November 24, 2009 | Commentary on Estate Tax
Only super-rich families like the Rockefellers, Vanderbilts and Carnegies pay the estate tax, right? Too bad no one told the family that owns and operates Reliable Contracting. Reliable is a construction company in Millersville, Md. What happened to it when a family member died illustrates how big an obstacle family-owned businesses face from the estate tax -- more aptly called the "death tax" by those familiar with its harmful ways. It is a tremendous burden because, despite appearing valuable on paper, Reliable and other similar businesses do not have sufficient cash available to pay the tax. Reliable has many high-cost assets, such as bulldozers and dump trucks.
This equipment makes up a majority of the business's value. Compared to the value of these assets, it has little cash on hand. And it needs every dollar of that cash to purchase new equipment or to replace old and worn-out parts. Yet, when a family member passed away, the IRS came knocking to collect the death tax on the full value of the business. Because it lacked sufficient cash to pay the tab, Reliable had to pay it off over a 10-year period. During that decade, a substantial portion of their precious cash flow went to pay this devastating tax.
Reliable could've used that cash to buy new equipment. It might have hired new workers and paid higher wages. Instead, that money went to Washington, and the business couldn't create those jobs or pay their workers more. Reliable Contracting's story isn't unique. The death tax threatens countless family-owned American businesses. Especially ones that own large amounts of land like farms and ranches. The only recourse available to most family-owned businesses is to buy expensive life insurance plans that they hope will pay their heirs enough to cover a death-tax liability. Grand Harvest Wines is such a business. It is a family-owned wine retailer with a store in New York City's Grand Central Terminal. Grand Harvest spends thousands of dollars a year on insurance premiums to prevent the death tax from destroying the business they've worked so hard to build.
It could use the money that goes to these expensive premiums to expand and employ new workers. Instead, it must devote those resources to protect family members left behind after a death occurs. It comes as no surprise, then, that the death tax places a tremendous drag on the economy. Douglas Holtz-Eakin, former director of the Congressional Budget Office, estimates that full repeal of the death tax would create 1.5 million jobs. This is half of what President Obama wrongly claimed the stimulus would create -- and at one-fifth the price.
We've compiled videos detailing the struggles family-owned businesses like Reliable Contracting, Grand Harvest Wines and others face because of this heavy toll. These videos offer flesh-and-blood proof that the death tax is a millstone around the necks of America's family-owned businesses and their workers.
Luckily for Congress, it will soon have the opportunity to relieve them of this burden. Under current law, the death tax goes on a one-year hiatus in 2010.
Then, in 2011, it rises from the ashes in full force. To prevent the inevitable (and completely justified) outcry sure to ensue when the tax returns, lawmakers will likely take action in the coming weeks to prevent this one-year moratorium from even occurring. They shouldn't. Rather than give this unfair tax new life, Congress should act now and permanently repeal the death tax once and for all.
The family-owned businesses they relieve will thank them if they do. So will the millions of people who are put back to work.
Curtis S. Dubay is senior tax-policy analyst at the Heritage Foundation.
First Appeared in McClatchy Newswire