WASHINGTON -- CONSAD report finds that estate tax disproportionately impacts family-run businesses and that eliminating the tax sooner will have a more beneficial affect on the economy. More. . .

What is the Estate Tax?

Estate taxes constitute double or even triple taxation on assets already subjected to state and local as well as federal income taxes and capital gains taxes. Families owning two or three franchise stores or farms are likely to be subjected to the highest estate tax rate of 55%. Outside of Japan, the U.S. has the highest estate tax rate in the world.

The estate tax applies to assets of $650,000 or more at death, a figure that is scheduled to increase to $1 million in 2006.  The lowest estate tax rate is 18 percent, but because the exemption is in the form of a tax credit, estates larger than $650,000 will pay a 37 percent estate tax for each additional dollar, rising to a cap of 55 percent.

The Impact of Estate Taxes on Family Businesses

Once considered a concern affecting only the super rich, estate taxes now imperil the middle class. Every year, the livelihood of thousands of Americans is destroyed when, upon the death of a loved one, the IRS demands up to 55% of their estate. To pay that hefty sum, many are forced to liquidate their assets and sell the family business. Women and minorities are being hit particularly hard, in large part because they are increasingly becoming entrepreneurs.

Although many small business owners and farmers make modes incomes, the value of their farms and businesses make their estates subject to the estate tax. And many baby boomers are beginning to get worried. As real estate and stock values climb, more and more people are subject to the tax.

Contrary to popular belief, its not the super rich who pay the highest estate taxes but the medium-sized estates. In 1995, 69,722 estates were required to file an estate tax return., Less than half the estates filing returns owed tax. In that same year estates over $20 million paid an average tax rate of 12.5 percent while estates between $5 and $10 million paid the highest average rate, 17.4 percent. These medium-sized estates are usually owned by small business people or farm families whose wealth is tied up in capital assets.

Larger estates, which would pay higher marginal tax rates on their assets, are more likely to use expensive estate planning and take advantage of the numerous loopholes in the tax law. In the July 23, 1999 Wall Street Journal, William Beach quotes Internal Revenue Service numbers that show that 86% of all taxable estates have assets worth less than $2.5 million, and four out of five taxable estates are valued at less than $1 million. "In other words, the estate tax includes in its sights the professional who has worked multiple decades, has invested his IRA well and owns a house -- hardly the image of Croesus. . .," writes Beach, a senior fellow in economics and director of the Center for Data Analysis at the Heritage Foundation.

The upshot of the estate tax is when a family business owner dies, the children often must sell the business, farm, home, land or other major assets just to pay a tax that makes no net contribution to the federal budget.

An Impediment to Small Business Growth

The estate tax forces entrepreneurs to face two bad choices: either pay huge sums of money to lawyers, accountants and estate planners to avoid estate taxes; or leave their children with a tax bill so large they have to sell all or part of their business. A study by Congress's Joint Economic Committee found that "the estate tax contributed to the sale or dissolution of thousands of family firms," a loss that is clearly detrimental to the country's economy.

Why Should Estate Taxes Be Eliminated?

In addition to being unfair and excessively harmful to small, family-run businesses and farms, AAUFT believes the estate tax should be eliminated because it is:

• Unfairly taxing hard-earned assets many times.
• Disproportionately harmful to the newly economically empowered, particularly women and minorities. Both the Black and Hispanic Chambers of Commerce have called for its repeal.
• Environmentally unsound because farm and ranch lands often must be sold by heirs to developers to pay the estate tax.
• A distinctive to savings at a time when personal savings are at an all-time low. With statutory rates up to 55 percent and effective rates up to nearly 80 percent, estate taxes provide no incentive for savings.
• Fiscally and economically counterproductive. In addition to leading to the dissolution of thousands of family firms, the estate tax costs jobs. The large estate planning costs divert funds that could be redirected to purchase additional labor and capital.
• Generate little, if any, federal revenue. A 1996 Heritage Foundation study showed that the estate tax contributes less than 1.5 % of federal revenue: its collection and administration will cost more this year and next than it will actually yield.
• Unnecessarily constrain liquidity. The individuals who are most adversely impacted by liquidity constraints are lower-income persons who have the motivation and talent to start their own firm, but lack the necessary capital.

