[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000
THE ESTATE TAX AND THE ALTERNATIVE MINIMUM TAX - INEQUITY FOR AMERICA'S
SMALL BUSINESSES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, APRIL 14, 2005
__________
Serial No. 109-11
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
______
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
SAM GRAVES, Missouri DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire ED CASE, Hawaii
STEVE KING, Iowa MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan RAUL GRIJALVA, Arizona
RIC KELLER, Florida MICHAEL MICHAUD, Maine
TED POE, Texas LINDA SANCHEZ, California
MICHAEL SODREL, Indiana JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas
J. Matthew Szymanski, Chief of Staff
Phil Eskeland, Deputy Chief of Staff/Policy Director
Michael Day, Minority Staff Director
SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS
JEB BRADLEY, New Hampshire Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio DANIEL LIPINSKI, Illinois
THADDEUS McCOTTER, Michigan ENI F. H. FALEOMAVAEGA, American
RIC KELLER, Florida Samoa
TED POE, Texas DANNY DAVIS, Illinois
JEFF FORTENBERRY, Nebraska ED CASE, Hawaii
MICHAEL FITZPATRICK, Pennsylvania MICHAEL MICHAUD, Maine
MELISSA BEAN, Illinois
Joe Hartz, Professional Staff
(ii)
?
C O N T E N T S
----------
Witnesses
Page
Vukelic, Mr. Jeff, Executive Vice President, Try-It Distributing. 4
Pitrone, Mr. Thomas C., Principal, The Integrity Group........... 6
Calimafde, Ms. Paula, Esq., Paley Rothman........................ 8
Ross, Ms. Jenell, Dealer/Operator & Vice President, Bob Ross
Buick GMC Hummer............................................... 10
Zittel, Mr. Paul, Amos Zittel and Sons, Inc...................... 12
Beach, Mr. Bill, Director, Center for Data Analysis, The Heritage
Foundation..................................................... 13
Appendix
Prepared statements:
Vukelic, Mr. Jeff, Executive Vice President, Try-It
Distributing............................................... 24
Pitrone, Mr. Thomas C., Principal, The Integrity Group....... 27
Calimafde, Ms. Paula, Esq., Paley Rothman.................... 31
Ross, Ms. Jenell, Dealer/Operator & Vice President, Bob Ross
Buick GMC Hummer........................................... 40
Zittel, Mr. Paul, Amos Zittel and Sons, Inc.................. 45
Beach, Mr. Bill, Director, Center for Data Analysis, The
Heritage Foundation........................................ 49
(iii)
THE ESTATE TAX AND THE ALTERNATIVE MINIMUM TAX - INEQUITY FOR AMERICA'S
SMALL BUSINESSES
----------
THURSDAY, APRIL 14, 2005
House of Representatives
Subcommittee on Tax, Finance, and Exports
Committee on Small Business
Washington, D.C.
The Subcommittee met, pursuant to call, at 2:09 p.m. in
Room 311, Cannon House Office Building, Hon. Jeb Bradley
presiding.
Present: Representatives Bradley, Millender-McDonald,
Chabot, McCotter, Keller, Poe, Fortenberry, Fitzpatrick,
Lipinski, Faleomavaega, Kelly, Bean, Davis, Case, Michaud
Mr. Bradley. Good afternoon, everyone. Congresswoman
Millender-McDonald will be here shortly, but I will call this
hearing of the Subcommittee on Tax, Finance, and Exports to
order and begin with a statement of my own.
I would like to begin by thanking all of you for
participating in this hearing this afternoon, especially those
of you who have traveled from significant distances to be here
to talk about the alternative minimum tax and the estate tax,
two taxes in our tax code that I think are among the most
unfair.
I look forward to working with all of you, as well as my
colleague from California, Congresswoman Millender-McDonald, as
we address the many issues facing small businesses in our
country.
The estate tax affects all Americans, especially small
business owners, and I used to be one, the small business
owners who have consistently identified permanent repeal of the
estate tax as one of their most pressing concerns.
Working together with President Bush, Congress, in 2001,
enacted bipartisan legislation that provides immediate relief,
through tax reduction and an expanded exemption, with complete
repeal occurring in 2010. Unfortunately, as we all know, the
provisions of that bill, in 2001, required Congress to pass
additional legislation to make the repeal and the elimination
permanent. Thankfully, the House, once again, did that just
yesterday afternoon by a vote of 272 to 162, and I might note,
a very bipartisan vote. It is now up to our colleagues on the
other side of the Capitol to pass similar legislation so that
we can finally get to a Committee of conference and, hopefully,
put a bill on the president's desk for his signature soon.
Simply put, the estate tax threatens the livelihoods of
many families that run small businesses across our country.
Small businesses have much of their assets tied up in
equipment, in inventory, and other critical assets that are
necessary to run a company. They do not have the available
liquid capital to pay the estate tax many times, and so are
forced to sell either the entire business or integral parts of
the businesses in order to cover the tax liabilities of the
estate tax. In my point of view, this is not acceptable, it
hurts our economy, and that is why we must continue to fight
for a permanent repeal of the death tax.
Similarly, the alternative minimum tax is an incredibly
complex provision--I am going to pay it tomorrow--in the tax
code that requires taxpayers to calculate their taxes twice and
then pay the larger amount. Initially, a method to ensure that
the wealthiest Americans paid their fair share because of the
combined effects of inflation and individual rate cuts, the AMT
has reached into the checking and savings accounts of the
middle class. The alternative minimum tax unfairly penalizes
businesses that invest heavily in capital assets by
significantly increasing the cost of capital and discourages
investment in productivity-enhancing assets by negating many of
the capital-formation incentives provided under the regular tax
system.
What we face with the alternative minimum tax is a sleeping
giant that is starting to wake up and gobble the hard-earned
funds of millions of American taxpayers, in particular, middle-
income taxpayers. Today, it is 3 million taxpayers, but in a
few short years, if we do not pass legislation to keep the
exemptions from returning to previous levels, it will be 11
million taxpayers. And if we do not have a longer-term solution
for the AMT by the end of the decade, it could be as many as 30
million taxpayers. One in three Americans potentially will fall
under this tax that was originally designed to catch 150 of the
most wealthy Americans that did not, at that time, pay their
fair share of taxes.
So what we have today, with the AMT, is a situation where
middle-income Americans will be paying more than the wealthier
Americans because they lose their personal exemptions, they
lose their exemptions for state and local taxes, and they lose
the exemptions for itemized deductions. Most of the benefits of
the tax cuts in 2001 and 2003 will no longer exist for these
taxpayers and for anybody that has had to go through the AMT.
The compliance costs of having to fill out taxes twice in a
dual universe--the normal way and then the AMT way--is much
higher.
So I am really looking forward to hear testimony today, but
before I get to our panel, I would like to recognize my
colleague from California, Congresswoman Millender-McDonald,
because I know that you have an opening statement. Thank you,
and I am sorry to have start before you got here.
Ms. Millender-McDonald. That is all right. I had another
one, so I just to just rush over from Rayburn over here.
