Death Shouldn’t Kill Family Business
Family-owned and operated small businesses, our "mom-and-pop shops," create 65 percent of Pennsylvania’s jobs. Often, mom and pop and their children work long and hard with the sincere hope that these job-growing enterprises will be carried on from one generation to the next. Yet, instead of doing all we can to encourage the continuity of our family businesses, Pennsylvania remains one of the few states to penalize them by imposing a job-killing inheritance tax upon the death of an owner, even when the business will be kept in the family.
The so-called "death tax" inflicts a disruptive burden on family-owned businesses, especially in these challenging economic times when money and credit are tight. Taxing the inflated paper value of productive capital assets at death often results in the forced liquidation of essential business resources (or sometimes the entire business) just to raise the cash necessary to pay the tax bill — all at a time when the business and its employees are most vulnerable. This is an unnecessary loss to our economy and our next generation of job creators.
Last year, Gov. Tom Corbett commissioned a Manufacturing Advisory Council to identify and prioritize top issues that can help influence, sustain and advance statewide growth in the manufacturing sector. The council published its formal conclusions in a report entitled "Recommendations to Encourage Growth in Pennsylvania’s Manufacturing Sector." One of the key recommendations, item No. 10.1.3, states: "To aid in retention of family-owned manufacturing firms across times of succession, the commonwealth should reform the Inheritance Tax to allow for family-owned manufacturing firms to transfer business assets to other family members."
Pennsylvania’s unusually harsh law imposes the death tax on the first and every subsequent dollar of value of a business asset passing from a deceased family member to a surviving family member. The tax rates range from 4.5 percent to 15 percent, depending upon the degree of the relationship (lineal descendants pay the base rate; non-lineal family members pay higher rates). The tax bill is due, in full, within nine months of the date of death. Thus, the death of a principal owner triggers a frantic scramble for liquidity amongst remaining family members. These family members must now grieve their loss while struggling to keep the enterprise viable amidst the already intense challenges of small business succession. Some family businesses are weakened by this process, others don’t survive, causing unnecessary loss to our economy, and costing jobs.
When it comes to taxation, the Pennsylvania courts have established that our General Assembly possesses wide discretion in establishing reasonable classifications related to legitimate state purposes. Ending the death tax on transfers of family business assets from a deceased owner to surviving family members to facilitate the continued productive deployment of assets in that business, and enhance economic activity and the employment of our citizens, would certainly be such a legitimate state purpose.
Replacing the one-time-only tax revenue generated by the death tax (revenue collected only at the short-sighted and sacrificial cost of forcing the permanent removal of productive business assets) with a steady stream of tax revenue paid by a viable ongoing enterprise and its employees will ultimately result in the receipt of greater and more sustainable tax revenue. The situation is reminiscent of the classic parable of the goose that laid the golden eggs. Imposing the death tax on mom-and-pop shops is akin to cooking the goose for tonight’s supper. Ending the death tax on mom-and-pop shops is an investment in the goose, assuring a steady supply of golden eggs (jobs) well into the future.
In terms of economics, ending the death tax on mom-and-pop shops will establish lasting incentives for our homegrown entrepreneurs to build the capital infrastructure that creates jobs here in Pennsylvania. And no longer would these same entrepreneurs be economically motivated to move their growing enterprises, and the jobs associated with them, to other states which have the foresight not to impose counterproductive death taxes.
Of course, eliminating our outmoded death taxes entirely would be an even more optimal measure to enhance Pennsylvania’s overall economic competitiveness. However, given the current fiscal constraints gripping state government, ending the detrimental impacts of death taxes on our job-producing mom-and-pop shops is an urgent and realistic reform we can accomplish now. It’s time to stop punishing our most productive employers, the hardworking family business people who form the backbone of our state’s economy. Let’s kill the destructive death tax on mom-and-pop shops, so family businesses can keep growing the jobs our citizens need.
Nothing should be considered as an attempt to aid or hinder the passage of any legislation before the General Assembly.
The opinions expressed here are those of the author and not necessarily those of The Susquehanna Valley Center.