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59–745 1999

WHAT WOULD REPEALING THE DEATH TAX

MEAN FOR SMALL BUSINESS?

HEARING

BEFORE THE

SUBCOMMITTEE ON

TAX, FINANCE, AND EXPORTS

AND

SUBCOMMITTEE ON RURAL ENTERPRISES,

BUSINESS OPPORTUNITIES, AND

SPECIAL SMALL BUSINESS PROBLEMS

OF THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

WASHINGTON, DC, MAY 13, 1999

Serial No. 106–12

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

MICHAEL P. FORBES, New York

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELA ́ ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBE ́ N HINOJOSA, Texas

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

JANICE SCHAKOWSKY, Illinois

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON TAX, FINANCE, AND EXPORTS

DONALD A. MANZULLO, Illinois, Chairman

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

PATRICK J. TOOMEY, Pennsylvania

CAROLYN MCCARTHY, New York

RUBE ́ N HINOJOSA, Texas

CHARLES A. GONZALEZ, Texas

GRACE F. NAPOLITANO, California

PHILIP ESKELAND, Senior Professional Staff Member

SUBCOMMITTEE ON RURAL ENTERPRISES, BUSINESS OPPORTUNITIES, AND SPECIAL

SMALL BUSINESS PROBLEMS

FRANK A. LOBIONDO, New Jersey, Chairman

RICK HILL, Montana

JIM DEMINT, South Carolina

JOHN THUNE, South Dakota

JOHN E. SWEENEY, New York

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

DAVID D. PHELPS, Illinois

TOM UDALL, New Mexico

BRIAN BAIRD, Washington

(III)

C O N T E N T S

Page

Hearing held on May 13, 1999 ............................................................................... 1

WITNESSES

Dunn, Jennifer, a Member in Congress from the State of Washington .............. 2

Tanner, John, a Member in Congress from the State of Tennessee .................... 4

Robbins, Aldona, Senior Research Fellow, Institute for Policy Innovation,

Arlington, VA ........................................................................................................ 19

Platt, H. Jay, President, Apache County Farm Bureau, Saint Johns, Arizona .. 20

Ruske, Roger, Owner, Cumberland Nurseries, Millville, New Jersey ................ 22

O’Shea, Kevin, Chief Financial Officer, Shamrock Electric Company, Elk

Grove, Illinois ....................................................................................................... 24

Kaplan, Arlene, Heart-to-Heart Home Health Care, Great Neck, New York .... 25

Breitstone, Stephen M., Estate Planning Attorney, Meltzer, Lippe, Goldstein

& Schlissel, Mineola, New York .......................................................................... 27

APPENDIX

Opening statements:

Manzullo, Hon. Donald .................................................................................... 34

LoBiondo, Hon. Frank ...................................................................................... 36

McCarthy, Hon. Carolyn .................................................................................. 38

Sweeney, Hon. John E ..................................................................................... 40

Prepared statements:

Dunn, Rep. Jennifer ......................................................................................... 43

Tanner, Rep. John ............................................................................................ 45

Robbins, Aldona ................................................................................................ 49

Platt, H. Jay ...................................................................................................... 54

Ruske, Roger ..................................................................................................... 59

O’Shea, Kevin ................................................................................................... 61

Kaplan, Arlene .................................................................................................. 71

Breitstone, Stephen M ..................................................................................... 77

Additional material:

Study by Gary Robbins & Aldona Robbins, Institute for Policy Innovation:

‘‘The Case for Burying the Estate Tax’’ ...................................................... 81

Statement of Representative Jim Saxton, Chairman, Joint Economic

Committee ..................................................................................................... 108

Study by the Joint Economic Committee: ‘‘The Economics of The Estate

Tax’’ ................................................................................................................ 112

Statement of The Associated General Contractors of America ..................... 158

Statement of The Distribution & LTL Carriers Association ......................... 162

Statement of The Mechanical Electrical Sheet Metal Alliance .................... 167

Statement of Michael Coyne, National Federation of Independent Business ................................................................................................................ 169

Statement of Thomas K. Zaucha, President & CEO, National Grocers

Association ..................................................................................................... 172

(1)

WHAT WOULD REPEALING THE DEATH TAX

MEAN FOR SMALL BUSINESS?

THURSDAY, MAY 13, 1999

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TAX, FINANCE, AND EXPORTS AND SUBCOMMITTEE ON RURAL

ENTERPRISES, BUSINESS OPPORTUNITIES, AND SPECIAL

SMALL BUSINESS PROBLEMS, COMMITTEE ON SMALL

BUSINESS,

Washington, DC.

The Subcommittees met, pursuant to notice, at 10:05 a.m., in

room 311, Cannon House Office Building, Hon. Don Manzullo

[chairman of the Subcommittee on Tax, Finance, and Exports]

presiding.

Chairman MANZULLO [presiding]. I call the Subcommittee to

order.

Today, we start the inaugural hearing of the Tax Subcommittee

on the topic of the estate tax, or as I call it the ‘‘death tax.’’ It gives

me great pleasure to co-Chair this hearing with my good friend

from New Jersey, Frank LoBiondo, who was awarded the chairmanship of the Rural Enterprises Subcommittee earlier this year.

I hope I am not stealing the thunder from my colleagues, but

there is a saying that there are only two certainties in life—death

and taxes. This issue cruelly combines them both.

People should not have to worry about the tax collector standing

outside the funeral home door waiting to collect the death tax. An

estate is built up after a lifetime of savings that has already been

taxed once.

Plus, with the growing stock market and burgeoning retirement

plans, more and more middle-class people will soon be surprised to

learn that they are part of the ‘‘super-rich.’’ Their heirs will have

to pay substantial death taxes at rates as high as 55 percent.

Today, we are focusing on the devastating impact of the death

taxes on small businesses. I am going to waive the rest of this

opening statement, and I would ask the rest of the members to do

also out of deference to the fact that we have two members who

are here on the first panel, and then, perhaps, if anybody wants

to give an opening statement, they can do it prior to the starting

of the second panel. I am sure that is okay with the members here.

And the testimony from the first member will be the Honorable

Jennifer Dunn. Jennifer.

2

STATEMENT OF HON. JENNIFER DUNN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF WASHINGTON

Ms. DUNN. Thank you very much, Chairman Manzullo and

Chairman LoBiondo. Thanks for holding this hearing to discuss a

very popular initiative, the repeal of the death tax. I want to especially thank my colleague on the Ways and Means Committee, Mr.

Tanner, for pushing this repeal as strongly as I have and for being

my colleague on H.R. 8, which is the bipartisan death tax repeal

bill.

Over 170 of our House colleagues have joined us on H.R. 8, the

Death Tax Elimination Act, which would phase out the death tax

starting in the year 2000 at five points each year, and that starts

at 55 percent, but if somebody’s paying the lower rate of 37 percent, we will also——

Chairman MANZULLO. Jennifer, excuse me a second. I think we

have a vote. No, it is not a vote. It is only a notification of a caucus

meeting.

Could you put the mike closer to your mouth, Jennifer? Thank

you.

Ms. DUNN. You bet. The Death Tax Elimination Act, which is

H.R. 8, a bipartisan bill, phases out the death tax by five percentage points a year over the next year. The goal, of course, is to

phase this tax out completely, and, therefore, over 10 years it is

only eliminated.

It has been said that only with our Government are you given

a certificate at birth, a license at marriage, and a bill at death. One

of the most compelling aspects of the American dream is to make

life better for our children and our loved ones, and yet the current

treatment of taxes on a person’s life savings is so onerous that

when one dies, the children are often forced to turn over half of

their inheritance to the Federal Government.

Even worse, not only does this take place at an agonizing time

in the life of the family, but they also have to watch their loved

one’s legacy be snatched up by an entity that is not known for its

great wisdom for spending money, and that is the Federal Government. We believe this is wrong. We believe that you should not dishonor the hard work of those who have passed on.

According to a recent study by the Life Insurance Marketing Research Association, less than half of all family businesses survive

the death of the founder, and only about 5 percent of these businesses survive into the third generation. This is terrible public policy particularly in light of the minimal amount of the money the

death tax brings into the Federal Government—just slightly over

1 percent of revenues and slightly over $23 billion, according to last

year’s figures.

In addition, a recent joint Economic Committee study reported

that for every dollar the death tax brings in, another dollar is spent

by the private sector simply to comply with it, so the total impact

of dollars that are taken out of the private sector that could be

going to additional employment or purchase of equipment or property in the private sector, the total amount is $46 billion a year

that come out of the Federal Government. You would think that a

basic principle of any revenue raiser, i.e. tax, would be to raise revVerDate 11-MAY-2000 10:35 Aug 26, 2002 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 D:\DISC\59745 txed01 PsN: txed01
3

enues, and yet we are losing exactly 100 percent of what we bring

in through compliance alone.

By confiscating between 37 and 55 percent of a decedent’s estate,

the Government punishes long-life habits of savings; it discourages

entrepreneurship and capital formation, and it penalizes families.

This is especially true, because these dollars are often the same

dollars that have been taxed three, four, five times before as they

go through the hands of the owner—through income tax, through

capital gains, through tax on dividends, and in many other ways.

Under today’s tax system—and this is really important to remember, because I am seeing it happen in my district—it is easier

and cheaper to sell the business or the family farm at 20 percent

capital gains than to retain it, built it up, invest in it, and try to

pass it on to the family after death. You have to remember that

the minimal death tax that is paid starts at 37 percent. This is not

a tax that starts at zero, and so that is vitally important to remember. It is huge; far more than capital gains.

Of course, Congress has attempted to ease the burden of the

death tax by increasing the personal exemption to adjust for the inflation of assets. Unfortunately, this will continue to be too little

help as home values, the increasing popularity of defined contribution plans, and the trend toward more small business entrepreneurship, particularly by women, drives middle-class estates above

the exemption.

Congress also tried very hard in 1997 to help small businesses

by creating an additional death tax exemption for family-owned

businesses. Here, too, however, is where a good idea went wrong.

It became impractical in the real world. The family-owned business

exemption, passed in the Taxpayer Relief Act of 1997, creates 14

new definitions in which a business must comply before it is eligible. So, it was a good idea at the time, but the exemption has proven to be nothing more than a boondoggle for attorneys and for estate tax planners. As a result, only about 3 percent of family-owned

businesses and farms can qualify for that 1997 provision. I recently

asked an estate tax attorney who advises 200 family-owned businesses, how many of these businesses are eligible for this exemption, and his answer ‘‘Out of 200, 10; 10 were eligible.’’

No amount of artful drafting will provide relief to only those Congress deems worthy. We can’t continue to congratulate ourselves

for legislative triumphs that just don’t benefit hard working Americans. Family relationships in the private sector are much too complex for us—those of us who want to do this in the Congress—to

duplicate or to reflect through Federal tax law. So, now we believe

it is time to be bold.

