the same oil might cost upward of $100 a barrel. If that is the case, you know, the problems we face today, as severe as they are, are going to be not quite as significant as the problems we might face if oil in fact is $100 a barrel.

So, we have to, much more quickly, become much more self-sufficient in energy production and in conservation.

It is my view that means coal production and that means more conservation. It means developing all the potential alternate sources of energy that are available as quickly as possible-knowing that some are going to pan out and some won't. But we can place our eggs in those baskets that seem to be working in a year or two, and not so much in those that don't seem to be working quite so well. But, I think, we have to proceed much more quickly, become much more self-sufficient in the production of energy, and that will help reduce inflation.

There are other ways to help small business. We can address those a little later on; perhaps some of the witnesses this morning will have some ideas. We can also develop some specific measures to help small businesses in the realm of tax policy. Inheritance taxes are too high. Federal estate taxes are too high. They were revised upward. That is, the estate tax limitation for exemption was increased in 1976 from $60,000 to $175,000. But, as many of you know, particularly any of you who are involved in an estate, Congress at that time also enacted a provision called carryover basis, which probably in the net result could create a lot of problems.

We are a small business State, and small businessmen and women want to be able to transfer their farms and businesses on to their daughters and sons. But, with estate tax levels where they are, in some cases it is almost impossible for a businesman or woman to do so. Then when they are broken up, other organizations come in, sometimes the chains or the bigger organizations come in and snap up what is left. So, estate taxes can and should be modified further.

In addition, I think that our tax code tends to encourage consumption too much and discourage investment and savings too much. Our tax code has to be revised in some way. Most people today suggest, and I agree, that we should accelerate depreciation. The tax code can be changed to accelerate depreciation. Perhaps also some changes in the corporate income tax rate, particularly as it affects smaller corporations. There are proposals to "roll over" capital gains on the sale of a smaller business, on condition the proceeds are reinvested in another small business.

There are a lot of ideas on how to help small business, which have been developed by the Small Business Committee, which are now before the Finance Committee and other committees. Because I think there is a growing realization, for a lot of reasons, we just have to keep small business, not only alive, but thriving. I believe it is accurate to point out that a majority of innovations in America are the result of small business and individual inventors. That is, it's the small businessman who comes up with the ideas, has the inventions, are the ones that, because they are small enough, can adjust their businesses to accommodate the innovations; whereas in most cases new ideas in very large bureaucratic enterprises, both public sector and private sector, tend to get lost.

Big business often is almost as bureaucratic as big government. So, it is innovation, too, that we have to keep alive in America. We all know that America has been falling behind other countries in developing patents, inventions, and innovations. Again, it is by encouraging small businesses that we can help push America back up to the forefront in development of patents and inventions and technology and know-how.

So, if we are going to balance the budget, we are going to have to do it in a way that leaves a little room for small business tax reductions. That is part of the dilemma that we face in Government today. That is, to what degree do we balance the budget at the expense of small business tax reductions? Capital cost recovery acts, whether they are accelerated depreciation or participating debentures for small businesses or whatever they may be, are going to cost some money.

So, the question is to what degree should we balance the budget at the expense of not enacting some of the small business tax incentives, or to state the problem the other way, is it more important to will we be helping small business more by enacting some of these tax measures at the expense of balancing the budget? Of course, this is a matter of degree. But, in addition it probably is a matter of symbols and messages, and a balanced budget, particularly these days, does send a very strong symbol, a very strong message, I think, to everybody in government, to the country, and to the world.

It will let everyone know that we are beginning to get more control over ourselves, a little more control over our destiny, and therefore a little more confidence in our institutions, whether they be Government institutions or non-Government institutions, and then build ideas and then progress.

Anyway, those are some of the thoughts that fairly accurately reflect what is going through the minds of the Members of the House and the Senate in this area.

To recap, the focus here today is on capital formation and capital retention problems that face small businessmen, and we will also devote some attention to other ideas people might have that we in the Congress can enact or maybe not enact, to get the small business alive and back on its two feet, not only this year but for future years.

With that, I would like to make two statements: One, Senator Hatch very deeply regrets that he is unable to come to today's hearing. He too is on the Small Business Committee, as I am. He very much wanted to come. You will understand the reason why he couldn't. He just assumed that he could come anytime. He assumed that he could fly into Missoula and get back to Salt Lake, but when he looked at airline schedules, he just couldn't do it. He wanted to come all day, and he had some meeting, I think, late tonight in Salt Lake and I think something last night too. And he just looked at the schedules, in fact, I asked my office to go back and look at airline schedules too to see if we could work something out, and he just couldn't come because of airline schedules.

Second, the hearing record will be kept open for 2 weeks. So, if any of you have any additional comments, any additional points that you want to make, you could do so within 2 weeks after today.

Our first witnesses appear in a panel. It will be John Lopach with the Montana State government; John Cronholm, the Finance Chief of

the Small Business Administration in Helena; and George Anderson, an accountant in Helena.

So, why don't each of the three of you come up to the witness table. I ask each of you to summarize, briefly, the statements you want to make. If you have any prepared statements, they will be included in the record. At the conclusion of the panel's opening remarks, I will have some questions, and I will just ask them to all of you as a panel, and each of you feel free to chime in at any time.

Do you want to begin, John?

Mr. LOPACH. Senator, I will begin.

Senator BAUCUS. OK.

STATEMENT OF JOHN LOPACH, DIRECTOR OF THE GOVERNOR'S OFFICE OF COMMERCE AND SMALL BUSINESS DEVELOPMENT, HELENA, MONT.

Mr. LOPACH. I am John Lopach, Director of the Governor's Office of Commerce. I have about a 10-minute statement, Senator.

I would like today to review four topics relevant to this hearing: first, the state of basic, or exporting, industry in the Montana economy; second, Montana's economic development policy; third, capital needs of basic industry in Montana; and fourth, means of providing capital to basic industry.

In Montana, basic industry consists of agriculture, 33,000 jobs; mining, 7,000 jobs; manufacturing, 26,000 jobs; railroad, 7,000 jobs; and Federal Government employment, 13,500 jobs. Over the 19 years 1960 through 1978, total basic jobs in the State increased by only 800, from 85,700 to 86,500. Basic industry's importance is that it exports goods and, thereby, brings a constant flow of dollars into the State.

Over the 19 years 1960 to 1978, Montana lost 6,000 jobs in the agriculture sector, 500 jobs in mining, and 2,000 jobs in the railroad sector. It gained 5,800 jobs in manufacturing and 3,600 in Federal Government employment. In the same period, the State's population has grown faster than the national average and nonbasic jobs have expanded quickly, from 150,000 in 1960 to 262,000 in 1978.

The preponderance of Montana's basic jobs are in the agriculture, mining, and wood products sectors: 50,600 jobs. As a digression, it is interesting to note that this total is exceeded by the total of State and local government jobs in Montana: 57,000. Montana's basic sector jobs are thus raw commodity related-we tend to ship our products in unprocessed or semifinished state: grain, cattle on the hoof, coal, metals smelted but not always refined, dimension lumber, and plywood.

The State is also 43d among the 48 contiguous States in cost of access to market centers: only 5 States have higher transportation costs. Because of this last point, and because most other business costs in Montana are near average, it is difficult for many manufacturing industries to locate here.

Because of these facts, both the legislative and executive branches of Montana government have agreed that economic development efforts of State government should concentrate on the encouragement of Montana-owned basic industries-processors, fabricators, manufacturers-which would create jobs and diversify the economic base by adding value to Montana products before export. We have concentrated

our efforts solely on that goal for the past 3 years in State government, assisting with both startups and expansions, and are beginning to see some fine results.

Economic development in Montana faces two major obstacles: distance from market centers and scarcity of capital. In the past, resolution of the distance problem has come from market decisions: if a commodity is scarce or of a sufficiently high quality, such as Montana grain, cattle, minerals, and lumber, by and large it finds markets. Currently, we are going beyond this solution by producing manufactured products of such a high quality or uniqueness that they can bear our additional transportation costs. Examples are agricultural machinery and equipment; automated industrial equipment; electronics; medical and dental apparatus; motor vehicles for specialized markets; specialized processed foods; alternative energy equipment. Such products are finding a place in national and international markets, many of them very successfully.

