Federal Estate Tax - 1 in 250 and Shrinking
Chuck Sheketoff
Only a handful of Oregonians are subject to the federal estate tax, and their ranks will shrink further next year, according to a new study by Citizens for Tax Justice.
Only 111 Oregon estates paid the federal tax in 2007, according to the new analysis of Internal Revenue Service data. The estate tax is typically paid in the year following the death, and preliminary data from the state’s Public Health Division shows that there were 30,415 deaths in Oregon in 2006.
Thus, just four out of every 1,000 deaths in Oregon triggered the federal estate tax, according to the Washington, D.C.-based research institute. The ratio was 13 per 1,000 in 2000, before cuts to the estate tax were enacted in 2001 under the Bush Administration.
If you attended 250 funerals in Oregon in 2006, odds are only one estate would have been subject to the federal tax. With its generous exemptions, the federal estate tax affects no one but the extremely wealthy, and even many of them avoid it with tax planning and charitable giving.
The amount of assets in an estate that are exempt from the federal estate tax has grown under the Bush Administration’s tax cut scheme passed in 2001. That law increased the exemption to $2 million per spouse, $4 million per couple, in 2006 and will increase it again, to $3.5 million per spouse, $7 million per couple, in 2009. Citizens for Tax Justice notes that the 2009 increase in the exemption level means fewer estates will be subject to the tax.
Under 2001 law, the federal estate tax will disappear entirely in 2010 for one year. If Congress does nothing, in 2011 the estate tax exemption will revert to $1 million, the level it would have been at if the 2001 law had not been passed.
People have joked that "2010 is the year we throw mama from the train." But it’s more accurate to call it "the year we throw what’s left of tax fairness out the window."
The sunset at the end of 2010 and return to the law that existed before the 2001 changes are forcing the hand of Congress to act soon. I'm optimistic that Congress will settle the estate tax debate in 2009. I’ve yet to meet someone who truly believes the 2010 repeal and the 2011 return to earlier tax levels are appropriate.
Oregon’s congressional delegation will need to step up and help protect the estate tax in 2009. With routine estate planning, couples with more than $7 million in assets can still avoid paying much or all of the federal estate tax upon death. The $7 million per couple exemption is generous enough, and Congress should go no further. It would be costly, unfair and unwise to weaken the federal estate tax to the point that even fewer pay the tax, and those who do pay contribute less than they would under the terms set for 2009.
Given the challenges now facing our country that require substantial new investments, this new report from CTJ makes the case for Congress to maintain this important revenue source that applies only to extremely wealthy households.
America’s wealthiest individual, Warren Buffett, also thinks Congress should maintain a healthy estate tax. Testifying before a congressional committee last year, Buffett said, “Equality of opportunity has been on the decline. A progressive and meaningful estate tax is needed to curb the movement of a democracy toward a plutocracy.”
The federal estate tax was created nearly 100 years ago to avoid creating dynastic wealth that squelches opportunity for most Americans. Warren Buffett understands the role of the estate tax, and so should Oregon’s congressional delegation.
Chuck Sheketoff is the executive director of the Oregon Center for Public Policy. You can sign up to receive email notification of OCPP materials at www.ocpp.org</p
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11:58 a.m.
Dec 4, '08
If you attended 250 funerals in Oregon in 2006
Who do you think we are -- Harold and Maude?
Dec 4, '08
Maintaining the estate tax is an affront to family values! And the children of the wealthy are surely more able to continue their father's work. Look at Dubya!!! Now what's wrong with that picture?!? It's not as though his lineage and financia.l advantages gave him the presidency, he was ust the right man for the job. NOT!
Dec 4, '08
Evan - while that was sort of a cult film years ago that some people saw almost 250 times, I wouldn't be surprised to learn that even some funeral directors in Oregon didn't attend 250 funerals that year. But you get the point - members of Congress who don't want to preserve the estate tax are not representing a very big group nor a typical voter.
Dec 4, '08
Remember, 7 mill. is exempt and the amount over that is subject to tax. So, if the well healed estate is valued at 100mill. the kids receive 7 plus roughly half of the remaining 93 mill. Tough to be sympathetic about their loss.
Dec 4, '08
"The federal estate tax was created nearly 100 years ago to avoid creating dynastic wealth that squelches opportunity for most Americans."
My understanding is that the estate tax was created to re-capture capital gains that are lost when the basis of property re-sets at death. Potential capital gains (and corresponding taxes) are lost when the basis of property re-sets; the estate tax was/in an attempt to fairly tax these gains, not to prevent dynasties.
