[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON SMALL
BUSINESS AND THE ESTATE TAX:
IDENTIFYING REFORMS TO MEET THE NEEDS
OF SMALL FIRMS AND FAMILY FARMERS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
NOVEMBER 4, 2009
__________
Small Business Committee Document Number 111-054
Available via the GPO Website: http://www.access.gpo.gov/congress/house
U.S. GOVERNMENT PRINTING OFFICE
53-451 WASHINGTON : 2009
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
DENNIS MOORE, Kansas
HEATH SHULER, North Carolina
KATHY DAHLKEMPER, Pennsylvania
KURT SCHRADER, Oregon
ANN KIRKPATRICK, Arizona
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine
MELISSA BEAN, Illinois
DAN LIPINSKI, Illinois
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
BRAD ELLSWORTH, Indiana
JOE SESTAK, Pennsylvania
BOBBY BRIGHT, Alabama
PARKER GRIFFITH, Alabama
DEBORAH HALVORSON, Illinois
SAM GRAVES, Missouri, Ranking Member
ROSCOE G. BARTLETT, Maryland
W. TODD AKIN, Missouri
STEVE KING, Iowa
LYNN A. WESTMORELAND, Georgia
LOUIE GOHMERT, Texas
MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
BLAINE LUETKEMEYER, Missouri
AARON SCHOCK, Illinois
GLENN THOMPSON, Pennsylvania
MIKE COFFMAN, Colorado
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Karen Haas, Minority Staff Director
.........................................................
(ii)
STANDING SUBCOMMITTEES
______
Subcommittee on Contracting and Technology
GLENN NYE, Virginia, Chairman
YVETTE CLARKE, New York AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon W. TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama
______
Subcommittee on Finance and Tax
KURT SCHRADER, Oregon, Chairman
DENNIS MOORE, Kansas VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona STEVE KING, Iowa
MELISSA BEAN, Illinois W. TODD AKIN, Missouri
JOE SESTAK, Pennsylvania BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, Pennsylvania, Chairman
HEATH SHULER, North Carolina MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana LOUIE GOHMERT, Texas
PARKER GRIFFITH, Alabama
(iii)
Subcommittee on Regulations and Healthcare
KATHY DAHLKEMPER, Pennsylvania, Chairwoman
DAN LIPINSKI, Illinois LYNN WESTMORELAND, Georgia,
PARKER GRIFFITH, Alabama Ranking
MELISSA BEAN, Illinois STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania GLENN THOMPSON, Pennsylvania
BOBBY BRIGHT, Alabama MIKE COFFMAN, Colorado
______
Subcommittee on Rural Development, Entrepreneurship and Trade
HEATH SHULER, North Carolina, Chairman
MICHAEL MICHAUD, Maine BLAINE LUETKEMEYER, Missouri,
BOBBY BRIGHT, Alabama Ranking
KATHY DAHLKEMPER, Pennsylvania STEVE KING, Iowa
ANN KIRKPATRICK, Arizona AARON SCHOCK, Illinois
YVETTE CLARKE, New York GLENN THOMPSON, Pennsylvania
(iv)
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Graves, Hon. Sam................................................. 2
WITNESSES
Spoa, Sr., Mr. Christy, President, Ellwood City Save-A-Lot,
Ellwood City, Pennsylvania, on behalf of Food Marketing
Institute...................................................... 3
Mayes, Ms. Meredith, Digital Solutions Manager, Colorcraft of
Virginia, Sterling, Virginia, on behalf of Printing Industries
of America..................................................... 5
Uhl, Uhl, Mr. Arthur, Fitzsimons & Jewett, PLLC, San Antonio,
Texas, on behalf of National Cattlemen's Beef Association...... 7
Neese, Ms. Terry, Distinguished Fellow, National Center for
Policy Analysis................................................ 9
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 18
Graves, Hon. Sam................................................. 20
Spoa, Sr., Mr. Christy, President, Ellwood City Save-A-Lot,
Ellwood City, Pennsylvania, on behalf of Food Marketing
Institute...................................................... 22
Mayes, Ms. Meredith, Digital Solutions Manager, Colorcraft of
Virginia, Sterling, Virginia, on behalf of Printing Industries
of America..................................................... 27
Uhl, Uhl, Mr. Arthur, Fitzsimons & Jewett, PLLC, San Antonio,
Texas, on behalf of National Cattlemen's Beef Association...... 33
Neese, Ms. Terry, Distinguished Fellow, National Center for
Policy Analysis................................................ 36
Statements for the Record:
Clarke, Hon. Yvette D............................................ 40
Associated Builders and Contractors, Inc......................... 43
Printing Industries of America................................... 44
Small Business Council of America................................ 46
International Franchise Association.............................. 54
Society of American Florists..................................... 55
Imperial Lithographics, Phoenix, AZ.............................. 57
Marc Nelson Oil Products, Salem, OR.............................. 59
RFI Enterprises, San Jose, CA.................................... 61
Grande Harvest Wines, New York, NY............................... 63
Simkins-Hallin, Inc., Bozeman, MT................................ 65
Mavar Shrimp & Oyster Co. Inc., Biloxi, MS....................... 69
(v)
FULL COMMITTEE HEARING ON SMALL
BUSINESS AND THE ESTATE TAX:
INDENTIFYING REFORMS TO MEET THE NEEDS
OF SMALL FIRMS AND FAMILY FARMERS
Wednesday, November 4, 2009
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:05 p.m., in Room
2360, Rayburn House Office Building, Hon. Nydia Velazquez
[chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Dahlkemper, Schrader,
Nye, Altmire, Bright, Griffith, Graves, Fallin, Luetkemeyer,
and Thompson.
Chairwoman Velazquez. [Presiding.] I call this hearing of
the House Small Business Committee to order.
For many, starting a successful business and seeing it grow
is the cornerstone of the American dream. As the daughter of an
entrepreneur, I saw firsthand what my family had to do to keep
a small business afloat. With big ideas for the future and
limited resources to call upon, I know that starting and
running your own venture for many entrepreneurs is a family
affair.
