[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
      WHAT WOULD REPEALING THE DEATH TAX MEAN FOR SMALL BUSINESS?

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                       TAX, FINANCE, AND EXPORTS

                                  and

                   SUBCOMMITTEE ON RURAL ENTERPRISES,
                      BUSINESS OPPORTUNITIES, AND
                    SPECIAL SMALL BUSINESS PROBLEMS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                      WASHINGTON, DC, MAY 13, 1999

                               __________

                           Serial No. 106-12

                               __________

         Printed for the use of the Committee on Small Business



                   U.S GOVERNMENT PRINTING OFFICE
59-745                    WASHINGTON : 1999



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                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN, 
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
MICHAEL P. FORBES, New York          DENNIS MOORE, Kansas
JOHN E. SWEENEY, New York            STEPHANIE TUBBS JONES, Ohio
PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
JIM DeMINT, South Carolina           DAVID D. PHELPS, Illinois
EDWARD PEASE, Indiana                GRACE F. NAPOLITANO, California
JOHN THUNE, South Dakota             BRIAN BAIRD, Washington
MARY BONO, California                JANICE SCHAKOWSKY, Illinois
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director
                                 ------                                

               Subcommittee on Tax, Finance, and Exports

                 DONALD A. MANZULLO, Illinois, Chairman
STEVEN J. CHABOT, Ohio               CAROLYN McCARTHY, New York
PHIL ENGLISH, Pennsylvania           RUBEN HINOJOSA, Texas
PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
                                     GRACE F. NAPOLITANO, California
           Philip Eskeland, Senior Professional Staff Member
                                 ------                                

Subcommittee on Rural Enterprises, Business Opportunities, and Special 
                        Small Business Problems

                FRANK A. LoBIONDO, New Jersey, Chairman
RICK HILL, Montana                   DONNA M. CHRISTIAN-CHRISTENSEN, 
JIM DeMINT, South Carolina               Virgin Islands
JOHN THUNE, South Dakota             DAVID D. PHELPS, Illinois
JOHN E. SWEENEY, New York            TOM UDALL, New Mexico
                                     BRIAN BAIRD, Washington


                            C O N T E N T S



                              ----------                              
                                                                   Page
Hearing held on May 13, 1999.....................................     1

                               WITNESSES

Dunn, Jennifer, a Member in Congress from the State of Washington     2
Tanner, John, a Member in Congress from the State of Tennessee...     4
Robbins, Aldona, Senior Research Fellow, Institute for Policy 
  Innovation, Arlington, VA......................................    19
Platt, H. Jay, President, Apache County Farm Bureau, Saint Johns, 
  Arizona........................................................    20
Ruske, Roger, Owner, Cumberland Nurseries, Millville, New Jersey.    22
O'Shea, Kevin, Chief Financial Officer, Shamrock Electric 
  Company, Elk Grove, Illinois...................................    24
Kaplan, Arlene, Heart-to-Heart Home Health Care, Great Neck, New 
  York...........................................................    25
Breitstone, Stephen M., Estate Planning Attorney, Meltzer, Lippe, 
  Goldstein & Schlissel, Mineola, New York.......................    27

                                APPENDIX

Opening statements:
    Manzullo, Hon. Donald........................................    34
    LoBiondo, Hon. Frank.........................................    36
    McCarthy, Hon. Carolyn.......................................    38
    Sweeney, Hon. John E.........................................    40
Prepared statements:
    Dunn, Rep. Jennifer..........................................    43
    Tanner, Rep. John............................................    45
    Robbins, Aldona..............................................    49
    Platt, H. Jay................................................    54
    Ruske, Roger.................................................    59
    O'Shea, Kevin................................................    61
    Kaplan, Arlene...............................................    71
    Breitstone, Stephen M........................................    77
Additional material:
    Study by Gary Robbins & Aldona Robbins, Institute for Policy 
      Innovation: ``The Case for Burying the Estate Tax''........    81
    Statement of Representative Jim Saxton, Chairman, Joint 
      Economic Committee.........................................   108
    Study by the Joint Economic Committee: ``The Economics of The 
      Estate Tax''...............................................   112
    Statement of The Associated General Contractors of America...   158
    Statement of The Distribution & LTL Carriers Association.....   162
    Statement of The Mechanical Electrical Sheet Metal Alliance..   167
    Statement of Michael Coyne, National Federation of 
      Independent Business.......................................   169
    Statement of Thomas K. Zaucha, President & CEO, National 
      Grocers Association........................................   172


      WHAT WOULD REPEALING THE DEATH TAX MEAN FOR SMALL BUSINESS?

                              ----------                              


                         THURSDAY, MAY 13, 1999

        House of Representatives, Subcommittee on Tax, 
            Finance, and Exports and Subcommittee on Rural 
            Enterprises, Business Opportunities, and 
            Special Small Business Problems, Committee on 
            Small Business,
                                                    Washington, DC.
    The Subcommittees met, pursuant to notice, at 10:05 a.m., 
in room 311, Cannon House Office Building, Hon. Don Manzullo 
[chairman of the Subcommittee on Tax, Finance, and Exports] 
presiding.
     Chairman Manzullo [presiding]. I call the Subcommittee to 
order.
    Today, we start the inaugural hearing of the Tax 
Subcommittee on the topic of the estate tax, or as I call it 
the ``death tax.'' It gives me great pleasure to co-Chair this 
hearing with my good friend from New Jersey, Frank LoBiondo, 
who was awarded the chairmanship of the Rural Enterprises 
Subcommittee earlier this year.
    I hope I am not stealing the thunder from my colleagues, 
but there is a saying that there are only two certainties in 
life--death and taxes. This issue cruelly combines them both.
    People should not have to worry about the tax collector 
standing outside the funeral home door waiting to collect the 
death tax. An estate is built up after a lifetime of savings 
that has already been taxed once.
    Plus, with the growing stock market and burgeoning 
retirement plans, more and more middle-class people will soon 
be surprised to learn that they are part of the ``super-rich.'' 
Their heirs will have to pay substantial death taxes at rates 
as high as 55 percent.
    Today, we are focusing on the devastating impact of the 
death taxes on small businesses. I am going to waive the rest 
of this opening statement, and I would ask the rest of the 
members to do also out of deference to the fact that we have 
two members who are here on the first panel, and then, perhaps, 
if anybody wants to give an opening statement, they can do it 
prior to the starting of the second panel. I am sure that is 
okay with the members here.
    And the testimony from the first member will be the 
Honorable Jennifer Dunn. Jennifer.

 STATEMENT OF HON. JENNIFER DUNN, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF WASHINGTON

    Ms. Dunn. Thank you very much, Chairman Manzullo and 
Chairman LoBiondo. Thanks for holding this hearing to discuss a 
very popular initiative, the repeal of the death tax. I want to 
especially thank my colleague on the Ways and Means Committee, 
Mr. Tanner, for pushing this repeal as strongly as I have and 
for being my colleague on H.R. 8, which is the bipartisan death 
tax repeal bill.
    Over 170 of our House colleagues have joined us on H.R. 8, 
the Death Tax Elimination Act, which would phase out the death 
tax starting in the year 2000 at five points each year, and 
that starts at 55 percent, but if somebody's paying the lower 
rate of 37 percent, we will also----
    Chairman Manzullo. Jennifer, excuse me a second. I think we 
have a vote. No, it is not a vote. It is only a notification of 
a caucus meeting.
     Could you put the mike closer to your mouth, Jennifer? 
Thank you.
     Ms. Dunn. You bet. The Death Tax Elimination Act, which is 
H.R. 8, a bipartisan bill, phases out the death tax by five 
percentage points a year over the next year. The goal, of 
course, is to phase this tax out completely, and, therefore, 
over 10 years it is only eliminated.
    It has been said that only with our Government are you 
given a certificate at birth, a license at marriage, and a bill 
at death. One of the most compelling aspects of the American 
dream is to make life better for our children and our loved 
ones, and yet the current treatment of taxes on a person's life 
savings is so onerous that when one dies, the children are 
often forced to turn over half of their inheritance to the 
Federal Government.
    Even worse, not only does this take place at an agonizing 
time in the life of the family, but they also have to watch 
their loved one's legacy be snatched up by an entity that is 
not known for its great wisdom for spending money, and that is 
the Federal Government. We believe this is wrong. We believe 
that you should not dishonor the hard work of those who have 
passed on.
    According to a recent study by the Life Insurance Marketing 
Research Association, less than half of all family businesses 
survive the death of the founder, and only about 5 percent of 
these businesses survive into the third generation. This is 
terrible public policy particularly in light of the minimal 
amount of the money the death tax brings into the Federal 
Government--just slightly over 1 percent of revenues and 
slightly over $23 billion, according to last year's figures.
    In addition, a recent joint Economic Committee study 
reported that for every dollar the death tax brings in, another 
dollar is spent by the private sector simply to comply with it, 
so the total impact of dollars that are taken out of the 
private sector that could be going to additional employment or 
purchase of equipment or property in the private sector, the 
total amount is $46 billion a year that come out of the Federal 
Government. You would think that a basic principle of any 
revenue raiser, i.e. tax, would be to raise revenues, and yet 
we are losing exactly 100 percent of what we bring in through 
compliance alone.
    By confiscating between 37 and 55 percent of a decedent's 
estate, the Government punishes long-life habits of savings; it 
discourages entrepreneurship and capital formation, and it 
penalizes families. This is especially true, because these 
dollars are often the same dollars that have been taxed three, 
four, five times before as they go through the hands of the 
owner--through income tax, through capital gains, through tax 
on dividends, and in many other ways.
    Under today's tax system--and this is really important to 
remember, because I am seeing it happen in my district--it is 
easier and cheaper to sell the business or the family farm at 
20 percent capital gains than to retain it, built it up, invest 
in it, and try to pass it on to the family after death. You 
have to remember that the minimal death tax that is paid starts 
at 37 percent. This is not a tax that starts at zero, and so 
that is vitally important to remember. It is huge; far more 
than capital gains.
    Of course, Congress has attempted to ease the burden of the 
death tax by increasing the personal exemption to adjust for 
the inflation of assets. Unfortunately, this will continue to 
be too little help as home values, the increasing popularity of 
defined contribution plans, and the trend toward more small 
business entrepreneurship, particularly by women, drives 
middle-class estates above the exemption.
    Congress also tried very hard in 1997 to help small 
businesses by creating an additional death tax exemption for 
family-owned businesses. Here, too, however, is where a good 
idea went wrong. It became impractical in the real world. The 
family-owned business exemption, passed in the Taxpayer Relief 
Act of 1997, creates 14 new definitions in which a business 
must comply before it is eligible. So, it was a good idea at 
the time, but the exemption has proven to be nothing more than 
a boondoggle for attorneys and for estate tax planners. As a 
result, only about 3 percent of family-owned businesses and 
farms can qualify for that 1997 provision. I recently asked an 
estate tax attorney who advises 200 family-owned businesses, 
how many of these businesses are eligible for this exemption, 
and his answer ``Out of 200, 10; 10 were eligible.''
    No amount of artful drafting will provide relief to only 
those Congress deems worthy. We can't continue to congratulate 
ourselves for legislative triumphs that just don't benefit hard 
working Americans. Family relationships in the private sector 
are much too complex for us--those of us who want to do this in 
the Congress--to duplicate or to reflect through Federal tax 
law. So, now we believe it is time to be bold.
    The Death Tax Elimination Act is the right answer at the 
right time. The productivity of enterprising Americans and a 
frugal Congress intent on reducing wasteful spending has helped 
to produce the first budget in the surplus--or surplus budget 
in a generation. So, what will the Congress' response be to 
this surplus? Will it spend money on dozens of worthy programs 
that could no doubt be created to help worthy people? Or it 
will cobble together a complicated, voluminous tax initiative 
that aims to help everyone and, therefore, helps no one?
    I think that we have to provide the American people with 
vision, and it must center on two main principles: the non-
Social Security surplus belongs to the American people, and it 
ought to be returned to them. We must honor the institutions on 
which strong communities are built. I can think of no better 
initiative that so well defines these two principles than 
repeal of the death tax.
    The ingredients to a successful family or business--thrift, 
diligence, suspension of gratification, savings--must, again, 
be rewarded and not taxed, and I hope that you will all join 
Mr. Tanner and me in this worthy fight.
    I want to thank you once again for providing this forum, 
and we look forward to your questions.
    [Ms. Dunn's statement may be found in the appendix.]
    Chairman Manzullo. Thank you, Congresswoman Dunn.
    Our next witness is Congressman Tanner.

