Grassley: Senate Majority Shifts Views on Expiring Tax Relief for “Fat Cats”; Small Businesses Need Right Policies for Job Creation

Floor Statement of Sen. Chuck Grassley
Delivered Monday, March 1, 2010

Today the Senate starts debate on expiring tax and health provisions. They are knownaround here as “extenders.” I’d like to make a couple of points on the process before I get intothe substance of the substitute.

What I find surprising is that we are taking up a package, that like last week’s exercise,absolutely belongs to the Senate Democratic Leadership. That is to say we are not taking up abipartisan package that I put together with Finance Committee Chairman Baucus. To be sure,some of the structure reflects the agreement my friend, the chairman, and I reached. But thispackage is almost three times the of the package we agreed on. Virtually all of theadditional cost is due to proposals that I would not have agreed to in representing the RepublicanConference. I was under the impression that the Senate Democratic Leadership was genuine inits desire to work on a bipartisan basis, but clearly I was mistaken. Although the SenateDemocratic Leadership was highly involved in the development of a bipartisan bill, theyarbitrarily decided to replace it with a bill that skews toward their liberal wing.

So, my first comment to my colleagues, the media, and the public is, don’t let thispackage be mislabeled as the Baucus-Grassley package. It is not the package my friendChairman Baucus and I negotiated. Again, the package before the Senate dramatically differs incost, balance, and intent from the Baucus-Grassley deal, announced on February 11.

My second preliminary comment goes to the way in which these expiring tax provisionshave been described by many on the other side, including those in the Democratic Leadership. Ifyou rolled the videotape back a week or so ago, you’d hear a lot of disparaging comments aboutthese routine, bipartisan extenders. From my perspective, those comments were made in aneffort to sully the bipartisan agreement reached by Chairman Baucus and me.

If you take a look at newspaper accounts of a week or so ago, you’d come away with theimpression that the tax extenders are partisan pork for Republicans. A representative samplecomes from one report, which describes the bipartisan bill as “an extension of soon-to-expire taxbreaks that are highly beneficial to major corporations, known as tax extenders, as well as othercorporate giveaways that had been designed to win GOP support.” The Washington Postincluded this attribution to the Senate Democratic Leadership in an article last week. “ “We’repretty close,” {the majority leader} said Friday during a television appearance in Nevada, addingthat he thought “fat cats” would have benefitted too much from the larger Baucus-Grassley bill.”

The portrait that was painted by certain members of the majority, echoed without criticalexamination, in some press reports was inaccurate. For one thing the tax extenders includeprovisions such as the deduction for qualified tuition and related expenses and also the deductionfor certain expenses of elementary and secondary school teachers. If you are going to school orif you are a grade school teacher, the Senate Democratic Leadership apparently viewed you as afat cat. If your house was destroyed in a recent natural disaster and you still need any of thetemporary disaster relief provisions contained in the extenders package, too bad, because helpingyou would amount to a corporate giveaway in the eyes of some.

The tax extenders have been routinely passed repeatedly because they are bipartisan andvery popular. Democrats have consistently voted in favor of extending these tax provisions.

House Speaker Nancy Pelosi released a very strong statement upon House passage of taxextenders in December of 2009, saying this was “good for businesses, good for homeowners, andgood for our communities.” December of 2009 was not very long ago. In 2006, the then-Democratic Leader released a blistering statement “after Bush Republicans in the Senate blockedpassage of critical tax extenders” because “American families and businesses are paying theprice because this Do Nothing Republican Congress refuses to extend important tax breaks.”

Recent bipartisan votes in the Senate on extending expiring tax provisions have come inthe Emergency Economic Stabilization Act of 2008, the Tax Relief and Health Care Act of 2006,which passed the Senate by unanimous consent, and the Working Families Tax Relief Act of2004, which originally passed the Senate by voice vote although the conference report onlyreceived 92 votes in favor and a whopping 3 against. According to the non-partisanCongressional Research Service, extension of several of these provisions goes back even further,including the Tax Relief Extension Act of 1999, which again passed the Senate by unanimousconsent but lost 1 vote on the conference report.

