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Opinion: Don’t Tax America’s Family Businesses to Death

Increased income taxes and estate taxes are the key danger points.

It’s unlikely you’ll see the worry on their faces. Yet, they know something is coming for them.

It came for people like Casey Roscoe, a former marketing executive for family-owned Seneca, a lumber company in Oregon, and Mark Peters, son of the founder of Butterball Farms in Grand Rapids, Mich. It specializes in products made from butter.  

You would never know they faced the fear of existential threat, but it’s inside them, and yet they’re the lucky ones. Hard work, a lifetime of risking their savings and some smart decisions allowed them to make it in America. So, why worry?

You could ask George Bartell the same question, the former chairman of Seattle’s own Bartell Drugs, the iconic 67-store chain founded in the Central District in 1890 by George’s grandfather.

The common thread between these three people is they own, or owned, a family business. Bartell’s was sold to Rite Aid two years ago.

It could be a drugstore company, a coffee shop chain, a machine parts firm or even a newspaper. And, equally, they all know one day this family livelihood, often multigenerational, will likely have to be sold off and vanish forever. Why? It’s a complicated and old story, but it often comes down to death and taxes. And, selling is often the only logical answer.

Research shows that family enterprises make up $7.7 trillion of our annual GDP and represent 59% of the country’s private workforce. Family businesses in America consist of 23.7% in manufacturing, 10.4% in construction/facilities and 9.75% in real estate.

In short, family businesses are America.

But unlike corporations, a family business, big or small, must plan carefully for death. For Casey’s and George’s family the decision was tough but straightforward: sell. Mark of Butterball Farms was luckier. He weathered his father’s passing, but he worries for his children.

Unlike corporations, family businesses are treated differently by the Tax Code. When the CEO of a corporation dies, there’s no tax bill. The business carries on as if nothing happened. However, if you’re a family-owned business, and the family owner dies, the Grim Reaper has a big surprise. It wants a big chunk of what your family business is worth. And it wants it now.

If you’re lucky enough to survive this passing, it’s not like the worry ever goes away. It’s a battle between keeping a business running against competition and hoping Congress doesn’t raise taxes or make regulations more difficult.

Sometimes, damaging actions are stopped cold, like the proposed new increases in the estate tax and income tax in last year’s defeated Build Back Better bill.

Congress never stops trying to find new ways to tax. It’s understandable. The government wants to do things, and it (we) needs to find a way to pay for those things. Family businesses are a soft target because many owners are too busy running their business to pay attention to what Congress is doing to them. Few notice the new regulations, or taxes, which seem innocuous at first. But they add up to the point of being death by a thousand cuts.

Key Danger Points

Today, research shows increased income taxes and estate taxes are the key danger points most family-business owners fear.

One of the most worrisome of these taxes is increases in the individual income tax rates. Since 79% of family businesses operate as “pass through” organizations, they pay ordinary income tax rates, currently at 30% to 35%. A corporation, however, gets off with paying only 21%.

There are other tax fears, like proposals to increase capital gains taxes from 20% to 39.6%, as well as proposals to cut the estate tax lifetime exemption in half and to increase the estate tax rate upon death of the family business owner.

As you can see, even those short sentences can cause one’s eyes to glaze over. Taxes are dull as dirt to write about, but they’re as sharp as razors when the bill comes due.

Sometimes the results of advocacy are invisible. But make no mistake. Advocacy works.

In the recently passed Inflation Reduction Act, taxes were raised, but thankfully not on family businesses. This time it was a 15% minimum income tax on corporations with profits over $1 billion, affecting about 150 to 200 corporations.

The key is to be vigilant in knocking down hidden taxes, unnecessary regulation and deadly tax increases.

Tax changes that affect family businesses don’t have to be enacted by Congress, either. They can quietly be levied by the Department of Treasury, like the elimination of valuation discounts.

Election season talk will shift to reducing the deficit, the largest in history. And once again family businesses will be the tax target. The sad truth is 70% of voters believe a wealth tax on successful family businesses is OK, and there are proposed bills waiting in the wings.

Family businesses, like Casey’s and Mark’s and George’s, and maybe yours, need to tell their stories about how they built their business, how they kept their employees funded during the pandemic and how local communities depend on their support.

A version of this article originally appeared as an Op-Ed in The Seattle Times.

Pat Soldano is president of Family Enterprise USA and the Policy and Taxation Group, Washington, D.C. Both are advocacy organizations fighting for family businesses and the reduction of taxes and regulations that hurt them.

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