Members of Heating, Air-conditioning & Refrigeration Distributors International (HARDI) strongly believe Congress should repeal the current estate tax. To get their message across, more than 80 HARDI members used their annual Fly-In event to conduct nearly 200 meetings with congressional leaders, sharing that an increase in the estate tax could jeopardize the future of their businesses. What were the results?

Members of Heating, Air-conditioning & Refrigeration Distributors International (HARDI) strongly believe Congress should repeal the current estate tax.

To get their message across, more than 80 HARDI members used their annual Fly-In event to conduct nearly 200 meetings with congressional leaders, sharing that an increase in the estate tax could jeopardize the future of their businesses.


Estate tax is defined as a tax levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. The tax, levied at the time of an owner's death, is mostly imposed on assets left to heirs, but does not apply to the transfer of assets to a surviving spouse.

The current estate tax is 35 percent - exempting assets up to $5 million. If Congress does not act on the issue by midnight, Dec. 31, 2012, the estate tax will increase to 55 percent, and the exemption will be reduced to only $1 million.

President George W. Bush's 2001 tax package reduced the estate tax each year beginning in 2002. The tax was eventually reduced to zero in 2010. Since then, Congress has failed to maintain Bush's tax cuts, and the tax has risen back to 35 percent for estates worth more than $5 million. Without congressional action, the estate tax will revert to pre-2001 levels in 2013.

"The estate tax and the constant changing of the formula for determining its rate places an undue burden on businesses in our industry and small businesses everywhere," said Talbot Gee, executive vice president, COO, HARDI. "A significant portion of our members are family businesses, and they generate an estimated 80 percent of the dollar value of HVACR products sold through distribution. There has to be some clarity about the estate tax and some consistency regarding the rate if it isn't repealed."


In 1973, John Glass purchased Aurora, Ill.-based ILLCO Inc. for $340,000 using his father's assets and a vendor guarantee as collateral.

Just 32 years old at the time, Glass was motivated to create something of lasting worth for his family. The company, which employed seven individuals upon the initial purchase, has grown to employ 92 workers across eight branches in three states. ILLCO now boasts $40 million in revenue.

Glass's daughter, Karen Madonia, is now acting as the company's chief financial officer. Through current estate tax regulation, she is challenged with finding a way to continue operating the business her father worked so hard to build without losing some or all of it to the IRS in the form of estate taxes.

Madonia, who also serves as HARDI government relations committee co-chair, recently testified before the House Small Business Subcommittee on Economic Growth, Tax, and Capital Access, sharing how the existing estate tax could potentially cripple future success at the family business.

"I personally find it fundamentally wrong to place a tax on death. If a person is able to accumulate wealth through hard work, and if that person pays his fair share of taxes on his income as it is earned, I do not understand how the government can justify taking a significant portion of what he has left simply because he opted to save and reinvest rather than consume," she said. "To me, and probably to a large portion of the generation behind me, the estate tax serves as a tremendous disincentive. Why work harder than the next guy to build something big if it is likely to die when you do? Why not be just another worker, make just enough money to live comfortably, and not worry about generating any more wealth than that? Is this really the lesson we want to teach our young people?"

Madonia stressed that an increased tax rate and a reduction in the exemption would place undue scrutiny on heating and air conditioning distributors due to large inventories.

"At ILLCO, we carry an inventory valued at $10 million and accounts receivable of about $5 million. Our inventory has to be high - we provide vital heating, air conditioning, and refrigeration parts and supplies to hospitals, schools, nursing homes, and grocery stores. When the refrigeration system in a grocery store goes down, it needs to be repaired within hours or the food is lost. When the air conditioning system in a hospital doesn't work, patients cannot be appropriately cared for until air is circulating again. The parts and supplies that we sell must be on hand in order to facilitate quick repairs and replacements, which means that we must carry a heavy inventory," said Madonia, during the hearing. "In my opinion, it is a fundamentally-flawed tax because it is, by definition, double taxation and it discourages entrepreneurship."


HARDI members took their concerns straight to Washington, D.C., visiting with congressional leaders and staff members during HARDI's fifth annual Fly-In event.

Dallas Rohrer, president, Aftermarket Specialties, Atlanta, spoke with staff members representing Sen. Saxby Chambliss, R-Ga., who offered support for a repeal of the estate tax.

"As a Republican, Sen. Chambliss' staffers were very supportive of our concerns," said Rohrer, who also serves on HARDI's board of directors. "We stressed that our top priority was to completely remove the estate tax, but said we would accept a renewal at the current rate - in a worst-case scenario. The staff members agreed that something needs to be done."

Mike Dungan, owner, Sales Engineers Inc., Eden Prairie, Minn., visited with Sen. Amy Klobuchar, D-Minn.

"Senator Klobuchar seemed very supportive of small businesses and supports ending the death tax, or at least keeping it at the $5 million threshold," he said. "This was the second time I've met with her, and it was a very positive meeting."

Bobby Schilling, R-Ill., spoke in favor of repealing the estate tax during the May 31 House Small Business Subcommittee hearing.

"I find it frustrating that the federal government can come in and take 55 percent of an estate," he said. "We have to stop calling it the estate tax and should call it what it is. It is a death tax. I see families spending up to $50,000 a year just to keep their business or farm."

HARDI members insisted a solution must be reached prior to New Year's Day.


HARDI representatives referenced several statistics regarding the negative impact of the estate tax. 

• An American Family Business Foundation study by Dr. Douglas Holtz-Eakin found that repealing the estate tax could save 1.5 million American jobs.

• The Joint Economic Committee found that the estate tax pulled roughly $847 billion of capital from the economy.

• Ending the estate tax would add $119 billion to the gross domestic product and boost workers' income by $79 billion.

• The estate tax causes a net revenue decrease for the federal government. Congress could raise nearly twice the current revenue - an increase of $23.3 billion - by repealing the estate tax. 

• Alicia Munnell, a member of the Council on Economic Advisors during the Clinton Administration, found that the estate tax imposes compliance costs in excess of $26 billion. This exceeds the estate tax's revenue yield.

• A study from the National Bureau of Economic Research found estate tax rates had a negative correlation with an individual's lifetime wealth accumulation.

• Joseph Stiglitz, chairman of the Council on Economic Advisors during the Clinton Administration, stated that inheritances actually reduce income inequality. 

• The stepped-up basis provision of S. 2242, the Death Tax Repeal Permanency Act, protects the value of property by setting the capital gains basis value at the time of the decedent's death instead of reverting the value to the time of purchase, saving heirs from costly capital gains taxes. 

• By repealing the generation skipping transfer tax, an extra tax on decedent's bequests to heirs other than children, S. 2242 will end the unfair triple taxation on inheritance left to grandchildren.


HARDI members also lobbied on behalf of numerous other issues during their most recent visit to Washington, D.C.

HARDI believes Congress should act immediately to extend the current tax rates and work toward a long-term solution of reforming the tax code for both corporations and pass-through entities to make the tax code simpler, more efficient and to promote growth.

"If Congress fails to act by the end of the year, Americans will be hit with a substantial tax increase," said Jon Melchi, director of government affairs, HARDI. "This taxmageddon is a $500 billion tidal wave of tax hikes - not over 10 years, but in a single year and each year thereafter. This is an average tax hike of nearly $3,800 per taxpayer. Congress has no excuse for threatening the economy with this tax hike with the entire summer legislative schedule wide open for business."

Another pressing issue included the preservation of Last-in-First-Out (LIFO) accounting method.

LIFO is an accounting method used by businesses to value inventory and is generally used by companies purchasing inventory that increases in cost.

"Repealing LIFO and retroactively placing a tax on LIFO reserves is penalizing businesses for following the rules," said Melchi. "A retroactive tax on LIFO reserves would be devastating to businesses and should be avoided."

HARDI members also oppose S. 398, the Implementation of National Consensus Appliance Agreements Act (INCAA).

"HARDI opposed the regulatory version of this issue, so it makes sense that we would oppose the legislative version," Melchi said. "Our members have simply been educating their Congressional delegations on the problems that these standards place upon on distributors. HARDI opposes the regional energy efficiency standards contained in INCAA because they fragment the marketplace, create perverse consumer incentives, and make distributors and wholesalers responsible for enforcement. We support the current federal law that allows us to distribute products uniformly throughout the United States."