[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




                                                   S. Hrg. 102-000 

THE ESTATE TAX AND THE ALTERNATIVE MINIMUM TAX - INEQUITY FOR AMERICA'S 
                           SMALL BUSINESSES

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

                                HEARING

                               before the

                SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, APRIL 14, 2005

                               __________

                           Serial No. 109-11

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
21-286                      WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001


                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

                SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

JEB BRADLEY, New Hampshire Chairman  JUANITA MILLENDER-McDONALD, 
SUE KELLY, New York                  California
STEVE CHABOT, Ohio                   DANIEL LIPINSKI, Illinois
THADDEUS McCOTTER, Michigan          ENI F. H. FALEOMAVAEGA, American 
RIC KELLER, Florida                  Samoa
TED POE, Texas                       DANNY DAVIS, Illinois
JEFF FORTENBERRY, Nebraska           ED CASE, Hawaii
MICHAEL FITZPATRICK, Pennsylvania    MICHAEL MICHAUD, Maine
                                     MELISSA BEAN, Illinois

                     Joe Hartz, Professional Staff

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Vukelic, Mr. Jeff, Executive Vice President, Try-It Distributing.     4
Pitrone, Mr. Thomas C., Principal, The Integrity Group...........     6
Calimafde, Ms. Paula, Esq., Paley Rothman........................     8
Ross, Ms. Jenell, Dealer/Operator & Vice President, Bob Ross 
  Buick GMC Hummer...............................................    10
Zittel, Mr. Paul, Amos Zittel and Sons, Inc......................    12
Beach, Mr. Bill, Director, Center for Data Analysis, The Heritage 
  Foundation.....................................................    13

                                Appendix

Prepared statements:
    Vukelic, Mr. Jeff, Executive Vice President, Try-It 
      Distributing...............................................    24
    Pitrone, Mr. Thomas C., Principal, The Integrity Group.......    27
    Calimafde, Ms. Paula, Esq., Paley Rothman....................    31
    Ross, Ms. Jenell, Dealer/Operator & Vice President, Bob Ross 
      Buick GMC Hummer...........................................    40
    Zittel, Mr. Paul, Amos Zittel and Sons, Inc..................    45
    Beach, Mr. Bill, Director, Center for Data Analysis, The 
      Heritage Foundation........................................    49

                                 (iii)
      


 
THE ESTATE TAX AND THE ALTERNATIVE MINIMUM TAX - INEQUITY FOR AMERICA'S 
                            SMALL BUSINESSES

                              ----------                              


                        THURSDAY, APRIL 14, 2005

                   House of Representatives
          Subcommittee on Tax, Finance, and Exports
                                Committee on Small Business
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 2:09 p.m. in 
Room 311, Cannon House Office Building, Hon. Jeb Bradley 
presiding.
    Present: Representatives Bradley, Millender-McDonald, 
Chabot, McCotter, Keller, Poe, Fortenberry, Fitzpatrick, 
Lipinski, Faleomavaega, Kelly, Bean, Davis, Case, Michaud 

    Mr. Bradley. Good afternoon, everyone. Congresswoman 
Millender-McDonald will be here shortly, but I will call this 
hearing of the Subcommittee on Tax, Finance, and Exports to 
order and begin with a statement of my own.
    I would like to begin by thanking all of you for 
participating in this hearing this afternoon, especially those 
of you who have traveled from significant distances to be here 
to talk about the alternative minimum tax and the estate tax, 
two taxes in our tax code that I think are among the most 
unfair.
    I look forward to working with all of you, as well as my 
colleague from California, Congresswoman Millender-McDonald, as 
we address the many issues facing small businesses in our 
country.
    The estate tax affects all Americans, especially small 
business owners, and I used to be one, the small business 
owners who have consistently identified permanent repeal of the 
estate tax as one of their most pressing concerns.
    Working together with President Bush, Congress, in 2001, 
enacted bipartisan legislation that provides immediate relief, 
through tax reduction and an expanded exemption, with complete 
repeal occurring in 2010. Unfortunately, as we all know, the 
provisions of that bill, in 2001, required Congress to pass 
additional legislation to make the repeal and the elimination 
permanent. Thankfully, the House, once again, did that just 
yesterday afternoon by a vote of 272 to 162, and I might note, 
a very bipartisan vote. It is now up to our colleagues on the 
other side of the Capitol to pass similar legislation so that 
we can finally get to a Committee of conference and, hopefully, 
put a bill on the president's desk for his signature soon.
    Simply put, the estate tax threatens the livelihoods of 
many families that run small businesses across our country. 
Small businesses have much of their assets tied up in 
equipment, in inventory, and other critical assets that are 
necessary to run a company. They do not have the available 
liquid capital to pay the estate tax many times, and so are 
forced to sell either the entire business or integral parts of 
the businesses in order to cover the tax liabilities of the 
estate tax. In my point of view, this is not acceptable, it 
hurts our economy, and that is why we must continue to fight 
for a permanent repeal of the death tax.
    Similarly, the alternative minimum tax is an incredibly 
complex provision--I am going to pay it tomorrow--in the tax 
code that requires taxpayers to calculate their taxes twice and 
then pay the larger amount. Initially, a method to ensure that 
the wealthiest Americans paid their fair share because of the 
combined effects of inflation and individual rate cuts, the AMT 
has reached into the checking and savings accounts of the 
middle class. The alternative minimum tax unfairly penalizes 
businesses that invest heavily in capital assets by 
significantly increasing the cost of capital and discourages 
investment in productivity-enhancing assets by negating many of 
the capital-formation incentives provided under the regular tax 
system.
    What we face with the alternative minimum tax is a sleeping 
giant that is starting to wake up and gobble the hard-earned 
funds of millions of American taxpayers, in particular, middle-
income taxpayers. Today, it is 3 million taxpayers, but in a 
few short years, if we do not pass legislation to keep the 
exemptions from returning to previous levels, it will be 11 
million taxpayers. And if we do not have a longer-term solution 
for the AMT by the end of the decade, it could be as many as 30 
million taxpayers. One in three Americans potentially will fall 
under this tax that was originally designed to catch 150 of the 
most wealthy Americans that did not, at that time, pay their 
fair share of taxes.
    So what we have today, with the AMT, is a situation where 
middle-income Americans will be paying more than the wealthier 
Americans because they lose their personal exemptions, they 
lose their exemptions for state and local taxes, and they lose 
the exemptions for itemized deductions. Most of the benefits of 
the tax cuts in 2001 and 2003 will no longer exist for these 
taxpayers and for anybody that has had to go through the AMT. 
The compliance costs of having to fill out taxes twice in a 
dual universe--the normal way and then the AMT way--is much 
higher.
    So I am really looking forward to hear testimony today, but 
before I get to our panel, I would like to recognize my 
colleague from California, Congresswoman Millender-McDonald, 
because I know that you have an opening statement. Thank you, 
and I am sorry to have start before you got here.

