[Congressional Record Volume 140, Number 127 (Tuesday, September 13, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: September 13, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                    FAMILY BUSINESS PRESERVATION ACT

                                 ______


                         HON. BILL K. BREWSTER

                              of oklahoma

                    in the house of representatives

                      Tuesday, September 13, 1994

  Mr. BREWSTER. Mr. Speaker, today my colleague, Jim McCrery, and I are 
introducing the Family Business Preservation Act, legislation which is 
designed to lessen one of the most dangerous impediments to the 
continued existence of family businesses in America--the irrational 
rules for applying the Federal estate and gift tax to family-owned 
businesses.
  Currently, the Federal estate tax has a maximum rate of 55 percent. 
This is substantially higher than the maximum income tax rate which is 
set at 36 percent, or 39.6 percent if you include the surtax on incomes 
over $250,000. Of course, this 55 percent does not apply to income 
generated by business property. It applies to the value of the property 
itself. A recent Tax Foundation study concluded that an estate tax rate 
of 55 percent has the same disincentive effect on entrepreneurs as a 
maximum income tax rate of 70 percent. Congress long ago determined 
that a 70 percent income tax rate is unreasonable. I doubt that anyone 
would seriously argue the contrary today.
  When you think about it, an estate tax at 55 percent requires a 
family to enter into a leveraged buyout of the Government's newly 
created 55 percent interest in the family's business or farm, just at 
the worst possible time--the death of a major ownerparticipant.
  What happens all too often is that the family simply cannot borrow 
enough money to pay off the Government and the business cannot borrow 
enough money to redeem enough of the decedent's interest to allow the 
estate to pay the tax. The family is forced to sell the business, often 
to large agribusiness or other corporations who have no ties to the 
community and little concern about the welfare of the business 
employees.
  Contrast this with what happens when a major shareholder in a 
publicly traded corporation dies. The estate can easily sell enough 
stock to pay the estate tax because there is a market for the stock. 
The corporation may have different owners, but the corporation 
continues as before--without being crippled with extraordinary new 
debt.
  However, this threat to the continued existence of family businesses 
is not merely an isolated hardship to some unfortunate families. Mr. 
McCrery and I are convinced that this ``accordion'' effect which 
shrinks family-owned businesses every time a family member dies is not 
only a significant factor in the concentration of agribusiness and 
reduction in the number of family farms but also a major disincentive 
to economic growth in this country.
  Family-owned businesses generate about 60 percent of our gross 
domestic product. During the 1980's, family-owned businesses accounted 
for an increase of more than 20 million private sector jobs. During 
that same period, employment in Fortune 500 companies decreased by 3.5 
million.
  We need to do our best to assure that irrational tax laws do not 
create drags on job creation and job retention for workers all across 
this country. Experience shows us that we cannot rely solely on large 
corporations to create new jobs in this country. We need family 
businesses to grow and prosper if we want to employ Americans.
  The legislation Mr. McCrery and I am introducing today will safeguard 
and encourage family businesses in several ways. First, it will reduce 
the estate tax rate when at least half the value of the estate is in a 
family-owned business. If the heirs continue to be active in the 
business, the maximum rate on the family business interest will be 15 
percent. If the heirs are not active in the business, but keep it in 
the family, the tax rate will be 20 percent. However, if the heirs do 
not keep the business for at least 10 years, then the estate tax 
savings will be recaptured.
  This should be a strong incentive for successful entrepreneurs to 
keep working and creating jobs, rather than selling out to others. It 
won't lock in heirs who do not have the interest or aptitude for the 
business, but it will discourage selling out to large companies who 
have no concern for the local community and local jobs.
  Second, the legislation will provide an alternative valuation date of 
40 months after the death of the decedent for family-business property. 
This will go a long way to resolving estate valuation disputes where 
the value of the business is closely tied to the skills of the 
decedent.
  Third, the legislation will index the so-called unified estate and 
gift tax credit for inflation so that inflation will not continue to 
erode the amount of the estate that is exempted from estate tax. The 
unified credit, which effectively exempts from tax estates valued at 
less than $600,000, was last increased in 1981. It should be increased 
for inflation since then. The least we can do is make certain that no 
further erosion takes place.
  Finally, the bill will allow hard-working individuals to give up to 
15 percent of their earned income each year to family members without 
being subject to gift tax. This will not apply to investment income 
and, unlike gifts to charity, there will be no income tax deduction. 
However if an individual wants to make a gift to a member of his family 
in a year when he has earned some money, the tax laws should not 
discourage it.
  I recognize that with the little time left and the crowded 
legislative schedule, this bill will not be enacted this year. I am 
hopeful, however, that introducing this legislation now will provide a 
vehicle to focus attention on this very important issue and will 
significantly enhance the chance of success next year.
  Mr. McCrery and I hope that our colleagues will keep in mind that, 
according to the Internal Revenue Service, business assets, which are 
defined to include closely held stock, farm assets, limited 
partnerships, and other non-corporate businesses, comprise just over 12 
percent of estates. This bill is not unrealistic. It does not repeal 
the estate tax. It will not cause an unacceptable drain on Federal 
revenues.
  This legislation is simply a well-targeted, effective incentive to 
create jobs for Americans by not allowing the Federal Government to 
take more than its fair share of a family business at the death of a 
major participant in the growth and success of that business.

                          ____________________