Repeal of the estate tax, or death tax, as it's often termed by its detractors, has been long-championed by agricultural commodity and small-business groups. Such action is critically important to America's family farms and small businesses, they contend. But is that really the case?
In his 2003 book, “Perfectly Legal,” New York Times tax writer David Cay Johnston argues that such a repeal would affect few, if any, of America's farmers “because few farmers in America have the kind of wealth that would even make them subject to the estate tax.” In fact, Johnston says IRS statistics on estate tax returns show that only 2% of the 2.4 million Americans who died in 2000 left an estate that owed any taxes.
Meanwhile, others contend the estate tax is at heart a voluntary program because proper estate planning, which admittedly can be costly, time-consuming and cumbersome, can eliminate or greatly minimize the estate tax bite for most property owners.
“The problem isn't with the law, it's with people's failure to plan for it,” says Rorie M. Sherman, editor in chief of Trusts & Estates magazine. “You don't need to repeal the estate tax. It's just a matter of estate planning; it's a matter of insurance, of organizing your business in a reasonable way.”
That's an opinion shared by Keith Evans, part owner of a family farm and former longtime communications director of the American Angus Association, who is among a minority of cattle industry folks who believe agriculture, as a whole, is on the wrong side of the estate-tax issue.
“Agriculture has fallen for the line advanced by the super rich that all inheritance taxes are wrong, but there are many good arguments for a fair inheritance tax,” Evans says. “For one, wealth in this country is increasingly concentrating in fewer and fewer hands, and inheritance taxes can help mitigate that situation.”
What makes inheritance taxes unfair, particularly to farmers and ranchers, he adds, is that agricultural property is often held for many years before the death of its owner.
“To tax the full capital gain is wrong, because much of the value is, in some cases virtually all of it, the result of inflation. Agriculture should be pushing for inflation indexing, not for elimination of the estate tax,” Evans says.
Indexing involves setting a base year for the exemption value and allowing that figure to grow with inflation. Bruce Hoffman, a rancher and vice president, Investments and Financial Consultants, Wachovia Securities, LLC, in Corpus Christi, TX, says the federal estate tax exemption was $600,000 in 1972. Allowing for a 3% annual inflation rate, that exemption indexed for inflation would be $1.7 million today, and $2.4 million if indexed at a rate of 4%.
“But under current federal law, the estate-tax exemption is set to drop to $1 million in 2011, with a 55% tax rate on estate value beyond that amount,” he says. At today's land values, it doesn't take a huge operation, or even the most aesthetically appealing piece of nature, to eclipse $1 million, he adds.
Hoffman points out most government programs, such as government wages and contracts, are indexed for inflation. Seemingly the estate tax exemption level is among the few that are static.
“There is a happy medium. The federal estate tax exemption for 2007 and 2008 is $2 million, with a 45% tax rate on the estate's value beyond that figure. The government should say, ‘Okay, we're at $2 million today. We'll now use that, and index it to inflation going forward. Or utilize the $3.5-million exemption level of 2009 and index it from there.”
Small-business groups point to surveys that show 78% of all Americans believe the estate tax is an unfair tax. They also contend that resources currently expended on estate planning could be reinvested into the business, thus creating new jobs and boosting local economies.
Permanent repeal of the estate tax was a top issue for Republicans the past six years, but Democrats stalled the effort on three straight occasions. And the November election results that gave Democrats control of both houses of Congress have essentially killed prospects for a permanent repeal.
There is support on both sides of the political aisle for estate-tax reform, however, Sherman says. But the more pressing needs in a Democratic congress for national health care and other programs likely will hinder any quick movement on the issue.