Mr. Chairman, thank you so much for convening this hearing
to discuss a very important issue for small business owners,
and that is the U.S. Tax Code. As tomorrow's tax return
deadline approaches, this topic is surely fresh in the minds of
many small firms, which we are very much aware of, the engines
that drive our economy. How many face a barrage of challenges
on their road to success, from inequities in federal
contracting to burdensome federal regulations and lack of
access to affordable health care? It has become increasingly
clear that our nation's small businesses deserve a break.
We are holding today's hearing because small businesses
continue to be hit by inequities in the tax code. Over the past
five years, a series of tax cuts, with a total cost of over $2
trillion, have been enacted, but the inequities for small
businesses still persist. The reality is that over half of
small firms only received an average $500 under these cuts
despite an enormous cost. Many of the tax cuts in these bills,
including the dividend tax cut, provided virtually no benefits
to small businesses or entrepreneurs.
While many of the tax reforms were instituted as a way to
improve the economy, the job record through 2004 was
considerably weak, and the GDP growth rate has hovered over 3
percent since last year. Part of the reason we have not seen
job growth is the lack of the tax relief aimed at stimulating
the small business sector, the proven job creators.
The two issues before us today are ones that significantly
impact small businesses. When considering reform, we must take
into account the needs of entrepreneurs and focus on solutions
that will stimulate the small business sector. While there is
no doubt that the alternative minimum tax and the estate tax
reform will provide necessary relief for small businesses, it
is clear that we face some tough choices.
With regard to the estate tax, there are clear solutions to
this issue that have bipartisan support, and we need to act
sooner rather than later. No one supports an estate tax that
forces the sale of a family-owned business.
Based on the panelists today, I think we can all agree many
American business owners dream of one day passing their
business on to another family member. The way the current law
is structured, however, it has made estate planning nearly
impossible. By reforming the estate tax to meet the needs of
small firms, we can ensure that family-owned farms and
businesses will be passed on from generation to generation, and
I think we owe it to small businesses to work together for a
permanent solution.
We will talk about AMT. The mere mention of it brings fear
to those who have even had to pay or even calculate it. It is
clear that Congress's failure to provide for adequate AMT
relief has meant that thousands of small business owners are
subject to this tax. The failure to address these issues has
contributed to the growing complexity of the tax code. Small
should businesses should not be spending thousands of dollars
on tax preparation. Small firms simply do not have the
resources or capital to comply, and it is wasted money that
business owners could allocate elsewhere.
According to an Office of Advocacy report, for small
businesses with less than 20 employees, the cost of tax
compliance is nearly double that of their larger counterparts.
So today's hearing is an opportunity to assess the real
impact of the current tax code on our nation's small
businesses. When we examine our tax priorities, the needs of
small businesses must be at the forefront. We are operating in
an era of budget deficits, so in terms of tax relief, it comes
down to priorities.
I look forward, Mr. Chairman, to today's testimony and hope
that we can identify solutions that will provide targeted tax
relief to small business owners. It is critical that we examine
how our economic policies affect the small business sector and
that we develop a tax code that awards our risk takers. Thank
you, Mr. Chairman
Mr. Bradley. Thank you very much.
I would like to recognize the first witness this afternoon,
Mr. Jeff Vukelic, who is the executive vice president of Try-It
Distributing from Lancaster, New York, and is here today
representing the National Beer Wholesalers Association. Mr.
Vukelic, Thank you.
STATEMENT OF JEFF VUKELIC, TRY-IT DISTRIBUTING
Mr. Vukelic. Thank you, Mr. Chairman.
My name is Jeff Vukelic, and I am executive vice president
of Try-It Distributing, where we serve the Buffalo/Niagara
Falls market as a distributor of Anheuser-Busch, Heineken, and
Labatt beers.
Try-It Distributing was started as a soft drink bottling
company by my grandfather, Stephen Vukelic, in 1928. My
grandparents were Croatian immigrants. They never dreamed their
company would grow into an operation with a fleet of over 110
delivery vehicles and more than 200 employees.
My parents, brothers, and I are fully involved and
committed corporate citizens. We serve on civic and not-for-
profit boards who respond to needs of charitable organizations,
who contribute to programs for at-risk youth and work closely
with law enforcement to advocate responsible consumption.
Elected officials on every level rely on us to be well-informed
and concerned supporters of individuals and ideas that ensure
good government.
The Vukelic family is typical of other family-owned
businesses in our association. Our home communities look to us
as consistent leaders and dependable doers.
As chair of the National Beer Wholesalers Association, I
appreciate the opportunity to share some thoughts with you
today on behalf of the 1,850 members of our organization.
The beer-wholesaling industry directly employs more than
92,000 Americans nationwide, and the beer industry at large
indirectly supports more than 890,000 workers, accounting for
more than $30 billion in tax revenues across the country. Many
wholesaling companies have been family owned and operated since
the repeal of prohibition in 1933.
Regulation is a fact of life for beer wholesalers. We are
regulated every day by a virtual alphabet soup of federal
agencies, including TTB, FCC, DOT, NHTSA, EPA, OSHA, and the
IRS, just to name a few. And because of the 21st Amendment, my
company is strictly regulated by the New York State Liquor
Control Authority.
I am here to talk about an issue that is absolutely
critical to every privately held and family-owned business in
America: the permanent repeal of the death tax. Now is the time
for Congress to take final action to permanently repeal the
federal death tax.
Over the last few years, and again yesterday evening, the
House of Representatives has made great strides in helping
America's small businesses by voting to permanently repeal the
death tax. We continue to wait on the Senate to take action.
Small business owners need certainty when planning for
their succession and the long-term viability of their
businesses. As long as Congress fails to act, business owners
will be forced to divert economic resources from investments
that grow businesses, create jobs, and boost the economy.
Instead, they will use those funds to pay for estate planners,
lawyers, and accountants to navigate them through the
uncertainties of the current tax structure and utilizing state
funding vehicles.
Permanent repeal would free up that time, money, and
energy. This would allow business owners to focus on growing
their businesses, creating more jobs, and working to stimulate
economic growth as a whole. We want to help keep the American
economy strong and viable for our future and the future of our
children.
Although full repeal will occur in 2010, the death tax
burden will return in full force in 2011 due to the sunset
language that was included in the Economic Growth and Tax
Relief Reconciliation Act of 2001.
According to a recent survey, 85 percent of those polled
want the death tax permanently abolished or significantly
reduced. The American people oppose, on principle, the concept
of anyone being taxed on the death of their parents.
Unfortunately, if permanent repeal is not passed, many small
business owners and farmers will continue to pay the ultimate
price created by the sunsetting of the death tax repeal: loss
of family businesses.
As the father of two young children, I am very concerned
about their future and the future of my company if the death
tax returns as currently scheduled. H.R. 8, the Death Tax
Repeal Permanency Act of 2005, was introduced by
Representatives Kenny Hulshof [MO-9] and Bud Cramer [AL-5] and
passed the House with strong, bipartisan support yesterday. I
would like to thank those members of this Committee that
supported that legislation.