STATEMENT OF HON. JOHN S. TANNER, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF TENNESSEE

    Mr. Tanner. Thank you, Mr. Chairman, Ms. McCarthy. I, too, 
want to thank Ms. Dunn. I came to this issue really in an 
anecdotal way. My district is, in large measure, agricultural 
in its geographical makeup, and I had some friends who were 
farming--a father and his son. His father died, and the son had 
to auction the equipment that belonged he and his father, which 
they used in their farming operation, in order to pay the 
estate taxes. He now is no longer in farming, because he had to 
buy the equipment back, and the added debt made his farming 
operation no longer economically viable.
    Now, this has been traditionally, I think, couched in a 
rich versus poor arena, and I did some further research, 
because I think that President Franklin Roosevelt's words 
were--had great meaning when he said the estate tax was an 
appropriate means of preventing the ``perpetuation of great and 
undesirable concentrations of control in a relatively few 
individuals over the employment and welfare of many, many 
others.'' Now, I have no quarrel with the statement, but when 
one looks at the way the estate tax is administered and is 
affecting small businesses and family farms in this country, 
whether it be a car dealership or a funeral home or something 
where one has a taxable estate, but one has no money, and, 
therefore, when the patriarch or matriarch dies, there is a 
sometimes several hundred thousand dollar tax bill with no cash 
to pay it, in which case, the funeral home, car dealership, or 
the small family farmer has to sell the assets that actually 
enable them and the family to generate a yearly income, not to 
mention, I believe, a societal value is embedded in the 
intergenerational transfer of assets particularly small farms 
and businesses from one generation to the other.
    But, anyway, 70 percent of all the taxable estates in this 
country are $5 million or less. Now, $5 million is a lot of 
money, but if one, as I said earlier, has assets of $3 million, 
all of which are tied up in the generation of yearly income, a 
$400,000 or $500,000 tax bill at the death of the patriarch or 
matriarch makes the business 100 percent tax in the case where 
they have to sell the assets.
     In President Franklin Roosevelt's study, you might be 
interested to know there was an estate exemption, and in 
today's dollars it was $9 million. We are struggling to get 
from $600,000, which we went to a couple years ago, up to, in 
some cases, $1.3 million if the estate qualifies, and there is 
a lot of qualifiers to that higher number, and so I think what 
we have done over time is really begin to get away from the 
principle espoused by President Roosevelt when--as I said, I 
agree with the vast transfer of wealth in the hands of a few 
over to control the lives of the many, and I would not have any 
problem with a $9 million exemption as it was in his day.
     Now, I don't know whether or not that is feasible, but the 
main point I wanted to make this morning was that this is no 
longer rich versus poor with 70 percent of the taxable estates 
at $5 million or less--and, by the way, they pay 50 percent of 
the entire estate tax collected. So, the estates of $50 million 
to $100 million to $200 million, even under our present system, 
it seems to me, are not--if one believes in an estate tax of 
some kind at some level, as a matter of public policy--it is 
not accomplishing what it was intended to do.
     And, so I think that any consideration we could give to 
those people engaged in farming, small business, and even 
others as it relates to this tax, so that we do not force, 
basically, people to sell the assets that their father, 
grandfather, mother, grandmother built up over the lifetime of 
hard work--interestingly enough, you might know that some of 
the people who agree with this and who are as supportive of 
this as anyone are the so-called ``greens,'' the 
environmentalists, because they have seen open spaces 
particularly around the urban areas of the country having to be 
sold at the death of the patriarch or matriarch, and had to be 
developed simply to pay the estate taxes. And, so when we talk 
about urban sprawl, when we talk about the quality, when we 
talk about the size of generational transfer of assets that 
creates family income yearly, all of that is intertwined in 
this issue. One would not maybe think of that at first blush, 
but it is true.
     And, so I want to thank you all again and appreciate very 
much your willingness to hear us out on this and your 
attentiveness to this issue, which I believe is something 
that--an area where we ought to change the public policy.
     Thank you.
     [Mr. Tanner's statement may be found in the appendix.]
     Chairman Manzullo. Thank you very much.
     I would like to ask a couple of questions, and then I am 
going to hand the gavel over to Mr. LoBiondo. I am also on the 
International Relations Committee, and we are having a hearing 
on the Kosovo so-called peace settlement. So I beg your 
forgiveness for leaving.
     I don't think that most Americans realize that life 
insurance proceeds are considered to be part of the taxable 
estate. The problem really arises when the last spouse dies, 
because of the unlimited marital deduction, which is relatively 
new. I think about 15 years ago, Congress tried to solve this 
problem. There used to be a huge tax upon the death of the 
first spouse, then another tax upon the death of the second 
spouse, so the family wouldn't get hit.
     In addition to your bill, there are some other bills that 
are floating around, one particular by Mr. Cox from California. 
Would you want to explain that to our forum here?
     Ms. Dunn. Yes, I would be happy to, Mr. Chairman. H.R. 8 
was designed to be a bipartisan bill to gradually--and we 
believe in a very practical way--phase out the rate of death 
tax, so that over a period of time the revenue losses would be 
gradual. For example, there is no revenue loss to the 
Government in the year 2000, which fits nicely into our plan 
not to put a whole lot of tax relief into 2000. The revenue 
loss begins in 2001 in Mr. Tanner's and my bill.
     Mr. Cox's bill is an immediate phase-out of the death tax, 
total phase-out, and I happen to be on Mr. Cox's bill, because 
that is what I would like to do, but we were looking for a 
practical way to do this, and you might be interested in 
knowing that Mr. Cox supports the Tanner-Dunn bill as I support 
the Cox bill and that our colleagues are signing up on both 
bills. So, it is just the difference between, I believe, a 
practical phase-out over 10 years versus an immediate phase-out 
of the death tax.
     Chairman Manzullo. Congressman Tanner and Congresswoman 
Dunn, is there really a net loss to the economy if you had an 
elimination of the death tax?
     Mr. Tanner. Well, of course----
     Chairman Manzullo. I am sorry, a net loss of tax revenue.
     Mr. Tanner. I think there is a fiscal note of around $200 
billion over 10 years. I disagree with that, but, nonetheless, 
that is what I have been told. There would be very little in 
the first two or three years. The estate tax now only collects 
about $23 billion a year for the Federal Government, and so if 
you phase it out over 10 years, you can see the small amount 
that we believe could be absorbed by the growth of the economy 
if we chose to go that route.
     Frankly, the monies collected--I have seen estimates--
correct me, Jennifer--but 63 to 67 cents of every dollar 
collected has to be expended by the Government to collect it.
     Chairman Manzullo. I know groups such as 60-Plus have put 
out different studies, anywhere from 50 to 65 percent. So, in 
your opinion, it is $23 billion each year less the 65 percent 
in Government expenditures----
     Mr. Tanner. It wouldn't be $23 billion the first year; it 
would only be $23 billion the 11th year and our 10th year if, 
under our plan to phase it down, the first few years would be 
virtually nothing. If one believes, as we do, that it is a 
grossly unfair tax to begin with, at least in terms of how it 
affects those estates of $5 million or less, and if one further 
believes that it is an extremely arduous cumbersome tax to 
collect, and if one believes that the money that goes into--the 
time, effort, and money that goes into estate planning to avoid 
this tax were put into job creation and the building of the 
business or the family farm because you did not have to fear 
having to sell the assets at the death of the founder or the 
patriarch, then, it seems to me, one could make the argument, 
it may not cost anything at all.
     Chairman Manzullo. I appreciate that.
     Ms. Dunn. And let me just add one thing: you have got $23 
billion coming in in 1998; you have got $23 billion 
approximately spent just to comply with that tax in 1998; you 
have got another 65 cents out of every dollar, as Mr. Tanner 
said, being spent by the Federal Government to pull in this 
tax; that is a huge problem.
     And I just want to give you some perspective. This death 
tax has been around through the history of our Nation but in 
very reserved ways. In the 1700's, our Government implemented 
the first death tax, and it was used specifically to fund a 
war. In the 1800's, twice, it was used--it was brought to fund 
wars, and after a period of no more than six years in all three 
of those cases, the death tax was ended, because the Government 
was smart enough to realize that this was not fair; it was not 
right, and it was not bringing in enough income to do anything 
major in our Government's budget. But, in 1916, when the death 
tax came in for the fourth time, the Government decided that 
hand in the pocket of the taxpayer was a pretty good deal, and 
it was never phased out. So, there is no reason this should 
have lasted as long as it has.
    We understand the build-up of Government and the 
inclination to bring in every dollar, but the scoring that John 
and I worked with is not dynamic scoring. It does not take 
behavior into consideration and the creation of jobs that 
should be done with this huge private sector donation that the 
$46 billion, through compliance and dollars every year, is 
going right out and mostly out of the businesses, the pockets 
of the small businesses.
     Chairman Manzullo. I appreciate. Mr. LoBiondo, if you 
wouldn't mind chairing the meeting. I have to run to the other 
meeting, and you can work with other members on getting their 
questions too.
     Chairman LoBiondo. I will be glad to, Mr. Chairman. Thank 
you.
     Chairman Manzullo. Thank you.
     Chairman LoBiondo [presiding]. Okay, I want to thank 
Chairman Manzullo for jointly hosting the meeting and to our 
two colleagues.
     I just have one question for you. Do you have any idea how 
Chairman Archer is viewing this? Has he said anything 
optimistic or--for either one?
     Ms. Dunn. Chairman Archer is a supporter of death tax 
relief. Obviously, we have to put a lot of tax relief into a 
very small amount of money over the next couple of years, 
because we choose to set aside the Social Security surplus.
     Chairman Archer, though, recently did a poll on the death 
tax, and he was most startled at the results and is looking 
very favorably at this. He asked people in the most negative 
way possible what they thought of the death tax, and the 
question was, basically, ``Even you knew billionaires might be 
getting some advantage, would you favor a repeal--a rate 
reduction repeal of the death tax? And the answer was 30 
percent of the said, ``No;'' 64 percent of the folks said they 
did favor a repeal of the death tax, and he is looking very 
seriously at this.
     I will also say, Mr. Chairman, that Chairman Archer has 
had much more interest shown by Members of the Congress--over 
170 people, our colleagues, have signed on this bill, and over 
70 national organizations have come to speak and testify and so 
forth with their interest in this bill--everybody from the Farm 
Bureau to NFIB.
     Chairman LoBiondo. Did you say 70--7-0--organizations or 
7?
     Ms. Dunn. Over 70 organizations.
     Chairman LoBiondo. Seventy; that is what I thought. Okay, 
thank you.
     Any other members have questions? Congresswoman McCarthy.
     Mrs. McCarthy. Thank you, and I appreciate your testimony.
     I come from Long Island where we have a large number of 
small businesses, and what we are seeing constantly are more 
women who have worked very hard to build up their small 
businesses. A lot these women are single; this is their only 
business, and they are raising their families, and certainly we 
are hearing the complaints that if something happened to them, 
all of their hard work would certainly go down the tubes as far 
as leaving something to their family.
     Michael Forbes who is out on the east end, which would be 
considered a rural area--although some of us that are out there 
now don't think its rural anymore--we are seeing our farmers 
leave; we are seeing them selling off now, mainly because they 
know if they die, there is not going to be anything left for 
their families to continue going with the estate taxes as it 
goes.
     So, I think that this is an issue that is extremely 
important for small businesses, our farmers, and it is 
something that we should be addressing. I happen to think it is 
totally unfair, and, obviously, hopefully, we will get it 
through this year, and I hope Congressman Archer will allow it 
to come through, because I do think it is important.
     Small business is the backbone of our country today, and--
they are--and we certainly here on this Committee will try and 
do whatever we can to help them, and I think that is important.
     I was curious, has the Joint Committee on Taxation scored 
your bill?
     Ms. Dunn. They have, and, as Mr. Tanner said, we have some 
disagreement with them, because it is not dynamic scoring, and 
it doesn't really register the impact of the dollars taken out 
of the private sector. Our bill is scored at $44 billion over 5 
years--$44 billion over 5; $198 billion over 10, and in the 
year 2001, which would be the first impact of our bill, the 
impact would be $4.1 billion. Right now, in the year 2001, we 
are expecting to have something like $11 billion available for 
tax relief. So, $4.1 billion in 2001 and gradually, of course, 
it would increase.
     Mrs. McCarthy. Has anyone actually looked at the 
difference between--all right, we are going to try and take 
away the estate tax--but has anyone looked at the other side of 
it, if these businesses continue to stay in businesses, whether 
they are farms or small businesses, on what they are paying 
into taxes, and wouldn't that almost even it off?
     Ms. Dunn. Yes.
     Mr. Tanner. That is what I tried to argue a few minutes 
ago or state, Ms. McCarthy. I see in west Tennessee the amount 
of effort that goes into the planning and so on to avoid the 
tax. I see farms being sold at the capital gains rate of 20 
percent before the death of the founder--if we could say that--
to avoid a 55 percent rate, and so I just believe that the 
scoring, although it may be technically correct from the 
standpoint of simple arithmetic, I think it fails to realize 
the realities involved in the collection of this tax.
     Ms. Dunn. And let me just add, Mrs. McCarthy, what often 
happens when the owner dies suddenly and hasn't really 
completed the turnover process and so you have got a huge death 
tax--55 percent--on the value of a small business or a small 
farm, and the young people, the children who--the loved ones 
who inherit these properties can't afford to pay that huge, 
onerous burden, because they don't want to break up the family 
farm or sell the implements. Big corporations move in; they can 
shoulder the burden. They often take over a small community 
newspaper, for example, and so there is a greater loss to the 
community, institutional loss--public service announcements 
from a newspaper, the employment by the owners of the small 
business; you can go on and on and on. Often these corporations 
close down the small operation; move them someplace else, so 
there is a true loss to the community when a small business 
closes down.
     You mentioned women starting small businesses. Right now, 
they are doing that at twice the rate of men. There is a huge 
exodus from corporate lives into entrepreneurial small 
businesses that are often owned individually by these women. 
And, so they are hit at their death when they wish to put 
