By: Natalia Holliday, Editor-In-Chief
“It’s the government’s final insult to force grieving families to visit both the undertaker and the IRS on the same day,” remarked Senate Majority Leader Mitch McConnell (R-KY) in a plea to repeal the federal estate tax, commonly known as the “death tax.”[1] On January 3, 2019, Republican Senators McConnell, Charles Grassley (R-IA), and John Thune (R-SD) introduced the Death Tax Repeal Act of 2019 in yet another effort to strike the death tax out of the Internal Revenue Code.[2] [3]
In 2017, the Tax Cuts and Jobs Act (TCJA) increased the exemption for taxable inheritance from $5 million to $10 million, to be adjusted for inflation.[4] Stated differently, any gifts from a decedent to an heir in an amount up to $10 million (adjusted to $11.4 million in 2019 for inflation)[5] made in a will or through intestacy (inheritance without a will) will pass to the heir tax-free. Once the $11.4 million threshold is met, any additional gifts are taxed at a 40% rate.[6]
So, if a grandparent passes in 2019 and leaves $20 million to her child, $11.4 million will transfer without tax, and the remaining $8.6 million will be taxed at 40%, resulting in revenue to the government of $3.44 million.
Realizing the revenue-generating potential of estate taxes on the ultra-wealthy, Independent Senator Bernie Sanders is fighting back against the proposed Death Tax Repeal Act.[7] His counter-legislation, the For the 99.8% Act, would reduce the current $11.4 million exemption to $3.5 million.[8] Estates between $3.5 million and $10 million would be taxed at a 45% rate; those between $10 million and $50 million at a 50% rate; a 55% rate would apply to estates in excess of $50 million; and any estate in excess of $1 billion would face a 77% tax liability.[9]
To put the revenue-generating potential into perspective, Sanders’ bill summary includes a 16-page list of United States billionaires, their individual net worth, and the revenue which could be generated by taxing their estates at the 77% rate.[10] For an example, if Amazon founder Jeff Bezos passed away the day Sanders created the list, and assuming all of Bezos’ wealth would have passed through a will or through intestacy, the federal government would have realized tax-revenue of about $101.34 billion.[11] Under the GOP-led repeal, Bezos’ estate tax liability would be $0.00.
Although each side couldn’t stand farther apart on the matter, both bills share one distinct commonality. The senators behind the Death Tax Repeal Act cite to the negative impact the estate tax can have on family farms and ranches, claiming that these agricultural businesses “bear the brunt” of the “purely punitive” tax.[12] Sanders also took note of the potential harm to family agricultural businesses. His bill carves out an allowance for family farmers, under which they can decrease the value of their farmland by up to $3 million in order to protect their farms from the estate tax.[13]
Interestingly, a study by the Urban-Brookings Tax Policy Center (TPC) indicates that roughly 80 farms and small businesses paid the estate tax in 2017, prior to the Tax Cuts and Jobs Act’s exemption increase.[14] The same study predicted that small farms and businesses would not be affected by the estate tax post-TCJA.[15] Yet, an article discussing politics and studies that affect policy wouldn’t be complete without pointing out that the director of the TPC is a former Obama administration official.[16]
The federal estate tax has long been a source of ire between the parties, with one side characterizing it as a punishment for dying and the other characterizing it as an opportunity to generate national revenue and to reduce income inequality. While those opposing the estate tax seem to have the more favorable position these days – the exemption threshold was only $600,000 from 1987 to 1997,[17] meaning far more people were subject to the tax – the fact is that a Democrat-controlled House of Representatives is very unlikely to permit the Death Tax Repeal Act to breath legislative life. With a Republican-controlled Senate, the For the 99.8% Act will likely end up in the same place as the Death Tax Repeal Act – the legislative cemetery.
Sources:
[1] https://www.thune.senate.gov/public/index.cfm/press-releases?ID=1A7AA395-2D0D-46C7-B33A-983B72211368
[2] https://www.congress.gov/bill/116th-congress/house-bill/222/text
[3] https://www.washingtonpost.com/us-policy/2019/01/28/top-gop-senators-propose-repealing-estate-tax-which-is-expected-be-paid-by-fewer-than-americans-year/?noredirect=on&utm_term=.e59cfdd00824
[4] BUDGET FISCAL YEAR, 2018, PL 115-97, December 22, 2017, 131 Stat. 2054
[5] https://www.forbes.com/sites/ashleaebeling/2018/11/15/irs-announces-higher-2019-estate-and-gift-tax-limits/#68c027e84295
[6] 26 U.S.C.A. § 2001 (West)
[7] http://time.com/5517714/bernie-sanders-estate-tax-wealthy/
[8] https://www.sanders.senate.gov/download/estate-tax-one-pager?id=DE8AEADA-A3F5-4D26-8517-F6730F161E29&download=1&inline=file
[9] Id.
[10] Id.
[11] Id.
[12] https://www.thune.senate.gov/public/index.cfm/press-releases?ID=1A7AA395-2D0D-46C7-B33A-983B72211368
[13] https://www.sanders.senate.gov/download/estate-tax-one-pager?id=DE8AEADA-A3F5-4D26-8517-F6730F161E29&download=1&inline=file
[14] https://www.taxpolicycenter.org/briefing-book/who-pays-estate-tax
[15] Id.
[16] https://thehill.com/policy/finance/427328-senate-republicans-reintroduce-bill-to-repeal-the-estate-tax
[17] https://taxfoundation.org/federal-estate-and-gift-tax-rates-exemptions-and-exclusions-1916-2014/