One member on the other side said, “Our side isn’t sure that the Republicans are realinterested in developing good policy and to move forward together. Instead, they are moreinclined to play rope-a-dope again, my own view is, let’s test them.” Another member of thislarge 59 vote majority exclaimed, “It looks more like a tax bill than a jobs bill to me. What theDemocratic Caucus is going to put on the floor is something that’s more focused on job creationthan on tax breaks.”

Reading those comments I found myself scratching my head. The only explanation forthis behavior is that certain senators decided last week that it serves a deeply partisan goal toslander what have been for several years bipartisan and popular tax provisions benefitting manydifferent people. The Washington Post article I quoted from earlier includes a statement from aSenate Democratic leadership aide saying that, “No decisions have been made, but anyoneexpecting us immediately to go back to a bill that includes tax extenders will be sorelydisappointed.”

You can imagine, that today, a little over a week after these comments, I’m reallyscratching my head. We have before us the expiring tax and health provisions that weredisparaged just a short time ago. Have they morphed from corporate tax pork? Have theysuddenly re-acquired their bipartisan character? Are these time-sensitive items, now expired formore than two months, suddenly jobs-related?

Now, as we begin to debate another, quote, jobs bill, I want to focus on the economy,small businesses, and jobs.

We all agree that our nation is currently facing challenging economic times. While therehave been some signs of improvements such as the recent growth in our gross domestic product,job losses continue to mount and many hardworking Americans are struggling to make endsmeet. According the Bureau of labor Statistics, over 8 million jobs have been lost since oureconomy officially slipped into a recession in December of 2007. The unemployment rate iscurrently at 9.7 percent, which is simply an unacceptable level.

The lack of job creation continues despite aggressive actions taken at the federal level inorder to stabilize the economy. This includes the enactment of TARP and the $800 billion dollarstimulus bill. However, these bills were all missing a critical ingredient for spurring jobcreation-substantial tax relief targeted at small business.

In October of 2008, Congress enacted the Troubled Asset Relief Program (TARP), a$700 billion dollar financial bailout bill that we were told had to be enacted immediately inorder to deal with so-called toxic assets to prevent credit from drying up, which would havechoked off the lifeblood of the American economy. What we actually got was direct infusionsof cash into the largest Wall Street banks, which was 180 degrees different than what we weretold by Treasury.

And later came the bailout of GM and Chrysler using TARP money after the Senate hadjust voted not to bail GM and Chrysler out. This inconsistent policy by Treasury createduncertainty in the financial markets and business community. Moreover, exorbitant bonuseswere paid to executives and managers of firms that would have been out of a job if not forCongress, Treasury, and the Federal Reserve intervening.

And how effective was the bailout at improving credit markets? In October 2009, theGovernment Accountability Office released a report reviewing TARPs first year performance.The GAO report found credit had improved based on certain market indicators. However, theywere not able to determine how much, if any, was attributed to TARP, as compared to generalmarket forces or other federal actions.

While it is unclear to the extent credit has been freed up as a result of TARP, it is clearwho has reaped the benefits of the program. This past year, many financial firms, includingGoldman Sachs, J.P. Morgan Chase and others who received TARP funds posted record or nearrecord profits.

While Wall Street executives have clearly benefited from TARP, small businesses andtheir employees have not been so fortunate. Small businesses continue to struggle to obtaincredit in order to expand their operations, purchase inventory, or even to make payroll.

The so-called stimulus bill enacted almost solely by an overwhelming Democraticmajority in Congress last February has not spurred job creation. The massive $800 billionspending bill was hastily rushed to the floor with little time to deliberate its merits.

