Death Tax Hurts Montanans
It’s a Job Killer—Small Family Businesses Suffer Most
BY CARL GRAHAM & DICK PATTEN
Six family-owned companies from across the state were just awarded the 2009 Montana Family Business Awards. Honored for their commitment to "service, family values and diversi-fication to satisfy the needs of their markets, often in challenging situations," the owners of these family businesses have much to celebrate.
Why? They, along with the tens of thousands of other Montana family business owners and farmers, have sacrificed much to build successful enterprises that can reinvest in new jobs and expanded opportunities in the their communities.
Unfortunately, in the end, all their hard work might be for naught if their businesses have to be sold to pay estate taxes.
The federal government requires the payment of estate taxes within nine months after the business owner's death, demanding a large percentage of the combined value of all family and business assets, including the house, car, savings accounts, retirement accounts, business equipment, inventory, buildings, land and more.
Family business owners often have most of what they own tied up in buildings, equipment, inventory and other "hard assets," so their families are forced to sell off large portions of the business, if not the entire company, to satisfy the IRS.
It's not as if these people haven't paid their taxes every year. They have, and probably more than their fair share. But they have to make one final payment at death to be free from Uncle Sam, at least until the next generation of the family passes on—if they're able to keep the business alive.
Contrary to popular myth, the estate tax rarely impacts the super rich. Rather, a disproportionate amount of estate tax filers come from the ranks of family business owners and family farmers. According to the Joint Economic Committee of Congress, between 1995 and 2005, estate taxes were paid by more than 37,000 "closely-held businesses," 24,000 family farms, 50,000 limited-partnerships and nearly 28,000 "other" non-corporate businesses, such as sole proprietorships.
Currently, such business owners face an estate tax rate of 45 percent, with the first $3.5 million exempt. This is likely to change later this year, when Congress revisits the tax again in an effort to prevent the rate from going to zero next year and jumping to 55 percent in 2011, which would happen under current law.
Some in Congress want to increase the tax and lower the exemption, while others want to keep the status quo. Both sides justify their positions out of concern over losing federal revenues at a time when Washington needs every tax dollar it can get.
A report for the American Family Business Foundation by economist Stephen Entin, a former Treasury official, should give them pause. According to Entin, if revenues are their primary concern, the best thing Congress could do is eliminate the tax, not raise it.
That's because a lower tax rate—indeed a tax rate of zero—would stimulate investment in family owned businesses and the creation of new jobs, both of which would generate increased federal, state and local tax revenues. As much as $23.3 billion annually, Entin estimates.
But there's another and perhaps more important reason to repeal the estate tax: jobs.
Former Congressional Budget Office Director Douglas Holtz-Eakin has estimated that as many as 1.5 million new jobs could be added to the economy nationwide simply by repealing the federal estate tax.
The Montana Policy Institute has calculated that Montana would gain 5,952 of those 1.5 million jobs. That's good news in a job market where Montana's unemployment rate stands at 6.6 percent.
Repeal of the federal estate tax is certainly a more dependable and less costly way to stimulate the economy than other policies being considered by Washington.
A majority of Americans agree. According to a recent Opinion Research Corporation poll, Americans support repeal of the federal estate tax by a nearly two-to-one margin.
It should be a no-brainer. More family businesses and farms growing in size. More jobs. More tax revenues. Congress should repeal the unfair "death tax." Doing so would not only be good for family business owners and farmers in Montana, but also good for the country.
Carl Graham is president of the Bozeman-based Montana Policy Insti-tute. Dick Patten is president of the American Family Business Foundation.