For the good of Hawaii, reduce the estate tax
AFTER eight attempts in the past two years, it is time Congress finally did something about the estate tax. Not only is it fundamentally unfair, it is bad for business and bad for Hawaii. That is why, if it cannot repeal the tax, Congress must at least pass a compromise bill that would reduce its burden on our businesses and our economy.
Proponents of the tax have some valid concerns about reform, but they are exaggerated. The estate tax will not stop the rich from getting richer, it does not and will not solve our budget woes and only the most cynical among us would believe that an end to the tax would mean an end to charitable giving.
The truth about the estate tax is that it is fundamentally unfair and damaging to Hawaii's businesses and its economy. It is a blatant case of double taxation, in which people are first taxed when they earn income, and then taxed again on that same money when they die.
THE ESTATE tax falls hardest not on the "rich," but on family businesses -- especially in Hawaii, where real estate values already are high and have been increasing rapidly. If commercial real estate values continue to rise at the rate they did in 2005 (13.8 percent, according to the Star-Bulletin), a family business on a $500,000 property today would be worth almost $3.5 million in 15 years. If you owned that business and were to die, your heirs would owe $690,000 based on the value of the real estate alone. Since the money usually is tied up in the business, it is unlikely they would have the cash to pay Uncle Sam. Your heirs would be forced either to sell the business or take on substantial debt to pay it.
THIS IS the sort of dilemma that faces the local surf shop, the family grocery store, the mom-and-pop plate lunch place down the street and many other family-owned businesses that have become a cherished part of our lives. If the proprietor dies, the business will either die with him or be sold off -- probably to a larger, publicly owned company. This is bad for Hawaii, because family-owned businesses are the engines of job growth and innovation in our economy, and big public companies often lay off employees of their new acquisitions.
Right now we have an opportunity to fix this situation. Congress is working on a compromise bill that would raise the amount of exemptions and lower the rate of taxation. This bill enjoys broad bipartisan support (Hawaii Reps. Ed Case and Neil Abercrombie voted for it), and it would reduce the number of family businesses destroyed by the tax. Hopefully, the final bill will exempt the first $5 million of individual estates, $10 million for couples, and then charge 25 percent tax on all assets above that.
THE HOUSE has passed multiple bills to reform the estate tax in the past, only to see them flounder in the Senate. We need to make it clear to Senators Akaka and Inouye that this issue is vitally important to the people of Hawaii and that their votes should reflect this fact. If Congress does not act now, it would be a death sentence for many of our small businesses and the jobs they create.
James K. Mee is an attorney in Honolulu.