Center for Non-Profits - Estate Tax Fact Sheet

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Action Needed to Oppose Estate Tax Repeal

(Posted 5/14/01)

A major initiative of President Bush's tax cut plan revolves around the repeal of the estate tax. There is substantial debate regarding the impact of repeal on the non-profit community, charitable donations and bequests, and spending on government programs. This part of the Bush tax cut passed the U.S. House of Representatives on April 4th by a 274-154 margin, and is awaiting action in the United States Senate. On Friday, May 11, Senators Charles Grassley and Max Baucus announced consensus on a "Chairman's Mark" that would repeal the estate tax by 2011. The Senate version, S. 275, is being fast-tracked, with debate underway in the Senate Finance Committee, which expects to vote on the measure by Tuesday, May 15, with a full Senate vote possible as early as Friday, May 18. An alternative sponsored by Senators Cochran (R-MS) and Conrad (D-ND) would raise both the taxable estate threshold and the exempt values of small businesses and family farms without repealing the estate tax completely.

Action Needed: New Jersey Senator Jon Corzine has already taken a public position against estate tax repeal, and should be commended for his leadership on the issue. Quick contact is needed with Senator Robert Torricelli, a member of the Senate Finance Committee -- to convey your opposition to complete repeal of the estate tax. He should be urged instead to support the Cochran-Conrad alternative proposal. His phone numbers are as follows:
Senator Robert Torricelli -- 202/224-3224, fax 202/224-8567

Additional estate tax resources are listed at the end of this article. If you need more information, please contact Brian Berness at the Center at 732/227-0800 or e-mail BrianB@njnonprofits.org.

Background on the Estate Tax Repeal Debate

Currently, the estate tax is only applied to estates valued at $675,000 and above. Under previously enacted legislation, this threshold is rising annually and by 2006, estates that can be taxed must value in excess of $1,000,000. Presently, this tax is paid by less than 2 out of every 100 estates--that is, of the 2.3 million people who died in 1997, only 42,901 had taxable estates.

Under the proposed plan, over the next several years, the estate tax rates will be gradually decreased as this threshold rises, resulting in the complete elimination of the estate tax by 2011.

Some groups favor this repeal because they say it will create jobs as well as save family farms and small businesses from having to be sold in order to pay the estate tax. They also say that the estate tax is tantamount to unfair double taxation.

Opponents of repeal fear that such action will dramatically reduce charitable bequests and the amounts of money spent on government programs as well as increase the divide between rich and poor in America.

The Joint Committee on Taxation has estimated that repealing the estate tax will cost the federal government approximately $186 billion over a 10-year phase-out period from 2002 to 2011. After the phase-out period, $800 billion to $1.3 trillion, or $80 to $130 billion annually, would be lost in the following decade from 2012-2021.

State governments also receive revenue through the federal estate tax. Under the current provisions of the federal estate tax, taxpayers receive a dollar-for-dollar credit against their federal estate tax liability for state estate and inheritance tax payments up to a specified amount. The maximum amount of the credit varies by the size of the estate. Under the Senate Finance Committee proposal, this credit would be repealed by 2005.

In most states, the estate and inheritance taxes are designed in such a way that states would face either a full or partial loss of revenues if the federal estate tax were repealed. New Jersey would suffer a partial loss of revenue from estate taxes, and in fiscal year 2000, New Jersey would have lost an estimated $158 million. This number would surely increase in years to come.

Recently, 120 of America's wealthiest people, including Warren Buffet, David Rockefeller, Jr., and George Soros signed a petition warning against the repeal of the estate tax. They said that repealing this tax would cost the government billions of dollars and will ultimately force the government to increase taxes or cut Medicare, Social Security, environmental protection, or other programs to make up for the lost revenue.

Many opponents of the complete repeal of the estate tax have expressed support for raising the threshold for taxable estates or making adjustments to the estate tax system that raise the exemptable values of family farms and small businesses. The Center for Non-Profits believes that Congress should indeed make adjustments to the current system, as the existing problems can rather easily be mended without dismantling the tax altogether.

Myths Surrounding the Repeal of the Estate Tax

In recent years, the terms and implications of repealing the estate tax have been defined primarily by its proponents. Some of the most widespread myths about repealing the estate tax appear below.

Myth 1:
Proponents of this repeal call the estate tax the "death tax." They believe that this money has been taxed once already as income and that the estate tax constitutes double taxation.

Fact:
This money is not being taxed on death, but as income to the beneficiaries of an estate. A significant portion of the value of all estates, and a majority of the value of the largest estates, have NEVER been subject to either the income or capital gains taxes even once. Most of this income is and has been sheltered between the generations. The estate tax completes the income tax; much of it is applied to money that has never been taxed as income in the first place.

Myth 2:
Proponents of this repeal like to say that estates are taxed at 55 percent.

Fact:
This is only part of the story. The estate tax rates go from 37 percent on the smallest taxable estates ($675,000) to the highest estate tax rate of 55 percent on estates valuing over $3 million. On average, after extensive estate planning, applicable exemptions, deductions, credits, and reclassifications of the total value of an estate, in 1997, estate taxes amounted to approximately 17 percent of the gross value of the estate-less than one-third of the highest 55 percent marginal rate. In 1997, of the 42,900 taxable estates, only 14 percent of all estates were valued over $2.5 million. Even fewer were valued over $3 million.

Myth 3:
The estate tax needs to be repealed because it affects family farms and small businesses that are often forced to be sold in order to pay the estate tax.

Fact:
In 1998, only 1.4 percent of the taxable estates included a farm that accounted for at least half of the gross estate, and only 1.6 percent included a small business. In estates valued at less than $5 million, farms and small businesses accounted for less than 4 percent of the assets. Right now, only 6 out of 10,000 people who die leave a taxable estate ($675,000 or more) in which a family business or farm forms the majority of the estate.

Current law also provides for higher estate tax exemptions for farms and family-owned businesses. The exemption for most estates that include such a farm or business is $1.3 million. A couple can exempt up to $2.6 million. Also, beneficiaries can defer the payment of estate taxes on businesses or farms for up to 14 years if the value is at least 35 percent of an estate.

Myth 4:
Amounts of charitable giving would not decline because people give out of a desire to help society.

Fact:
While altruism and the desire to help those less fortunate are real reasons why people give to charity, many other people give in order to defray the amounts of taxes they pay. Research has consistently shown that the estate tax has resulted in an increase in the amounts of charitable bequests. The repeal of the estate tax will undoubtedly cause some decline in charitable giving.

Studies done by the U.S. Department of Treasury and Duke University indicate that charitable donations would decline by as much as 12 to 45 percent if the estate tax were repealed because people would have less of an incentive to give.

Religious institutions, universities, and hospitals, which typically receive large donations and bequests, might be hurt most by a decline in giving. Ultimately, it would be difficult for all non-profits to compete for fewer donations by the time the complete phase-out occurs in 2011.

For more information about the estate tax repeal legislation, please contact Brian Berness at the Center for Non-Profit Corporations at (732) 227-0800 or by e-mail at BrianB@njnonprofits.org.

Additional Web resources on this issue:

OMB Watch Estate Tax Resource Page: http://www.ombwatch.org/npadv/estatetax/

Center on Budget and Policy Priorities analysis: http://www.cbpp.org/4-3-01tax.htm.

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