April 13, 2015 Weekly Legislative Update
DEATH TAX REPEAL VOTE THIS WEEK
A vote on the TIA-supported Death Tax Repeal Act, HR 1105 cosponsored by Congressmen Brady (R-TX) and Bishop (D-GA) has been added to the floor calendar for tax week, Thursday, April 16th. TIA has made Congressman Brady's bill one of our main legislative focus and we are very thrilled to see a repeal bill move forward for the first time in a decade.
A few action items:
-Please send letters of support to Congress on HR 1105 and S683. If you signed our letter and could write another short, separate letter of support then please consider sending them to the bill sponsors/committee or me to pass on.
-Please share our letter and show your support on social media, we will be using the hash tag #DeathTaxRepeal
Background on the Qualified Family-Owned Business Interest (QFOBI) Deduction
The Qualified Family-Owned Business Interest (QFOBI) Deduction was introduced in 1997 as part of the Taxpayer Relief Act of 1997, later amended with the passage of the Internal Revenue Service Restructuring and Reform Act of 1998. In 2001, it was repealed with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, which also phased-out and repealed the estate tax.
For the years that QFOBI was “active” it proved to be immensely unpopular and was heavily criticized by both tax practitioners and family-owned businesses and farms—the intended target of QFOBI’s tax relief.
Professors Michael Graetz and Ian Shapiro put it best: “Everyone now agrees—regardless of which side of the issue they are on—that QFOBI has been a complete and utter failure… It did not solve anything. QFOBI has so many requirements, so many strictures and pitfalls, that very few family businesses have obtained any tax relief at all because of it.”
In order to qualify for QFOBI, family-owned businesses had to meet a number of stringent criteria. The limitation section alone contains two sentences that, when combined, are 27 percent longer than the Gettysburg Address. While not an exhaustive list, QFOBI requires that:
- At least 50 percent of the business must be owned by one family at the time of death, or 70 percent by two families, or 90 percent by three families.
- Non-family heirs have been actively employed by the family business for at least 10 years prior to the death of the owner.
- Family members (including the owner) “materially participated” in the business for at least 5 of the previous 8 years before the owner died.
- Family members (including the owner) owned the business for at least 5 of the previous 8 years before the owner died.
- The business was not been publicly traded in any of the 3 years before the owner’s death.
- The business did not derive more than 35 percent of its income from dividends, interest, rents, or royalties (unless it is a bank).
- The owner was a U.S. citizen when he or she died.
Additionally, the tax benefits of QFOBI are subject to “recapture,” meaning that if the heirs fail to meet the work or ownership requirements during the decade following the decedent’s death, they are subject to additional estate tax. As a result of these requirements, QFOBI was barely utilized in the years it was active, with only 1 percent of estates claiming the QFOBI deduction in 2001. Many more paid thousands of dollars to attorneys and estate planners only to find that they did not qualify.
At the time, many experts provided testimony to the Ways and Means Committee about the complexity and time-consuming nature of QFOBI:
“The limited benefits provided by [QFOBI and Special Use Valuation], which is limited to a select group of taxpayers, should be contrasted with the substantial complexity they produce. In addition to their statutory and administrative complexity, the provisions encourage extensive tax planning and invite manipulation of ownership interests and asset use.”
— Stefan Tucker, Chair, Section on Taxation, American Bar Association, Hearing on the Impact of Complexity of the Tax Code on Individual Taxpayers and Small Businesses, Committee on Ways and Means, Subcommittee on Oversight, May 25, 1999.
“The new Qualified Family-Owned Business Interest Exclusion (QFOBI) is now the most complex provision in the Tax Code…Both the American College of Trust and Estate Counsel…and the Real Property and Probate Division of the American Bar Association have urged repeal. In an article in the January 1998 issue of Trusts and Estates, the author referred to [QFOBI] as ‘one of the most ambiguous and complicated tax provisions to be passed in decades.’”
—Harold Apolinsky, American Family Business Institute and Small Business Council of America, Hearing on Reducing the Tax Burden, Committee on Ways and Means, January 28, 1998.
