment regulators have recently begun focusing more attention on them. Section 6217 of the 1990 Coastal Zone Management Act Reauthorization Amendments required all states with federally ap- proved coastal zone management programs to submit non-point source pollution control programs to the U.S. Environmental Protection Agency and National Oceanic Atmospheric Administration (NOAA) for approval. Many small businesses are concerned that the non-point source provisions in the reauthorization bill are too rigid, complex and costly to effectively reduce non-point source pollutants. They believe that non-point source proposals may introduce national land use planning and intrude in an area traditionally regulated at the state level. STATUS The Clean Water Act reauthorization bill attempts to implement a major regulatory program for nonpoint source water pollution. The Congress will act on this legislation in 1994. DISCUSSION Issues to be considered in regulating non-point sources include: * Federal land use planning. * Federal regulation in areas traditionally regulated by the states. * Concerns that standards be based on good science and realistic risk assessments. * Avoiding takings of private property without just compensation. (See also the discussion under Cost Effective/Efficient Environmental Protection.) Recycling Are additional measures needed to encourage environmentally sound recycling? BACKGROUND Recycling requirements have created opportunities for some small businesses in the recycling industry. Recycling is sometimes the most cost-effective and efficient approach for achieving waste and pollution reduction. Yet small businesses are sometimes ill-informed about environmentally sound recycling practices. Some argue that promotion of recycling through direct government interventions--for example, by imposing recycling mandates on industry--can distort recycling markets, cause inefficient recycling and even sometimes cause greater environmental harm. Moreover, voluntary recycling by small businesses can be hampered by burdensome government definitions of solid and hazardous waste. Regulatory obstacles to on-site treatment and recycling of wastes can also inhibit small business recycling. STATUS Some state and local governments have imposed recycling mandates on industry. Some in Congress wish to follow suit with nationwide recycling mandates. The U.S. Environmental Protection Agency (EPA) recently assigned a task force the responsibility of modifying its regulatory definition of solid waste under the Resource Conservation and Recovery Act (RCRA). This could affect some recycling practices. The EPA is reforming its regulation of hazardous wastes under RCRA's Subtitle C. The agency recently established a committee of environmental, industry, state and federal representatives to develop hazardous waste regulatory options. This initiative could affect some recycling practices as well. Executive Order 12873, signed in October 1993, imposes recycling mandates on the federal acquisition process. DISCUSSION Policies that encourage efficient recycling may include the following: * Reforming government regulation of waste handling, especially hazardous waste. Government paperwork and permitting requirements for handling waste can discourage market-driven recycling because of the high costs and liability incurred by parties attempting to recycle such waste. * Encouraging local jurisdictions and other parties handling waste collection to charge a collection fee based on the weight or volume of the waste collected. Flat-rate fees provide no incentive for waste generators to separate material for recycling from their waste streams. * Eliminating government intervention in the recycling marketplace. * Providing small businesses with more information on environmentally sound recycling practices. * Allowing small businesses to perform on-site recycling of waste streams in a manner that achieves both reasonable business and environmental goals. Reducing Paperwork Required by Environmental Regulation Should environmental paperwork requirements be reduced for small businesses? If so, how? BACKGROUND The paperwork burdens imposed on small businesses because of environmental regulation have increased substantially over recent years. Small businesses may be required to comply with as many as 100 environmental regulations. The limited resources available to small businesses make it increasingly difficult for them to cope with the added paperwork burden. Moreover, duplicative forms used to solicit information about environmental compliance often force small businesses to answer the same questions repeatedly. STATUS The National Performance Review recommended that the U.S. Environmental Protection Agency's permit program be streamlined in ways that include establishing a permit clearinghouse to serve as a single point of contact and piloting a cross-program permit tracking system. Small business advocates are urging Congress and the EPA to consolidate paperwork requirements. DISCUSSION Measures to be considered for reducing paperwork burdens include: * Allowing filing by computer. * Consolidating or eliminating duplicative reporting required by the EPA and other federal and state programs. * Strengthening and enforcing the Paperwork Reduction Act. * Adopting cross-program permitting. * Allowing greater use of group permitting, such as was utilized in the storm water permitting program. * Improving EPA assistance to small businesses in explaining regulatory requirements and the measures needed for compliance. * Making guidance documents more readily available. * Simplifying formats for providing information. * Mandating that the Occupational Safety and Health Administration (OSHA) finalize its material safety data sheets (MSDS). * Standardizing permitting