S. 420, the Death Tax Fairness Act, has been introduced by
Senators John Kyl [AZ] and Bill Nelson [FL]. This bill also
seeks full and final repeal of the death tax.
I urge Congress to act quickly and not turn its back on
America's small business owners. Please encourage the Senate to
schedule a vote on permanent repeal now. Congress must make
death tax repeal permanency a priority by sending President
Bush legislation for his signature.
As I close my remarks, I am thinking about the talents,
sacrifices, and hard work that my grandfather and my father
invested in making Try-It Distributing a success. Stephen
Vukelic, a young newcomer from Croatia, achieved the American
Dream. Please do not allow such bright dreams to become
nightmares for the third and fourth generations of families who
are working hard every day to sustain solid American
businesses.
Mr. Chairman, thank you for the opportunity to share with
you our organization's position on these important small
business issues.
[Mr. Vukelic's statement may be found in the appendix.]
Mr. Bradley. Thank you very much, sir.
Our second panelist is Mr. Thomas Pitrone, who is the
principal of the Integrity Group of Willoughby, Ohio, and a
member of the National Small Business Association. Welcome.
STATEMENT OF THOMAS PITRONE, THE INTEGRITY GROUP
Mr. Pitrone. Good afternoon, Chairman Bradley and Ranking
Member--
Ms. Millender-McDonald. --Millender-McDonald.
Mr. Pitrone. --Millender-McDonald.
Ms. Millender-McDonald. Thank you so much, sir.
Mr. Pitrone. Thank you. I appreciate the opportunity to
testify on the negative impact of the estate tax on small
businesses. I am an estate tax practitioner. My primary focus,
my practice, has worked with older folks on their money-
management issues, but I also consult with small businesses on
continuity and estate tax issues.
My firm was started with my dad, Frank Pitrone, who was a
CLU, in 1983, and I have been in advocacy for small business
since about 1988, through my association with COSE, the Council
of Smaller Enterprises in Greater Cleveland, and then I was a
delegate to the White House Conference on Small Business, and I
am sitting on the board of the National Small Business
Association now.
The estate tax is a tax on capital, as far as small
businesses are concerned. For the majority of small business
owners, their major asset is their business. I know scores of
business owners who are worth more than $5 million, but they
could not cash a check for more than 10 because they do not
have any liquidity. It is hard to get cash out of a company.
They have worked hard all of their lives, as we just heard.
They are frugal, they amass wealth, and they take care of their
families. They live around the demands of their business. It
does not make any difference if it is a farm or a store or a
distributorship, insurance agency, when the business is in
trouble, everybody in the family reacts. They understand that
the business is important to the business owner, to the
breadwinner, and it pays the bills.
It is not a new phenomenon. The issues of small business
are older than our country. The founders, by our standards,
were all small businessmen. They were tradesmen, lawyers,
farmers, and they saw the importance of small business
preservation as one of the issues that drove the Revolution. In
the 1760's, George Washington saw the separation from England
as important to the survival of small business, just business
in general because there was nothing but small businesses then.
So it is not too much to say that part of the reason for the
Revolution was the existence of business in the United States,
the colonies then.
Well, as I said, I have been involved in advocacy for 17
years, and I hear representatives talking about how important
small business is and how they believe in small business. I
have just got to say, you need to do more than believe in it
because, as the Ranking Member mentioned, it is the engine that
drives the country, and the freedom to start a business is one
of the most important freedoms, and you see it blossom wherever
there is liberty. If you go to New York, Kiev, Nairobi, you see
people with a box and a few things to sell. They are small
business people; they are making it on their own.
So, in our country, a business owner works for 30, 40
years, pays his taxes, volunteers, does all of the things that
we know they do, and then one day I come in and talk to him and
tell him about what he is going to have to do to avoid the
estate tax, or the government is going to take half of his
business when he dies. And often, they do not believe me.
I can think of an instance where I went to see a fellow who
owned a truck terminal, and I told him that he was going to
have to pay half, or the government was going to take his
business, and he said, I never heard of this; it cannot be
true. And I said, No, no, it is true. And he said, Well, my
business is not worth anything. So I looked out the window, and
he has got a truck terminal and all of these tractors and
probably 25 trailers, and he said, I have written them down;
they have no book value. I said, Well, the IRS does not care
about that. They go by what a willing buyer would pay a willing
seller. And he said, If you get a willing buyer, get him in
here.
So we began to talk about what he had to do, and he,
frankly, did not believe me. He began to rant and rave, say bad
things about the government, and finally ended up kicking me
out.
And the truth is, what we have to do to avoid the estate
tax is ridiculous. I tell people that they have to do obviously
transparently stupid things to avoid the estate tax. They have
to have a defective trust. They have to send their children
crummy letters, and I feel like a witch doctor. It is like
voodoo, but that is what they need to do avoid the estate tax.
They often cannot believe me. They also have to buy a lot of
life insurance and pay attorneys a lot of money to draft the
documents that they need.
A small business owner already has a buy/sell agreement. He
has got insurance for liquidity. He understands that. It makes
sense to him, but when you tell him that the government is
going to take half of his business when he dies, the value of
his business, and he has to come up with the cash within nine
months, you cannot blame him for feeling persecuted.
So the proponents of the death tax are dismissive about our
issues. Small business is secondary to them. They say, ``Can't
we just fix it? Raise the limits.''
There are two provisions that I just want to talk about
real briefly. One is Section 6166, which allows a company to
finance for 14 years. I have only known one company that did
that. They told me it was hell. The IRS is not really financing
as much as they become your partner. The other is the family-
owned business exclusion, which is so complicated, nobody uses
it, and the reason is the exclusions and the inflation have
reduced the benefit of it, at any rate.
I will sum up just by saying that small business will not
be safe until we have totally eliminated the death tax, and I
want to thank you for the opportunity to make my statement, and
I look forward to questions.
[Mr. Pitrone's statement may be found in the appendix.]
Ms. Millender-McDonald. Mr. Chairman, before we proceed to
the other one, I have just been told that we have a vote within
a half hour, is it?--about a half hour, and then I will have to
leave, so can you please ask the witnesses to be very brief and
summarize as opposed to extending their remarks?
Mr. Bradley. Well, you have just done that, so I will
repeat it, and I will let you ask your questions first when we
are completed with all of the witnesses.
Our third participant this afternoon is Ms. Paula Calimafde
and is representing Paley Rothman from Bethesda, Maryland, and
the Small Business Council of America.
STATEMENT OF PAULA CALIMAFDE, PALEY ROTHMAN
Ms. Calimafde. It is a pleasure to be here, and I commend
all of you for holding these hearings on very difficult topics.
I am Paula Calimafde. I am the chair of the Small Business
Council of America. It is a national, nonprofit organization
which represents small businesses only on federal tax, health
care, and employee benefit matters. I am also a tax attorney,
and I work with small business owners every day, and,
unfortunately, from time to time, I have to deal with probate,
which is what happens when someone passes away. I was fortunate
enough to be a commissioner at the White House Conference in
1986, and I was a presidential delegate to the White House
Conference in 1995.
