Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
June 16, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 1564 words
HEADLINE:
TESTIMONY June 16, 1999 RONALD P. SANDMEYER, JR. HOUSE WAYS AND
MEANS RETIREMENT AND HEALTH RELATED TAX PROPOSALS
BODY:
Testimony of Ronald P. Sandmeyer, Jr. President and CEO Sandmeyer Steel
Company On behalf of the National Association of Manufacturers Before the
Committee on Ways and Means U.S. House of Representatives On Estate Tax
Repeal June 16, 1999 Mr. Chairman and members of the committee, thank
you for the opportunity to appear before you today to discuss estate taxes. My
name is Ronald P. Sandmeyer, Jr., and I am here today on behalf of the National
Association of Manufacturers. The NAM is the nation's largest national
broad-based industry trade group. Its 14,000 member companies and subsidiaries,
including approximately 10,000 small and medium manufacturers, are in every
state and produce about 85 percent of U.S. manufactured goods. The NAM's member
companies and affiliated associations represent every industrial sector and
employ more than 18 million people. I am President and CEO of Sandmeyer Steel,
one of the more than 9,000 family-owned or closely held small manufacturers in
the NAM. Every year when the NAM surveys its small members,
repeal of federal estate and gift
taxes emerges as the single most important tax
policy issue affecting their ability to grow. This may surprise some who only
see a tax when it is collected, but I know that you, Mr. Chairman, were once a
small manufacturer, and that you have seen what I have seen. Sandmeyer Steel
Company is a third generation family-owned business in Philadelphia,
Pennsylvania. We produce stainless steel plate products that are sold to
fabricators and equipment manufacturers who make equipment used in a variety of
different process industries. My grandfather,-Paul C. Sandmeyer, founded the
company in 1952. My brother Rodney and I are the third generation at our
company. We have been working with our father to try to make certain that our
company survives the difficult transition from second to third generation. A
good transition includes both a successful management succession plan and a
successful ownership succession strategy. A successful transition is one that
leaves a company strong and capable of continued growth. This is important not
just to us, but also to our 140 employees and their families. The death tax can
be devastating to the ownership-succession component of this transition between
generations in a family- owned business. A Vermont Life study, which shows that
fewer than one in three family-owned companies survives to the next generation,
is not surprising. The 55 percent estate tax rate does not allow much room to
breathe. Very few businesses or business owners have that kind of liquidity, and
almost no manufacturer does. It is a mistake to regard the death tax as a
one-time burden for a company. The mere threat and uncertainty of the death tax
looming out there is a constant burden to our business. Any business that hopes
to survive the death tax must make costly sacrifices today. Meetings with
lawyers and financial planners are expensive and drain a lot of time from a
company's key decision makers. Money spent on attorney fees and life insurance
premiums would be better invested in new pieces of equipment or in hiring and
training additional employees. Time and money spent preparing for the death tax
simply does not help a business in any other way. This diversion of valuable
human and financial capital achieves absolutely no economically useful purpose.
It does not increase productivity, expand a workforce or put new product on the
shelf. A business pays this cost every year, not just at some uncertain future
date when an even bigger bill comes due. There is no simple solution in estate
planning. Uncertainty is unavoidable. To begin with business owners do not know
when they will have to pay the tax. Then it is hard to anticipate how much tax
will be owed, because you cannot know in advance if the IRS will agree with what
you think is a fair valuation of your business. Without a fair market value
sale, the valuation is purely subjective and is open to costly debate and
dispute. There are no simple tools that solve the liquidity problem. Electing an
extended pay-off under section 6166(b) can burden your business with an IRS lien
for more than a decade, in addition to the debt service payments themselves.
