Members of the Senate clashed with Republican leaders and small business owners by refusing to permanently bury the federal estate tax.
Holding true to their belief that repealing the tax was primarily a GOP maneuver to benefit the wealthy and gain election-year votes, members of the Democratic-led Senate defeated the Permanent Death Tax Repeal Act with a vote of 54 to 44 on June 12. The vote fell short of the 60 tallies that were needed to overcome procedural objections and approve the legislation.
“The Senate has missed a golden opportunity to provide tax relief for America’s small businesses, farmers and families,’’ said Thomas Donohue, president and chief executive officer of the U.S. Chamber of Commerce. “It will not die here — we will continue the fight until common sense wins. It is high time Congress stopped the long arm of the IRS from reaching beyond the grave. Death should not be a taxable event.’’
Trade organizations and tax coalitions throughout the country have invested long hours trying to convince lawmakers that eliminating the “grave-robbing’’ tax would benefit the business community without impacting federal revenues. They had hoped the Senate would follow suit with the Republican-controlled House which voted 256 to 171 to approve the legislation a week earlier.
“The death tax is very burdensome for family-owned businesses and the majority of construction companies are family-owned,’’ said Phil Thoden, director of congressional relations, tax and fiscal affairs for the Associated General Contractors (AGC) of America in Alexandria, VA. “The tax also hits capital-intensive businesses, like equipment companies, really hard.’’
Thoden said 58 of the 100 senators supported a “Sense of the Senate’’ resolution last year to endorse the permanent elimination, but the resolution cannot be signed into law since it was merely a non-binding Senate opinion.
Many Democrats opposed the bill, saying it would have provided tax relief for the wealthy and caused federal revenues to decline.
“To eliminate the estate tax, dig the deficit hole deeper … and take it all out of Social Security is not defensible,’’ said Sen. Kent Conrad, D-ND.
Rep. Charles Rangle of New York, who serves as the ranking Democrat on the tax-writing House Ways and Means Committee, suggested Republicans were pushing the legislation in order to help raise campaign funds from rich Americans who stand to benefit from having the tax repealed. Opponents also described the repeal as an effort by Republicans to garner election-year votes needed to secure the long-term future of President Bush’s tax cuts.
“The only reason this bill is on the floor is not just because it is an election year, but because we are nearing the election,’’ said Rangle. “And who are the ones that make campaign contributions?’’
The estate tax, originally initiated in 1916 to fund World War I, was gradually being reduced as part of President Bush’s $1.3 trillion tax cut plan that was signed into law last year. Under the president’s Tax Relief Act of 2001, the tax would be reduced between now and 2009 and eliminated in 2010. However, it would be reinstated under a sunset provision in the tax package and come back to haunt businesses in 2011 with a top rate of 55 percent and an exemption for assets of up to $1 million.
For example, if a family-owned business is worth $10 million, there would be a $1-million exemption, so the owners would be taxed on $9 million. Under the maximum rate of 55-percent taxation, the family could end up paying more than $4 million in estate taxes. The tax is typically due nine months after the date of death.
Republicans used their leverage in April to block a major energy bill until Democratic leaders in the Senate agreed to hold a vote on the estate tax no later than June 28. Sen. Phil Gramm, R-TX and Senate Majority Leader Tom Daschle, D-SD, were instrumental in agreeing to allow a vote on the tax before the lawmakers adjourn.
Daschle said it was no coincidence that he scheduled the vote on the tax bill directly after the Senate voted to raise the debt ceiling because he wanted to link the two proposals in voters’ minds.
Democrats quickly responded by introducing two propositions of their own — one which would have exempted family farms and small businesses inherited by direct descendants and the other which would have exempted all estates except those valued at more than $3 million for individuals and $6 million for couples. The first measure fell 16 votes short of the required 60, while the second proposal was 22 votes shy of acceptance.
Gramm said the argument against the death tax is two-fold.
“One is the simple argument that rather than letting families keep this money, the government can spend it better,’’ said Gramm. “The other argument is that somehow if your family had a family business or had a family farm, that the government ought to level the playing field by imposing a tax on it because somehow it is unfair to people who didn’t own a business or farm. This bill is not a question of money. It’s a question of right and wrong.’’
Gramm called the Democratic alternatives a “fig leaf that would provide political protection for more senators than tax relief for their constituents.’’
Dennis Day, senior director of public affairs for the AGC, said fighting the estate tax has been a top legislative priority for construction organizations and trade groups for at least six years. He said the issue has often been treated like a political football with priorities bouncing back and forth from the impact on businesses to the long-term budget implications.
Officials with the Associated Equipment Distributors (AED) knew it would be a struggle to gain the necessary votes in the Senate.
“The Associated Equipment Distributors and our allies have built support on the hill for making the death tax repeal permanent, but legislation to do so has languished in the Senate because of the Democratic leadership’s refusal to allow it to come to the floor until now,’’ said Christian Klein, AED’s Washington counsel. “This likely will be the only Senate floor vote on the death tax repeal permanency issue this year.’’
Joseph Manero, spokesman for the American Road and Transportation Builders Association (ARTBA), said the permanent elimination of the death tax would lift a burden from the shoulders of business owners and farmers.
“With family-operated businesses, the largest part of the person’s estate is usually their business,’’ said Manero. “If a large portion of the estate value has to be paid in taxes when someone dies, many times the family loses the business.’’
The ARTBA, the AED and the AGC are among a group of organizations that recently sent a letter to members of the Senate urging them to repeal the tax. Other groups which signed the letter include the Association of Equipment Manufacturers, National Asphalt Pavement Association, National Utility Contractors Association and the National Stone, Sand and Gravel Association.
“Although there are myriad arguments in favor of death tax repeal, one of the most compelling is the fact that it forces family businesses, including our member companies in the capital-intensive construction industry, to spend tremendous sums of money to pay lawyers and accountants to develop estate plans to protect those companies from being destroyed by the tax upon the death of the current generation of owners,’’ the letter stated.
“Huge sums of money have also been wasted to buy death tax-related life insurance to provide liquidity when the tax comes due. A study last year by the AED estimated that America’s family businesses spend more than $14 billion per year — or more than half of the roughly $27 billion the tax raises on an annual basis — just to buy death tax-related life insurance,” it said.
Manero said the $14 billion represents money that could have been put to better use by hiring new employees, providing additional training for current workers and investing in new technology to increase productivity and safety.
According to the National Federation of Independent Businesses, more than 70 percent of family businesses do not survive a second generation and 87 percent do not get passed onto a third generation. About 60 percent of small business owners report they would create new jobs in the coming year if the tax is eliminated.
“We have a lot of small and medium-size members that have gathered wealth and are being forced to spend millions of dollars on lawyers and accountants for estate matters,’’ said Nick Yaksich, vice president of government affairs for the Association of Equipment Manufacturers. “This legislation would have taken the tax off the books and let our members put the money back into their businesses.’’
AFL-CIO President John Sweeney said the effort by the Republican leadership to permanently repeal the estate tax is the culmination of “a public relations sham to cover up what is really a shameless gift to the richest estate owners in the nation.’’
The Congressional Budget Office estimates the tax brings in between one and two percent of total federal revenues. In 2000, the tax raised roughly $22 billion out of nearly $2 trillion in total federal tax receipts.
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