June 16, 1999

Thank you, Chairman Archer, for holding a hearing on proposals to reduce the tax burden on personal savings. We particularly wish to focus on the effect of the estate tax on family-owned businesses. The Food Marketing Institute (FMI) is pleased to submit testimony today because elimination of the estate and gift tax is our top legislative priority for the 106^th Congress. About 1,000 of our members are closely held businesses — often family owned — and the burden of planning for and paying estate taxes is a critical issue for their companies.

The bricks and mortar to build a supermarket can cost $3 million alone, so most grocery store owners, even the smallest — who comprise more than half of our membership — have personal assets taxed at the top marginal rate of 55%. This tax kills family businesses and affects local jobs. We also have less than 20 minority owned grocers, most first-generation business owners — the first in their families to accumulate capital — who wonder if their children will be able to participate in the great American economy. Our members are your constituents. Their customers, who visit supermarkets on an average of 2.2 times a week, depend on them not only for food shopping convenience, but also for local support in charity and community events. They are also significant employers in their local operating areas.

A small food retailer with one to three stores may have assets worth about $20 million. That creates an estate tax bill of about $10 million. With yearly profits of a penny on the dollar — the industry average — the owner has very little cash on hand. While some FMI members buy life insurance just to prepare for paying the tax, many cannot afford the premiums necessary to protect all of their assets.

The Food Marketing Institute (FMI) is a nonprofit association conducting programs in research, education, industry relations and public affairs on behalf of its 1,500 members including their subsidiaries — food retailers and wholesalers and their customers in the United States and around the world. FMI's domestic member companies operate approximately 21,000 retail food stores with a combined annual sales volume of $225 billion — more than half of all grocery store sales in the United States. FMI's retail membership is composed of large multi-store chains, small regional firms and independent supermarkets. Its international membership includes 200 members from 60 countries.

FMI's President and CEO Tim Hammonds is the co-chairman of a unique coalition that was announced yesterday — Americans Against Unfair Family Taxation. What makes us unique is that we represent family-owned businesses throughout the United States. The coalition will give this issue a much higher profile through a national television and print advertising initiative and a series of local town meetings designed to inform the American people. Research already conducted shows that Americans believe a top 55% tax rate is too high and simply unfair.

Effect of the Estate Tax when a Supermarket Owner Dies

Supermarket succession, the passing of years of hard work on to the next generation is a top concern of family-owned supermarket retailers and wholesalers. Succession planning is long and difficult. Owners are forced to answer difficult questions about the future of a company they have worked their entire lives to create and grow. The transfer of ownership and the family dynamics are central questions in the decision to plan for the future of the business.

The shocking reality is when the owner realizes that up to 55% of his or her company can be lost to estate and gift taxes. When the owner of a supermarket dies, the individual's estate is subject to federal and state death taxes. The tax not only covers the life savings of the one who passed away, abut also the home, land, pensions, life insurance, stocks and bonds, annuities, IRAs, 401K plans and the business assets and anything else that has any economic value. The deceased has already paid income tax on that money. They have paid and collected payroll taxes and employment taxes; many have paid capital gains taxes as well.

Food retailers and wholesalers run capital intensive businesses, requiring large investments in land, stores or shopping centers, refrigeration, point-of-sale equipment, large inventories, lighting, transportation, such as fleets of trucks, etc. One single asset of a company can be more than the amount of the $650,000 exemption or threshold for the unified credit. Owners of most family owned grocery stores plow their after tax profits back into their stores in equipment, new consumer services, associates/jobs, remodeling and new store development. As mentioned earlier, the average profit of our industry is one penny on the dollar after taxes, so you can see why the supermarket industry is particularly vulnerable to the devastating effect of this tax.

Family-owned supermarkets that do survive after the principal owner's death have already spent thousands, and even more than $3 to $5 million, according to industry members surveyed, to simply plan for the eventuality of estate taxes. Most grocery stores involved in planning purchase life insurance, have buy/sell agreements or provide lifetime gifts of stock. FMI strongly believes that the resources spent planning for and paying the death tax could be used more productively to grow supermarkets, provide customers with value and create additional jobs in the economy.