What about the family business tax relief available under current law? Well,
it's so complicated and so narrowly crafted that it is hard to find a single
attorney anywhere who is willing to advise a client that the family business
will qualify. Even then, there will be times when the correct business decision
will conflict with the optimum tax strategy. For example, trying to increase an
owner's liquidity outside of the business so the tax can be paid ultimately can
result in the business being ineligible for the limited relief that might have
existed. Even the increase in the unified credit is of limited help to a family
business owner. The unified credit produces a lump sum of money that survives
the tax, but once you have built that into your plan all future growth is taxed
exactly as before. Rate reduction is the only relief short of full repeal that
would significantly affect business decisions. Reduce the tax rate, and you
reduce the risk on every decision to reinvest and grow your company. There are
several proposed bills that repeal the death tax. The NAM supports all of them.
Repeal it any way you can. Representative Cox has a bill that simply
repeals the estate tax, the gift tax and the
generation skipping tax immediately. His bill, H.R. 86, would
immediately free thousands of small-business owners to devote more time and
attention to growing our businesses. He has attracted 200 cosponsors to the
cause of repeal. Representatives Jennifer Dunn and John Tanner, of this
committee, also have a repeal bill before the House in H.R. 8. Their bill phases
out the death tax by reducing the rates 5 percent per year until the tax is
finally eliminated. The Dunn-Tanner approach has found some supporters who have
not been able to support the Cox bill, particularly those who are concerned
about the budget impact of outright repeal. The phase-out, aside from eventually
eliminating the tax, also provides real relief in the short term. By lowering
marginal rates, the Dunn-Tanner bill would improve the ultimate rate of return
on every investment made in your company. Senator Kyl has introduced two bills
that repeal the death tax. The first was a companion to the Cox bill that gained
30 cosponsors in the Senate. Despite the enthusiastic support of the NAM and
numerous other business groups, full and immediate repeal has not found a firm
footing in the Senate, and in particular it has not gained the bipartisan
support that both the Cox bill and the Dunn-Tanner bill have won in the House.
That situation changed recently when Senator Kyl introduced the Estate
Tax Elimination Act, S. 1128. His new bill repeals all
the death taxes and does away with the step-up in basis. We strongly endorse S.
1128 with one caveat: we only support elimination of step-up basis for inherited
assets as long as it is coupled with immediate and total repeal
of the death tax. Lawmakers added the step-up basis provision to the
tax code to partially offset a confiscatory
estate-tax regime. It is critically important to keep the
current basis rules in place until the death tax is totally eliminated.
Actually, the Kyl bill does permit a limited step-up in basis to mirror the
existing unified credit so that no dollar free from estate taxes today would be
inadvertently taxed under his bill. This new measure was introduced with
bipartisan support from several Finance Committee members. The bill costs less
than the Cox proposal, but it does this by creating a revenue stream for the
government. Most importantly, however, under the bill, death would no longer be
a taxable event. From my own personal perspective, the new Kyl bill is so simple
and fundamentally sound that I find it hard to believe someone hasn't introduced
the concept sooner. Don't tax the transfer of a business from one generation to
the next. But leave the basis unchanged and tax the gain on the sale if and when
it ever occurs. There is all the difference in the world between taxing at death
and taxing at the time of a voluntary sale. Death, though certain, is
unpredictable and involuntary. When it occurs, the money to pay the taxes is
tied up in the business. A voluntary sale, on the other hand, is at a time of
your choosing, and the money from the sale is on the table to pay the resulting
capital gains taxes. And of course, the taxable value of a sale and the amount
of the taxes that are payable is certain and known prior to the transaction, not
months or even years later. That is why capital gains taxes don't force
companies out of business, but the death tax can. There are few provisions in
the tax code that force successful companies out of business. Few provisions tax
involuntary actions or events. The death tax is one. More often than not the
death tax actually kills the company soon after the owner dies. And I remind you
again, don't lose sight of or underestimate the costs incurred by people trying
to make reasonable and prudent preparations just to pay the tax. It is clear
that momentum has been building for death tax repeal. I urge you to eliminate
death as a taxable event.
LOAD-DATE: June 18, 1999
