Despite the major impact that family-owned businesses have on job creation and economic growth, estate tax policy conflicts with our need to promote and protect family enterprises.
The estate tax creates needless complexity and hardship for family-owned businesses. It often eliminates a family’s ability to reinvest or grow, sometimes making it impossible to pass these businesses down to future generations.
This tax, often called the “death tax,” is terrible policy. Assets taxed in an estate have previously been subject to income taxes, capital gains taxes, dividend taxes, corporate income taxes, or business taxes at the local, state, and federal level.
Smaller family-owned businesses have it especially tough, because they must liquidate part of their business and find an outside buyer. This problem is pronounced for capital-intensive businesses, such as manufacturing companies. While they may own a lot of assets, these assets are vital for the everyday operations of a business.
Whether the business transfer occurs by death or by an outright sale, it creates a taxable event that can send years of profits to the Internal Revenue Service. This takes capital away from where it is needed: to pay for facilities, equipment, inventory, and trade receivables that support jobs and keeps the business going.
Whether they’re manufacturers in the Midwest or farmers in the Dakotas, grieving families should not be forced to visit the undertaker and their accountant on the same day.
Family-owned businesses are the backbone of the economy. They generate 64 percent of gross domestic product, employ 60 percent of the workforce, and create 78 percent of all new jobs.
The Tax Cuts and Jobs Act was a big win for these businesses. They saw tax reduction through the creation of the 20 percent pass-through deduction, while the expansion of Section 179 will allow them to continue investing in the economy.
Perhaps most importantly, family-owned businesses received significant relief from the estate tax, as tax reform doubled the death tax exemption from $5.5 million to $11 million (double that amount for a married couple) through 2025.
While this is a significant step in the right direction, lawmakers must continue to fight for a full repeal of the death tax and reject any efforts to expand it.
This tax should be completely repealed, as proposed by Sen. John Thune, R-S.D., and Rep. Jason Smith, R-Mo., in their recently introduced Death Tax Repeal Act of 2019. The bill enjoys the support of dozens of lawmakers, including that of Senate Majority Leader Mitch McConnell, R-Ky., and Senate Finance Committee Chairman Chuck Grassley, R-Iowa.
The repeal of the death tax is a worthwhile long-term policy goal, but we should continue to take incremental steps to make our tax code more competitive and ensure that the more than 5.5 million family-owned businesses can be successfully handed down to the next generation. At a minimum, the current $5.5 million exclusion should be made permanent and increased.
The progress made so far on repeal must not be eroded, as proposed by several Democratic presidential candidates including Sen. Bernie Sanders, I-Vt., who wants to increase it to a staggering 77 percent. Increasing the death tax would place undue hardships on family-owned businesses and undo the economic progress made by the Trump administration.
Being a family-owned business is hard enough as it is without the government making it almost impossible to pass it down to the next generation. The death tax should be repealed.
Kip Eideberg is vice president of government and industry relations at the Association of Equipment Manufacturers, which represents manufacturers and parts and service providers for the agriculture, construction, forestry, mining, and utility equipment industries. Alex Hendrie is director of tax policy at the nonprofit group Americans for Tax Reform.