everything they put their hearts and souls into developing and 
the savings and the risks they have taken in taking loans, they 
are going to sell it before they die, because 20 percent 
capital gains is less than 55 percent death tax.
     Mrs. McCarthy. One of the things that I have noticed too--
and probably Congressman Forbes will address this--I have 
gotten to know a lot of farmers out in his area. They have been 
there for a couple hundred years actually, and they have worked 
the farms really hard, but because it is a tourist area now, 
the land is worth more than they ever thought they could ever 
get. And being an environmentalist, I don't like seeing 300 
homes going up onto a farm, and nobody is even living there. 
Unfortunately, the consequences, in my opinion, is there is no 
housing out there for middle-income people anymore. If you are 
wealthy, you can buy an acre, which in some areas of South 
Hampton will go for $150,000--one acre right in the middle of a 
farm. The majority of people that actually live out there can't 
afford that, so to me it is a total injustice. We have to do 
what we can for them.
     Chairman LoBiondo. Thank you.
     Mrs. McCarthy. Thank you.
     Chairman LoBiondo. Congressman Hill.
     Mr. Hill. Thank you, Mr. Chairman.
     I want to congratulate both of you. I am a co-sponsor of 
your bill. I actually have a bill, as well, that would convert 
the estate tax to a capital gains tax, but I don't think there 
is a tax that is more unfair than is the death tax.
     In my previous life, however, I worked with a lot of small 
businesses, and I worked with them to try to help them develop 
strategies to avoid the death tax, and I think that in the 
modeling that has been used by those that are scoring this, 
they don't have a full understanding of just how much money 
gets spent on trying to avoid paying the death tax. As you 
know, you can set up charitable trusts and insurance trusts and 
generation-skipping trusts; there is all sorts of kinds of 
trusts. The problem that I experience working with these small 
businesses is that it diverted a lot of money from the 
reinvestment in their business. In fact, I think it is why a 
lot of small business owners object to the death tax is 
substantially because of that. They have to buy life insurance 
that they wouldn't ordinarily buy, which is very expensive, or 
professional fees for accountants and lawyers to set up these 
trusts.
    But, also, once these assets get allocated to these trusts 
or the mechanism gets put in place, it often creates a real 
rigid environment for them to manage those business assets 
thereafter, because they don't have the same flexibility using 
those assets, because they are in a trust or they are allocated 
to trust or they have created a complex trust agreement.
    And I guess my question is, is there some way that we can 
get this scored to take those kinds of things fully into 
consideration--their impact on revenues and their impact on the 
economy?
    Ms. Dunn. You know, I don't think we have the answer to 
that. A lot of us have pushed for years for dynamic scoring or 
at least a combination of what we use in dynamic scoring, 
because to be realistic about something like this and we should 
provide that kind of management leadership, I think, being 
realistic about budgeting.
    You would say that the death tax, if it were totally 
repealed, that the energy that would go into the economy 
through the abilities of the entrepreneurs and the small 
business people and the family farmers would be much greater 
and result in far more dollars in revenue going one way or 
another into the Government, but there is not any way we can 
change this right now.
    I think sometimes you have to go by instinct on some of 
these things, so the economic growth tax relief, like capital 
gains and death tax, I believe, over the long-run will bring in 
more dollars, and they have been able to do a little bit better 
in capital gains projecting for the first couple of years under 
capital gains cuts that revenues will actually increase, and I 
think that is the result of experience that we have seen 
through the years when that really has been provided.
    Mr. Hill. I think the same is true of the death tax, your 
bill particularly, and the fact that it is phased in I think 
will give us the opportunity to demonstrate that there are 
economic rewards to it over a period of time.
    In my State, we have a lot of farms and ranches, and what 
people are facing is, is that if you are going to sell the farm 
or the ranch in order to deal with the tax question, you are a 
whole lot better off to subdivide it and sell it as a 
subdivision than you are to sell it as a ranch, because most of 
these--in fact, many of the farmers and ranchers in my State, 
if you use the income test alone, would be eligible for food 
stamps. They would be eligible for financial assistance. 
Obviously, they are not eligible because of the value of their 
estate, because they may have a $3 million or $4 million or $5 
million farm or ranch. But it can't produce enough income for 
multi-generations to live off that.
    But the problem is--so, the strategy, then, is that the 
only alternative is to sell it. So, the alternative, then, if 
you are going to sell it, you are better off to sell it not as 
a farming unit but sell it as a subdivision, and most of 
Montana has been broken up into 20-acre subdivisions. Even 
operating ranches have been subdivided in anticipation of the 
opportunity to do that, and that is a great tragedy. It is a 
great tragedy for us from the standpoint of family agriculture, 
but it is also a great tragedy in terms of how it is going to 
impact the environment as well.
    You know, one of the problems I see is that a lot of 
businesses and farms and ranches may have a $5 million value to 
their estate, but they don't have any money. In fact, some of 
the most successful small businesses don't have a lot of cash 
around; they don't have a surplus of liquidity. They are 
pouring that money back into their business, and what I see 
when they reach a certain point, from my personal experience, 
is that they start diverting that capital to reinvest in the 
business and create more jobs and investing into mechanisms to 
avoid taxes and particularly this tax.
    And I just know intuitively and from my personal 
experience--although it is anecdotal--that if we get rid of 
this tax or get it down to a level where people think it is 
fair and manageable, that we will see these small businesses 
reinvest in their businesses and grow those businesses much 
larger, and I think we will keep those within a family, which I 
think creates more competition and more opportunity.
    I just thank you both for your work. If there is something 
that we can do to help in trying to get a more scoring of that, 
I would certainly offer my help, and I am hopeful that Mr. 
Archer will include your bill or something like it in any tax 
relief package.
    Thank you, Mr. Chairman.
    Chairman LoBiondo. Thank you, Congressman Hill.
    Let me ask Congresswoman Dunn and Congressman Tanner, how 
are you on time? I believe more members might want to ask 
questions. Are you okay a little while longer?
    Okay, I will ask Committee members to keep in mind that our 
colleagues have a limited amount of time and that we do have a 
second panel.
    Now, I would ask Congresswoman Christensen, do you have any 
questions of the panel members?
    Ms. Christian-Christensen. Thank you, Mr. Chairman. Could I 
just pass until I find out what questions have been asked?
    Chairman LoBiondo. Sure. Congressman Baird, do you----
    Mr. Baird. Congressman Tanner, Congresswoman Dunn, it is 
great to see you both here, and I appreciate your work on this 
bill.
    I wanted to echo your comments earlier. I am proud to co-
sponsor it and for many of the reasons you have mentioned. Two 
particularly that stand out for me are environmental 
protection. In my district, we have a lot of family foresters 
who have been very good stewards of the land over many years. 
They have got forests that are 40, 50, 60 years old. Suddenly, 
the owner--father, mother--passes away, and instead of being 
able to wait the next 20 years to let the forest reach full 
maturity, they are virtually forced to clear cut doing just the 
exact opposite of what we want them to do for the environment.
    Similarly, for me, it is a pro-labor issue. We have a 
number of mid-size businesses that have more capital assets or 
more assets than would meet the exclusion, and if they are 
forced to sell, they often have very good contracts with labor; 
they pay family wages; they are good community stewards; they 
help with charities, et cetera, and they are forced to sell 
when one of them dies rather than pass it on to their kids who 
would presumably keep the same community tradition.
    The only possible hesitation I have about this issue--and I 
really would appreciate sincerely your addressing it--the 
issues I have just addressed have to do with family farms, 
family businesses, local community ownership. That, to me, 
conceptually, is somewhat different than someone who is passing 
on an enormous stock portfolio that may not necessarily have 
the job or environmental benefit locally, and I am aware that 
there are some other bills that seek to distinguish between 
assets--concrete physical assets versus equities, et cetera. 
Could you share your thoughts on that in terms of how we might 
work that out or what the pros and cons are from your 
perspective?
    Mr. Tanner. Well, as you know, I had quoted President 
Franklin Roosevelt in my opening statement about--that it is 
undesirable in this country. I mean, the reason that we had an 
estate tax to begin with was because people saw the UK and saw 
where some fellow acquired great wealth in 1450 and 23 
generations later none of them had worked or contributed to the 
economy or to the society and so on, and we didn't want that in 
this country, and every generation stands on its own, and so 
forth.
    When President Roosevelt made that statement, though, the 
exemption in that day's dollar terms was about $9 million. 
Well, if you all could help us to get to $9 million and a 
capital gains right above that, then I have no quarrel at all 
with that, because I think President Roosevelt's words have a 
certain truth in them.
    We are concentrating on, in our bill, trying to reduce the 
rate gradually, so that as this thing matures, we can say that 
at some point in time maybe we ought to look at flipping over 
to a capital gains rate above some meaningful number that will 
address the sorts of things we are talking about with family 
farms and small businesses. I mean, I don't have any problems 
if someone has got several billion dollars paying a little 
something to help out with the purchase of aircraft carriers 
and tanks and highways and all the things that we need. I don't 
have a problem with that, but where do you start with that, you 
know?
    Ms. Dunn. I do think I agree with Mr. Tanner. You have got 
a real definition problem when you come into a situation like 
that. If you are talking about a rich individual, what is rich? 
Is it somebody like Helen Anderson in my district in Northbend, 
Washington--that you are familiar with, Mr. Baird--who did 
exactly run into the situation you described--inherited a large 
piece of timber property from her father that had never been 
cut, and it was open to people wandering through the trails and 
birds and things and animals living in it and people driving by 
and seeing how pretty it was. Well, she had to literally cut 
down all the second growth timber on her property--mow her 
piece of property to pay what amounted to $1 million, and it 
was all gone, because she had to pay the CPAs and the lawyers 
and the estate tax and then the Federal death tax. So, the 
community was left bereft after that happened. That is not what 
we want to see. I know that is not what you want to see with 
your two particular areas of interest.
    But, I mean, how do you define wealth? Is it somebody who 
owns a couple of Taco Bells? So, that is the problem that you 
run into, and I think earlier, folks who were the Fathers of 
our country and later on who ran our country very well realized 
that because this was an excessive almost obsessive tax, to tax 
the same dollar the third or fourth time, it really wasn't 
fair, and it really hurt the growth of the economy. I think we 
can justify this kind of tax relief.
    Mr. Baird. I am not referring so much to wealth, 
Congresswoman, I am more--because I agree with you entirely. 
That is the problem is we have set the cap, whatever we call 
wealthy, then people who are asset wealthy, then, are forced to 
sell their assets--but more in terms of concrete, physical 
assets--farms, forests, manufacturing qualities versus a huge 
investment equity portfolio that doesn't necessarily have local 
ownership. Is there a way we can address that or is that also--
?
    Ms. Dunn. You know--and excuse me for interrupting--but if 
you leave those folks out, those folks aren't going to--I mean, 
first of all, if they have big dollars and assets like stocks 
and bonds, they are going to figure out how to use a CPA and 
lawyer to get around the death tax, but, number two, what will 
happen is behavior will again change, and if there is no death 
tax on those other entities, that is where they will put their 
investment. So, why do you want to change the balance of the 
whole economic market by not including everybody and allowing 
the market to work?
    Mr. Baird. Thank you. Thank you, Mr. Chairman.
    Chairman LoBiondo. Congressman Toomey.
    Mr. Toomey. Thank you, Mr. Chairman.
    I would like to start by commending my colleagues for their 
tremendous work on this. I am a proud co-sponsor of your bill, 
and I think that you make a very compelling case that the death 
tax is one of the most ridiculous and unreasonable features of 
a tax code that is riddled with ridiculous and unreasonable 
features, and I would further point that I think you can make a 
very strong principled argument that the multiple layers of tax 
on the same income, of which this is sort of the crowning 
pinnacle after a lifetime of paying taxes, makes for a strong 
case to do an across the board elimination rather than 
targeting different income groups or asset classes, in my 
opinion.
    I have two specific questions for you. Earlier, if I 
recall, you mentioned that the estate tax collects about $23 
billion a year, and my question is, in light of the very large 
percentage of costs that go to collecting that, is that a net 
number or a gross number for the Federal Government? In other 
words, after all the collection costs are incurred, does the 
Government net $23 billion?
    Mr. Tanner. Gross.
    Mr. Toomey. That is a gross number. So, if you do the only 
reasonable calculation and net out the cost of acquiring that 
$23 billion, the Federal Government is left with $7 billion, $8 
billion, something on that order.
    Ms. Dunn. Yes, and the private sector is depleted of 100 
percent of what is produced by this tax----
    Mr. Toomey. Right.
    Ms. Dunn [continuing]. Because that is what the compliance 
costs are.
    Mr. Toomey. Sure, and totally separate and apart from all 
of the costs in the private sector and the costs of the economy 
and all of the perverse incentives it creates, the Federal 
Government only manages to net $7 billion or $8 billion.
    My second question is, you mentioned that the Joint 
Committee on Taxation scored your bill as costing the Federal 
Government $44 billion over 5 years, if I recall correctly. Is 
that a net number or is that a gross number?
    Ms. Dunn. Again, gross.
    Mr. Toomey. That is a gross number. So, in fact, we can be 
sure that the Federal coffers will diminish by much less than 
$44 billion, aside from the whole positive scoring of the 
effect on the economy?
    Ms. Dunn. You are absolutely right. It is what one of the 
congressmen was saying earlier; that is exactly right.
    Mr. Toomey. Okay, thank you.
    Chairman LoBiondo. Congressman Phelps.
    Mr. Phelps. Thank you, Mr. Chairman, and I, too, want to 
commend you both for your leadership on this particular issue. 
It is gratifying for a new member to come in and start a 
session with such legislation that benefits all--working 
people.
    Mine is probably more of a comment than a question, real 
quickly. Coming from the State legislature in Illinois and 
