Sen. Elizabeth Warren is the latest presidential candidate to propose a massive increase in the death tax to finance government policies that have failed in the past. Warren’s Senate Bill 787, the “American Housing and Economic Mobility Act,” would resurrect several housing policies that many economists agree accelerated the housing crisis and compromised the financial future of thousands of American family business owners and their employees.
Warren’s goal is admirable in seeking to make it easier for Americans to rent or own homes, but the means she would use to achieve this end are many of the same policies that led to last decade’s housing crisis. Warren’s proposal would expand the Community Reinvestment Act (CRA) by increasing the number of loans banks are required to extend to unqualified borrowers.
The goal of the CRA can only be understood as forcing banks to make shaky loans that they otherwise would not. First enacted in 1977 under President Jimmy Carter, the CRA started with the simple aim of encouraging banks to meet the needs of borrowers in all communities. Standards for extending loans were relaxed under presidents Bill Clinton and George W. Bush, and penalties increased for non-compliant banks. With CRA data readily available, a public shaming campaign ensued, and banks were attacked for not helping poorer people purchase homes.
Fast-forward to 2019: Warren’s proposed legislation would require banks to provide more mortgages and funding to borrowers with incomes too low to make consistent payments by prohibiting housing discrimination based on source of income. Sound familiar?
The road to the 2008 housing crisis was paved with good intentions and an unwillingness for leaders in both parties to stand up for common sense. Warren’s bill doubles down on the appeal of helping the poor afford housing while leaving common sense behind.
Notably, the Warren bill only increases CRA mandates on banks, including community banks. Her bill does not do so for credit unions, even the largest 5 percent of credit unions that each manage at least $1 billion in assets.
The bill summary available on Warren’s website lists roughly $500 billion in new spending financed by hiking the death tax to the highest levels in two decades. But according to a Tax Foundation analysis, a similar plan proposed by Sen. Bernie Sanders to hike the death tax would raise only $310 billion in ten years. To raise the revenue required to finance Warren’s long list of priorities, housing included, would almost certainly require raising taxes on the middle class.
The optics of hiking the death tax to pay for housing may seem favorable at first glance, but Warren should consider that nearly 70 percent of voters consistently favor repealing the death tax altogether. An NPR/Ipsos poll taken before the Tax Cuts and Jobs Act passed in 2017 showed that 65 percent of respondents favored repealing the estate tax, including 51 percent of Democrats. Polling going back over 30 years shows the same sentiment. The public simply does not think death should be a taxable event for anyone.
Also hidden within Warren’s plan to tax the rich are the thousands of family businesses that employ workers in every community across the country. According to a study by the S-Corp Association, the largest or “wealthiest” family businesses employ the most workers. The study shows that large family businesses (those with revenues of at least $5.85 million and 20 or more employees) represent only 4.1 percent of firms with employees but account for 31 percent of private U.S. employment.
For their modest numbers, large family businesses are job machines. These larger family businesses are almost always competing against even larger multinational corporations that are not required to pay a 75 percent estate tax at the passing of every generation, as Warren proposes.
Family businesses are often “asset rich but cash poor,” meaning their value is machinery, buildings, inventory, and workers, not cash in bank accounts. Family businesses hit by the death tax often do not have enough cash on hand to pay Uncle Sam, so they must fire employees or sell off the company entirely to pay up.
Even for businesses under the current exemption but planning for growth, the death tax is a constant, costly burden. Businesses of all sizes spend more every year on estate tax-related compliance and planning than the tax collects for the federal government, according to the Tax Foundation.
Simply put, it makes no sense to punish family businesses and their workers to resurrect a housing plan almost certain to cause more harm than help. The lessons of the past and economics of the present should be considered as democratic presidential contenders roll out their plans to improve the country.
Targeting family businesses for more taxes is a short-sighted and misinformed approach. Employment statistics aside, family businesses are the backbone of their communities. They provide good-paying jobs, help to sponsor local kids’ baseball teams, and help foster a feeling of community on Main Street. Taxing America’s family businesses to death is not a sensible way to raise revenue for old ideas likely to fail again.