requirements. * Creating an "emissions bank" that would allow companies to trade emissions "credits" for offsetting purposes under the Clean Air Act. Superfund How should Superfund be reformed? BACKGROUND The Superfund program was created by Congress in 1980 for the purpose of cleaning up the nation's hazardous waste sites. The U.S. Environmental Protection Agency was given broad authority to perform this function. The program established a fund to pay for the cleanup of these sites. Superfund is financed primarily by taxes on crude oil, certain chemical feedstocks and an environmental corporate tax. The fund is used when "responsible" parties cannot be located or are unwilling or unable to clean up the site. However, the ultimate costs of hazardous waste cleanup are borne by anyone associated with a hazardous waste site. The EPA can require not only a generator of hazardous wastes, but any transporter of hazardous wastes to a site, or any past or present owner or operator of the land on which the site is located, to pay for the entire site's cleanup costs. This has meant that parties, frequently small businesses, that had nothing to do with creating the hazardous waste site, have had to pay the full cost of the site's cleanup. A review of the costs and benefits of the Superfund program indicates the following: The EPA is authorized to spend a total of $15.2 billion through 1994 on site cleanup. Superfund accounts for 25 percent of EPA's budget. The EPA recently estimated that the Superfund program will ultimately cost $27.2 billion. However, the General Accounting Office has questioned the reliability of EPA's Superfund cost estimates, projecting that Superfund could cost up to $300 billion. Along with questions about cost, there are a number of questions about the effectiveness of the Superfund program. As of October 1991, about 1,200 hazardous waste sites were scheduled for cleanup. Only 63 sites were cleaned up between 1981 and October 1991. Superfund's liability system ensures that the contributions of various parties toward hazardous waste cleanup stand in little or no discernable relation to their relative responsibility. Moreover, responsible parties are frequently required to clean a site to the point that it is cleaner than the surrounding water and soil. And even after a wastesite has been removed from the list of sites to be cleaned up, the EPA can decide to apply a more stringent cleanup standard in the future and may seek payment from the same parties. A survey conducted in September 1993 at the University of New Hampshire's Center for Venture Research showed that Superfund liability significantly affects small firms' ability to implement investment decisions. Nearly 70 percent of the respondents cited the liability system as Superfund's biggest problem. STATUS The Superfund program was last reauthorized in 1990 and is due for reauthorization in 1994. The Clinton Administration has recognized that changes in the Superfund program are necessary and has promised to require polluters to "pay more" of the cleanup costs. DISCUSSION Measures to be considered for addressing Superfund include: * Eliminating retroactive liability prior to January 1, 1987. * Requiring good science and realistic risk assessments in assessing hazards from waste sites. * Requiring action/cleanup decisions to be based upon real risks only. * Requiring good science and realistic risk assessments in establishing cleanup standards. This would include a realistic consideration of future uses of the site. * Requiring cost-effective remedy selections that have been reviewed by objective, independent professionals. * Eliminating "reopeners"--reopening the remediation process at a site after it has been closed. * Streamlining the de minimis/de micromis process--the process originally intended to provide a quick exit from liability for waste generators that contributed minimum quantities of waste to a site. * Opening the de minimis/de micromis process to input from EPA's small business ombudsman. * Offering alternative funding strategies for site cleanups. Tax Incentives for Investing in Pollution Control Equipment Should tax incentives be available to small businesses for investing in pollution control equipment or other pollution reduction measures? BACKGROUND Small businesses are finding it increasingly necessary to invest in equipment or other property to comply with environmental regulations. Yet pollution control equipment cannot be rapidly written off under current tax laws, nor are tax credits available for such investments. Moreover, American small businesses are finding themselves at a competitive disadvantage because of disparities between U.S. and foreign tax policy with respect to these investments. In Canada, pollution control equipment for air and water pollution can be depreciated over a three-year period, with 25 percent of the investment qualifying for a write-off the first year and the balance written off over the remaining two years. In France, equipment used to purify industrial water or air or to remove odors receives a 50-percent deduction in the first year. Structures used to accomplish these tasks can also be expensed in the first year. STATUS On June 17, 1993, legislation was introduced to provide tax incentives for pollution abatement equipment. DISCUSSION * Should tax incentives (deductions, tax credits) be provided for pollution abatement equipment, remedial costs and/or pollution prevention/reduction measures? If so, what incentives should be allowed? Human Capital Over the next decade, 85 percent of new workers will be women, immigrants and minorities. The diversification of the work force is one of the major factors that will influence American businesses in the 21st century. Small and growing companies will also need to offer increasingly