A new Democratic proposal to increase the capital gains tax could cost 745,000 jobs, a study published by the Regional Economic Models Inc. (REMI) projects.
The Sensible Taxation and Equity Promotion (STEP) Act, which would tax unrealized capital gains when heirs inherit assets, among other things, would have a "significantly negative impact" on the economy, including average job losses of 745,000 over 10 years, the report found.
The analysis, conducted for the Committee to Unleash Prosperity, found that sustained annual job losses from eliminating a tax benefit on appreciated assets known as the step-up in basis could eliminate between 537,000 to 949,000 jobs, with models predicting a base of 745,000 lost jobs through 2030.
Sen. Chris Van Hollen (D-Md.) introduced the STEP Act, which seeks to eliminate the step-up in basis and trigger immediate capital gains taxes for those whose assets are transferred by gift, in trust or upon death. It still maintains the existing $1 million exemption.
The step-up in basis protects business owners whose business is worth far more now than decades earlier when they started it, to pass on the business to family members with no capital gains tax because the cost basis of the business is "stepped up" to its current value at death. Van Hollen's bill would eliminate this provision.
"The stepped-up basis loophole is one of the biggest tax breaks on the books, providing an unfair advantage to the wealthy heirs every year," Van Hollen argues. "This proposal will eliminate that loophole once and for all. It's time to stop subsidizing massive inheritances for the rich and start investing in everyday Americans."
The Joint Committee on Taxation has estimated that the stepped-up basis provision was worth $41.9 billion in 2021 alone.
REMI also evaluated the impact of the STEP Act on U.S. economic output, private investment, and research and development (R&D) spending. At a minimum, and over a 10-year period, REMI predicts a gross domestic product (GDP) loss of $824 billion if the act were to beome law, a private investment decline of $612 billion, and a drop in R&D spending of $6.2 billion.
It also projects the STEP Act would lead to a minimum 10-year loss in personal income of $1.1 trillion, which translates to $8,748 per household.
An earlier projection conducted by the consulting firm Ernst & Young on behalf of the Family Business Estate Tax Coalition also found that repealing the step-up in basis provision would hurt GDP and significantly decrease job creation. Its projections were less severe than REMI's, predicting 80,000 fewer jobs over 10 years and 100,000 fewer jobs for every year thereafter. It also estimated a $10 billion per year reduction in GDP.
Chris Netram, vice president of tax and domestic economic policy at the National Association of Manufacturers, told The Fence Post: "Stepped-up basis protects family-owned manufacturers from significant tax bills when businesses are passed on to the next generation. As this report shows, repealing step-up could have a dramatic impact on small manufacturers across the country, potentially requiring families to liquidate businesses, leverage assets, or lay off employees to cover the tax hit.”
While President Joe Biden has said he supports repealing the stepped-up basis provision, a White House official told Fox News that his tax proposal includes a carve-out for small, family-owned businesses and farms, although those details have yet to be disclosed.