Estate Tax Repeal

OVERVIEW

Construction companies are overwhelmingly small, family-owned and closely-held businesses, and thus are particularly susceptible to the estate tax burden given the capital-intensive, illiquid nature of the industry. Due in large part to the estate tax, more than 70 percent of family businesses do not survive to the second generation, and 90 percent fail to see the third generation. According to the Small Business Administration, 77 percent of failed family businesses enter into bankruptcy following the death of the founder. The estate tax not only jeopardizes the survival of family-owned construction companies, but it also siphons critical funds that could be invested back into the business. ABC applauds the inclusion of full repeal in both the Trump administration tax plan and the House tax reform “Blueprint.”

ABC SUPPORTS
• Full repeal of the estate tax ("death tax")
• Withdrawal of proposed Section 2704 Regulations by the Treasury Department.

ABC OPPOSES
• Any attempt to raise the current rate of 40 percent or lower the exemption from $5 million.
• Regulatory imposition of “family attribution” which would raise estate taxes on family businesses while harming economic growth and job creation. 

BACKGROUND

When the owner of a construction company dies, the value of the company is added to the owner’s estate and taxed after exemptions. The estate tax, also known as the “death tax,” places a significant burden on future generations of family business owners, as well as their employees, customers and suppliers. Small, family-owned construction companies are particularly hard hit by the death tax because the value of these businesses is not in liquid assets.

The estate tax yielded $21.3 billion to the federal treasury in 2016, but is most likely revenue-neutral when the full impact of closing a business is considered. Multiple studies project that repeal of the estate tax would create more than 100,000 jobs, and would eventually result in a net increase to federal coffers. At less than 1 percent of annual federal revenue, ABC believes the death tax is hardly worth the devastation it causes to family-owned construction businesses.

With the return of the estate tax after its one-year repeal in 2010, the immediate concern was the looming threat of a punitive 55 percent rate paired with a diminished $1 million exemption, and the sustainability of temporary deals to keep this underlying policy at bay. Congress ultimately compromised with a permanent 40 percent rate paired with a portable $5 million exemption, leaving a relatively high levy on a comparatively narrow base of inheritors. While this deal lent business owners the statutory certainty required to make appropriate plans for family succession, no sooner had this legislation been passed than the Obama administration began looking to squeeze more money out of the deal. In the waning days of the Obama Administration, the Treasury Department released proposed regulations on Section 2704 that could have a profound impact on the valuation and therefore taxation of family businesses. The regulations as written would institute back-door “family attribution,” a standard that has been rejected by the courts for decades, and that would jeopardize traditional discounts for minority ownership stakes, inflating tax bases by as much as 40 percent.  As the regulations were not finalized by the time President Obama left office, we urge the Trump administration to formally withdraw them as soon as possible. A recent ABC-sponsored study concluded that these regulations would raise estate taxes on large family businesses by billions of dollars, create a multi-billion dollar drag on long term economic growth, and cost more than 100,000 jobs in the next decade.

Family-owned businesses are the backbone of the U.S. economy and give Americans a sense of pride and accomplishment. In the construction industry, they provide valuable jobs and play an integral role in building communities. ABC believes these businesses are worth preserving for the next generation.