serving for 14 years there and realizing that facing revenue 
questions are very much a challenge, the thing that I--I know 
that before we get through this year, this session when the 
budget is formed, hopefully, there will be a bipartisan 
agreement on how we do that or it probably won't be done. If we 
either give across-the-board tax cuts and even agree on target 
tax cuts or a combination of both or whatever comes out, I 
guess my concern is--even though I am co-sponsor of this bill, 
and I know probably all of us will be or are already and see 
its merits for what it is--but I am concerned as a new member 
and being raised to be responsible for my own budget in my own 
life, knowing that it takes revenue to operate and whoever's 
forecasts are accurate or not that we study here and what it 
means 10 years on down the road, it will have an impact. Once 
we have a reliance on revenue and it is taken away, the 
question comes in my mind, will this body--does Congress have 
the will and can we work in a bipartisan manner to either 
identify replacement revenues or to reduce accordingly?
    So, I guess, what I am saying, I think this action is 
incumbent on all of us to honestly try to work together in 
doing one of either or a combination of both, and the good 
economy helps take care of a lot of those problems; I realize 
that. But just as a new member that is probably naive in a lot 
ways of how we come about working in this manner to be sure 
that we don't just depend on good economic growth and pretend 
it is always going to happen, and prepare for a rainy day, 
because as we all are co-sponsors or at least support this 
concept, we are going to also be providing money for small 
business grants, loans that will be guaranteed by the 
Government, and that is taking from this column away from what 
we would like to do in terms of being fiscal responsible.
    So, the fiscal responsibility really comes to the heights 
when we start--although this tax, obviously, it is recognized 
it should--and it doesn't make sense--it should go away, but I 
would hope that I am part of a Congress in his first term that 
would say ``Let's us proportionally act if we are going to pass 
measures like this on all the other ramifications of the 
budget, such as our military spending, everything else that we 
are debating right now. Just a comment as a new member, thank 
you.
    Chairman LoBiondo. Okay, thank you. Congressman Forbes.
    Mr. Forbes. Thank you, Mr. Chairman, and I appreciate this 
joint Subcommittee hearing on a very important issue, and 
thanks to both of you for your leadership on this issue, and I 
am proud to also be a co-sponsor of the bill. In fact, I have 
co-sponsored every bill that would eliminate the death tax that 
I could find in this Congress and in the last with the hope 
that ultimately we will get there, and thank you again for your 
leadership.
    I want to also thank the chairmen for what I see in our 
upcoming panel. There are two of the four witnesses are from 
Long Island, New York, and I wouldn't want to suggest that we 
have a disproportionate problem in New York with the estate 
tax, but I certainly appreciate the fact that we have some 
folks from Long Island who are going to be able to speak to it, 
and, Ms. Kaplan, when she comes up, I know in her testimony, 
she had noted that it is not corporations, it is not small 
corporations, it is families that you have referenced that pay 
this tax.
    In my old life as the regional administrator of the Small 
Business Administration, I met too many people who had to cash 
in a lifetime investment to pay those taxes. Their families, 
their parents had built the business and saw it lost, because 
Uncle Sam had to get that pocket full of change, and, 
ultimately, they lost their businesses, and I have met too many 
local farmers on Long Island. We have precious few farms left, 
very important farms, and, single-handedly, the death tax is 
leading to the elimination of those family farms, and so I, 
again, thank you for your leadership and hope and pray that we 
can get a bill to the floor and passed and ultimately to the 
President that he would sign.
    I just have one question--if you can address this, I don't 
know--in putting together your legislation, were you able to 
come upon any information about estate planning and just how 
many small businesses may actually be involved in estate 
planning to mitigate or soften the impact of the death tax? I 
would suggest that a lot of small businesses, frankly, are 
marginal operations, and they are living day-to-day and to 
spend a lot of money on estate planning is sometimes a luxury 
they just can't afford, but has there been any information 
accumulated in regard to estate planning?
    Mr. Tanner. First, let me say that I tried to masquerade 
myself as being from Long Island, but my accent, I am afraid, 
gave me away. [Laughter.]
    Mr. Forbes. We welcome you as part of Long Island.
    Mr. Tanner. One runs into attorney-client privilege. Ms. 
Dunn and I had a bill last year to extend the privilege, 
actually, of taxpayers or to put the privilege of privacy into 
the taxpayer rather than the tax preparer, and so I don't know 
any way one could reasonably get an accurate count of how small 
businesses have consulted their attorney or their CPA in terms 
of some sort of estate planning. I know that a prudent 
businessman who had the drive, initiative, and good sense to 
build a business that became a taxable estate, would probably 
consult someone during the course of his life or her life, and 
so I would just guess that it would be very substantial.
    Someone else made a comment, this is particularly important 
to minorities, women, to first generational founders of 
businesses that make it, and there is societal value here, a 
matter of public policy notwithstanding, all of the things that 
we believe are wrong with the collection of it and the 
cumbersome nature of it and the unfairness, and so on, and so I 
just think it is good public policy that we take this up, and I 
appreciate what Mr. Phelps said, because he and I worked 
together on a lot of the budget matters when we talked about 
paying off the debt and being financially responsible and so 
on, but I think this is a tax that is clearly counterproductive 
and is not good public policy, and that is why I am pleased to 
join Ms. Dunn on this and other bills we have collaborated on 
in the past.
    Ms. Dunn. Mr. Forbes, when I used the figure that $23 
billion was spent in compliance to bring in $23 billion, the 
dollars, by the way, were a little less than that in what this 
tax brought in before last year. Last year, it moved from about 
$20 billion up to $23 billion last year, but $23 billion buys a 
lot of CPAs and lawyers, and that is really the question we are 
asking, and that is an investment that would be much better 
served to go into employment in a community and the build-up of 
a small business.
    Mr. Forbes. Thank you, Mr. Chairman.
    Chairman LoBiondo. Congressman Udall.
    Mr. Udall. Thank you very much, Mr. Chairman. First of all, 
let me thank Congressman Tanner and Congresswoman Dunn for 
their leadership on this issue. Clearly, we have a very 
difficult situation for small businesses and family-owned 
operations, and I think, Congressman Tanner, your tale of the 
Markum family is a very telling one.
    I am wondering how many family farms or family-owned 
businesses fit into the same category as the Markums--as you 
have described, in the range of $1.3 million to whatever size 
you would reasonably consider a small, family-owned business, 
and what does your bill do specifically for them? Either one of 
you may answer this.
    Mr. Tanner. Approximately 70 percent of the estate tax 
returns are filed on estates of $5 million or less, and so 7 
out of 10 would be in the range up to $5 million. Certainly, 
the small family farms and the anecdotal illustrations that 
have been talked about this morning would probably fall within 
that, and so I don't know.
    As Ms. Dunn said, we are reducing the rate in this bill 
over the next 10 years so that we can hopefully get it passed 
and absorb the revenue loss, and, actually, we believe as we 
get into the bill three or four, five years down the line, 
people will see the wisdom of it as behavior changes and more 
and more effort goes into job creation and growth of the 
business than it does into figuring out a way to avoid the 
estate tax and selling off of all of the open space around the 
urban areas like Long Island that has been talked about.
    Mr. Udall. Thank you. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman LoBiondo. Thank you. Congressman DeMint, do you 
have any questions?
    Mr. DeMint. Thank you for the work on this, and we have 
heard so many good things about it. Help us understand the 
objections that we are going to run into. Who is opposed to 
this and what is the opposition saying about this bill?
    Ms. Dunn. Is it mostly a lack of understanding about what 
death tax really does and whom it affects that is creating the 
opposition. You will hear, for example, this is just a way to 
give tax breaks to your rich friends, and we have talked about 
all our rich friends today--the farmers, the small business 
people, the people that own a couple of 7-Elevens or a Taco 
Bell--and, so what is the definition of rich these days? People 
want to have more and more control over their own funds now, 
and the Government, in this case, is becoming an enemy instead 
of a partner of the private sector and the small business 
solutions. So, those who have not heard the real information 
about the effect of this tax, maybe those who believe that 
small business and farms aren't necessarily the core of what 
makes this Nation great, those are the complaints that I hear 
about it.
    Mr. DeMint. So, you think it is more, really, 
misinformation or just a lack of information at this point than 
true objections to the concept?
    Ms. Dunn. Yes, and I think--one other statement I would 
make--because Mr. Phelps, I guess, has just left--but he made 
an interesting comment, something I didn't really understand 
until a couple a years ago: when you have tax relief, you lose 
revenues, and that means you lose certain programs that are 
very important to all of us, but it is important for him and 
others to understand that tax relief in our budget process 
requires cutting, in some way, dollars from other areas, and 
the only way you can provide tax relief is either to cut 
loopholes--we have talked a lot about corporate loopholes--
close corporate loopholes or to take entitlement cuts, and so 
they have to be paid for--tax relief has to be paid for in 
these two ways.
    This year, for the first time--and so you see the Ways and 
Means Committee cutting a lot of corporate aid, and you will 
see loopholes being closed, and that is what can be used to pay 
revenues, and it needs to be offsetting--this year, though, for 
the first time, we made an adjustment in our process of 
providing tax relief under the Pay Go system. We said that if 
there is an increase in the non-Social Security surplus in July 
when CBO comes back with its new surplus projections, those 
dollars must go either to tax relief or debt reductions. So, 
there are some additional dollars potentially there for tax 
relief, but tax relief is always paid for.
    Mr. DeMint. Thank you.
    Chairman LoBiondo. Thank you. Congresswoman Christensen.
    Ms. Christian-Christensen. Thank you, Mr. Chair, and I want 
to also welcome our colleagues here this morning.
    Mr. Tanner, you said that the proposal is important to 
minorities and rural businesses, and I don't disagree with 
that. I am just not sure about eliminating the tax altogether. 
And you have also used the $9 million in the time that I have 
been here in the Committee hearing as a place at which you 
would consider setting the limit. I wonder if you consider 
exempting the estates somewhere around $6 million and maybe 
lowering the rates as an alternative as well?
    Mr. Tanner. We can talk about that. As I said in my 
statement, $9 million was the dollar figure when President 
Franklin Roosevelt with which I agree and which I read earlier, 
and an answer to a question over here, to some degree, it is 
not offensive on the transfer of vast degrees of wealth, I 
think, for those people to be asked who have really received 
the most from this system to help pay some of the common 
obligations we have as a Nation, whether it be interstate 
highways or aircraft carriers or whatever it might have to be. 
That is not what we are talking about, at least not what I am 
talking about when I talk about the estate tax relief. The $9 
million figure was just a figure that would relate to today's 
economy.
    What I think we ought to concentrate on is, one, the 
unfairness of it, and even in the case of vast amounts of 
wealth, one could argue that it is really unfair, because, 
theoretically, all of this money has been taxed during one's 
working lifetime, and one gets into how many times does the 
Government tax? I really believe 55 percent, which is the top 
rate, is unfair in the extreme just by virtue of the fact that 
the Government takes more than half of it. I am not one who 
thinks that they shouldn't help out in some respect but not at 
that rate no matter who they are.
    Now, on the other hand, if we could get some meaningful 
relief as a matter of public policy so that the green spaces 
around urban areas are not having to be sold for development 
and subdivisions and they can be kept as farms or forests or 
whatever they are, and if we could get some relief to small 
business owners so that all of the energy, money, and expense 
that goes into trying to figure out how to plan one's estate 
could go further into job creation and the expansion of that 
small business not to mention the societal value of the 
generational transfer of one's work product of one's life to 
one's children or grandchildren, I just think as a matter of 
public policy, this needs to be looked at carefully.
    Now, as far as what we could do, I think you are into a 
legislative decision there. How do you get 219 votes? Is it $6 
million or is $4 million or is $10 million or is to eliminate 
it or take it down to the capital gains? I mean, that is when 
you have got to figure out how you get 219 votes.
    Ms. Dunn. And I will just say, I am a proponent of rate 
reduction, because that is the way you phase this tax out for 
all time. I want to see this tax gone. It is unfair; it is 
onerous; it comes at the worst time in a family's life; it is a 
tax on property that has, in one way or another, paid taxes 
three or four times before.
    We did some work on the unified exemption in 1997. In that 
bill, we took the current unified exemption, which was $600,000 
for a property, and we raised over a period of 10 years to $1 
million. So, by the year 2007, it will be $1 million. And then 
you hear Congressman Tanner saying that under Franklin 
Roosevelt's terms of office in the 1930's, it exempted $9 
million, so whose--where is--it is a subjective thing. I think 
that rate reduction, which really phases this thing out, is the 
way to go. Otherwise, you probably never will catch up in terms 
of indexing and particularly after a period of inflation like 
we have been through the last couple of decades.
    Ms. Christian-Christensen. Thank you.
    Chairman LoBiondo. Well, I would like to thank our 
colleagues, Congresswoman Dunn, Congressman Tanner, for being 
here today, for your work on this legislation. I think, as you 
can tell, both from Congressman Manzullo's Committee and from 
my Committee, you have strong support as well as from many of 
our colleagues, and we look forward to seeing this legislation 
move ahead.
    Mr. Tanner. Thank you.
    Chairman LoBiondo. I would now ask the second panel to come 
up and take seats at the table.
    [Pause.]
    Okay, I would like to welcome our second panel of visitors 
today. I would remind our panelists that we will be working 
under the five-minute rule. I would encourage you to keep your 
statements to that length or maybe even a little shorter. If 
your statements are longer, you can feel confident that your 
entire statement will be entered into the record as this will 
be considered for the future.
    Our first panelist that we will hear from will be Aldona 
Robbins who is vice-president of Fiscal Associates and Bradley 
Senior Research Fellow at the Institute for Policy Innovation. 
Welcome, and thank you for joining us today.

