The Enterprise Value Tax

Last week I released a new study published by The Maine Heritage Policy Center examining a proposed federal tax dubbed the “Enterprise Value Tax.” (EVT)  The findings of the study (pdf) below:

In legislation backed by Congressional Democratic leadership this past spring, 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 percent 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 percent 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 Representative as part of “H.R. 4213: American Jobs and Closing Tax Loopholes Act of 2010” and is still under consideration in the U.S. Senate. The adoption of an Enterprise Value Tax would be especially damaging to Maine’s businesses and economy for the following key reasons:

  • A large portion of Maine’s small businesses are structured as partnerships.
  • The imposition of an EVT will potentially extract around $55 million annually from Maine’s economy, working capital that would be better used by Maine’s current and future partnerships to expand an already anemic economy.
  • Maine is currently experiencing a “capital flight” with the ratio of interest, dividend and capital gains income per taxpayer dropping significantly against the national average.
  • Maine policymakers have been working on reducing state-level capital gains taxes through tax reform—an effort to reduce the volatility of the state’s revenue base that would be thwarted by an Enterprise Value Tax imposed at the federal level.

For these reasons, Maine’s state and local policymakers, as well as its Congressional delegation, should continue to oppose a federal EVT due to the economic damage it would inflict on Maine’s local businesses and residents.

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