President Biden and Congressional Democrats want trillions of dollars in new taxes and spending. Included in this plan is a proposal to slug small businesses with higher taxes by eliminating step-up in basis and creating a second death tax.
Repealing step-up in basis will impose capital gains taxes on the unrealized gains of every asset owned by a taxpayer once they die. This tax would be separate from, and in addition to, the 40 percent Death tax. This tax increase will eliminate 80,000 to 100,000 jobs each year for the first ten years and reduce the GDP by one hundred billion dollars over the next ten years.
At a recent Republican Ways and Means Committee hearing, several American business owners explained that this second death tax would threaten their family-owned businesses and their ability to pass their businesses down to future generations.
One witness, Patrick McDowell, who owns a family farm with his two brothers in Texas, explained that how this tax would harm asset rich, cash poor businesses like his. He stated: “The plan punishes our family just because we want the next generation to make a living in agriculture…. we will be frantically selling tractors and cattle to pay the tax because we don’t have that kind of cash.”
Another witness, Michael Gilmartin, who is President of Commercial Creamery Co, noted that it is hard enough keeping a family business going: “we’ve had fires and we’ve had fights…I think by going forward with this, eliminating the stepped-up basis, we are saying we don’t value family businesses and we are going to make them go away and I think it’s ironic that that’s part of the American Family’s Plan.”
Finally, Don Biates, owner of a family-run farm corporation in Alaska, noted that this second death tax would devastate local communities across America: “Small family-owned businesses are the bedrock of our communities. They support the youth teams, local fundraisers, local celebrations. Capital gains, estate taxes, and stepped-up basis are related. All deter family businesses from continuing for another generation.”
This tax increase would create significant new complexity for family owned businesses. This proposal would force taxpayers to determine the cost basis of all assets owned, many of which may have been owned for decades. As noted by an Ernst and Young study, if the taxpayer is unable to provide sufficient evidence to prove the cost basis, then it may set to $0. In other words, the tax would be applied to the entire value of taxpayer assets:
“Family-owned businesses may also find it difficult to comply because of problems in determining the decedent’s basis and in valuing the bequeathed assets. It seems likely that these administrative problems could lead to costly disputes between taxpayers and the IRS. Additionally, if sufficient evidence is not available to prove basis, then $0 may be used for tax purposes. This may result in an inappropriately large tax at death.”
Repealing step-up in basis has already been tried and failed. In 1976 congress eliminated stepped-up basis but it was so complicated and unworkable it was repealed in 1980 before it took effect.
As noted in a July 3, 1979, New York Times article, it was “impossibly unworkable”:
“Almost immediately, however, the new law touched off a flood of complaints as unfair and impossibly unworkable. So many, in fact, that last year Congress retroactively delayed the law’s effective date until 1980 while it struggled again with the issue.”
As noted by the NYT, intense voter blowback ensued:
“Not only were there protests from people who expected the tax to fall on them — family businesses and farms, in particular — bankers and estate lawyers also complained that the rule was a nightmare of paperwork.”
The testimony of all the witnesses came to the same conclusion: Biden’s proposal would ruin their family-owned businesses that have been their families’ livelihoods for decades. This proposal to increase capital gains tax will not only threaten the economy and cost jobs but endanger businesses across the country.