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Family Owned Businesses Could See ‘Death Tax’ Exemption

ALL IN THE FAMILY: Pennsylvania lawmakers will soon consider a proposal to eliminate inheritance taxes on family business assets.

By Melissa Daniels | PA Independent

HARRISBURG — Some Pennsylvania lawmakers say the state’s inheritance tax is inherently unfair.

While those lawmakers succeeded in eliminating the tax for family owned farms last year, this session marks round two, with family owned businesses possibly getting a break.

State Rep. Steve Bloom, R-Cumberland, will soon introduce legislation to eliminate the inheritance tax on business assets, including real estate, for children, siblings or other relatives of a decedent.

He led similar legislation last year that exempts family owned farms from paying the tax.

Bloom’s proposal chips away at the tax, rather than eliminating it altogether. But whether another exemption happens will depend on whether lawmakers can stand losing state revenue.

All too often, Bloom said, family owned businesses may not have the cash to pay the inheritance tax bill. This means family members inheriting a business are faced with selling off assets or taking out a loan to cover the tax while keeping the business in the family.

These factors, Bloom said, inhibit Pennsylvania’s business economy, which relies on family businesses. Nationwide, family owned businesses provide about 65 percent of all wages, according to the Center for Family Business at Elizabethtown College.

But introducing another exemption to the inheritance tax could mean the state must cut spending elsewhere.

Bloom said the big-picture effect on Pennsylvania’s budget is minimal, given the revenue — such as income and sales taxes — businesses turn over to the state.

“The impact on preserving Pennsylvania jobs and allowing entrepreneurs to continue to be successful here in Pennsylvania is going to generate much more than would be lost,” Bloom said.

A Department of Revenue analysis of Bloom’s proposal shows that exempting family businesses would create a loss of $9.9 million in taxes in 2013-14, and $11.3 million the next year. By 2017-18, that figure would be around $13.4 million, as over time  inflation would increase asset values.

Year-to-date figures for inheritance tax collections on all types of assets totaled $390.5 million as of December, according to the Department of Revenue.

Those who pay the tax have nine months after an individual’s death to pay up.

Bloom, who introduced the proposal late last session in the form of House Bill 2639, has already gained support among fellow House members. So far, he’s up to 47 co-sponsors, including 10 Democrats.

Bloom said he supports other efforts to eliminate the tax, but he hopes to chip away at it over time.

“If we can’t eliminate it, at least we can make progress towards lessening its impact,” he said.

Gov. Tom Corbett, who heralded the family farm exemption, has previously expressed support for eliminating the tax. Exempting the manufacturing industry from the tax was a recommendation of the Governor’s Manufacturing Advisory Council in late 2012.

Senate Majority Leader Dominic Pileggi, R-Delaware, also supports the measure, outlining a family business exemption as a goal for this session. He’ll introduce a co-sponsorship memo regarding the legislation in the coming weeks, according to a spokesman.

But creating parsed-out exemptions in tax codes can create an extra layer of confusion, despite the intent, said Neil Hendershot, a Harrisburg-area attorney who specializes in estate planning.

The inheritance tax is convoluted on its face, he said, with different rates for different situations, and various reporting requirements that may or may not apply to all situations.

“It bears a review but doing it on an ad hoc basis is going to make it more and more complicated,” Hendershot said.

Hendershot said he would prefer to see the law streamlined for all asset classes, or perhaps revamped with advice from a panel of experts. Issues surround the tax, such as privacy concerns on making asset values public information, that could be part of the discussion, he said.

Some Pennsylvania lawmakers have introduced proposals to eliminate the tax. State Sen. Richard Alloway, R-Franklin, for example, has introduced legislation to phase out the tax, which is similar to proposals he introduced previously.

Alloway said the tax is a disincentive to save money, causing people to spend or give gifts before they die rather than burden someone with a tax.

Acknowledging the revenue crunch the state would face by eliminating the tax altogether, Alloway said he also supports proposals that “take a couple bites out of the apple” instead.

After all, change takes time when working with a government calendar.

“Sometimes it take five, six, 10 years before you end up getting a bill through,” he said. “We’re having the dialogue right now and talking about what we can do and can’t do and seeing if we can pull consensus together.”

Contact Melissa Daniels at melissa@paindependent.com

— Edited by John Trump at jtrump@watchdog.org

Proud to be an American January 05, 2013 at 01:53 PM
This isa good proposal, but how do they know how much they stand to lose on the next 3 years, when its based on the death of someone? Glad they know how many people will die who own family businesses.
Marc LeVine January 07, 2013 at 06:58 PM
Good to look at the entire picture to protect the family. Here is an article many may be interested in reading on the topic. "Proactively Plan For Your Estate While Tax Laws Still Benefit Donors And Heirs." Retirement and estate planning is necessary within small and midsize family businesses. This article provides a proactive plan. http://www.midmarket.org/knowledge/articles/proactively-plan-your-estate-while-tax-laws-still-benefit-donors-and-heirs

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