The estate tax makes sense for property that appreciates, but doesn't make sense for income earned in life. Let's say someone has $7 million in the bank. On the last day of his life, he earned $100K, paid $35K in taxes and put the remaining $65K under his mattress. Upon death, he attempted to pass the $65K to his children, and they were required to pay another $32.5K in taxes, leaving his children with $32.5K out of the initial $100k.
Except with the estate tax, income is not taxed twice. The argument that rich people should pay more taxes just because they're rich grows tired. Especially in regard to the estate tax, which is out-of-sync with the general principles of the tax code. And yes, I agree that rich people should pay their fair share, I just don't think the estate tax is the way to do it.
Besides, why should we give the government more money so they can continue to fight wars overseas, lock up poor people at home, and give kickbacks to their corporate buddies? More government is not the answer.
Dec 4, '08
Just an aside, that this isn't an esoteric issue. As the baby-boomers inherit their parents' wealth we will see the largest transfer of assets in US history.
Coincidence that most happen to be in debt just now?
Dec 4, '08
When property is transferred at death, the recipient gets a stepped up basis -- and that's one of the larger tax expenditures.
Dec 5, '08
Chuck, you have hit upon a major flaw (some would say opportunity) in the system. I assume the reason why a decedent's assets are given a step up in basis is to compensate for the fact that the assets have to pass through the estate tax system. If you pay 50% estate tax on the value of "Black Acre", it is probably unfair to then add a capital gain tax on top of the estate tax when Black Acre is then sold. But where assets pass free from estate tax - due to Bush's tax cuts or for whatever other reason - I would argue that there should be no step up in basis.
9:37 a.m.
Dec 5, '08
In fact, the elimination of the stepped up basis was included in the repeal of the estate tax. This would recoup a significant portion of the lost tax revenue, although timing of payment will be affected.
Personally, I expect to see the law changed before 2010, perhaps with the 2009 exemption levels made permanent. Despite the small number of people affected, the pre-2001 estate tax did work a hardship on many people who truly are "middle class" even if on paper they were considered the rich.
Dec 5, '08
Jack: The proposal to eliminate both the estate tax and the step up in basis is not only a large tax decrease for those now subject to the tax, but a huge increase for Middle America.
Current law: If you have a simple run of the mill non-taxable estate with value of $300,000, 95% of which consists of a home with a tax basis of $100,000. Now, No estate tax and heirs can sell home and divy up the $300,000
Republican proposed law: If we get rid of estate tax in exchange for no step up in basis, that same estate will now pay a capital gains tax (maybe 23% state and federal combined, unless most of the BO readers get their way and the cap gains goes up to 38%, in which case its more like 46%). Total tax to this same estate is $46,000.
So.
Large estates = Huge tax cut Middle America = Huge tax increase
What else is new.....Thanks Republicans
Dec 9, '08
...unless most of the BO readers get their way ...
It would be interesting to add a poll facility to the blog to test statements like this. There's some like this one that I wonder what the support level here really is. It would be interesting to have a separate poll when you press the "submit comment" button. That way you could say what percent of the voting readership wants something vs. what percent of the posting readership. I'll be there's a significant difference. I assume the above mentioned would be posters, but, all in all, it might be an interesting thing to test out.
12:27 p.m.
Dec 9, '08
"Except with the estate tax, income is not taxed twice."
You're right--as with everything, it's taxed INFINITELY. Another phrase for income is "recipient of a money transfer." When you receive money, you are taxed on the transfer. That's true whether it's:
wage income investment income gambling (eg lottery) income estate income *gift income
There are exemption ceilings for most of these, but the bare fact remains: when you receive income, you pay a tax. I believe that the less direct effort you expend to get that income, the higher the tax should be. In other words, wage income--the result of direct economic productivity--should be taxed lowest, or at minimum no higher than any other form of income. Investment income reflects residual productivity, but the process that directly generates investment income does not require effort on the part of the beneficiary. I would be willing to put estates somewhere between investment and gift income; there's a potential for estate recipients to have had an indirect hand in creating that income at some point (say, working the family farm), but it's still money received without direct effort. Lottery and gift income, of course, accrues to you simply by being you, and either nice or lucky.
Jack Roberts: "the pre-2001 estate tax did work a hardship on many people who truly are "middle class" even if on paper they were considered the rich."
<h2>Name three of those people. I'd be willing to bet you can't, since all previous attempts to push this canard have failed for lack of evidence.</h2>