Copyright 2000 The Washington Post
The Washington
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June 5, 2000, Monday, Final Edition
SECTION: A SECTION; Pg. A01
LENGTH: 1767 words
HEADLINE:
Estate Tax Affects Few Heirs, Yet Repeal Bid Gains Support
BYLINE: Glenn Kessler , Washington Post Staff Writer
BODY:
Sandy Graffius is in the business of
death--manufacturing and selling concrete burial vaults used to protect the dead
when they're lowered into the ground. Someday, she would like to hand over her
Sinking Spring, Pa., company to one of her three daughters. But she fears the
estate tax, called the "death tax" by its opponents, could kill the firm because
her family would have sell it to pay estate taxes.
The campaign to
repeal the estate tax has been built on this kind of anecdote--stories of
small-business folks and farmers who think they won't be able to pass on their
businesses to their children because of a potentially crushing tax burden
imposed on their estates after death. The strategy has helped build bipartisan
momentum: Four dozen House Democrats, including some of the most liberal and
members of the Black Caucus, plan to join Republicans this week in voting to
repeal the tax.
But a close examination of recent Internal Revenue
Service data and interviews with a variety of academic experts suggests the
estate tax, estimated to raise $ 28 billion this year, actually hits only a
relative handful of small-business entrepreneurs and farmers. In 1998, the
latest year for which figures were available, 3 percent of taxable estates had
significant farm or small-business assets, or about 780 small businesses and 650
farms out of nearly 47,500 returns.
In fact, about 98 percent of
Americans pay no estate tax, and most who do pay it don't pay much.
The
biggest winners of an estate tax repeal would be a tiny group
of people. About half of all estate taxes in 1998 were paid by fewer than 3,000
estates--those larger than $ 5 million, IRS data show.
Estate tax
opponents also claim that the costs of complying with the estate tax are equal
to the revenue raised. But Alicia Munnell, the economist who is cited as the
original source of that estimate in a Joint Economic Committee report, said her
work was taken out of context to inflate the figure.
Charles Davenport,
a law professor at Rutgers University who specializes in tax policy, said a
generous estimate of total planning costs, estate administration and IRS
administration would be about 7 percent of the revenue, and more likely it was 2
percent to 4 percent.
"A lot of myths abound in the land about the
estate tax," he said. "Many people don't realize they are not at a level of
wealth that could be affected by the estate tax."
The first $ 675,000 of
an estate is exempt from tax and the level rises to $ 1 million in 2006. Farms
and closely held businesses have a $ 1.3 million exemption. An estate can pass
tax-free to a spouse and any donations to charity are not taxed.
Neil
Harl, agriculture law professor at Iowa State University and author of three
volumes on the estate tax, said Congress already had provided enough other
exemptions, discounts and extended-payment schedules that, with a little
planning, someone could shield as much as $ 4 million in farm or small-business
assets from taxation. "I'm convinced [estate tax repeal] is a
stalking horse for those with huge estates who know they would have trouble
arguing they should get a break," Harl said.
But many opponents of the
tax say it is just wrong, regardless of who pays it. "It's an unfair tax," said
Rep. Jennifer Dunn (R-Wash.), who has led the Republican effort to end the tax.
"In this country, we ought to be able to work hard and leave what we have
accumulated to our children."
Estate taxes in some form have existed for
centuries, even among the Romans, and the version today in the United States was
enacted in 1916 to help fund World War I. Part of the rationale for the estate
tax is help capture revenue from huge gains in stock and bond investments that
otherwise are never taxed unless they are sold. Over time, the estate tax has
never raised a significant portion of federal tax revenue, generally less than 2
percent of the overall pie.
While the marginal tax rate can climb as
high as 55 percent, the effective tax rate is much lower--on average 20
percent--because such a large chunk upfront is exempt from taxation. In 1998,
estates valued at $ 600,000 to $ 1 million, which accounted for nearly half of
all taxable estates, had an effective tax rate of 6 percent.
About 2
percent of deaths result in estate tax liability. Budget estimates to 2010
suggest the percentage won't change, even with incomes rising and the prospect
that the baby boom generation stands to inherit a fortune in accumulated wealth
from its parents. One reason is the scheduled rise in the exemption to $ 1
million.
Yet the campaign to roll back the tax has a lot of strength. A
broad coalition that includes women and African American business groups, car
dealers and small-newspaper owners, and Hispanic and Indian business owners has
argued that estate tax has led to rise of business conglomerates and prevents
minorities from establishing a foothold in the business community because
businesses must be sold to pay the estate tax.
Republican presidential
candidate George W. Bush has promised to repeal the tax, while his Democratic
rival, Vice President Gore, supports expanding an exemption for land transfers
used for conservation.
