Move to repeal estate tax gains momentum
House is set to vote tomorrow on a bill to phase out 'death taxes.' Family businesses are targets for relief.
In Washington, old taxes rarely die or even fade away. But tomorrow the US House is expected to vote to phase out a World War I-era federal estate tax that could mark the beginning of the end for what critics call the cruelest tax of all.
The vote could also endear House Republicans to baby boomers who collectively stand to inherit $15 trillion from parents - the biggest transfer of wealth in history.
At its heart, the vote is between two fundamental tax philosophies: fairness for individuals versus fairness for society at large. On one side are GOP lawmakers and several dozen Democrats who say parents should be able convey to their children the gains of their lifelong labors - without paying taxes so exorbitant that children must sell the family business just to come up with the payment.
On the other side are those who argue that phasing out the estate tax amounts to a tax cut for millionaires, and that tweaking it - not eliminating it entirely - will address the concerns of family farmers and businesspeople.
For Edward Vander Pol, the vote can come none too soon.
The family-run trucking business in Auburn, Wash., which he and his brother inherited from their father, has already paid out $500,000 in estate taxes. They've used another $150,000 in capital from the business to hire accountants and lawyers, and buy life insurance, to try to ease the tax bite.
"My father started out with two trucks in 1936. Now we have 1,000," he says. "But the money is all in the trucks. There isn't a lot of cash around to send the IRS 55 percent of what it's worth."
As long as he can remember, the prospect of estate taxes driving the family out of the company - or the company out of the business - has been a worry. The number of family-owned trucking businesses is shrinking, and he believes so-called death taxes are a big factor in that trend.
A tax on the few
In fact, fear of this tax is often bigger than the real bite, experts say. Only about 2 percent of estates wind up owing estate taxes, which cover the value of homes, land, equipment, savings, and insurance. The bigger the estate, the higher the tax rate. While the top rate is 55 percent, most families don't come close to paying it.
About half of all taxable estates are taxed at a 6 percent rate, because the first $675,000 is exempt from taxation, according to the Internal Revenue Service. For farms and closely held businesses, the tax kicks in at $1.3 million. With accounting and legal savvy, the tax can be avoided altogether.
But it doesn't take a stable of polo ponies to reach $675,000. Homeowners in much of San Francisco or parts of metropolitan Boston, and farmers at the edge of urban sprawl, are finding that their homes or land easily top that level.
Under current law, that exemption will rise to $1 million in 2006. As a result, the percent of estates subject to the tax is not expected to rise, according to some budget estimates.
But that fact does little to assuage owners of family-run businesses such as supermarkets, where most of the assets line the aisles. Indeed, supermarkets are big players in the fight to repeal the tax.
"There are 30,000 items in a typical store, which could be worth from $3 million to $4 million. It's an asset-rich, cash-poor business that often makes a net profit of about a penny on $1 of sales," says Bill Greer, spokes-man for the Food Marketing Institute, an industry group in Washington. "That doesn't leave much for extra things like estate planning,"
GOP leaders say the bill's momentum - which surprises even supporters - is driven by a perception that the tax is unfair. They say it hits families and their businesses at the toughest of times, and catches some of them unprepared.
The House bill has 244 sponsors, including 46 Democrats, and is expected to pass easily tomorrow. President Clinton vetoed a similar bill last year.
House Democrats are offering an alternative. Rep. Charles Rangel (D) of New York proposes to raise the exemption for family farms and family businesses to $4 million, and to cut the maximum tax rate from 55 percent to 44 percent.
The Senate is expected to pass a bill that resembles the Rangel proposal more than it does the House GOP bill. The president has said he supports the Rangel version. Whether estate-tax relief occurs this year will likely depend on how the two chambers reconcile their different bills.
No uproar among Democrats
In the past, Democrats have opposed estate-tax repeal as just another tax break for the rich. But with the growth in minority- and women-headed businesses, the tax is increasingly biting into Democrats' constituencies.
"One of the things that has propelled this bill forward is the fact that the estate tax has become a rural issue, due to the aging of the rural population and the immense increase in the value of farmland," says William Beach, director for the Center for Data Analysis at the Washington-based Heritage Foundation.
"The voice of women in business has also become an important factor in this issue," Mr. Beach adds. "The fastest-growing segment of the business community is women-owned businesses."
The estate tax is expected to add about $28 billion to the US Treasury this year. Scaling back that tax could deprive other federal programs of resources, especially if the economy turns sour, say repeal opponents.
Harold Apolinsky, whose Birmingham, Ala., law firm does much of its work helping people dodge estate taxes, is nonetheless an advocate of repeal.
"I've come to the conclusion that it's just not fair for people to pay taxes all their working lives and then pay taxes at their death," says Mr. Apolinsky.
(c) Copyright 2000. The Christian Science Publishing Society