It is not surprising then that many small-business owners
imagine passing along the farm or business they have built to a
child or grandchild to carry on the family trade. But for many
parents who have spent their whole lives working to leave their
business to their children, the estate tax can threaten the
dream of having a son or daughter follow in their footsteps.
For many family businesses, the estate tax was a hurdle too
great to overcome as the heirs of a family farm or business
suddenly found themselves in the middle of a complex outdated
law. It closed the doors on countless viable family businesses
because they did not have the cash on hand when the estate tax
came due. This was especially true for many family farmers, who
were forced to liquidate--their greatest wealth is the land
they till, not the cash in their bank accounts.
For small-business owners that sought to overcome these
hurdles, the anxiety and costs were tremendous. After all,
estate planning for small businesses is complex and costly.
Entrepreneurs attempting to plan for the future had to hire
costly lawyers and accountants to navigate laws, calculate
their estate tax, and set aside funds so they could pass along
the family trade.
Even then, entrepreneurs were not guaranteed their family
business or farm would survive to pass on to the next
generation. One entrepreneur told me he spent 5 years, hundreds
of thousands of dollars for consultants, and carried a life
insurance policy to protect his children from having to sell
the family business. Despite his careful planning, he was still
worried he may have overlooked something which would cost his
employees their jobs if his children were not able to pay the
estate taxes to keep their doors open.
It is not surprising then that before estate tax reform was
enacted in 2001, some 70 percent of family businesses did not
survive into the second generation. Almost 90 percent did not
make it to the third generation.
While the estate tax reforms enacted in 2001 allowed
entrepreneurs to focus on growing their ventures, the reforms
were enacted on a temporary basis and will soon end. Starting
in 2011, the estate tax exemptions for small businesses will
expire. When they disappear, millions of family enterprises
will again find their chances for survival beyond the first
generation in jeopardy.
In today's hearing, we will examine what the future of the
estate tax holds for small businesses. Some are calling for
complete repeal of the estate tax; others have suggested that
Congress freeze estate tax provisions in their 2010 form. One
thing is clear: We will need to find a solution.
Small businesses face enough hurdles to succeed even
without the estate tax as an insurmountable obstacle in their
way. Children who inherit the family farm or firm and wish to
carry on their trade should not be forced to sell or liquidate
their business.
Protecting the family business and farm so it can flourish
into the next generation will also help the communities who
depend on these enterprises for jobs and services. By crafting
an estate tax policy that works for small businesses and family
farms, entrepreneurs can focus on growing their ventures,
creating the jobs and growth needed for long-term prosperity.
I would like to take this opportunity to thank all the
witnesses for being here. I am glad that they were able to make
this trip to Washington to be with us this afternoon and look
forward to the hearing from them--or to hear from you.
With that, I will yield to Ranking Member Graves for his
opening statement.
Mr. Graves. Madam Chair, I appreciate it very much, and I
also want to join you in thanking our witnesses for coming
today, and some of you from a long way, but I do appreciate you
taking the time out of your schedule to be here.
Entrepreneurs are struggling, and they are responding to a
very difficult economy by working to expand and create jobs at
a time of high unemployment. Now they are threatened with
additional regulations, mandates, and tax increases to pay for
health care and additional government spending. The last thing
that they need is the possibility of losing their businesses.
Yet if Congress fails to act before 2011, family businesses and
entrepreneurs may find their companies at risk.
Current law, which would phase out the estate tax for those
who pass away in 2010 only, is scheduled to sunset January 1,
2011. If Congress does nothing, the top marginal estate tax
rate of 55 percent and an exemption of just $1 million would
again take effect in 2011.
Small businesses and farms are often operated by families
and transferred from one family member to the next. These
entrepreneurs frequently return any savings right back into
their businesses by purchasing valuable equipment or land
needed to operate the company.
In the case of a small company or a farm, although the
assets are transferred after a descendant's death may be
valuable, the heir's net worth or liquidity may not be high.
The heir, facing a 50 percent estate tax bill, may be forced to
sell vital equipment or land just to pay the tax, rendering the
business inoperable. The net effect is the reduction of capital
formation for productivity and business expansion.
Death should not be a taxable event. The notion that the
federal government is owed anything upon the death of a family
member is outrageous to me.
Before current law sunsets at the end of 2010, Congress
must act. I support a full repeal of the estate tax, and I have
introduced legislation, H.R. 664, to make the 2001 and 2003 tax
relief, including the estate tax phase-out, permanent. But the
fact that there is uncertainty in the law makes it very
difficult for small-business owners and farmers to plan, and we
cannot allow these entrepreneurs to risk their future or their
companies.
Madam Chair, again, I want to thank you for holding this
hearing, and I appreciate and look forward to the testimony.
Chairwoman Velazquez. Thank you.
The chair recognizes the gentleman from Pennsylvania, Mr.
Altmire, for the purpose of introducing our first witness.
Mr. Altmire. Thank you, Madam Chair. And welcome to all of
our witnesses, especially my constituent, Mr. Spoa. Mr. Christy
Spoa is the president of Ellwood City Save-a-Lot, located in
Ellwood City, Pennsylvania. Mr. Spoa's company is family-owned
and was started over 90 years ago.
He is testifying on behalf of the Food Marketing Institute.
FMI represents more than 1,500 food retailers and wholesalers
worldwide.
Welcome, Mr. Spoa.
Chairwoman Velazquez. Your mic is not on. Thank you.
STATEMENT OF CHRISTY SPOA
Mr. Spoa. --thank you--and members of the Committee. Thank
you for inviting me to testify about the impact of the estate
tax on small businesses.
My name is Christy Spoa, Senior, and I am the president of
the Ellwood City Save-a-Lot in Ellwood City, Pennsylvania. We
have been a family-owned business for 91 years and are proud of
the relations we have built with our customers and our
community.
