Estate Tax Issue - Who's Rich And Who's Just Comfortable
BOSTON — 'There is no way you can keep this place, absolutely no way," an estate attorney told Lee Ann Goddard Ferris after the accidental death of her father, a rancher in central Idaho.
In a statement to the Senate Finance Committee last month, Mrs. Ferris recalled her shock at the estate tax - $3.3 million - that she and her three siblings would owe Uncle Sam on the family's 2,600-acre ranch should her mother also die.
"We just lost my father, and now we are going to lose the ranch?" she asked.
Cases like this are being presented to congressional committees as business and farm lobbyists press for a reduction in "death taxes" as part of a tax-cut package.
The talk of reducing the estate tax comes as the baby-boom generation inherits what experts say is the largest intergenerational transfer of wealth in history. Their parents are passing land, stocks, and other assets that have surged in value during the postwar economic boom.
At issue is whether the tax - begun in 1916 partly to check the power of the wealthiest families - now needs adjusting. The wealthiest 1 percent of households owns more than one-third of the nation's assets. But the question now is what constitutes significant wealth.
Already, few heirs pay the estate tax: just 1.37 percent of decedents in 1995. Revenues from the tax last year totaled $17 billion, 1 percent of federal revenues.
But rising real estate and stock prices mean increasing numbers of Americans have larger estates, pushing them above the exemption levels last set in 1987.
"It is not just the wealthy who have to pay," says Ginny Flynn, spokeswoman for the Senate Finance Committee.
Millions of Americans take financial planning measures to avoid or reduce their tax liability. But without any change in the estate tax provisions, the number of taxable estates will more than double, to 74,000, by 2007, bringing federal receipts to $35.2 billion, according to the Joint Committee on Taxation.
Given the limits on tax relief in the budget deal reached by Republican leaders and the Clinton administration last week, many potential heirs may still face substantial bills.
"There will be less money for tax relief than would be necessary to accommodate the ideal estate tax relief measure," Ms. Flynn says. But she says the package will include some easing of estate taxes.
The deal provides $135 billion in gross tax relief over five years. That sum must be split among tax breaks for capital gains, child tax credits, expanded individual retirement accounts, and education.
Martin Sullivan, an economist at Tax Analysts, a nonprofit tax publisher in Arlington, Va., estimates the budget negotiators will provide $5 billion to $10 billion in estate tax relief over five years, much less than some legislators had hoped.
Estate tax relief is popular.
In the Senate alone, five Republicans have bills for this purpose. A sixth bill is sponsored by a Republican and a Democrat. Senate minority leader Thomas Daschle (D) of South Dakota put estate relief in his tax bill. So did President Clinton in his budget proposal.
The National Federation of Independent Business wants the estate tax repealed. "It is not worth the devastation it causes to family business and farms." says federation spokesman Christian Braunlich.
But some tax experts object to using popular groups to justify estate tax relief.
Charles Davenport, a law professor at Rutgers University, Newark, N.J., says Ferris's tax burden on the Idaho ranch may be easier to manage than she indicates.
Congress years ago eased estate taxes for farmers and family businesses. And tax court decisions make it even easier.
"I have never seen a case where a farm was sold to pay federal estate taxes," says Neil Harl, an economics professor and tax expert at Iowa State University, Ames.
Some experts even call it a "voluntary" tax, particularly for the wealthy, who use a variety of legal maneuvers to avoid it.
A person can transfer any size estate to a spouse at death, free of taxes. When the estate goes to children or others, the regular exemption level is $600,000 for an individual. With some planning, both spouses together can get a $1.2 million exemption. That allows most estates to escape taxation.
Budget negotiators will have to decide whether to raise those exemptions, reduce tax rates - currently 18 to 55 percent - or ease payment terms.