Family Business First

Congress is actively working on tax reform, fueled by the Republican Contract which pledges to reduce taxes. Specifically, the estate tax component of the Contract passed by the House of Representatives includes:

1. for decedent dying in 1996, the exemption would be raised from $600,000 to $700,000; for decedents dying in 1997, the exemption would by $725,000; and for those dying after 1997, the exemption would be $750,000; and

2. after 1998, the unified credit would be indexed for inflation each year.

In addition, the following would be indexed for inflation beginning in 1998:

1. the $10,000 annual exclusion for gifts;

2. the $750,000 ceiling amount on special use valuation under section 2032A;

3. the $1 million generational-skipping transfer tax exemption; and

4. the value of closely held business eligible for the special four percent interest rate. Currently, federal estate tax rates are 53 percent on taxable transfers between $2.5 million and $3 million and 55 percent on taxable transfers over $4 million, and there is a $600,000 exemption.

Several bills have been introduced in the 104th Congress which would modify current estate tax laws. In addition to the Republican Contract, House bills include H.R. 784, the Family Heritage Preservation Act, which repeals the federal estate and gift tax and tax on generation-skipping transfers; and H.R. 1212, the National Family Enterprise Act of 1995, which is directed at family businesses and which provides for a total potential exemption of $2 million, a doubling of the annual gift tax exclusion and an increase in the special use valuation.

Several bills have been introduced, or will shortly be introduced, in the Senate, including S. 161, the American Family Business Preservation Act, which provides a maximum estate tax rate of 20 percent (15 percent if the heirs are actively engaged in the business) for heirs who maintain the family business for 10 years after the decedent's death; and a soon to be introduced bill by Senate Finance Committee members, which would eliminate estate taxes on any family-owned business interest, as long as the business exceeded 50 percent of the adjusted gross estate, and the decedent has materially participated in the operation of the business for five of the past eight years.

Our view:

• Over 90 percent of the approximately 15 million businesses in the United States are family owned and controlled. The vast majority of family-owned and operated businesses are small, and they generate about 60 percent of the nation's national product and play an increasing role in job creation. It is a fact that during the 1980s, family businesses accounted for an increase of more than 20 million private sector jobs, at a time during which Fortune 500 employment decreased by more than 3.5 million. Clearly, the contributions of family-owned and controlled businesses hold an important key to the country's economic growth and stability.

• American family businesses face unreasonable and anachronistic federal estate tax laws. These laws are disincentives to expanding family businesses, and in many cases force businesses to sell out so the heirs can afford the estate tax burden. These closures negatively impact employees of stable family-held businesses and local economies, and collectively they dampen the nation's economy.

• When family business heirs are forced to sell in order to pay estate taxes, they really incur a double tax because they have to pay a capital gains on the asset sold which might be 30 percent of its value. Then they have to pay estate taxes based on the appraisal of the property before death. The net effect is that the tax is almost 70 to 75 percent.

• The federal estate tax is fueled on the concept that if we tax the rich, we keep the power concentration out of the hands of too few people. However, the irony of the current system is that it forces family-owned businesses to sell to larger corporations, further concentrating the power base of this country.

• Family businesses are the innovators of industry, and the gauge by which large business measure their efficiency and competitiveness.

Action

• Request members of Congress to cosponsor and support a bill which allows family businesses to be passed from generation to generation, tax free, so long as the business is held for at least 10 years after the transfer.

• Family Business First supports the efforts of the Committee to Preserve the American Family Business. We believe that there must be a shift from the current governmental view of family businesses as short-term sources of revenue for the federal government, to one of a long-term source vital to America's economic health and productivity.

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