  STATEMENT OF ALDONA ROBBINS, PH.D., SENIOR RESEARCH FELLOW, 
         INSTITUTE FOR POLICY INNOVATION, ARLINGTON, VA

    Dr. Robbins. Thank you, Mr. Chairman, and thank you for the 
invitation to appear at this hearing.
    What I would like to do is to highlight briefly a few of 
the major findings of a recent study that we have done for the 
Institute for Policy Innovation on how estate taxes affect the 
economy. First, estate taxes, which once were almost the 
exclusive headache of the super-rich, are much more likely to 
affect small-to medium-sized estates today than 50 years ago. 
In 1945, estates that were under $2.5 million--and that is in 
today's wealth--accounted for about one-third of all returns. 
In 1995, those estates accounted for 89 percent of returns. 
This is due in large part to the declining value of the estate 
tax exemption which was worth $9 million--again, in today's 
wealth--in 1916, and, as Congressman Tanner said, in 1930 as 
well versus the $650,000 in 1999. With Wall Street's 
spectacular performance over the last several years, it is easy 
to see how a middle-class family who owns a home, has IRAs, or 
401(k)s could hit $650,000 pretty easily.
    Second, estate taxes are harmful to the economy. High 
marginal estate tax rates discourage saving, about half of 
which is directed toward bequests, which in turn, leads to less 
investment, slower economic growth, and lower tax revenues. We 
estimate that eliminating the estate tax would ultimately 
produce more than $5 in extra GDP for every dollar of static 
revenue lost. Because the Federal Government collects about 33 
cents of each dollar of extra GDP, any pay-off that is greater 
than 3 to 1 is going to at least pay for itself.
    Third, estate taxes hit small business particularly hard. 
With the amount of tax owed, while it is based on asset value, 
the simple fact is that the tax has to be paid out of income 
produced by the asset. So, let us look at a family-run store 
that has a 10 percent return after inflation; that is 5 percent 
after taxes. If the owner dies and is subject to the 55 percent 
death tax rate, how do heirs pay the bill? Do they send 55 
percent of the store's inventory to Washington? No, the 
Treasury doesn't accept payment-in-kind, only cash. If the 
heirs devote the entire 5 percent annual return, the death tax 
could be paid off in only 11 years. Unfortunately, Treasury 
wants its money now. They could go and borrow from the bank at 
9 percent--that is 4.5 percent after tax--and pay off the loan 
in 50 years, but would the heirs want to run the store for 50 
years for free? Probably not; they choose to sell.
    Let us look at a small farmer who owns land near an urban 
area. His farm would yield a 10 percent return only when it is 
valued as farmland, but tax law requires that the asset be 
valued at its best use. That lowers the pre-tax return to 5 
percent--2.5 percent after tax--and, in this case, even a 50-
year bank loan won't save the farm.
    The lesson to be learned here is that all taxes are paid 
out of income. Even if the death tax is rare event--only once 
in a lifetime--its average impact is very large; large enough 
that for some, the combined effects of income and death taxes 
approach 100 percent. In cases like these, the clear message is 
don't invest, consume.
    Last, estate planning richly rewards taxpayers who can 
anticipate that they might be subject to the tax. Those caught 
off guard, often owners of small businesses, family farms, and 
savers who amass wealth during their lifetime, end up paying 
most of the tax. That may be why the largest estates, in fact, 
do not pay the highest estate tax rates.
    Thank you.
    [Dr. Robbins' statement may be found in the appendix.]
    Chairman LoBiondo. Thank you, Ms. Robbins.
    What we will do is normal procedure, and we will go through 
the opening statements for all of the panelists, and then if 
there are any questions from members, we will go to them.
    The next witness is H. Jay Platt, a member of the Board of 
Directors of the Arizona Farm Bureau Federation and 
representing today the American Farm Bureau. Mr. Platt, thank 
you for joining us.

