The Hidden Costs: Reduction of the Federal Estate Tax

Protecting West Virginia’s Priorities: The Hidden Costs of Repeal or Drastic Reduction of the Federal Estate Tax

MAY 2006

 

Executive Summary

During the first week of June, the Senate will consider legislation to repeal or drastically reduce the estate tax. The House of Representatives passed a bill to repeal the tax (HR.8) in April 2005.

Repealing the estate tax would cost tens of billions of dollars annually – totaling $1 trillion in just ten years. This report demonstrates how Senator Jon Kyl’s (R-AZ) proposal to lower the estate tax rate to 15 percent and raise the exemption level to $5 million ($10 million for couples) would have similarly harmful effects on the deficit and funding for vital programs. 

•  The President’s budget this February proposed $183 billion in cuts to domestic discretionary spending over the next five years (2007-2011). The budget plan passed by the House on May 18 proposed reducing funding for domestic discretionary programs by $167 billion over five years, while the Senate passed budget plan would reduce funding by $123 billion. 
• The estate tax is the most progressive way to raise the revenue our nation needs to meet its many commitments. Given that a substantial proportion of the assets of multi-million dollar estates have never been taxed before, the estate tax ensures the fairness in our tax system by guaranteeing that everyone pays their fair share. 
• In 2003, the most recent year for which IRS figures are available, only 105 West Virginians – 0.5 percent of deaths that year – paid any estate tax. This report compares that figure to West Virginia’s 44,000 uninsured children, West Virginia’s 71,450 households that experience hunger every year, and the 2,698 estimated qualified West Virginia high school students that did not attend college due to financial cost. The needs of these three constituent groups could be addressed with revenue from the estate tax. 
• Under current law, the estate tax only taxes multimillionaires. Currently, those with estates worth less than $2 million – $4 million for couples – are exempt from the estate tax. The current estate tax rate is 46 percent, which, taking into account the high exemption level, translates to an effective rate of about 20 percent. 
• Sen. Kyl’s proposal to lower the estate tax rate to the capital gains rate (currently 15 percent) and raise the exemption level to $5 million ($10 million per couple) would lose 84 percent of the revenue lost by full repeal. 
• This report shows how the loss of revenue in one year under Kyl’s proposal could alternatively be used to make up for the entire set of budget cuts proposed to agriculture, energy supply and conservation, environmental protection, health research, housing assistance, K-12 and higher education, nutrition assistance, transportation, veterans medical care, and vocational training in 2011. 
• The report concludes that a drastic reduction of the estate tax would be too costly and simply unnecessary. Non-partisan Congressional Budget Office analysis shows that only a small percentage of family farms and small businesses pay the estate tax at all. Unlike the Kyl proposal, reasonable and responsible reform would not deepen the deficit, result in cuts to needed domestic spending, or shift the tax burden to working families. Balancing tax cuts for multimillionaires with severe budget cuts for vital programs and community services would reflect woefully misplaced priorities. The Senate must act to preserve the federal estate tax and protect America’s future.

 

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Read more about how WV CAG supports fair taxation in our work here.