I am pleased to say that the fourth generation of Spoas
will carry on this tradition. Three of my children work with me
at the Save-a-Lot and will eventually run the company.
Operating a supermarket is a demanding undertaking that
requires long hours and dedication, but they have tackled these
challenges with creativity and enthusiasm. I take great pride
in knowing that I am leaving the business in good hands.
However, the existence of the estate tax makes planning
this succession harder than it should be. For a number of
years, I have worked with my industry association, the Food
Marketing Institute, to advocate for the repeal of this unfair
tax.
I hoped the 2001 reforms would be the first steps in this
process. But the situation it created by having the tax
disappear next year before snapping back to as much as 55
percent in 2011 has made estate planning nearly impossible.
I continue to hope that Congress will repeal the tax or
eliminate it for companies to stay in the family, but right
now, businesses like mine need certainty and predictability.
The estate tax hits family-owned businesses when they are
at their weakest, following the death of the head of the
company. This period can turn into a nightmare for families
that have not adequately prepared. I can only imagine how
painful it must be to have to sell off all or part of a once-
thriving family business in order to pay the estate tax.
Supermarket owners tend to be asset-rich in terms of
buildings, equipment and stock, but cash poor. Even single-
store operator can quickly find themselves exceeding the
current exemption levels, and multi-store companies can easily
exceed $10 million.
It is exceedingly difficult for companies like mine and
others in the industry to withdraw significant amounts of cash
to pay the estate tax. And since I operate a single store,
selling off part of the business to raise funds is not an
option. No one wants to leave that as a legacy for their
children.
So in order to protect against the cost of the tax, I carry
a life insurance policy that would help my family cover the
expense of compliance, should anything happen to me. Similarly,
I have spent countless hours with lawyers and accountants to
plan for the orderly transition of leadership from myself to my
children.
The estate tax makes this process infinitely more
complicated, and it will even be more complex once my children
take over, since there will now be three owners. They will also
have to spend a significant amount of money to make sure that
unforeseen circumstances do not threaten the viability of the
business and their ability to leave it to the next generation.
So I am not just passing on the company, but the cost of estate
planning, as well.
Some might argue that this is the cost of doing business.
But every dollar that goes toward insurance premiums and estate
planning is a dollar not invested in my business. It is money
taken from job creation, increased wages, and better benefits.
Right now, I have 25 employees, and they bear the brunt of this
tax just as much as my family do.
In the 91 years we have been in business, I would guess we
have employed over 1,000 people at one time or another. Where
are these jobs going to come from if family businesses are
weakened or sold to cover the cost of the tax? It can be easy
to ignore this impact, but for communities that are struggling
to create good jobs, it is a question that needs to be
answered.
At the start of my testimony, I mentioned that I have been
advocating for years to repeal this tax. It is my belief that
it simply does more harm than good. Both the industry and I
recognize that this is a difficult task and have worked to
support reasonable compromises when they are offered. But I
continue to believe that repeal is the best solution and the
best way to make sure that small and family-owned businesses
continue to thrive and create jobs.
For individually owned and operated grocery stores like
mine, the estate tax is a constant source of anxiety that has
real consequences for my family, my employees, and the day-to-
day operations of my business. I do not have the cash or assets
on hand to simply write the government a check, so I have spent
years and thousands of dollars to plan for the worst. But no
matter how much I spend, I always wonder, have I done enough?
Thank you for inviting me to testify, and I will be happy
to answer any questions.
[The statement of Mr. Spoa is included in the appendix.]
Chairwoman Velazquez. Thank you, Mr. Spoa.
Our next witness is Ms. Meredith Mayes. She is the digital
solutions manager of ColorCraft of Virginia, located in
Sterling, Virginia. ColorCraft is a family-owned, high-end
commercial digital printing company. Ms. Mayes testifying on
behalf of Printing Industries of American. PIA is the world's
largest graphic arts trade association, representing an
industry with approximately 1 million employees.
You have 5 minutes.
STATEMENT OF MEREDITH MAYES
Ms. Mayes. Chairwoman Velazquez, Ranking Member Graves, and
members of the Committee, good afternoon, and thank you for
inviting me to testify today. My name is Meredith Mayes, and I
work as a digital solutions manager at ColorCraft of Virginia,
a commercial printing company.
I represent the second generation of the company. My
father, Jim Mayes, acquired ColorCraft in 1986 and grew it from
a 23-employee shop to one with nearly 98 employees at its peak.
We currently employ 51 workers, including my mother, who--in
the traditional mom-and-pop sense of small business--oversees
the company's accounting.
Through all of the ups and downs, our company has always
remained true to its family atmosphere. Our longest serving
employee has been with us for 23 years. We know that this term
is more than just company culture; it is a commitment to jobs
and growth for our family, but also for those families who
depend on ColorCraft for their livelihoods. That is why the
estate tax is a tremendous concern for us and for thousands of
printers across the country.
According to the Printing Industries of America, of which
ColorCraft is a proud member, 6 out of 10 printing companies
are family-owned. In total, there are approximately 17,000
family-owned plants in the United States, and they employ close
to 600,000 workers. The uncertain future of the estate tax is
top of mind for nearly all of these firms.
At ColorCraft, I have watched my father spend numerous
hours and dollars attempting to ensure the longevity of a
company he works so hard to keep afloat and growing. Annually,
we spend $5,000 on estate tax planning. All told, we have spent
$730,000. Our company would much rather have reinvested that
$730,000 to fund sales training, technical education, and debt
reduction, all of which would benefit the entire ColorCraft
family and the jobs we provide.
On that note, job creation should definitely be part of an
estate tax discussion. The printing industry has lost 73,000
jobs since mid-2008. Family-owned small businesses are critical
to the revival of our economy, and an estate tax that soaks up
financial resources and negatively impacts job creation is very
troubling.
This is especially true, as a 2006 Joint Economic Committee
report stated that the revenue raised by the death tax amounts
to only 1.2 percent of total federal revenues.
