The estate tax has long been a bete noir of conservative business groups, which claim it’s a killer of small, family-run businesses. Former President Bush tried mightily to repeal what opponents derisively call the “death tax” and won a provision in his 2001 tax bill to phase out the tax by 2010. But the phaseout lasts only one year.
After 2010 the tax will revert back to its pre-2001 provisions. Only the first $1 million of an estate will be exempt and the tax rate will rise back to 55 percent. The idea, when Bush’s phaseout was proposed, was to force Congress to act on the issue. But with the election of Barack Obama, the debate is about to take another turn.
Buried in his new budget bill is language that would freeze the estate tax at its 2009 level.
Individuals with estates of $3.5 million or less would be exempt from the 45 percent estate tax rate, and married couples could seek a combined exemption of $7 million, depending on how their marital assets are titled.
The move is seen as a compromise, but could face strong opposition in Congress from opponents of the tax. Once again, they will cite its effect on small businesses. But do small family firms really have a dog in this fight? According to a new study by the Center on Budget Policy and Priorities, a Washington-based think tank, the answer is no.
The study claims that almost no small businesses or farm estates would owe any estate tax under the Obama budget bill. Only 140 estates in the entire nation would be taxable in 2011, and virtually none of them would have to be liquidated to pay the tax, it states.
Based on the organization’s analysis, fewer than 0.2 percent of all estates — two of every 1,000 — will be subject to tax in 2009. Of the estates that are taxable, only about 1.3 percent are small business or farm estates — that is, estates in which a small business or farm that is valued at up to $5 million makes up the majority of the estate.
The upshot is that only three out of every 100,000 people who die this year will own a small business or farm that is subject to any estate tax, according to the study.
The very few small farm and small-business estates that will owe any estate tax from deaths in 2009 will face a tax that, on average, equals only one seventh (14.3 percent) of the value of the estate. Taxable estates as a whole will owe tax equal to an average of 19.4 percent of the value of the estate, still less than one-fifth of an estate’s value, it goes on to state.
The organization argues that the 2009 exemption on the first $3.5 million of any estate — $7 million for a couple — generally protects most small business and family-owned farms. On top of that, the tax code contains a number of special estate tax provisions that are targeted to small business and small farms estates. They are designed to significantly reduce the amount beyond the exemption.
For family farms, for example, a separate provision allows them to value their land at its current use, i.e. farming, instead of its highest and best use, which is normally the standard. This is particularly helpful for farms near urban areas, where the value of the land for development may be considerably higher.
Farm and small business estates are also generally eligible to defer payment of estate tax (paying only interest) for five years and then may pay the tax in up to 10 annual installments. The first $1.33 million in estate tax is subject to an interest rate of only 2 percent.
Property held by multiple heirs, each of whom has a minority interest, or property that is otherwise difficult to sell also can be valued at lower levels. According to the Congressional Budget Office, so-called minority interest discounts reduced the taxable value of undeveloped land and farmland by an average of 51 percent in 2000, the most recent figures available.
As with all tax measures, a further reduction or repeal of the estate tax would impact federal revenue at a time when the annual budget deficit is soaring past $1 trillion.
Permanently repealing the estate tax would cost almost $1.3 trillion over the first 10 years, starting in 2012. This includes $1 trillion in lost revenue and $277 billion in increased interest payments on the national debt. In contrast, making the 2009 estate tax permanent would cost about $609 billion over the same time. Of that, $485 billion would be in revenue losses and $124 billion would be in added interest costs.
Beyond the numbers, however, there is a philosophical argument that opponents often make against the estate tax. Simply put, it is a form of double or triple taxation, it’s extremely complex, and the cost to figure out tax strategies to minimize the tax are excessive. Additionally, the tax stunts the growth of the national economy and limits job creation in America.
The National Federation of Independent Business (NFIB) runs a separate organization, the Family Business Estate Tax Coalition, dedicated to the permanent repeal of the death tax. Over the life of a business, it notes, the government collects income tax and other taxes. In other words, it’s taken more than its fair share of the estate in taxes already.
For a small business, a farm or storefront, a warehouse, and some delivery trucks can quickly add up to millions of dollars in assets that help a business turn only a middle-class profit. Yet the estate would be valued based on the assets, not the income it produces, the NFIB asserts.
The debate over the estate tax is as old as the republic itself. The original idea was to prevent the buildup of wealth that leads to the creation of baronial estates and a permanent class of idle rich that might try to impose a monarchy. Although that seems far-fetched today, it’s an even bet that the current budget bill is unlikely to end this debate.