Senate Hearing Testimony on the Estate Tax

United for a Fair Economy Statement for Senate Finance Committee Hearing on the Uncertainty of Planning under Estate Tax Law

Nov. 13, 2007

United for a Fair Economy (UFE) is an independent, nonpartisan organization that has been raising awareness about economic inequality since 1995. UFE has worked since 1999 to prevent repeal of the estate tax. Members of UFE's Responsible Wealth project have let lawmakers know that thousands of wealthy people who expect to pay the estate tax are happy to do so, because they think keeping the tax is important to our country's future. In addition, UFE is a member of Americans for a Fair Estate Tax, a coalition of dozens of national nonprofit organizations working to retain a responsible estate tax.

UFE's report, "Spending Millions To Save Billions; The Campaign of the Super Wealthy to Kill the Estate Tax," documented that the push for repeal of the estate tax is not a grassroots movement. Instead, the repeal effort comes from a coalition of anti-tax groups, business trade associations, newspaper owners, and lobbying firms, allied with some of America's wealthiest families, including the Mars and Walton clans. The report details how 18 super wealthy families spent millions on estate tax repeal efforts in order to save $72 billion. (See .)

As the Senate Finance Committee considers changes to the estate tax, United for a Fair Economy requests that two key principles be followed. Any changes to the estate tax should be revenue neutral, compared with estate tax law starting in 2011-2020. Using any other approach would mean increasing taxes - or deficits -- for taxpayers who are not millionaires. A second important principle would be to re-introduce progressivity in the estate tax rate.

Estate tax law in 2011 contains a $1 million exemption and a top tax rate of 55%. A revenue-neutral approach to estate tax changes means that if legislation proposes to raise the exemption, the top tax rate will need to increase. One possible revenue-neutral configuration might be to combine the 2008 exemption of $2 million per spouse, with a progressive tax rate ranging from 40% on estates under $5 million to 65% on the largest estates over $20 million.

Changes to the Estate Tax Are Costly
The estate tax brings in significant revenue. Repealing the estate tax would slash federal revenues that are needed to fund programs like college loans and small business loans that build opportunity for everyone to get ahead. Full repeal would reduce revenues more than $1.1 trillion during the first full ten years (2012 to 2021), according to the Center on Budget and Policy Priorities. In the context of prolonged large budget deficits, abolishing the estate tax is fiscally irresponsible, according to Senator George Voinovich (R-OH) and other moderates in both parties who abhor the prospect of red ink for decades to come.

Proposals to sharply cut the estate tax are almost as expensive as repealing the tax. For example, Senator Kyl's recent proposal exempts the first $10 million of a married couple's estate from the tax ($5 million for an individual) and taxes the first $25 million over the exemption level at the current capital gains rate, and the amount over the $25 million threshold at 30%. The Congressional Budget Office's 2007 Budget Options (pp. 313-314) says that complete estate tax repeal and retention of the modified carryover basis would reduce revenue by $60 billion in 2012. Sen. Kyl's proposal would reduce revenue by $46 billion in 2012, or 76% as much as repealing the estate tax entirely. Like permanent repeal, this proposal is irresponsible in both its fiscal impact and its policy direction.

Even proposals to "freeze" the estate tax at the 2009 exemption and tax rate would reduce revenue by $30 billion in 2012, or 50% as much as repealing the estate tax entirely, according to the CBO Budget Options. Like the Kyl proposal, this proposal would also have the effect of reducing taxes on people who were fortunate enough to inherit large wealth and increasing taxes on middle-class people who have worked for everything they own. That runs counter to the core American value of fairness.

The Estate Tax is the Most Progressive Tax and Fairest Tax
There is now general agreement that growing economic inequality is harmful to our country. As the nation's most progressive tax, and the only tax on wealth, the estate tax plays an important role in maintaining the progressivity of the overall federal tax system and in reducing economic inequality. It helps to ensure the distribution of wealth by merit, rather than by privileges of birth. In this sense, it is our fairest tax. In addition, it enhances economic growth and competitiveness by encouraging the wider dispersion of wealth, rather than its accumulation in fewer and fewer hands.