While its contribution to the federal coffers is minimal, its impact on family businesses can be devastating. According to a recent survey, 51 percent of family businesses said that, because of the estate tax, they would have significant difficulty surviving in the event of a principal owner's death. Fourteen percent said it would be impossible for them to survive.¹

Widespread Public Support for Eliminating the Estate Tax

There is tremendous public support for eliminating the estate tax.. According to national survey by John McLaughlin & Associates conducted as recently as January 29th 2001:

• 78.5% of likely general election voters approve of abolishing the estate tax;
• 88.5% say it is unfair to tax a person's earnings when earned and then again when they die;
• 75% said that present estate tax rates can discourage Americans from keeping businesses or farms in the family;
• 75% of respondents said they would be more likely to support a member of congress who voted to reduce estate taxes;
• 89% of likely general election voters believe that 100 % of a person's assets should be passes down tax-free to their heirs.

Strong congressional support also exists for reducing/eliminating the estate tax. Last Congress, AAUFT launched a campaign in support of the Death Tax Elimination Act, which was sponsored by Rep. John Tanner, (D-TN), Rep. Jennifer Dunn, (R-WA) and 283 other members of Congress. The bill, however, was vetoed by then President Clinton. With President bush's support, there is a unique opportunity to repeal this tax this year.

For more Information

¹"Why Death Taxes Should Be Abolished," Bruce R. Bartlett, Senior Fellow; National Center for Policy Analysis, Policy Backgrounder #150; August 18, 1999

The Economics of the Estate Tax, A Joint Economic Committee Study, United State Congress, December 1998

http://www.deathtaxes.com/ -- this site was created by The Seattle Times, one of the last family owned and operated metropolitan newspapers left in America.

Quotes About Estate Taxes

"Why Death Taxes Should Be Abolished" - National Center for Policy Analysis

"Grave Robbers: The Moral Case Against the Death Tax" - CATO Policy Analysis No. 353 (in PDF Format; please download Adobe Acrobat Reader 3.0)

"The Case for Burying the Estate Tax" - Institute for Policy Innovation

Types of Estate Taxes Levied by the States

Inheritance Tax: This tax is levied on the recipient of a bequest of funds. This tax varies in it rate based on the relationship between the decedent and the recipient of the bequest. Thus members of the immediate family of a deceased individual are taxed at a LOWER rate than those more distant in relation. The surviving souse is allowed a 100% exemption. The federal government does NOT levy an inheritance tax.  

Estate Tax: Levied on the estate PRIOR to the distributions of assets to heirs. Imposed on the estate, these taxes are enacted by both the state and federal governments. The tax rate is NOT based on family relationships.

Pick-up Tax: This type of estate tax is based on the link between federal and state estate taxes. Federal tax regulations permit taxpayers to claim credit for a certain amount or percentage of the state tax. In effect, states can "pick up" a portion of the federal estate tax and the taxpayer's liability remains the same as the amount the federal government would levy in any case. Thus state governments benefit.

Gift Tax: Levied on transfers of wealth prior to any death. The giver is responsible for all gift taxes. Rates depend on the relationship of giver to recipient.

Reasons for Change

• Estate taxes are unfair and constitute double taxation. People work their entire lives, pay their taxes and struggle to create and estate of value that provides security to the family and employees they leave behind,. It is unfair to tax one’s life earnings for a second time, robbing them in death of the family economic security they worked throughout their lives to provide.

• Estate taxes are fiscally and economically counterproductive. Less than 1.5 percent of federal revenues come from the estate tax. Experts estimate that anywhere from 65 percent to 100 percent of that revenue is offset by administrative and compliance expenses. In addition, several economic studies, including work done by Treasury Secretary Summers, have concluded that, for every dollar in transfer taxes taken at death $33 in capital formation is lost from the economy. Fiscally, it is an IRS agent full employment program that punishes grieving families while providing minimal benefit to the government treasury after expenses and creating economic inefficiency and loss.