The Death Tax Elimination Act is the right answer at the right

time. The productivity of enterprising Americans and a frugal Congress intent on reducing wasteful spending has helped to produce

the first budget in the surplus—or surplus budget in a generation.

So, what will the Congress’ response be to this surplus? Will it

spend money on dozens of worthy programs that could no doubt be

created to help worthy people? Or it will cobble together a complicated, voluminous tax initiative that aims to help everyone and,

therefore, helps no one?

4

I think that we have to provide the American people with vision,

and it must center on two main principles: the non-Social Security

surplus belongs to the American people, and it ought to be returned to them. We must honor the institutions on which strong

communities are built. I can think of no better initiative that so

well defines these two principles than repeal of the death tax.

The ingredients to a successful family or business—thrift, diligence, suspension of gratification, savings—must, again, be rewarded and not taxed, and I hope that you will all join Mr. Tanner

and me in this worthy fight.

I want to thank you once again for providing this forum, and we

look forward to your questions.

[Ms. Dunn’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you, Congresswoman Dunn.

Our next witness is Congressman Tanner.

STATEMENT OF HON. JOHN S. TANNER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF TENNESSEE

Mr. TANNER. Thank you, Mr. Chairman, Ms. McCarthy. I, too,

want to thank Ms. Dunn. I came to this issue really in an anecdotal way. My district is, in large measure, agricultural in its geographical makeup, and I had some friends who were farming—a father and his son. His father died, and the son had to auction the

equipment that belonged he and his father, which they used in

their farming operation, in order to pay the estate taxes. He now

is no longer in farming, because he had to buy the equipment back,

and the added debt made his farming operation no longer economically viable.

Now, this has been traditionally, I think, couched in a rich

versus poor arena, and I did some further research, because I think

that President Franklin Roosevelt’s words were—had great meaning when he said the estate tax was an appropriate means of preventing the ‘‘perpetuation of great and undesirable concentrations

of control in a relatively few individuals over the employment and

welfare of many, many others.’’ Now, I have no quarrel with the

statement, but when one looks at the way the estate tax is administered and is affecting small businesses and family farms in this

country, whether it be a car dealership or a funeral home or something where one has a taxable estate, but one has no money, and,

therefore, when the patriarch or matriarch dies, there is a sometimes several hundred thousand dollar tax bill with no cash to pay

it, in which case, the funeral home, car dealership, or the small

family farmer has to sell the assets that actually enable them and

the family to generate a yearly income, not to mention, I believe,

a societal value is embedded in the intergenerational transfer of assets particularly small farms and businesses from one generation

to the other.

But, anyway, 70 percent of all the taxable estates in this country

are $5 million or less. Now, $5 million is a lot of money, but if one,

as I said earlier, has assets of $3 million, all of which are tied up

in the generation of yearly income, a $400,000 or $500,000 tax bill

at the death of the patriarch or matriarch makes the business 100

percent tax in the case where they have to sell the assets.

5

In President Franklin Roosevelt’s study, you might be interested

to know there was an estate exemption, and in today’s dollars it

was $9 million. We are struggling to get from $600,000, which we

went to a couple years ago, up to, in some cases, $1.3 million if the

estate qualifies, and there is a lot of qualifiers to that higher number, and so I think what we have done over time is really begin

to get away from the principle espoused by President Roosevelt

when—as I said, I agree with the vast transfer of wealth in the

hands of a few over to control the lives of the many, and I would

not have any problem with a $9 million exemption as it was in his

day.

Now, I don’t know whether or not that is feasible, but the main

point I wanted to make this morning was that this is no longer rich

versus poor with 70 percent of the taxable estates at $5 million or

less—and, by the way, they pay 50 percent of the entire estate tax

collected. So, the estates of $50 million to $100 million to $200 million, even under our present system, it seems to me, are not—if one

believes in an estate tax of some kind at some level, as a matter

of public policy—it is not accomplishing what it was intended to do.

And, so I think that any consideration we could give to those people engaged in farming, small business, and even others as it relates to this tax, so that we do not force, basically, people to sell

the assets that their father, grandfather, mother, grandmother

built up over the lifetime of hard work—interestingly enough, you

might know that some of the people who agree with this and who

are as supportive of this as anyone are the so-called ‘‘greens,’’ the

environmentalists, because they have seen open spaces particularly

around the urban areas of the country having to be sold at the

death of the patriarch or matriarch, and had to be developed simply to pay the estate taxes. And, so when we talk about urban

sprawl, when we talk about the quality, when we talk about the

size of generational transfer of assets that creates family income

yearly, all of that is intertwined in this issue. One would not

maybe think of that at first blush, but it is true.

And, so I want to thank you all again and appreciate very much

your willingness to hear us out on this and your attentiveness to

this issue, which I believe is something that—an area where we

ought to change the public policy.

Thank you.

[Mr. Tanner’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you very much.

I would like to ask a couple of questions, and then I am going

to hand the gavel over to Mr. LoBiondo. I am also on the International Relations Committee, and we are having a hearing on the

Kosovo so-called peace settlement. So I beg your forgiveness for

leaving.

I don’t think that most Americans realize that life insurance proceeds are considered to be part of the taxable estate. The problem

really arises when the last spouse dies, because of the unlimited

marital deduction, which is relatively new. I think about 15 years

ago, Congress tried to solve this problem. There used to be a huge

tax upon the death of the first spouse, then another tax upon the

death of the second spouse, so the family wouldn’t get hit.

6

In addition to your bill, there are some other bills that are floating around, one particular by Mr. Cox from California. Would you

want to explain that to our forum here?

Ms. DUNN. Yes, I would be happy to, Mr. Chairman. H.R. 8 was

designed to be a bipartisan bill to gradually—and we believe in a

very practical way—phase out the rate of death tax, so that over

a period of time the revenue losses would be gradual. For example,

there is no revenue loss to the Government in the year 2000, which

fits nicely into our plan not to put a whole lot of tax relief into

2000. The revenue loss begins in 2001 in Mr. Tanner’s and my bill.

Mr. Cox’s bill is an immediate phase-out of the death tax, total

phase-out, and I happen to be on Mr. Cox’s bill, because that is

what I would like to do, but we were looking for a practical way

to do this, and you might be interested in knowing that Mr. Cox

supports the Tanner-Dunn bill as I support the Cox bill and that

our colleagues are signing up on both bills. So, it is just the difference between, I believe, a practical phase-out over 10 years

versus an immediate phase-out of the death tax.

Chairman MANZULLO. Congressman Tanner and Congresswoman

Dunn, is there really a net loss to the economy if you had an elimination of the death tax?

Mr. TANNER. Well, of course—— Chairman MANZULLO. I am sorry, a net loss of tax revenue.

Mr. TANNER. I think there is a fiscal note of around $200 billion

over 10 years. I disagree with that, but, nonetheless, that is what

I have been told. There would be very little in the first two or three

years. The estate tax now only collects about $23 billion a year for

the Federal Government, and so if you phase it out over 10 years,

you can see the small amount that we believe could be absorbed

by the growth of the economy if we chose to go that route.

Frankly, the monies collected—I have seen estimates—correct

me, Jennifer—but 63 to 67 cents of every dollar collected has to be

expended by the Government to collect it.

Chairman MANZULLO. I know groups such as 60–Plus have put

out different studies, anywhere from 50 to 65 percent. So, in your

opinion, it is $23 billion each year less the 65 percent in Government expenditures——

Mr. TANNER. It wouldn’t be $23 billion the first year; it would only be $23 billion the 11th year and our 10th year if, under our

plan to phase it down, the first few years would be virtually nothing. If one believes, as we do, that it is a grossly unfair tax to begin

with, at least in terms of how it affects those estates of $5 million

or less, and if one further believes that it is an extremely arduous

cumbersome tax to collect, and if one believes that the money that

goes into—the time, effort, and money that goes into estate planning to avoid this tax were put into job creation and the building

of the business or the family farm because you did not have to fear

having to sell the assets at the death of the founder or the patriarch, then, it seems to me, one could make the argument, it may

not cost anything at all.

Chairman MANZULLO. I appreciate that.

Ms. DUNN. And let me just add one thing: you have got $23 bil- lion coming in in 1998; you have got $23 billion approximately

spent just to comply with that tax in 1998; you have got another

7

65 cents out of every dollar, as Mr. Tanner said, being spent by the

Federal Government to pull in this tax; that is a huge problem.

And I just want to give you some perspective. This death tax has

been around through the history of our Nation but in very reserved

ways. In the 1700’s, our Government implemented the first death

tax, and it was used specifically to fund a war. In the 1800’s, twice,

it was used—it was brought to fund wars, and after a period of no

more than six years in all three of those cases, the death tax was

ended, because the Government was smart enough to realize that

this was not fair; it was not right, and it was not bringing in

enough income to do anything major in our Government’s budget.

But, in 1916, when the death tax came in for the fourth time, the

Government decided that hand in the pocket of the taxpayer was

a pretty good deal, and it was never phased out. So, there is no reason this should have lasted as long as it has.

We understand the build-up of Government and the inclination

to bring in every dollar, but the scoring that John and I worked

with is not dynamic scoring. It does not take behavior into consideration and the creation of jobs that should be done with this huge

private sector donation that the $46 billion, through compliance

and dollars every year, is going right out and mostly out of the

businesses, the pockets of the small businesses.

Chairman MANZULLO. I appreciate. Mr. LoBiondo, if you wouldn’t

mind chairing the meeting. I have to run to the other meeting, and

you can work with other members on getting their questions too.

Chairman LOBIONDO. I will be glad to, Mr. Chairman. Thank

you.

Chairman MANZULLO. Thank you.

Chairman LOBIONDO [presiding]. Okay, I want to thank Chairman Manzullo for jointly hosting the meeting and to our two colleagues.

I just have one question for you. Do you have any idea how

Chairman Archer is viewing this? Has he said anything optimistic

or—for either one?

Ms. DUNN. Chairman Archer is a supporter of death tax relief.

Obviously, we have to put a lot of tax relief into a very small

amount of money over the next couple of years, because we choose

to set aside the Social Security surplus.

Chairman Archer, though, recently did a poll on the death tax,

and he was most startled at the results and is looking very favorably at this. He asked people in the most negative way possible

what they thought of the death tax, and the question was, basically, ‘‘Even you knew billionaires might be getting some advantage, would you favor a repeal—a rate reduction repeal of the

death tax? And the answer was 30 percent of the said, ‘‘No;’’ 64

percent of the folks said they did favor a repeal of the death tax,

and he is looking very seriously at this.

I will also say, Mr. Chairman, that Chairman Archer has had

much more interest shown by Members of the Congress—over 170

people, our colleagues, have signed on this bill, and over 70 national organizations have come to speak and testify and so forth

with their interest in this bill—everybody from the Farm Bureau

to NFIB.

Chairman LOBIONDO. Did you say 70—7–0—organizations or 7?

8

Ms. DUNN. Over 70 organizations.