The bottom line: Attempts to define family-owned businesses out of the estate tax will necessarily leave some businesses behind, hamstring effective business management, restrict owners’ ability to diversify their business, and act as a brake on business growth. When this was last tried with QFOBI it failed miserably. Additionally, attempting to “carve-out” family-owned businesses and farms will always be complicated, require reams of paperwork, and cost thousands of dollars to comply with. The only way to ensure that family-owned businesses and farms are fully protected from the estate tax is to repeal it; modifying or expanding QFOBI is no substitute.
The Estate Tax by the Numbers
Estate tax hurts capital formation and job growth—
- Prior to 2008, the estate tax reduced capital formation in the economy by an estimated $1.1 trillion. This is nearly the total cumulative estate tax revenue since its inception – $1.2 trillion in real 2008 dollars.
Estate tax planning and compliance is time consuming and expensive—
- Even with a $5 million exemption level, 34 percent of small businesses have incurred expenses in the last five years in order to protect themselves and their heirs from estate tax liability, and another 15 percent expect to do so in the future.
- For every $1 of tax revenue raised from the estate tax, $1 is wasted in compliance. For example, in 2006, it is estimated that family businesses spent $27.8 billion just to comply with the law.
- Less than 10 percent of small-business owners have a good understanding of estate tax rules. For that reason, those who are impacted by the estate tax must pay for expensive estate planning, such as hiring lawyers and accountants to comply with the tax’s complex rules.
Estate tax forces family businesses to sell their highly illiquid business assets—
- Recent increases in agriculture cropland values have greatly expanded the number of farms and ranches that now top the estate tax exemption. USDA data shows that agricultural land values have almost doubled since 2005. In 2012, there were over 90,000 farms in the United States and land and buildings worth more than $5 million.
- The price of U.S. farmland has skyrocketed to its highest level since the 1970s. As a result, farmers are hiring financial advisors in order to avoid huge estate taxes on their increasingly valuable land.
Estate tax creates more uncertainty for family businesses—
- Out of an estimated 2.5 million family businesses, 48 percent expect a family member to take over the business. Therefore, families want to plan ahead for the estate tax.
The Effects of the Estate Tax on Small Business and Farms
What Small Business Owners and Members of Congress are Saying
Brandon Whitt, Batey Farms (7th generation farmer), Murfeesboro, Tennessee, American Farm Bureau Federation
- “We have spent countless hours talking with financial advisors, accountants and attorneys trying to put together a plan that will allow Batey Farms to remain a viable business.”
Bobby McKnight, Cattle Farmer (7th generation cattleman), Fort Davis, Texas, National Cattlemen’s Beef Association
- “At one time I had to cut my staff by sixty-five percent. In fact, the death tax is considered one of the leading causes of the breakup of multi-generation family farms and ranches.”
Karen Madonia, Chief Financial Officer and next generation of Illco, Inc., a Chicago-area distributor of heating, ventilation, air-conditioning and refrigeration equipment, parts and supplies, HARDI.
- “The estate tax serves as a tremendous entrepreneurial disincentive…It shouldn’t be the case that the thing that keeps you up at night is the worry that you may leave your kids with a huge tax burden when you die.”
Robert Johnson, Black Entertainment Television (BET)
- “This level of taxation continues to pose a serious threat to the likelihood that present-day African American owned businesses can be preserved as part of a family's long-term legacy.”
Senate Republican Conference Chairman John Thune (R-S.D.)
- “Currently, more than 70% of small businesses fail before they are passed on to the second generation and 90% family businesses don’t survive to the third generation.”
Representative Kevin Brady (R-Texas)
- “It is to me the most immoral and I think most direct attack on the American dream that exists.”
Representative Sanford Bishop (D-Ga.)
- “Let’s finally put an end to this unfair tax, let’s allow the death tax to peacefully die and stay there so the United States can join the rest of the industrialized world and no longer punish savings, investment and hard work.”
Todd Wilkinson, South Dakota Cattlemen’s Association
- “Put us back on equal parity, we paid the tax to buy it [the land], our employees live off of what we bring in to this economy, just give us a fair shake…don’t tax us out of business.”
