[Congressional Record Volume 141, Number 190 (Thursday, November 30, 1995)]
[Senate]
[Pages S17855-S17856]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                   SMALL FAMILY FARMS AND BUSINESSES

  Mr. ABRAHAM. Mr. President, I rise today to talk about an important 
issue for small family farms and businesses in my State of Michigan and 
across our country.
  Family businesses need estate tax relief. Federal estate or death 
taxes kill family-owned businesses. These taxes impose an unbearable 
burden on our Nation's most productive citizens--family business 
entrepreneurs. The estate tax eliminates jobs and permanently damages 
communities that depend upon these businesses.
  Family businesses have the opportunity to continue growing and 
creating jobs for generations, instead of handing the business over to 
the IRS.
  Current estate tax rates range from 37 to 55 percent. Faced with the 
tremendous burden imposed by this tax upon their death, business owners 
in my home State of Michigan and across the United States, will react 
in several of the following ways:
  First, the business owner will not expand the business because large 
capital expenditures for long term growth make little sense when the 
family will soon be forced to sell or liquidate the business.
  Second, the children will not participate in the business because the 
business owner, knowing that taxes will prevent children from 
continuing operation of a family business, will often discourage their 
children from working in the business and encourage them to gain 
experience elsewhere.
  Third, the business owner will pay dearly in estate planning costs. 
Even if business owners have the foresight to plan early for their 
death, the expense of this planning, in insurance, legal and accounting 
costs, can be enough to eliminate the business' small profit margin. 
These extra insurance, legal, and accounting costs are especially 
burdensome because small businesses survive on cash flow, not profit.
  Fourth, heirs may not be able to afford tax payments. Despite some 
planning, heirs are often still faced with a significant tax burden. 
Even paid out over time, taxes may be too much of a burden to survive 
in an internationally competitive market. Plus, what bank is going to 
loan money to a business that the IRS holds a first lien against?
  Mr. President, I ask unanimous consent to have printed in the Record 
an article from today's Wall Street Journal, entitled ``Will Uncle Sam 
Inherit the Family Business'' by David Pankonin. This describes the 
terrible effects of estate taxes on his fourth-generation family 
business. Mr. Pankonin's story is typical of thousands of similar 
family businesses across the country.
  There being no objection, the article was ordered to be printed in 
the Record, as follows:

             [From the Wall Street Journal, Nov. 28, 1995]

              Will Uncle Sam Inherit the Family Business?

                          (By David Pankonin)

       Cleaning out a box in the back office a few Sundays ago, I 
     came across the hand-written contract that passed the family 
     business from my great-grandfather to my grandfather. it was 
     dated Dec. 8, 1910. That was the day my grandfather became 
     proud owner of Pankonin's retail farm equipment company for 
     the princely sum of $518.09. Farther down in the same stack 
     of papers, I discovered a second document, a partnership 
     agreement between my grandfather and my father, dated 1946. 
     Times having gotten considerably more complicated by 1946, 
     the document ran to two pages. The value of Pankonin's had 
     risen to $8,912.66.
       I plan to put those pieces of paper in a glass case out in 
     our showroom. When our customers come in to see next year's 
     new tractors and combines, they can see the little bit of the 
     history my family has put into the place.
       Statistically, my company shouldn't have made it this far. 
     The survival rate for family firms for a first- to second-
     generation transfer runs about 30%. For firms that stay in 
     the family from the second to third generation, that number 
     drops to 4%. For the fourth-generation transfer that put the 
     company in my hands, it's a fraction of 1%. At 16, my son 
     isn't spending every moment thinking about his chances of 
     running the family business, but as his father, I'd like to 
     know what I'm working toward. Will I be able to pass the 
     company inherited from my father along to my son--or in spite 
     of what my will might say--am I just working hard to pay an 
     heir called Uncle Sam?
       My worry is a real one. According to a recent Gallup Poll, 
     one-third of all small-business owners will have to sell 
     outright or liquidate a part of their firm to pay estate 
     taxes. Of those who have to liquidate to pay the Internal 
     Revenue Service, half expect they'll have to eliminate 30 or 
     more jobs. Another 20% of those firms put the number of 
     employees they'll have to let go as high as 100 or more.
       My father died when I was 23 years old, one quarter away 
     from completing my MBA at Northwestern. When I came home for 
     the funeral and decided to stay to run the business, my 
     mother became my banker, generously extending me 100% of my 
     financing. We made it work. Making it work the next time 
     won't be so easy. The reason is that for tax purposes. 
     Pankonin's and our dealership building is worth substantially 
     more than in those early years.
       Today at my company we've got 16 employees. They're not 
     family, but they're the 

[[Page S17856]]
     next closest thing. If, after I'm gone, my wife has to shut us down, 
     what will they do? Maybe it's not something you can measure 
     in dollars and cents, but they've got a stake in this 
     company, too.
       At our store, we see plenty of people in the same 
     situation. Farming is a high-investment, low-margin business. 
     It's not uncommon to meet farmers who are paper 
     millionaires--asset rich, cash poor. That may be hard for the 
     rest of America to imagine; then again, maybe not. Think of 
     all the retirees who own homes on either coast, bought 30 
     years ago for $30,000 but worth $350,000 today. I'll bet they 
     don't feel ``rich'' either--at least until they sell their 
     home and see that capital gains tax bill.
       When my time comes, I'd like my son to be thinking about 
     whether it's right for him to run the family business, not 
     whether he's ready to saddle himself with a lien against the 
     paper value of the business to pay the inflated estate tax--
     or whether he's calculated how many employees he'd have to 
     let go to clear the bill with the IRS.
       The best solution would be to exempt the hundreds of 
     thousands of small family businesses across this country from 
     the estate tax altogether. Congress and the president could 
     haggle over how small is small, but the principle would be 
     carried into policy. If the political climate isn't right for 
     a complete exemption, then President Clinton ought to adopt 
     the proposals Congress has built into its budget plan: Raise 
     the federal tax exemption for family-owned business assets to 
     $1.5 million, institute a $750,000 personal exemption and cut 
     the tax rate for qualified small businesses in half for 
     assets between $1.5 and $5 million.
       President Clinton calls the tax reforms Congress is backing 
     ``tax cuts for the rich,'' and says he's holding out for cuts 
     that help American families. Nice rhetoric. If he's serious, 
     he'll take a second look and support the tax reforms in 
     Congress' plan. If the small family businesses of America 
     don't get some relief, federal taxes may just be the death of 
     us yet.

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