Lawrence Summers, the Director of President Obama’s National Economic Council, saidthe test for stimulus is whether it is timely, targeted, and temporary. This stimulus bill hit the trifecta;it failed on all three.

Through a report issued in January of 2009 by the current chair of President Obama’sCouncil of Economic Advisors, Christina Romer, the administration predicted that the stimuluswould save or create 3.7 million jobs.

We were told by the Obama Administration that if the bill was not passed quickly wewould experience unemployment of 9 percent. However, we were also told by the ObamaAdministration that if the stimulus bill passed, unemployment would not go over 8 percent.

Well, Mr. President, the bill was passed but what did we get for the $800 billion in debt,before interest, that was laid at the feet of our children and grandchildren? The unemploymentrate jumped from 7.7% in January--right before the stimulus was enacted--to a high of 10.1% inOctober. While unemployment recently dipped slightly to 9.7%, this was not due to job creation,but because millions of individuals have literally given up looking for work. The ObamaAdministration also stated that quote “more than 90 percent of the jobs created are likely to be inthe private sector.” In all, 3.3 million jobs have been lost since the stimulus bill was enacted, and3.2 million of those jobs were private sector jobs. In summary, the Obama Administration wasterribly inaccurate regarding its stimulus jobs projection.

At the time the stimulus bill was passed, I raised concerns that the bill was not targetedenough at small businesses and job creation. However, my point of view lost out and less thanone-half of one percent of the bill included tax relief for small businesses. The money in thestimulus bill to give tax credits to people who buy electric plug-in golf carts, or to pay forrattlesnake husbandry in Oregon, among numerous other ill-advised provisions, would have beenbetter allocated to small business tax relief. Since the stimulus, small businesses have beenbearing the brunt of job losses in our economy. However, the words of those on the other sideregarding the importance of small business to job creation does not match their actions whenlooking at the paltry amount of small business tax relief that they have provided. Again, in thejobs bill or stimulus bill or whatever you want to call it that passed the Senate last week, therewas only one provision directed solely to small business tax relief. That was a provision that Isupport, increased expensing of equipment purchased by small businesses, but it is a very smallprovision and it only gave small businesses what they’ve already been getting for the last coupleyears.

That provision was only $35 million out of a $62 billion bill—the $15 billion thateveryone talks about plus the $47 billion for the highway trust fund that is typically notmentioned. Last year, I introduced S. 1381, the Small Business Tax Relief Act of 2009. My billwould double the amount of equipment that a small business could expense, and it would makethose higher levels permanent, instead of just for one year as the Reid bill did. In mynegotiations on a “jobs bill”, I sought to include provisions from my small business tax reliefbill, but there was no agreement to put small business tax relief provisions from my bill in thebipartisan compromise we reached. Instead, we were asked to defer those provisions.

According to ADP National Employment data, from February of 2009 through January of2010 small businesses with fewer than 500 employees saw employment decline by 2.67 million,while large businesses with 500 or more employees saw employment decline by 694,000.

While I am sure many of us disagree about the effectiveness of the financial bailout andstimulus spending in getting our economy back on track, I know we all agree that there has beena lack of job creation and too many people continue to be unemployed.

Because the stimulus bill has so clearly failed what it was supposed to do, which is tocreate jobs, the Administration and Congressional Democratic Leadership are running away fromthe word stimulus faster than the triple-crown winning horse, Secratariat. Everything proposednow is called a jobs bill, even if it includes proposals that were always labeled stimulus in thepast. Only 6 percent of Americans believe the stimulus bill created jobs. That is less than the 7percent of Americans who believe that Elvis is still alive.

Last week the Senate passed a bill that included a provision designed to increase hiring.This includes a payroll tax holiday for business that hire unemployed workers and a tax credit forthe retention of newly hired individuals in 2010.

