Murray Gerber, former owner of Prototype & Plastic Mold Co. Inc., says estate taxes played a big part in his decision to sell his injection molding company two years ago.
It wasn't the only factor, he said. Cash flow was getting tight, in an industry with already tight profit margins of 3-5 percent. Gerber, whose Middleton, Conn., business had about $8 million in sales, also said the Clinton administration's 1993 tax increases had hurt profitability.
But Gerber said he was spending $30,000 a year on insurance and legal fees to pay estate taxes for when he died. That expense, combined with all of the other factors, made it difficult for him to pass the business to his son James, who wanted to take over the company.
"I was tremendously concerned about estate taxes," he said. "In truth, it was one of the reasons I decided to sell my business."
Stories like Gerber's figure prominently in a debate in Washington about eliminating the estate tax, which has become one of the chief legislative priorities of small business lobbyists.
Business groups paint the tax as an onerous levy that makes it tough to pass on family-owned businesses and farms to the next generation. They say small businesses spend significant amounts of money planning for the tax that otherwise would go into the business.
But others say the tax's effect is minor.
Only 2 percent of estates get taxed, and about half of the $28 billion the tax raises each year come from just 5 percent of those who pay the tax.
In effect, opponents argue a repeal would shower a huge tax break on a very small number of people.
Whatever the truth, the debate is kicking up again on Capitol Hill. Repeal advocates introduced legislation Jan. 31, and political analysts say the measure in some form looks very likely to pass this year simply because President Bush favors it.
"It passed [Congress] with strong bipartisan majorities last time, and the only thing that kept it from becoming law was [President Clinton's] veto pen," said Ed Frank, spokesman for the National Federation of Independent Business in Washington.
The bill — which was introduced Jan. 31 by Reps. Jennifer Dunn, R-Wash., and John Tanner, D-Tenn. — would phase out the tax over 10 years and would give all estate tax filers a $1.3 million tax credit.
Sen. Jon Kyl, R-Ariz., also is drafting legislation. Dunn said her approach generally mirrors that of President Bush, but she said it is too soon to know if the bill will move on its own or as part of a larger tax bill.
The repeal campaign has attracted the support of the National Tooling and Machining Association, a Fort Washington, Md.-based trade group whose membership includes mold makers and tool and die companies.
John Cox, NTMA's manager of government affairs, said he could not identify a member who was forced to sell his business because of the tax. But he said planning for the tax eats up a lot of money that could otherwise be invested in the business.
David Hidding, vice president of family-owned Dana Molded Products Inc. in Arlington Heights, Ill., said he and his father, Daniel, the president, found the estate tax process complicated.
"It's a big problem," he said. "When my father and I looked at it, he flat out asked, `David, do you want the business, or should we sell it and do you want cash?' It would have been a hell of a lot easier to say I'll take the cash."
The average family-owned small and medium-sized manufacturer spends $52,000 a year planning for the estate tax bill, according to the National Association of Manufacturers in Washington.
"We know those dollars can be better used for productivity increases, employee compensation, and other investments," said Dean Garritson, vice president of small and medium manufacturers for NAM.
But others think the business community is overstating the impact of estate taxes.
J. Michael Keeling, president of the ESOP Association, said with proper planning most businesses can weather estate tax issues.
"Estate taxes are easy to avoid and easy to plan around," Keeling said. "Yes, they are very Draconian, and the rates are very, very high. ... But there are so many lawyers and accountants and financial advisors that can help any business owner put in play an estate planning program that eliminates the bite of the estate tax."
"I don't think in the real world the death tax is creating ... horror stories," he said.
A study from the centrist Brookings Institution found that less than 2 percent of estates get taxed, and that most of the benefit of repealing the tax would go to the largest estates. Five percent of estates paid about half of the $28 billion the tax generated in 1997, the study said.
By comparison, the study said the federal gas tax generated $39 billion in 1999.
Only about 3 percent of estates contain small businesses and farms, and those that are large enough to pay taxes can pay it off over 14 years and can use other exemptions, according to the study.
The law also taxes capital gains that would not otherwise be taxed, the study said. An aide to Kyl said his bill likely would include a provision that will apply the capital gains tax to estates, while repealing the overall estate tax.