Patricia Baldwin, Reliable Contracting
- “Unfortunately, when my Uncle Bill died, which is my father’s uncle, he did not do any estate planning, which is now what you have to do to survive, and it took our company 10 years, $1 million a year, to pay that tax off.”
Harry Alford, National Black Chamber of Commerce
- “Business ownership has arrived in the African American community and we are starting to get to the point that secession and transfer over of wealth is going to be a reality. The National Black Chamber of Commerce say on this [repealing the estate tax] will be steady and firm.”
DATE: April 9, 2015
SUBJECT: April Agenda
“Republicans believe every day is the Fourth of July, but the Democrats believe every day is April 15.” – Ronald Reagan
If your conversations with constituents are like mine, I bet you’ve heard at least one of the following refrains this year:
“Lead the way”
“Get things done”
Americans want results. That’s why we should all be encouraged by the way we finished March. We accomplished two major goals and in so doing, set the tone for the remainder of this Congress.
Number one, we passed a budget.
As I have said before, our budget represents our vision for the future. We envision a more efficient, more accountable government that lives within its means. We envision a stronger America that provides freedom and security, both at home and abroad. And we envision a nation that values hard work and gives everyone the opportunity to live out their American dream. This is the vision I believe we are all striving towards each day and I am more confident than ever in our ability to make it a reality.
We also repealed the flawed SGR physician payment system—once and for all—while ensuring much needed fiscal stability to the Medicare program. For too long, this problem had been kicked down the road with one “fix” after another. By addressing it head on, however, we have removed another burdensome legislative cliff from the docket and secured the most significant entitlement reforms in nearly two decades.
Looking ahead to April, we will build on this momentum and continue delivering results on behalf of the American people.
April 13th – 16th | Tax Freedom and Financial Independence
GROWING A HEALTHY ECONOMY WITH CONSUMER CHOICE AND A FAIR TAX CODE
With April 15th right around the corner, nobody needs to remind the American people that it’s tax season. Under our current tax system, nobody is getting a fair shake. Whether its families struggling with the hours required by compliance, the cost of hiring professional help, or a heavy tax burden, our tax system is costing hardworking taxpayers more and more every year. House Republicans remain committed to the ultimate goal of a simpler, fairer tax code. Meanwhile, the IRS has maliciously targeted individuals and groups simply because of their personal beliefs. The current system is unfair and America is fed up.
We must also remained focused on stemming the growing avalanche of Washington red tape and regulatory overreach that harms consumers and taxpayers, reduces their choices and makes it harder for them to achieve financial independence. Consumers and taxpayers now have fewer community financial institutions to help them achieve financial independence. Without these institutions, it is harder to buy a car so they can drive to work, send a child to college, or start a small business.
We will begin this month with a series of bills aimed at getting the government off the backs of taxpayers and reforming the institutions that serve them. First up will be a series of bills to promote a healthier economy, preserve consumer choice and help our fellow Americans achieve the dream of financial independence:
- H.R. 299, Capital Access for Small Community Financial Institutions Act of 2015 (Stivers)
- H.R. 601, Eliminate Privacy Notice Confusion Act (Luetkemeyer)
- H.R. 1195, Bureau of Consumer Financial Protection Advisory Boards Act (Pittenger)
- H.R. 1259, Helping Expand Lending Practices in Rural Communities Act (Barr)
- H.R. 1265, Bureau Advisory Commission Transparency Act (Duffy)
- H.R. 1367, Applying the Expedited Funds Availability Act to American Samoa and the Northern Mariana Islands (Radewagen)
- H.R. 1480, SAFE Act Confidentiality and Privilege Enhancement Act (Dold)
- H.R. 650, Preserving Access to Manufactured Housing Act of 2015 (Fincher)
- H.R. 685, Mortgage Choice Act of 2015 (Huizenga)
