The remainder of the summer session on Capitol Hill will be more anxious than usual for family businesses. That anxiety, likely to continue into 2025, is due to the talk of a “wealth tax,” coupled with the looming expiration date on provisions of the 2017 Tax Cuts and Jobs Act (TCJA).
At summer’s start, Senate Finance Committee Chairman Ron Wyden (D-Ore.) kept the wealth tax chorus going with hearings on his Billionaire’s Income Tax Act, which is aimed at getting high wealth earners to pay “their fair share.”
At the same time, House Ways and Means Committee Chairman Jason Smith (R-Mo.) and Tax Subcommittee Chairman Mike Kelly (R-Pa.) announced the formation of 10 official Tax Teams, composed of Ways and Means members, to study key tax provisions of the TCJA, which was enacted by the Trump administration in 2017 and is set to expire Dec. 31, 2025.
The Tax Teams are named after the 10 areas of focus around which they’re organized: American Manufacturing, Working Families, American Workforce, Main Street, New Economy, Rural America, Community Development, Supply Chains and U.S. Innovation and Global Competitiveness. Nearly all of these will affect family-owned businesses. The goal, Smith says, is to “identify legislative solutions that will continue to help families, workers and small businesses.”
If action is not taken and the 2017 tax cuts expire, an average family of four earning $75,000 would see their taxes increase by $1,500 per year, while a family of five with two earners making around $100,000 would see a tax increase of nearly $7,500 a year, according to Smith.
The Senate’s Billionaire Tax Act aims much higher on the income ladder. This act looks to, among other things, overhaul the tax code to fix carried interest, create a minimum corporate income tax on foreign profits, raise taxes on stock buybacks, enact minimum taxes on the richest Americans and increase estate and gift tax exemption amounts.
What’s at Stake?
Up and down the halls of Congress, tax bills focused on the wealthy are being patched together behind closed doors. Why? Because the country needs to fill a growing deficit gap.
A hearing before the U.S. Senate Budget Committee, convened in June by committee chairman Sen. Sheldon Whitehouse (D-R.I.) to discuss “making Wall Street pay its fair share,” quickly revealed some deep divisions between Democrats and Republicans as they confront the expiration of TCJA.
The broad proposals targeting wealthy Americans are likely to ensnare family businesses. More than 80% of family businesses are pass-through entities, but few tax provisions differentiate between them and corporations.
While corporations pay only 21% in taxes, family business pass-through entities pay higher rates — up to 37% in federal taxes. And that’s with the 20% pass-through deduction that is set to expire next year.
There is more wealth tax legislation on the table, too.
Sen. Elizabeth Warren (D-Mass.), along with Reps. Pramila Jayapal (D-Wash.) and Brendan Boyle (D-Pa.), reintroduced the Ultra-Millionaire Tax Act. Their hope is to bring in $3 trillion in revenue over the course of 10 years by requiring the top 0.05% of American households to pay two cents for every dollar of wealth over $50 million.
Meanwhile, the Biden administration has proposed its own crackdown on high-wealth Americans and large corporations in its FY2025 budget earlier this year.
The Biden proposals include raising the corporate tax rate to 28% and increasing the new corporate minimum tax rate on billion-dollar corporations from 15% to 21%.
But for pass-through family business owners, the Biden plan would also create a new individual minimum tax, aimed at ultra-high-net-worth individuals, while restoring the top individual tax rate to 39.6% for single filers making over $400,000 per year and married couples making more than $450,000 per year. This is where the rate stood before the TCJA was enacted.
In addition, the White House proposes raising the corporate tax rate to 28%, as well moving the corporate minimum tax rate on billion-dollar corporations from 15% to 21%. Another Biden measure would require ultra-high-net-worth individuals to pay a minimum 25% income tax, with the wealthiest paying as much as 39.6%.
What’s the Tab?
The accounting pencils are working overtime as both chambers on Capitol Hill search for offsets and add new revenues, while the national debt continues to balloon.
The Congressional Budget Office (CBO) recently updated its TCJA estimates, based on analysis from the Joint Committee on Taxation, and the math doesn’t work.
The CBO concluded that extending the expiring individual tax rates and provisions affecting individual Americans will result in a net cost (additional budget deficit) of $3.4 trillion over the next decade, and more than $4 trillion if the handful of expiring business provisions — like expensing of research and development costs — are included.
