Don’t Tax Family Businesses Out of California

tax signFamily businesses are the bedrock of our communities and the economy. A recent study showed that the state’s 1.4 million family businesses employ 7 million people. Family businesses tend to pay their employees better, train them better, and provide more generous benefits than nonfamily companies. We’re also less likely to significantly downsize during tough economic times.

I know because I’m the president of Holt of California, which was established in 1931 and is now owned by three families.

For years, like all businesses, we have had to adapt to ever-higher taxes and ever-more stringent regulations. To no one’s surprise, our state has ranked dead last the past two years in the annual survey of business executives nationwide conducted by CEO Magazine. But we have survived and now provide a wide range of equipment and servicing for construction and agriculture and employ more than 700 people in Northern and Central California.

But just when you think things can’t get any worse, along comes legislation by state Sen. Scott Wiener, D-San Francisco. Senate Bill 726 would place a measure on next year’s ballot to overturn two 1982 initiatives that abolished California’ inheritance tax and impose a 40 percent death tax on California’s family businesses. That would generate an estimated $4.5 billion a year for Sacramento politicians to spend, and would put California family businesses at a huge disadvantage compared to the rest of the nation.

The bill had been scheduled to face its first hearing on April 26 before the Senate Governance and Finance Committee, but after Family Business Association lobbyists organized a coalition of nearly 50 business and farming groups to oppose it, Sen. Wiener made it a two-year bill, meaning it won’t be heard during the remainder of 2017. FBA will do everything in our power to persuade Sen. Wiener to drop the measure altogether and if he declines to do so, to stop this poorly considered measure once and for all.

Why is it important to encourage, not destroy, family businesses?

Because families are in it for the long term, we focus not just on the next fiscal quarter but the next quarter-century. And because we’re based in our communities, we care about them, donating our time and financial support for community-based organizations and projects.

But keeping businesses family-owned is a struggle. Only about 30 percent survive into the second generation, about 12 percent make it into the third generation and just 3 percent operate in the fourth generation and beyond. And one reason for that distressingly low long-term success rate is high inheritance taxes.

While proponents of the current 40 percent federal death tax argue that only “the rich” pay because the first $5.5 million in assets are excluded, many family businesses and farms are land-rich and cash-poor. With the high value of land in California, the total value of assets can easily exceed that seemingly high threshold.

Furthermore, the need for the tax to be paid in cash is particularly troubling as many survivors are left with no other option but to sell homes, family farms and businesses and lay off employees just to pay those taxes. This is money that could have otherwise been used as working capital to create jobs and allow business expansion.

Sen. Wiener says he will only pursue the measure if the federal government abolishes its death tax, as has been proposed, but the bill does not contain such a clause. The bill also refuses to address the very real issue of what would occur if the federal estate tax is reimposed by a future Congress. If reinstated at the same rate, it could result in California estates being taxed at a staggering 80 percent rate.

While family businesses in the other 49 states could be significantly strengthened if the federal government abolishes its death tax, California would punish them and undoubtedly many would leave the state, taking jobs and tax revenue with them. Currently just 18 states impose such a tax – none with rates higher than 18 percent – while four states have repealed their death taxes since 2010.

Family businesses are the foundation of our economy and our communities. Isn’t it time our politicians take steps to keep family businesses operating profitably for the next generation instead of doing everything they can to drive us out of business, or at least out of California?

Ken Monroe is President and CEO of Holt of California and serves as Vice Chair of the Family Business Association of California.

This piece was originally published by Fox and Hounds Daily