Testimony
on behalf of the

National Cattlemen's Beef Association

In regard to

The Impact of Estate Taxes on Farm and Ranch Families

submitted to

The Senate Committee on Agriculture, Nutrition, and Forestry

Mr. Clark Willingham
President-elect
Dallas, Texas

February 25, 1997

Chairman Lugar, Members of the Committee: Thank you for your interest in relieving the estate tax burden on America's agricultural producers. I appreciate the opportunity to testify before you today on the devastating effect estate taxes have on the ability of cattlemen and women to pass their family businesses on to the next generation.

My name is Clark Willingham. I am President-elect of the National Cattlemen's Beef Association (NCBA), and represent NCBA's 230,000 members who come from all segments of beef production. I will also be making a few comments on behalf of the Family Business Estate Tax Coalition.

For the past several Congresses, relieving the estate tax burden has been a top priority for NCBA. The 105th Congress is no exception. As evidenced by the more than 20 separate bills you, members of this Committee, and others in Congress have introduced or sponsored, it is apparent that many of you have also made reform of estate taxes a top priority. I am hopeful that this strong showing of support among key senators and representatives will generate the momentum necessary to achieve our reform goals.

From the cattle industry's perspective, the so-called "death tax" is the primary obstacle in keeping our family owned businesses intact and viable during the transition from one generation to the next Nearly one-half of our members have been in business more than 50 years and 15% of our family members have operated for more than 100 years. These are the folks who for generations have contributed to the economy of the local communities, who are the foundation of an industry that represents 20 percent of the agricultural gross domestic product and annually generates $150 billion plus in economic activity that not only benefits local communities, but the nation as well.

Add to this high level of economic activity the public monies generated, such as fuel taxes, excise taxes, income taxes and related revenues, and one must question the wisdom of a federal policy that effectively erodes the base of the rural economy. Death is a certainty for each of us. Unfortunately, it also unleashes the IRS, which can take up to 55% of a business and its assets before the next generation has the opportunity to carry on the family tradition.

Statistics indicate the average age of a cattleman is 55 years, which suggests therecurrently are a lot of ranch families who will soon face the burden of federal estate taxation. Statistics also indicate that the number of cattle operations has declined 20 percent since 198 1, a trend that many feel is accelerated by the burden estate taxes pose on surviving family members.

NCBA feels this burden has contributed to families selling their family farming and ranching enterprises in anticipation of the death tax. In addition, many of our members report that their efforts to plan for the impact of estate taxes has led to management decisions that are not always in the best interests of operating a profitable enterprise.

We also believe, in addition to enhancing the well-being of the beef industry, that estate tax reform will provide society in general with environmental benefits. Any business that is successful over a long period of time is one in which the principals pay close attention to the maintenance, up-keep and improvement of the production facility. For cattlemen, their production facility is the land -- land that they and their ancestors have nurtured to ensure its ability to support their beef herds, and land that they share with a natural ecosystem that includes wildlife habitat, watersheds, riparian areas, and so forth.

Unfortunately, a cattle operation is a capital intensive enterprise typified by having most of its assets invested in the land or cattle. In other words, the sale of the land and/or cattle becomes the primary source of funds available to meet the costs of estate taxes. When this occurs, ranches or farms get split up, particularly in areas of urban/suburban growth and escalating land values. The net result is that land that once provided nutritious beef or other staples for our diets and habitat for Mother Nature's flora and fauna is instead used to grow houses, shopping malls, and roads.

Taxing capital at death is frustrating when one considers that the money used to buy, maintain and improve these assets was taxed when earned. Adding to the insult are the estate tax rates which can impose a top rate of 55 percent -- which is especially troubling when compared to the top capital gains tax rate of 28%.

As a footnote, Mr. Chairman, I understand that tomorrow's hearing will focus on capital gains taxes and I want to let the Committee know that NCBA is working with many other business groups to get that rate below 20%, and that we appreciate and strongly support all efforts to lower the tax rates on capital gains. I only bring up the disparity in the tax rates to point out the urgent need to, at a minimum, get the estate tax rates down.

Obviously, NCBA's favored position is outright repeal of estate taxes. Death is a lousy event to tax. But if repeal is not likely, we strongly urge support of efforts to reform the estate tax code, whether it be through lower rates, increased exemptions or some combination thereof.

Mr. Chairman, as you and the Committee are aware, the estate tax accounts for roughly 1% of federal revenues. William W. Beach, Senior Fellow in economics at the Heritage Foundation, has repeatedly stated that the costs of compliance and lost economic activity due to the estate tax far exceed the revenues gained by the federal government. Professor Richard Wagner of George Mason University projects that over an eight-year period, elimination of the estate would add 250,000 jobs and pump $80 billion in annual economic growth to the nation's output.

I mentioned at the outset that NCBA is a member of the Family Business Estate Tax Coalition, a large group made up of trade associations and organizations who represent the vast majority of this nation's family owned enterprises. This group worked in a bipartisan fashion during the 104th Congress to build the case on the negative impact that the estate tax places on family businesses. The message of the Coalition is simple, and perhaps redundant, but needs to be repeated.

Liquidity is the fundamental characteristic that distinguishes the estates of family owned businesses from those of individuals holding marketable securities and/or other liquid assets. Publicly traded stock can be easily sold to pay the estate tax, doing little harm to capital investments that are critical to the productivity of the business and the overall financial well-being of the company. But as I've said before, a family owned business, whether it's a ranching operation or a restaurant, must sell critical assets -- and often the business itself must be sold -- to pay estate taxes, or suffer under the resultant debt load necessary to continue in business.

Mr. Chairman, our campaign to reform the estate tax is about jobs, economic growth and the financial stability of this nation's many small and medium sized communities. On behalf of the NCBA, and members of the Coalition, we thank you and your colleagues for holding this hearing. We encourage you to move boldly in your efforts to provide relief from the death tax burden.

We recognize the constraints placed on reforms by the budget and want to work with you to maximize the benefits of reform for those families and businesses who are most impacted. Thank you for your leadership on this important issue, and for the opportunity to testify before the Committee. I would be happy to answer any questions you may have.