    Ms. Millender-McDonald. That is all right. I had another 
one, so I just to just rush over from Rayburn over here.
    Mr. Chairman, thank you so much for convening this hearing 
to discuss a very important issue for small business owners, 
and that is the U.S. Tax Code. As tomorrow's tax return 
deadline approaches, this topic is surely fresh in the minds of 
many small firms, which we are very much aware of, the engines 
that drive our economy. How many face a barrage of challenges 
on their road to success, from inequities in federal 
contracting to burdensome federal regulations and lack of 
access to affordable health care? It has become increasingly 
clear that our nation's small businesses deserve a break.
    We are holding today's hearing because small businesses 
continue to be hit by inequities in the tax code. Over the past 
five years, a series of tax cuts, with a total cost of over $2 
trillion, have been enacted, but the inequities for small 
businesses still persist. The reality is that over half of 
small firms only received an average $500 under these cuts 
despite an enormous cost. Many of the tax cuts in these bills, 
including the dividend tax cut, provided virtually no benefits 
to small businesses or entrepreneurs.
    While many of the tax reforms were instituted as a way to 
improve the economy, the job record through 2004 was 
considerably weak, and the GDP growth rate has hovered over 3 
percent since last year. Part of the reason we have not seen 
job growth is the lack of the tax relief aimed at stimulating 
the small business sector, the proven job creators.
    The two issues before us today are ones that significantly 
impact small businesses. When considering reform, we must take 
into account the needs of entrepreneurs and focus on solutions 
that will stimulate the small business sector. While there is 
no doubt that the alternative minimum tax and the estate tax 
reform will provide necessary relief for small businesses, it 
is clear that we face some tough choices.
    With regard to the estate tax, there are clear solutions to 
this issue that have bipartisan support, and we need to act 
sooner rather than later. No one supports an estate tax that 
forces the sale of a family-owned business.
    Based on the panelists today, I think we can all agree many 
American business owners dream of one day passing their 
business on to another family member. The way the current law 
is structured, however, it has made estate planning nearly 
impossible. By reforming the estate tax to meet the needs of 
small firms, we can ensure that family-owned farms and 
businesses will be passed on from generation to generation, and 
I think we owe it to small businesses to work together for a 
permanent solution.
    We will talk about AMT. The mere mention of it brings fear 
to those who have even had to pay or even calculate it. It is 
clear that Congress's failure to provide for adequate AMT 
relief has meant that thousands of small business owners are 
subject to this tax. The failure to address these issues has 
contributed to the growing complexity of the tax code. Small 
should businesses should not be spending thousands of dollars 
on tax preparation. Small firms simply do not have the 
resources or capital to comply, and it is wasted money that 
business owners could allocate elsewhere.
    According to an Office of Advocacy report, for small 
businesses with less than 20 employees, the cost of tax 
compliance is nearly double that of their larger counterparts.
    So today's hearing is an opportunity to assess the real 
impact of the current tax code on our nation's small 
businesses. When we examine our tax priorities, the needs of 
small businesses must be at the forefront. We are operating in 
an era of budget deficits, so in terms of tax relief, it comes 
down to priorities.
    I look forward, Mr. Chairman, to today's testimony and hope 
that we can identify solutions that will provide targeted tax 
relief to small business owners. It is critical that we examine 
how our economic policies affect the small business sector and 
that we develop a tax code that awards our risk takers. Thank 
you, Mr. Chairman

    Mr. Bradley. Thank you very much.
    I would like to recognize the first witness this afternoon, 
Mr. Jeff Vukelic, who is the executive vice president of Try-It 
Distributing from Lancaster, New York, and is here today 
representing the National Beer Wholesalers Association. Mr. 
Vukelic, Thank you.

         STATEMENT OF JEFF VUKELIC, TRY-IT DISTRIBUTING


    Mr. Vukelic. Thank you, Mr. Chairman.
    My name is Jeff Vukelic, and I am executive vice president 
of Try-It Distributing, where we serve the Buffalo/Niagara 
Falls market as a distributor of Anheuser-Busch, Heineken, and 
Labatt beers.
    Try-It Distributing was started as a soft drink bottling 
company by my grandfather, Stephen Vukelic, in 1928. My 
grandparents were Croatian immigrants. They never dreamed their 
company would grow into an operation with a fleet of over 110 
delivery vehicles and more than 200 employees.
    My parents, brothers, and I are fully involved and 
committed corporate citizens. We serve on civic and not-for-
profit boards who respond to needs of charitable organizations, 
who contribute to programs for at-risk youth and work closely 
with law enforcement to advocate responsible consumption. 
Elected officials on every level rely on us to be well-informed 
and concerned supporters of individuals and ideas that ensure 
good government.
    The Vukelic family is typical of other family-owned 
businesses in our association. Our home communities look to us 
as consistent leaders and dependable doers.
    As chair of the National Beer Wholesalers Association, I 
appreciate the opportunity to share some thoughts with you 
today on behalf of the 1,850 members of our organization.
    The beer-wholesaling industry directly employs more than 
92,000 Americans nationwide, and the beer industry at large 
indirectly supports more than 890,000 workers, accounting for 
more than $30 billion in tax revenues across the country. Many 
wholesaling companies have been family owned and operated since 
the repeal of prohibition in 1933.
    Regulation is a fact of life for beer wholesalers. We are 
regulated every day by a virtual alphabet soup of federal 
agencies, including TTB, FCC, DOT, NHTSA, EPA, OSHA, and the 
IRS, just to name a few. And because of the 21st Amendment, my 
company is strictly regulated by the New York State Liquor 
Control Authority.
    I am here to talk about an issue that is absolutely 
critical to every privately held and family-owned business in 
America: the permanent repeal of the death tax. Now is the time 
for Congress to take final action to permanently repeal the 
federal death tax.
    Over the last few years, and again yesterday evening, the 
House of Representatives has made great strides in helping 
America's small businesses by voting to permanently repeal the 
death tax. We continue to wait on the Senate to take action.
    Small business owners need certainty when planning for 
their succession and the long-term viability of their 
businesses. As long as Congress fails to act, business owners 
will be forced to divert economic resources from investments 
that grow businesses, create jobs, and boost the economy. 
Instead, they will use those funds to pay for estate planners, 
lawyers, and accountants to navigate them through the 
uncertainties of the current tax structure and utilizing state 
funding vehicles.
    Permanent repeal would free up that time, money, and 
energy. This would allow business owners to focus on growing 
their businesses, creating more jobs, and working to stimulate 
economic growth as a whole. We want to help keep the American 
economy strong and viable for our future and the future of our 
children.
    Although full repeal will occur in 2010, the death tax 
burden will return in full force in 2011 due to the sunset 
language that was included in the Economic Growth and Tax 
Relief Reconciliation Act of 2001.
    According to a recent survey, 85 percent of those polled 
want the death tax permanently abolished or significantly 
reduced. The American people oppose, on principle, the concept 
of anyone being taxed on the death of their parents. 
Unfortunately, if permanent repeal is not passed, many small 
business owners and farmers will continue to pay the ultimate 
price created by the sunsetting of the death tax repeal: loss 
of family businesses.
    As the father of two young children, I am very concerned 
about their future and the future of my company if the death 
tax returns as currently scheduled. H.R. 8, the Death Tax 
Repeal Permanency Act of 2005, was introduced by 
Representatives Kenny Hulshof [MO-9] and Bud Cramer [AL-5] and 
passed the House with strong, bipartisan support yesterday. I 
would like to thank those members of this Committee that 
supported that legislation.
    S. 420, the Death Tax Fairness Act, has been introduced by 
Senators John Kyl [AZ] and Bill Nelson [FL]. This bill also 
seeks full and final repeal of the death tax.
    I urge Congress to act quickly and not turn its back on 
America's small business owners. Please encourage the Senate to 
schedule a vote on permanent repeal now. Congress must make 
death tax repeal permanency a priority by sending President 
Bush legislation for his signature.
    As I close my remarks, I am thinking about the talents, 
sacrifices, and hard work that my grandfather and my father 
invested in making Try-It Distributing a success. Stephen 
Vukelic, a young newcomer from Croatia, achieved the American 
Dream. Please do not allow such bright dreams to become 
nightmares for the third and fourth generations of families who 
are working hard every day to sustain solid American 
businesses.
    Mr. Chairman, thank you for the opportunity to share with 
you our organization's position on these important small 
business issues.
    [Mr. Vukelic's statement may be found in the appendix.]

