Estate Tax Devastating to Small Business
The owners of Ohio's tens of thousands of family businesses and farms know all too well the sacrifices required to build a successful enterprise that can reinvest in new jobs and expanded opportunities in the community.
These business owners also know that their hard work, in the end, might be for naught, and that their business or farm may have to be sold to pay off federal and state estate taxes.
For Ohioans, both the state and federal governments require payment of estate taxes following a death, demanding, in the case of business owners, a large percentage of the combined value of all family and business assets, including homes, cars, savings accounts, retirement accounts, business equipment, inventory, buildings, land and more.
Family business owners typically have most of what they own tied up in buildings, equipment, inventory and other "hard assets," so their families often are forced to sell off large portions of the business, if not the entire company, to satisfy the Ohio Department of Taxation and the IRS.
It's not as if these business owners haven't paid their taxes every year. They have, and probably more than their fair share. But one final payment is required at death, at least until the next generation - if they're able to keep the business alive - passes on.
Fortunately, efforts are currently underway to end Ohio's estate tax by 2012.
This would be a wise move. As a study by the Connecticut Department of Revenue Services showed last year, the 26 states with no estate tax produced twice as many new jobs and their economies grew nearly 50 percent more from 2004-2007 than the 24 states (Ohio included) that had estate taxes. [One state, Virginia, has subsequently repealed its tax.]
A separate study by the Connecticut Treasurer's office found that 52 percent of tax-planners reported the primary reason their wealthy clients left Connecticut was because of the state's estate tax.
Ending Ohio's tax would help keep businesses and jobs here and might even help stave off the population decline in cities such as Cleveland, Dayton, Canton, and Youngstown, all included in recent years in Forbes magazine's list of America's fastest dying cities.
While Ohio appears to be moving in the right direction, reform efforts in Washington are moving in the opposite direction.
Business owners currently face a federal estate tax rate of 45 percent, with the first $3.5 million exempt. This is likely to change later this year, when Congress revisits the tax in an effort to prevent the rate from going to zero next year and jumping to 55 percent in 2011, which would happen under current law.
Some in Congress want to increase the tax and lower the exemption, while others want to keep the status quo. Both sides justify their positions out of concern over losing federal revenues.
A report for the American Family Business Foundation by economist Stephen Entin, a former Treasury official, should give them pause. According to Entin, if revenues are their primary concern, the best thing Congress could do is eliminate the tax, not raise it.
That's because a lower tax rate - indeed a tax rate of zero - would stimulate investment in family owned businesses and help create new jobs, both of which would generate increased tax revenues. As much as $23.3 billion annually, Entin estimates.
But there's another - and perhaps more important - reason to repeal the estate tax: jobs.
Former Congressional Budget Office Director Douglas Holtz-Eakin has estimated that as many as 1.5 million new jobs could be added to the economy nationwide simply by repealing the federal estate tax. The Buckeye Institute has calculated that Ohio would gain nearly 60,000 of those 1.5 million jobs.
Repealing the estate tax is certainly a more dependable and less costly way to stimulate the economy than other policies being considered in Columbus and Washington.
Estate tax repeal should be a no-brainer. More family businesses and farms growing in size. More jobs. More tax revenues.
Both Ohio and Washington should repeal the unfair "death tax." Doing so not only would be good for family business owners and farmers, but good for Ohio and the entire country.
Marc Kilmer is senior policy analyst at the Buckeye Institute. Dick Patten is president of the American Family Business Foundation.