I have a very important message, and it is very strange for
me to be sitting here, surrounded by these people who I know
have spent a lot of time and effort to come here and who
obviously believe in what they are saying, but my message is
very different. I believe, and I guess it is even stronger, I
know that repeal of estate taxes in 2010 and beyond actually
hurts small business owners, and the reason why it hurts them
is a technical reason, and I think that is why most small
business owners do not understand the issue. It is because, in
2010, small business owners are going to lose a part of their
step-up in basis, and the way the estate tax rules work today,
when a person passes away, the heirs get the property from that
decedent at fair market value. That is their basis.
In the 2010 rule and beyond, $1.3 million of the assets
goes decedent's heirs with a step-up, and the rest get the
carry-over basis from the decedent. What that means is whatever
the decedent's basis was, they have to use that, and, believe
me, it is not easy to figure out what a carry-over basis is. I
believe, in 1976, Congress tried to repeal the step-up in
basis. It got extended to 1980. It never got put into place.
The reason why is a number of attorneys and accountants kept
coming to Congress and saying, There is no way we can figure
out the basis for someone who died who acquired property 50
years ago. And under the rules, if you cannot prove the basis,
the basis in the property is zero.
So the Small Business Council of America believes strongly
that repeal is not the answer. What the answer is, is an
increase in exemption level, and I will go over some numbers
quickly, but you will see that that exemption level should be
$3.5 million next year, not 2009, because when you see how many
small businesses are trapped by the $1.5 million exemption
level to the $3.5 million level, it is more than, like, 84,000
small businesses are getting caught between that $1 million and
the $3.5 million exemption level.
We think the step-up in basis needs to be preserved, and we
also believe that the gift and estate tax system should be
reunified.
Let me explain to you a simple example so you will
understand what I am talking about. As soon as a small business
owner who owns exactly $3.5 million of assets--he is single,
and he passes away. He passes away in 2011. Congress has
repealed the estate tax. Of the $3.5 million, $1.3 million gets
a step up in basis. The other $2.2 million of assets that this
man has owned and worked hard for is now a carry-over basis.
Imagine this man is 85 years' old. Who is going to figure
out what the basis in these assets were? Who knows? But let us
assume, for argument's sake, that the basis in the assets is a
million. That leaves the heirs of that small business owner
with $1.2 million of income tax. Compare that to the estate tax
law staying in place in 2009. There would be a $3.5 million
exemption, a complete step-up in basis. The man dies, his
family inherits those assets, and they have $3.5 million of
step-up. If they were to set up the next day, zero taxable
income and zero gain.
Now, I hate to be so technical. I hate to be talking about
step-up and carry-over. I know Bill knows what I am talking
about, and a few others do, but it is because of this that
repeal, even though it is being touted something beneficial to
small business owners, it is not. This is a very, very sad
state of affairs, and, in fact, the small business owners are
the straw men today for carrying repeal, and it is the very,
very, very, very rich who will benefit from repeal, not the
small business owners.
I have got a chart which, if you take a look at it,
explains very clearly who is a winner and who is a loser, but
basically the small business owners who have more than $1.3
million in assets and less than $3.5 million, which happens to
be a huge percentage of small business owners, will do worse
with repeal.
So that is my message, and as far as AMT, AMT, just like
estate taxes, was never intended to hurt the owners of small
businesses who work for a living. It just got that way, and we
would much rather see an exemption high enough to get estate
tax away from small businesses and repeal AMT. Use those
dollars to repeal AMT, which is really hurting small business
owners. Thank you.
[Ms. Calimafde's statement may be found in the appendix.]
Mr. Bradley. Thank you very much.
Our fourth panelist is Ms. Jenell Ross, who is a dealer and
operator and vice president of Bob Ross Buick GMC Hummer in
Centerville, Ohio, and is representing the American
International Automobile Dealers Association. Thank you.
STATEMENT OF JENELL ROSS, BOB ROSS BUICK GMC HUMMER
Ms. Ross. Good afternoon. My name is Jenell Ross. I am here
today as a representative of the American International
Automobile Dealers Association. I want to thank the Committee
for allowing my testimony today.
The death tax is an issue that is near and dear to my heart
because of my family's firsthand experience with it. I am the
dealer principal of Ross Motor Cars in Centerville, Ohio,
representing Buick, GMC Hummer, and Mercedes Benz franchises.
Thirty-one years ago, my father, Bob Ross, took the chance of a
lifetime and started Ross Motor Cars.
Our family-owned dealership had been in business for 23
years when he passed away unexpectedly. My father was a very
talented and capable businessman. Like a lot of small business
owners, he knew about the death tax, but he passed away long
before any of us expected him to, and because of that, the
dealership's estate planning was years behind where it should
have been. When he died, the responsibility of keeping the
business running and the workers employed fell on my mother,
brother, and me. Although we were familiar with many of the
dealership operations, I can tell you that none of us was fully
prepared to take on the overwhelming responsibility of managing
the day-to-day operations of the business. It was, in many
ways, on-the-job training.
Perhaps you can imagine, amidst all of the emotions
surrounding this personal family tragedy, the incredible shock
we felt in receiving a federal tax bill for more than half the
value of our business. That shock was compounded by the fact
that nearly 90 percent of our dealership's net worth was tied
up in land, building, equipment, inventory, and parts--assets
that could not be easily liquidated without seriously damaging
our ability to function. And that was true not just in our
case, but it is true for most dealerships today.
Dealerships are heavily leveraged, and in today's
competitive environment, dealers have no choice but to maintain
large inventories of new vehicles. At the same time, we are
under enormous pressure from manufacturers to maintain our
properties and buildings at increasingly higher and higher
levels.
My experience with the death tax has made this issue a very
personal one, and we are not alone. Every year, tens of
thousands of families are forced to endure what we have
endured. But it is important to remember that the death tax
imposes a huge cost, even on automobile dealers who are fully
prepared for it. In fact, 70 percent of dealers view the tax as
the greatest barrier to expanding business opportunities
because death tax planning drains resources away from growing
the business and creating more jobs.
It is not uncommon for dealers to divert upwards of $10,000
per month in estate planning. That has certainly been the case
for our family business. Ever since we received the federal
death tax bill years ago, my mother has been in weekly contact
with a team of lawyers and insurance agents to make sure our
death tax payment plan remains viable and our dealership
remains solvent. We are currently embarked on a 10-year payment
plan to pay off the death tax. In the meantime, our business is
being held for collateral. Our dealership and our employees are
managing very well today, but there is no question, the
experience took a tremendous toll on my family.
Our ordeal with the death tax has been eye opening. It has
motivated us to do what we can to help bring a permanent end to
his oppressive and burdensome tax. Not a day has gone by over
the past eight years in which we have not been haunted by what
could have been, not only to our business but to the 145
employees of Ross Motor Cars whose families depend on us.
The majority of today's 21,000 automobile dealerships are
true family businesses, run, managed, and expanded by family
members across several generations. We employ over 1 million
Americans. When small businesses do not have to commit tens of
thousands of dollars to death tax planning, that money is
typically reinvested into the business, and as we expand, so do
our payrolls.