This progressivity is illustrated by the small portion of people who pay the estate tax. In 2004, with 112,107,000 households, there were 1,120,000 households with a net worth of more than $5 million. Households with $5 million in net worth are in the top 1% of all households in wealth. When one considers that in 2007, two spouses together can pass on $4 million tax free, with no other planning efforts, it's easy to see how the estate tax is only paid by about 1% of all who die. (Data from Edward Wolff, "Recent Trends in Household Wealth in the US," June 2007; based on 2004 Survey of Consumer Finances.)

Estate Tax Does Not Threaten Small Farms and Businesses

Contrary to popular thought, the estate tax does not threaten small farms and businesses. According to the Congressional Budget Office, very few small businesses or family farms pay the estate tax - about 123 farms each year at the current $2 million exemption; all but a handful had enough liquid assets to pay the tax. In addition, to lower any estate tax owed, farmers can currently value farmland at between 45% and 75% of its fair market price. Small businesses and farmers can also pay estate taxes over 14 years. (See .)

Similarly, according to the Tax Policy Center, in 2004, with an exemption of $1.5 million per spouse, of almost 19,000 taxable estates, only about 440 were primarily made up of farm and business assets. Again, most had enough liquid assets to pay the tax. (This is why opponents of the estate tax still have not been able to find a farm sold to pay the estate tax, especially since the exemptions were increased in 2001.)

Some legislators have proposed keeping the estate tax with an unlimited exemption for qualified family-owned farms and/or businesses (QFOBI). However, as the Tax Policy Center noted, an unlimited QFOBI exemption would be very costly, and would give the wealthy huge incentives to buy farms and businesses, thus bidding up prices and actually hurting family farms and businesses. In addition, an unlimited QFOBI exemption would exempt some of the largest businesses in the world, such as Mars and Cargill. (Leonard Burman, William Gale, and Jeffrey Rohaly, "Options to Reform the Estate Tax," Tax Policy Center, March 2005.)

According to a 2004 small business survey by the National Federation of Independent Businesses, "death taxes" ranked 36th as an issue of concern to business owners- lower than "controlling my own time". The survey was of 20,000 NFIB members. (See .)

Tom Buis, President of the quarter-million-member National Farmers Union, recently stated, "Family farmers and ranchers are insulted by those who use farmers as the reason for eliminating estate taxes, when the real beneficiaries are the nation's multimillionaires."

The Estate Tax Encourages Charitable Giving
Repealing or drastically reducing the estate tax would reduce charitable giving as well, by eliminating a powerful tax incentive to make charitable donations. A study by the Congressional Budget Office shows that if there had been no estate tax in 2000, U.S. charities would have lost $13 to $25 billion in donations that year alone. Such losses could seriously weaken the enormous variety of important organizations supported by bequests and foundations, from soup kitchens to universities.

For all these reasons, United for a Fair Economy and its project Responsible Wealth advocate changing the estate tax by:

  • Maintaining the exemption at $2 million for individuals and $4 million for couples
  • Indexing the exemption for inflation
  • Keeping the step-up in basis
  • Simplifying provisions to ease the transfer of the few family-owned businesses and farms subject to the tax, and retaining the existing ability of businesses and farms to pay any tax over 14 years. One possibility would be to re-instate a higher exemption for qualifying estates with farm or business assets, for example, doubling the existing exemption. Although we support higher exemption levels for small businesses and farms because of their illiquidity, we do not believe all farms and businesses should be exempt from all estate tax responsibility.
  • Creating an automatic exemption for married couples that is double that for single people
  • Ending loopholes for non-farm estates, such as valuation discounts for multiple owners, and special trust arrangements
  • Reinstating the credit for state estate and inheritance taxes, so states do not create a mismatched patchwork of state laws, but can simply piggyback on a reformed federal law
  • Returning to a progressive rate structure, lowering the rate on estates smaller than $5 million to 40%, with incremental steps to a top tax rate of 65% on estates over $20 million.

The responsible estate tax changes we propose would:
  • Maintain the revenue expected to be generated by the estate tax from 2011-2020
  • Continue to encourage charitable giving
  • Simplify estate tax provisions regarding married couples, businesses, and farms
  • Reduce compliance and administration costs by simplifying the tax code and reducing loopholes
  • Make the estate tax more progressive and thus fairer
  • Enhance economic growth and competitiveness by encouraging the wider dispersion of wealth, rather than its accumulation in fewer and fewer hands.

In conclusion, we urge you to support fiscal discipline and tax fairness by voting against both permanent repeal of the estate tax and proposals to change the estate tax that are not revenue-neutral.
Posted in: