Following the November elections, Congress is expected to embark on a major tax and spending debate that may have significant fiscal policy implications for years to come. In addition to expiring Bush-era marginal tax rates for individuals, expiring business tax incentives, steep budget cuts and a scheduled increase in the federal debt limit, Congress must act to avoid a major increase in the estate tax.
If current estate tax rates are allowed to expire after 2012, small and mid-sized family-owned businesses seeking to transfer between generations could be subject to a potentially crippling tax hike.
In a broad tax bill passed in late 2010, Congress set the estate tax rate at 35 percent with a $5 million exemption per individual. After 2012, these levels will revert to pre-Bush-era levels (55 percent with a $1 million individual exemption) unless Congress passes legislation by the end of the year to extend the current rates.
This potential tax increase is especially onerous for construction and manufacturing industries, which tend to be capital-intensive, investing heavily in such assets as equipment, materials and real property, and tend not to have large amounts of liquid capital available. When a business owner in one of these industries passes away, the owner's heir often is forced to pay the estate tax by selling these assets or possibly the business itself.
If the current rates are allowed to expire, the estate tax would kick in at 55 percent after only the first $1 million of inherited cash and assets. In many cases, the first $1 million likely would be reached simply by accounting for the transfer of an average roofing company's office and warehouse facilities.
In anticipation of the impending estate tax debate, some key members of Congress are taking steps needed to raise this issue's profile.
Sen. John Thune (R-S.D.) recently introduced legislation (S. 2242, "Death Tax Repeal Permanency Act of 2012") that permanently would repeal the estate tax. In the House, Rep. Kevin Brady (R-Texas) has introduced similar legislation (H.R. 1259, "Death Tax Repeal Permanency Act of 2011").
The current legislative gridlock in Washington, D.C., could indicate an extension of current estate tax levels is a more likely outcome; however, some House and Senate members are working to bring both bills to the floor for a vote before the November elections. NRCA has endorsed Thune's bill and will be advocating for its passage this year.
Thune has emerged as the Senate leader on repeal or reform of the estate tax. Given his status as a respected politician, Thune's leadership no doubt will lend credibility to the estate tax issue. Securing the support of a Democratic senator also would help Thune's efforts. The bipartisan effort in 2010, when the previous estate tax debate took place, was led by Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.). Neither senator will be engaged significantly in late 2012; Kyl announced he will retire after 2012, and Lincoln lost her re-election in 2010.
NRCA is an active member of the Family Business Estate Tax Coalition (FBETC), a broad coalition of business groups that has advocated for estate tax repeal or reform for many years. FBETC has been educating Congress regarding the hazardous nature of the tax increase potentially faced by family-owned businesses. This education process is especially important in the current Congress where nearly one in four members of the House assumed office after the previous debate on the estate tax took place.
One thing that may help the coalition in its efforts is many freshman members of Congress come from the small-business sector, including former NRCA President Rep. Reid Ribble (R-Wis.), a co-sponsor of Brady's repeal legislation. Because of their previous experiences, many freshman lawmakers already understand if family-owned businesses are to sustain themselves through generational transfer, they must not be subject to unreasonable taxation levels.
Although this sentiment pervades many congressional offices, many members of Congress still believe estates should be subject to high taxes. These members see a significant increase in the estate tax as a possible way to reduce the deficit. However, the tax hike would jeopardize the long-term viability of family-owned businesses.
NRCA and its coalition partners will continue to push for reasonable reforms to the estate tax in an effort to one day set the stage for full, permanent repeal.
Brandon Audap is NRCA's director of federal affairs.