Chairman LOBIONDO. Seventy; that is what I thought. Okay,

thank you.

Any other members have questions? Congresswoman McCarthy.

Mrs. MCCARTHY. Thank you, and I appreciate your testimony.

I come from Long Island where we have a large number of small

businesses, and what we are seeing constantly are more women

who have worked very hard to build up their small businesses. A

lot these women are single; this is their only business, and they are

raising their families, and certainly we are hearing the complaints

that if something happened to them, all of their hard work would

certainly go down the tubes as far as leaving something to their

family.

Michael Forbes who is out on the east end, which would be considered a rural area—although some of us that are out there now

don’t think its rural anymore—we are seeing our farmers leave; we

are seeing them selling off now, mainly because they know if they

die, there is not going to be anything left for their families to continue going with the estate taxes as it goes.

So, I think that this is an issue that is extremely important for

small businesses, our farmers, and it is something that we should

be addressing. I happen to think it is totally unfair, and, obviously,

hopefully, we will get it through this year, and I hope Congressman

Archer will allow it to come through, because I do think it is

important.

Small business is the backbone of our country today, and—they

are—and we certainly here on this Committee will try and do

whatever we can to help them, and I think that is important.

I was curious, has the Joint Committee on Taxation scored your

bill?

Ms. DUNN. They have, and, as Mr. Tanner said, we have some

disagreement with them, because it is not dynamic scoring, and it

doesn’t really register the impact of the dollars taken out of the pri- vate sector. Our bill is scored at $44 billion over 5 years—$44 billion over 5; $198 billion over 10, and in the year 2001, which would

be the first impact of our bill, the impact would be $4.1 billion.

Right now, in the year 2001, we are expecting to have something

like $11 billion available for tax relief. So, $4.1 billion in 2001 and

gradually, of course, it would increase.

Mrs. MCCARTHY. Has anyone actually looked at the difference between—all right, we are going to try and take away the estate

tax—but has anyone looked at the other side of it, if these businesses continue to stay in businesses, whether they are farms or

small businesses, on what they are paying into taxes, and wouldn’t

that almost even it off?

Ms. DUNN. Yes.

Mr. TANNER. That is what I tried to argue a few minutes ago or

state, Ms. McCarthy. I see in west Tennessee the amount of effort

that goes into the planning and so on to avoid the tax. I see farms

being sold at the capital gains rate of 20 percent before the death

of the founder—if we could say that—to avoid a 55 percent rate,

and so I just believe that the scoring, although it may be technically correct from the standpoint of simple arithmetic, I think it

fails to realize the realities involved in the collection of this tax.

9

Ms. DUNN. And let me just add, Mrs. McCarthy, what often happens when the owner dies suddenly and hasn’t really completed the

turnover process and so you have got a huge death tax—55 percent—on the value of a small business or a small farm, and the

young people, the children who—the loved ones who inherit these

properties can’t afford to pay that huge, onerous burden, because

they don’t want to break up the family farm or sell the implements.

Big corporations move in; they can shoulder the burden. They often

take over a small community newspaper, for example, and so there

is a greater loss to the community, institutional loss—public service

announcements from a newspaper, the employment by the owners

of the small business; you can go on and on and on. Often these

corporations close down the small operation; move them someplace

else, so there is a true loss to the community when a small business closes down.

You mentioned women starting small businesses. Right now,

they are doing that at twice the rate of men. There is a huge exodus from corporate lives into entrepreneurial small businesses that

are often owned individually by these women. And, so they are hit

at their death when they wish to put everything they put their

hearts and souls into developing and the savings and the risks they

have taken in taking loans, they are going to sell it before they die,

because 20 percent capital gains is less than 55 percent death tax.

Mrs. MCCARTHY. One of the things that I have noticed too—and

probably Congressman Forbes will address this—I have gotten to

know a lot of farmers out in his area. They have been there for a

couple hundred years actually, and they have worked the farms

really hard, but because it is a tourist area now, the land is worth

more than they ever thought they could ever get. And being an environmentalist, I don’t like seeing 300 homes going up onto a farm,

and nobody is even living there. Unfortunately, the consequences,

in my opinion, is there is no housing out there for middle-income

people anymore. If you are wealthy, you can buy an acre, which in

some areas of South Hampton will go for $150,000—one acre right

in the middle of a farm. The majority of people that actually live

out there can’t afford that, so to me it is a total injustice. We have

to do what we can for them.

Chairman LOBIONDO. Thank you.

Mrs. MCCARTHY. Thank you.

Chairman LOBIONDO. Congressman Hill.

Mr. HILL. Thank you, Mr. Chairman.

I want to congratulate both of you. I am a co-sponsor of your bill.

I actually have a bill, as well, that would convert the estate tax to

a capital gains tax, but I don’t think there is a tax that is more

unfair than is the death tax.

In my previous life, however, I worked with a lot of small businesses, and I worked with them to try to help them develop strategies to avoid the death tax, and I think that in the modeling that

has been used by those that are scoring this, they don’t have a full

understanding of just how much money gets spent on trying to

avoid paying the death tax. As you know, you can set up charitable

trusts and insurance trusts and generation-skipping trusts; there is

all sorts of kinds of trusts. The problem that I experience working

with these small businesses is that it diverted a lot of money from

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the reinvestment in their business. In fact, I think it is why a lot

of small business owners object to the death tax is substantially because of that. They have to buy life insurance that they wouldn’t

ordinarily buy, which is very expensive, or professional fees for accountants and lawyers to set up these trusts.

But, also, once these assets get allocated to these trusts or the

mechanism gets put in place, it often creates a real rigid environment for them to manage those business assets thereafter, because

they don’t have the same flexibility using those assets, because

they are in a trust or they are allocated to trust or they have created a complex trust agreement.

And I guess my question is, is there some way that we can get

this scored to take those kinds of things fully into consideration— their impact on revenues and their impact on the economy?

Ms. DUNN. You know, I don’t think we have the answer to that.

A lot of us have pushed for years for dynamic scoring or at least

a combination of what we use in dynamic scoring, because to be realistic about something like this and we should provide that kind

of management leadership, I think, being realistic about budgeting.

You would say that the death tax, if it were totally repealed, that

the energy that would go into the economy through the abilities of

the entrepreneurs and the small business people and the family

farmers would be much greater and result in far more dollars in

revenue going one way or another into the Government, but there

is not any way we can change this right now.

I think sometimes you have to go by instinct on some of these

things, so the economic growth tax relief, like capital gains and

death tax, I believe, over the long-run will bring in more dollars,

and they have been able to do a little bit better in capital gains

projecting for the first couple of years under capital gains cuts that

revenues will actually increase, and I think that is the result of experience that we have seen through the years when that really has

been provided.

Mr. HILL. I think the same is true of the death tax, your bill particularly, and the fact that it is phased in I think will give us the

opportunity to demonstrate that there are economic rewards to it

over a period of time.

In my State, we have a lot of farms and ranches, and what people are facing is, is that if you are going to sell the farm or the

ranch in order to deal with the tax question, you are a whole lot

better off to subdivide it and sell it as a subdivision than you are

to sell it as a ranch, because most of these—in fact, many of the

farmers and ranchers in my State, if you use the income test alone,

would be eligible for food stamps. They would be eligible for financial assistance. Obviously, they are not eligible because of the value

of their estate, because they may have a $3 million or $4 million

or $5 million farm or ranch. But it can’t produce enough income for

multi-generations to live off that.

But the problem is—so, the strategy, then, is that the only alternative is to sell it. So, the alternative, then, if you are going to sell

it, you are better off to sell it not as a farming unit but sell it as

a subdivision, and most of Montana has been broken up into 20–

acre subdivisions. Even operating ranches have been subdivided in

anticipation of the opportunity to do that, and that is a great tragVerDate 11-MAY-2000 10:35 Aug 26, 2002 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 D:\DISC\59745 txed01 PsN: txed01
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edy. It is a great tragedy for us from the standpoint of family agriculture, but it is also a great tragedy in terms of how it is going

to impact the environment as well.

You know, one of the problems I see is that a lot of businesses and farms and ranches may have a $5 million value to their estate,

but they don’t have any money. In fact, some of the most successful

small businesses don’t have a lot of cash around; they don’t have

a surplus of liquidity. They are pouring that money back into their

business, and what I see when they reach a certain point, from my

personal experience, is that they start diverting that capital to reinvest in the business and create more jobs and investing into

mechanisms to avoid taxes and particularly this tax.

And I just know intuitively and from my personal experience— although it is anecdotal—that if we get rid of this tax or get it

down to a level where people think it is fair and manageable, that

we will see these small businesses reinvest in their businesses and

grow those businesses much larger, and I think we will keep those

within a family, which I think creates more competition and more

opportunity.

I just thank you both for your work. If there is something that

we can do to help in trying to get a more scoring of that, I would

certainly offer my help, and I am hopeful that Mr. Archer will include your bill or something like it in any tax relief package.

Thank you, Mr. Chairman.

Chairman LOBIONDO. Thank you, Congressman Hill.

Let me ask Congresswoman Dunn and Congressman Tanner,

how are you on time? I believe more members might want to ask

questions. Are you okay a little while longer?

Okay, I will ask Committee members to keep in mind that our

colleagues have a limited amount of time and that we do have a

second panel.

Now, I would ask Congresswoman Christensen, do you have any

questions of the panel members?

Ms. CHRISTIAN-CHRISTENSEN. Thank you, Mr. Chairman. Could I

just pass until I find out what questions have been asked?

Chairman LOBIONDO. Sure. Congressman Baird, do you—— Mr. BAIRD. Congressman Tanner, Congresswoman Dunn, it is

great to see you both here, and I appreciate your work on this bill.

I wanted to echo your comments earlier. I am proud to co-sponsor

it and for many of the reasons you have mentioned. Two particularly that stand out for me are environmental protection. In my

district, we have a lot of family foresters who have been very good

stewards of the land over many years. They have got forests that

are 40, 50, 60 years old. Suddenly, the owner—father, mother— passes away, and instead of being able to wait the next 20 years

to let the forest reach full maturity, they are virtually forced to

clear cut doing just the exact opposite of what we want them to do

for the environment.

Similarly, for me, it is a pro-labor issue. We have a number of

mid-size businesses that have more capital assets or more assets

than would meet the exclusion, and if they are forced to sell, they

often have very good contracts with labor; they pay family wages;

they are good community stewards; they help with charities, et

cetera, and they are forced to sell when one of them dies rather

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than pass it on to their kids who would presumably keep the same

community tradition.

The only possible hesitation I have about this issue—and I really

would appreciate sincerely your addressing it—the issues I have

just addressed have to do with family farms, family businesses,

local community ownership. That, to me, conceptually, is somewhat

different than someone who is passing on an enormous stock portfolio that may not necessarily have the job or environmental benefit locally, and I am aware that there are some other bills that

seek to distinguish between assets—concrete physical assets versus

equities, et cetera. Could you share your thoughts on that in terms

of how we might work that out or what the pros and cons are from

your perspective?

