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MAY 13, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 1353 words

HEADLINE: PREPARED TESTIMONY OF
THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA - AGCA
BEFORE THE HOUSE SMALL BUSINESS COMMITTEE
SUBCOMMITTEES ON TAX, FINANCE AND EXPORTS
AND RURAL ENTERPRISES, BUSINESS OPPORTUNITIES,
AND SPECIAL SMALL BUSINESS PROBLEMS
SUBJECT - THE DEATH TAX

BODY:

Thank you, Chairman Manzullo and Chairman LoBiondo, for holding a hearing this morning on the effect of the death (estate) tax on family-owned construction companies. AGC is pleased to submit testimony today because elimination of the death tax is our top legislative priority for the 106th Congress. 94% of AGC members are closely-held businesses -- often family-owned -- and planning for and paying death taxes is an onerous burden our members will have to face at some point in the life of their company.
You'll notice throughout this testimony that we consistently refer to the estate tax as the "death tax." We prefer to call it the "death tax" for two reasons: 1) death of the owner of a company is the event that triggers the tax; and 2) at a rate of 37% to 55% on all company assets, this tax kills small businesses and kills jobs! AGC is the nation's largest and oldest construction trade organization, founded in 1918. AGC represents more than 33,000 firms, including 7,200 of America's leading general contractors, and 12,000 specialty-contracting firms. They are engaged in the construction of the nation's commercial buildings, shopping centers, factories, warehouses, highways, bridges, tunnels, airports, waterworks facilities, waste treatment facilities, dams, water conservation projects, defense facilities, multi-family housing projects, and site preparation/utilities installation for housing developments.
EFFECT of DEATH TAXES on CONSTRUCTION COMPANIES
Business continuity - the passing of years of hard work to the next generation - is a great concern to family-owned construction companies. Succession planning is long and difficult. Owners are forced to answer to difficult questions about the future of the company they have often worked all their life to grow. Who will run the business when I'm gone? What does my family think should happen? How will ownership be transferred? These are just a few of the questions a contractor must address when undertaking succession planning.As difficult as succession planning can be, it gets even worse when the owner realizes that up to 55% of his or her company can be lost to death taxes. When the owner of a construction company dies, his or her estate is subject to federal and state death taxes. The total value of the estate includes the value of the family business along with other assets such as homes, cash, stocks, and bonds. At a minimum, an estate over $650,000 (gradually increased to $1 million by 2006) will be subject to a federal death tax rate of 37% and an estate over $3 million will be taxed at an astronomical federal rate of 55%. This tax is on top of not only the state death tax but also the income, business, and capital gains taxes that have been paid over an individual's lifetime. It is not surprising, then, that more that 70% of family businesses do not succeed to the second generation and 87% do not survive to the third generation.
The construction industry is capital intensive, requiring large investments in heavy equipment. One single critical company asset can cost more than the amount ($650,000) of the unified credit. For instance, a 150-ton crane used in bridge construction can cost more than $1 million. A scraper can cost $700,000 and a large bulldozer can cost more than $800,000.
Most family-owned construction firms invest a significant portion of their after-tax profits in equipment, facilities and working capital. This is necessary for these firms to increase their net worth, create jobs and continue to be bonded for larger projects. Because of these assets, the construction industry is especially vulnerable to the devastating effect of the death tax.
Those family-owned construction companies that do survive after death taxes have spent thousands, sometimes millions, of dollars to plan for and pay death taxes. Of AGC firms involved in estate planning, 63% purchase life insurance, 44% have buy/sell agreements and 29% provide lifetime gifts of stock.
Last year, Richard Forrestel, a CPA and Treasurer for Cold Spring Construction in Akron, New York, testified succinctly on what death tax planning has cost his company:
"We spend in excess of $100,000 a year in insurance costs and accounting fees to ensure that we have the capital to pay the death tax and transfer our business from one generation to the next. We have diverted enormous amounts of capital and management time to this process. We ought to be buying bulldozers and backhoes built in Peoria, Illinois rather than wasting capital on intangible life insurance policies."
In sum, AGC believes that all the resources spent planning for and paying the death tax should be used more productively to grow businesses and create jobs.
CONSTRUCTION JOB LOSSES
The death tax not only affects the business owner, but also his or her employees. While the death tax rate on a company is 37% to 55%, for the worker who loses a job because of death taxes the rate is in effect an agonizing 100%! AGC's family-owned firms employ on average 40 persons and have created on average 12 new jobs each in the last five years. The death tax, however, can destroy these jobs because firms are often forced to sell, downsize or liquidate to pay this onerous tax. On average, 46 workers lose their jobs every time a family-owned business closes. And everytime an owner foregoes the purchase of new equipment because resources have been diverted to pay death taxes, the workers who use and build that equipment are impacted.
Also, remember the effect these family-owned businesses have on their immediate community. They family-owned businesses not only offer jobs, but they are a vital part of every community providing specialized services, supporting local charities, and returning earnings back to the local economy.
ECONOMIC EFFECTS of the DEATH TAX
A most frustrating aspect of death taxation is that after all the countless hours and financial resources spent preparing for and paying the tax, it raises almost no revenue for the federal government! Annual death tax receipts total approximately $23 billion, less than 1.4% of total tax revenue.
Furthermore, the Congressional Joint Economic Committee released a report last year on the death tax that found that this tax "raises very little, if any, net revenue for the federal government." The JEC also concluded that the tax results in losses under the income tax that are roughly the same size as the death tax revenue. LEGISLATION SUPPORTED BY AGC
AGC appreciates the efforts made by Congress in lowering the death tax as part of thTaxpayer Relief Act of 1997. However, Congress needs to do much more than simply increase the unified credit to help the growing number of family-owned businesses facing the death tax. The construction industry urges Congress to focus on eliminating death tax rates. As stated earlier, the construction industry is capital intensive and even the smallest contractors have lifetime assets that easily exceed the unified credit amount.
In the House, we strongly support H.R. 8, introduced by Reps. Jennifer Dunn and John Tanner, that calls for gradual elimination of the death tax by 5% per year over a period of ten years. We also support H.R. 86, introduced by Rep. Chris Cox, that calls for full and immediate repeal of this tax. We urge Congress to include legislation eliminating the death tax in any upcoming tax legislation.
SUMMARY
The death tax has become an American nightmare at the end of the American dream for familyowned construction companies. Construction company owners work hard to grow' their business. They create jobs for people in their community. They pay federal and state taxes throughout the life of their company. But then, when they die, the federal government steps in and takes over half of their company. It is unthinkable in a time of surplus that our government imposes a tax that raises so little revenue while it devastates businesses and kills jobs. AGC urges you to pass legislation to eliminate this terrible tax.
Thank you for the opportunity to present testimony this morning.
END

LOAD-DATE: May 14, 1999

Document 44 of 46.


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