Testimony of Jerry Pierce, Orlando, Fla.
Restaurant Equipment Sales
Small Business Priorities for the 109th Congress
Committee House Small Business Committee
March 8, 2005
Good afternoon Mr. Chairman and Members of the Committee. Thank you for inviting me to speak on House Resolution 22, the Small Business Bill of Rights, sponsored by Congressmen Ric Keller and Bud Cramer. I am pleased to be here on behalf of the National Federation of Independent Business (NFIB) and to represent their 600,000 members in expressing our support of small businesses having (1) the right to join together to purchase affordable health insurance, (2) the right to tax laws that allow family-owned small businesses to survive over several generations and offer them incentives to grow, (3) the right to be free from frivolous lawsuits, and (4) the right to be free of unnecessary, restrictive regulations and paperwork.
My name is Jerry Pierce and I own and operate Restaurant Equipment World, headquartered in Orlando, Florida. I founded the company in 1976 in Cleveland, Ohio selling restaurant equipment to small delicatessens and restaurants. We eventually began furnishing equipment and services to theme parks such as Sea World and Cypress Gardens, and later to chain restaurants such as Applebee’s and Denny’s and many others. In 1983, I moved my family and company to Orlando, Florida and expanded into a cash and carry business and about six years ago into the electronic commerce business with 22,000 customers across the country and with sales to people in 45 foreign countries. Although we are a small company with 32 employees, we have been able to become the leading marketer of restaurant equipment in electronic commerce. We offer a full range of employee benefits, including health insurance.
Small Business Health Plans
The small-business community is struggling each year to afford the cost of increasing health insurance premiums. According to the NFIB Research Foundation, the cost of health insurance is the top concern for small-business owners across the country. It is for this reason that I support the creation of Small-Business Health Plans, formerly known as Association Health Plans. These plans would allow small-business owners to band together across state lines to purchase health insurance as part of a large group, thus ensuring greater bargaining power, lower administrative costs and freedom from the costs of complying with 50 different sets of state insurance mandates. Fortune 500 companies and labor unions already have this ability. These plans will simply level the playing field and give small employers the same privileges as their counterparts in labor and big business. In addition, Small-Business Health Plans will introduce into the marketplace much needed competition and diversity. Without the ability to shop for more affordable options, we are left with the choice to shift costs or drop coverage. Small Business Health Plans would end the nightmare of health care purchasing for small businesses.
Due to the current structure of the health care industry, too many small-business owners and their employees do not have access to affordable health insurance. The problem of uninsured individuals in our country is largely a problem of small-business owners and their employees. Of the 45 million uninsured Americans, over 51% are either self-employed or working in a firm with fewer than 100 employees. In addition, most small businesses that provide health benefits can only afford to offer a single coverage option and continually operate under the threat of having to drop coverage altogether. It is critical that small employers have the ability to offer health insurance to their employees. Competition for skilled workers is keen. Medium to large companies attract those employees because the companies can offer insurance and other benefits. When compared with large corporations, small businesses face dramatic disparities in the health care marketplace. For instance, my own daughter does not participate in our company health care plan because she can be included in her husband’s large corporation plan for only $40 per month. If, however, her husband lost his job, it would cost $428.51 per month to be added to our company plan. Small businesses are major job creators, but have trouble attracting good people when competitive health care plans cannot be offered. Besides not being able to offer a competitive health care plan to our employees, we continue to have back-to-back increases in premiums that far exceed the inflation rate. From 2003 to 2004, our premiums per employee increased 13.1%, and from 2004 to 2005 the premiums increased another 12.3% for a compounded increase of 27.1% for that two-year period. Small-Business Health Plans would allow small businesses to band together to negotiate better rates as a result of cost efficiencies associated with volume purchasing of health care.
Death Tax Repeal
Running a family business is hard work. In fact, the likelihood of a small business passing from the first generation to the next is about 3 in 10, and to pass this same business to the third generation is about 1 in 10. The death tax threatens the livelihood of small businesses and their employees. In addition, the death tax unfairly taxes the same assets twice. Annually, small-business owners pay income taxes, employment taxes, property taxes, local taxes, social security taxes, and excise taxes, just to name a few. After they pay all of these taxes, they make a choice to invest these after tax dollars back into their business. The death tax endangers family businesses and their employees’ jobs because small businesses have much of their assets tied up in equipment, inventory and other assets necessary to run a company. These businesses do not have cash available to pay the death tax, and many times they are forced to sell critical parts of their businesses or the entire business outright in order to cover the tax liabilities.