 STATEMENT OF H. JAY PLATT, RANCHER AND PRESIDENT, THE APACHE 
COUNTY FARM BUREAU, SAINT JOHNS, AZ, REPRESENTING THE AMERICAN 
                          FARM BUREAU

    Mr. Platt. Good morning, Mr. Chairman, members of the 
Committee. I appreciate this opportunity to be here and make 
this statement.
    My wife, Trish, and I have traveled to this hearing from 
St. Johns, Arizona where we operate a cow/calf operation in 
conjunction with my two younger brothers. We are the third 
generation of Platts to be on our ranch, which was begun by my 
grandfather early this century. I also have two young sons, 
each of whom harbors the hope of staying on our ranch if we are 
not put out of business by the death tax.
    Our operation consists of a cow herd of 650 mother cows and 
their calves. That is down from slightly over 1,000 mother cows 
due to drought. We run these cows on some 125,000 acres of land 
in two States--Arizona and New Mexico. Of that acreage, we own 
roughly 20,000 acres. The balance we lease from the State and 
from the Federal Government. Now, that may sound like a lot of 
acreage, and indeed it is. I would hasten, however, to point 
out that our operation is typical for our part of the country 
where some 100 acres are required to support a single cow.
    My home community of St. Johns is an area of few roads and 
few people, located in northeast Arizona, approximately half 
way between Phoenix and Albuquerque, New Mexico. Ranching is 
the core foundation of our community and its economy. Local 
ranchers serve on school boards; give volunteer time to church 
and community service organizations: Our mayor is the local 
brand inspector, saddlemaker and is also a rancher. Ranchers in 
our community support the single hardware store, the single 
grocery store, and we also help to keep three gas stations in 
business.
    If ranchers in my county, Apache County, do not survive the 
death tax, the nature and character of my community, of my 
county, and of the land itself, will be forever altered. Mr. 
Hill has alluded to what is happening in Montana. If our ranch 
is sold to pay the death tax, I can assure you that it will not 
be sold to another rancher: Rather, it will be cut up, carved 
up, into 40-acre parcels and sold as rural ranchettes to 
absentee owners.
    We have worked hard to be good conservators and stewards of 
the land. It is in our best interest to do so, having a vested 
economic interest in how well we manage that land. An absentee 
owner whose ties to the land are fleeting and are recreational 
in nature cannot have the same interest in conversation and 
stewardship which we have.
    I am 48 years old, and I am now impressed with the nature 
of my own mortality. I am planning for my death: A few weeks 
ago I made a 440-mile round trip drive to Phoenix, Arizona to 
consult with an estate tax attorney. That will be the first of 
many such trips which I will make. I expect to expend 
considerable time and resources in crafting an estate tax plan. 
Those are resources and time which would be far better spent on 
my family and on my business. I also know that if I do not do 
this planning, my family business, our ranch, will be sold to 
pay a death tax.
    As I mentioned at the beginning, my grandfather started our 
operation some 100 years ago. We have worked hard to build a 
modern, efficient ranch and feel that we have been very 
successful in so doing. All along the way we paid taxes on what 
we have earned. It is difficult for us to understand why we 
should again be forced to pay at our deaths. It is almost 
incomprehensible to me that my Government would force my family 
to sell our ranch at my death and punish us for our success. My 
community, my county, my family, and indeed the land and the 
environment, would be better served if our ranch continues in 
business.
    Thank you.
    [Mr. Platt's statement may be found in the appendix.]
    Chairman LoBiondo. Well, thank you very much, Mr. Platt, 
for that testimony.
    Before I introduce the next panel member, I would like to 
also acknowledge a couple of folks from New Jersey: Peter 
Furey, that I have worked with for a number of years who is 
executive director for the New Jersey Farm Bureau and also Mr. 
Lou Fisher who is here with our panelist, Mr. Ruske--that I 
will introduce in a minute. Lou Fisher is from my district; 
operates Fisher's Markets, a small family business and thought 
it important enough today, although he is not testifying, to be 
here.
    And the panelist that I would like to introduce is Mr. 
Roger Ruske. Roger owns Cumberland Nursery in Millville, New 
Jersey. He is a member of the New Jersey Farm Bureau, and he is 
also a member of the New Jersey State Board of Agriculture, and 
he is secretary of the Cumberland County Planning Board. Roger, 
thank you for joining us. Please go ahead.

    STATEMENT OF ROGER RUSKE, OWNER, CUMBERLAND NURSERIES, 
                         MILLVILLE, NJ

    Mr. Ruske. Thank you, Chairman LoBiondo. I have come today 
to wear two hats----
    Chairman LoBiondo. Excuse me, just for one minute, Roger. 
If you could ask Mr. Platt to move the microphone over? I think 
those microphones will move, and then everybody will be able to 
hear you.
    Mr. Ruske. How is that? Is that okay?
    Chairman LoBiondo. That is much better, thank you.
    Mr. Ruske. Okay. As I said, I have come here this morning 
wearing two hats. My hat is as a member of the State Board of 
Agriculture. I am one of eight people who are in charge and a 
head of the Department of Agriculture in the State of New 
Jersey, and I can assure you that every farmer in New Jersey--
man, woman, and child--is against the estate or the so-called 
death tax and as a representative of all the farmers in New 
Jersey, I would urge you to please do away with that. That is 
my official hat.
    The hat I am most proud of is my Cumberland Nurseries hat, 
and if you see my little insignia on top, it has the four 
generations of my family that have been in the nursery business 
since basically the turn of this century. I am a third 
generation nurseryman following in my grandfather's footsteps, 
and my son, Christopher, is following in mine.
    Daily, as farmers and agriculturists, we must deal with the 
capriciousness of Mother Nature, unending Government rules and 
regulations, not to mention the normal problem-solving tasks 
involved in running any business. In my business, if one is to 
be successful, long-range planning is essential. The crop that 
I plant today may not be harvested for one to five years, so we 
understand what long-term and long-range planning is.
    My grandfather began his nursery business in Connecticut at 
the early part of this century. He was a natural farmer. He 
always bragged he only went to the sixth grade, and that was 
pretty good in his day--I guess that was considered a college 
education today. But he was known in our town as the midnight 
farmer. Grandpa worked all day at his day job and worked half 
the night on building up his nursery. Grandpa persevered 
through depressions, world war; his barn burned down; Japanese 
beetles almost ate him out of house and home, and he earned and 
saved what he could during that time. And he thought that his 
earnings and savings would be his to do with as he pleased, and 
in that day age, I guess people didn't think a whole lot about 
the Government confiscating your property.
    Later on in his life, in the late sixties and in 1970, the 
family finally convinced grandpa that he had to do some estate 
planning, and Mr. Hill will appreciate this: he chose badly for 
estate plans, and this I think happens way too often. After 
grandpa passed away, it took years for the family to settle the 
estate. Between IRS asking for more paperwork documentation and 
what-not, five years went by, and even after five years, the 
IRS is still gunning my mother for paperwork and a few dollars.
    I called her up the other day and asked her ``Mom, do you 
still have some paperwork? I would just like to look at it.'' 
She said after the 7-year limit or 14-year limit, whenever it 
was up, she destroyed it. She did not even want to be reminded 
again of what her Federal Government did to her.
    Let us fast forward just a little bit to this generation. 
My wife, son, and I have 275 acres in Cumberland County, New 
Jersey, and I think that by most of today's standards, we are 
considered successful. We have a very simple business; I am a 
sole proprietorship; my wife and I own the property; I have one 
child who is in business with me. All I want to do is pass my 
business on to my son. My will is literally this thick, which 
you could solve with one sentence, ``I leave it to my son.'' I 
have to set up--as Mr. Hill will again appreciate--all kinds of 
trusts, marital trusts. I don't even understand what half of it 
is, but I understand, too, that I think this bill is probably 
called the accountants' and lawyers' and insurancemen's full 
employment bill, because they love it.
    But we must pass this on to my son for all the reasons you 
have heard about land conservation, preserving the small 
business, I must be able to pass this on to my son. I have to 
do this through estate planning. I should not have to do this. 
I should not have to spend my time, my money to protect my 
assets from my Government.
    I also brought with me--and I only brought one; Louis has 
the other two with him--this is one section of the Federal 
estate tax code. I just tried to read one page and forget it. 
You have to be a lawyer or an accountant to understand it, but 
this is how complicated our laws are.
    The answer to all of this: abolish the tax--I have heard so 
many times this morning--just please do away with it. And I am 
sure the reply will be from many in Government will be this is 
going to create a budget shortfall. Well, you want to hear 
about a budget shortfall, just get hit with a late frost, a 
hard winter, a drought, or declining market prices and 
disappearing customers. In 1977, 1978, in a severe winter, I 
lost one-third of my crops. Nobody was there to increase my 
taxes or anything like that so that I could make more money. I 
suggest that the Government live the same way that we have to 
live.
    I thank the chairman and the Committee for having the 
intestinal fortitude to address this problem. Many, many people 
perceive this as a rich person's problem; it is not. It is an 
American problem, and I hope you can solve this for us.
    Thank you.
    [Mr. Ruske's statement may be found in the appendix.]
    Chairman LoBiondo. Roger, thank you very much for that 
inspiring testimony.
    Next on the panel is Mr. Kevin O'Shea who is the chief 
financial officer of Shamrock Electric Company in Elk Grove, 
Illinois, and he is testifying on behalf of the National Small 
Business United. Mr. O'Shea, please proceed.