There are non-economic costs to the estate tax, too. Small
businesses are known for community service. And, trust me, a
local printer is often the first stop for every local club,
school, and charity seeking an in-kind donation.
For instance, ColorCraft supports local educational
programs, including Head Start and the Monroe Technology Center
in Leesburg, Virginia. An estate tax that threatens small-
business survival also threatens non-profit and community
support.
So what can Congress do to ensure that the estate tax
doesn't continue to be an albatross on small printers' necks as
we seek to survive and grow? In my opinion, a full, outright
and permanent repeal of this tax is the best solution. The next
best-case scenario is permanent reform.
One reform idea is the Estate Tax Relief Act of 2009,
introduced by Rep. Shelley Berkley and others, which would
phase in the estate tax exemption levels over 10 years to $5
million, while also decreasing the tax rate to 35 percent. This
particular adjustment of exemption levels and rates, if indexed
for inflation and made permanent, would relieve approximately
80 percent of family-owned printers from both the destructive
planning and payment of the estate tax.
This approach is one our industry would welcome and
support, though a higher starting exemption level and a
shortened timeframe would provide more practical relief.
I would add a note of caution regarding top exemption
levels. I urge Congress to be mindful that capital-intensive
industries like printing have non-cash assets that add up very
quickly in spite of depreciation schedules. For example, our
most recent equipment purchase was a printing press at $3.8
million.
Additionally, many family-owned printers strive to own
rather than lease their plants, which also adds to the estate
tax calculation. What may sound like a lot of money on paper
doesn't always translate to cash on hand.
As stated previously, I manage the digital printing side of
my family's business. My father and many of his generational
peers have an expertise in traditional ink-on-paper printing,
an area of the industry that is expected to have less than 1
percent annual sales growth between now and 2020. In contrast,
digital printing is expected to have 133 percent sales growth
by 2020.
As I network with second-and third-generation printers
across the country, many of us are driving the digital
expertise and, therefore, driving the future growth of the
entire industry. My generation wants the chance to lead our
family-owned businesses into the future. I hope fervently that
Congress will act upon the problem of the estate tax issue to
allow ColorCraft and other printers to continue growing,
succeeding, and reaching our full potential.
Again, thank you for holding today's hearing and for
inviting me to testify. I look forward to answering any
questions you may have.
[The statement of Ms. Mayes is included in the appendix.]
Chairwoman Velazquez. Thank you, Ms. Mayes.
Our next witness is Mr. Arthur Uhl. He is an attorney and
founding partner of Uhl, Fitzsimons & Jewett law firm in San
Antonio, Texas. The law firm focuses on real estate, business
and energy law matters. Mr. Uhl is also a cattle rancher and
producer. He is testifying on behalf of the National
Cattlemen's Beef Association, a marketing organization and
trade association for a million cattle farmers and ranchers.
Welcome.
STATEMENT OF ARTHUR UHL
Mr. Uhl. Madam Chair, Ranking Member Graves, and members of
this Committee, my name is Arthur Uhl, and I am a rancher, cow
producer, and attorney from San Antonio, Texas. I am testifying
on behalf of the National Cattlemen's Beef Association, the
NCBA, which is the largest and oldest national organization
representing America's cattlemen and cattlewomen.
As chairman of NCBA's tax and credit policy Committee, I
can testify that the repeal or fundamental reform of our
federal estate tax system is at the heart of NCBA's mission,
and we believe it is critical to the long-term viability of our
industry.
I appreciate your Committee raising awareness of the
tremendous burden that the estate tax places on America's
farmers and ranchers. Ninety-seven percent of American farms
and ranchers are owned and operated by families, many of which
have owned their properties for generations. To a small-and
medium-sized operation, this tax can be a death sentence. Thank
you for holding this hearing and bringing cattlemen to the
table.
Tax policy is a key factor impacting American cattle
producers, particularly in today's difficult business climate.
In an industry where financial returns are historically small,
we depend upon the ability to pass on a farm or ranch to the
next generation without exhausting resources for arduous
planning or being forced to break apart economically viable
operations. We view the estate tax as fundamentally unfair,
inefficient, economically stifling, and particularly
devastating to our business, which requires highly valued
assets to produce minimal economic returns.
Cattle producers understand and appreciate the role of
taxes in maintaining and improving our nation, but they also
believe the most effective tax code is a fair one. For this
reason, NCBA members fundamentally disagree with the taxing of
assets that have already been taxed, sometimes two and three
times over. In the eyes of American farmers and ranchers, death
should not be a taxable event, either for the estate or for the
heirs.
The current onerous estate tax system is also at odds with
our important national goals of preserving natural resources
and open space. Family farms and ranches provide an abundant
and necessary source of food and fiber to feed the growing
global population, as well as Americans right here at home. Not
only are they producing nutritious food, America's farmers and
ranchers are taking care of the land, air and water that make
our way of life possible.
The death tax breaks up farm and ranch land and displaces
family generational farms and ranches, expediting their
conversion to strip malls and condo complexes and doing a great
disservice to the American public and our rural way of life.
All family businesses would like to see this tax go away,
and historically the cattlemen have fought for full repeal of
the estate tax. But our members recognize full repeal may not
be an option at this time, so we are simply asking Congress to
reform the estate tax to give relief and certainty to dedicated
farming and ranching families who continue to work and preserve
the land.
The minimal amount of progress which has been made is at
risk of being undone. Currently, the estate tax rate is set at
45 percent for estate assets exceeding $3.5 million in value,
or $7 million per couple. The president's proposed budget would
freeze the estate tax at these levels so they could be dealt
with at a later date. If Congress does nothing, in 2011, the
exemption amount and tax rate will revert to staggering pre-
2001 tax levels, meaning estate assets exceeding $1 million
would be taxed at the 55 percent rate.
When you factor in land and equipment, not to mention
rising property values, it is clear that most farms and ranches
would easily exceed the million-dollar threshold. This is a
value that most farmers and ranchers will never see in terms of
cash, as it is tied up in productive assets, which we hope to
pass down to the next generation.