    Mr. Bradley. Thank you very much, sir.
    Our second panelist is Mr. Thomas Pitrone, who is the 
principal of the Integrity Group of Willoughby, Ohio, and a 
member of the National Small Business Association. Welcome.

        STATEMENT OF THOMAS PITRONE, THE INTEGRITY GROUP


    Mr. Pitrone. Good afternoon, Chairman Bradley and Ranking 
Member--

    Ms. Millender-McDonald. --Millender-McDonald.

    Mr. Pitrone. --Millender-McDonald.

    Ms. Millender-McDonald. Thank you so much, sir.

    Mr. Pitrone. Thank you. I appreciate the opportunity to 
testify on the negative impact of the estate tax on small 
businesses. I am an estate tax practitioner. My primary focus, 
my practice, has worked with older folks on their money-
management issues, but I also consult with small businesses on 
continuity and estate tax issues.
    My firm was started with my dad, Frank Pitrone, who was a 
CLU, in 1983, and I have been in advocacy for small business 
since about 1988, through my association with COSE, the Council 
of Smaller Enterprises in Greater Cleveland, and then I was a 
delegate to the White House Conference on Small Business, and I 
am sitting on the board of the National Small Business 
Association now.
    The estate tax is a tax on capital, as far as small 
businesses are concerned. For the majority of small business 
owners, their major asset is their business. I know scores of 
business owners who are worth more than $5 million, but they 
could not cash a check for more than 10 because they do not 
have any liquidity. It is hard to get cash out of a company.
    They have worked hard all of their lives, as we just heard. 
They are frugal, they amass wealth, and they take care of their 
families. They live around the demands of their business. It 
does not make any difference if it is a farm or a store or a 
distributorship, insurance agency, when the business is in 
trouble, everybody in the family reacts. They understand that 
the business is important to the business owner, to the 
breadwinner, and it pays the bills.
    It is not a new phenomenon. The issues of small business 
are older than our country. The founders, by our standards, 
were all small businessmen. They were tradesmen, lawyers, 
farmers, and they saw the importance of small business 
preservation as one of the issues that drove the Revolution. In 
the 1760's, George Washington saw the separation from England 
as important to the survival of small business, just business 
in general because there was nothing but small businesses then. 
So it is not too much to say that part of the reason for the 
Revolution was the existence of business in the United States, 
the colonies then.
    Well, as I said, I have been involved in advocacy for 17 
years, and I hear representatives talking about how important 
small business is and how they believe in small business. I 
have just got to say, you need to do more than believe in it 
because, as the Ranking Member mentioned, it is the engine that 
drives the country, and the freedom to start a business is one 
of the most important freedoms, and you see it blossom wherever 
there is liberty. If you go to New York, Kiev, Nairobi, you see 
people with a box and a few things to sell. They are small 
business people; they are making it on their own.
    So, in our country, a business owner works for 30, 40 
years, pays his taxes, volunteers, does all of the things that 
we know they do, and then one day I come in and talk to him and 
tell him about what he is going to have to do to avoid the 
estate tax, or the government is going to take half of his 
business when he dies. And often, they do not believe me.
    I can think of an instance where I went to see a fellow who 
owned a truck terminal, and I told him that he was going to 
have to pay half, or the government was going to take his 
business, and he said, I never heard of this; it cannot be 
true. And I said, No, no, it is true. And he said, Well, my 
business is not worth anything. So I looked out the window, and 
he has got a truck terminal and all of these tractors and 
probably 25 trailers, and he said, I have written them down; 
they have no book value. I said, Well, the IRS does not care 
about that. They go by what a willing buyer would pay a willing 
seller. And he said, If you get a willing buyer, get him in 
here.
    So we began to talk about what he had to do, and he, 
frankly, did not believe me. He began to rant and rave, say bad 
things about the government, and finally ended up kicking me 
out.
    And the truth is, what we have to do to avoid the estate 
tax is ridiculous. I tell people that they have to do obviously 
transparently stupid things to avoid the estate tax. They have 
to have a defective trust. They have to send their children 
crummy letters, and I feel like a witch doctor. It is like 
voodoo, but that is what they need to do avoid the estate tax. 
They often cannot believe me. They also have to buy a lot of 
life insurance and pay attorneys a lot of money to draft the 
documents that they need.
    A small business owner already has a buy/sell agreement. He 
has got insurance for liquidity. He understands that. It makes 
sense to him, but when you tell him that the government is 
going to take half of his business when he dies, the value of 
his business, and he has to come up with the cash within nine 
months, you cannot blame him for feeling persecuted.
    So the proponents of the death tax are dismissive about our 
issues. Small business is secondary to them. They say, ``Can't 
we just fix it? Raise the limits.''
    There are two provisions that I just want to talk about 
real briefly. One is Section 6166, which allows a company to 
finance for 14 years. I have only known one company that did 
that. They told me it was hell. The IRS is not really financing 
as much as they become your partner. The other is the family-
owned business exclusion, which is so complicated, nobody uses 
it, and the reason is the exclusions and the inflation have 
reduced the benefit of it, at any rate.
    I will sum up just by saying that small business will not 
be safe until we have totally eliminated the death tax, and I 
want to thank you for the opportunity to make my statement, and 
I look forward to questions.
    [Mr. Pitrone's statement may be found in the appendix.]

    Ms. Millender-McDonald. Mr. Chairman, before we proceed to 
the other one, I have just been told that we have a vote within 
a half hour, is it?--about a half hour, and then I will have to 
leave, so can you please ask the witnesses to be very brief and 
summarize as opposed to extending their remarks?

    Mr. Bradley. Well, you have just done that, so I will 
repeat it, and I will let you ask your questions first when we 
are completed with all of the witnesses.
    Our third participant this afternoon is Ms. Paula Calimafde 
and is representing Paley Rothman from Bethesda, Maryland, and 
the Small Business Council of America.

          STATEMENT OF PAULA CALIMAFDE, PALEY ROTHMAN


    Ms. Calimafde. It is a pleasure to be here, and I commend 
all of you for holding these hearings on very difficult topics.
    I am Paula Calimafde. I am the chair of the Small Business 
Council of America. It is a national, nonprofit organization 
which represents small businesses only on federal tax, health 
care, and employee benefit matters. I am also a tax attorney, 
and I work with small business owners every day, and, 
unfortunately, from time to time, I have to deal with probate, 
which is what happens when someone passes away. I was fortunate 
enough to be a commissioner at the White House Conference in 
1986, and I was a presidential delegate to the White House 
Conference in 1995.
    I have a very important message, and it is very strange for 
me to be sitting here, surrounded by these people who I know 
have spent a lot of time and effort to come here and who 
obviously believe in what they are saying, but my message is 
very different. I believe, and I guess it is even stronger, I 
know that repeal of estate taxes in 2010 and beyond actually 
hurts small business owners, and the reason why it hurts them 
is a technical reason, and I think that is why most small 
business owners do not understand the issue. It is because, in 
2010, small business owners are going to lose a part of their 
step-up in basis, and the way the estate tax rules work today, 
when a person passes away, the heirs get the property from that 
decedent at fair market value. That is their basis.
    In the 2010 rule and beyond, $1.3 million of the assets 
goes decedent's heirs with a step-up, and the rest get the 
carry-over basis from the decedent. What that means is whatever 
the decedent's basis was, they have to use that, and, believe 
me, it is not easy to figure out what a carry-over basis is. I 
believe, in 1976, Congress tried to repeal the step-up in 
basis. It got extended to 1980. It never got put into place. 
The reason why is a number of attorneys and accountants kept 
coming to Congress and saying, There is no way we can figure 
out the basis for someone who died who acquired property 50 
years ago. And under the rules, if you cannot prove the basis, 
the basis in the property is zero.
    So the Small Business Council of America believes strongly 
that repeal is not the answer. What the answer is, is an 
increase in exemption level, and I will go over some numbers 
quickly, but you will see that that exemption level should be 
$3.5 million next year, not 2009, because when you see how many 
small businesses are trapped by the $1.5 million exemption 
level to the $3.5 million level, it is more than, like, 84,000 
small businesses are getting caught between that $1 million and 
the $3.5 million exemption level.
    We think the step-up in basis needs to be preserved, and we 
also believe that the gift and estate tax system should be 
reunified.
    Let me explain to you a simple example so you will 
understand what I am talking about. As soon as a small business 
owner who owns exactly $3.5 million of assets--he is single, 
and he passes away. He passes away in 2011. Congress has 
repealed the estate tax. Of the $3.5 million, $1.3 million gets 
a step up in basis. The other $2.2 million of assets that this 
man has owned and worked hard for is now a carry-over basis.
    Imagine this man is 85 years' old. Who is going to figure 
out what the basis in these assets were? Who knows? But let us 
assume, for argument's sake, that the basis in the assets is a 
million. That leaves the heirs of that small business owner 
with $1.2 million of income tax. Compare that to the estate tax 
law staying in place in 2009. There would be a $3.5 million 
exemption, a complete step-up in basis. The man dies, his 
family inherits those assets, and they have $3.5 million of 
step-up. If they were to set up the next day, zero taxable 
income and zero gain.
    Now, I hate to be so technical. I hate to be talking about 
step-up and carry-over. I know Bill knows what I am talking 
about, and a few others do, but it is because of this that 
repeal, even though it is being touted something beneficial to 
small business owners, it is not. This is a very, very sad 
state of affairs, and, in fact, the small business owners are 
the straw men today for carrying repeal, and it is the very, 
very, very, very rich who will benefit from repeal, not the 
small business owners.
    I have got a chart which, if you take a look at it, 
explains very clearly who is a winner and who is a loser, but 
basically the small business owners who have more than $1.3 
million in assets and less than $3.5 million, which happens to 
be a huge percentage of small business owners, will do worse 
with repeal.
    So that is my message, and as far as AMT, AMT, just like 
estate taxes, was never intended to hurt the owners of small 
businesses who work for a living. It just got that way, and we 
would much rather see an exemption high enough to get estate 
tax away from small businesses and repeal AMT. Use those 
dollars to repeal AMT, which is really hurting small business 
owners. Thank you.
    [Ms. Calimafde's statement may be found in the appendix.]

    Mr. Bradley. Thank you very much.
    Our fourth panelist is Ms. Jenell Ross, who is a dealer and 
operator and vice president of Bob Ross Buick GMC Hummer in 
Centerville, Ohio, and is representing the American 
International Automobile Dealers Association. Thank you.

      STATEMENT OF JENELL ROSS, BOB ROSS BUICK GMC HUMMER


    Ms. Ross. Good afternoon. My name is Jenell Ross. I am here 
today as a representative of the American International 
Automobile Dealers Association. I want to thank the Committee 
for allowing my testimony today.
    The death tax is an issue that is near and dear to my heart 
because of my family's firsthand experience with it. I am the 
dealer principal of Ross Motor Cars in Centerville, Ohio, 
representing Buick, GMC Hummer, and Mercedes Benz franchises. 
Thirty-one years ago, my father, Bob Ross, took the chance of a 
lifetime and started Ross Motor Cars.
    Our family-owned dealership had been in business for 23 
years when he passed away unexpectedly. My father was a very 
talented and capable businessman. Like a lot of small business 
owners, he knew about the death tax, but he passed away long 
before any of us expected him to, and because of that, the 
dealership's estate planning was years behind where it should 
have been. When he died, the responsibility of keeping the 
business running and the workers employed fell on my mother, 
brother, and me. Although we were familiar with many of the 
dealership operations, I can tell you that none of us was fully 
prepared to take on the overwhelming responsibility of managing 
the day-to-day operations of the business. It was, in many 
ways, on-the-job training.
    Perhaps you can imagine, amidst all of the emotions 
surrounding this personal family tragedy, the incredible shock 
we felt in receiving a federal tax bill for more than half the 
value of our business. That shock was compounded by the fact 
that nearly 90 percent of our dealership's net worth was tied 
up in land, building, equipment, inventory, and parts--assets 
that could not be easily liquidated without seriously damaging 
our ability to function. And that was true not just in our 
case, but it is true for most dealerships today.
    Dealerships are heavily leveraged, and in today's 
competitive environment, dealers have no choice but to maintain 
large inventories of new vehicles. At the same time, we are 
under enormous pressure from manufacturers to maintain our 
properties and buildings at increasingly higher and higher 
levels.
    My experience with the death tax has made this issue a very 
personal one, and we are not alone. Every year, tens of 
thousands of families are forced to endure what we have 
endured. But it is important to remember that the death tax 
imposes a huge cost, even on automobile dealers who are fully 
prepared for it. In fact, 70 percent of dealers view the tax as 
the greatest barrier to expanding business opportunities 
because death tax planning drains resources away from growing 
the business and creating more jobs.
    It is not uncommon for dealers to divert upwards of $10,000 
per month in estate planning. That has certainly been the case 
for our family business. Ever since we received the federal 
death tax bill years ago, my mother has been in weekly contact 
with a team of lawyers and insurance agents to make sure our 
death tax payment plan remains viable and our dealership 
remains solvent. We are currently embarked on a 10-year payment 
plan to pay off the death tax. In the meantime, our business is 
being held for collateral. Our dealership and our employees are 
managing very well today, but there is no question, the 
experience took a tremendous toll on my family.
    Our ordeal with the death tax has been eye opening. It has 
motivated us to do what we can to help bring a permanent end to 
his oppressive and burdensome tax. Not a day has gone by over 
the past eight years in which we have not been haunted by what 
could have been, not only to our business but to the 145 
employees of Ross Motor Cars whose families depend on us.
    The majority of today's 21,000 automobile dealerships are 
true family businesses, run, managed, and expanded by family 
members across several generations. We employ over 1 million 
Americans. When small businesses do not have to commit tens of 
thousands of dollars to death tax planning, that money is 
typically reinvested into the business, and as we expand, so do 
our payrolls.
    The argument that death tax repeal would be too costly to 
the federal coffers is just flat-out wrong. As you may be 
aware, Dr. Wilbur Steger, who advised six U.S. presidents, 
conducted a study on the death tax recently. He calculated what 
the repercussions of death tax repeal would be on the economy 
and concluded that repeal of the tax would actually result in a 
slight increase in revenue to the federal government, $1.7 
billion over 10 years.
    The arguments for permanent repeal of the death tax are 
many, but perhaps the most important reason for why this tax 
should be permanently repealed is that this tax, more so than 
any other, is viewed by the public at large to be fundamentally 
unfair. Last year, AIADA conducted a national survey to gauge 
public sentiment on this issue, and what we found was truly 
remarkable. Voters across political, ideological, and 
demographic lines considered it unfair for the government to 
tax individual earnings twice, both when they are earned and 
again at the time of the earner's death. Nowhere among the 
major voter groups did we find less than 70 percent saying it 
was unfair. If for no other reason, the death tax ought to be 
permanently repealed because it is a tax that is fundamentally 
unfair.
    I want to applaud this Committee for recognizing this 
reality early on, and I want to applaud this Committee and this 
entire chamber not only for the work you did in 2001 to repeal 
the death tax but also for your bipartisan cooperation on this 
issue yesterday.
    In today's competitive auto-retail business environment, 
auto dealers need predictability in the tax code in order to 
hire additional employees, buy new equipment, and expand 
business opportunities. This chamber's vote yesterday will help 
bring badly needed predictability to the tax code.
    In closing, I want to urge the Senate to follow this 
chamber's bipartisan action on this issue and vote to 
permanently repeal the federal estate tax. This issue is not 
about politics; it is about fairness. Thank you.
    [Ms. Ross' statement may be found in the appendix.]