 STATEMENT OF KEVIN O'SHEA, CHIEF FINANCIAL OFFICER, SHAMROCK 
 ELECTRIC COMPANY, ELK GROVE, IL, REPRESENTING NATIONAL SMALL 
                        BUSINESS UNITED

    Mr. O'Shea. Mr. Chairman, ranking members, and members of 
the Subcommittees, thank you for the opportunity to appear here 
today. As stated, my name is Kevin O'Shea. I am the chief 
financial officer for a small electrical firm in Elk Grove, 
Illinois.
    For the past 43 years, my father has worked to make our 
company a successful small business. Because of his life work, 
there are 120 families that can call Shamrock Electric their 
employer, and it is a company they can be proud of.
    By profession, I am an accountant, and, as such, I 
generally make decisions based upon numbers, such as cash 
flows, capital requirements, and expected returns. When I 
started to plan my father's estate, I felt it would be just 
another exercise in number crunching, but I was very wrong.
    Estate planning has nothing to do with numbers and 
everything to do with family. When we started planning my 
father's estate, he contracted cancer, and he eventually beat 
it, but during the time that he was suffering from cancer, I 
had to, on a daily basis, discuss his eventual death with him, 
so that we could plan for his estate. There was a sense of 
urgency at that time, and we needed to get it done, and we 
couldn't stop. Just after he got better, our industry took a 
downturn, and our company started having some bad years, but we 
couldn't let that deter us either; we had to continue with the 
planning process, so in the event that there was a company 
left, we could pay the estate taxes and pass it on to the next 
generation.
    In addition to that, my one and only sibling, my sister, 
became very upset that I was put in charge of my parent's 
estate planning and that she was cut out of the process. The 
reason being that I am involved in the company, and she is not, 
and because of the estate planning and the need to continue our 
family business, we had to make the decisions and put the 
company first and tell her that she just had to accept what we 
made as the decision.
    These were some very hard times for our family, and I think 
that this is something that is missed when we talk about 
revenues to the Federal Government. There are things other than 
money. There is family relationships, and I think this is 
something that I would like you to think about when it is time 
to case the vote on whether or not we repeal the estate taxes.
    As has been said before, I think there is a misconception 
as to who pays estate taxes in the United States. The 
architects of our tax code believe that it is people that are 
inheriting vast amounts of wealth that have never worked a day 
in their life to earn that wealth. In reality, those people 
have liquid assets; they can set those assets up in trusts, and 
they can bypass the tax laws and not pay the estate taxes. 
People that are paying estate taxes are small family-owned 
businesses, and they are being devastated.
    The other item is that people haven't earned the money from 
family business; that my parent's generation created it, and to 
pass it along to us is without the Federal Government getting 
its share of it is unfair. What I would like to say is I 
started in the family business when I was 14. I have been 
working there for 21 years now. I have held every job within 
that company, and from the day I started, I have prepared 
myself to be in charge of Shamrock Electric, and I think I have 
prepared myself very well, and for somebody to say I have not 
earned the opportunity to have that company is very insulting 
to me.
    In 1995, I was a member of the White House Conference on 
Small Business. One of the top three recommendations coming out 
of the White House Conference was to repeal the estate taxes. 
That was 2,000 small business owners speaking in unison that 
the estate taxes are a very real problem for small business.
    I would like to thank the Committee for taking a look at 
this problem, and thank you very much for the opportunity.
    [Mr. O'Shea's statement may be found in the appendix.]
    Chairman LoBiondo. Thank you very much, Mr. O'Shea.
    I would now like to turn to and yield to my colleague, 
Congresswoman McCarthy, for introduction of a guest that she 
has from her district.
    Mrs. McCarthy. Thank you, Mr. Chairman. I would like to 
introduce Ms. Kaplan. She is a reputable small business owner 
in the health profession who runs the business with her son in 
Great Neck, New York. She brings an interesting perspective 
before this Subcommittee on the impact of the estate tax on the 
health care industry. Thank you for traveling from--everyone 
thinks because we live on Long Island, we get here so easily. 
It is short, but, let me tell you, the planes are horrible. 
[Laughter.]
    But, anyway, thank you, Arlene, and I am looking forward to 
your testimony.

 STATEMENT OF ARLENE KAPLAN, HEART-TO-HEART HOME HEALTH CARE, 
GREAT NECK, NY, REPRESENTING THE NATIONAL ASSOCIATION OF WOMEN 
                        BUSINESS OWNERS

    Ms. Kaplan. Thank you. Good morning, Mr. Chairman and 
members of the Committee. My name is Arlene Kaplan, and I am 
the CEO and founder of Heart to Home, Heartland on the Bay, and 
Workplace CPR. These are companies that operate on Long Island 
in New York.
    I opened my first business about 15 years ago. We provide 
health care services from all of our companies. I have about 70 
employees; about half of them have been with me for over 5 
years. I am also on the Board of Directors of the National 
Association of Women Business Owners.
    I am not a tax expert, unless I qualify, because I pay lots 
of taxes--personal income tax, corporate tax, and employment 
taxes. I am here before you to ask if I have already paid taxes 
on everything I own while I am alive, why do I have to pay 
taxes on these things when I am dead? Now, I don't mean to be 
flip, because the circumstances are very serious. I am just 
expressing my frustration with a tax situation that seems to 
have gone awry.
    The current estate, or death taxes, as it is now known, was 
initiated in 1916 to fund World War I. It was maintained in the 
tax code through the twenties and thirties to help prevent the 
concentration of wealth. Since that time, anti-trust laws have 
eliminated these concerns, but, to date, the estate tax remains 
in tact.
    I would like to go back before World War I to the turn of 
the century, so that you can know me a little bit better and so 
that you will know that there are probably millions of people 
like me. Three of the four of my grandparents came to this 
country before the turn of the century, and one came just 
after. They all came from the area known as the Pale, the area 
between Russia and Poland. The children were born here, and all 
of them got at least a high school education; two of them even 
went to college. When my grandparents died, there was some 
small amount of money left to the children and grandchildren. 
The total from both sides probably didn't amount to $10,000. 
When my father died, he had already distributed his money to 
his children, his grandchildren, and his great-grandchildren. 
The total he gave out was under $100,000; nothing of concern to 
the IRS.
    Now, we fast-forward to me. A number of years ago I was 
widowed. I eventually remarried and then came an awakening. I 
went to a lawyer to do a prenuptial, because that is the thing 
you are supposed to do. Now, I have nothing against lawyers; my 
company employs lots of them. We have a corporate lawyer, a tax 
attorney, an employment attorney, a regulatory attorney, and a 
real estate attorney. Now, I have a death attorney. My feeling 
is that when I am on my deathbed, a lawyer will be standing 
there telling me that I can't die until I finish filling out my 
Government death forms and paying my taxes.
    As a result of meeting with the attorney for the 
prenuptial, I told my children the best thing I could do for 
them was to make sure I left them my house with a big mortgage 
and outstanding credit card balances and nothing else. If they 
didn't want to be burdened, I needed to spend all of my money 
and make sure my companies had relatively little value, 
because, you see, I made it. I am successful. When I die, I 
will leave an estate that is probably going to be more money 
than my father may have made in his lifetime, and we grew up 
poor--at least, when I grew up, I found out as a kid I was a 
poor; I didn't know it then. We live in a five-story walk-up 
tenement in Manhattan.
    I have been in the health care business for over 40 years. 
I believe I do good work helping the people in my community. I 
pay my taxes, both personal and corporately, maybe not with a 
smile, but I certainly understand that this country that gave 
my grandparents and the succeeding generations a chance needs 
to tax its citizens to continue to be in this country. My 
oldest son is my partner, and I have a really hard time with 
the thought that he might have to sell my life work 
achievements in order to pay the estate taxes that will be due.
    NAWBO's position is to repeal the estate tax in its 
entirety. The so-called death tax creates a disincentive to 
expand business, create jobs, and often, literally, taxes the 
family business right out of the family. Many businesses would 
add more jobs over the coming years if the death taxes were 
eliminated.
     We know that that is probably not the best thing to say at 
the moment ``eliminated,'' however, we have some suggestions. 
Increase the exemption to $760,000 and index it to allow it to 
increase and pass on to the families. Surely, we can get the $1 
million exemption level down before the year 2006. Tax trusts 
on their taxable income at the same rate bracket as for a 
single individual. Make retirement plan assets up to $1.5 
million per person exempt from the estate tax since all such 
amounts are also subject to income tax, and reinstate the $1 
million exemption per descendant for generation-skipping taxes.
    I appreciate the Committee considering these issues and the 
suggestions I have offered. Please know that the leadership of 
NAWBO and its members look forward to hearing from you and 
working with you. NAWBO will assist your efforts in any way 
that we can.
    Thank you very much for your time.
    [Ms. Kaplan's statement may be found in the appendix.]
    Chairman LoBiondo. Thank you.
    I will continue to yield to my colleague from Long Island.
    Mrs. McCarthy. Thank you. My next witness is Steve 
Breitstone. Now, in defense--because all of you have talked 
about lawyers, which I kind of think is unfair. You have got to 
remember the lawyers are only interpreting and trying to work 
out what we, the Federal Government have put the burden on. So, 
I don't think it is fair to blame the lawyers; I think it is 
fair to blame the Federal Government. And I think if you really 
think that through, you will see that is true.
    Mr. Breitstone is a highly respected estate tax attorney 
from Mineola, my hometown, and has first-hand knowledge of the 
impacts of estate tax as on small businesses.
    Steve, thank you for coming; I appreciate it.