The argument that death tax repeal would be too costly to
the federal coffers is just flat-out wrong. As you may be
aware, Dr. Wilbur Steger, who advised six U.S. presidents,
conducted a study on the death tax recently. He calculated what
the repercussions of death tax repeal would be on the economy
and concluded that repeal of the tax would actually result in a
slight increase in revenue to the federal government, $1.7
billion over 10 years.
The arguments for permanent repeal of the death tax are
many, but perhaps the most important reason for why this tax
should be permanently repealed is that this tax, more so than
any other, is viewed by the public at large to be fundamentally
unfair. Last year, AIADA conducted a national survey to gauge
public sentiment on this issue, and what we found was truly
remarkable. Voters across political, ideological, and
demographic lines considered it unfair for the government to
tax individual earnings twice, both when they are earned and
again at the time of the earner's death. Nowhere among the
major voter groups did we find less than 70 percent saying it
was unfair. If for no other reason, the death tax ought to be
permanently repealed because it is a tax that is fundamentally
unfair.
I want to applaud this Committee for recognizing this
reality early on, and I want to applaud this Committee and this
entire chamber not only for the work you did in 2001 to repeal
the death tax but also for your bipartisan cooperation on this
issue yesterday.
In today's competitive auto-retail business environment,
auto dealers need predictability in the tax code in order to
hire additional employees, buy new equipment, and expand
business opportunities. This chamber's vote yesterday will help
bring badly needed predictability to the tax code.
In closing, I want to urge the Senate to follow this
chamber's bipartisan action on this issue and vote to
permanently repeal the federal estate tax. This issue is not
about politics; it is about fairness. Thank you.
[Ms. Ross' statement may be found in the appendix.]
Mr. Bradley. Thank you very much, Ms. Ross.
Our next panelist is Paul Zittel. He is from Eden, New
York, and represents the American Farm Bureau Federation.
STATEMENT OF PAUL ZITTEL, AMOS ZITTEL AND SONS, INC.
Mr. Zittel. Thank you and good afternoon. My name is Paul
Zittel. I, along with my brother and two sons and two nephews,
own and operate Amos Zittel and Sons, Inc., in Eden, New York.
I am also the elected vice president of New York Farm Bureau.
Farm Bureau thanks the Subcommittee for holding this hearing to
spotlight the need for permanent death tax repeal and to end
the alternative minimum tax.
Farm Bureau supports the permanent repeal of death taxes.
This is for a good reason: Farm and ranch estates face heavier,
potentially more disruptive, death tax burdens than other
estates. Roughly twice the number of farmer states paid federal
death tax in the late 1990's compared to other estates.
Moreover, the average death tax is also larger than the tax
paid by most other estates.
My brother and I are the fourth generation of Zittels to
farm. We grow fruits and vegetables on 180 acres of land and
flowers under plastic in two and a half acres of greenhouses.
We sell a portion of our products through our own family retail
market.
Our family farm corporation employs 60 people, 22 of them
year round. My two sons and two nephews plan to continue the
family farming business. My family and I have spent thousands
of dollars and countless hours structuring our business to try
to reduce or eliminate the impact of death taxes when my
brother and I die. We pay thousands of dollars per year in life
insurance so that there will be cash for Uncle Sam if the tax
is due. The financial drain on our business is significant, and
still no one can tell us for sure that our escape plan will
successfully protect the future of my children's livelihood.
Last year was a particularly difficult year for us due to
crop damage caused by three hurricanes that ravaged the East
Coast. Even so, we could not risk foregoing our insurance
payments. This meant that we had to freeze our wages for our
employees and reduce the wages for ourselves. In addition, we
had to borrow money for operating expenses and were not able to
afford the scheduled improvements to our buildings and
equipment. We do not know yet when we will be able to recover.
The impact of death taxes with rates as high as 47 percent
can be so severe that their imposition can destroy farm
businesses. Farm operations are capital-intensive businesses
whose assets are not easily converted into cash. In order to
generate the funds that are needed to pay death taxes, heirs
often have to sell parts of their business, and this can ruin
the economic viability of the business. Faced with the
realization that their family farm may not survive death taxes,
children may choose to leave the farms.
An increase in the death tax exemption is not the answer.
Only a complete elimination of the death tax can erase the
impact of the death tax and the estate-planning burden caused
by changing exemptions.
Before I conclude, I would like to mention the alternative
minimum tax. AMT relief is important to farmers since they pay
the tax more often compared to other taxpayers. According to
the USDA Economic Research Service, slightly more farmers are
subject to AMT, with just under 2 percent of farmers currently
paying a tax. Farm Bureau supports the extension of the
increased AMT exemption and the total elimination of the
alternative minimum tax.
Farm Bureau commends the Committee on Small Business for
holding this hearing to highlight the need for permanent death
tax repeal. Farmers, however, will not be able to rest in peace
until Congress finishes the job of eliminating the death taxes.
Farm Bureau calls on both the House and the Senate to pass
legislation to end death taxes once and for all. Thank you.
[Mr. Zittel's statement may be found in the appendix.]
Mr. Bradley. Thank you very much, Mr. Zittel.
Our final panelist is Mr. Bill Beach, who is the director
of the Center for Data Analysis at the Heritage Foundation here
in Washington, D.C. Thank you, sir.
STATEMENT OF WILLIAM BEACH, CENTER FOR DATA ANALYSIS, THE
HERITAGE FOUNDATION
Mr. Beach. Thank you, Mr. Chairman, Congresswoman. In the
interest of your time, I am going to lay before you the case
for repealing the estate tax presented by my colleagues.
Clearly, you can see it is a tax on virtue, a virtuous life. It
undermines the economy. It slows the economy. It is, in many
respects, a tax that undermines the income tax. It has every
earmark of the kinds of bad taxes that you, from time to time,
review and yesterday repealed, and I congratulate you for that.
Let me focus, instead, on the alternative minimum tax
because, as the chairman said, this is also an important tax
for small business, and I will just take a few minutes to
review a few facts about the AMT.
In a conversation I once had with former Senator Bob
Packwood, I asked him, Senator, tell me how many people,
taxpayers, did you originally intend, or did Congress intend,
to cover with the AMT? And he said that it could not have been
more than 150,--I believe you used the number, 155--and it was
150 very high-income taxpayers, at that.
We are a very far cry from 150 taxpayers today. If we do
nothing to rein in the AMT or to repeal it, the tax is expected
to be paid by nearly 40 million taxpayers in just five years
from now. If that forecast holds, the population of AMT
taxpayers would have grown by 16 times since 2003, or 16 times
over a seven-year period.
The personal AMT directly affects individuals who file
their business taxes through the 1040, and it does so in a
number of ways. First, the AMT filers generally pay higher tax
rates than regular income tax filers. The AMT tax rates are 26
percent and 28 percent. Higher tax rates mean that one's own
labor income and capital costs are higher, thus either driving
down overall operating margin or increasing prices, and we
believe that there is a tangible, measurable, and significant
effect on economic performance because of the increasing
coverage of the AMT.