Unfortunately, new tax revenue measures too often and too heavily target America’s family businesses, which together account for 83.3 million jobs. With deficit estimates now in the trillions of dollars, Congress is looking to the wealthy for new tax revenues.
In our annual survey of family business leaders, the prospect of a wealth tax now ranks among their top new worries.
The top tax worry among survey respondents was that personal income taxes are too high, but 5% of respondents noted that a “new wealth tax” is also a looming problem. That’s up from zero percent in the previous year’s survey.
What Is a Wealth Tax?
What exactly are we talking about when it comes to a wealth tax, and what does it mean for family businesses?
Wealth taxes are typically recurrent taxes on an individual’s wealth — assets net of debt. They are often designed as a tax on top of all the other recurring taxes — income taxes paid on wages, investment earnings and income from family businesses — that are imposed on the value of the assets an individual owns.
In many ways, a wealth tax is like a real estate tax on a home or business property. But instead of just taxing the real estate, it can apply to all assets an individual owns, including the value of a family business. Of course, the value of assets can change frequently, so how — and how often — would they be assessed under a wealth tax?
Let’s take, for example, Sen. Wyden’s Billionaires Income Tax Act, which targets individuals with $1 billion in assets at the end of a given year. It would also apply to an individual with $100 million of income for three consecutive years. For trusts, the asset level in the proposal is $100 million and the income limit is $10 million, though that is likely to decrease.
For wealthy taxpayers, these taxes would be imposed on their unrealized gains at the end of each year, based on the value of the asset minus the owner’s basis, which, in most cases, would be the amount they originally paid for the asset.
For readily tradeable assets, like stocks, the owner would have to “mark the stock to market” at the end of each year. For example, under Wyden’s bill, if shares were purchased for $100 in 2020 and they are worth $1,000 on Dec. 31, 2024, the unrealized gain would be $900 and the shares would be taxed as if they had been sold at the end of the year.
Since the value of many assets, including a family business, are hard to assess, Wyden’s Billionaires Tax Act would defer the wealth tax on non-tradeable assets until they are sold, but with the deferred tax subject to interest charges.
An additional twist in Wyden’s plan is that it would treat transfers of assets by gift or bequest as if the asset had been sold first. As a result, the asset would be “marked to market,” as with the annual wealth tax. This would effectively eliminate the tax-free step-up in basis at death, since the unrealized gain would have already been taxed.
While Wyden has not released an official revenue estimate on his bill, one must wonder whether it will raise that much in the long run.
Does a Wealth Tax Work?
In a 2018 report, “The Role and Design of Net Wealth Taxes,” the Organisation for Economic Co-operation and Development (OECD), an international policy organization of 38 democracies, concluded wealth taxes tend not only to generate little revenue but to also create a lot of legal uncertainty and “kill the entrepreneurial spirit.” The report calls on countries to repeal such taxes.
In Europe, for example, Norway, Spain and Switzerland currently have a wealth tax. France and Italy levy wealth taxes on selected assets but not on an individual’s net wealth.
In 2018, France abolished its net wealth tax and replaced it with a real estate wealth tax. Other countries that abolished their wealth taxes are Austria (1994), Denmark (1997), Germany (1997), the Netherlands (2001), Finland (2006), Iceland (2006), Luxembourg (2006) and Sweden (2007).
The only way to ensure successful individuals and family businesses don’t fall victim to misguided “fair share” wealth tax proposals is to speak out on Capitol Hill. A recent U.S. Supreme Court case may help with that goal.
In a 7-2 ruling, issued June 20, 2024, in Moore v. United States, the high court upheld the constitutionality of the Mandatory Repatriation Tax, which attributes the realized and undistributed income of an American-controlled foreign corporation to the entity’s American shareholders and taxes them accordingly.
While the court was not tasked with directly addressing a wealth tax, four justices strongly suggested that gains must be realized before they can be taxed under the Sixteenth Amendment. This is important because it signals that a majority of justices might vote to strike down a tax on unrealized gains and serves as an important warning to Congress.
It’s a warning family business owners need to stress when they engage with their senators and representatives at home and on Capitol Hill. The next Congressional Family Business Caucus Meeting is scheduled for Sept. 18. The meeting will address pass-through taxation, family enterprise structure, and proposed wealth tax legislation.
This is the time to speak out against lawmakers’ attempts to kill the spirit of America’s family businesses and successful individuals.