An estate tax exemption of agricultural lands is an optimal
way to diminish the devastating effects of the estate tax on
family ranching operations. Farm and ranch land market values
continue to increase based on many things, including their
proximity to urban sprawl. In most cases, this inflated market
value is the basis for assessing the death tax, resulting in
the need to liquidate productive agricultural assets in order
to keep what we can.
Indexing for inflation is absolutely critical in countering
escalating land values, and stepped-up basis provisions are
imperative when those assets have been levied with the tax.
NCBA has supported recent legislative proposals to increase the
exemption levels and decrease the rate of taxation.
For these reasons, it is our recommendation that Congress
act swiftly to bring further reform to the death tax. We urge
you to work with Chairman Rangel and the Ways and Means
Committee to include the reform ideas laid out in
Representative Berkley's bill, as well as the adoption of the
agricultural exemption contained in the Thompson-Salazar bill,
because, at the end of the day, all we really want is to keep
our farms and ranches in production.
We need farms and ranches to stay whole and be passed down
from generation to generation in order to take care of the
land, feed our country, feed the world, and maintain our way of
life.
NCBA appreciates the House Small Business Committee holding
this hearing, and U.S. cattle producers need your leadership
and look forward to continuing dialogue on this important
issue.
[The statement of Mr. Uhl is included in the appendix.]
Chairwoman Velazquez. Thank you, Mr. Uhl.
The chair recognizes Ms. Fallin for the purpose of
introducing our next witness.
Ms. Fallin. All right. Thank you, Madam Chair. It is a
great pleasure to be able to introduce one of my long-term
friends and a woman that is very highly respected in Oklahoma,
and that is Terry Neese. Terry, welcome. It is good to have you
here in front of our Small Business Committee.
Ms. Neese has served as a distinguished fellow at the
National Center for Policy Analysis. In this role, she develops
ideas to help small-business owners make better financial and
health care decisions. She is the owner of a small business, a
family farm, and has founded several organizations to educate
and train small-business owners.
Ms. Neese has been recognized by Fortune magazine as one of
the power 30 most influential small-business women in
Washington, and Inc. magazine has named her as one of four top
advocates for entrepreneurs in the United States. So we are
thrilled today that she was able to make time in her schedule
to join us from Oklahoma.
And welcome, Terry. It is good to have you here.
STATEMENT OF TERRY NEESE
Ms. Neese. Thank you. It is good to be with you. Thank you,
Congresswoman Fallin.
And, Madam Chairwoman, good to see you. It has been a
while. And I appreciate you holding this important hearing.
Members of the Committee, thank you for inviting me and
giving me the opportunity to discuss the detrimental impact of
the estate tax on small business and their families.
Today, I am speaking on behalf of the National Center for
Policy Analysis, a nonprofit, nonpartisan public policy
research organization dedicated to developing and promoting
private alternatives to government regulation and control. The
NCPA recently started the Family Policy Center, where we focus
on finding private solutions to issues faced by women,
families, and small business. They are headquartered in Dallas,
Texas, and I live and work in Oklahoma.
Support for the estate tax is based on three major claims:
first, inheritances are a major source of wealth inequality;
second, the tax provides significant revenue for the federal
government; and, third, the individuals required to pay the tax
can easily afford it.
These are, however, all myths. Not only the rich, but
lower-and middle-class Americans, especially small-business
owners, should be concerned if the estate tax is not repealed
or maintained permanently.
It is a common assumption that inheritances are a major
source of wealth inequality. And an NCPA study shows that only
17 percent of wealth for the top 1 percent wealth came from
bequests. In actuality, individual skills and personal choices
are far more important in determining household wealth.
Because inheritances are only a minor factor determining
the wealth distribution among retirees, using the estate tax as
redistributive mechanism is unlikely to have a significant
effect on that distribution. In fact, it may be self-defeating
if it slows capital formation. The resulting increase in
capital returns would make the rich even richer.
The second myth, the tax provides significant revenue for
the federal government, in fact, it makes up 1 percent to 3
percent of federal tax revenue. It slows capital formation,
reducing tax revenues, lowering wages, employment, federal
payroll, and income tax revenues.
And according to the Heritage Foundation, if the estate tax
were repealed, the U.S. economy would average as much as $11
billion per year in extra output, and an average of 145,000 new
jobs per year could be created, and personal income could rise
by an average of $8 billion annually above current projections.
The third myth and final one is the individuals required to
pay the tax can easily afford it. It is important to understand
that the burden of the tax falls on the recipient, not the
giver. Middle-class Americans, especially small-business
owners, are often stuck with a burdensome estate. Small-
business owners and family farmers generally have large
investments in infrastructure. Many don't have large capital
assets that can be used to pay the tax. And, therefore, many
heirs have to liquidate the farm or shut the doors on the
family business to pay the estate tax.
The NCPA views the estate tax as anti-family, because it
does not allow a parent to pass their hard work and their
wealth, if they have any wealth, to their children. It is anti-
farm, because farms are especially vulnerable because they hold
vast amounts of land which are subject to the estate tax as
they are passed from generation to generation. And it is anti-
small business. It hurts small businesses that don't enjoy the
same tax shelters and benefits as large corporations.
As Congresswoman Fallin said, I have been involved in
small-business issues for more than 30 years, serving as a
national president of the National Association of Women
Business Owners, owner of my own business, and today as a
distinguished fellow at the National Center for Policy
Analysis.
So, on behalf of the NCPA and the many small-business
owners like me and families that might be affected by the
actions of this Committee, I am in hopes that you will look at
this, as small-business owners are the job-creators of this
country, and we will lead us out of the recession as we did in
2001. They don't need any more taxes, not now, and not when
they die.
Thank you very much. And I look forward to your questions.
[The statement of Ms. Neese is included in the appendix.]