costly employee benefits in order to attract and retain good employees. Health care coverage, retirement plans, unemployment compensation, insurance and workers' compensation premiums constitute a growing portion of employer costs. To alleviate burgeoning costs, federal and state policymakers are considering mechanisms that will better enable businesses to offer comprehensive employee benefits packages. Finally, small employers and entrepreneurs will need to ensure that they and their employees are adequately trained to meet the challenges of the 21 st century marketplace. Serious mismatches between the needs of employers and skills possessed by the work force will greatly affect economic productivity and international competitiveness. A shortage of skilled workers could have a disproportionate impact on the small business community, which generally offers relatively lower salaries and less extensive benefits than larger companies. Smaller firms will be scrambling to compete for--and train--the best workers in a tight market. For related information, see Fair Labor Standards Act; Striker Replacement Legislation; Unfunded Mandates; and Payroll Tax Reform. Access to Health Care Should employers be required to offer and pay for health care coverage for employees, or should individuals be required to enroll in health plans themselves? BACKGROUND While overall access to health care has improved over recent decades, the access picture has worsened for many, particularly the poor and uninsured. Lack of access typically results from economic, supply, distributional and sociocultural barriers. Most Americans receive their health care through private insurance or government programs. However, 38.9 million people--15.4 percent of America's total population--are uninsured, and many more are underinsured. While 16.6 percent of the non-elderly population in urban areas have no health insurance, 34.1 percent of those living in rural areas are uninsured. According to recent thinking, affordable health care costs can be achieved only when universal coverage is achieved. However, the cost of improving access to health care would depend on the extent and generosity of coverage, and the health care demands of those who are unable to pay for coverage. Many critics fear the creation of new entitlement programs because of the history of Medicaid, Medicare and Social Security growing well beyond original financial projections. Some argue that expanding access may cost the American public more money. Others believe that health care costs will decrease for most Americans under universal coverage. Preventive care might be expected to lower emergency room costs, for example. STATUS During the past decade, policymakers have discussed reform efforts that would improve access to health care. Included in the discussions about comprehensive health care reform are an employer mandate to provide health insurance, subsidies and tax credits to assist businesses in providing coverage, an individual mandate to obtain health insurance and a government-run health system. Incremental initiatives that would expand access include tax credits to assist low- and middle income Americans, private insurance market reforms and expanded use of medical savings accounts. DISCUSSION * How can the revenues for America's health care needs be raised? * Should employers be required to provide access to health care coverage to their workers? * What are the elements of small-group market reform and what has been their impact on improving access to health insurance for small firms? * Who are the uninsured and what can be done to improve coverage among this population? * Options include, but are not limited to, the following: Implement or phase in universal health care coverage, meaning coverage would be required for all Americans. Implement or phase in universal access to health care coverage, meaning all Americans would have an opportunity to be covered. Adopt incremental initiatives aimed at improving access and reducing health care costs. Adapting to Diversity in the Small Business Work Force What, if anything, can be done to encourage diversity and multiculturalism in America's small business workplaces? BACKGROUND The concepts of work force diversity and "multiculturalism" seek to recognize, respect and capitalize on the different backgrounds and experiences of employees. The composition of the U.S. work force is changing with the addition of more women and minorities; by the year 2000, these groups will account for more than half the work force. At the same time, new attitudes and legislation are making workplaces more welcoming environments for gay and lesbian Americans and for people with disabilities. Many companies that have implemented diversity programs report results that include a more productive, innovative work force and fewer discrimination-based lawsuits. STATUS Demographic, societal and legislative changes have led to changes in the composition of the work force. DISCUSSION * What, if anything, can the government do to help small businesses adapt to a 21 st century work force? * Is diversity training cost-effective for small businesses? Could such training help prevent discrimination-based lawsuits or the loss of trained, productive workers? * What, if any, research needs to be undertaken to determine what initiatives should be taken by small businesses to ensure that their work forces remain productive and cohesive? * Should schools assist the future work force by educating them about diverse cultures and backgrounds? * Should diversity training include education about HIV/AIDS? Americans with Disabilities Act Should the government provide financial incentives or additional assistance to help small businesses comply with the Americans with Disabilities Act (ADA)? BACKGROUND The