Pennsylvania’s new state budget will make it easier to sustain a family business after the owner dies.
Gov. Tom Corbett signed a $28.4 billion state budget that would eliminate the inheritance tax on business assets. The supporting legislation seems on the verge of being passed. The House approved House Bill 48 on June 24 with a vote of 198-0 and it has moved on to the Senate for potential approval.
The stated goal of the tax cut is to help businesses survive the transition after a death and prevent the loss of jobs when bereaved owners are forced to sell assets to scrounge up the tax payment.
Locally, the tax change didn’t come soon enough for the Light family, which operates A to Z Vacuum in Wyomissing.
Ron Light, in his 70s, sold the business to his son Scott in December, in part because of fears of a big inheritance-tax hit should Ron die.
Scott Light said the business was assessed at $1.5 million. If he inherited it, it would generate an estate tax of $67,500, based on the 4.5 percent rate for passing assets to lineal heirs.
He said he has seen three businesses close because they had to pay the inheritance tax after the owners died.
“Businesses already pay plenty of taxes,” Light said. “Why do they have to take more?”
In Pennsylvania, family owned businesses comprised 36 percent of businesses that responded to the U.S. Census’ 2007 Survey of Business Owners. They employed 42 percent of everyone working for the responding companies.
The existing Pennsylvania inheritance-tax rate varies depending on the relationship of the heir to the deceased.
The tax rate is 0 percent on transfers to a surviving spouse or to a parent from a child 21 or younger. The rate is 4.5 percent on transfers to direct descendants and lineal heirs, 12 percent on transfers to siblings and 15 percent on transfers to other heirs, except certain institutions.
Property owned jointly by a married couple also is exempt.
If it passes, the tax cut is projected to cost the state $3.8 million, according to the House Committee on Appropriations.
“That’s a small cost to the commonwealth for trying to grow businesses,” said Judith A. Harris, an estate-tax and business lawyer and the chairwoman of Norris McLaughlin & Marcus’ estate trust and tax group Pennsylvania office.
Harris, based in Allentown, said she has seen businesses suffer because of the inheritance tax.
In some cases, the business was the deceased’s single largest asset, and the estate didn’t have enough cash to pay the tax, due nine months after the death, she said.
The bill would require all the assets that are transferred to be devoted to the same business for five years after the death – or be subject to inheritance tax.
Last year, state lawmakers eliminated the estate tax on family farms.
That was extremely helpful for farmers, Harris said. No other type of business generally has such wealth tied up in nonliquid assets, she said.
Overall, the inheritance tax brought more than $845 million in revenue in the 2012-2013 tax year, according to the state Department of Revenue.