The payroll tax holiday part of this proposal is likely to spark some modest hiring atbusinesses at the margins, among those that have seen some improvements in their business, butare on the fence about whether to hire somebody now or wait until later. However, manybusinesses continue to struggle and won’t hire new employees just because it is the stated policygoal of Congress. Before a business can hire a new employee, they need to know that that thenew employee will generate additional revenue that exceeds the cost of the employee.

The latest survey of Small Business Economic Trends by the National Federation ofIndependent Businesses (NFIB) shows that many small businesses may not be in a place thatthey could afford to hire new employees, even with the payroll tax holiday.

I have here a chart from NFIB with selected components from their Small BusinessOptimism Index. While many components of this index improved slightly from December, it isclear that small businesses continue to struggle.

- A net negative 1 percent of owners plan to create new jobs in the next three months;

- A net positive of only 1% of businesses owners expect the economy to improve. Only 4%of business owners said it was a good time to expand

- a net NEGATIVE 42 percent of owners reported higher earnings

This last component is especially important for businesses when it comes to hiring newemployees. If earnings are declining there is little a payroll holiday will do to spark hiring sincethe businesses needs to know that the revenue generated from the additional employee willexceed the cost, not just today but in the future as well.

According to the NFIB survey, when businesses are asked what the single most importantproblem facing their business is, the answer is lack of sales. But, this is closely followed bytaxes and then government regulations and red tape.

I am glad that my colleagues on the other side have recognized that true job creation comesthrough the private sector and have thus sought hiring incentives through payroll tax relief.

However, this minor tax relief is a drop in the bucket considering the challenges small businessesare facing due to the economy and proposed increased taxes and red tape included in thePresident’s budget -- whether we are speaking about “cap and trade” that will drastically increasetheir energy costs, health care reform that would mandate small businesses to offer healthbenefits that will increase the cost of labor, or the call for tax increases on so-called wealthytaxpayers earning over $200,000 that will largely fall on the backs of small business.

If our intention is to increase long-term employment, the last thing we should be doing inthis time of economic uncertainty is increase taxes or place additional burdens on those who areresponsible for creating 70% of the jobs in our economy -- namely small businesses.Providing small businesses a payroll tax holiday while intending to impose increasedtaxes, regulations and mandates amounts to throwing them a few peanuts while taking away theirsupper.

In recent months, I have spoken at length about the impact of the tax increases set to kickin 10 months from today. I’ve examined the impact of these tax increases on small businesses.Let’s take a close look at this impact.

The President and my colleagues on the other side of the aisle have proposed increasingthe top two marginal tax rates from 33 and 35 percent to 36 and 39.6 percent, respectively;increasing the tax rates on capital gains and dividends to 20%; fully reinstating the personalexemption phase-out, known as PEP, for those making over $200,000; and fully reinstating thelimitation on itemized deductions, which is known as Pease, for those making over $200,000.

With PEP and Pease fully reinstated, individuals in the top two rates could see their marginal taxrate increased over 15 percent or more.

My colleagues on the other side of the aisle respond that these proposals will only hit“wealthy” individuals and only a small percentage of small businesses fall into this category.What my colleagues fail to understand is that the small businesses that fit into this group are notstatic, but consist of different businesses over time that go in and out of the top two tax bracketsdepending on the market. Data from the Joint Committee on Taxation, which is the nonpartisanofficial Congressional scorekeeper on tax issues, shows that 44% of the flow-through businessincome will be hit with the increase in the top two tax rates proposed by the President andDemocratic Congressional Leadership. This hits small businesses particularly hard, since mostsmall businesses are organized as flow-through entities. It will increase taxes on single smallbusiness owners that make more than $200,000 per year, even if they plow all of their incomeback into their small business to keep paying their workers or hire additional workers.Increasing taxes on this group punishes their success. It limits their ability reinvest intheir company. It prevents them from putting away funds for tough economic times to keep theirbusiness afloat.

Government is currently creating a climate of uncertainty where the private sector doesnot know what we will do next, what taxes will be raised, or what regulatory barriers will be putin their way.

