With the Senate Majority Leader committed to a “dual-track” legislative strategy that includes a partisan budget resolution, Congress will soon be tasked with deciding which revenue raisers to include in a multi-trillion-dollar reconciliation package. A key area of concern for private companies is the estate tax and related provisions.
Some proposals under consideration, like applying capital gains taxes at death, literally threaten the ability of family businesses to survive from one generation to the next, and the family business community is understandably alarmed about their prospects. As such, we wanted to provide an update on the latest developments in this space, and on our efforts to defeat these dangerous provisions.
Policies Under Consideration
The following proposals appeared in President Biden’s American Families Plan and American Jobs Plan and/or in legislation introduced by key lawmakers this year that would directly impact the ability of a family business to be passed on from one generation to the next. The policies would:
- Increase the top capital gains rate from 23.8% to 43.4% on taxpayers with income over $1 million;
- Impose a new “capital gains at death” tax at the higher rate on an estate’s unrealized gains over $1 million, on top of any estate tax liability; and
- Raise the top estate tax rate to 65 percent, reduce the exemption amount to $3.5 million per spouse, eliminate minority and lack of marketability discounts, and limit the use of GRATs and other trusts.
The cumulative effect of these policies would be to impose effective tax rates of 60 percent or more on family businesses, endangering their ability to survive from one generation to the next and resulting in increased consolidation in many industries and fewer job opportunities in many parts of the country.
Congressional Response
Since President Biden released his tax plan back in March, lawmakers from both parties have expressed serious reservations about his “capital gains at death” proposal. In May, thirteen House Democrats wrote that the proposal “runs the risk of forcing farms and ranches to sell part, or all, of a farm that may have been passed down for several generations in order to pay the tax burden.”
Soon after, Rep. David Scott – Chairman of the House Agriculture Committee and a senior member of the Congressional Black Caucus – wrote:
I am very concerned that proposals to pay for these investments could partially come on the backs of our food, fiber, and fuel producers. In particular, “step-up in basis” is a critical tool enabling family farming operations to continue from generation to generation. The potential for capital gains to be imposed on heirs at death of the landowner would impose a significant financial burden on these operations. Additionally, my understanding of the exemptions is that they would just delay the tax liability for those continuing the farming operation until time of sale, which could result in further consolidation in farmland ownership. This would make it more difficult for young, beginning, and socially disadvantaged farmers to get into farming.
Meanwhile, all 50 members of the Senate Republican caucus also wrote in opposition to the proposal, and took aim specifically at claims that family farmers and small businesses would be protected:
Further, the proposed “protections” simply delay the tax liability—rather than provide any real tax relief—for those continuing to operate the business, farm, or ranch. In fact, these protections create new “lock-in” effects that could make any eventual changeover in operation or transfer of the business financially untenable.
Finally, the business community has come together to rally against these proposed changes. Earlier this year, 117 trade associations signed on to a letter highlighting the devastating effects that reducing or eliminating the current step-up regime would have on family businesses. The letter references an accompanying study by EY that estimates the new policy would increase the cost of capital and ultimately deter investment, while eliminating several hundreds of thousands of jobs:
Repealing step-up basis via death at tax is estimated to decrease job equivalents by approximately 80,000 jobs in each of the first ten years, and 100,000 jobs each year thereafter.
This analysis estimates that for every $100 of revenue raised by repeal via tax at death the wages of workers would decline $32. That is, the burden of the tax is such that nearly one-third of every dollar of revenue raised comes out of the paychecks of US workers.
Winston Group Survey
S-CORP is utilizing every possible opportunity to amplify and build on these efforts. In addition to recruiting signatories for the business community and congressional letters, we recently commissioned a survey, conducted by the Winston Group, to gain insights into how American voters feel about the tax hikes currently on the table. The results revealed a remarkable lack of support for the President’s proposals, notably those having to do with the estate tax.
For example, voters generally oppose the basic concept of the estate tax:
- Two-out-of-three voters agreed with the statement, “If you are rich, you should be able to pass your wealth on to your children.”
- Two-out-of-three voters also agreed with the statement, “If you own a business, you should be able to pass your business on to your children without the children having to pay a tax on the appreciated value of the company until they sell it.”
With regard to the Biden policy of taxing unrealized gains at death, voters are strongly opposed to the concept. Fifty-nine percent of all voters and sixty-five percent of independents opposed the following policy:
- “There is a proposal that after an individual dies their estate would be subject to two layers of tax. First, the appreciated assets in their estate would now be subject to the higher, 43.4% capital gains tax. Then, the remaining estate would be subject to the 40% estate tax.”
Fifty-seven percent of voters believed that such a policy would force family businesses to sell rather than pass the business on to their children:
- “Adding the capital gains tax on businesses whose value has increased over time, in addition to the to the current estate tax, will force family business owners to sell their business rather than pass them on to their children.”
S-Corp Efforts
To socialize these findings, S-Corp hosted a webinar with our national membership, and we have hosted several briefings with members of Congress and staff. We also crafted an op-ed which ran in the Gazette and the Washington Examiner. Finally, we created and circulated a presentation articulating the threats faced by individually- and family-owned businesses, which we will continue to use in briefings with the business community and congressional staff.
In addition, working through our Main Street Employers coalition, S-Corp is organizing meetings with dozens of moderate Republicans and Democrats to articulate the concerns of the family business community, and to encourage them to oppose any tax provisions that would hurt the ability of businesses to grow and survive from one generation to the next.
Finally, S-Corp is working with our allies to highlight other threats to family businesses that could appear in the coming weeks, including efforts to eliminate minority and lack of marketability discounts, as well as efforts to reduce or eliminate the use of GRATs in estate planning. These innocuous sounding provisions have the potential to increase estate tax levies on family businesses by 30, 40, 50 percent or more. With the strong pushback against the President’s capital gains at death proposal, we expect congressional attention to shift their way.
Outlook
In the coming weeks, the Democratic Leadership in the Senate will be looking to advance a large tax package that will likely include some of the provisions highlighted above. S-CORP plans to continue fighting these proposals for as long as is necessary, and will do everything it can to ensure that family businesses can continue to grow and thrive in the future.