    Mr. Bradley. Thank you very much, Ms. Ross.
    Our next panelist is Paul Zittel. He is from Eden, New 
York, and represents the American Farm Bureau Federation.

      STATEMENT OF PAUL ZITTEL, AMOS ZITTEL AND SONS, INC.


    Mr. Zittel. Thank you and good afternoon. My name is Paul 
Zittel. I, along with my brother and two sons and two nephews, 
own and operate Amos Zittel and Sons, Inc., in Eden, New York. 
I am also the elected vice president of New York Farm Bureau. 
Farm Bureau thanks the Subcommittee for holding this hearing to 
spotlight the need for permanent death tax repeal and to end 
the alternative minimum tax.
    Farm Bureau supports the permanent repeal of death taxes. 
This is for a good reason: Farm and ranch estates face heavier, 
potentially more disruptive, death tax burdens than other 
estates. Roughly twice the number of farmer states paid federal 
death tax in the late 1990's compared to other estates. 
Moreover, the average death tax is also larger than the tax 
paid by most other estates.
    My brother and I are the fourth generation of Zittels to 
farm. We grow fruits and vegetables on 180 acres of land and 
flowers under plastic in two and a half acres of greenhouses. 
We sell a portion of our products through our own family retail 
market.
    Our family farm corporation employs 60 people, 22 of them 
year round. My two sons and two nephews plan to continue the 
family farming business. My family and I have spent thousands 
of dollars and countless hours structuring our business to try 
to reduce or eliminate the impact of death taxes when my 
brother and I die. We pay thousands of dollars per year in life 
insurance so that there will be cash for Uncle Sam if the tax 
is due. The financial drain on our business is significant, and 
still no one can tell us for sure that our escape plan will 
successfully protect the future of my children's livelihood.
    Last year was a particularly difficult year for us due to 
crop damage caused by three hurricanes that ravaged the East 
Coast. Even so, we could not risk foregoing our insurance 
payments. This meant that we had to freeze our wages for our 
employees and reduce the wages for ourselves. In addition, we 
had to borrow money for operating expenses and were not able to 
afford the scheduled improvements to our buildings and 
equipment. We do not know yet when we will be able to recover.
    The impact of death taxes with rates as high as 47 percent 
can be so severe that their imposition can destroy farm 
businesses. Farm operations are capital-intensive businesses 
whose assets are not easily converted into cash. In order to 
generate the funds that are needed to pay death taxes, heirs 
often have to sell parts of their business, and this can ruin 
the economic viability of the business. Faced with the 
realization that their family farm may not survive death taxes, 
children may choose to leave the farms.
    An increase in the death tax exemption is not the answer. 
Only a complete elimination of the death tax can erase the 
impact of the death tax and the estate-planning burden caused 
by changing exemptions.
    Before I conclude, I would like to mention the alternative 
minimum tax. AMT relief is important to farmers since they pay 
the tax more often compared to other taxpayers. According to 
the USDA Economic Research Service, slightly more farmers are 
subject to AMT, with just under 2 percent of farmers currently 
paying a tax. Farm Bureau supports the extension of the 
increased AMT exemption and the total elimination of the 
alternative minimum tax.
    Farm Bureau commends the Committee on Small Business for 
holding this hearing to highlight the need for permanent death 
tax repeal. Farmers, however, will not be able to rest in peace 
until Congress finishes the job of eliminating the death taxes. 
Farm Bureau calls on both the House and the Senate to pass 
legislation to end death taxes once and for all. Thank you.
    [Mr. Zittel's statement may be found in the appendix.]

    Mr. Bradley. Thank you very much, Mr. Zittel.
    Our final panelist is Mr. Bill Beach, who is the director 
of the Center for Data Analysis at the Heritage Foundation here 
in Washington, D.C. Thank you, sir.

   STATEMENT OF WILLIAM BEACH, CENTER FOR DATA ANALYSIS, THE 
                      HERITAGE FOUNDATION


    Mr. Beach. Thank you, Mr. Chairman, Congresswoman. In the 
interest of your time, I am going to lay before you the case 
for repealing the estate tax presented by my colleagues. 
Clearly, you can see it is a tax on virtue, a virtuous life. It 
undermines the economy. It slows the economy. It is, in many 
respects, a tax that undermines the income tax. It has every 
earmark of the kinds of bad taxes that you, from time to time, 
review and yesterday repealed, and I congratulate you for that.
    Let me focus, instead, on the alternative minimum tax 
because, as the chairman said, this is also an important tax 
for small business, and I will just take a few minutes to 
review a few facts about the AMT.
    In a conversation I once had with former Senator Bob 
Packwood, I asked him, Senator, tell me how many people, 
taxpayers, did you originally intend, or did Congress intend, 
to cover with the AMT? And he said that it could not have been 
more than 150,--I believe you used the number, 155--and it was 
150 very high-income taxpayers, at that.
    We are a very far cry from 150 taxpayers today. If we do 
nothing to rein in the AMT or to repeal it, the tax is expected 
to be paid by nearly 40 million taxpayers in just five years 
from now. If that forecast holds, the population of AMT 
taxpayers would have grown by 16 times since 2003, or 16 times 
over a seven-year period.
    The personal AMT directly affects individuals who file 
their business taxes through the 1040, and it does so in a 
number of ways. First, the AMT filers generally pay higher tax 
rates than regular income tax filers. The AMT tax rates are 26 
percent and 28 percent. Higher tax rates mean that one's own 
labor income and capital costs are higher, thus either driving 
down overall operating margin or increasing prices, and we 
believe that there is a tangible, measurable, and significant 
effect on economic performance because of the increasing 
coverage of the AMT.
    Second, the AMT tax brackets are not indexed for inflation, 
unlike the regular tax brackets. That means the AMT filers 
annually face an increase in their taxes just from the effects 
of inflation.
    And, thirdly, small businesses located in high-tax states 
are much more likely to incur AMT liabilities than in low-tax 
states. According to Len Burman and David Weiner, the state and 
local tax deduction permitted on the 1040, Individual Income 
Tax Form, accounts for 51 percent of all tax liabilities under 
the AMT. In other words, 51 percent of those people who are 
thrown into the AMT are thrown in because you are permitted to 
deduct state and local taxes. Indeed, taxpayers in high-tax 
states are 5 percentage points more likely to be on the AMT 
than those in low-tax states.
    Mr. Chairman, on page 9 of my testimony, copies of which 
are available at the table in the back, we have all original 
data just for this hearing. I asked my colleagues back at the 
Center for Data Analysis to go through their data bases and to 
determine the number of AMT taxpayers who have a small business 
in their tax form, and they found, for 2005, 1.9 million 
taxpayers are also small business operators and filing their 
taxes through the 1040.
    As you know, the current law has an increased exemption 
amount which expires at the end of this year, and so how much 
more AMT filers will there be in the small business community? 
That number will jump from 1.9 million to 6.4 million in just 
one year alone. If Congress does nothing to extend the current 
exemption levels between now and the end of the year, we will 
have a threefold increase in small businesses covered by the 
AMT.
    So, in conclusion, like my colleagues who made a very good 
case for the permanent repeal of the estate tax or for 
repealing the estate tax in such a way as to fix the basis 
problems that Paula was talking about, I would make the case, 
or, at least, start the case, that we should repeal the AMT for 
purposes of fairness in the tax code, to get back to the 
original intention, at least, and also for economic efficiency.
    You cannot have that big of an increase in small business 
people who are covered by the AMT and expect the economy to 
continue to produce the kinds of good jobs and strong growth 
that it has been producing in the last two years. Thank you.
    [Mr. Beach's statement may be found in the appendix.]

