OPED/DOHERTY/1stjc/19 inches/mark2nd

Los Angeles holds its breath awaiting (and fearing) a new owner for the Dodgers, and baseball loses its last family-owned franchise. Strange as it may seem, tax laws are largely to blame.

Peter O’Malley said it himself, according to news reports in early January. The team would present a heavy tax burden to his family if he were to die, O’Malley said. What didn’t get across to those used to only income or capital gains taxes was the huge and crippling nature of the estate taxes that cause many a family business to be sold or liquidated when the owners die.

The estate tax is inspiring the O’Malleys to leave baseball and potentially leaving L.A. fans in the lurch. Sure, the O’Malleys are promising to find a buyer who vows to stay in L.A., but the history of modern corporate-owned sports franchises doesn’t inspire much confidence.

And for what? That tax is both very tough on businesses and almost worthless to the federal government a lose/lose proposition for the entire economy. While the O’Malleys’ decision is focusing L.A.’s attention on the dilemmas estate taxes can cause, it’s not just mega-millionaire magnates who have reason to dread these levies.

“It’s one of the top issues with our members,” says Raymond Keating, the chief economist with the Small Business Survival Committee in Washington, a pro-entrepreneur organization representing 40,000 small businesses. “It certainly plays a large part in small businesses not being able to be passed on to second and third generations.”

The estate tax is one of the worst imaginable in terms of incentives for building and maintaining a thriving business. It taxes accumulated capital directly, and at unusually high rates. And taxing capital means ultimately taxing jobs, which depend on that accumulated capital.

For instance, passing on estates worth $600,000 garners a 37 percent tax rate, which goes up as high as 55 percent on estates worth more than $3 million. (And the IRS decides how much your property and equipment are worth!)

When the value of land, property, and equipment are considered, you needn’t be an O’Malley you might be just a regular guy who owns a couple of pizza restaurants and your hapless heirs would owe the IRS well over $1 million upon your death.

No wonder family-owned businesses want to sell out to big companies often there’s just no other way to pay the tax bill that comes with death. (The estate tax is also to blame in some degree for the rapid disappearance of family-owned newspapers; many have had to sell to chains to deal with estate taxes.)

Real plutocrats are far more likely to be expert in the sort of trusts and shelters that cushion the tax blow. The estate tax is far more damaging to the smaller, family-owned business, and a real barrier to minorities especially, who are more likely to be building up a first generation of wealth to try to pass on to their children.

This tax is no winner for the feds, either. Estate tax revenues have floated around 1 percent of federal revenues for the past few years, practically a rounding error when it comes to federal budgets.

And the collection costs for the tax are so huge that the Center for the Study of Taxation estimates compliance and enforcement costs add up to 65 cents for every dollar collected. Part of the reason for the huge compliance costs is that over 10,000 cases are now in court where families are challenging the IRS’s estimation of the estate’s worth.

When you think about the business deaths and job loss the taxes can cause, it’s more than possible that the estate tax is of practically no benefit whatsoever to the feds.

Fortunately, some politicians, led by California’s Rep. Chris Cox, R-Newport Beach, are contemplating putting the estate tax out of all of our misery. Cox has over 100 co-sponsors for a bill to end the tax entirely, and Fortune magazine reported back in November that killing the estate tax could be a surprisingly prominent element in Republican legislative priorities this year.

We can only hope so. A USC law professor, Edward McCaffrey, put it best while testifying before the Senate Finance Committee: The estate tax is a tax on work and savings without consumption, on thrift, on long term savings. There is no reason why even a liberal populace need support it.

Without the estate tax, L.A. might be able to rest easy with the Dodgers in the hands of the family that owned it for 47 years and truly loved L.A. And all those who work hard to build a family business could rest (and rest in peace) easier.

Brian Doherty is assistant editor of Reason, an L.A.-based social and political commentary magazine.

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