But we have made very little headway against our second major obstacle: Capital scarcity.

This second obstacle, I believe, is both regional and national in its scope, and is closely related to the problem of inflation. In a period of very high inflation many investors are likely to steer clear of the stock market entirely, perhaps bonds as well, and invest for the most part in safe investments such as land and minerals and foreign exchange. In such a situation, it is highly unlikely that we will find investors for most small processors, fabricators, and manufacturers which are precisely the businesses we would most like to see expand. From the view point of Montana government, this expansion is necessary to provide a solid economic base and diversify local economies. From the viewpoint of the Federal Government, it is necessary in order to expand exports and repatriate the dollars held abroad.

The capital that is most urgently needed by these new basic industries is equity or ownership capital, not debt. Through the excellent programs of the Small Business Administration, the Economic Development Administration, and the Farmers Home Administration, Government guarantees have made available to these businesses large amounts of commercial bank debt. But, probably because of our anxiety to see these businesses expand and succeed, we have in some cases allowed them to assume more debt than they can readily handle. The major question to be considered, I believe, is how to attract equity capital, ownership capital to these businesses?

I have heard one of my colleagues say that if equity capital were more readily available, half of the businesses in his portfolio could double or even triple their sales. I am convinced this is true. It these were exporting industries, and assuming the exports could find ready markets, we would have no trade deficit.

Capital can be raised by retaining earnings. Many of the tax reduction and deferral bills before Congress, as well as the revisions in depreciation schedules, will help in this regard. But startup and expansion capital must be attracted in large lump sums, and to accomplish this we must attract investors away from lucrative and rather safe investments in foreign currency, land, and minerals. This, I believe, can only be done by offering them security for their investments and a competitive return.

Therefore, at a time when this Nation is plagued by trade deficits and must, among other remedies, expand her exports, I would recommend that the Congress consider means of guaranteeing or insuring private sector equity investment in basic industry and, probably by means of tax reductions, insuring that the return on that investment is competitive with other investment options. If this step can be taken, I am confident that we will witness a revitalization in basic industry throughout the Nation. Without it, our progress will be as slow and frustrating as it is today.

Thank you.

Senator BAUCUS. Thank you very much, John.
Who is next, George or John?

Mr. CRONHOLM. Thank you, Senator.

STATEMENT OF JOHN CRONHOLM, ASSISTANT DISTRICT DIRECTOR, U.S. SMALL BUSINESS ADMINISTRATION, HELENA, MONT. Mr. CRONHOLM. Thank you for the opportunity to appear and make a statement on behalf of the Montana small business community. My name is John Cronholm and I am the Assistant District Director for SBA in Montana. I have been primarily responsible for the implementation of the SBA lending program in Montana since September 1970; however, my association with small business is lifetime.

My father loaned his mustering out pay-$500-from the Navy in World War I to his brother to buy a smalltown cafe. Times got tough and my dad had to take over the business in order to protect his loan. He often observed that it only took him 32 years to get his money back. I grew up in this small business climate, operated a typewriter repair service to supplement my GI benefits to get through college, and am deeply concerned about small business problems. I view my presence here as a unique opportunity to call attention to the serious problems presently confronting our small business community. In support of this statement I have made copies of letters from some Montana bankers addressing the issue.

Let me open with the observation that the small business person is honest and hard working. All he wants is the opportunity to enjoy the fruits of his labor. In today's economic climate that is becoming increasingly difficult for him to do. Inflation increases the cost of doing business faster than the business' ability to compensate. Even though small business is generally more flexible than big business in responding to changing conditions, it does not have the capital reserves of big business to weather prolonged and severe economic storms. We are presently in such a storm.

Confiscatory interest rates are eroding capital faster than the business can generate it and capital is the fuel of the business machine. Let me give you an example.

We have a borrower who obtained a bank loan guaranteed by this agency in December 1978. The interest rate was 101/2 percent, and tied to prime so that the customer would get the "benefit" of changing conditions and so that the bank could sell the loan to a secondary market purchaser. It seemed like a perfect arrangement. The business got the money it needed to expand and take advantage of the tourist season. The bank made a loan, sold the guaranteed portion and was