Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
June 16, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2849 words
HEADLINE:
TESTIMONY June 16, 1999 PAUL S. SPERANZA, JR. HOUSE WAYS AND
MEANS RETIREMENT AND HEALTH RELATED TAX PROPOSALS
BODY:
STATEMENT on FEDERAL ESTATE AND GIFT TAX REFORM presented to the HOUSE
COMMITTEE ON WAYS AND MEANS on behalf of the U.S. CHAMBER OF COMMERCE by Paul S.
Speranza, Jr. June 16, 1999
Mr. Chairman and members of the Committee,
my name is Paul Speranza and I am pleased to appear before you today in my
capacity as a member of the Board of Directors of the U.S Chamber of Commerce
and as Chairman of the Chamber's Taxation Committee. The U.S. Chamber is the
world's largest business federation representing more than three million
business organizations of every size, sector and region. I also represent the
Business Council of New York State, Inc., which is the largest business
federation in New York. In addition, I represent the Greater Rochester New York
Metro Chamber of Commerce, where I chair its tax committee. Lastly, I represent
the Food Marketing Institute, which represents more than half of the food stores
in the United States. I appreciate this opportunity to relate to the Committee
my experiences with the impact of the federal estate and gift tax, and to
express the views of the U. S. Chamber and the other organizations that I
represent on pending legislative proposals providing relief from the federal
estate and gift tax. BACKGROUND OF THE FEDERAL ESTATE AND GIFT TAX The federal
estate tax was enacted in 1916 principally to finance this country's involvement
in World War 1. After 1916, and despite some early efforts to repeal
taxes on wealth transfers during peacetime, the federal estate
tax has remained a consistent feature of the federal
tax system. The history of the federal estate
tax for the years following World War I to present day essentially involves a
gradual expansion of the estate tax base, coupled with increases in the rates of
estate tax imposed. In 1976, the federal estate tax and gift tax structures were
combined and a single, unified, graduated estate and gift tax system was
created.
Under the current federal estate and gift tax, the rates are
steeply graduated and begin at 18 percent on the first $ 1 0,000 of cumulative
transfers and reach 55 percent on transfers that exceed $3 million. A unified
tax credit is available to offset a specific amount of a decedent's federal
estate and gift tax liability. Under the Taxpayer Relief Act of 1997, this
exemption amount was increased to its current $650,000 level, and will continue
to be increased incrementally until it reaches $1 million by the year 2006. The
exemption amount however, will not be indexed for inflation after 2006.
In addition, the Taxpayer Relief Act of 1997 created a new exemption for
"qualified family-owned business interests". However, this exemption, plus the
amount effectively exempted by the applicable unified credit cannot exceed
$1,300,000. Whether a decedent's estate can qualify for the maximum $1,300,000
exemption amount depends, among other things, on the mix of personal and
qualified business assets in the estate at the death of the decedent and
satisfaction of an exceedingly complex array of conditions relating to the
structure of the family business and the conduct of the heirs after the
decedent's death. Indeed, after only two-year's of experience, it is clear that
many family businesses will not qualify for this exemption. THE FEDERAL ESTATE
AND GIFT TAX IS COMPLEX, UNFAIR AND INEFFICIENT
When the government in a
free society uses its power to tax, it has an obligation to do so in the least
intrusive manner. Taxes imposed should meet the basic criteria of simplicity,
efficiency, neutrality and fairness. The federal estate and gift tax, even with
the credits and exemptions available under current law, fails miserably to meet
any of these requisites.
Today's federal estate and gift is a
multi-layered taxing mechanism so complex that it literally encourages attempts
by professional advisers to avoid estate tax liability through a variety of
transactions and techniques, many of which would not (and should not) be
undertaken but for the desire to preserve a family's savings and capital. This
in turn has lead to the allocation of billions of dollars of precious business
resources towards estate tax planning and compliance costs, despite the fact
that the actual revenue generated accounts for less than 1.5 percent of all
federal tax collections. Coincidentally, the cost of planning, compliance and
collection of this tax equals the amount of the tax collected.
Nor can
the estate and gift tax be considered either neutral or fair to individuals or
businesses. The tax is progressive in the extreme, with the lowest effective tax
rate almost equal to the highest income tax rate. This penalizes those who have
saved more, risked more, and worked harder than others. In this way, the estate
and gift tax is actually a tax on the virtues of industry and thrift.
Moreover, the estate and gift tax is far more likely to affect small and
medium- sized businesses today than it was sixty years ago. In fact, in 1995,
over half of the estate and gift tax revenue generated was derived from estates
valued at less than $5 million. Unfortunately, many small and family-owned
business owners are either unaware of the need for estate tax planning or unable
to afford it, which later results in an estate and gift tax liability that often
threatens the continued viability of the business. In order to pay such
liabilities, these businesses are forced to either lay off workers, borrow
funds, reduce capital investments, liquidate, or sell to an outside buyer. These
actions harm everyone connected with these businesses, including its owners,
employees, customers, vendors, and families.
