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Death tax holding back economic recovery
The tens of thousands of owners of Washington family businesses know all too well the sacrifices required to build a successful enterprise that can reinvest in new jobs and expanded work opportunities for people in the community.
These business owners also know that their hard work, in the end, might be for naught, and that when they die their families may have to sell the business to pay federal and Washington state estate taxes.
The government requires payment of estate taxes following a death, demanding, in the case of business owners, a large percentage of the combined value of all family and business assets, including homes, cars, savings accounts, retirement accounts, business equipment, inventory, buildings, land and more.
Family business owners typically have most of what they own tied up in buildings, equipment, inventory and other “hard assets,” so their families often are forced to sell off large portions of the business, if not the entire company, to satisfy the Department of Revenue and the IRS.
Contrary to popular myth, the estate tax rarely impacts the super rich. Rather, a disproportionate number of estate tax filers come from the ranks of family business owners.
From 1995-2005, for instance, federal estate tax filers included 37,000 “closely-held businesses,” 24,000 family farms, 50,000 limited-partnerships and nearly 28,000 “other” non-corporate businesses (such as sole proprietorships), according to the Joint Economic Committee of Congress.
It’s not as if these business owners haven’t paid taxes every year. They have, and probably more than their fair share.
But one final payment is required to both the state and the feds at death, making it more difficult for the next generation of business owners to keep the business open.
States (including Washington) that collect estate taxes fare worse than states without the tax.
A study last year by the Connecticut Department of Revenue Services showed that the 26 states with no estate tax produced twice as many new jobs and their economies grew nearly 50 percent more from 2004-2007 than the 24 states that had estate taxes.
A survey conducted by the Connecticut Treasurer’s office found that 52 percent of tax-planners reported the primary reason their wealthy clients left Connecticut was because of the state’s estate tax.
One state, Virginia, has subsequently repealed its tax.
Washington should follow its lead if it wants to keep as many businesses and jobs in state as possible.
And so should Congress.
Some federal lawmakers want to increase the tax and lower the exemption, while others want to keep the status quo. Both sides justify their positions out of concern over losing federal revenues.
A report for the American Family Business Foundation by economist Stephen Entin, a former Treasury official, should give them pause. According to Entin, if revenues are their primary concern, the best thing Congress could do is eliminate the tax, not raise it.
That’s because a lower tax rate — indeed a tax rate of zero — would stimulate investment in family owned businesses and help create new jobs, both of which would generate increased income tax revenues, as much as $23.3 billion annually, Entin estimates.
But there’s another — and perhaps more important — reason to repeal the estate tax: jobs.
Former Congressional Budget Office Director Douglas Holtz-Eakin estimated that as many as 1.5 million new jobs could be added to the economy nationwide simply by repealing the federal estate tax.
Washington Policy Center calculates that Washington State would gain more than 33,000 of those 1.5 million jobs. That’s good news in a job market where unemployment reached 9.2 percent in August, according to the Washington State Employment Security Department.
Estate tax repeal should be a no-brainer. Repeal would result in more family businesses growing in size, more jobs, and more tax revenues — both for Washington state and the entire country.
Carl Gipson is director of the Center for Small Business at Washington Policy Center in Seattle (washingtonpolicy.org). Dick Patten is president of the American Family Business Foundation in Washington, D.C. (nodeathtax.org).