The House will also hold the IRS accountable and ensure fairness for all. Since the allegations of the IRS targeting conservatives for their political beliefs were confirmed, Americans have lost faith in the ability of the IRS to fairly administer our tax laws. The Department of Justice's recent decision to exonerate Lois Lerner and the Inspector General’s easy recovery of emails the IRS Commissioner testified under oath were irretrievably lost demonstrate that the Administration is unwilling to fix what's wrong at the IRS. The following bills will begin the process of restoring trust in the IRS, increasing transparency, fairness, and accountability:
- H.R. 1058, Taxpayer Bill of Rights Act of 2015 (Roskam)
- H.R. 1152, Prohibiting officers and employees of the Internal Revenue Service from using personal email accounts to conduct official business (Marchant)
- H.R. 1026, Taxpayer Knowledge of IRS Investigations Act (M. Kelly)
- H.R. 1314, Providing for a right to an administrative appeal relating to adverse determinations of tax-exempt status of certain organizations (Meehan)
- H.R. 1295, Improving the process for making determinations with respect to whether organizations are exempt from taxation under section 501(c)(4) of such Code (Holding)
- H.R. 709, Prevent Targeting at the IRS Act (Renacci)
- H.R. 1104, Fair Treatment for All Donations Act (Roskam)
- H.R. 1563, Federal Employee Tax Accountability Act of 2015 (Chaffetz)
- H.R. 1562, Contracting and Tax Accountability Act of 2015 (Chaffetz)
Our constituents make sacrifices every day to provide for themselves and their families. We owe it to them to create a simpler, fairer tax code that respects their hard work and doesn’t give the federal government one dollar more than it needs. That’s why we will finish the week with two bills that make sure Americans keep more of their hard earned money:
- H.R. 1105, Death Tax Repeal Act of 2015 (K. Brady)
- H.R. 622, Permanent State & Local Tax Deduction (K. Brady)
INNOCENT SELLERS FAIRNESS ACT REINTRODUCED IN CONGRESS
Legislation has been introduced in the House of Representatives to protect dealers from unfair product liability lawsuits. TIA applauds Rep. Blake Farenthold (R-TX) for his reintroduction of the TIA-promoted "Innocent Sellers Fairness Act" (H.R. 1199) that would provide product liability protection to those businesses that merely sell products, and did not manufacture or install them.
Unfounded and unfair lawsuits are increasingly having a negative effect on the ability of building material dealers and distributors to run their business and contribute to their communities. According to a 2010 study by the U.S. Chamber of Commerce Institute for Legal Reform, small businesses bear 81 percent of business tort liability costs.
"TIA thanks Representative Farenthold for his work to restore some sanity to our legal system by recognizing that business owners that merely sell products, and are not involved in the manufacturing process, should not be held liable for defects that they did not create," said TIA President, Freda Pratt-Boyer.
Current law imposes liability without wrongdoing on sellers, and exposes them to all of the damages allegedly suffered by a plaintiff, even though others may have played the critical role in causing the damages. The "mistake" may have been in the manufacture or design of the product, or in a customer's improper use of the product, yet the seller is often faced with some or all of the liability.
TIA has long supported efforts to reform product liability law.
Congressman Farenthold was joined by five representatives as original cosponsors to introduce the Innocent Sellers Fairness Act, H.R. 1199. The original cosponsors are Reps. Rick Crawford (R-AR), John "Jimmy" Duncan Jr. (R-TN), Trent Franks (R-AZ), Lynn Jenkins (R-KS) and Lamar Smith (R-TX). The bill has been referred to the House's Judiciary Committee, and the Energy and Commerce Committee.
Since January, TIA has poured huge efforts into persuading Ways and Means Chairman Paul Ryan to move a short-term extenders bill for 2015, based on the chairman’s agreement that WOTC and other expired tax extenders should continue in effect until tax reform passes.
At the same time TIA has built the case for making WOTC permanent, recognizing Chairman Ryan is driving hard for a corporate tax reform bill this year. Casting aside individual tax reform and, perhaps, taxation of pass-through entities, Ryan aims to strike a deal with Treasury Secretary Lew on reforming the corporate tax code—which of course includes WOTC and other tax extenders.
Ryan jump-started corporate tax reform in January and February by passing bills making key extenders permanent—e.g., increased small business expensing (H.R. 636), charitable deductions of food inventory (H.R. 644), and Hire More Heroes Act (H.R. 22) which Senators Portman and Cardin want to amend to extend WOTC for 2015 and cover workers who’ve exhausted their unemployment benefits.