Second, the AMT tax brackets are not indexed for inflation,
unlike the regular tax brackets. That means the AMT filers
annually face an increase in their taxes just from the effects
of inflation.
And, thirdly, small businesses located in high-tax states
are much more likely to incur AMT liabilities than in low-tax
states. According to Len Burman and David Weiner, the state and
local tax deduction permitted on the 1040, Individual Income
Tax Form, accounts for 51 percent of all tax liabilities under
the AMT. In other words, 51 percent of those people who are
thrown into the AMT are thrown in because you are permitted to
deduct state and local taxes. Indeed, taxpayers in high-tax
states are 5 percentage points more likely to be on the AMT
than those in low-tax states.
Mr. Chairman, on page 9 of my testimony, copies of which
are available at the table in the back, we have all original
data just for this hearing. I asked my colleagues back at the
Center for Data Analysis to go through their data bases and to
determine the number of AMT taxpayers who have a small business
in their tax form, and they found, for 2005, 1.9 million
taxpayers are also small business operators and filing their
taxes through the 1040.
As you know, the current law has an increased exemption
amount which expires at the end of this year, and so how much
more AMT filers will there be in the small business community?
That number will jump from 1.9 million to 6.4 million in just
one year alone. If Congress does nothing to extend the current
exemption levels between now and the end of the year, we will
have a threefold increase in small businesses covered by the
AMT.
So, in conclusion, like my colleagues who made a very good
case for the permanent repeal of the estate tax or for
repealing the estate tax in such a way as to fix the basis
problems that Paula was talking about, I would make the case,
or, at least, start the case, that we should repeal the AMT for
purposes of fairness in the tax code, to get back to the
original intention, at least, and also for economic efficiency.
You cannot have that big of an increase in small business
people who are covered by the AMT and expect the economy to
continue to produce the kinds of good jobs and strong growth
that it has been producing in the last two years. Thank you.
[Mr. Beach's statement may be found in the appendix.]
Mr. Bradley. Thank you very much, Mr. Beach.
Congresswoman McDonald, because you said you have to attend
another hearing,--
Ms. Millender-McDonald. Thank you so much, Mr. Chairman. It
seems like if it is not one end of the spectrum, it is another,
but thank you all so much for your testimony.
Mr. Pitrone, I think it is, you stated that if we are
interested in small businesses, then we should understand, and
I am paraphrasing you, the anguish that small businesses have
in terms of the estate tax and AMT, and, I mean, we certainly
do sympathize with you, and we are certainly for small
businesses, so I want to make that position first. But I do
want to go back to what Ms. Calimafde said about the step-up in
basis and that being a disposition or an imposition for small
businesses as opposed to the exemption level.
How do you disagree with what she is saying, when she has
so eloquently spoken to that and, I am sure, has the data to
support that, Mr. Pitrone? Is it Pitrone?
Mr. Pitrone. Yes. Pitrone is correct. Thank you.
You are asking me why I would support the elimination of
the death tax?
Ms. Millender-McDonald. What I am saying is that Ms.
Calimafde said that, of the years that she has had the
experience of working with taxes, that she does not think the
step-up in basis and the estate tax should be repealed, that
the step-up in basis should be reserved, and she would much
rather see exemption levels being dealt with. Do you not agree
with what she is saying, or if you disagree, why is that?
Mr. Pitrone. Okay. I do not know that I disagree. I have to
be frank. Before I sat down next to her and started talking to
her before the panel began, I had not given it a whole lot of
thought. I had done some research on the topic that she is
discussing. I think that a lot of what she is saying is valid
and the small business community has focused primarily on the
elimination, and, as you know, especially from the testimony
yesterday and the debate, the American people do not like the
idea of having to pay a tax just because someone died, whereas
the capital gains tax, which is what she is talking about, does
not occur because someone died; it occurs because somebody sold
something.
Frankly, I am not crazy about any taxes, but I am really
not prepared to give you an answer, although--
Ms. Millender-McDonald. That is all right. I do understand
that, and I am sorry that I put you in that imposition, but
what about the gentleman next to you? Is it Vukelic?
Mr. Vukelic. Vukelic, yes.
Ms. Millender-McDonald. Yes, Vukelic. What are your
thoughts on what Ms. Calimafde said?
Mr. Vukelic. In just listening to her, like Mr. Pitrone, I
heard her talk about it for the first time, and that, to me,
sounds like more of a compromise. Maybe she was talking more of
a compromise. I do not know. For me, I am for a permanent
repeal.
Ms. Millender-McDonald. I see. If we had permanent repeal
of that, as I look at the budgetary cost of that, it would be
in the neighborhood of $290 billion that the budget will be
hit, and as we move into years of this repeal and interest
payments on the debt, we are talking about nearly a $1 trillion
budget hit. We are already at $450 billion as a deficit. What
do you gentlemen propose that we do, as members of Congress who
have to balance your budget? Where do we get that money when we
have been hit like that with a repeal of those taxes?
Mr. Pitrone. Well, you know, the numbers that you are
discussing have been in the Washington Post. Over the week,
they have run a series of articles. I think the numbers come
from the Urban Tax Foundation.
Ms. Millender-McDonald. It does not say that, sir, but I do
know that our own deficit does raise the issue because--
Mr. Pitrone. I understand. I understand.
Ms. Millender-McDonald. Yes.
Mr. Pitrone. Well, first of all, what exactly the numbers
are going to be is highly speculative. For instance, I hear
someone talking about if we repeal the estate tax, and Bill
Gates, Warren Buffett, and Larry Ellison happen to be on a
plane the next day, and it crashed, the government would have
lost several billion dollars.
Ms. Millender-McDonald. Let me just say this. I am saying,
what do we do, as members of Congress, to backfill this money,
irrespective of whether it is whatever or whatever?
Mr. Pitrone. It works out to 2 percent a year. It is 2
percent a year. The trillion-dollar number over the next 15
years is 2 percent of the annual budget a year.
Ms. Millender-McDonald. We are still talking about a
deficit.
Mr. Pitrone. I understand, but--
Ms. Millender-McDonald. So where do we get the money if we
should happen to repeal all of these on a permanent basis, and
that is only one tax?
Mr. Pitrone. You can make the case that economic growth, as
a result of eliminating the estate tax and not forcing small
businesses to spend huge amounts of money on planning and
insurance that they otherwise would not need, would raise
growth to the point--it is only 2 percent.
Ms. Millender-McDonald. That is certainly not a valid
assessment of that, Mr. Pitrone.
Ms. Calimafde, what do you think, as we grapple with this?
And you have said, and I certainly appreciate your assessment
of this, what can one do when we are faced with this large
deficit, and we are talking about a repeal permanently on these
taxes?
Ms. Calimafde. Well, I have thought about this a lot, and
years ago I was for repeal, and I was for it because, at the
time, it seemed that too many people who worked hard all of
their lives were losing businesses and farms, and then the more
I looked at it,--
Ms. Millender-McDonald. And we all regret that.
