In February, U.S. Rep. Kevin Brady, R-Texas, introduced a bill to the U.S. House of Representatives that would repeal the federal estate tax, which is the fourth highest estate tax in the world, according to the Tax Foundation. The estate tax, Brady argues, “is an overwhelming cause of the dissolution of family businesses” and a “significant hindrance to entrepreneurial activity because many family businesses lack sufficient liquid assets to pay estate tax liabilities.”

In a show of support for Brady’s bill — HR 1105: Death Tax Repeal Act of 2015 — Karen Madonia, CFO, ILLCO Inc., urged Congress to pass the legislation during a March 25 hearing in the House Committee on Ways and Means. “I personally find it fundamentally wrong to place a tax on death,” said Madonia, who also serves as co-chair of Heating, Air-conditioning & Refrigeration Distributors International’s (HARDI’s) government relations committee.

Many others in the HVACR industry have also expressed support for the bill, which passed the House on April 16. But, despite widespread support from small business owners and organizations, the bill still faces numerous hurdles before it can become law.

A ‘Huge Issue’ for the Industry

The estate of a person who passes away in 2015 can be taxed up to 40 percent for assets exceeding $5.43 million — assets that include not only cash reserves but also land, property, inventory and other assets. For small business owners, including many in the HVACR industry, repealing this tax would have a significant positive impact on those who wish to pass their family businesses on to their descendants.

Jon Melchi, HARDI’s vice president of government affairs and business development, said the tax is consistently polled as one of the most unpopular taxes in America and has been one of their members’ top concerns for several years. 

“It’s a huge issue for our members,” he said. “It’s not $5 million sitting in your bank account — that money can be your real estate that you hold, the trucks you own, the inventory you have, and so on. The running joke is you don’t want to die at the beginning of cooling season, when you have a warehouse full of air conditioners.”

Charlie McCrudden, senior vice president of government relations for ACCA, said the estate tax is less burdensome than it used to be, though it is still a major concern for family-owned contracting businesses.

“Reforms to the estate tax several years ago did increase the exempted amount, indexed it to inflation and gave a bit more certainty to family-owned small businesses,” he said. “However, there are a number of family-owned small businesses that still face estate tax liability. If this bill were passed, it would remedy that problem. We’re hopeful it will pass.”

Under the current tax law, “There have been some family-owned businesses that have had to sell off part of their businesses to pay the tax,” McCrudden added. “That really shouldn’t happen.”

“These aren’t people who are über wealthy; they’ll often have to buy life insurance — a significant amount — to cover the tax,” Melchi said. “HARDI’s members say that can cost into the six figures annually. You can be forced to hold large cash reserves; that’s money that’s on the sidelines, and, while I’m sure the insurance companies like it, it’s not something that is benefiting the economy at large. That’s a big problem.”

HVACR Businesses Take a Stand

During the March 25 hearing, Madonia explained to House leadership why the estate tax is harmful and unfair to small businesses. “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.

Madonia also explained how small businesses already pay taxes and contribute to the economy.

“In my opinion, it is a fundamentally flawed tax because it is, by definition, double taxation, and it discourages entrepreneurship,” she said. “The U.S. has already benefited from that person’s success because he has employed people who pay taxes, bought buildings on which he has paid property taxes and bought inventory and supplies from other companies, which can then afford to employ more people who pay taxes.”

Another HARDI member, Johnstone Supply of Bloomington, Minn., has had to become “highly leveraged” in order to keep the business in the family, according to U.S. Rep. Erik Paulsen, R-Minn., who also spoke during the committee hearing. “They’ve been forced to spend about 20 percent of their net income on life insurance to fund their future estate obligations. This is money that could otherwise be reinvested in the company, the business or the community. But that money is locked up. … The tax code is literally forcing them, essentially, to consider breaking up the business.”

Steve Moon, owner of Moon Air Inc. in Elkton, Md., said the tax is unfair to more than just the business owner and should absolutely be repealed.

“Not only is it unfair that grieving families are put in a financial bind at the hardest times of their lives, but it costs America jobs,” Moon said. “Politicians seem to think we are a cash cow they can continue to milk from beyond the grave. When there is money to pay the tax, stripping the reserve accounts clean leaves these companies very vulnerable at their worst hour. Family members and management get discouraged, frustrated and just close it up, and, poof, jobs are gone. Why can’t our government change its attitude and support small business instead of instigating its death?”

Industry involvement like Madonia’s recent testimony on Capitol Hill has been, and will continue to be, a key part of pushing the bill forward through the House and Senate, Melchi said.

“Rep. Paulsen from Minnesota references Johnstone Supply in his district, and these are all issues we’ve been able to push at HARDI’s Congressional Fly-In event,” Melchi said. “People say, ‘I don’t know if I make a difference,’ but in one congressional hearing, we had two HARDI members prominently displayed for the relationships they developed during the fly-in. So, we can make a difference, especially on issues like this. Just being able to tell your personal story, you can make things happens.”

Wait and See

Also on March 25, U.S. Sen. John Thune, R-S.D., introduced the Death Tax Repeal Act of 2015 in the Senate. The bill mirrors the House version and is cosponsored by 27 senators.

However, things in the Senate “are moving a lot slower, especially tax-related things,” Melchi said. “But it’s our hope the Senate Finance Committee will follow the lead of the House and hold a vote on this. There has not been a vote on this in more than 10 years, and so many people have pledged their support for repealing the tax that it’s time to put your money where your mouth is. So, let’s hold a vote on it, and let’s see.

“What I thought was interesting was that some of the Democratic representatives seemed to have an interest in trying to do some things with the estate tax. They seem to understand the tax is punitive, and there should maybe be some sort of solution — maybe not outright full repeal but fixing the problem. It shows that folks who were previously locked into the $1 million are interested in moving the ball a little further.”

For now, the industry is in a wait-and-see mode as the bills work their way through the Senate. Meanwhile, HARDI and other industry organizations will continue to advocate for the bill at the local, state and federal levels.

“You shouldn’t have to think about government when you want to hire new employees or take on a new line, and you sure as heck shouldn’t have to think about government when you’re thinking about what will happen when you’re gone,” said Melchi.

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