Mr. TANNER. Well, as you know, I had quoted President Franklin

Roosevelt in my opening statement about—that it is undesirable in

this country. I mean, the reason that we had an estate tax to begin

with was because people saw the UK and saw where some fellow

acquired great wealth in 1450 and 23 generations later none of

them had worked or contributed to the economy or to the society

and so on, and we didn’t want that in this country, and every generation stands on its own, and so forth.

When President Roosevelt made that statement, though, the exemption in that day’s dollar terms was about $9 million. Well, if

you all could help us to get to $9 million and a capital gains right

above that, then I have no quarrel at all with that, because I think

President Roosevelt’s words have a certain truth in them.

We are concentrating on, in our bill, trying to reduce the rate

gradually, so that as this thing matures, we can say that at some

point in time maybe we ought to look at flipping over to a capital

gains rate above some meaningful number that will address the

sorts of things we are talking about with family farms and small

businesses. I mean, I don’t have any problems if someone has got

several billion dollars paying a little something to help out with the

purchase of aircraft carriers and tanks and highways and all the

things that we need. I don’t have a problem with that, but where

do you start with that, you know?

Ms. DUNN. I do think I agree with Mr. Tanner. You have got a

real definition problem when you come into a situation like that.

If you are talking about a rich individual, what is rich? Is it somebody like Helen Anderson in my district in Northbend, Washington—that you are familiar with, Mr. Baird—who did exactly run

into the situation you described—inherited a large piece of timber

property from her father that had never been cut, and it was open

to people wandering through the trails and birds and things and

animals living in it and people driving by and seeing how pretty

it was. Well, she had to literally cut down all the second growth

timber on her property—mow her piece of property to pay what amounted to $1 million, and it was all gone, because she had to

pay the CPAs and the lawyers and the estate tax and then the

Federal death tax. So, the community was left bereft after that

happened. That is not what we want to see. I know that is not

what you want to see with your two particular areas of interest.

But, I mean, how do you define wealth? Is it somebody who owns

a couple of Taco Bells? So, that is the problem that you run into,

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and I think earlier, folks who were the Fathers of our country and

later on who ran our country very well realized that because this

was an excessive almost obsessive tax, to tax the same dollar the

third or fourth time, it really wasn’t fair, and it really hurt the

growth of the economy. I think we can justify this kind of tax relief.

Mr. BAIRD. I am not referring so much to wealth, Congresswoman, I am more—because I agree with you entirely. That is the

problem is we have set the cap, whatever we call wealthy, then

people who are asset wealthy, then, are forced to sell their assets— but more in terms of concrete, physical assets—farms, forests, manufacturing qualities versus a huge investment equity portfolio that

doesn’t necessarily have local ownership. Is there a way we can address that or is that also—?

Ms. DUNN. You know—and excuse me for interrupting—but if

you leave those folks out, those folks aren’t going to—I mean, first

of all, if they have big dollars and assets like stocks and bonds,

they are going to figure out how to use a CPA and lawyer to get

around the death tax, but, number two, what will happen is behavior will again change, and if there is no death tax on those other

entities, that is where they will put their investment. So, why do

you want to change the balance of the whole economic market by

not including everybody and allowing the market to work?

Mr. BAIRD. Thank you. Thank you, Mr. Chairman.

Chairman LOBIONDO. Congressman Toomey.

Mr. TOOMEY. Thank you, Mr. Chairman.

I would like to start by commending my colleagues for their tremendous work on this. I am a proud co-sponsor of your bill, and

I think that you make a very compelling case that the death tax

is one of the most ridiculous and unreasonable features of a tax

code that is riddled with ridiculous and unreasonable features, and

I would further point that I think you can make a very strong principled argument that the multiple layers of tax on the same income, of which this is sort of the crowning pinnacle after a lifetime

of paying taxes, makes for a strong case to do an across the board

elimination rather than targeting different income groups or asset

classes, in my opinion.

I have two specific questions for you. Earlier, if I recall, you mentioned that the estate tax collects about $23 billion a year, and my

question is, in light of the very large percentage of costs that go

to collecting that, is that a net number or a gross number for the

Federal Government? In other words, after all the collection costs

are incurred, does the Government net $23 billion?

Mr. TANNER. Gross.

Mr. TOOMEY. That is a gross number. So, if you do the only reasonable calculation and net out the cost of acquiring that $23 billion, the Federal Government is left with $7 billion, $8 billion,

something on that order.

Ms. DUNN. Yes, and the private sector is depleted of 100 percent

of what is produced by this tax——

Mr. TOOMEY. Right.

Ms. DUNN [continuing]. Because that is what the compliance

costs are.

Mr. TOOMEY. Sure, and totally separate and apart from all of the

costs in the private sector and the costs of the economy and all of

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the perverse incentives it creates, the Federal Government only

manages to net $7 billion or $8 billion.

My second question is, you mentioned that the Joint Committee

on Taxation scored your bill as costing the Federal Government

$44 billion over 5 years, if I recall correctly. Is that a net number

or is that a gross number?

Ms. DUNN. Again, gross.

Mr. TOOMEY. That is a gross number. So, in fact, we can be sure that the Federal coffers will diminish by much less than $44 billion, aside from the whole positive scoring of the effect on the economy?

Ms. DUNN. You are absolutely right. It is what one of the congressmen was saying earlier; that is exactly right.

Mr. TOOMEY. Okay, thank you.

Chairman LOBIONDO. Congressman Phelps.

Mr. PHELPS. Thank you, Mr. Chairman, and I, too, want to commend you both for your leadership on this particular issue. It is

gratifying for a new member to come in and start a session with

such legislation that benefits all—working people.

Mine is probably more of a comment than a question, real quickly. Coming from the State legislature in Illinois and serving for 14

years there and realizing that facing revenue questions are very

much a challenge, the thing that I—I know that before we get

through this year, this session when the budget is formed, hopefully, there will be a bipartisan agreement on how we do that or

it probably won’t be done. If we either give across-the-board tax

cuts and even agree on target tax cuts or a combination of both or

whatever comes out, I guess my concern is—even though I am cosponsor of this bill, and I know probably all of us will be or are

already and see its merits for what it is—but I am concerned as

a new member and being raised to be responsible for my own budget in my own life, knowing that it takes revenue to operate and

whoever’s forecasts are accurate or not that we study here and

what it means 10 years on down the road, it will have an impact.

Once we have a reliance on revenue and it is taken away, the question comes in my mind, will this body—does Congress have the will

and can we work in a bipartisan manner to either identify replacement revenues or to reduce accordingly?

So, I guess, what I am saying, I think this action is incumbent

on all of us to honestly try to work together in doing one of either

or a combination of both, and the good economy helps take care of

a lot of those problems; I realize that. But just as a new member

that is probably naive in a lot ways of how we come about working

in this manner to be sure that we don’t just depend on good economic growth and pretend it is always going to happen, and prepare for a rainy day, because as we all are co-sponsors or at least

support this concept, we are going to also be providing money for

small business grants, loans that will be guaranteed by the Government, and that is taking from this column away from what we

would like to do in terms of being fiscal responsible.

So, the fiscal responsibility really comes to the heights when we

start—although this tax, obviously, it is recognized it should—and

it doesn’t make sense—it should go away, but I would hope that

I am part of a Congress in his first term that would say ‘‘Let’s us

15

proportionally act if we are going to pass measures like this on all

the other ramifications of the budget, such as our military spending, everything else that we are debating right now. Just a comment as a new member, thank you.

Chairman LOBIONDO. Okay, thank you. Congressman Forbes.

Mr. FORBES. Thank you, Mr. Chairman, and I appreciate this

joint Subcommittee hearing on a very important issue, and thanks

to both of you for your leadership on this issue, and I am proud

to also be a co-sponsor of the bill. In fact, I have co-sponsored every

bill that would eliminate the death tax that I could find in this

Congress and in the last with the hope that ultimately we will get

there, and thank you again for your leadership.

I want to also thank the chairmen for what I see in our upcoming panel. There are two of the four witnesses are from Long Island, New York, and I wouldn’t want to suggest that we have a disproportionate problem in New York with the estate tax, but I certainly appreciate the fact that we have some folks from Long Island who are going to be able to speak to it, and, Ms. Kaplan, when

she comes up, I know in her testimony, she had noted that it is

not corporations, it is not small corporations, it is families that you

have referenced that pay this tax.

In my old life as the regional administrator of the Small Business Administration, I met too many people who had to cash in a

lifetime investment to pay those taxes. Their families, their parents

had built the business and saw it lost, because Uncle Sam had to

get that pocket full of change, and, ultimately, they lost their businesses, and I have met too many local farmers on Long Island. We

have precious few farms left, very important farms, and, singlehandedly, the death tax is leading to the elimination of those family farms, and so I, again, thank you for your leadership and hope

and pray that we can get a bill to the floor and passed and ultimately to the President that he would sign.

I just have one question—if you can address this, I don’t know— in putting together your legislation, were you able to come upon

any information about estate planning and just how many small

businesses may actually be involved in estate planning to mitigate

or soften the impact of the death tax? I would suggest that a lot

of small businesses, frankly, are marginal operations, and they are

living day-to-day and to spend a lot of money on estate planning

is sometimes a luxury they just can’t afford, but has there been any

information accumulated in regard to estate planning?

Mr. TANNER. First, let me say that I tried to masquerade myself

as being from Long Island, but my accent, I am afraid, gave me

away. [Laughter.]

Mr. FORBES. We welcome you as part of Long Island.

Mr. TANNER. One runs into attorney-client privilege. Ms. Dunn

and I had a bill last year to extend the privilege, actually, of taxpayers or to put the privilege of privacy into the taxpayer rather

than the tax preparer, and so I don’t know any way one could reasonably get an accurate count of how small businesses have consulted their attorney or their CPA in terms of some sort of estate

planning. I know that a prudent businessman who had the drive,

initiative, and good sense to build a business that became a taxable

estate, would probably consult someone during the course of his life

16

or her life, and so I would just guess that it would be very substantial.

Someone else made a comment, this is particularly important to

minorities, women, to first generational founders of businesses that

make it, and there is societal value here, a matter of public policy

notwithstanding, all of the things that we believe are wrong with

the collection of it and the cumbersome nature of it and the unfairness, and so on, and so I just think it is good public policy that we

take this up, and I appreciate what Mr. Phelps said, because he

and I worked together on a lot of the budget matters when we

talked about paying off the debt and being financially responsible

and so on, but I think this is a tax that is clearly counterproductive

and is not good public policy, and that is why I am pleased to join

Ms. Dunn on this and other bills we have collaborated on in the

past.