Ms. Calimafde. Right.
Ms. Millender-McDonald. That is right.
Ms. Calimafde. But the more you look at the numbers, they
are not nearly what they seem to be, and the more I looked at
the repeal bill, and I realized it was really hurting small
businesses, we, as a group, had to just change our position.
And I do think that, for instance, if NSBA looks at this issue
carefully, they are going to realize more of their members get
hurt by repeal than if they keep it at the $3.5 million
exemption, and I would hope that that amount would increase.
I do think there are some numbers out from the Center of
Budget and Public Policy Priorities, I believe, is the group,
that say that if you increase the exemption, even, like, to the
$10 million level, which is $10 million per person, and if you
have got a married couple, that means $20 million of assets
that is going to the estate tax free, if you keep the estate
tax rate at a 45-percent level, which, by the way, the
effective rate is usually around 18 percent, even though it
says 45 percent, because of deductions and charitable
contributions, I think you retain quite a bit of the revenue
from the estate tax.
Saying that in another way, what that means is there are
some very, very high-income taxpayers out there,--they are the
ones who are generating that percentage of the revenue--and
then you have this huge group of small businesses, between 1
million to 3.5 million, that are also putting a lot of revenue
into the estate tax. So that is why I am saying, if we get them
out of the system, we still have revenue for the folks who are
very, very high-income taxpayers. That would be my approach.
Ms. Millender-McDonald. And would you agree that even with
the repeal of the estate tax, that there will continue to be
some complexities associated with the system that provides for
the stepped-up-basis regime?
Ms. Calimafde. From a probate viewpoint, it is going to be
terrible because the repeal part sounds good, and actually, Mr.
Pitrone mentioned, well, it will be a capital gains tax. It is
not always a capital gains tax; it can also be a regular income
tax on assets that small business could be hit with. But if you
cannot prove your basis, your basis is zero, so, to me, it is
totally unworkable, and I would say you either have to go with
the exemption at a higher amount so that small business is
really taken out, or if you are going to go with a repeal,
somehow you have got to step up the basis to a minimum of 3.5 a
person so, at least, they are as good as they were in 2009.
And, frankly, as I said, years ago they tried to--not ``they,''
Congress--tried to appeal the step-up in basis--
Ms. Millender-McDonald. We are ``they.''
Ms. Calimafde. I know. I did not want to make you feel
badly.
Ms. Millender-McDonald. We feel badly all the time.
Ms. Calimafde. No. You all are doing a very good job. But
the step-up in basis, the reason why it never got repealed is
that it was unworkable. So here we are going to 2010 with a
bill that, I think, is really unworkable.
Ms. Millender-McDonald. I thank you so much.
Mr. Chairman, just one for Mr. Beach.
Mr. Beach, you might have some legitimacy to some of your
points on AMT because while it was initially for those that
were wealthy, it has kind of impacted a lower level of persons
who are making $50,000.
Mr. Beach. You are absolutely right about that.
Ms. Millender-McDonald. And so it is a possibility we need
to look at a balanced approach here, and I would love to maybe
sit with you about some balance to this as opposed to just
terminating it altogether so, at least, we come halfway with
what you have said with the AMT.
Mr. Beach. Well, if I may just comment on that, if you will
permit me, I think the balanced approach has a name, and it is
called ``tax reform.'' The AMT was put in place as a plug in
the tax system, and, at the time, it was an appropriate plug.
Many people were upset about those 155 people. It was in the
Newsweek magazine, as you may know from looking at the
clippings of that time period. But now it reaches every income
level except the bottom 10 percent of the income distribution,
and the more the Congress does will well-intended, social
policies, the more difficult it becomes.
So I am very happy to hear you say that you are interested
in that, and I would be delighted to sit down with you at any
time.
Ms. Millender-McDonald. I would love to do that.
Mr. Chairman, I appreciate your allowing me to go first and
to raise the questions. And I would like to perhaps look at a
study, request a study to be done, on this to ensure that we
are, at least, getting information that is recent to look at
the stepped-up basis, along with the estate tax repealed
permanently, because we do want to do the right thing for small
businesses,--you are the engine that drives the country--but we
also want to make sure that that deficit does not continue to
grow so exponentially that we are just off the chart and trying
to, at least, take care of the people's business. So I thank
you so much.
Mr. Bradley. Thank you very much, Congresswoman Millender-
McDonald, and perhaps our respective staffs can talk about that
information issue.
I would like to get back to one of the points that my
colleague raised and Mr. Pitrone answered in terms of the
ability of the repeal of the estate tax to make it easier for
small businesses to survive and not have the financial impact
that a static look at where revenue loss would be, and that was
estimated to be nearly $300 billion would be, and if you had
some further information or perhaps, Heritage,--I see nodding--
that you might have some further information that would
diminish that tax loss by virtue of the tax repeal. And we know
that, for instance, as the capital gains tax has been less,
that it actually increased revenues because people were not
holding onto investments that would have been more productive
elsewhere, and perhaps this is a similar situation, so if you
would like to comment on that.
Mr. Beach. If I could be permitted to do so, there is a
body of economic literature--it exists in the academic
literature and the public policy literature--that, I think,
correctly analyzes the estate tax from a tax standpoint. It is
a tax on capital. It increases the cost of capital. It
increases the cost of capital to all borrowers of that capital,
and, as a consequence, when you reduce the tax wedge or the tax
on the capital that reduces the price of capital, when you
reduce the price of capital, you make it more available for
investment.
And so we do see, in the modeling on this, an increase in
economic activity, an increase in employment in the
neighborhood of about 250,000 jobs per year, an increase in
national output, and also, as a consequence of all of that sort
of thing, an increase in the revenue reflows back to the
federal government. Just as an exercise, if you had about a $25
billion static reduction in the estate tax revenue in one year,
in the first year, and all of the economics that I have just
described to you come true, about a third of that would come
back to you in additional revenues in that second year, and
that grows over the course of time.
The estate tax repeal never totally pays for itself, but it
is not the complete static losses that have been described here
today. In fact, if we can address the basis issues that Paula
has, quite correctly, raised, and we can get to a situation
where we have, one, repeal; and, two, we are taxing the
voluntary transfer of assets outside the family business or a
family situation, either under cap gains or income taxes, then
the work that others have done on this indicates that the
reflows are substantial because now what you are doing is you
are augmenting the natural reflows coming from repeal of the
estate tax with additional cap gains revenues and income tax
revenues.
I have not seen a simulation yet, over a 10-year period, in
which all of the revenues come back, but they are getting very
close to coming back. So if we can reduce the question to how
do we do the basis, I think there are many different answers to
that. Again, it is voluntary. We do not hear a basis question,
carry-over, or step-up until there is a voluntary transfer
outside of this family business. We could exempt very old
property or have a fair-market-value test for very old
property.
Back in the seventies, we had some real questions about
basis because we were dealing with a lot of property that
predated any tax law at all, back in the 1910's and into the
1890's. Now, most property in use has come into use or has
transferred into somebody's hands since modern taxation
policies have been put in place at this date in federal level,
so record keeping is much better than it was, even 30 years
ago.
