A House subcommittee held a hearing Wednesday on the estate tax after one of its members introduced legislation to repeal it.
Rep. Kevin Brady, R-Texas, introduced the Death Tax Repeal Act of 2015 last month. The bill would amend the Tax Code to repeal both the estate tax and the Generation-Skipping Transfer Tax. Proponents of the bill argue that the estate tax hurts small businesses, family farmers and ranchers who want to pass on their businesses to the next generation. Opponents pointed out that the estate tax affects relatively few families, especially after the exemption amount was raised to $5 million in 2010.
“The story is the same in all of our districts—family business owners and farmers work hard for their entire lives with the goal of passing on the fruits of their labor, but face the sometimes insurmountable hurdle of the death tax,” said House Ways and Means Select Revenue Measures Subcommittee Chairman Dave Reichert, R-Wash., in his opening statement at Wednesday’s hearing. “And in addition to the actual tax liability the death tax imposes, merely planning for it—regardless of whether these businesspeople and farmers end up owing it—is yet another challenge that we will hear discussed today. In fact, as I am sure many of my colleagues have, I consistently hear from local businesses about how this unnecessary tax threatens the livelihoods of families.”
Under current law, the estate tax takes a 40 percent cut from a taxable estate when a person passes away. Republican proponents of the repeal pointed to a report from Congress’s Joint Economic Committee that found family businesses and farms are far more likely than other estates to face a tax bill bigger than their liquid assets and that the tax generates a “negligible amount of revenue.”
Rep. Richard Neal, D-Mass., the ranking Democrat on the subcommittee, pointed to other studies that showed the estate tax affected few small businesses and family farms.
“Congress has recognized the plight of these businesses and enacted numerous provisions to help our nation’s farmers and small businesses, whether through generous expensing rules or accelerated and bonus depreciation—both of which I have supported,” he said in his opening statement. “This is in addition to raising the thresholds on the estate and gift tax. We have gone from a $1 million dollar exemption with a top rate of 55 percent to a $5 million dollar exemption—indexed for inflation—with a top rate of 40 percent. While our nation’s farmers and small businesses have legitimate concerns about the estate tax, it is my hope that they are not being used to end the estate tax for our nation’s wealthiest.”
He pointed to a study by the Tax Policy Center that found only 20 small business and farm estates nationwide owed any estate tax in 2013. The Tax Policy Center study estimated that those 20 estates owed just 4.9 percent of their value in tax, on average. Congress’s Joint Committee on Taxation also found that in 2013, there were 2.6 million deaths in the United States, and 4,700 estate tax returns reporting some tax liability were filed.
“This means 99.85 percent of all estates owe no estate tax at all,” said Neal. “By comparison, in the mid-1970s, taxable estate tax returns exceeded 6 percent of all deaths.”
Brandon Whitt, a seventh-generation farmer from Murfeesboro, Tenn., testified before the subcommittee on behalf of the American Farm Bureau Federation. He told lawmakers that he farms with his wife and father-in-law in a suburbanized area just outside Nashville.
“When my wife’s grandmother passed in 1988, my father-in law, who had farmed the land his entire life, was faced with a huge estate tax,” he said.
The value of the farm had doubled over the previous 10 years, and his father-in-law ended up having to sell 120 acres of land to pay estate taxes.
“This may not sound like much of a sacrifice since it left him with 483 acres to farm, but it completely changed the farm business,” said Whitt. “The land was lost to development and having houses so close to our fields made it impossible for us to continue raising cattle. Fast forward to today: we still farm that same land. Only now it is easily valued at $25,000 per acre.”
He hopes that his children will be the eighth generation to farm the land. “My father-in-law John is now 72 years old,” said Whitt. “As we look to the future, we can’t help but worry about what will happen when he passes away. We have spent countless hours talking with financial advisors, accountants and attorneys trying to put together a plan that will allow Batey Farms to remain a viable business. We know that we will face an estate tax when my father-in-law dies and we are planning now to try to avoid having to sell more acres to pay the tax. I can’t help but think about what our farm might be like if we could have invested all that time and energy into our business.”
Bobby McKnight, a seventh-generation cattleman from Fort Davis, Texas, testified on behalf of the American Cattlemen’s Beef Association about his family-owned small business. “Sometimes I need up to seven employees to help me run my operation efficiently,” he said. “Over the years I have invested a lot of time, resources and sweat equity in developing my employees. We work alongside each other taking care of the livestock and hoping for a good year where we will all reap the benefits of hard work. When times have been lean I have had to make sacrifices to keep my business above water and to keep my employees on the ranch. I make it a priority to put our people first because I don’t want to let them go. But sometimes you run out of places to cut and you have to make the uncomfortable decision to cut seasoned employees. That is what happened to my family during hard times brought on by the estate tax. At one time I had to cut my staff by 65 percent. I had to let go of seasoned employees that had families of their own and they were forced to find work elsewhere. The skill set needed to work cattle is a special skill set that takes years to learn, and I would give anything to have that skilled labor back working for me once more.”
Karen Madonia, CFO at Illco Inc., a Chicago-area distributor of heating, ventilation, air-conditioning and refrigeration equipment, parts and supplies, testified on behalf of Heating, Air-Conditioning and Refrigerator Distributors International. Her father purchased the business back in 1973.
“I personally find it fundamentally wrong to place a tax on death,” she said. “If a person accumulates wealth through hard work, and if that person pays his fair share of taxes on 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. The United States has already benefited from that person’s success because he has employed people who pay taxes, bought buildings on which he has paid property taxes and bought inventory and supplies from other companies, which can then afford to employ more people who pay taxes. He has created opportunity for the community as a whole while creating prosperity for himself. We all benefit when a small businessperson succeeds. To me, and probably to a large portion of the generation behind me, the estate tax serves as a tremendous entrepreneurial disincentive.”
Ray Madoff, a professor at Boston College Law School, argued that Congress should not be hasty in repealing the estate tax. “As an introductory matter, it is important to keep in mind that, in one form or another, the estate tax has been with us since this country’s earliest days,” he said. “The first estate tax was enacted in 1797, long before the income tax. Our modern estate tax was enacted in 1916, a mere three years after the enactment of the income tax. Any tax that has stood the test of time for so long should not be repealed without due attention to the role that it plays in our society, and the negative repercussions that could result from its repeal.”
He noted that the estate tax promotes fairness in the tax system and provides an important source of revenue for the government. According to the most recent estimates the estate tax will generate about $294 billion over the next 10 years.