• Estate taxes affect nearly every American. In addition to the millions of Americans who are directly affected by the death tax, there are millions more who are indirectly affected as thousands of small businesses refuse to grow and invest in new jobs for fear of the devastating tax impact of a principle’s death. Further investment is lost to the defensive measures businesses must employ to shield themselves from this devastating tax. Insurance premiums and planning costs typically cost tens of thousands of dollars annually representing lost revenues that are unrelated to business growth and job creation.

• Estate taxes hurt small businesses, women and minorities. 61 percent of family business owners say that the payment of death taxes will limit their business growth while 13 percent say their growth will be impossible. Women whose life expectancy exceeds that of men are often left not only with the grief of a lost spouse, but with the painful burden of a death tax that threatens their children’s security. The estate tax is particularly harsh on minorities whose families are now accumulating wealth for the first time and are typically building first generation businesses which are most vulnerable to collapse from the estate tax. This new entrepreneurial class is also less likely to be aware of the estate tax and typically has not planned for the estate tax liabilities.

• Estate taxes destroy the ability of family-owned businesses to be kept within the family and passed from one generation to the next. A family business can easily be worth $10 million when the value of land, equipment and buildings are calculated. The income of the business is often a small percentage of overall asset value. Yet, when a principle dies, the family is expected to pay up to 60 percent of the asset values in cash for the estate taxes. It doesn’t matter that many members of the family may have worked their entire lives building the business, making it successful and developing economies of scale. All too often, the family has no choice but to sell the business. Their money was invested in land, buildings, employees and the American dream. But thanks to the estate tax, the family business is dissolved, a heritage is destroyed.

• Estate taxes hurt the economy. A 1996 Heritage Foundation study found that a repeal of the estate tax would provide substantial benefits to the American economy over the next nine years: (1) the nation’s economy would average as much as $11 billion per year in extra output; (2) an average of 145,000 additional jobs would be created; (3) personal income would rise by an average of $8 billion per year above current projections; and (4) the deficit would actually decline due to the growth generated by increased capital formation.

While efforts continue to pass a tax bill that includes the repeal of the estate tax, legislation is pending that will start the phase out of the estate tax. The House of Representatives passed a measure that would increase the minimum wage by $1 over two years. As a relief measure to small business which must bear the brunt of minimum wage increased, the House provided tax offsets, including rate reduction in estate taxes. Estate tax relief makes sense in this context:

• Employers hit by the minimum wage increase should be provided with offsets. As Congress considers increasing the minimum wage, it seems reasonable that the affected employers be given relief to help offset the economic impact of the increase. Past minimum wage increases have been costly for employers. In addition to the increased wage base, compression (i.e., the raises given to existing employees to keep their position relative to new hires) results in considerably increased labor costs to employers. Past increases have not provided employers with offsets for these losses.

• Estate Tax Relief is universal. All employers, regardless of size, location or type of business/industry, face the prospect of the estate tax. Minimum wage offsets should not result in picking winners and losers depending on the nature of a business and its organizational characteristics. The estate tax, unfortunately, does not discriminate. The fact that relief from this onerous tax cuts across all business categories and types argues the equity of the relief provided by dealing with estate tax.

• Targeted offsets are less desirable. Suggested alternatives such as self-employed health insurance deductibility and business meals deductibility target a small population of beneficiaries and generally leave out quick service restaurants, retailers, supermarkets and other similarly situated businesses which are the largest minimum wage employers. Conversely, those industries that would benefit from self-employed health insurance and business meal deductibility would fully benefit from estate tax relief.

• Three important considerations are necessary to ensure the right approach to estate tax relief is undertaken: (1) the measure must be broad-based; (2) rate reduction is the only meaningful relief; and (3) the provision must encourage repeal.

As contained in the bill recently passed by the House, enrolled as  H.R. 3081, the "Small Business Tax Fairness Act" represents the most equitable offset to the minimum wage and the most balanced approach to estate tax reform/repeal.