By all accounts, the House of Representatives will consider what Beltway types are referring to as “Tax Reform 2.0” sometime before the scheduled August recess. While legislating in an election year is always difficult, this exercise is a good one in that it lays the groundwork for how the GOP Congress would like to build on the successes and correct the deficiencies of the Tax Cuts and Jobs Act of 2017. One area that Tax Cuts 2.0 should focus on is finally, fully, and forever repealing the death tax.
There is no more unfair federal tax than the “estate, gift, and generation-skipping transfer” tax, better known as the “death tax.” Consider its effect: After working a lifetime and paying taxes every year, a successful business owner or family farmer passes away only for their family to discover that even more taxes are owed on after-tax savings and investments — often to be paid by laying off “close-as-family” employees or selling land and other assets. The death tax rate can run as high as 40 percent federally. In addition, 12 states plus the District of Columbia have their own state death taxes (median top rate, 16 percent), and six states have inheritance taxes (Maryland actually has both, incredibly).
Polls going back decades have found supermajorities of Americans want to see the death tax repealed — including an NPR poll from just last year showing 76 percent opposition. Seven hundred and twenty-seven economists (including four Nobel laureates, most famously Milton Friedman) and 150 grassroots conservative groups have signed separate joint letters urging Congress to repeal the death tax.
The House apparently agrees, since GOP members included full death tax repeal in their version of tax reform only to see it watered down on the rocks and shoals of Senate reconciliation rules (the House also voted to fully repeal the death tax in 2015, with seven Democratic votes). Considering the House had to adopt most of the Senate version of tax reform in the final product, re-introducing full repeal into the conversation would be a good way to reassert the prerogatives of the people’s house.
The Tax Cuts and Jobs Act of 2017 ended up greatly increasing the “standard deduction” used in calculating death tax liability. Under the new law, the first $11 million of assets are exempt from the federal (but not necessarily the state) death tax. A surviving spouse can, with proper planning, exclude $22 million of assets. These numbers are indexed to inflation, but there’s a catch: starting in 2026, they are cut in half, to $5.5 million and $11 million plus inflation, respectively.
The death tax cut in the law is only temporary thanks to Senate budget reconciliation constraints. There was only one GOP senator — Susan Collins of Maine — outright opposed to full death tax repeal last year. The addition of a few more GOP senators in the 2018 midterm elections might make a big difference in a future tax reform reconciliation product.
As a result of the legislation, federal revenues from the death tax have slowed to a trickle. The Congressional Budget Office estimates that death tax revenues under the current “standard deduction” levels will average about $20 billion per year, or one-half of one percent of all federal revenues. The federal government will collect twice as much revenue from “miscellaneous fees and fines” during these years. When you’re half as big as “miscellaneous,” you know you’ve lost some weight. According to the Tax Policy Center, only 1,700 estates will owe the death tax in 2018 (and that’s down from only 5,500 before the law change). Merely the wildly successful, not the rich, pay the death tax. The federal government would not miss the money, even without taking into account the positive economic effects and dynamic revenue implications of death tax repeal.
So, why repeal the death tax? If it’s so insignificant to federal tax revenue projections and so rare to owe it, at least with the current “standard deduction” level, what’s the use? The Tax Foundation modeled what death tax repeal would do for the economy before tax reform passed. Necessarily, the beneficial economic effects will be more muted than their analysis, since the death tax standard deduction was doubled and the economic/tax system has been reset in many other ways, but their findings are nonetheless instructive (particularly if pre-tax cut law snaps back).
According to the Tax Foundation data from last year, death tax repeal would create 159,000 jobs. The economy would be 0.8 percent bigger in the long run (to put that in context, the size of the economy today is $20 trillion, so the economy would instead be $160 billion bigger this year in the absence of a death tax — nearly $500 for every man, woman, and child). Additionally, after-tax income would rise under a dynamic analysis by one percent across the board, including by 0.7 percent for the lowest quintile of households.
Over 92 percent of the static score cost of repealing the death tax would be recovered by taxes collected elsewhere in the federal tax structure, including higher tax revenues resulting from more economic growth, after-tax income, and job creation. This is an important point. The death tax is such an economic dead weight, repealing it literally almost pays for itself under a dynamic analysis.
The dead weight economic effects of the death tax are not a direct result of the tax itself — which even before the tax cut was a tiny portion of federal revenues — but rather from the compliance costs and a leech-like death tax avoidance industry. An army of estate planners, lawyers, actuaries, accountants, and life insurance agents exist solely to help people avoid the death tax. While large family-owned businesses and farms would likely spend something on estate planning, it’s unlikely they would buy the life insurance, trusts, and other tax shelters which are routinely sold as an upcharge by these companies. These industries, along with national Democrats who seem driven by #resist, class envy rhetoric rather than facts and data, are why a death tax still exists.
All of this is ample reason for death tax repeal to be a part of Tax Reform 2.0 — because tax reform without death tax repeal is simply incomplete.
Ryan Ellis (@RyanLEllis) is a senior policy adviser for the Family Business Coalition.