Editor’s Note: Pat Soldano, who has lived in Orange County for more than 50 years, is president of Family Enterprise USA, which advocates for family businesses in Washington, D.C. The Business Journal’s Family-Owned Business Awards Special Report, featuring award nominees, begins on page 23. The awards ceremony is scheduled for June 2.
It’s hard to imagine our legislators working to undermine the largest economic engine in this country, an engine that generates $7.7 trillion of GDP a year and accounts for 54% of the private workforce, but they are.
What is this engine? The family business. And there are plenty at risk in Orange County, and across America.
Yet, attacks on this multi-trillion chunk of GDP faces death by a thousand cuts, and, according to new research, the public seems okay with this, or is confused about who is paying for what.
The new research, by Family Enterprise USA in early 2022, shows the American family business is more diversified than ever. The research shows 24% of family businesses are in manufacturing, over 10% in construction and facilities, and 9.8% in real estate. The family farm business is just 5% of the total. The research surveyed 300 family business owners across the country.
Family businesses tend to be long-term employers, with over 74% in business 30-plus years and 33.5% grossing over $50 million a year. In addition, 44% pay above average wages and nearly 80% added jobs during the last pandemic year.
If you ask these owners what their main worries are, 27% say a recession or market downturn keeps them up at night. The one thing owners say they cannot handle (14%) is more negative government regulation. No amount of hard work or strategic planning can stop that, specifically unfair tax penalties that force them to consider selling their business outright.
“Two huge economic emergencies caused by the liquidity crisis of 2008-2009 and the COVID pandemic of 2020-2021 provided a one-two punch to many small and midsized family businesses,” said Chris Loumakis, founder and chairman of Brea-based ISYS Solutions Inc., a family-owned company that provides nurse care management and related services in workers’ compensation
cases.
“These externally generated economic calamities and many of our government’s regulatory responses to them have pushed many of these businesses into bankruptcy and critically crippled others,” Loumakis said.
New worries are the availability of labor, with nearly 23% stating this as main risk, and inflation. Inflation barely registered in last year’s survey, but this year over 11% say this keeps them up at night.
Despite the headwinds, improving post pandemic market conditions and good planning have 89% of family businesses saying their business will grow this year, which is great news.
But when it comes down to passing the business down to the next generation, well, that’s getting tougher. Some 85% will do it through gifting or outright sale to their children. Yet, the study revealed only 51% have passed on ownership, and only 35% have passed on controlling or full ownership of their businesses.
Death Tax Cometh
The government’s Grim Reaper, The Death Tax, gets a lot of attention, and rightly so. Research shows voters think the death tax is unfair.
The research says family business owners would love to see The Death Tax repealed entirely (33%), but 20% would be happy with a reduction from the current 40% to 20%. That is still a huge bill to pay upon the owner’s death. Many, however, some 24% are okay with where the tax is right now, a lifetime exemption at $11.7 million per person.
“When the founding member of a family business dies, he or she has already spent a lifetime paying taxes on the business and on personal income,” said Cindy Ayloush, chief executive of Fullerton-based Hydraflow, which began in 1961.
Ayloush is the second generation of a family involved in this manufacturer of engineered component parts for the aerospace industry; members of the third generation have also joined the company.
“The second generation may be able to scrape enough money together to pay taxes on the death through loans or previously bought insurance, but when the second generation dies, the company has probably grown three or fourfold,” Ayloush said.
“Unfortunately, the large value of the company never aligns with the liquid cash available, and this forces the third generation to sell the company just to pay the taxes. This puts innocent employees at risk of losing their jobs.”
Many have fought to eliminate the death tax. However, currently the repeal of the gift and estate tax is not possible due to the political climate in Congress, the state of the economy after the pandemic and the concern by voters of the large national debt.
Voters And Owners
You can’t run a business based on voter attitudes, but the undercurrent of negative sentiment among voters is palpable, and misplaced, according to new voter research from national pollster Frank Luntz. One finding says voters are just plain misinformed about who pays what share of taxes.
For example, according to the research, voters believe the top 10% of earners pay roughly 35% of the nation’s total tax bill. The reality is the top 10% pay 71%.
Oddly, the same research shows 62% of voters think family businesses are getting a raw tax deal, with some 44% saying it’s not fair to tax businesses into oblivion, since they were built on a lifetime of savings and hard work. It seems voters both hate and love the successful.
Voters and legislators are always looking for ways to pay or not pay for new proposals, like those offered in last year’s Build Back Better legislation. Most tax hits in these proposals are aimed squarely at family businesses, from The Death Tax to IRA investments, to elimination of grantor trusts and valuation discounts, to additional taxes on the highest earners.
The Death Tax isn’t a big income stream for the federal government. In the last fiscal year with recorded revenues, 2020, the gift and estate tax brought in $17.6 billion in revenue for the federal government, up from $13.2 billion in 2019. The gift and estate tax generally only raises 1% to 1.5% of all tax revenues.
The long-term trend is thumbs down on this most important driver of our economy, yet family businesses still flourish and grow. It seems the only ones fighting for this sector of our economy are the family businesses themselves, but they’re exhausted, lonely warriors trying to keep the heads above water while at the same time trying to keep a piece of the business running for their sons
and daughters.
Still, public sentiment isn’t all negative. When voters were asked who they most worry about The Death Tax negatively affecting, almost 60% said: “family members.” So, there is some sympathy still out there for our $7.7 trillion worth of family businesses.
One key message is to get our legislators to back off negative legislation affecting family businesses, specifically damaging tax laws and more regulation. Perhaps we can suggest helping family business through incentive programs, instead of making it harder to grow and add jobs.
Next, the “tax the rich” voter attitudes perhaps can be changed by stopping the misinformation about who pays taxes in this country. The top 10% of earners pay 71% of taxes, not the perceived 35%.
And then educate voters with real family business stories that show how much they contribute to the economy and their community. Next, explain they are not “the rich,” but are treated that way by Congress.
It’s up to all of us to understand the stakes involved when it comes to keeping our family businesses alive. It means speaking to one person at a time, one legislator at a time, about the importance of not putting up barriers to family businesses, but rather giving them the fuel that they need to take us all into the future.