Ms. DUNN. Mr. Forbes, when I used the figure that $23 billion

was spent in compliance to bring in $23 billion, the dollars, by the

way, were a little less than that in what this tax brought in before

last year. Last year, it moved from about $20 billion up to $23 billion last year, but $23 billion buys a lot of CPAs and lawyers, and

that is really the question we are asking, and that is an investment

that would be much better served to go into employment in a community and the build-up of a small business.

Mr. FORBES. Thank you, Mr. Chairman.

Chairman LOBIONDO. Congressman Udall.

Mr. UDALL. Thank you very much, Mr. Chairman. First of all, let

me thank Congressman Tanner and Congresswoman Dunn for

their leadership on this issue. Clearly, we have a very difficult situation for small businesses and family-owned operations, and I

think, Congressman Tanner, your tale of the Markum family is a

very telling one.

I am wondering how many family farms or family-owned businesses fit into the same category as the Markums—as you have described, in the range of $1.3 million to whatever size you would

reasonably consider a small, family-owned business, and what does

your bill do specifically for them? Either one of you may answer

this.

Mr. TANNER. Approximately 70 percent of the estate tax returns

are filed on estates of $5 million or less, and so 7 out of 10 would

be in the range up to $5 million. Certainly, the small family farms

and the anecdotal illustrations that have been talked about this

morning would probably fall within that, and so I don’t know.

As Ms. Dunn said, we are reducing the rate in this bill over the

next 10 years so that we can hopefully get it passed and absorb the

revenue loss, and, actually, we believe as we get into the bill three

or four, five years down the line, people will see the wisdom of it

as behavior changes and more and more effort goes into job creation and growth of the business than it does into figuring out a

way to avoid the estate tax and selling off of all of the open space

around the urban areas like Long Island that has been talked

about.

Mr. UDALL. Thank you. Thank you very much. Thank you, Mr.

Chairman.

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Chairman LOBIONDO. Thank you. Congressman DeMint, do you

have any questions?

Mr. DEMINT. Thank you for the work on this, and we have heard

so many good things about it. Help us understand the objections

that we are going to run into. Who is opposed to this and what is

the opposition saying about this bill?

Ms. DUNN. Is it mostly a lack of understanding about what death

tax really does and whom it affects that is creating the opposition.

You will hear, for example, this is just a way to give tax breaks

to your rich friends, and we have talked about all our rich friends

today—the farmers, the small business people, the people that own

a couple of 7-Elevens or a Taco Bell—and, so what is the definition

of rich these days? People want to have more and more control over

their own funds now, and the Government, in this case, is becoming an enemy instead of a partner of the private sector and the

small business solutions. So, those who have not heard the real information about the effect of this tax, maybe those who believe that

small business and farms aren’t necessarily the core of what makes

this Nation great, those are the complaints that I hear about it.

Mr. DEMINT. So, you think it is more, really, misinformation or

just a lack of information at this point than true objections to the

concept?

Ms. DUNN. Yes, and I think—one other statement I would

make—because Mr. Phelps, I guess, has just left—but he made an

interesting comment, something I didn’t really understand until a

couple a years ago: when you have tax relief, you lose revenues,

and that means you lose certain programs that are very important

to all of us, but it is important for him and others to understand

that tax relief in our budget process requires cutting, in some way,

dollars from other areas, and the only way you can provide tax relief is either to cut loopholes—we have talked a lot about corporate

loopholes—close corporate loopholes or to take entitlement cuts,

and so they have to be paid for—tax relief has to be paid for in

these two ways.

This year, for the first time—and so you see the Ways and

Means Committee cutting a lot of corporate aid, and you will see

loopholes being closed, and that is what can be used to pay revenues, and it needs to be offsetting—this year, though, for the first

time, we made an adjustment in our process of providing tax relief

under the Pay Go system. We said that if there is an increase in

the non-Social Security surplus in July when CBO comes back with

its new surplus projections, those dollars must go either to tax relief or debt reductions. So, there are some additional dollars potentially there for tax relief, but tax relief is always paid for.

Mr. DEMINT. Thank you.

Chairman LOBIONDO. Thank you. Congresswoman Christensen.

Ms. CHRISTIAN-CHRISTENSEN. Thank you, Mr. Chair, and I want

to also welcome our colleagues here this morning.

Mr. Tanner, you said that the proposal is important to minorities

and rural businesses, and I don’t disagree with that. I am just not

sure about eliminating the tax altogether. And you have also used

the $9 million in the time that I have been here in the Committee

hearing as a place at which you would consider setting the limit.

18

I wonder if you consider exempting the estates somewhere around

$6 million and maybe lowering the rates as an alternative as well?

Mr. TANNER. We can talk about that. As I said in my statement,

$9 million was the dollar figure when President Franklin Roosevelt

with which I agree and which I read earlier, and an answer to a

question over here, to some degree, it is not offensive on the transfer of vast degrees of wealth, I think, for those people to be asked

who have really received the most from this system to help pay

some of the common obligations we have as a Nation, whether it

be interstate highways or aircraft carriers or whatever it might

have to be. That is not what we are talking about, at least not

what I am talking about when I talk about the estate tax relief.

The $9 million figure was just a figure that would relate to today’s

economy.

What I think we ought to concentrate on is, one, the unfairness

of it, and even in the case of vast amounts of wealth, one could

argue that it is really unfair, because, theoretically, all of this

money has been taxed during one’s working lifetime, and one gets

into how many times does the Government tax? I really believe 55

percent, which is the top rate, is unfair in the extreme just by virtue of the fact that the Government takes more than half of it. I

am not one who thinks that they shouldn’t help out in some respect

but not at that rate no matter who they are.

Now, on the other hand, if we could get some meaningful relief

as a matter of public policy so that the green spaces around urban

areas are not having to be sold for development and subdivisions

and they can be kept as farms or forests or whatever they are, and

if we could get some relief to small business owners so that all of

the energy, money, and expense that goes into trying to figure out

how to plan one’s estate could go further into job creation and the

expansion of that small business not to mention the societal value

of the generational transfer of one’s work product of one’s life to

one’s children or grandchildren, I just think as a matter of public

policy, this needs to be looked at carefully.

Now, as far as what we could do, I think you are into a legislative decision there. How do you get 219 votes? Is it $6 million or

is $4 million or is $10 million or is to eliminate it or take it down

to the capital gains? I mean, that is when you have got to figure

out how you get 219 votes.

Ms. DUNN. And I will just say, I am a proponent of rate reduction, because that is the way you phase this tax out for all time.

I want to see this tax gone. It is unfair; it is onerous; it comes at

the worst time in a family’s life; it is a tax on property that has,

in one way or another, paid taxes three or four times before.

We did some work on the unified exemption in 1997. In that bill,

we took the current unified exemption, which was $600,000 for a

property, and we raised over a period of 10 years to $1 million. So,

by the year 2007, it will be $1 million. And then you hear Congressman Tanner saying that under Franklin Roosevelt’s terms of

office in the 1930’s, it exempted $9 million, so whose—where is—

it is a subjective thing. I think that rate reduction, which really

phases this thing out, is the way to go. Otherwise, you probably

never will catch up in terms of indexing and particularly after a

19

period of inflation like we have been through the last couple of decades.

Ms. CHRISTIAN-CHRISTENSEN. Thank you.

Chairman LOBIONDO. Well, I would like to thank our colleagues,

Congresswoman Dunn, Congressman Tanner, for being here today,

for your work on this legislation. I think, as you can tell, both from

Congressman Manzullo’s Committee and from my Committee, you

have strong support as well as from many of our colleagues, and

we look forward to seeing this legislation move ahead.

Mr. TANNER. Thank you.

Chairman LOBIONDO. I would now ask the second panel to come

up and take seats at the table.

[Pause.]

Okay, I would like to welcome our second panel of visitors today.

I would remind our panelists that we will be working under the

five-minute rule. I would encourage you to keep your statements to

that length or maybe even a little shorter. If your statements are

longer, you can feel confident that your entire statement will be entered into the record as this will be considered for the future.

Our first panelist that we will hear from will be Aldona Robbins

who is vice-president of Fiscal Associates and Bradley Senior Research Fellow at the Institute for Policy Innovation. Welcome, and

thank you for joining us today.

STATEMENT OF ALDONA ROBBINS, PH.D., SENIOR RESEARCH

FELLOW, INSTITUTE FOR POLICY INNOVATION, ARLINGTON,

VA

Dr. ROBBINS. Thank you, Mr. Chairman, and thank you for the

invitation to appear at this hearing.

What I would like to do is to highlight briefly a few of the major

findings of a recent study that we have done for the Institute for

Policy Innovation on how estate taxes affect the economy. First, estate taxes, which once were almost the exclusive headache of the

super-rich, are much more likely to affect small-to medium-sized

estates today than 50 years ago. In 1945, estates that were under

$2.5 million—and that is in today’s wealth—accounted for about

one-third of all returns. In 1995, those estates accounted for 89 percent of returns. This is due in large part to the declining value of

the estate tax exemption which was worth $9 million—again, in today’s wealth—in 1916, and, as Congressman Tanner said, in 1930

as well versus the $650,000 in 1999. With Wall Street’s spectacular

performance over the last several years, it is easy to see how a

middle-class family who owns a home, has IRAs, or 401(k)s could

hit $650,000 pretty easily.

Second, estate taxes are harmful to the economy. High marginal

estate tax rates discourage saving, about half of which is directed

toward bequests, which in turn, leads to less investment, slower

economic growth, and lower tax revenues. We estimate that eliminating the estate tax would ultimately produce more than $5 in

extra GDP for every dollar of static revenue lost. Because the Federal Government collects about 33 cents of each dollar of extra

GDP, any pay-off that is greater than 3 to 1 is going to at least

pay for itself.

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Third, estate taxes hit small business particularly hard. With the

amount of tax owed, while it is based on asset value, the simple

fact is that the tax has to be paid out of income produced by the

asset. So, let us look at a family-run store that has a 10 percent

return after inflation; that is 5 percent after taxes. If the owner

dies and is subject to the 55 percent death tax rate, how do heirs

pay the bill? Do they send 55 percent of the store’s inventory to

Washington? No, the Treasury doesn’t accept payment-in-kind, only

cash. If the heirs devote the entire 5 percent annual return, the

death tax could be paid off in only 11 years. Unfortunately, Treasury wants its money now. They could go and borrow from the bank

at 9 percent—that is 4.5 percent after tax—and pay off the loan in

50 years, but would the heirs want to run the store for 50 years

for free? Probably not; they choose to sell.

Let us look at a small farmer who owns land near an urban area.

His farm would yield a 10 percent return only when it is valued

as farmland, but tax law requires that the asset be valued at its

best use. That lowers the pre-tax return to 5 percent—2.5 percent

after tax—and, in this case, even a 50-year bank loan won’t save

the farm.

The lesson to be learned here is that all taxes are paid out of income. Even if the death tax is rare event—only once in a lifetime—

its average impact is very large; large enough that for some, the

combined effects of income and death taxes approach 100 percent.

In cases like these, the clear message is don’t invest, consume.

