For a number of years small businesses have been experiencing major difficulties in the area of product liability insurance because of escalating costs for adequate coverage and, in many instances, refusal by the insurance companies to issue any type of product liability insurance coverage. This situation exists even for companies which have never had a claim filed against them.

Although manufacturers may be hit the hardest, the problem also exists for distributors and retailers. Manufacturers may be forced to delay the introduction of new products and distributors may find retailers are unwilling to stock products without proof of coverage, which may result in firms reducing their product lines or going out of business and adding to the unemployment rolls.

Added to the problem for manufacturers is the fact they may be sued for equipment over whose use they have no control. Nor can they exercise any control over subsequent alterations to the equipment they have manufactured once it leaves their ownership. Yet, they, as original manufacturers, are the ones who can be sued by injured employees of companies to whom they supply the equipment-employees whose injuries probably have already been compensated under state Workers' Compensation awards. There has also grown over the years an increasing tendency on the part of consumers to sue. This has led to greatly-inflated monetary awards being demanded which companies have to carry on their books as a contingent liability until the case has been settled. A survey conducted by the National Small Business Association showed there was a vast difference between the inflated amounts being demanded and the actual amounts awarded.

Various proposals have been made in an attempt to achieve a solution to this problem: reform of the tort

system; limitations on the size of court awards; and time limits on the manufacturer's liability after the product or equipment is put on the market. Although a long-term solution is most desirable, it is imperative that there be additional short-term relief to help small businesses which are suffering now. The Revenue Act of 1978 contains a first step to alleviating this existing problem. Product liability losses, incurred in taxable years beginning after September 30, 1979, may be carried back 10 years instead of 3—if not fully utilized, the loss is then available as a carryforward for the succeeding 7 years. This law also allows for the accumulation of reasonable amounts to pay for future product liability losses. However, amounts cannot be set-aside in a tax-exempt trust fund, as would have been the case in the Product Liability Insurance Tax Equity (PLITE) legislation, which would have allowed companies and professionals business deductions for payments made into a reserve fund where the funds would be deductible as a business expense and tax-exempt while they remained in the trust.

Another legislative proposal, which would have granted immediate relief, would have allowed reinsurance to be offered which would protect the insurance company's reserves from excessive losses and thus result in lower premiums and more availability. Still another viable proposal is encompassed in the Product Liability Risk Retention Act which will permit small companies, who are unable to obtain affordable product liability insurance or who have large deductibles, to pool all or part of their product liability risk in risk retention groups. Thus, small companies, through this pooling arrangement, would find this self-insurance practical for the first time. They would also benefit from lower costs since insurance company profits and overhead would be eliminated.

RESOLVED

Small business has seen its role in the U.S. economy dwindle for decades. Much of the reason for its decline lies in its inability to get the capital to be able to compete with large business in this country. The corporate giants, meanwhile, have access to the capital they need at the lowest available rates. They continue to increase their share of the Gross National Product at the expense of small business.

This competitive country must redirect its economic structure to return to the principles of private enterprise upon which it was founded. At the rate we are going there will soon be no small business in America. The American dream of starting one's own business and making it a success will be nothing more than a dream. No one man or woman will be able to come close to competing with the major corporations.

The U.S. Congress can help restore the American dream by passing legislation facilitating the recovery of capital. But it must be of genuine help for the small business and not a tool for big business to continue to take over and freeze out small business as it has been doing for years. The corporate giants, with their easy access to capital at the lowest rates, would use any legislation to accelerate expansion to the disadvantage of small business if there is not a ceiling on the benefits. The small retailer would get little joy from his newly won benefits if he found a major corporate chain was using them to open a store next door. This would happen without a ceiling. The small manufacturer would find the same thing. Whatever he was able to invest in new productive equipment would be more than matched by the well-heeled giant

that had been running him out of business anyway. In some industries, major corporations who presently subcontract would find it a greater advantage to manufacture themselves should legislation without a ceiling be passed.

Any tax bill accelerating depreciation should provide a 10% investment tax credit for all equipment, machinery, and furnishings. It would allow them to be depreciated over four years. This type of capital investment could be depreciated as much as four or five times faster than presently allowed. These incentives would be targeted to small business by limiting to $1 million the amount of total investment in equipment, machinery and furnishings upon which accelerated depreciation would be allowed.

Buildings and fixtures would also be depreciated much faster. These types of investments could be written off in 10 years. This type of investment could be depreciated as much as six times faster than under present rules. This depreciation reform would also be targeted to small business by limiting to $1 million per year the amount of investment in buildings and fixtures upon which accelerated depreciation would be allowed.