I am a retail food industry
executive and a tax attorney; I have been involved with the federal estate and
gift tax law for the last 30 years. While in law school, I wrote a law review
article on this subject under the supervision of Professor Steven Lind. After
law school, I received an advanced tax law degree from the New York University
of Law, where I studied the Estate and Gift Tax Law with Professor Richard
Stevens and Guy Maxfield. Professors Lind, Stevens and Maxfield are the nation's
foremost authorities in this field and have written the definitive textbook on
the estate and gift tax law. Throughout my career, I have assisted individuals,
families, and businesses in the estate and gift tax field. The law in this field
has become substantially more complex over the years. It has also become
incomprehensible, unfair, confiscatory and downright un- American.
I
would like to give you one example to make this point although there are many.
The Estate of Chenoweth, 88 T. C. 1577 (1987), and related cases in certain
circumstances value the same stock in a closely held family business for gross
estate purposes higher than it values the very same asset for marital deduction
purposes. This difference in the valuations of the very same asset can leave an
unsuspecting surviving spouse with a major estate tax liability. Chenoweth may
or may not be a correct interpretation of the law, but it is definitely wrong on
logic and fairness. Why do I share all of this? Because the time has come for
Congress to put estate tax attorneys like me out of business. We can find more
productive things to do. I know that there are other estate tax attorneys who
agree with me on this matter. As I will explain in more detail below, a recent
survey conducted in upstate New York shows that innocent people are losing their
jobs as a result of this cruel tax.
Over the last three months, I have
worked closely with the Public Policy Institute of New York State, a research
and educational organization affiliated with The New York Business Council, to
complete a survey on the impact of the federal estate and gift tax on family
business employment levels in Upstate New York. While the survey has not yet
been formally published, the data submitted by the 365 family businesses
respondents reveals that for these respondents alone, at least 15,000 jobs in
Upstate New York are at risk over the next five years as a direct result of the
estate and gift tax. This figure includes jobs that would not be created because
of the allocation of resources away from business expansion and towards planning
for the estate and gift tax, as well as jobs that would have to be terminated
upon the death of the patriarch or matriarch of the business. In fact over
one-third of the respondents indicated that they would be compelled to take the
dramatic and clearly undesirable step of selling or completely liquidating the
business in order to meet the estate and gift tax burden.
While I look
forward to sharing the detailed results of this survey with the Committee upon
its publication, the evidence we have gathered supports overwhelmingly the
conclusion that the estate and gift tax has a crippling effect on job growth,
job creation and business expansion in Upstate New York's family- business
community, which is one of the most vital components of the region's economy. I
feel almost certain that these conclusions would not be substantially different
if the survey were conducted in other states. Professor Douglas Holtz-Eakin, the
Chairman of the Economics Department at the Maxwell School at Syracuse
University, has worked with us on this. According to U.S. News and World Report,
the Maxwell School has been rated as the number one graduate public policy
school in the United States. Professor Holtz-Eakin's analysis points out that
the ultimate cost of this tax is borne by those who lose their jobs as a result
of it. PENDING FEDERAL ESTATE AND GIFT TAX LEGISLATION
As noted above,
The Taxpayer ReliefAct of 1997 provided a narrow class of family businesses with
modest relief from the estate and gift tax. While virtually any form of relief
is welcome, the U.S. Chamber and the other organizations that I represent feel
strongly that any future estate and gift tax reform legislation should provide
relief to all estates, regardless of the size, financial structure or
composition of the estate's assets.
The U.S. Chamber and the other
organizations that I represent continue to support legislation that provides for
immediate repeal of the estate and gift tax.
The case for immediate repeal is compelling: the
estate and gift tax penalizes savings, results
in direct and substantial harm to family-owned businesses and farms, reduces the
rate of job creation, is complex, costly and inefficient to comply with (and
collect) and does not produce substantial federal revenue. While outright
repeal of the estate and gift tax should thus
remain the ultimate goal, the U.S. Chamber and the other organizations that I
represent realize that current bud et limitations may prevent this Congress from
taking that step. If so, additional interim estate and gift tax relief should be
enacted, and should be geared toward what is the most harmful aspect of the
regime: the outrageously high rates of tax imposed.
Both family business
owners and estate tax practitioners agree that Congress should avoid any
attempts to define what does, and what does not, constitute a "family business"
for purposes of targeting estate and gift tax relief. The competitive
marketplace requires that family businesses structure their assets and
operations in ways that are as varied as the industries in which they engage. It
follows that conditioning the benefits on the way that a family business may
chose to structure itself simply cannot achieve an equitable distribution of
estate and gift tax relief.