It is often cited that only 2% of American taxpayers actually pay this tax. I can assure you that more than 2% of Americans do pay this tax—not to the federal government, but to lawyers, accountants and life insurance agents. Family firms taking steps to survive death-tax liabilities spend an average of nearly $125,000 per company on attorney/consultant fees, life insurance premiums, etc. (Impact of the Federal Estate Tax on Family Business Employment Levels in Upstate New York, Travis Research Associates, June 22, 1999). Business owners have to get involved in estate planning, because if we don’t, all that we have worked for will be eliminated. I remember when my father-in-law was in his seventies and stated that it was time close his businesses and liquidate assets so that his family would have money to pay the death tax. This not only hurt the family, but it also destroyed a life’s work of building a tool and die business. Jobs were also lost and the people who lost those jobs were not named Warren Buffet or Bill Gates. In my case, I have wasted money setting up a trust and by encouraging my children to purchase “second to die” insurance on my wife and myself, in addition to other strategies. The existence of the death tax affects my decisions to expand my business and make investments. To ignore the death tax statute is suicide for a family business. The money spent for planning for the death tax is money that is not spent on growing our business or on providing better employee benefits, like health care, dental plans or 401(K) plans. These are products that small-business owners want to offer to employees in order to maintain a quality work force.
In 2001, the President signed into law the Economic Growth and Tax Reconciliation Act, which repealed the death tax. However, unless those tax cuts are made permanent, the death tax will resurface in 2011 bringing back all the problems currently faced by family business owners. The death tax discourages savings and investments, reduces wages and job creation, and is the leading cause of dissolution for thousands of family-run businesses.
Legal Reform
With a dramatic rise in the cost of lawsuits, it is not surprising that many small-business owners fear getting sued, even if a suit is not filed. That possibility – the fear of lawsuits – is supported by a recent NFIB Research Foundation National Small Business Poll, which found that about half of small-business owners surveyed either were “very concerned” or “somewhat concerned” about the possibility of being sued.
The escalating numbers of lawsuits (threatened or filed) are having a negative impact on small-business owners. Small-business owners spend countless hours and sometimes significant sums of money to settle, defend, or work to prevent a lawsuit.
For the small-business owner with five employees or less, the problem is the $5,000 and $10,000 settlements, not the million dollar verdicts. When you consider that many of these small businesses only net $40,000 - $60,000 a year, $5,000 paid to settle a case immediately eliminates about 10% of a business’ annual profit. Small-business owners also are troubled by the fact that they often are forced to settle a case at the urging of their insurer. In most cases, if there is any dispute of fact, the insurer will perform a cost-benefit analysis. If the case can be settled for $5,000 the insurer is likely to agree to the settlement because generally it is less expensive than litigating, even if the small-business owner would ultimately prevail in the suit.
Once the suit is settled, the small-business owner must pay higher business insurance premiums. Typically, it is the fact that a small-business owner settled a case—for any amount—that drives insurance rates up. It does not matter if the business owner was ultimately held liable after a trial. Many small-business owners understand this dynamic, and as a result, will settle claims without notifying their insurance carriers.
In addition to the financial costs of settling a case are the psychological costs. Small-business owners threatened with lawsuits often would prefer to fight in order to prove their innocence. They do not appreciate the negative image that a settlement bestows on them or on their business.
Regulatory Reform
Simple government regulations, particularly when it comes to the paperwork they generate, can create quite a burden on small business. The less time small-business owners spend with “government overhead,” the more they can spend growing their business and employing more people.
Regulatory costs per employee are highest for small firms. A report commissioned by the Small Business Administration’s Office of Advocacy estimates that the regulatory compliance costs for firms with fewer than 20 employees is nearly $7,000 per employee, per year. According to the NFIB Research Foundation the best thing for small businesses regarding regulations is simplicity—simplicity in instructions, simplicity in requirements, and an overall reduction in the size of the paperwork and the time necessary to complete forms.
I would like to take this opportunity to thank Chairman Manzullo for his efforts to reduce the burden of regulation on small business, specifically for his bill H.R. 682, the “Regulatory Flexibility Improvements Act.”
This bill will help reduce the federal regulatory burden on small businesses by ensuring that federal agencies comply with the letter and the spirit of the Regulatory Flexibility Act (RFA) as well as provide the Small Business Administration’s Office of Advocacy with more authority. H.R. 682 restores the intent of Congress by closing loopholes agencies currently use to avoid compliance and by giving RFA more teeth. Provisions in the bill will ensure that ALL agencies gauge the impact of regulations and research alternative ways of reducing the burden on small business. H.R. 682 will give small business a greater voice in the formulation of federal regulations, which in turn, helps the government produce better laws that would increase compliance and reduce the cost of doing business.
Chairman Manzullo and Ranking Member Velazquez, thank you for the opportunity to submit the views of the National Federation of Independent Business to the committee. It is my hope that together we shall achieve progress toward our shared goal of reducing the negative role that the federal government plays in the lives of the American small business owner.