And I think there is a good discussion which can be had
either in the House, probably in the Senate, and, hopefully,
and compromise on this whole basis question. We should not let
that stand in the way of what is the right move here, and that
is a complete and permanent repeal of estate taxes.
Mr. Bradley. Thank you very much.
I would like to ask one quick question about the
alternative minimum tax. I have been a co-sponsor of Mr.
English's bill to permanently repeal AMT, but, as you know,
given the budget circumstances that we have, it is just very
unlikely that that is going to happen.
Yesterday, I introduced legislation that will extend will
extend the expiring provisions that up the income limits, and
it makes indexing for inflation permanent. Is this, in your
view, ladies and gentlemen, a reasonable solution, at least for
this year, as we try to address, I think, what you spoke about
in terms of tax reform?
Mr. Beach. Well, if I could just start very quickly, yes,
that is the necessary step that Congress must take. The
exemption levels need to be extended so that the President's
Advisory Panel on Tax Reform, the president himself, his staff,
and the relevant members of the Committees here, tax-writing
Committees in the Congress, can do the work of changing the
entire tax system to something that is simpler, fairer, and
more pro-growth.
You would complicate the matters extremely by letting key
provisions, AMT being one, to expire and thus to produce a
different baseline from which all of the tax reform measures
would be taken. So I strongly recommend that as a good move,
and I can hear members on both sides saying, yes, that is
something that they could support.
Mr. Bradley. Anyone else on that?
Ms. Calimafde. I think it is a great first step because,
you know, AMT, when you really look at it, it is a second-
alternative system sitting on top of the regular system, and
what it does in the small business arena is the owners are not
able to take advantage of deductions, so it is a really unfair
tax.
Mr. Bradley. And when one looks at the AMT, and this is my
last question on AMT, the cost of compliance is just something
that seems excessive. Have there been any studies that have
been done that you are aware of that would indicate what the
cost of alternative compliance is?
Mr. Beach. Remember, Mr. Chairman, that the alternative
minimum tax exists at the individual level and at the corporate
level; there is a corporate AMT. Most of the tax analysts--
Leonard E. Burman is the most, I guess you might say,
accomplished of those here in town--have argued that the
compliance of the AMT is almost as great as the compliance cost
with the estate tax because of the record keeping required, the
accountants and lawyers required to advise, the kinds of
penalties associated with miscalculation, late-filing fees, on
and on and on.
So I would guess, conservatively speaking, that it is
probably close to 30 cents on the dollar. We have generally
kind of settled on 31 cents on the dollar as the compliance
cost for all federal estate taxes, and that is gift, generation
skipping, and the estate tax. If AMT is close, I would say 25
to 30 cents is not a bad estimate.
Mr. Bradley. Mr. Beach, if you could leave us with that
study, or get it to us, that you talked about in your first
question, that would be great.
Mr. Beach. It is a footnote in my testimony, sir.
Mr. Bradley. Okay. Thank you.
Lastly, and we are in the middle of the vote on the
bankruptcy bill, and I do not want to miss that vote, and I
know it was not so much the subject of today's hearings, but
perhaps you would like to touch on some of the provisions in
the 2001 and, in particular, the 2003 tax cuts and their impact
on small businesses. Were they positive? Were they negative?
What is your view on some of those expensing provisions, the
drop in the income tax rates, and how they impact small
business?
Mr. Beach. Let me just reference a couple of things. We
have written on this on several occasions, the Heritage
Foundation has. Starting with 2001, the best thing in that
legislation was the reduction in the rates, sir, and those rate
reductions have accounted for a significant proportion of the
growth since 2001 in the economy. The combination of the rate
reduction in 2001 with the very pro-growth elements of the 2003
bill, i.e., dividend rate reduction, the way you handle cap
gains, but particularly the accelerated depreciation
provisions; the provisions that stimulated investment, by
themselves, account for three-fourths of the employment gain
since that time, probably as much as half of the overall output
gain.
We had a very severe contraction in our stock markets, we
had a major contraction in world trade flows and capital flows
following September 11th, and we had what is almost an
unprecedented blow to the confidence that investors have in
corporate America--all three of those things combined together,
as the president has said many, many times, and yet we had one
of the shallowest recessions in U.S. history. And now we have
had nearly 3 million jobs growth since the 2003 act. I think
that those are the provisions that affect everybody, but they
really help small businesses.
Mr. Bradley. I am very sorry. I have one more question, and
perhaps each of you would like to touch on this. There has been
an awful lot of discussion about a compromise in the Senate on
the estate tax. What is a realistic compromise that achieves
the goals that, I think, all of you have expressed on the
estate tax and how it impacts small businesses and the economy?
What would be a reasonable compromise, or perhaps there is not
one?
Mr. Vukelic. A reasonable compromise? I believe the
exemption rate would have to be more than what they proposed
yesterday in the Pomeroy Amendment. I believe it had to be at
least $10 million, and the rate would be a capital gains rate.
That is what we would be for.
Ms. Calimafde. I would like to add to that that step-up
basis should be preserved, and the gift and estate tax system
should be reunified, and I particularly think if the rates are
going down, there is a way that Congress could target that to
small business interests only, so if somebody went above the
exemption level, and it is because of a family-held business or
a closely held business, those interests could be taxed at,
say, a 15-percent rate.
Once again, our view is protecting small business here, so
that is why I think a compromise is very doable.
Mr. Pitrone. Yes. I would go with the $10 million per
individual, $20 million for husband and wife.
Mr. Bradley. At a cap gains rate?
Mr. Pitrone. At a cap gains rate.
Ms. Ross. Considering the personal experience that my
family and I have had, we are in the mindset of a permanent
repeal of the death tax due to what we are still having to pay
and how that compromises us extending and expanding our
operations as well as creating jobs.
Mr. Bradley. I would agree with you. Unfortunately, in
order to get something through, there may have to be a
compromise.
Mr. Zittel. I am sure there probably will have to be a
compromise, but agriculture's view has been repeal of the death
tax, and I think that is where we would stand, but certainly
when we are talking the $10 million per person, it would go a
long ways in meeting the needs of agriculture.
Mr. Beach. I honestly do not think you need to compromise,
but if you do, then make it a temporary measure. We are in
favor of a unified capital tax--put everything at the same
rate, under the same definition of taxing capital, throw
everything into the pie--because we think, once we are there,
we can then talk about double taxation much more reasonably,
and we can move for fundamental tax reform.
The estate tax is likely on its last legs because the
American people do not view it as an economic or fiscal issue;
they view it as a moral issue, and they think it is the wrong
thing to do, to talk to the tax collector at death. So if there
is a compromise, it must necessarily be a temporary one because
I do not think that the voters are going to say, ``Ah, you
fixed it at last.''
Mr. Bradley. I would like to thank all of you who have come
this afternoon. It has been very informative. We appreciate it
very much, and please stay in touch with us on these critical
issues.
[Whereupon, at 3:17 p.m., the Subcommittee was adjourned.]
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