House of Representatives > Small Business Committee

We are writing to advise you of the views and estimates of the Committee on Small Business on the President’s Fiscal Year 2007 budget proposal. In short, the President’s proposed budget request for the coming year will help small employers grow our economy and create jobs.

The Committee again applauds the President for endorsing further tax relief proposals that benefit small businesses such as:

Making permanent the tax cuts previously passed by Congress, including estate or “death” tax repeal, in which the average tax savings in 2005 was $3,235 per small business;
Making contributions to Health Savings Accounts (HSAs) tax deductible and increasing the amount that can be set aside for HSAs;
Enacting an even higher and permanent small business (Section 179) expensing limit by increasing the deduction for qualifying property from $100,000 to $200,000 and increasing the phase-out of the deduction from $400,000 to $800,000 and indexing both levels for inflation thereafter;
Making permanent the research and experimentation tax credit;
Combining and making permanent the Work Opportunity and Welfare to Work Tax Credit; and
Extending for one-year individual Alternative Minimum Tax (AMT) relief.

We would further encourage the Budget Committee to add more tax relief for small business owners in the budget resolution to include:

Increasing the business meal deduction;
Establishing a standard home office deduction;
Incorporating the deduction for the health insurance costs of self-employed individuals into the calculation of the self-employment tax; and
Permanently repealing individual AMT.

These and other high priority consensus small business tax reforms are contained in the Small Employer Tax Relief Act of 2005 (HR 3841). This legislation also includes the repeal of the Federal Unemployment Tax Act (FUTA) temporary surcharge of 0.2 percent on employers. This “temporary” surcharge has been in place since 1976. Unfortunately, the President’s FY ’07 revenue proposal includes yet another extension of this tax. Because the unemployment level has dropped to a low rate of 4.7 percent and the unemployment trust fund has an adequate surplus, it is now time to finally let the “temporary” surcharge or tax expire.

While there are many agencies, programs, and initiatives within the federal government that directly or indirectly benefit or assist small business, the House Small Business Committee has primary legislative responsibility for the Small Business Administration (SBA). The rest of this letter will focus on the President’s FY ’07 budget request for the SBA, which falls within the broader confines of the 370 Commerce and Housing Credit budget account.

The President requests $624.2 million in spending for the SBA in FY ’07. This is about 37 percent less than what was spent on the SBA in FY ’01 while, during the same time, the SBA served more small businesses than ever in its history. The SBA certainly knows how to do more with less and it ought to be commended. While the Committee believes the President’s FY ’07 budget proposal for the SBA is generally sound and reasonable, particularly in context of the overall 2007 budget request that cuts non-security discretionary spending to below last year’s level, and should not be cut further, there are a few notable exceptions.

First, the request contains a new proposal to increase fees on all small business loans of over $1 million guaranteed by the SBA over and above what is necessary to keep these programs operating at a zero subsidy rate. The Committee continues to support a zero subsidy rate (no taxpayer financing) for the 7(a), the Certified Development Company (CDC) or 504, and the Small Business Investment Company (SBIC) programs. This proposed fee increase, however, would go beyond what is needed to cover the loan subsidy to apply to some of the administrative expenses associated with providing federal government guarantees on these loans. While relatively modest now, if approved, this $7 million fee increase would set a negative precedent for future budget requests. Subsequent budget proposals could continue to lower the dollar threshold until small business borrowers and/or lenders would eventually have to pay the entire administrative cost of issuing these loans. This has the potential of dampening demand for the various SBA loan guarantee programs.

Plus, the proposal unfairly and disproportionately hits the SBIC program, with a higher fee of 0.64 percent, versus 0.04 percent fee for the 7(a) program and a 0.11 percent fee for the 504 program. It is also not clear who exactly will pay these new fees – small businesses, lenders (banks or individual SBICs) or a combination thereof because the proposal incorrectly gives too much discretion to the SBA Administrator to impose these fees.

Second, the request proposes to amend the interest rate charged on SBA disaster loans. Current law provides a four percent interest rate to disaster loan borrowers who do not have credit elsewhere. Under this proposal, a disaster loan borrower would receive this rate for only the first five years of a disaster loan. After the fifth year, the interest rate would adjust to the Treasury bill rate, which has increased in recent months. The SBA estimates that $41 million can be raised from disaster loan borrowers with this policy change. However, the vast majority of SBA disaster loans have terms greater than five years. This proposal would undoubtedly add a great deal of uncertainty to disaster loan borrowers because they would not know exactly what they will pay over the lifetime of a loan at precisely the worst time, financially, in their life. The Committee strongly opposes this proposal to impose an adjustable interest rate on SBA disaster loans.

Third, the Committee also remains concerned about the SBA’s renewed effort to eliminate the $1 million loan subsidy for the Microloan program and the accompanying $13 million in technical assistance. This program reaches various demographic groups that would otherwise not be served by the private sector and even the SBA’s 7(a) program. Combined with the technical assistance, the Microloan program achieves a default rate of less than one percent. Unless the SBA devises some other means to reach this unique market, which without the program would not have access to capital, the Committee will continue to oppose the elimination of the modest appropriation for the Microloan program.

Finally, while recognizing the tough budgetary environment, the Committee believes that the programs at SBA deserve an inflationary increase after years of not receiving much, if any, increase at all. The Small Business Development Center (SBDC) program, the Women’s Business Center (WBC) program, and the SCORE program, which serve their small business clients very well, are cases in point. This would require about an additional $4 million to the SBA’s FY ’07 budget request.

In conclusion, the President’s FY ’07 budget request for small business can be supported, with the above exceptions noted, both in terms of his tax relief proposals and the SBA budget request.

Sincerely yours,

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The Honorable Donald Manzullo, Chairman The Honorable Roscoe Bartlett

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The Honorable Sue Kelly The Honorable Steve Chabot

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The Honorable Sam Graves The Honorable Todd Akin

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The Honorable Bill Shuster The Honorable Marilyn Musgrave

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The Honorable Jeb Bradley The Honorable Steve King

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The Honorable Thaddeus McCotter The Honorable Ric Keller

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The Honorable Ted Poe The Honorable Michael Sodrel

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The Honorable Jeff Fortenberry The Honorable Michael Fitzpatrick

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The Honorable Lynn Westmoreland The Honorable Louis Gohmert

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