    Mr. Bradley. Thank you very much, Mr. Beach.
    Congresswoman McDonald, because you said you have to attend 
another hearing,--

    Ms. Millender-McDonald. Thank you so much, Mr. Chairman. It 
seems like if it is not one end of the spectrum, it is another, 
but thank you all so much for your testimony.
    Mr. Pitrone, I think it is, you stated that if we are 
interested in small businesses, then we should understand, and 
I am paraphrasing you, the anguish that small businesses have 
in terms of the estate tax and AMT, and, I mean, we certainly 
do sympathize with you, and we are certainly for small 
businesses, so I want to make that position first. But I do 
want to go back to what Ms. Calimafde said about the step-up in 
basis and that being a disposition or an imposition for small 
businesses as opposed to the exemption level.
    How do you disagree with what she is saying, when she has 
so eloquently spoken to that and, I am sure, has the data to 
support that, Mr. Pitrone? Is it Pitrone?

    Mr. Pitrone. Yes. Pitrone is correct. Thank you.
    You are asking me why I would support the elimination of 
the death tax?

    Ms. Millender-McDonald. What I am saying is that Ms. 
Calimafde said that, of the years that she has had the 
experience of working with taxes, that she does not think the 
step-up in basis and the estate tax should be repealed, that 
the step-up in basis should be reserved, and she would much 
rather see exemption levels being dealt with. Do you not agree 
with what she is saying, or if you disagree, why is that?

    Mr. Pitrone. Okay. I do not know that I disagree. I have to 
be frank. Before I sat down next to her and started talking to 
her before the panel began, I had not given it a whole lot of 
thought. I had done some research on the topic that she is 
discussing. I think that a lot of what she is saying is valid 
and the small business community has focused primarily on the 
elimination, and, as you know, especially from the testimony 
yesterday and the debate, the American people do not like the 
idea of having to pay a tax just because someone died, whereas 
the capital gains tax, which is what she is talking about, does 
not occur because someone died; it occurs because somebody sold 
something.
    Frankly, I am not crazy about any taxes, but I am really 
not prepared to give you an answer, although--

    Ms. Millender-McDonald. That is all right. I do understand 
that, and I am sorry that I put you in that imposition, but 
what about the gentleman next to you? Is it Vukelic?

    Mr. Vukelic. Vukelic, yes.

    Ms. Millender-McDonald. Yes, Vukelic. What are your 
thoughts on what Ms. Calimafde said?

    Mr. Vukelic. In just listening to her, like Mr. Pitrone, I 
heard her talk about it for the first time, and that, to me, 
sounds like more of a compromise. Maybe she was talking more of 
a compromise. I do not know. For me, I am for a permanent 
repeal.

    Ms. Millender-McDonald. I see. If we had permanent repeal 
of that, as I look at the budgetary cost of that, it would be 
in the neighborhood of $290 billion that the budget will be 
hit, and as we move into years of this repeal and interest 
payments on the debt, we are talking about nearly a $1 trillion 
budget hit. We are already at $450 billion as a deficit. What 
do you gentlemen propose that we do, as members of Congress who 
have to balance your budget? Where do we get that money when we 
have been hit like that with a repeal of those taxes?

    Mr. Pitrone. Well, you know, the numbers that you are 
discussing have been in the Washington Post. Over the week, 
they have run a series of articles. I think the numbers come 
from the Urban Tax Foundation.

    Ms. Millender-McDonald. It does not say that, sir, but I do 
know that our own deficit does raise the issue because--

    Mr. Pitrone. I understand. I understand.

    Ms. Millender-McDonald. Yes.

    Mr. Pitrone. Well, first of all, what exactly the numbers 
are going to be is highly speculative. For instance, I hear 
someone talking about if we repeal the estate tax, and Bill 
Gates, Warren Buffett, and Larry Ellison happen to be on a 
plane the next day, and it crashed, the government would have 
lost several billion dollars.

    Ms. Millender-McDonald. Let me just say this. I am saying, 
what do we do, as members of Congress, to backfill this money, 
irrespective of whether it is whatever or whatever?

    Mr. Pitrone. It works out to 2 percent a year. It is 2 
percent a year. The trillion-dollar number over the next 15 
years is 2 percent of the annual budget a year.

    Ms. Millender-McDonald. We are still talking about a 
deficit.

    Mr. Pitrone. I understand, but--

    Ms. Millender-McDonald. So where do we get the money if we 
should happen to repeal all of these on a permanent basis, and 
that is only one tax?

    Mr. Pitrone. You can make the case that economic growth, as 
a result of eliminating the estate tax and not forcing small 
businesses to spend huge amounts of money on planning and 
insurance that they otherwise would not need, would raise 
growth to the point--it is only 2 percent.

    Ms. Millender-McDonald. That is certainly not a valid 
assessment of that, Mr. Pitrone.
    Ms. Calimafde, what do you think, as we grapple with this? 
And you have said, and I certainly appreciate your assessment 
of this, what can one do when we are faced with this large 
deficit, and we are talking about a repeal permanently on these 
taxes?

    Ms. Calimafde. Well, I have thought about this a lot, and 
years ago I was for repeal, and I was for it because, at the 
time, it seemed that too many people who worked hard all of 
their lives were losing businesses and farms, and then the more 
I looked at it,--

    Ms. Millender-McDonald. And we all regret that.

    Ms. Calimafde. Right.

    Ms. Millender-McDonald. That is right.

    Ms. Calimafde. But the more you look at the numbers, they 
are not nearly what they seem to be, and the more I looked at 
the repeal bill, and I realized it was really hurting small 
businesses, we, as a group, had to just change our position. 
And I do think that, for instance, if NSBA looks at this issue 
carefully, they are going to realize more of their members get 
hurt by repeal than if they keep it at the $3.5 million 
exemption, and I would hope that that amount would increase.
    I do think there are some numbers out from the Center of 
Budget and Public Policy Priorities, I believe, is the group, 
that say that if you increase the exemption, even, like, to the 
$10 million level, which is $10 million per person, and if you 
have got a married couple, that means $20 million of assets 
that is going to the estate tax free, if you keep the estate 
tax rate at a 45-percent level, which, by the way, the 
effective rate is usually around 18 percent, even though it 
says 45 percent, because of deductions and charitable 
contributions, I think you retain quite a bit of the revenue 
from the estate tax.
    Saying that in another way, what that means is there are 
some very, very high-income taxpayers out there,--they are the 
ones who are generating that percentage of the revenue--and 
then you have this huge group of small businesses, between 1 
million to 3.5 million, that are also putting a lot of revenue 
into the estate tax. So that is why I am saying, if we get them 
out of the system, we still have revenue for the folks who are 
very, very high-income taxpayers. That would be my approach.

    Ms. Millender-McDonald. And would you agree that even with 
the repeal of the estate tax, that there will continue to be 
some complexities associated with the system that provides for 
the stepped-up-basis regime?

