Policy Documents

The Economic Impact of an Enterprise Value Tax

J. Scott Moody –
November 1, 2011

In legislation backed by Congressional Democratic leadership last year, there was an attempt to more than double the taxation on the sale of many businesses. A provision in that legislation, known as the “Enterprise Value Tax,” would have changed the federal taxation on a sale of any business structured as a partnership from a capital gains rate of 15% to ordinary income rates. Under the proposed legislation, entrepreneurs and family members owning small businesses other than family farms would no longer qualify for the 15% capital gains treatment upon the sale of their business if the entity held any form of partnership interest, interest income, investment real estate or securities.

The Enterprise Value Tax, or EVT, passed in the House of Representatives in 2010 as part of “H.R. 4213: American Jobs and Closing Tax Loopholes Act,” and is a part of President Obama’s proposed American Jobs Act now before Congress. The adoption of an Enterprise Value Tax would be especially damaging to Washington businesses and economy for the following key reasons:

  • A large portion of Washington businesses are structured as partnerships
  • The imposition of an EVT would pull money out of the private sector, reducing working capital that would be better used to expand an already anemic economy
  • Many Washington lawmakers are proposing to close loopholes and stabilize revenues through reform of the state tax system — an effort that would be thwarted by an Enterprise Value Tax imposed at the federal level

For these reasons, Washington state policymakers should oppose a federal EVT due to the economic damage it would inflict on Washington’s local businesses and residents.

Partnerships are an important segment of America’s economic and business landscape. According to business data from the United States Internal Revenue Service, in 2007 there were 3.1 million partnerships consisting of 18.5 million partners with $20.4 trillion in assets and nearly $10 trillion of equity. By 2010, the IRS estimates the number of partnerships will swell to 3.8 million, including thousands located in Washington state.

According to the United States Department of Treasury, the original intent of a capital gains tax was to take into account that an entrepreneur’s income is not guaranteed but rather it is subjected to certain risks that the individual must bear. Congress’ proposed EVT legislation would no longer take into account this entrepreneurial risk and would significantly increase the tax burden on most partnerships when they are sold. The EVT proposal is written so broadly that it would sweep up partnerships and most family businesses, many of which are unaware they are facing a potentially large new tax on the accumulated value of their working careers.