Chairwoman Velazquez. Thank you. There is going to be a
series of seven votes coming up. I am not going to be asking
questions in this round, and I am going to recognize the rest
of the members that are here, and then we will go into recess,
and I will come back and ask my questions.
So, Mr. Graves?
Mr. Graves. I will defer, too, Madam Chair. I don't think
there is anything that could be said or any question that I
could ask that would get me to be more against the estate tax.
[Laughter.]
Chairwoman Velazquez. Mr. Griffith?
Mr. Griffith. Madam Chair, thank you for holding this
hearing. We appreciate so much your comments. I hope that we
can translate that and transfer it into the floor of the House
and make something happen so that our hard-earned tax dollars
are not planning to try to avoid an estate tax in the future.
It is a major, major problem and a major difficulty, and we
appreciate, Madam Chair, holding this hearing and certainly you
all for being here. Thank you.
Chairwoman Velazquez. Mr. Luetkemeyer?
Mr. Luetkemeyer. Thank you, Madam Chair.
I would just ask a couple of brief questions. I think we
are all in agreement here. This is an issue that we are all in
agreement on. This is a really big problem for small
businesses. As a small-business person myself, I have seen our
family have to go through this discussion of how we can succeed
or pass down businesses from one to the other.
I know, Mr. Spoa, you talked a little bit about some of the
problems in planning. You had the importance of life insurance
in that. But it--you also made the comment about--it is
extremely difficult to try and make a long-term plan on estates
with this constant changing of the rules and every year, having
to go back and redo this.
Can you give some examples or experiences on the difficulty
of doing this and the cost that is involved in trying to go
back--and trying to revise this and protect this group this
time and that asset this next time--moving target, isn't it?
Mr. Spoa. Yes, it is. It is a moving target. And it becomes
more difficult, I think, for my children that are taking over
the business, because there are three of them involved, and
they have to worry about the other two. I really only have to
worry about myself, up to certain point, until these children
decided they wanted to take over and stay in the business.
They have to continually plan for each of them and what
they have--what if something happens to one of them? What
happens to the business? So they have had to invest in
insurance policies. And the joke is sort of, if anybody is
going to die, better do it next year, because then we can pass
on. We don't have to worry about it.
But it is a moving target. I mean, you have to sit down
with the accountants. You have to sit down with the tax
planners. You have to sit down with the attorneys. And you do
it every year--
Mr. Luetkemeyer. It is a cost that you have to incur that
you have to incur, is it not?
Mr. Spoa. Right, it is a cost.
Mr. Luetkemeyer. Do you have an idea of roughly what your
costs are or what the average cost is for people to comply?
Mr. Spoa. I think I will go along with what the young lady
next to me said, it was roughly around $5,000 a year. We may be
a little higher than that, but I hate--I hesitate to guess
without knowing for sure. But it is probably, I would say,
between $5,000 and $10,000 a year.
Mr. Luetkemeyer. Okay.
Ms. Mayes, you made the comment about, you know, printing
industry is very--it is unlike the cattlemen industry or the
cattle industry over here, which you can sell off a number of
acres to do this. It is hard to sell your printing press--
Ms. Mayes. That is right.
Mr. Luetkemeyer. --you know, to kind of divide that up and,
you know, throw off this part and that part. I mean, when you
buy a huge asset like that, which is probably 50 percent to 60
percent of all your assets, are all tied up, or your money--
your capital is tied up in one asset, it makes it difficult to
try to sell off parts in order to be able to keep the whole.
Not that farming is not an industry that it is easy to
accommodate estate taxes. I mean, that is also incumbent on the
way you generate cash. But it really causes a problem for the
printing industry, does it not?
Ms. Mayes. Yes, it is a very capital-expensive industry. I
mean, one press is $3 million. We have three large presses and
all of the small equipment, as well, everything, it is just
very capital-intensive industry.
Mr. Luetkemeyer. It really affects everybody differently,
like I say, under the capital--with the cattle industry here,
you know, if you sell off too much land, suddenly it doesn't
make your farm productive enough to maintain and to be able to
stay in business, I would guess, Mr. Uhl. Is that correct?
Mr. Uhl. Excuse me?
Mr. Luetkemeyer. When talking about, if you have to sell
off some of your property, it makes it difficult to try and
cash flow your business. You are usually set up so you--the
size of your business is--the activities that you have on your
property is conducive to the size of the total ranch.
Mr. Uhl. Absolutely. A critical mass is absolutely
necessary in our business. And when you have to sell off part
of your land, that obviously impacts your economic viability.
Mr. Luetkemeyer. Right.
Ms. Neese, just a real quick one for you. You were talking
about the negative impact on economic activity. And I thought
that was an interesting comment from the standpoint that
actually the estate tax is a restraint on economic activity.
That is an interesting comment. Can you elaborate on this a
little bit?
Ms. Neese. Well, I think it is because of--especially if
you are a farmer, the infrastructure and the cash assets that
you have, it is a detriment to employment, to wages, to
revenues, federal revenues, if you look at it as a detriment.
Mr. Luetkemeyer. Just expansion in general, I would guess.
Ms. Neese. Exactly.
Mr. Luetkemeyer. Yes. And if you have to sell off part of
your assets, you have got less to leverage if you want to
expand or improve your business, I would take it.
Ms. Neese. Exactly. And one other quick comment from my
perspective, in my business, I own a human resources firm in
Oklahoma City. And we spent anywhere from around $5,000 to
$7,500 a year. And we have been doing that now for 20 years.
And the uncertainty is one of the biggest problems. We need
permanent fix. And that will help all small-business owners. It
will help us create more jobs. It will be so--the burden that
will be released would be a huge one for us.
Mr. Luetkemeyer. Thank you for your comments. My time is
up.
Thank you, Madam Chair.
Chairwoman Velazquez. Mr. Schrader?
Mr. Schrader. Thank you, Madam Chair.
