ANALYSIS: From Main Street to Wall Street

By at 24 August, 2021, 8:27 am

Banks providing “STEP Act loans” will net approximately $38 billion in income through interest payments and fees on family business borrowers.

By Karen Kerrigan –

No, this is not the story about a successful entrepreneur who takes her startup to the public markets.

This is about government policy run amiss. A story about the unintended consequences of “well-meaning” policy doing the exact opposite of what supporters say it will do and actually harming (not helping) the little guy and gal…and assisting those who don’t need it.

Such is the case with the so-called Sensible Taxation and Equity Promotion (STEP) Act.

The legislation is being considered by Democrats and President Biden as a “pay for” to fund the $3.5 trillion blowout spending package. It would retroactively tax capital gains on income and property passed on to heirs after the owner’s death. Therefore, a person who inherits an asset would be taxed on the full appreciation of an asset, including before they took ownership or control. This is in addition to the current death tax, and why some are calling the elimination of step-up in basis a “double death tax.”

STEP Act Harms Small Businesses and Local Communities

On August 11, SBE Council released a survey of small business owners that clearly shows how this unfair and unreasonable policy works against the stated goals of STEP Act supporters. When asked what would happen if retroactive capital gains taxes on the assets of family businesses were passed into law, 78% of small business owners say it would have crippling consequences for small businesses, their employees and communities. In addition:

● 70% of small business owners said that larger companies will buy up small local enterprises at low prices.

● 68% believe that family members and beneficiaries would be forced to borrow money to keep businesses afloat.

● 67% responded that fewer small businesses and family enterprises would survive.

So, the big companies would get bigger and family businesses would be forced to borrow money. That is, if they survive. If they don’t, that means less competition, more industry concentration, limited job opportunities, less economic growth, and fewer/less innovative choices for consumers.

So big companies win, big time. Family businesses and their local communities lose.

STEP Act Winners: Banks

The financial sector – banks – stand to gain big from the STEP Act if it were enacted and signed into law. To be clear, SBE Council and our small business members love our banks, but we do not like policies that pick winners and losers, that favor certain industries, or in the case of the STEP Act, would generate a massive wealth transfer by making small business owners borrow money to pay unwarranted and unfair tax bills, which would generate a very nice windfall for banks.

According to an analysis for SBE Council by Georgetown Capital Advisors, LLC, eliminating step-up in basis as the STEP Act would do “will likely force households with limited access to liquidity to take out significant loans to pay a portion of the new federal tax on inherited assets.”

Banks providing the loans will net “approximately $38 billion in income through interest payments and fees on borrowers over a 10-year period.”

STEP Act Losers: Small, Family-Owned Businesses

A lifetime of grinding it out and taking risks and making extraordinary sacrifices does not seem to register or matter with STEP Act supporters. Family businesses and farms would be forced to subsidize the banking industry to pay off government taxes and liens, or lose their property and assets.

As summarized by the analysis: “Households inheriting/holding $1+ million in unrealized capital gains that will be forced to liquidate family assets, take out loans, or both – adding another layer of uncertainty to an already uncertain future for closely-held family businesses.”

And, as highlighted by SBE Council’s recent survey noted above , the broader consequences of eliminating step-up in basis would be far-reaching:

● 50% of respondents said the proposal would hurt their ability to carry on the business

● 51% said it would hurt their ability to make capital investments in the business

● 42% said it would hurt their ability to secure loans or lines of credit

● 47% said it would hurt their ability to keep existing employees

● 49% said it would hurt their ability to support local charitable organizations

● 48% said it would hurt their ability to pay federal or state taxes

● 45% said it would hurt their ability to support the local economy

● 48% said it would hurt their ability to support their own family

Ditch the STEP Act and All Efforts to Eliminate Step-up in Basis

Eliminating step-up in basis is bad policy that will harm small businesses. It will force business owners to secure loans as punishment for years of hard work – not to grow the business or make investments – but to pay off the government.

Policy that benefits one industry at great cost or loss to another is never good policy. Making the tax system more complex and costly works against the interests of small businesses and our economy. In fact, according to SBE Council’s survey, 83% of small business owners believe elected officials should support tax policies that make it possible to pass on their family business.

Especially now, as small business owners and their employees are working harder than ever to keep their businesses afloat and recover, our elected officials in Washington need to fully support their efforts. Democrats and President Biden need to ditch the STEP Act and provide tax certainty and relief to family businesses so they can continue to endure throughout the remainder of this pandemic and beyond.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.


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