Inheritance tax should go

Honolulu Advertiser Editorial
Thursday, July 27, 2000
By U.S. Rep. Neil Abercrombie

Not long ago, the owner of a Honolulu auto body repair shop told me of the long hours and years of hard work she and her family had devoted to building a successful business. Working nights and weekends was the rule, leisure time was the exception. Their commitment paid off, and even though the family is far from wealthy, they have achieved a level of modest prosperity.

The owner's worry now is that when she dies, her children may have to sell the shop to pay the inheritance tax on the estate, a tax that runs as high as a whopping 55 percent.

I hear similar stories from other small-business owners. Even people who won't be affected by the inheritance tax think it's unfair. Why should assets be taxed a second time when they've already been taxed as income during the owner's lifetime? And why should a family be hit with a tax bill when they're still in grief and shock from the loss of a loved one?

Defenders of the inheritance tax claim that it applies only to the rich. This is a fallacy. First, more than half of estates subject to the tax are valued at less than $5 million. That's not manini, but it's a long way from the Microsoft category. Inventory, equipment and real estate assets (especially here in Hawai'i) can easily boost the value of a small business well beyond the $5 million mark.

Second, the truly rich - the Rockefellers, Gateses, etc. - can hire legions of lawyers, accountants, and estate planners to avoid the inheritance tax. Small-business owners can rarely afford the luxury of advice from these high-priced experts.

Too often the result is that when the owner of a family business dies, the heirs have to sell the firm or liquidate the assets to pay the inheritance tax.

Usually it's not just the family who suffers: employees face pay cuts, shorter hours or even the unemployment line. No wonder 70 percent of family business don't survive into the second generation, and nearly 90 percent don't make it to the third.

When I hosted a June 20 video teleconference with leaders of Hawai'i's small-business community, they made these points emphatically:

• Small businesses are often forced to divert resources from business operations in order to pay premiums for life insurance to pay anticipated taxes.
• Hawai'i's high real estate values often escalate estate valuations to the point where they are subject to disproportionately high inheritance taxes.
• Small-business valuations frequently reflect high concentrations of noncash assets (such as equipment), leaving heirs short of cash to meet inheritance tax obligations.
• The death of an owner often throws a small business into turmoil, compounding the difficulties of heirs trying to deal with inheritance tax obligations.
• Inheritance tax planning frequently compels small-business owners to structure their firms in ways that reduce tax liability but also reduce profits.

That's why I became a sponsor of H.R. 8, a bill to eliminate this unfair and counterproductive levy. My colleagues in the House of Representatives, including a large number of Democrats, agreed with me. The measure passed the House June 9 on an overwhelming bipartisan vote.

Some have asked why a Democrat would vote for, let alone sponsor, a bill like this one. My answer is fairness, small-business survival and job preservation.

Eliminating the inheritance tax is not only the right thing to do, it's something we can afford to do. With the projected federal budget surplus now in the $2 trillion range, the great debates in Congress resolve around the question of how to utilize that surplus. From my perspective, the most important priorities are saving Social Security, strengthening Medicare with a prescription drug benefit and paying down the national debt.

Still, the surplus is large enough to address these most pressing issues and, at the same time, provide targeted tax cuts that meet the standards of fairness, economic stimulus or social utility.

Congressman Neil Abercrombie, a Democrat, and a self-described liberal, represents Hawaii's First District.

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