I guess a question for Mr. Uhl, maybe Ms. Neese, in terms
of the farmers, I am a farmer, and also I have a small
business. And I am very concerned about, you know, my estate
and being able to pass things onto my kids. Any rough
estimates, in terms of sizes, particularly of the average--you
know, such as it is farm or ranch, where they would fall in the
different proposals that are being discussed in terms of, you
know, estate value, what percentage of farms, what percent of
ranches are about $3.5 million, above $5 million, or below
those numbers, that sort of thing?
Mr. Uhl. To our knowledge, there is no hard economic data
that will tell you an exact percentage of farms or ranches that
will come within the standard. Certainly, if the exemption rate
goes down to a million dollars, many, many more will come in.
According to the National Agricultural Statistics Service
in the USDA, the average beef operation was 573 acres, and the
average operation also had 40 cows. Also, the average
profitability over a 30-year average was $30 per head. So what
that would lead you to, I believe, economically would be that
that average beef operation would average about $1,200 in
profitability per year for that 573-acre average.
So I guess what that really tells you is that there are
many people in the industry who are not in the industry full
time, that it is merely on a part-time basis. For those of us
who are in the business full time, many more acres are
involved.
Again, according to the National Agricultural Statistics
Service, in 2009, the average pasture value per acre was
$1,070. In 2003, that was $605. So during that 4-year period,
the average per-acre value went up 77 percent, which shows you
how rapidly these values have been escalating.
Of course, that is of no use to us in the business, because
we don't intend to sell our land. We would like to pass it
along. So that is why this issue is so important to us.
Mr. Schrader. Ms. Neese, any comments along the same lines?
Ms. Neese. Just a personal experience. My family farm has
been in our family for 100 years. My grandfather started the
farm, passed it down to my father, and two other siblings. They
ended up having to sell part of their land. It was a big
problem for my father. I ended up purchasing the farm from my
father to create less complications for him and giving him a
life estate on the farm until his passing.
So that is just an example of some of the things. And I
have to tell you, this was back when the--was charging 20
percent interest rates. So I got my father out of that and paid
it off for him.
So these are some of the things personally that I have been
through in terms of trying to deal with passing the farm off
generation to generation. We are in Cotton County, Oklahoma,
and because it is a 100-year-old farm, I would love to keep it
in my name.
Mr. Schrader. Thank you very much.
Just a comment, Madam Chair, that I think it is a nice,
great, bipartisan bill that we could maybe get behind, and I
hope this Committee will look favorably on it. We are actually
getting something maybe from the Senate at end of this week or
next week, whenever the Senate ever gets anything done, that is
going to be spending a lot more for relief for our different
businesses. I can't think of any better expense is to take care
of this, and the $28 billion or whatever would pale in
comparison to the benefit for American farmers and American
small businesses.
Chairwoman Velazquez. Mr. Thompson?
Mr. Thompson. Thank you, Madam Chairwoman.
Thank you to the panel for your testimony today.
Mr. Spoa, it is good to have another Pennsylvanian here.
And I wanted to start out with--just wanted to ask you, you
talked about your family-owned company has provided jobs for
many people over the years. And what are the kind of jobs that
will disappear if small businesses must be sold to pay estate
taxes? And are you concerned that the jobs won't be created to
fill that void?
Mr. Spoa. Well, the jobs that are filled by the retail
grocery industry, you have well-paying jobs in the meat
department, the bakeries, the delis, produce managers, front-
end manager. These are all well-paying jobs that people
actually support families on.
Now, a lot of your part-time workers are the high school
students who get their first job, can learn a little bit about
what it is like to have to go to work every day, to follow a
schedule, learn how to take orders from your supervisors, and
learn how to interact with the consumer, and just generally
learn a little bit about life in general, rather than just the
book-learning that they receive in school.
So those are the jobs that would be lost, along with what
every small retailer does for their community as a whole.
Mr. Thompson. Can you tell me a little bit about that, in
terms of how it would impact the surrounding community and the
economy, give me some examples?
Mr. Spoa. Ellwood is a small community. Businesses support
the local hospital. Businesses support the local Distributive
Education Clubs of America's program. Businesses support
churches and all the clubs that go along with the churches, the
bingos and the dinners that the churches throw. They support
the bans from the high school. I mean, you name it, and small
business is there to support, every business in relationship to
what they can afford to help, but they all help. They all do
something for their community.
And if they are gone, where is the community going to get--
where are they going to get that--who is going to provide those
services for them?
Mr. Thompson. Okay. Thank you.
Ms. Mayes, in your testimony, you emphasized the need for
certainty in the estate tax. We have heard a little bit about
that. Would you elaborate on why this is important?
Ms. Mayes. It is so important for the planning phase. You
know, I discussed that we spend $5,000 a year, total of
$730,000. Most of that is on life insurance premiums, the life
insurance premiums on my father, on myself, on another partner
of ours, just to try and plan. We never know which direction it
is going to go in, and that is why just to get a certain plan
down that we can plan for now would just be so helpful, and we
wouldn't have to go back and forth.
Mr. Thompson. Yes, thank you.
Mr. Uhl, in your testimony, you talked about farmers and
ranchers are often multi-generation small businesses. How
frequently do they need assistance with succession and estate
planning? And have you seen any trends related to this issue,
you know, of that line of farming and ranching ending, where,
you know, has there been up to this point situations where
farmers have not continued to the next generation because of
these costs and maybe combined with other factors?
Mr. Uhl. Yes, absolutely, in two different ways. On account
of farm economics now, many times in many instances, the
primary farmer or rancher needs to take a second job, and so
that sort of takes them out of the industry. And many times,
the death tax can cause a requirement for a mortgage to be put
on the property, which ultimately ends up being such a burden
that it is--those economic assets are sold down the line.
And so even though it may be 3, 4, 5 years after the death
tax is imposed, ultimately, the land is sold on account of
that, because there is no longer an economically viable unit
intact. So, yes.
Mr. Thompson. Thank you.
And I will yield back, Madam Chair.
Chairwoman Velazquez. Mr. Bright?