It is hard to imagine a more onerous or unfair tax. When the owner dies, as much as she or he may have wanted to pass the business down to the children or cousins, the estate tax puts them in a deep financial hole. This is even before they get started. Some try to stay in business by taking out a loan with the Internal Revenue Service as their silent partner, skimming off a large portion of the profits every year, stifling job growth and business expansion. This option is extremely risky. The supermarket industry has never been more competitive than it is today. To survive, owners must use all available capital to upgrade their stores with new services and invest in technology to stay as efficient as possible. They need all of their slim profits, along with loans from banks and other sources, to remain competitive.

All too often, however, the estate tax forces them to close or sell the store. And the community loses an institution that may have supported the local economy for years. And the industry loses another independent operator, historically the source of greatest innovation in our business. The whole idea of the self-service supermarket, an American innovation, started with independent entrepreneurs in the 1930s.

Economic Effects of the Federal Estate Tax

The icing on the cake for FMI members is that after involved planning, which takes assets away from their business while they are alive; they are shocked to learn that the tax raises almost no revenue for the federal government.

The Joint Economic Committee of Congress released a "dynamic" report in December 1998, which found that this tax "raises very little, if any, net revenue for the federal government." The JEC also concluded that the estate tax results in losses under the income tax that are roughly the same size as the revenue brought in by the estate tax. Annual death tax receipts total approximately $23 billion, less than 1.4% of total tax revenue.

FMI believes Congress needs to do much more than simply increase the unified credit to help the growing number of family owned businesses facing high estate tax rates upon their deaths. The supermarket industry urges Congress to focus on eliminating these high tax rates. As mentioned earlier, raising the unified credit does little to ameliorate the ravaging effect of this tax. Closely held supermarkets and their wholesalers are capital intensive businesses, whose owners invest profits back into their business, but pay taxes at the personal rate. Lifetime assets easily exceed the unified credit amount of $650,000 (under current law, up to $1 million by 2006).

In the House of Representatives, we strongly support the bipartisan, leadership legislation, H.R. 8, introduced by Reps. Jennifer Dunn and John Tanner that calls for gradual elimination of the death tax by 5% per year over a period of 11 years. We also support H.R. 86, introduced by Rep. Chris Cox, which calls for full and immediate repeal of this tax. Versions of H.R. 8 have also been introduced in other tax packages, sponsored by Rep. Sam Johnson and Reps. Jennifer Dunn and Jerry Weller. We urge Congress to include legislation eliminating the estate and gift tax in any upcoming tax legislation.

Summary

The federal estate tax has become a huge disincentive to continuing small family owned businesses. Take for instance, the two-store operator in the nation's heartland, who has built his business so he now employs 500 people, with 200 jobs added in just the last five years. The fair market value of his business is $10 to $20 million. He has spent between $600,000 and $1 million in succession planning, but he will have to sell all or a part of the business when he dies to satisfy the estate tax. He believes he will grow and expects to employ 700 people in his community in the next five years. All would lose their positions working for this small, but important market innovator, if he died.

Another two-store operator has already spent just under $10 million in estate taxes, and the second generation has managed to hang on, by taking out a loan. This delayed the opening of a third store for almost five years and added a large debt payment. These funds otherwise could have been used to fund parts of his expansion instead of borrowing and adding cost to his operations. A few million dollars of the federal tax payment was deferred and debt taken on to pay back the federal tax over an allotted time period, so most of his profits are applied to the federal tax payments.

Supermarket owners pay federal and state taxes throughout the life of their company. When they die, the federal government steps in and takes half of the worth of the their company assets. It is unjust for our government to impose a tax that raises so little revenue while it devastates businesses and kills jobs. FMI urges you to pass legislation to eliminate this tax.

Thank you for the opportunity to present testimony this morning.