We can start to put some certainty back into the business world by declaring we will notincrease taxes on businesses one dime by making the 2001 and 2003 bipartisan tax measurespermanent. But let me be clear, businesses do not want to be certain that the government isgoing to raise their taxes and make them go through more red tape. They want to be certainthat’s not going to happen. Until then, many will simply sit on the sidelines and not hire moreworkers.

Moreover, we can directly provide targeted relief to small businesses. Last June, Iproposed legislation to do just that. I introduced the Small Business Tax Relief Act of 2009 tolower taxes on job-creating small businesses.

Since the Democratic leadership barred any amendments last week, I’m hopeful we’lldebate and vote on an amendment offered by Senator Thune. Many provisions in my bill arecontained in the Thune amendment, which I support.

My bill contains a number of provisions that will leave more money in the hands of smallbusinesses so that they can hire more workers, continue to pay the salaries of their currentemployees, and make additional investments in their business. This includes allowing flowthroughsmall businesses such as partnerships, S corporations, LLCs, and sole proprietorships todeduct 20% of their income, effectively reducing their taxes by 20%. My bill also includes relieffor small business owners from the unfair alternative minimum tax. It takes the general businesscredits, such as the employer-provided child care credit, out of the alternative minimum tax.

This allows a mom and pop retail store that provides child care for their employees to get thesame tax relief that a Fortune 500 company gets when it provides child care for its employees.

My bill would also allow more of the nearly two-million small C corporations to benefit from thelower tax rates for the smallest C corporations. There are so many small C corporations becausethey were formed as C corporations before other entities such as LLCs become more widelyused. Among other provisions, my bill would also lower the potential tax burden on small Ccorporations that convert into S corporations.

The NFIB has written a letter supporting my small business tax relief bill, stating, quote,“To get the small business economy moving again, small businesses need the tools andincentives to expand and grow their business. S. 1381 provides the kinds of tools and incentivesthat small businesses need.”

I’d now like to talk about an opportunity for true bipartisanship that was killed by theDemocratic leadership. The same day that Chairman Baucus and I released a bipartisan bill thatcontained significant compromises, behind closed doors Democratic leaders cherry-picked just 4provisions out of the larger bill that Chairman Baucus and I agreed to. Those provisions hadbeen agreed to in a meeting of senior members of the other side only while Chairman Baucusand I were negotiating. I was extremely disappointed to see the Democratic leadership blow upthe bipartisan deal that Chairman Baucus and I reached. To pour a little salt into the wound, theDemocratic leadership then prohibited any senator on either side of the aisle from even offeringan amendment to improve the bill that he hijacked.

One of the four provisions the Democratic leadership cherry-picked is Build AmericaBonds. If it had been just me drafting a bill, I wouldn’t have included this provision. However,in the sake of bipartisanship and compromise in the context of a much larger bill, I reluctantlyagreed that putting this provision in the bill would not cause the overall bill to lose my support.

Build America Bonds is a very rich spending program disguised as a tax cut. Bloombergreported that large Wall Street investment banks have been charging 37% higher underwritingfees on Build America Bonds deals than on other deals. Therefore, American taxpayers appearto be funding huge underwriting fees for large Wall Street investment banks as part of the BuildAmerica Bonds program.

The Democratic leadership has said the Build America Bonds program is about creatingjobs, but I want to know whether it’s about lining the pockets of Wall Street executives. Lastweek, I asked Goldman Sachs CEO a number of questions about these much larger underwritingfees subsidized by American taxpayers. I expect to have that discussion shortly.

Turning back to the bill being debated this week, the Thune amendment, whichincorporates many of the provisions from my small business tax relief bill, provides substantialsmall business tax relief and should be adopted.

In this bill, I hope that we can all work together toward improving our economy -- notthrough more government -- but by letting the engine of job creation-small business-keep moreof their own money in the form of substantial small business tax relief.

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