While Congress weighs the potential of enacting yet another multibillion-dollar stimulus proposal in the name of creating jobs, it is overlooking a legislative time bomb. Unless tax law is modified, mom-and-pop stores could close and family farms disappear, taking with them jobs far more real than those found in stimulus package make-work programs. Sen. Charles E. Grassley, Iowa Republican, has sounded the alarm over tax-relief provisions that will expire at year's end. It is perhaps most important to the health of our economy to prevent the estate tax, more popularly known as the "death tax," from coming back to life.
A few years back, a series of strange legislative compromises resulted in the elimination of the death tax during this calendar year. Unless the law is changed, it will return with a vengeance in 2011 at a 55 percent rate for inheritances above $1 million. While that might sound like a problem limited to the wealthy, it is not. Working family farms are often land-rich but cash poor. Farms spreading across hundreds of acres may be worth a great deal, but the families that own them may have very little cash on hand to pay the government 55 percent of the property's value on nine month's notice from the death of a family owner.
In many cases, these farmers would have no option but to sell the land to raise the cash. The family would thus lose the vast bulk of its business - taking with it all the farm workers' jobs and benefits and perhaps their very way of life.
Mr. Grassley last week described what would happen to a pair of local family operations. "The state of Iowa will lose tens of millions of dollars of hard capital invested for almost 90 years between the two companies," he explained. "The multinational or foreign companies will come calling. They will be circling these home-grown businesses. ... [The death tax] will have killed the local roots of these successful small-town businesses."
Mr. Grassley's push to keep the death tax plowed under may prove to be a tough sell with an administration and congressional leadership sympathetic to tax hikes. To address this, Sen. Jon Kyl, Arizona Republican, and Sen. Blanche Lincoln, Arkansas Democrat, have offered a useful compromise. Their proposal would set the tax at a 35 percent rate, payable only after the first $5 million of estate value. The Joint Committee on Taxation estimates this would rescue 562,000 family estates from the death tax over the next 10 years. Failure to act would subject an estimated 616,000 to the 55 percent tax.
With small businesses already hammered by the effects of an ongoing recession, revival of the death tax would impose a job-killing burden when it is least needed. The House and Senate should ditch ineffective stimulus plans and repeal the death tax for good - or at least modify it significantly - to stop these family businesses from closing.
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