Last, estate planning richly rewards taxpayers who can anticipate that they might be subject to the tax. Those caught off guard,

often owners of small businesses, family farms, and savers who

amass wealth during their lifetime, end up paying most of the tax.

That may be why the largest estates, in fact, do not pay the highest estate tax rates.

Thank you.

[Dr. Robbins’ statement may be found in the appendix.]

Chairman LOBIONDO. Thank you, Ms. Robbins.

What we will do is normal procedure, and we will go through the

opening statements for all of the panelists, and then if there are

any questions from members, we will go to them.

The next witness is H. Jay Platt, a member of the Board of Directors of the Arizona Farm Bureau Federation and representing

today the American Farm Bureau. Mr. Platt, thank you for joining

us.

STATEMENT OF H. JAY PLATT, RANCHER AND PRESIDENT,

THE APACHE COUNTY FARM BUREAU, SAINT JOHNS, AZ,

REPRESENTING THE AMERICAN FARM BUREAU

Mr. PLATT. Good morning, Mr. Chairman, members of the Committee. I appreciate this opportunity to be here and make this

statement.

My wife, Trish, and I have traveled to this hearing from St.

Johns, Arizona where we operate a cow/calf operation in conjunction with my two younger brothers. We are the third generation of

Platts to be on our ranch, which was begun by my grandfather

early this century. I also have two young sons, each of whom harVerDate 11-MAY-2000 10:35 Aug 26, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 D:\DISC\59745 txed01 PsN: txed01
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bors the hope of staying on our ranch if we are not put out of business by the death tax.

Our operation consists of a cow herd of 650 mother cows and

their calves. That is down from slightly over 1,000 mother cows due

to drought. We run these cows on some 125,000 acres of land in

two States—Arizona and New Mexico. Of that acreage, we own

roughly 20,000 acres. The balance we lease from the State and

from the Federal Government. Now, that may sound like a lot of

acreage, and indeed it is. I would hasten, however, to point out

that our operation is typical for our part of the country where some

100 acres are required to support a single cow.

My home community of St. Johns is an area of few roads and few

people, located in northeast Arizona, approximately half way between Phoenix and Albuquerque, New Mexico. Ranching is the core

foundation of our community and its economy. Local ranchers serve

on school boards; give volunteer time to church and community

service organizations: Our mayor is the local brand inspector, saddlemaker and is also a rancher. Ranchers in our community support the single hardware store, the single grocery store, and we

also help to keep three gas stations in business.

If ranchers in my county, Apache County, do not survive the

death tax, the nature and character of my community, of my county, and of the land itself, will be forever altered. Mr. Hill has alluded to what is happening in Montana. If our ranch is sold to pay

the death tax, I can assure you that it will not be sold to another

rancher: Rather, it will be cut up, carved up, into 40-acre parcels

and sold as rural ranchettes to absentee owners.

We have worked hard to be good conservators and stewards of

the land. It is in our best interest to do so, having a vested economic interest in how well we manage that land. An absentee

owner whose ties to the land are fleeting and are recreational in

nature cannot have the same interest in conversation and stewardship which we have.

I am 48 years old, and I am now impressed with the nature of

my own mortality. I am planning for my death: A few weeks ago

I made a 440-mile round trip drive to Phoenix, Arizona to consult

with an estate tax attorney. That will be the first of many such

trips which I will make. I expect to expend considerable time and

resources in crafting an estate tax plan. Those are resources and

time which would be far better spent on my family and on my business. I also know that if I do not do this planning, my family business, our ranch, will be sold to pay a death tax.

As I mentioned at the beginning, my grandfather started our operation some 100 years ago. We have worked hard to build a modern, efficient ranch and feel that we have been very successful in

so doing. All along the way we paid taxes on what we have earned.

It is difficult for us to understand why we should again be forced

to pay at our deaths. It is almost incomprehensible to me that my

Government would force my family to sell our ranch at my death

and punish us for our success. My community, my county, my family, and indeed the land and the environment, would be better

served if our ranch continues in business.

Thank you.

[Mr. Platt’s statement may be found in the appendix.]

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Chairman LOBIONDO. Well, thank you very much, Mr. Platt, for

that testimony.

Before I introduce the next panel member, I would like to also

acknowledge a couple of folks from New Jersey: Peter Furey, that

I have worked with for a number of years who is executive director

for the New Jersey Farm Bureau and also Mr. Lou Fisher who is

here with our panelist, Mr. Ruske—that I will introduce in a

minute. Lou Fisher is from my district; operates Fisher’s Markets,

a small family business and thought it important enough today, although he is not testifying, to be here.

And the panelist that I would like to introduce is Mr. Roger

Ruske. Roger owns Cumberland Nursery in Millville, New Jersey.

He is a member of the New Jersey Farm Bureau, and he is also

a member of the New Jersey State Board of Agriculture, and he is

secretary of the Cumberland County Planning Board. Roger, thank

you for joining us. Please go ahead.

STATEMENT OF ROGER RUSKE, OWNER, CUMBERLAND

NURSERIES, MILLVILLE, NJ

Mr. RUSKE. Thank you, Chairman LoBiondo. I have come today

to wear two hats—— Chairman LOBIONDO. Excuse me, just for one minute, Roger. If

you could ask Mr. Platt to move the microphone over? I think those

microphones will move, and then everybody will be able to hear

you.

Mr. RUSKE. How is that? Is that okay?

Chairman LOBIONDO. That is much better, thank you.

Mr. RUSKE. Okay. As I said, I have come here this morning wearing two hats. My hat is as a member of the State Board of Agriculture. I am one of eight people who are in charge and a head of

the Department of Agriculture in the State of New Jersey, and I

can assure you that every farmer in New Jersey—man, woman,

and child—is against the estate or the so-called death tax and as

a representative of all the farmers in New Jersey, I would urge you

to please do away with that. That is my official hat.

The hat I am most proud of is my Cumberland Nurseries hat,

and if you see my little insignia on top, it has the four generations

of my family that have been in the nursery business since basically

the turn of this century. I am a third generation nurseryman following in my grandfather’s footsteps, and my son, Christopher, is

following in mine.

Daily, as farmers and agriculturists, we must deal with the capriciousness of Mother Nature, unending Government rules and

regulations, not to mention the normal problem-solving tasks involved in running any business. In my business, if one is to be successful, long-range planning is essential. The crop that I plant

today may not be harvested for one to five years, so we understand

what long-term and long-range planning is.

My grandfather began his nursery business in Connecticut at the

early part of this century. He was a natural farmer. He always

bragged he only went to the sixth grade, and that was pretty good

in his day—I guess that was considered a college education today.

But he was known in our town as the midnight farmer. Grandpa

worked all day at his day job and worked half the night on building

23

up his nursery. Grandpa persevered through depressions, world

war; his barn burned down; Japanese beetles almost ate him out

of house and home, and he earned and saved what he could during

that time. And he thought that his earnings and savings would be

his to do with as he pleased, and in that day age, I guess people

didn’t think a whole lot about the Government confiscating your

property.

Later on in his life, in the late sixties and in 1970, the family

finally convinced grandpa that he had to do some estate planning,

and Mr. Hill will appreciate this: he chose badly for estate plans,

and this I think happens way too often. After grandpa passed

away, it took years for the family to settle the estate. Between IRS

asking for more paperwork documentation and what-not, five years

went by, and even after five years, the IRS is still gunning my

mother for paperwork and a few dollars.

I called her up the other day and asked her ‘‘Mom, do you still

have some paperwork? I would just like to look at it.’’ She said

after the 7-year limit or 14-year limit, whenever it was up, she destroyed it. She did not even want to be reminded again of what her

Federal Government did to her.

Let us fast forward just a little bit to this generation. My wife,

son, and I have 275 acres in Cumberland County, New Jersey, and

I think that by most of today’s standards, we are considered successful. We have a very simple business; I am a sole proprietorship;

my wife and I own the property; I have one child who is in business

with me. All I want to do is pass my business on to my son. My

will is literally this thick, which you could solve with one sentence,

‘‘I leave it to my son.’’ I have to set up—as Mr. Hill will again appreciate—all kinds of trusts, marital trusts. I don’t even understand what half of it is, but I understand, too, that I think this bill

is probably called the accountants’ and lawyers’ and

insurancemen’s full employment bill, because they love it.

But we must pass this on to my son for all the reasons you have

heard about land conservation, preserving the small business, I

must be able to pass this on to my son. I have to do this through

estate planning. I should not have to do this. I should not have to

spend my time, my money to protect my assets from my Government.

I also brought with me—and I only brought one; Louis has the

other two with him—this is one section of the Federal estate tax

code. I just tried to read one page and forget it. You have to be a

lawyer or an accountant to understand it, but this is how complicated our laws are.

The answer to all of this: abolish the tax—I have heard so many

times this morning—just please do away with it. And I am sure the

reply will be from many in Government will be this is going to create a budget shortfall. Well, you want to hear about a budget shortfall, just get hit with a late frost, a hard winter, a drought, or declining market prices and disappearing customers. In 1977, 1978,

in a severe winter, I lost one-third of my crops. Nobody was there

to increase my taxes or anything like that so that I could make

more money. I suggest that the Government live the same way that

we have to live.

24

I thank the chairman and the Committee for having the intestinal fortitude to address this problem. Many, many people perceive

this as a rich person’s problem; it is not. It is an American problem, and I hope you can solve this for us.

Thank you.

[Mr. Ruske’s statement may be found in the appendix.]

Chairman LOBIONDO. Roger, thank you very much for that inspiring testimony.

Next on the panel is Mr. Kevin O’Shea who is the chief financial

officer of Shamrock Electric Company in Elk Grove, Illinois, and he

is testifying on behalf of the National Small Business United. Mr.

O’Shea, please proceed.

STATEMENT OF KEVIN O’SHEA, CHIEF FINANCIAL OFFICER,

SHAMROCK ELECTRIC COMPANY, ELK GROVE, IL, REPRESENTING NATIONAL SMALL BUSINESS UNITED

Mr. O’SHEA. Mr. Chairman, ranking members, and members of

the Subcommittees, thank you for the opportunity to appear here

today. As stated, my name is Kevin O’Shea. I am the chief financial

officer for a small electrical firm in Elk Grove, Illinois.

For the past 43 years, my father has worked to make our company a successful small business. Because of his life work, there

are 120 families that can call Shamrock Electric their employer,

and it is a company they can be proud of.

By profession, I am an accountant, and, as such, I generally

make decisions based upon numbers, such as cash flows, capital requirements, and expected returns. When I started to plan my father’s estate, I felt it would be just another exercise in number

crunching, but I was very wrong.

Estate planning has nothing to do with numbers and everything

to do with family. When we started planning my father’s estate, he

contracted cancer, and he eventually beat it, but during the time

that he was suffering from cancer, I had to, on a daily basis, discuss his eventual death with him, so that we could plan for his estate. There was a sense of urgency at that time, and we needed to

get it done, and we couldn’t stop. Just after he got better, our industry took a downturn, and our company started having some bad

years, but we couldn’t let that deter us either; we had to continue

with the planning process, so in the event that there was a company left, we could pay the estate taxes and pass it on to the next

generation.