  STATEMENT OF STEPHEN M. BREITSTONE, LAW OFFICES OF MELTZER, 
           LIBBE, GOLDSTEIN & SCHLISSEL, MINEOLA, NY

    Mr. Breitstone. Thank you, Congresswoman. I have been 
practicing tax law, generally, since 1982. I survived--
originally, I was a corporate tax attorney. I survived the Tax 
Reform Act of 1986. At that time, we were concerned that we 
were going to be out of work. After listening to today's 
testimony, I feel like an endangered species-- [Laughter.]--
once again, but the fact of the matter is that I have 
confidence in my resourcefulness and my ability to continue, 
even if the estate tax is repealed, to provide my clients with 
services that they really need, and I certainly agree with your 
comment--we do not, as attorneys create the problem. I take 
great pride in helping my clients who are mainly small 
businesses to avoid the problem and to manage the problem, and 
I also find it, I guess, offensive that the rhetoric from 
Washington continues to be ``Let us close all the loopholes; 
there are abuses.'' Anything that we can do to help to 
ameliorate the estate tax to make it manageable is viewed as an 
abuse, and there have been proposals from the administration 
time and time again to close these so-called loopholes, and I 
think that the prospect of doing so is extremely dangerous 
unless it is accompanied by significant reform, and by reform, 
I mean raising the levels--the threshold levels before the tax 
is imposed significantly.
    The idea that was talked about earlier of a $9 million 
threshold that was originally enacted, that is a number, but it 
doesn't necessarily stand on its own, but it is a much greater 
number than the current $650,000 exemption. Yes, the tax is 
deferred, generally, until the second spouse dies if there are 
two spouses, and you can avoid a total of $1.2 million. The 
ability to--and this is being increased--the small business 
exemption enacted in 1997 is a total boondoggle. It very rarely 
applies, and even it does apply, there are numerous 
disqualification events that can end up preventing the heirs 
from being able to conduct the business in a rational, economic 
manner.
    Our practice, as I said, relates primarily to small 
businesses and closely-held businesses, and by small, I don't 
mean candy stores; I mean businesses that are owned by 
individuals starting from start-up companies to the successful 
family business that has been passed down one, two, three 
generations in some instances, rare instances. These businesses 
are inherently perilous.
    The people that found these businesses and choose to go 
into them, really, to me, represent the epitome of the American 
dream. It is their willingness to give up the safety net and to 
take the risks that they take personally and financially to 
start a small business and to run it. Typically, they are 
undercompensated for their efforts for many years; they suffer 
from numerous vicissitudes of the marketplace; they are 
inherently at a competitive disadvantage to large, established 
businesses; they don't have the ability to raise capital; their 
stock is illiquid; unless they eventually go to the public 
markets, their ability to borrow is extremely limited, and it 
is really ironic, and it is really abominable that at the time 
that these companies are suffering the major transitional event 
in their lifetime, the time when they need to pass on 
leadership from one generation to the next, that they must go 
out and incur debt or sell off assets to raise capital equal to 
55 percent or more of their net worth.
    Now, under the best of circumstances, a small business 
cannot afford to incur that kind of indebtedness or to raise 
that type of capital without significantly increasing the level 
of risk associated with the business, and the estate tax--I 
deal with many companies that are looking to raise capital. We 
try to help them; that is one of our things we take pride in. 
But the fact is that raising capital to put into plants and 
equipment to develop new technologies is something that is 
attractive to the marketplace. Yes, it is an uphill battle, but 
if they have something good to offer, they can attract capital. 
But it is very difficult to attract capital to pay estate 
taxes, because it is a one-way street--the money goes out and 
absolutely nothing comes in to pay for it.
    I would like to summarize by saying that the thresholds 
really need to be increased. I am not necessarily in support of 
a total repeal of the estate tax for the very wealthy, because 
I do think there are some concentrations of wealth that are 
anti-competitive as to small business, and I also think that a 
gradual phase-out of the tax will leave the economy shouldered 
with the continuing burden of compliance without getting the 
savings in terms of revenues. So, as the revenues go down, the 
compliance levels are still going to be very high, and I think 
that that would be really inefficient.
    Thank you.
    [Mr. Breitstone's statement may be found in the appendix.]
    Chairman LoBiondo. Thank you, Mr. Breitstone.
    Congressman Hill, do you have questions?
    Mr. Hill. Thank you very much, Mr. Chairman.
    First of all, I want to thank you all for testifying, and, 
Mr. Platt, your testimony could come right out of Montana.
    The one point I want to make--and I guess I would ask you 
about--I suspect if you are like most Montanans, you haven't 
put a lot of money into a retirement account, and you struggle 
with a 650-cow/calf operation to feed three families.
    Mr. Platt. Ours is a an industry that is capital-intensive 
and is not a cash cow--no pun intended. I have no savings to 
speak of. My personal checking account is pretty much a month-
to-month sort of thing. Again, the reason that my wealth, if 
you will, is not liquid in nature--in fact, it is quite the 
opposite--land is very illiquid and that being the primary 
element of my estate.
    Mr. Hill. I noticed you have some sons you hope to bring in 
the business. Let me just tell you from personal experience, 
when I tried to bring sons into my business, one day they 
realized that the harder they worked to grow the business, the 
bigger the tax liability they were building for themselves, 
which is one of the real problems associated with passing these 
businesses from one to the next.
    Ms. Robbins, your testimony I found really interesting, and 
I would just ask you if you would provide for me some of the 
foundations of the economic model you did for the projections 
that you included in your testimony?
    Dr. Robbins. Sure.
    [The information may be found in the appendix.]
    Mr. Hill. I would really appreciate having that 
information, because I found it really interesting.
    Dr. Robbins. Okay.
    Mr. Hill. My questions are really for you, Mr.--is it 
Breitstone?
    Mr. Breitstone. Breitstone.
    Mr. Hill. Breitstone. By the way, in Montana, the prairie 
dogs aren't an endangered species; we have a million of them.
    Mr. Breitstone. I don't feel so bad. [Laughter.]
    Mr. Hill. Right. The situation with a publicly-traded--if 
you own stock in a publicly-traded company, if you sell that 
company, that stock--it doesn't have much impact on the value 
of the company or the ongoing operations of the company. I 
mean, that is the difference, isn't it, between a privately-
traded company or a closely-held company?
    Mr. Breitstone. Absolutely. The real impact of the estate 
tax--the real adverse impact is felt primarily by the small, 
closely-held business, because, first of all, as an economic 
unit, even though some are in corporate form, it is very hard 
to distinguish between the economics of the individual 
shareholder and the economics of the company; they put their 
own wealth into the company. But with a public company, public 
companies have--their shareholdings are widely held; their 
shares can readily be sold. For the most part, public companies 
really don't need to be concerned about the estate tax. They 
don't have to pay for the cost of planning for it and complying 
with it.
    Mr. Hill. And as a matter of fact, I would make the 
argument that the current tax structure we have, in general, 
encourages the accumulation of wealth within corporations, 
publicly-traded corporations, and discourages the accumulation 
of wealth in privately-held companies, because public companies 
can hold other companies, and their dividends aren't taxed, and 
there is all kinds of incentives for the creation of pyramiding 
of economic wealth in publicly-traded companies.
    Mr. Breitstone. Many small businesses cash out.
    Mr. Hill. That is right.
    Mr. Breitstone. They sell out to the big companies.
    Mr. Hill. One of the things that I found working with small 
businesses is that more often than not--and you make the 
point--a lot of these businesses don't succeed in subsequent 
generations, particularly in the third generation. The 
percentages are pretty small, and that is because the person 
that founded the business was the original entrepreneur, and 
they had the passion for the business and the idea and all 
that.
    One of the problems with these small businesses, when that 
person dies, that has an adverse impact on the business aside 
from just the tax impact. I mean, in essence, what we are doing 
is we are piling on. The entrepreneur dies, and then we are 
saying ``We are going to tax you too. We are going to give you 
financial penalties on top of all other penalties that you have 
associated with that.'' I mean, isn't that part of the problem?
    Mr. Breitstone. Well, certainly, the death of the 
entrepreneur is a big hit for a company. I would venture to say 
that in the ideal business model the types of skills that the 
entrepreneur was able to muster in order to found the company 
and just get it off the ground, may not necessarily, in the 
long run, be the same types of skills necessary for the company 
to continue as a viable entity into the next generation, and I 
think that companies grow stronger if they are cognizant of the 
need to put the proper management in place.
    The problem is that management--the qualifications 
necessary to have management that will be able to carry on, 
whether it is family or not, is very expensive; it is a 
significant cost. And I would much rather see that the money go 
into paying for management and paying for new technologies to 
be able to stay on top of the market than paying into the tax 
system, which seems to add very little to the budget.
    Mr. Hill. It is nice to hear some of the concerns that you 
expressed earlier and that is the total elimination of the 
estate tax, complete elimination of the estate tax. I think the 
estate tax is unfair. I am concerned about what the impacts of 
that might be in terms of discouraging people from ever selling 
anything, because if you pass it from one generation to the 
next generation without ever incurring any tax liability, we 
could actually encourage people also, then, never to sell 
anything.
    That is why--I will just ask; you might want to comment on 
this if you would care to--I have introduced a bill that would 
eliminate the death tax, but when you die you trigger a capital 
gains. Your estate would be subject to a capital gains tax. The 
new basis would be passed on to the new heirs. It sets that tax 
rate at 15 percent, and, again, you would only be paying a tax 
on the unrealized gain or you would be recognizing the gain. 
Savings accounts, retirement accounts--those things wouldn't be 
subject to that tax.
    Mr. Breitstone. It is my feeling that the capital gains 
tax--as we now have it with a very low, effective rate--already 
serves that purpose. Death is not necessarily the time when a 
company should be paying a tax. The income tax system does, 
however, deal with the free market which will eventually 
dictate whether a company is to be sold, liquidated, whether it 
is going to continue or not continue, and at the time that the 
business, the exigencies of the business, which could be many--
could be technological changes; it could be supply changes; it 
could be changes in management; death of an owner; there are 
just too many to enumerate--but those factors will eventually 
compel--a business that is insufficient, that gets passed on to 
the next generation will not succeed and prosper in the long-
run unless they are operating it efficiently.
    Mr. Hill. And that is the other side of this coin. You 
specialize in tax avoidance techniques, right? I mean, you help 
people----
    Mr. Breitstone. I wouldn't say, necessarily--I certainly 
wouldn't describe it that way. [Laughter.]
    Mr. Hill. All right, I will describe it.
    Mr. Breitstone. One of the things that I do is manage tax 
liabilities and structures things in a way that is most 
efficient from a tax point of view, most efficient from the 
taxpayer point of view.
    Mr. Hill. As you can tell, I am not a lawyer, so I probably 
didn't couch that exactly the way----
    Mr. Breitstone. Well, there are many other things that I do 
than just tax avoidance.
    Mr. Hill. My point simply is, is the cost of that, and that 
costs your customers a lot, doesn't it? I mean, your clients 
pay a lot, not just in fees to you but accounting fees, 
evaluation fees, life insurance----
    Mr. Breitstone. Oh, estate tax planning is an extremely 
costly endeavor, from legal fees to the cost of insurance. I 
mean, it compels massive investments in an insurance product 
which would really make very little economic sense but for the 
estate taxes.
    Mr. Hill. My point, simply, is that is not money invested 
in the business in growing and expanding it.
    Mr. Breitstone. Right, exactly; I agree.
    Mr. Hill. Thank you, Mr. Chairman. I appreciate the 
tolerance and the time. Thank you very much.
    Chairman LoBiondo. Thank you. Congresswoman McCarthy.
    Mrs. McCarthy. Thank you. Number one, I want to thank the 
whole panel. I think your message has been extremely loud and 
clear, and there certainly are a number of us here in Congress 
that will be taking up the fight for all of you at least to try 
and make it better.
    And to Steve, actually, the questions that were just asked 
were answered by you, and I appreciate that. We thank you for 
your time, and hopefully we can look forward to certainly 
picking your brains in the future as we push this thing a 
little bit further out.
    I hope that eventually that we can come to some sort of 
conclusion on helping our small farmers, our small businesses. 
As I said earlier, it is the backbone of our country.
    So, I appreciate your time and your effort to be here with 
us, even though--I will explain this--a lot of our members are 
running back and forth to different Committee hearings and 
everything else like that and being that today is Thursday, a 
lot of people are not around, so we never how many--the 
testimony will get to everybody; they will read it. I thank 
you.
    Chairman LoBiondo. I just have one question. Roger, you 
mentioned the situation when you called your mother and asked 
her if she had had any paperwork saved and what her response 
was about wanting to get rid of it and just put it out of her 
mind. Not to sort of open up a raw nerve, but would you suggest 
that was solely just because of the impact? Did it have 
something to do with how she was treated by the IRS? Was it a 
combination of why that experience was so bitter?
    Mr. Ruske. It was a combination of things----
    Chairman LoBiondo. If you could use the microphone, please.
    Mr. Ruske. It was a combination of things. It was a long 
slow death for my grandfather. Unfortunately, my uncle, who was 
in the business with him, died a month before he did, so that 
complicated the whole affair. But my mother is a simple woman. 
She raised nine children and felt what was yours was yours, and 
she couldn't understand why these people from Internal Revenue 
kept badgering them for more money, and it has really turned 
her off on Government, and every time she sees a bomb being 
dropped wherever we are dropping bombs now, she says, ``Why is 
my money being used for that? Why did they take my father's 
money and do that?'' So, yes, the Government had a very serious 
impact on her.
    And she--I suppose my attitude towards lawyers come from my 
mother--but the lawyers and the accountants and the 
insurancemen are the messenger. I mean, they--Mrs. McCarthy is 
absolutely correct--they don't do anything; they just tell us 
what we should be doing.
    But it is very personal. Estate taxes have become very 
personal, and then they become emotional, and then irrational 
thought comes into it. This is what it unfortunately gets down 
to.
    Chairman LoBiondo. Okay. Well, I would, too, like to join 
in thanking all of the panelists. You have helped put a very 
human face on what is perceived as a problem that is out there 
somewhere. And often when we deal with issues in legislation, 
it is helpful to that human face and to hear that human story 
that you have all done so well to portray to us, and we thank 
you for taking time out of your busy schedules to be here.
    I would like to add that, without objection, we will leave 
the record open for 10 days for the submission of statements 
for the record.
    And, with that, the meeting is adjourned.
    [Whereupon, at 11:54 a.m., the Subcommittees were 
adjourned.]
                                APPENDIX

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