Over 97-1/2% of all U.S. companies would be able to use this legislation to full advantage. Most of the remaining 2-1/2% of companies, which account for 79% of the investment in this country, could use it up to the ceiling amount. Thus, depreciation simplification and reform would help small business and significantly reduce the revenue loss that would occur if there were no ceilings on benefits.

RESOLVED

The decline in our productivity is caused by several conditions. For the first time in twenty years, the Joint Economic Committee Annual Report of 1979 unanimously concluded that an increase in productivity is vital to the improvement of our economic standard of living and to the reduction of inflation. A partial cause of this situation is the antiquated production facilities of many American manufacturers. Another partial cause is the utilization of inefficient equipment; and yet another partial cause is the overall age of our country's industrial machinery. The most recent U.S. survey of machine tools shows only 11% of the industrial machinery in use today is less than five years old; 76% is at least ten years old. Equipment renewal and upgrading are necessary in both large and small manufacturing companies. Increasing productivity through equipment renewal is best achieved for small business through the purchase of affordable used machinery and equipment.

Under present law there is a $100,000 limitation on the amount of used equipment eligible for investment tax credit, but there is no limitation on the investment credit available for new equipment. This discriminatory tax treatment impacts directly and primarily on small business which is already hindered by

its inability to externally or internally generate capital necessary to buy new equipment.

In order to increase productivity and competition, the discriminatory ceiling on the amount of used property eligible for a tax credit must be eliminated; and, the carryover provisions available for new property must also be available for similarly situated used property. Traditionally, small businesses purchase used capital equipment; large businesses basically purchase newly manufactured capital equipment. The cost of obtaining capital for production equipment is high for everyone, especially those who cannot borrow at the prime rate.

Firms purchasing used capital equipment do not have a chance to offset some of their costs through this tax credit. Confining the investment credit to only equipment with the latest technology helps primarily the largest enterprises and basically ignores the numerically greater small business segment of our economy which needs this tax credit the most. Because the small business sector offers the greatest potential for increasing employment, there is normally a direct relationship between increased installation of used machinery and increased employment.

RESOLVED

The lack of available debt or equity capital has been identified as a universal concern of small businesses. Historically, commercial banks have supplied the most significant amounts of outside capital to the small business community and it is expected that this trend will continue in the future. However, it has often been said that this source of capital is not adequate for the long-term needs of smaller firms.

Additionally, there are other roadblocks for a firm seeking capital. For example, direct investments by employees or others in small independent businesses are difficult to attract as the rewards associated with these investments are rarely equal to the related risks. The small business owner is hesitant to sell an equity interest in the business because of the desire to maintain independence and the competitive advantage of confidentiality. Moreover, an equity interest in a small business is often difficult to liquidate for the intermediate-term investor.

A partial solution is a new, hybrid security for use by small businesses who need capital but in amounts less than those generally provided by venture capital companies. The new hybrid security is called a Small Business Participating Debenture (SBPD). It would combine certain debt characteristics (such as an interest rate and a maturity date) with existing equity characteristics (such as a share in the net profits of the issuing enterprise). The significant characteristics of the SBPD concept are its tax consequences. The total interest paid by the SBPD issuer would be treated as an interest expense and deductible by the company. This would include the interest due through the stated rate and any "premium" interest payments made that represent a share of net income.

The tax benefits and incentives to the investor in SBPDs include taxing "premium" interest earned as if it were a long-term capital gain and, when possible, allowing capital formation credits to flow through to the investor in a manner similar to the investment tax

credit for an investment in equipment. In the event that the investor does not recover his full investment, SBPD legislation would allow him an ordinary loss deduction.

mary:

Advantages to Small Business Borrowers

Entire cost of borrowing is tax deductible.
Avoids giving up equity.

No necessity for additional bureaucratic controls. Potentially, the total of borrowing could be reduced as a result of tax benefits of the investors.

Advantages to SBPD Investors

Receives tax credits as incentive for making investment.

Portion of interest (share of profits) is taxable as a capital gain.

Losses on SBPD investments would be offset by ordinary income.

The administration of the SBPDs would be relatively inexpensive as no government involvement is required nor is there any risk of loss to the government. Unlike several pieces of legislation aimed at small business, this one has only a nominal cost to the Treasury; acordingly, this solution is a practical one.

This new hybrid security has been discussed extensively and has received widespread support. In the 96th Congress and again in the 97th, Senator Lowell P. Weicker (R. Conn.) and others introduced a bill to amend the Internal Revenue Code to create SBPDs.

RESOLVED