In addition to that, my one and only sibling, my sister, became

very upset that I was put in charge of my parent’s estate planning

and that she was cut out of the process. The reason being that I

am involved in the company, and she is not, and because of the estate planning and the need to continue our family business, we had

to make the decisions and put the company first and tell her that

she just had to accept what we made as the decision.

These were some very hard times for our family, and I think that

this is something that is missed when we talk about revenues to

the Federal Government. There are things other than money.

There is family relationships, and I think this is something that I

would like you to think about when it is time to case the vote on

whether or not we repeal the estate taxes.

25

As has been said before, I think there is a misconception as to

who pays estate taxes in the United States. The architects of our

tax code believe that it is people that are inheriting vast amounts

of wealth that have never worked a day in their life to earn that

wealth. In reality, those people have liquid assets; they can set

those assets up in trusts, and they can bypass the tax laws and not

pay the estate taxes. People that are paying estate taxes are small

family-owned businesses, and they are being devastated.

The other item is that people haven’t earned the money from

family business; that my parent’s generation created it, and to pass

it along to us is without the Federal Government getting its share

of it is unfair. What I would like to say is I started in the family

business when I was 14. I have been working there for 21 years

now. I have held every job within that company, and from the day

I started, I have prepared myself to be in charge of Shamrock Electric, and I think I have prepared myself very well, and for somebody to say I have not earned the opportunity to have that company is very insulting to me.

In 1995, I was a member of the White House Conference on

Small Business. One of the top three recommendations coming out

of the White House Conference was to repeal the estate taxes. That

was 2,000 small business owners speaking in unison that the estate taxes are a very real problem for small business.

I would like to thank the Committee for taking a look at this

problem, and thank you very much for the opportunity.

[Mr. O’Shea’s statement may be found in the appendix.]

Chairman LOBIONDO. Thank you very much, Mr. O’Shea.

I would now like to turn to and yield to my colleague, Congresswoman McCarthy, for introduction of a guest that she has from her

district.

Mrs. MCCARTHY. Thank you, Mr. Chairman. I would like to introduce Ms. Kaplan. She is a reputable small business owner in the

health profession who runs the business with her son in Great

Neck, New York. She brings an interesting perspective before this

Subcommittee on the impact of the estate tax on the health care

industry. Thank you for traveling from—everyone thinks because

we live on Long Island, we get here so easily. It is short, but, let

me tell you, the planes are horrible. [Laughter.]

But, anyway, thank you, Arlene, and I am looking forward to

your testimony.

STATEMENT OF ARLENE KAPLAN, HEART-TO-HEART HOME

HEALTH CARE, GREAT NECK, NY, REPRESENTING THE NATIONAL ASSOCIATION OF WOMEN BUSINESS OWNERS

Ms. KAPLAN. Thank you. Good morning, Mr. Chairman and

members of the Committee. My name is Arlene Kaplan, and I am

the CEO and founder of Heart to Home, Heartland on the Bay, and

Workplace CPR. These are companies that operate on Long Island

in New York.

I opened my first business about 15 years ago. We provide health

care services from all of our companies. I have about 70 employees;

about half of them have been with me for over 5 years. I am also

on the Board of Directors of the National Association of Women

Business Owners.

26

I am not a tax expert, unless I qualify, because I pay lots of

taxes—personal income tax, corporate tax, and employment taxes.

I am here before you to ask if I have already paid taxes on everything I own while I am alive, why do I have to pay taxes on these

things when I am dead? Now, I don’t mean to be flip, because the

circumstances are very serious. I am just expressing my frustration

with a tax situation that seems to have gone awry.

The current estate, or death taxes, as it is now known, was initiated in 1916 to fund World War I. It was maintained in the tax

code through the twenties and thirties to help prevent the concentration of wealth. Since that time, anti-trust laws have eliminated these concerns, but, to date, the estate tax remains in tact.

I would like to go back before World War I to the turn of the century, so that you can know me a little bit better and so that you

will know that there are probably millions of people like me. Three

of the four of my grandparents came to this country before the turn

of the century, and one came just after. They all came from the

area known as the Pale, the area between Russia and Poland. The

children were born here, and all of them got at least a high school

education; two of them even went to college. When my grandparents died, there was some small amount of money left to the

children and grandchildren. The total from both sides probably

didn’t amount to $10,000. When my father died, he had already

distributed his money to his children, his grandchildren, and his

great-grandchildren. The total he gave out was under $100,000;

nothing of concern to the IRS.

Now, we fast-forward to me. A number of years ago I was widowed. I eventually remarried and then came an awakening. I went

to a lawyer to do a prenuptial, because that is the thing you are

supposed to do. Now, I have nothing against lawyers; my company

employs lots of them. We have a corporate lawyer, a tax attorney,

an employment attorney, a regulatory attorney, and a real estate

attorney. Now, I have a death attorney. My feeling is that when

I am on my deathbed, a lawyer will be standing there telling me

that I can’t die until I finish filling out my Government death

forms and paying my taxes.

As a result of meeting with the attorney for the prenuptial, I told

my children the best thing I could do for them was to make sure

I left them my house with a big mortgage and outstanding credit

card balances and nothing else. If they didn’t want to be burdened,

I needed to spend all of my money and make sure my companies

had relatively little value, because, you see, I made it. I am successful. When I die, I will leave an estate that is probably going

to be more money than my father may have made in his lifetime,

and we grew up poor—at least, when I grew up, I found out as a

kid I was a poor; I didn’t know it then. We live in a five-story walkup tenement in Manhattan.

I have been in the health care business for over 40 years. I believe I do good work helping the people in my community. I pay

my taxes, both personal and corporately, maybe not with a smile,

but I certainly understand that this country that gave my grandparents and the succeeding generations a chance needs to tax its

citizens to continue to be in this country. My oldest son is my partner, and I have a really hard time with the thought that he might

27

have to sell my life work achievements in order to pay the estate

taxes that will be due.

NAWBO’s position is to repeal the estate tax in its entirety. The

so-called death tax creates a disincentive to expand business, create jobs, and often, literally, taxes the family business right out of

the family. Many businesses would add more jobs over the coming

years if the death taxes were eliminated.

We know that that is probably not the best thing to say at the

moment ‘‘eliminated,’’ however, we have some suggestions. Increase the exemption to $760,000 and index it to allow it to increase and

pass on to the families. Surely, we can get the $1 million exemption

level down before the year 2006. Tax trusts on their taxable income

at the same rate bracket as for a single individual. Make retirement plan assets up to $1.5 million per person exempt from the estate tax since all such amounts are also subject to income tax, and

reinstate the $1 million exemption per descendant for generationskipping taxes.

I appreciate the Committee considering these issues and the suggestions I have offered. Please know that the leadership of NAWBO

and its members look forward to hearing from you and working

with you. NAWBO will assist your efforts in any way that we can.

Thank you very much for your time.

[Ms. Kaplan’s statement may be found in the appendix.]

Chairman LOBIONDO. Thank you.

I will continue to yield to my colleague from Long Island.

Mrs. MCCARTHY. Thank you. My next witness is Steve

Breitstone. Now, in defense—because all of you have talked about

lawyers, which I kind of think is unfair. You have got to remember

the lawyers are only interpreting and trying to work out what we,

the Federal Government have put the burden on. So, I don’t think

it is fair to blame the lawyers; I think it is fair to blame the Federal Government. And I think if you really think that through, you

will see that is true.

Mr. Breitstone is a highly respected estate tax attorney from

Mineola, my hometown, and has first-hand knowledge of the impacts of estate tax as on small businesses.

Steve, thank you for coming; I appreciate it.

STATEMENT OF STEPHEN M. BREITSTONE, LAW OFFICES OF

MELTZER, LIBBE, GOLDSTEIN & SCHLISSEL, MINEOLA, NY

Mr. BREITSTONE. Thank you, Congresswoman. I have been practicing tax law, generally, since 1982. I survived—originally, I was

a corporate tax attorney. I survived the Tax Reform Act of 1986.

At that time, we were concerned that we were going to be out of

work. After listening to today’s testimony, I feel like an endangered

species— [Laughter.]—once again, but the fact of the matter is that

I have confidence in my resourcefulness and my ability to continue,

even if the estate tax is repealed, to provide my clients with services that they really need, and I certainly agree with your comment—we do not, as attorneys create the problem. I take great

pride in helping my clients who are mainly small businesses to

avoid the problem and to manage the problem, and I also find it,

I guess, offensive that the rhetoric from Washington continues to

be ‘‘Let us close all the loopholes; there are abuses.’’ Anything that

28

we can do to help to ameliorate the estate tax to make it manageable is viewed as an abuse, and there have been proposals from the

administration time and time again to close these so-called loopholes, and I think that the prospect of doing so is extremely dangerous unless it is accompanied by significant reform, and by reform, I mean raising the levels—the threshold levels before the tax

is imposed significantly. The idea that was talked about earlier of a $9 million threshold

that was originally enacted, that is a number, but it doesn’t necessarily stand on its own, but it is a much greater number than

the current $650,000 exemption. Yes, the tax is deferred, generally,

until the second spouse dies if there are two spouses, and you can

avoid a total of $1.2 million. The ability to—and this is being increased—the small business exemption enacted in 1997 is a total

boondoggle. It very rarely applies, and even it does apply, there are

numerous disqualification events that can end up preventing the

heirs from being able to conduct the business in a rational, economic manner.

Our practice, as I said, relates primarily to small businesses and

closely-held businesses, and by small, I don’t mean candy stores; I

mean businesses that are owned by individuals starting from startup companies to the successful family business that has been

passed down one, two, three generations in some instances, rare instances. These businesses are inherently perilous.

The people that found these businesses and choose to go into

them, really, to me, represent the epitome of the American dream.

It is their willingness to give up the safety net and to take the

risks that they take personally and financially to start a small

business and to run it. Typically, they are undercompensated for

their efforts for many years; they suffer from numerous vicissitudes

of the marketplace; they are inherently at a competitive disadvantage to large, established businesses; they don’t have the ability to

raise capital; their stock is illiquid; unless they eventually go to the

public markets, their ability to borrow is extremely limited, and it

is really ironic, and it is really abominable that at the time that

these companies are suffering the major transitional event in their

lifetime, the time when they need to pass on leadership from one

generation to the next, that they must go out and incur debt or sell

off assets to raise capital equal to 55 percent or more of their net

worth.