    Ms. Calimafde. From a probate viewpoint, it is going to be 
terrible because the repeal part sounds good, and actually, Mr. 
Pitrone mentioned, well, it will be a capital gains tax. It is 
not always a capital gains tax; it can also be a regular income 
tax on assets that small business could be hit with. But if you 
cannot prove your basis, your basis is zero, so, to me, it is 
totally unworkable, and I would say you either have to go with 
the exemption at a higher amount so that small business is 
really taken out, or if you are going to go with a repeal, 
somehow you have got to step up the basis to a minimum of 3.5 a 
person so, at least, they are as good as they were in 2009. 
And, frankly, as I said, years ago they tried to--not ``they,'' 
Congress--tried to appeal the step-up in basis--

    Ms. Millender-McDonald. We are ``they.''

    Ms. Calimafde. I know. I did not want to make you feel 
badly.

    Ms. Millender-McDonald. We feel badly all the time.

    Ms. Calimafde. No. You all are doing a very good job. But 
the step-up in basis, the reason why it never got repealed is 
that it was unworkable. So here we are going to 2010 with a 
bill that, I think, is really unworkable.

    Ms. Millender-McDonald. I thank you so much.
    Mr. Chairman, just one for Mr. Beach.
    Mr. Beach, you might have some legitimacy to some of your 
points on AMT because while it was initially for those that 
were wealthy, it has kind of impacted a lower level of persons 
who are making $50,000.

    Mr. Beach. You are absolutely right about that.

    Ms. Millender-McDonald. And so it is a possibility we need 
to look at a balanced approach here, and I would love to maybe 
sit with you about some balance to this as opposed to just 
terminating it altogether so, at least, we come halfway with 
what you have said with the AMT.

    Mr. Beach. Well, if I may just comment on that, if you will 
permit me, I think the balanced approach has a name, and it is 
called ``tax reform.'' The AMT was put in place as a plug in 
the tax system, and, at the time, it was an appropriate plug. 
Many people were upset about those 155 people. It was in the 
Newsweek magazine, as you may know from looking at the 
clippings of that time period. But now it reaches every income 
level except the bottom 10 percent of the income distribution, 
and the more the Congress does will well-intended, social 
policies, the more difficult it becomes.
    So I am very happy to hear you say that you are interested 
in that, and I would be delighted to sit down with you at any 
time.

    Ms. Millender-McDonald. I would love to do that.
    Mr. Chairman, I appreciate your allowing me to go first and 
to raise the questions. And I would like to perhaps look at a 
study, request a study to be done, on this to ensure that we 
are, at least, getting information that is recent to look at 
the stepped-up basis, along with the estate tax repealed 
permanently, because we do want to do the right thing for small 
businesses,--you are the engine that drives the country--but we 
also want to make sure that that deficit does not continue to 
grow so exponentially that we are just off the chart and trying 
to, at least, take care of the people's business. So I thank 
you so much.

    Mr. Bradley. Thank you very much, Congresswoman Millender-
McDonald, and perhaps our respective staffs can talk about that 
information issue.
    I would like to get back to one of the points that my 
colleague raised and Mr. Pitrone answered in terms of the 
ability of the repeal of the estate tax to make it easier for 
small businesses to survive and not have the financial impact 
that a static look at where revenue loss would be, and that was 
estimated to be nearly $300 billion would be, and if you had 
some further information or perhaps, Heritage,--I see nodding--
that you might have some further information that would 
diminish that tax loss by virtue of the tax repeal. And we know 
that, for instance, as the capital gains tax has been less, 
that it actually increased revenues because people were not 
holding onto investments that would have been more productive 
elsewhere, and perhaps this is a similar situation, so if you 
would like to comment on that.

    Mr. Beach. If I could be permitted to do so, there is a 
body of economic literature--it exists in the academic 
literature and the public policy literature--that, I think, 
correctly analyzes the estate tax from a tax standpoint. It is 
a tax on capital. It increases the cost of capital. It 
increases the cost of capital to all borrowers of that capital, 
and, as a consequence, when you reduce the tax wedge or the tax 
on the capital that reduces the price of capital, when you 
reduce the price of capital, you make it more available for 
investment.
    And so we do see, in the modeling on this, an increase in 
economic activity, an increase in employment in the 
neighborhood of about 250,000 jobs per year, an increase in 
national output, and also, as a consequence of all of that sort 
of thing, an increase in the revenue reflows back to the 
federal government. Just as an exercise, if you had about a $25 
billion static reduction in the estate tax revenue in one year, 
in the first year, and all of the economics that I have just 
described to you come true, about a third of that would come 
back to you in additional revenues in that second year, and 
that grows over the course of time.
    The estate tax repeal never totally pays for itself, but it 
is not the complete static losses that have been described here 
today. In fact, if we can address the basis issues that Paula 
has, quite correctly, raised, and we can get to a situation 
where we have, one, repeal; and, two, we are taxing the 
voluntary transfer of assets outside the family business or a 
family situation, either under cap gains or income taxes, then 
the work that others have done on this indicates that the 
reflows are substantial because now what you are doing is you 
are augmenting the natural reflows coming from repeal of the 
estate tax with additional cap gains revenues and income tax 
revenues.
    I have not seen a simulation yet, over a 10-year period, in 
which all of the revenues come back, but they are getting very 
close to coming back. So if we can reduce the question to how 
do we do the basis, I think there are many different answers to 
that. Again, it is voluntary. We do not hear a basis question, 
carry-over, or step-up until there is a voluntary transfer 
outside of this family business. We could exempt very old 
property or have a fair-market-value test for very old 
property.
    Back in the seventies, we had some real questions about 
basis because we were dealing with a lot of property that 
predated any tax law at all, back in the 1910's and into the 
1890's. Now, most property in use has come into use or has 
transferred into somebody's hands since modern taxation 
policies have been put in place at this date in federal level, 
so record keeping is much better than it was, even 30 years 
ago.
    And I think there is a good discussion which can be had 
either in the House, probably in the Senate, and, hopefully, 
and compromise on this whole basis question. We should not let 
that stand in the way of what is the right move here, and that 
is a complete and permanent repeal of estate taxes.

    Mr. Bradley. Thank you very much.
    I would like to ask one quick question about the 
alternative minimum tax. I have been a co-sponsor of Mr. 
English's bill to permanently repeal AMT, but, as you know, 
given the budget circumstances that we have, it is just very 
unlikely that that is going to happen.
    Yesterday, I introduced legislation that will extend will 
extend the expiring provisions that up the income limits, and 
it makes indexing for inflation permanent. Is this, in your 
view, ladies and gentlemen, a reasonable solution, at least for 
this year, as we try to address, I think, what you spoke about 
in terms of tax reform?

    Mr. Beach. Well, if I could just start very quickly, yes, 
that is the necessary step that Congress must take. The 
exemption levels need to be extended so that the President's 
Advisory Panel on Tax Reform, the president himself, his staff, 
and the relevant members of the Committees here, tax-writing 
Committees in the Congress, can do the work of changing the 
entire tax system to something that is simpler, fairer, and 
more pro-growth.
    You would complicate the matters extremely by letting key 
provisions, AMT being one, to expire and thus to produce a 
different baseline from which all of the tax reform measures 
would be taken. So I strongly recommend that as a good move, 
and I can hear members on both sides saying, yes, that is 
something that they could support.

    Mr. Bradley. Anyone else on that?

    Ms. Calimafde. I think it is a great first step because, 
you know, AMT, when you really look at it, it is a second-
alternative system sitting on top of the regular system, and 
what it does in the small business arena is the owners are not 
able to take advantage of deductions, so it is a really unfair 
tax.

    Mr. Bradley. And when one looks at the AMT, and this is my 
last question on AMT, the cost of compliance is just something 
that seems excessive. Have there been any studies that have 
been done that you are aware of that would indicate what the 
cost of alternative compliance is?