Ms. Fallin?
Ms. Fallin. Thank you, Madam Chair. I do have a couple of
questions.
And I, too, support eliminating the estate tax and hope we
can accomplish that before it expires. I would like to ask Ms.
Neese a couple of questions. Why is the estate tax more
burdensome on a small family business than the larger ones?
Ms. Neese. Well, I am not sure that it is more burdensome
on small business, other than it costs small-business owners so
much to get into compliance and to make sure that they are able
to pass that small business on to the next generation.
And especially in today's economy, a lot of small
businesses are really hurting, and it is difficult for them to
just make payroll. And so to know that they have got to take
another $5,000 or $7,500 to help them with the estate tax
planning is a huge lump to take out of their budget when they
could be using those dollars to market and continue to sell
their wares and keep themselves in business.
Ms. Fallin. That would make sense. And I would assume that
those small-business owners may not have the level of expertise
in accounting that some of the larger ones might.
Ms. Neese. They definitely have to have an attorney who--
perhaps the large corporations have an attorney on staff and
human resource people that the large corporations have on
staff, so absolutely correct.
Ms. Fallin. That is good. If I could ask Mr. Spoa a
question, you said that you carry a life insurance policy to
protect your family against the expense of an estate tax. Can
you just elaborate a little bit more on why it is important for
companies in industries with low capital and small margins to
have something like that?
Mr. Spoa. Well, if you want to pass your business on, you
have to. If something would happen, there is no money there for
the payment of a tax. So you really don't have any choice.
I guess you could say, if you don't do it, you are setting
a plan that really isn't a plan. So what they say, you can have
no plan be a plan. And if you don't have the insurance and you
don't do some planning, then you are willing to let your
business go and all the years that your parents put into it and
the hours that my wife and I put into it and the hours that the
kids are putting into that means nothing if you don't buy that
insurance, so that at least you have the cash to pay that tax.
Ms. Fallin. Thank you. That is very good.
I know we are short on time, so, Madam Chairman, I will
relinquish my time. Thank you very much.
Chairwoman Velazquez. Thank you.
Mr. Nye?
Mr. Nye. Thank you, Madam Chairman. My questions were
largely answered. I just wanted to say thank you for coming
here. I know it is arduous to get into Washington, but it is
important for us to hear from you. For us to be able to make
good policy, we have to hear from people who are on the front
lines every day who are experiencing this, trying to keep up
with the regulations, paying the expenses that you have talked
about today, in terms of keeping up with all this code.
And I just want to say: Thank you for taking the time to
come sit here before us, because we need to see from people who
are out there on the front line every day for us to make good
decisions. So we appreciate you being here.
I yield back.
Chairwoman Velazquez. Ms. Dahlkemper?
Ms. Dahlkemper. Thank you, Madam Speaker, and I apologize
for coming in late. I had another hearing. But I just want to
thank you, also. And I don't have any further questions at this
point, so I appreciate your testimony today and appreciate you
coming in front of us.
I yield back.
Chairwoman Velazquez. Okay. So I do have a question.
We all support your concern regarding the estate tax, but
we have a lot of competing interests right now, and one of them
is facing rising deficits and the impact this could have on our
economy in the future.
Estimates say that repeal will cost $1 trillion over 10
years. So if there is an exemption amount, a magic number that
will protect small businesses, while taking into consideration
fiscal constraints, what will that number be, Mr. Spoa?
Mr. Spoa. You are talking the exemption or the tax rates?
Chairwoman Velazquez. The exemption.
Mr. Spoa. The exemption. The problem with setting a set
figure with the exemption is that may work very well today,
this year or next year, but 5 to 10 years down the road, that
number would mean nothing anymore. So I don't know if you--if
you really can set a--
Chairwoman Velazquez. So let me ask you this question,
then. There are a broad array of estate tax proposals right
now. And one proposal is to make the 2009 levels of $3.5
million permanent. Would this provide, in the case of Mr. Uhl,
farmers with the certainty they need and the necessary
protection? If not, what would be an acceptable threshold for
family farms?
Mr. Uhl. It would provide the certainty. Certainly, the
higher the exemption level, the more people that will be
employed, the better it will be for our economy. The current
level of $3.5 million is insufficient for a meaningful number
of members not only in our association, but the industry, those
who produce the most beef.
I am not prepared to tell you a number, but I can tell you,
the higher the number, the better for our industry and the
better for our economy.
Chairwoman Velazquez. Okay. Any other member of the panel
would like to comment?
Ms. Neese. You know, Madam Chairwoman, I would love to be
really optimistic and say how important it is that it is
totally repealed and we have a permanent repeal so that we can
then permanently decide what to do with our businesses, in
terms of estate tax.
Chairwoman Velazquez. Sorry, Ms. Neese. We don't live in a
perfect world.
Ms. Neese. But I would point to, you know, some of the
studies that have come out that have said that the economy
would average as much as $11 billion a year in extra output. I
mean, look at some of those.
I just think that, to protect small business, Mr. Uhl has
made two good points. One, we need to have something permanent.
And, two, the higher the amount, the better. But I will keep my
rose-colored glasses on and stick to total, permanent repeal.
Chairwoman Velazquez. Okay.
Ms. Mayes?
Ms. Mayes. Well, just $5 million would help approximately
80 percent of the printing companies that would be relieved of
this burden in today's dollars and cents, but just something
permanent so that we could plan would be great, because the
most important thing is, I have 51 families that I have to
worry about, not just my own. It is more important to worry
about those 51 families and their longevity and their
livelihoods.
Chairwoman Velazquez. Okay. Well, thank you very much. And
we will continue to listen and discuss this issue that I know
is important for small businesses in America, especially at a
time when small businesses are struggling. Thank you all for
being here today.
I ask unanimous consent that members will have 5 days to
submit a statement and supporting materials for the record.
Without objection, so ordered.
This hearing is now adjourned.
[Whereupon, at 2:00 p.m., the Committee was adjourned.]
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