STATEMENT
of the
Honorable Nydia M. Velázquez, Chair
House Committee on Small Business
Full Committee Hearing: “Small Businesses and the Estate Tax:  Identifying Reforms to Meet the Needs of Small Firms and Family Farmers”
Wednesday, November 4, 2009

 

For many, starting a successful business and seeing it grow is the cornerstone of the American Dream.  As the daughter of an entrepreneur, I saw firsthand what my family had to do to keep a small business afloat.  With big ideas for the future and limited resources to call upon, I know that starting and running your own venture for many entrepreneurs is a family affair.  It is not surprising, then, that many small business owners imagine passing along the farm or business they have built to a child or grandchild to carry on the family trade.  But for many parents who have spent their whole lives working to leave their business to their children, the estate tax can threaten the dream of having a son or daughter follow in their footsteps.

For many family businesses, the estate tax was a hurdle too great to overcome as the heirs of a family farm or business suddenly found themselves in the middle of a complex web of archaic laws.  It closed the doors on countless viable family businesses because they did not have the cash on hand when the tax came due.  This was especially true for our family farmers, who were forced to liquidate because their greatest wealth is the land they till, not the cash in their bank accounts.

For small business owners that sought to overcome these hurdles, the anxiety and costs were tremendous.  After all, estate planning for small businesses is complex and costly.  Entrepreneurs attempting to plan for the future had to hire costly lawyers and accountants to navigate laws, calculate their estate tax, and set aside funds so they could pass along the family trade.

Even then entrepreneurs were not guaranteed their family business or farm would survive to pass on to the next generation.  One entrepreneur told me he spent five years, hundreds of thousands of dollars for consultants, and carried a life insurance policy to protect his children from having to sell the family business.  Despite his careful planning, he was still worried he may have overlooked something which would cost his employees their jobs if his children were not able to pay the estate taxes to keep their doors open. 

It’s not surprising then that before estate tax reform was enacted in 2001, some seventy percent of family businesses didn’t survive into the second generation.  Almost ninety percent didn’t make it to the third generation.  

While the estate tax reforms enacted in 2001 allowed entrepreneurs to focus on growing their ventures, the reforms were enacted on a temporary basis and will soon end. Starting in 2011, the estate tax exemptions for small businesses will expire.  When they disappear, millions of family enterprises will again find their chances for survival beyond the first generation in jeopardy. 

In today’s hearing, we will examine what the future of the estate tax holds for small businesses.  Some are calling for complete repeal of the tax.  Others have suggested that Congress freeze estate tax provisions in their 2010 form. 

One thing is clear—we will need to find a solution.  Small businesses face enough hurdles to succeed even without the estate tax as an insurmountable obstacle in their way.  Children who inherit the family farm or firm and wish to carry on their trade shouldn’t be forced to sell or liquidate the business. 

Protecting the family business and farm so it can flourish into the next generation will also help the communities who depend on these enterprises for jobs and services.  By crafting an estate tax policy that works for small businesses and family farms, entrepreneurs can focus on growing their ventures—creating the jobs and growth needed for long-term prosperity.