    Mr. Beach. Remember, Mr. Chairman, that the alternative 
minimum tax exists at the individual level and at the corporate 
level; there is a corporate AMT. Most of the tax analysts--
Leonard E. Burman is the most, I guess you might say, 
accomplished of those here in town--have argued that the 
compliance of the AMT is almost as great as the compliance cost 
with the estate tax because of the record keeping required, the 
accountants and lawyers required to advise, the kinds of 
penalties associated with miscalculation, late-filing fees, on 
and on and on.
    So I would guess, conservatively speaking, that it is 
probably close to 30 cents on the dollar. We have generally 
kind of settled on 31 cents on the dollar as the compliance 
cost for all federal estate taxes, and that is gift, generation 
skipping, and the estate tax. If AMT is close, I would say 25 
to 30 cents is not a bad estimate.

    Mr. Bradley. Mr. Beach, if you could leave us with that 
study, or get it to us, that you talked about in your first 
question, that would be great.

    Mr. Beach. It is a footnote in my testimony, sir.

    Mr. Bradley. Okay. Thank you.
    Lastly, and we are in the middle of the vote on the 
bankruptcy bill, and I do not want to miss that vote, and I 
know it was not so much the subject of today's hearings, but 
perhaps you would like to touch on some of the provisions in 
the 2001 and, in particular, the 2003 tax cuts and their impact 
on small businesses. Were they positive? Were they negative? 
What is your view on some of those expensing provisions, the 
drop in the income tax rates, and how they impact small 
business?

    Mr. Beach. Let me just reference a couple of things. We 
have written on this on several occasions, the Heritage 
Foundation has. Starting with 2001, the best thing in that 
legislation was the reduction in the rates, sir, and those rate 
reductions have accounted for a significant proportion of the 
growth since 2001 in the economy. The combination of the rate 
reduction in 2001 with the very pro-growth elements of the 2003 
bill, i.e., dividend rate reduction, the way you handle cap 
gains, but particularly the accelerated depreciation 
provisions; the provisions that stimulated investment, by 
themselves, account for three-fourths of the employment gain 
since that time, probably as much as half of the overall output 
gain.
    We had a very severe contraction in our stock markets, we 
had a major contraction in world trade flows and capital flows 
following September 11th, and we had what is almost an 
unprecedented blow to the confidence that investors have in 
corporate America--all three of those things combined together, 
as the president has said many, many times, and yet we had one 
of the shallowest recessions in U.S. history. And now we have 
had nearly 3 million jobs growth since the 2003 act. I think 
that those are the provisions that affect everybody, but they 
really help small businesses.

    Mr. Bradley. I am very sorry. I have one more question, and 
perhaps each of you would like to touch on this. There has been 
an awful lot of discussion about a compromise in the Senate on 
the estate tax. What is a realistic compromise that achieves 
the goals that, I think, all of you have expressed on the 
estate tax and how it impacts small businesses and the economy? 
What would be a reasonable compromise, or perhaps there is not 
one?

    Mr. Vukelic. A reasonable compromise? I believe the 
exemption rate would have to be more than what they proposed 
yesterday in the Pomeroy Amendment. I believe it had to be at 
least $10 million, and the rate would be a capital gains rate. 
That is what we would be for.

    Ms. Calimafde. I would like to add to that that step-up 
basis should be preserved, and the gift and estate tax system 
should be reunified, and I particularly think if the rates are 
going down, there is a way that Congress could target that to 
small business interests only, so if somebody went above the 
exemption level, and it is because of a family-held business or 
a closely held business, those interests could be taxed at, 
say, a 15-percent rate.
    Once again, our view is protecting small business here, so 
that is why I think a compromise is very doable.

    Mr. Pitrone. Yes. I would go with the $10 million per 
individual, $20 million for husband and wife.

    Mr. Bradley. At a cap gains rate?

    Mr. Pitrone. At a cap gains rate.

    Ms. Ross. Considering the personal experience that my 
family and I have had, we are in the mindset of a permanent 
repeal of the death tax due to what we are still having to pay 
and how that compromises us extending and expanding our 
operations as well as creating jobs.

    Mr. Bradley. I would agree with you. Unfortunately, in 
order to get something through, there may have to be a 
compromise.

    Mr. Zittel. I am sure there probably will have to be a 
compromise, but agriculture's view has been repeal of the death 
tax, and I think that is where we would stand, but certainly 
when we are talking the $10 million per person, it would go a 
long ways in meeting the needs of agriculture.

    Mr. Beach. I honestly do not think you need to compromise, 
but if you do, then make it a temporary measure. We are in 
favor of a unified capital tax--put everything at the same 
rate, under the same definition of taxing capital, throw 
everything into the pie--because we think, once we are there, 
we can then talk about double taxation much more reasonably, 
and we can move for fundamental tax reform.
    The estate tax is likely on its last legs because the 
American people do not view it as an economic or fiscal issue; 
they view it as a moral issue, and they think it is the wrong 
thing to do, to talk to the tax collector at death. So if there 
is a compromise, it must necessarily be a temporary one because 
I do not think that the voters are going to say, ``Ah, you 
fixed it at last.''

    Mr. Bradley. I would like to thank all of you who have come 
this afternoon. It has been very informative. We appreciate it 
very much, and please stay in touch with us on these critical 
issues.
    [Whereupon, at 3:17 p.m., the Subcommittee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T1286.001
    
    [GRAPHIC] [TIFF OMITTED] T1286.002
    
    [GRAPHIC] [TIFF OMITTED] T1286.003
    
    [GRAPHIC] [TIFF OMITTED] T1286.004
    
    [GRAPHIC] [TIFF OMITTED] T1286.005
    
    [GRAPHIC] [TIFF OMITTED] T1286.006
    
    [GRAPHIC] [TIFF OMITTED] T1286.007
    
    [GRAPHIC] [TIFF OMITTED] T1286.008
    
    [GRAPHIC] [TIFF OMITTED] T1286.009
    
    [GRAPHIC] [TIFF OMITTED] T1286.010
    
    [GRAPHIC] [TIFF OMITTED] T1286.011
    
    [GRAPHIC] [TIFF OMITTED] T1286.012
    
    [GRAPHIC] [TIFF OMITTED] T1286.013
    
    [GRAPHIC] [TIFF OMITTED] T1286.014
    
    [GRAPHIC] [TIFF OMITTED] T1286.015
    
    [GRAPHIC] [TIFF OMITTED] T1286.016
    
    [GRAPHIC] [TIFF OMITTED] T1286.017
    
    [GRAPHIC] [TIFF OMITTED] T1286.018
    
    [GRAPHIC] [TIFF OMITTED] T1286.019
    
    [GRAPHIC] [TIFF OMITTED] T1286.020
    
    [GRAPHIC] [TIFF OMITTED] T1286.021
    
    [GRAPHIC] [TIFF OMITTED] T1286.022
    
    [GRAPHIC] [TIFF OMITTED] T1286.023
    
    [GRAPHIC] [TIFF OMITTED] T1286.024
    
    [GRAPHIC] [TIFF OMITTED] T1286.025
    
    [GRAPHIC] [TIFF OMITTED] T1286.026
    
    [GRAPHIC] [TIFF OMITTED] T1286.027
    
    [GRAPHIC] [TIFF OMITTED] T1286.028
    
    [GRAPHIC] [TIFF OMITTED] T1286.029
    
    [GRAPHIC] [TIFF OMITTED] T1286.030
    
    [GRAPHIC] [TIFF OMITTED] T1286.031
    
    [GRAPHIC] [TIFF OMITTED] T1286.032
    
    [GRAPHIC] [TIFF OMITTED] T1286.033
    
    [GRAPHIC] [TIFF OMITTED] T1286.034
    
      

                                 
