The Oregon Estate Tax’s $2 Billion Loophole

Chuck Sheketoff

This fall Oregonians may vote on a ballot measure that boils down to a choice between preserving funding for schools, public safety and health and human services or giving a tax break to heirs of millionaires and multimillionaires. That vote, if the measure gets certified, will decide whether to continue the Oregon estate and inheritance tax.

That tax affects only the estates of the wealthiest 3 percent of Oregonians who die. If you go to two funerals a week for an entire year, you might attend two or three where the deceased’s estate would pay any Oregon estate tax. Even the busiest funeral parlor director won’t see many individuals subject to the Oregon estate tax.

Often lost in the debate about continuing the estate and inheritance tax is the fact that about $2 billion of capital gains on assets transferred at death escape the income tax each year in Oregon. Under a loophole in the income tax code that works in tandem with the estate and inheritance tax, when property is transferred upon death to an heir, unrealized capital gains on the property are excluded from the personal taxable income of the recipient of the transfer.

Here is how it works.

Assume Grandpa bought $10,000 of Nike stock on August 1, 1995. When Grandpa died mid-May of this year, his 876 shares were worth about $94,900. At the time of his death he had never paid income taxes on the $84,900 in profit from his investment; they were unrealized gains.

Under his estate plan, Grandpa’s stock passed to you at his death. Two weeks after he died you sold the Nike stock and got about $95,300.

Under the $2 billion estate and inheritance tax loophole, you will only pay income taxes on the $400 difference between the value of the stock at Grandpa’s death ($94,900) and the value of the stock when you sold it ($95,300).

The $84,900 in unrealized profit that Grandpa had and the $95,300 gift to you totally escape the income tax through an income tax loophole written as part of the estate and inheritance tax system.

Add up all the sales this year of assets transferred to Oregonians at death and you get the $2 billion per year estate tax loophole that allows those assets to avoid all taxation. This loophole exempting from taxation $2 billion in profits costs taxpayers an estimated $194 million a year in lost tax revenues — money that otherwise would fund schools, public safety or health care.

The $2 billion-a-year loophole is generous enough. Granting the heirs of millionaires and multimillionaires still more tax breaks — especially when schools are cutting teachers and college education is increasingly unaffordable — makes no sense.

The initiative’s proponents don’t like to mention the $2 billion loophole. But the loophole is one of several good reasons why Oregonians should vote “no” on any effort to repeal the estate and inheritance tax.

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.

By Chuck Sheketoff July 18, 2012 Posted in open discussion.