With all the focus on eliminating the Bush tax cuts and spurring the economy, President Obama and Congressional Democrats are tripping over themselves touting their small business tax breaks this election season. What they’re not mentioning is an automatic tax increase that will hit family-owned businesses hard, starting on New Year’s Day.
Unless Congress and President Obama act, the inheritance or “death tax” will automatically revert to its pre-2001 level: 55 percent of the value of one’s estate after a $1 million deduction. That tax alone often breaks a small business if its owner suddenly dies.
Supporters say the estate tax affects only the wealthy, but in reality, it also hits family-owned businesses and the people who work for them.
Because the death tax often hits family businesses suddenly, family members don’t have an opportunity to plan the transition of the business or farm. So, relatives must not only deal with the loss of a loved one, they must also come up with the money to pay state and federal estate taxes. Too often, they are forced to sell part or all of the business. Some simply close up shop.
During his presidential campaign, Mr. Obama proposed a 45 percent estate tax with a $7 million deduction. Now, farmers and small-business owners fear the president will forget his promise in order to collect more tax money for the federal government.
Word from our nation’s capital is Congress could go one of three ways on an estate tax fix. The options are a 45 percent tax on estates over $2 million; a 60 percent tax on estates over $1 million; or a 60 percent tax on estates over $2 million.
We should remember that states impose their own death taxes as well. Our state’s estate tax rate ranges from 10 to 19 percent after a $3.5 million exemption, with a few narrow deductions for families that own farms or timberland.
The late Jennifer Dunn, former representative from our state’s 8th District, recognized how the death tax literally dismantles businesses and farms at the most trying times of people’s lives. She championed the tax phase-out but was never able to remove the provision calling for the automatic re-enactment at full value. She firmly believed it is a job killer, one that lives up to its “death tax” nickname.
In fact, researchers at the Heritage Foundation estimate that 300,000 jobs are lost each year to the death tax because families have to sell the farm, manufacturing plant or store just to pay state and federal estate taxes.
Many who support “death to the death tax” believe its purpose is misunderstood. The wealth in family and privately-owned business and farms is not in diamonds, gold, private jets, fancy island estates and high interest paying bonds. It is in equipment, machinery, inventory, factories, stores and buildings that provide jobs – American jobs.
According to Don Root, owner of GM Nameplate in Seattle and a long-time opponent of the estate tax, “Some may think this is a tax that just a few wealthy people will pay, so it does not matter what the percentage is. This thinking is far from reality. That wealth is creating more than 50 percent of the jobs in this country and most of the job growth in the country.”
At its core, the death tax isn’t fair.
By the time the owner of a family business dies, he or she has already paid a multitude of taxes: income taxes, business taxes, license fees, excise taxes, Social Security taxes and real estate taxes; they paid sales taxes on everything they bought and paid personal property taxes on everything they owned.
Most of what’s left goes to pay wages and benefits to employees, who pay taxes all over again — Social Security taxes, income taxes, sales taxes, excise taxes, license fees, and property taxes. If, despite all that, the business has anything left when the owner dies, Uncle Sam lurks at death’s door —literally — and tries to take most of that, too.
Don Brunell is the president of the Association of Washington Business.