House Small Business Subcommittee on Economic Growth, Tax and Access to Capital Chairman Joe Walsh (R-IL) today held a hearing to examine the impact of the estate tax on small businesses and the economy. The estate tax, also known as the death tax, is frequently cited as one of the most important issues for small businesses. Without Congressional action, the current federal estate tax rates will expire on December 31, 2012, and revert to the higher pre-2001 levels.
“During our sluggish economic recovery, Congress should be working towards providing any type of tax relief to small businesses possible to allow them to invest and create jobs,” said Chairman Walsh. “Small business already have an avalanche of tax increases that await them at the end of the year, including the expiration of the 2001 and 2003 tax cuts and new health care law taxes. The estate tax is yet another burden that awaits job creators, and therefore should be repealed.
“Family-owned business owners and farmers tend to hold substantial amounts of their personal income in their business or land, and when they die, those assets often need to be sold to pay the tax, decimating the business and robbing heirs of their family legacy. In America, we should not punish people who work hard to build a legacy for their loved ones, but if Congress fails to act by the end of this year, that is exactly the message that Washington will be sending to small businesses.”
The current estate tax law rate is 35% and the estate tax exemption is $5 million. If Congress does not act on this policy, the estate tax will revert to pre-2001 levels of a 55% rate and a $1 million exemption on January 1, 2013. An October 2011 American Family Business Council study found that the repeal of the estate tax would increase the level of GDP by about 2.26% by 2021. A Joint Economic Committee study found that prior to 2001, the estate tax reduced capital formation by about $847 billion.
For related hearing documents, click here.
Notable Witness Quotes:
Karen Madonia, CFO of Illco, Inc. in Aurora, IL, testifying on behalf of the Heating, Air-Conditioning & Refrigeration Distributors International, said, “I personally find it fundamentally wrong to place a tax on death. If a person is able to accumulate wealth through hard work, and if that person pays his fair share of taxes on his income as it is earned, I do not understand how the government can justify taking a significant portion of what he has left simply because he opted to save and re-invest rather than consume.”
“In most cases, we’re not talking about passing on bank accounts with multi-million dollar balances. We’re talking about businesses where most of the net worth is tied up in inventory, accounts receivable, equipment and real estate. At Illco, for example, we carry an inventory valued at $10,000,000 and accounts receivable of about $5,000,000. Our inventory has to be high – we provide vital heating, air-conditioning and refrigeration parts and supplies to hospitals, schools, nursing homes and grocery stores.”
Michael G. Flesher, Owner of Taylor Rental Center in Vestal, NY, testifying on behalf of the American Rental Association said, “Under current law my heirs would be able to continue to operate the business keeping sixteen full time employees working and supporting their families. The business would continue to invest in new equipment and to provide services to the community where it is located. And most importantly for me, my heirs would be able to have the financial security I have spent the past 40 years working to provide for them.
“If the estate tax reverts to the levels of 2000, my estate would be severely impacted. That could mean that sixteen good people who have given our company many years of service would no longer have a job. The businesses that provide products and services to our company could lose a good customer. But foremost, the economic security of my heirs will be uncertain.”
Neil D. Katz, Managing Partner of Katz, Bernstein & Katz, LLP in Syosset, NY said, “Small businesses are struggling in today’s economy to meet their obligations and provide for the business owners and their families. Adding the burden of an estate tax to be due, or one currently due as a result of the death of the former business owner, can make the operation of a small business a nearly impossible task.
While the estate tax can cause an incredible burden on the small business owner, the constant changes in the estate tax law over the last 12 years, coupled with the uncertainty of the future rules, have made it even more difficult. This point cannot be overemphasized. If Congress could establish rules that business owners could be assured would survive for a period of 10-15 years then they would at least have a chance (albeit a difficult battle) to plan for the tax burden.”