In addition, Congress should avoid merely
accelerating the increase in the estate and gift tax exemption that already is
scheduled to be fully phased-in to the $1 million level by the year 2006. This
would provide additional relief to only those estates at the lowest end of the
taxable range and would not provide any meaningful relief to the medium and
larger-sized businesses that make more substantial contributions to employment
levels and local economies. For these businesses, merely accelerating the
increase in the exemption level is insufficient to mitigate the impact of estate
and gift tax rates that can result in more than half of the value of the family
business going directly to the U.S. Treasury.
Currently, the United
States has the highest estate and gift tax rates of any country, followed by
France at 40 percent Spain at 38 percent Germany at 35 percent, and Belgium at
30 percent. For estates with a value that equals or exceeds $3 million, a
maximum rate of 55 percent is imposed, even if the majority of the value of the
estate is comprised of non-liquid assets. With such high rates of tax, it is
common for the estate and gift tax liability of a business or individual to
exceed the monetizable value of the estate's assets. Thus, even if one were to
embrace the dubious notion that a tax at death is needed to insure progressivity
wiihin the tax code and "backstop" the income and capital gains tax systems, the
55 percent maximum rate is, by any reasonable definition, confiscatory.
There is simply no legitimate rationale for a maximum income tax rate of
39.6 percent a long-term capital gains tax rate of 20 percent and a maximum
estate and gift tax rate of 55 percent which not surprisingly is the highest
stated rate of tax in the Internal Revenue Code. Only recently has there been
such a marked disparity between the maximum income tax rate and the maximum
estate and gift tax rate.
The U.S. Chamber and the other organizations
that I represent are thus fully supportive of H.R. 8, the bi-partisan
legislation introduced by Representatives Jennifer Dunn (R-WA) and John Tanner
(D-TN) that addresses directly the confiscatory estate and gift tax rate
structure. The Dunn-Tanner legislation provides for a "phase-out" of the estate
and gift tax over a ten-year period, accomplished by a five percentage point
across-the-board rate reduction in each of the ten intermediate years. The
Dunn-Tanner legislation represents a fiscally responsible approach to repeal
because it mitigates the revenue impact with a ten-year phase-in period.
Moreover, the Dunn-Tanner legislation provides immediate rate relief over the
interim period without introducing any additional complexity into the Code.
The U.S. Chamber and the other organizations that I represent also
support S. 1 128, the bi-partisan legislation introduced recently by Senators
Jon Kyl (R-AZ) and Bob Kerrey (D-Neb), and co-sponsored by a coalition of
Republican and Democrat members of the Senate Finance Committee. Under the
Kyl-Kerrey bill, estate and gift taxes would be repealed in their entirety (and
immediately) and the "step-up" in basis rules applicable to property acquired
from a decedent would likewise be eliminated. The Kyl-Kerrey bill would thus
make death a non-taxable event provide for the "carry- over" of tax basis with
respect to property received from a decedent impose a tax only when the heir
decides voluntarily to dispose of the asset and provide that the rate of tax
imposed on the subsequent sale of such property by the heir will in no case
exceed the top effective income tax rate of 39.6 percent (and in most cases,
will be the lower applicable capital gains tax rate of 20 percent). Of course,
no estate or gift tax will be payable in the case of a family-owned business
that simply continues to pass the business property from generation to
generation. It also should be noted that in the context of this proposal,
Section 302 of the Internal Revenue Code should be modified to allow all such
transactions at the 20 percent capital gains rate so long as the appropriate
holding period requirement is met.
The U.S. Chamber and the other
organizations that I represent urge this Committee to consider seriously
proposals that address the punitive levels of estate and gift tax rates and
provide for an equitable distribution of relief for the varying types of estates
and businesses affected by the tax. CONCLUSION In conclusion, the estate and
gift tax depletes the estates of taxpayers who have saved their entire lives,
often forcing successful family businesses to liquidate or take on burdensome
debt to pay the tax. Taxpayers should be motivated to make financial decisions
for business and investment reasons, and not be punished for individual
initiative, hard work, and capital accumulation. Let us also not forget the
thousands of employees of family-owned businesses who will lose their jobs as a
result of this unfair tax. They bear the heaviest cost of all. The U.S. Chamber
and the other organizations that I represent believe that the
estate and gift tax should be repealed
immediately. However, short of immediate repeal, the estate and
gift tax should be reformed in a manner that eliminates the
well documented negative effects of this tax on individuals and the owners of
family businesses. Thank you for the allowing me the opportunity to testify here
today.
LOAD-DATE: June 18, 1999