Now, under the best of circumstances, a small business cannot

afford to incur that kind of indebtedness or to raise that type of

capital without significantly increasing the level of risk associated

with the business, and the estate tax—I deal with many companies

that are looking to raise capital. We try to help them; that is one

of our things we take pride in. But the fact is that raising capital

to put into plants and equipment to develop new technologies is

something that is attractive to the marketplace. Yes, it is an uphill

battle, but if they have something good to offer, they can attract

capital. But it is very difficult to attract capital to pay estate taxes,

because it is a one-way street—the money goes out and absolutely

nothing comes in to pay for it.

I would like to summarize by saying that the thresholds really

need to be increased. I am not necessarily in support of a total reVerDate 11-MAY-2000 10:35 Aug 26, 2002 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 D:\DISC\59745 txed01 PsN: txed01
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peal of the estate tax for the very wealthy, because I do think there

are some concentrations of wealth that are anti-competitive as to

small business, and I also think that a gradual phase-out of the tax

will leave the economy shouldered with the continuing burden of

compliance without getting the savings in terms of revenues. So, as

the revenues go down, the compliance levels are still going to be

very high, and I think that that would be really inefficient.

Thank you.

[Mr. Breitstone’s statement may be found in the appendix.]

Chairman LOBIONDO. THANK YOU, MR. BREITSTONE. Congressman Hill, do you have questions?

Mr. HILL. Thank you very much, Mr. Chairman.

First of all, I want to thank you all for testifying, and, Mr. Platt,

your testimony could come right out of Montana.

The one point I want to make—and I guess I would ask you

about—I suspect if you are like most Montanans, you haven’t put

a lot of money into a retirement account, and you struggle with a

650–cow/calf operation to feed three families.

Mr. PLATT. Ours is a an industry that is capital-intensive and is

not a cash cow—no pun intended. I have no savings to speak of.

My personal checking account is pretty much a month-to-month

sort of thing. Again, the reason that my wealth, if you will, is not

liquid in nature—in fact, it is quite the opposite—land is very illiquid and that being the primary element of my estate.

Mr. HILL. I noticed you have some sons you hope to bring in the

business. Let me just tell you from personal experience, when I

tried to bring sons into my business, one day they realized that the

harder they worked to grow the business, the bigger the tax liability they were building for themselves, which is one of the real problems associated with passing these businesses from one to the next.

Ms. Robbins, your testimony I found really interesting, and I

would just ask you if you would provide for me some of the foundations of the economic model you did for the projections that you included in your testimony?

Dr. ROBBINS. Sure.

[The information may be found in the appendix.]

Mr. HILL. I would really appreciate having that information, because I found it really interesting.

Dr. ROBBINS. Okay.

Mr. HILL. My questions are really for you, Mr.—is it Breitstone?

Mr. BREITSTONE. Breitstone.

Mr. HILL. Breitstone. By the way, in Montana, the prairie dogs

aren’t an endangered species; we have a million of them.

Mr. BREITSTONE. I don’t feel so bad. [Laughter.]

Mr. HILL. Right. The situation with a publicly-traded—if you own

stock in a publicly-traded company, if you sell that company, that

stock—it doesn’t have much impact on the value of the company or

the ongoing operations of the company. I mean, that is the difference, isn’t it, between a privately-traded company or a closelyheld company?

Mr. BREITSTONE. Absolutely. The real impact of the estate tax—

the real adverse impact is felt primarily by the small, closely-held

business, because, first of all, as an economic unit, even though

some are in corporate form, it is very hard to distinguish between

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the economics of the individual shareholder and the economics of

the company; they put their own wealth into the company. But

with a public company, public companies have—their shareholdings

are widely held; their shares can readily be sold. For the most part,

public companies really don’t need to be concerned about the estate

tax. They don’t have to pay for the cost of planning for it and complying with it.

Mr. HILL. And as a matter of fact, I would make the argument

that the current tax structure we have, in general, encourages the

accumulation of wealth within corporations, publicly-traded corporations, and discourages the accumulation of wealth in privatelyheld companies, because public companies can hold other companies, and their dividends aren’t taxed, and there is all kinds of incentives for the creation of pyramiding of economic wealth in publicly-traded companies.

Mr. BREITSTONE. Many small businesses cash out.

Mr. HILL. That is right.

Mr. BREITSTONE. They sell out to the big companies.

Mr. HILL. One of the things that I found working with small

businesses is that more often than not—and you make the point— a lot of these businesses don’t succeed in subsequent generations,

particularly in the third generation. The percentages are pretty

small, and that is because the person that founded the business

was the original entrepreneur, and they had the passion for the

business and the idea and all that.

One of the problems with these small businesses, when that person dies, that has an adverse impact on the business aside from

just the tax impact. I mean, in essence, what we are doing is we

are piling on. The entrepreneur dies, and then we are saying ‘‘We

are going to tax you too. We are going to give you financial penalties on top of all other penalties that you have associated with

that.’’ I mean, isn’t that part of the problem?

Mr. BREITSTONE. Well, certainly, the death of the entrepreneur

is a big hit for a company. I would venture to say that in the ideal

business model the types of skills that the entrepreneur was able

to muster in order to found the company and just get it off the

ground, may not necessarily, in the long run, be the same types of

skills necessary for the company to continue as a viable entity into

the next generation, and I think that companies grow stronger if

they are cognizant of the need to put the proper management in

place.

The problem is that management—the qualifications necessary

to have management that will be able to carry on, whether it is

family or not, is very expensive; it is a significant cost. And I would

much rather see that the money go into paying for management

and paying for new technologies to be able to stay on top of the

market than paying into the tax system, which seems to add very

little to the budget.

Mr. HILL. It is nice to hear some of the concerns that you expressed earlier and that is the total elimination of the estate tax,

complete elimination of the estate tax. I think the estate tax is unfair. I am concerned about what the impacts of that might be in

terms of discouraging people from ever selling anything, because if

you pass it from one generation to the next generation without ever

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incurring any tax liability, we could actually encourage people also,

then, never to sell anything.

That is why—I will just ask; you might want to comment on this

if you would care to—I have introduced a bill that would eliminate

the death tax, but when you die you trigger a capital gains. Your

estate would be subject to a capital gains tax. The new basis would

be passed on to the new heirs. It sets that tax rate at 15 percent,

and, again, you would only be paying a tax on the unrealized gain

or you would be recognizing the gain. Savings accounts, retirement

accounts—those things wouldn’t be subject to that tax.

Mr. BREITSTONE. It is my feeling that the capital gains tax—as

we now have it with a very low, effective rate—already serves that

purpose. Death is not necessarily the time when a company should

be paying a tax. The income tax system does, however, deal with

the free market which will eventually dictate whether a company

is to be sold, liquidated, whether it is going to continue or not continue, and at the time that the business, the exigencies of the business, which could be many—could be technological changes; it

could be supply changes; it could be changes in management; death

of an owner; there are just too many to enumerate—but those factors will eventually compel—a business that is insufficient, that

gets passed on to the next generation will not succeed and prosper

in the long-run unless they are operating it efficiently.

Mr. HILL. And that is the other side of this coin. You specialize

in tax avoidance techniques, right? I mean, you help people—— Mr. BREITSTONE. I wouldn’t say, necessarily—I certainly wouldn’t

describe it that way. [Laughter.]

Mr. HILL. All right, I will describe it.

Mr. BREITSTONE. One of the things that I do is manage tax liabilities and structures things in a way that is most efficient from a

tax point of view, most efficient from the taxpayer point of view.

Mr. HILL. As you can tell, I am not a lawyer, so I probably didn’t

couch that exactly the way—— Mr. BREITSTONE. Well, there are many other things that I do

than just tax avoidance.

Mr. HILL. My point simply is, is the cost of that, and that costs

your customers a lot, doesn’t it? I mean, your clients pay a lot, not

just in fees to you but accounting fees, evaluation fees, life

insurance—— Mr. BREITSTONE. Oh, estate tax planning is an extremely costly

endeavor, from legal fees to the cost of insurance. I mean, it compels massive investments in an insurance product which would

really make very little economic sense but for the estate taxes.

Mr. HILL. My point, simply, is that is not money invested in the

business in growing and expanding it.

Mr. BREITSTONE. Right, exactly; I agree.

Mr. HILL. Thank you, Mr. Chairman. I appreciate the tolerance

and the time. Thank you very much.

Chairman LOBIONDO. Thank you. Congresswoman McCarthy.

Mrs. MCCARTHY. Thank you. Number one, I want to thank the

whole panel. I think your message has been extremely loud and

clear, and there certainly are a number of us here in Congress that

will be taking up the fight for all of you at least to try and make

it better.

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And to Steve, actually, the questions that were just asked were

answered by you, and I appreciate that. We thank you for your

time, and hopefully we can look forward to certainly picking your

brains in the future as we push this thing a little bit further out.

I hope that eventually that we can come to some sort of conclusion on helping our small farmers, our small businesses. As I said

earlier, it is the backbone of our country.

So, I appreciate your time and your effort to be here with us,

even though—I will explain this—a lot of our members are running

back and forth to different Committee hearings and everything else

like that and being that today is Thursday, a lot of people are not

around, so we never how many—the testimony will get to everybody; they will read it. I thank you.

Chairman LOBIONDO. I just have one question. Roger, you mentioned the situation when you called your mother and asked her if

she had had any paperwork saved and what her response was

about wanting to get rid of it and just put it out of her mind. Not

to sort of open up a raw nerve, but would you suggest that was

solely just because of the impact? Did it have something to do with

how she was treated by the IRS? Was it a combination of why that

experience was so bitter?

Mr. RUSKE. It was a combination of things—— Chairman LOBIONDO. If you could use the microphone, please.

Mr. RUSKE. It was a combination of things. It was a long slow

death for my grandfather. Unfortunately, my uncle, who was in the

business with him, died a month before he did, so that complicated

the whole affair. But my mother is a simple woman. She raised

nine children and felt what was yours was yours, and she couldn’t

understand why these people from Internal Revenue kept badgering them for more money, and it has really turned her off on

Government, and every time she sees a bomb being dropped wherever we are dropping bombs now, she says, ‘‘Why is my money

being used for that? Why did they take my father’s money and do

that?’’ So, yes, the Government had a very serious impact on her.

And she—I suppose my attitude towards lawyers come from my

mother—but the lawyers and the accountants and the

insurancemen are the messenger. I mean, they—Mrs. McCarthy is

absolutely correct—they don’t do anything; they just tell us what

we should be doing.

But it is very personal. Estate taxes have become very personal,

and then they become emotional, and then irrational thought

comes into it. This is what it unfortunately gets down to.

Chairman LOBIONDO. Okay. Well, I would, too, like to join in

thanking all of the panelists. You have helped put a very human

face on what is perceived as a problem that is out there somewhere. And often when we deal with issues in legislation, it is helpful to that human face and to hear that human story that you have

all done so well to portray to us, and we thank you for taking time

out of your busy schedules to be here.

I would like to add that, without objection, we will leave the

record open for 10 days for the submission of statements for the

record.

And, with that, the meeting is adjourned.

[Whereupon, at 11:54 a.m., the Subcommittees were adjourned.]

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