Estate Tax Repeal Benefits Few Taxpayers But Penalizes A Larger Population By Taking Funds From Charities
By: Amos Goodall, Jr.
The House of Representatives has passed legislation terminating estate tax in the United States four out of the past four years, most recently on April 13, 2005. This measure has not previously passed the senate. However, based on President Bush's recent campaign, the Estate Tax faces a strengthened assault.
Federal estate taxes as we known them had their genesis with the 1916 Revenue Act. they both produce income for the federal government and cause changes in the way residents act, as people seek to transform themselves from taxpayers into non-taxpayers, or at least reduce their tax burdens.
While an eleemosynary intent may spark charitable donations, the reward of favorable tax treatment provides fuel for the process. A theory of charitable gifting is that this tax savings accelerates peoples' natural tendency to support wothwhile organizations such as institutions of higher education, which is born out by research published by the Congressional Budget Office (CBO). The thesis of this article is that repeal of the estate tax will have a substantial dampening effect upon charitable gifts, while only benefitting a small handful of taxpayers.
Since 1916, there have been many changes in federal laws dealing with gratuitous transfers, both during life and at death. One set of fundamental changes was introduced with the Tax Reform Act of 1976 which created a uniform gift and estate tax rate schedule applying both to gifts during a life and after death. One facet of this Act was a threshold for the imposition of a tax, called the "unified credit," originally set at $175,000. Essentially, until a person's gifts and bequests, exclusive of all annual exclusions, cumulatively exceed the threshold, there is no tax due. The unified credit establishes a credit for the taxes that would be otherwise due on gift or estate transfers of property up to the credit amount. For example, in 2004 and 2005, the applicable credit was $555,800, which by design is the tax due on a bequest of $1.5 million. In 2003, it was $345,800, the tax due on a bequest of $1 million. This credit may be applied to offset taxes on gifts during a lifetime (up to $1 million) or at death.
The Economic Recovery Act of 1981 gradually increased the unified credit over a six-year period, raising the threshold to $600,000.00. In 1997, the Taxpayer Relief Act gradually raised the threshold to $1 million by 2006. Four years later, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) produced sweeping changes to the tax landscape, providing substantial incremental increases in the threshold, so that the effective threshold will be $3.5 million by 2009 and repealing the tax altoghter for decedents dying on or after January 1, 2010. Since the 2001 legislation was passed by a closely divided Senate, in anteresting parliamentary provision, the Byrd Rule, requires that the Act is automatically repealed for 2011 and pre-EGTRRA thresholds reinstated, unless there is additional legislation.
No observer expects EGTRRA's sunset provision to become effective. This past November, one plank of George Bush's reelection platform involved the more rapid and permanent repeal of Estate Taxes. When Congress convenes, this may be a primary focus of the session.
Only a small number of residents actually pay federal Estate Taxes. for decedents dying in 1998, when the threshold was lower, there were 20,350 tax returns filed which reported estate tax liability after applicable deductions and credits. In 2000, this number had grown to24,399.
Applying a $2.5 million threshold to tax returns filed for 2000, there would have been 14,712 returns with tax due. For 2003, the IRS estimates that there were 16,295 estate tax returns with tax due. If the threshold had been $3.5 million as presently is provided for 2009, there would have been 5,689 taxable estates. Inflation may drive this number up slightly. Thus conservatively, less than six thousand taxpayers' families will reap a reward from the total repeal of federal Estate Taxes each year.
On the other side of the equation, repeal of the federal Estate tax will dampen charitable contributions. According to a study published by CBO, elimination of this tax, using 2000's figures, would have resulted in a decrease in charitable contributions and bequests by 16 to 28 percent.
If some persons make charitable donations to be effective upon their death, other persons get triple duty from their gifts by making them during life. First, they can see the effect of their largess and experience the appreciation of the donee. Second, they can obtain a tax deduction on current income taxes. Third, they reduce the sixe of their estates so as to diminish their estate's ultimate tax liability.
According to a study by the American Association of Fund Raising Counsel, published by the Center for Philanthropy at Indiana University, individuals donated $183 billion to charity in 2002 (representing 76.3% of all such giving), while individuals bequeathed $18.1 billion (representing 7.5%). The balance came from foundations and corporations.
The authors of the CBO study concluded that if all taxpayers responded to this loss of incentive, lifetime donations would decrease by up to 11% in the year studied. Finally, the CBO study concluded that raising the threshold from $2 million (its level in 2006) to $3.5 million (its maximum level under EGTRRA) would have a much more negligible effect on giving, roughly a one percent diminumation in charitable contributions.
Thus, using the estimates summarized above, complete repeal of estate tax benefit roughly six thousand very wealthy taxpayers per year, while reducing contributions needed by charities potentially by more than $25 billion. This represents a significant loss to higher education institutions and others who depend on charitable support for a substantial part of their budgets.
**The endnotes have been taken out of this article