Death to the Death Tax!
Despite grumbling over what didn’t happen this past June, there is at least one major accomplishment that deserves more attention. In the tax code enacted with the General Fund budget, the General Assembly eliminated the inheritance tax -- more appropriately the “death tax” -- levied on a business when sons, daughters, or other family heirs take leadership of it upon the death of the owner.
Tom Danzi, owner of Suburban Collision in Delaware County, called the two legislative champions, Representative Stephen Bloom (R-Cumberland) and Senate Majority Leader Dominic Pileggi (R-Delaware), “heroes” for successfully landing the legislation on Governor Tom Corbett’s desk this past June.
“I have two sons that I want to leave the business to,” Danzi said. “All my life I paid real estate taxes, income taxes, workers compensation and unemployment taxes, and local taxes and they still wanted to tax my business if I died before transferring it.”
Bloom said that the stupidity of the tax compounds its unfairness. “Small businesses like these don’t have a lot of cash on hand,” he explained. “The money is invested in equipment and employees. So, you have to get rid of valuable assets just to pay the tax. Some businesses can’t survive selling off equipment or firing employees. Why not keep the business operating, keep people employed and both will then pay even more taxes in the future?”
Danzi attested. He said that if he suddenly passed away before transferring his business that his sons would have had to sell trucks, layoff loyal employees, or both. Before the new law, the Danzi scenario played out thousands of times across Pennsylvania for small, family-owned businesses. Often, the tax burden is so astronomical that the business is closed or sold; resulting in lost jobs and entire communities left with a substantial void. Bloom calls this exodus the “mentor drain”, likening it to the “brain drain”, where the young and well educated leave the commonwealth for better opportunities.
Under the old law, all assets were taxed even if the business operated at a loss. Additionally, the rates were 4.5 percent on direct descendants and lineal heirs, 12 percent on siblings, and 15 percent on all other types of heirs.
The Bloom bill was combined with Pileggi’s Senate bill and rolled into the omnibus tax code. Under the new law, a small business is defined as one with fewer than 50 employees and fewer than $5 million in assets.
“Ending the death tax on family-owned small businesses is the right thing to do, both to keep our economy strong and to respect the life’s work of these business leaders,” said David N. Taylor, Executive Director of the Pennsylvania Manufacturers’ Association. “Allowing their enterprises to survive to the next generation brings a much greater long-term benefit to the Commonwealth than collecting a comparatively small about of one-time tax revenue. Representative Bloom, Senator Pileggi, and Governor Corbett are to be commended, along with all of the advocates who endorsed it and legislators who supported it.”
Bloom said he was intent on fighting for the elimination of the tax when first elected in 2010 and became even more determined when he saw it was one of the recommendations of the Governor’s Manufacturing Advisory Council (GMAC) Report released last August. PMA’s Taylor serves on the GMAC.
Bloom also spearheaded the bill in the last legislative session that eliminated the same death tax on family farms.
The National Federal of Independent Business (NFIB) said that small business, including those that are family owned, create just over 60 percent of the new jobs in Pennsylvania. According to figures from the NFIB, 48 percent of family business owners would like to have a family member eventually take over operation of their venture. The number rises to five in eight among those whose firm employs 20 or more people.
About nine percent intend to transfer business ownership to one or more family members within the next five years. Those planning the transfer average a little less than 60 years of age. Thirty-nine percent say that they originally went into the business with one or more family members. Almost three-quarters of inherited businesses were transferred to more than a single-family member.
Cumberland County business owner owner Dale Kaplan calls it, “a very powerful and positive thing” the General Assembly and Governor accomplished in eliminating the tax. “I want to leave it (dry cleaning business) to my daughter. But, if I died, she would have to lay off some of the company’s 19 employees or sell assets to pay the tax,” Kaplan said. “It would have been almost impossible to come up with the money.”
As a tax attorney, Bloom said he saw his share of this worst case scenario. Luckily, this will not happen again in the Commonwealth of Pennsylvania.