Rep. Charles B. Rangel (D-N.Y.), senior Democrat
on the House Ways and Means Committee, recently offered an alternative that
would exempt the first $ 4 million of an estate for farms and closely held
businesses, up from $ 1.3 million now, and reduce estate tax rates. The Clinton
administration has opposed repeal of the tax, estimated to cost $ 50 billion a
year within a decade, but has indicated it would accept Rangel's plan.
Douglas Holtz-Eakin, chair of the economics department at Syracuse
University, said the IRS data may be incomplete because entrepreneurs may sell
their businesses before they die because they fear the estate tax.
Frank
Blethen, publisher of the Seattle Times, a family-owned newspaper, and a leader
in the lobbying to eliminate the tax, said the data "doesn't include the
hundreds of thousands of businesses that sell out or liquidate" before the owner
dies. Blethen, who spends $ 30,000 a year on life insurance premiums, said
buying life insurance to help fund possible tax liabilities also is a drain on
businesses much smaller than his.
Holtz-Eakin has conducted research
indicating that the estate tax adversely affects investment and employment at
small businesses. But he conceded that the same could be said for a variety of
other taxes and that it isn't clear whether the estate tax poses a relatively
higher burden than, say, capital-gains taxes or payroll taxes.
Davenport
and other estate experts contend the tax unfairly gets blamed for cash-flow
problems at small businesses after an owner dies. He said a bigger problem for
small businesses than the estate tax is figuring out how to divide an estate
among more than one heir, especially if only one child wants to continue the
business.
There are provisions in the tax code to allow estates to
stretch out tax payments for more than a decade and also sharply reduce the
assessed value of a business. Yet some companies get squeezed between having
assets that have value, such as land and business machinery, and yet little
available cash to pay an estate tax bill.
One frequently cited example
is Sengstacke Enterprises, a Chicago-based black newspaper chain that recently
was put up for sale by its heirs after it was hit with an estate tax bill of
more than $ 2 million. But its cash-flow problems were compounded by poor estate
planning--the owner left the estate to his grandchildren without setting up a
trust, increasing the overall tax bill by 30 percent, said David Shayne, one of
the estate's lawyers.
Some estate experts say heirs don't always want to
continue the business, so paying the estate tax is just a convenient excuse for
selling it. That's one thing that worries Jimmie Crowder, 61, owner of a funeral
home in South Hill, Va.
He figures that, counting his $ 1 million
insurance policy to help pay estate taxes, his estate would be worth $ 3.7
million, with the funeral home accounting for about $ 1.2 million of that
amount. He would let a son who works for him inherit the enterprise, but Crowder
says it's a tough industry, with lousy hours, extensive government regulation
and not much profit.
"I'll be honest with you, I'm not sure he'll stay
here when I'm retired or dead," Crowder said.
Graffius, 64, the owner of
the Pennsylvania burial vault company, estimates that her estate would be valued
at $ 5.5 million, of which $ 1.5 million is her business. She has been
transferring, tax-free, $ 10,000 in stock every year to one of her daughters,
who now owns about 12 percent of the company. Graffius also spends about $ 2,600
a year in insurance premiums to buy a $ 1 million policy to help defray estate
taxes.
But she was surprised to learn that only a few hundred estates a
year have significant small-business assets. "I thought it would be more," she
said.
In some ways, the estate tax has been good to Graffius: She was
able to build her business by buying two companies that she says sold out for
estate-tax purposes. "It helps me as far as making mine grow while I'm alive,"
she said. "The trick is to live. That's good."
A Big Difference
. . .
Estates of more than $ 5 million accounted for more than half the
total federal estate tax collected in 1998, the latest year for which figures
were available.
Estate tax collected for each value of estate
$
600,000 to $ 1 million $ 921 million
$ 1 million to $ 5 million $ 9
billion
$ 5 million and above $ 10.4 billion
Number of returns
per value:
$ 600,000 to $ 1 million 20,106
$ 1 million to $ 5
million 24,479
$ 5 million and above 2,898
Average tax collected
per value:
$ 600,000 to $ 1 million $ 46,000
$ 1 million to $ 5
million $ 369,000
$ 5 million and above $ 3.6 million
.
. . And a Smaller Impact
The estates of small-business-people and
farmers formed a small percentage of estates worth more than $ 600,000, the
minimum cutoff in 1998.
Taxable estates with at least half their value
in farm assets and farm real estate: 642
1.4% of total
Taxable
estates with at least half their value in small-business assets: 776
1.6% of total
SOURCE: Internal Revenue Service, Treasury Office
of Tax Analysis
GRAPHIC: IG,,TWP
LOAD-DATE: June 05, 2000 