Soon to come will be votes to make other extenders permanent, state and local tax deduction (H.R. 622), and research tax credit (H.R. 880). Our problem is the Chairman’s made no decision on permanent WOTC.
How can Chairman Ryan get a corporate tax reform bill to the President’s desk with Democrats having enough votes to block bills in the Senate? The answer is via a budget reconciliation bill that Republican leaders will begin laying the groundwork for when Congress returns on Monday.
The top order of business today for House and Senate budget committees will be to “reconcile” their different budget resolutions. If they can agree on a joint budget resolution and pass it in both houses—there’s no reason they cannot agree as Republicans control both bodies—the way will be open for writing a “budget reconciliation bill” not only repealing or making changes to Obamacare, but including anything dealing with the budget—expenditures, debt limit, defense, entitlements, highway funding, trade, corporate tax reform, etc.
The aim of Speaker Boehner and Majority Leader McConnell is a major confrontation with the President over the direction of government, and reconciliation gives Republicans a strategic advantage—Senate Democrats won’t be able to block a reconciliation bill which, under the Budget Act, requires only 51 votes for passage and cannot be filibustered.
The President can veto such a bill, the end-game being either Republican success in wringing a deal from the Administration, or a “calculated failure” that becomes a dress rehearsal for the 2016 election.
The timing of the struggle will likely be after Labor Day, when the budget reconciliation bill (which funds the government) must be passed by September 30th. Neither Speaker Boehner nor Majority Leader McConnell want another government shutdown, so the struggle could be prolonged till Christmas by a series of continuing resolutions to keep the government working.
The odds favor WOTC and other tax extenders being included in the Budget Reconciliation bill if a Tax Extenders Bill doesn’t pass beforehand.
To make reconciliation more acceptable to the President, Republicans may offer concessions. Tax extenders have long been viewed as “sweeteners” for any deal. The President supports renewal of the tax extenders, so allowing them would be a concession to the Administration—at the same time pleasing the extenders’ many Republican supporters.
But nobody can be sure this will happen, and even if WOTC and other extenders are reauthorized for 2015 in a reconciliation bill, any corporate tax reform package in the same bill could terminate WOTC and other extenders for 2016 and beyond.
The best course for our campaign is for us not to stand by and watch the budget committees conjure reconciliation, for this will surely be followed by Ways and Means and Finance writing a major corporate tax section of the reconciliation bill, and we must be part of that process from the beginning.
If it comes to reconciliation, our goals are clear—we want a WOTC extension for 2015 and permanent extension for 2016 and beyond. But it’s not going to be an easy journey, and we could go another year in expired status.
Our best course right now remains to continue pushing hard for a stand-alone extenders bill for 2015, while continuing to persuade Chairman Ryan to make WOTC permanent.
One vehicle for getting this done, if Senator Hatch and Senator McConnell would agree, is a bill that’s already passed the House and approved by the Senate Finance Committee, the Hire More Heroes Act (H.R. 22), which encourages hiring of veterans by having them not count toward the fifty employee limit at which employers must offer health insurance. This bill could be amended to add tax extensions for 2015, and Senators Portman, Cardin, Stabenow, and Brown have an amendment ready to go renewing WOTC for 2015.
However, any bill or stand-alone measure would suffice. We need pressure on Senator McConnell, coming from other senators, to choose a vehicle to extend WOTC.
Please talk to your senatorial contacts about the fact that, if we don’t get the extenders passed soon, we could likely be waiting for budget reconciliation—a donnybrook of a struggle that could last till Christmas. Senator Hatch said it’s a disgrace the way the extenders were handled last year, so please urge him to act now to talk to Senator McConnell about bringing an extenders bill to the floor for passage as soon as possible.
Use the same argument contacting House members—ask them to urge Speaker Boehner and Chairman Ryan to pass a tax extenders bill renewing WOTC and other extenders as soon as possible, otherwise we could be waiting till Christmas before the struggle over Budget Reconciliation is concluded, and that means another entire year in expired status—like taking a wrecking ball to valuable programs like hiring veterans and the disabled.