Case Overview, Repeal of the Federal Estate and Gift Tax
This document provides background information and summarizes the debate over repeal of the federal estate and gift tax. The links to the left will lead you to public documents that we have found.
Since 1916, estate taxation under the Federal Government has almost always been carried out under a hybrid system, gradually evolving into what is now the unified transfer tax (UTT). "Unified" in 1981, the UTT (or the "death tax" as it is endearingly called) represents the only wealth tax levied by the Federal Government, and is an amalgam of three components: the estate tax, the gift tax, and the generations-skipping transfer tax (GSTT).
The congressional debates around wealth taxation in the 106th Congress have focused on the estate tax, although other elements of the unified tax are brought into debate in conjunction with it. The Federal Estate Tax, enacted in 1916 (under Title 26, Subtitle B, Chapter 11 of the United States Constitution), is levied on the monetary assets and property owned by a deceased person and transferred to inheritors. While one form of the death tax is tax levied on the estate before any transfers, the form of tax that became the subject of congressional debate is closer to an inheritance tax, levied on individuals who receive property from the estate. Despite this similarity to inheritance taxes, the 1916 Federal Estate Tax does not depend on the relationship of the heir to the deceased person or on the size of the transfer, which is typical of an inheritance tax. In any case, the death tax provides incentive to transfer assets before death, or to place them in a mediated ownership form such as a limited partnership etc. All assets owned by the deceased person are subject to the estate tax, including property in joint tenancy, living trusts, and life insurance (if the insurance was owned or controlled by the decedent).
The gift tax was first enacted in 1924, repealed in 1926, and re-enacted in 1932 in an attempt to reduce estate and income tax avoidance. Integrated with the estate tax in 1976 (the same year as the GSTT was enacted to block means to avoid the estate and gift taxes) the gift tax applies to lifetime transfers of assets just as transfers at death are taxed under the estate tax. One major distinction between the estate tax and the gift tax is that the latter applies on the amount received by the donee on a tax exclusive basis.
Currently, the first $675,000 of lifetime taxable transfers is exempt from the integrated estate and gift taxes. For estates above this amount, the tax rate begins at 37 percent and rises to 55 percent on taxable transfers above $3 million. For the third component of the UTT, the GSTT, the exempt amount given by gift or by will to, say, a long-term trust for multiple generations, is $1,040,000. This is separate from the $675,000 exempt for estate and gift taxes.
Over the years, as efforts were made to make wealth taxation more efficient and effective, debate raged over its validity and need. Bipartisan oppositional appeals deemed the death tax "complicated, costly, inefficient, arbitrary, and unfair" and thus worthy of being repealed. Others understood the proposed repeal and the subsequent tax break as a favor to the wealthiest, affecting at best only 1 to 2 percent of taxpayers. Opposition to the tax gained momentum during the Clinton Administration, as the Republican-dominated Congress vied to reform the tax structure by simplifying it and making it leaner. In 1999, on the heels of the passage of more than half a trillion dollars of tax cuts in the Congress, Representatives Dunn (R-WA) and Tanner (D-TN) sponsored H.R. 8, the Death Tax Elimination Act in amendment of the Internal Revenue Code of 1986 to phase-out estate and gift taxes over a ten-year period. Many proponents and opponents believed this bill reflected a compromise on the issue-along the way there were significant changes in the wording of the demand, ranging from total elimination of the tax to increasing the exemption, to altering the various capital gains provisions within the tax, and so on. After heavy lobbying by many coalitions and advocacy groups, H.R. 8 passed through the House of Representatives and the Senate (S.1128). The legislation was vetoed by President Clinton, and supporters in the House and Senate could not produce enough votes to override the veto.
The timeline of this overview pertains to the lobbying effort begun prior to, but re-energized and carried out in the 106th Congress. The story, however, does take a conclusive turn in the 107th Congress, when George W. Bush's promise to eliminate the estate tax during his presidential campaign, was indeed fulfilled. In 2001, a tax bill was indeed enacted that provides for the said tax to be repealed as of January 1, 2010: a ten-year phase-out originally proposed in H.R. 8. However, the bill also includes a "sunset provision," that provides for the nullification of the repeal on January 1, 2011 when the estate tax will become effective again (unless action is taken to extend the repeal by the Congress and the President). Under the 2001 bill, the exempt amount of the estate will register an annual increase from $675,000 (current) to $1 million in 2006 to $3.5 million in 2009.
The issue does not fit snugly into partisan camps, with moderate Democrats supporting the Republicans in the passage of H.R. 8 in the Congress in 2000, and some others who were not directly supportive but willing to exchange support for other causes like an increased minimum wage, or to settle on alterations and different sorts of tax cuts, not entirely in line with President Clinton's pledge to veto the bill, which he did make good on. Representatives Cox (R-CA), Dunn (R-WA), Tanner (D-TN), Abercrombie (D-HI), DeLay (R-TX), Gilchrest (R-MD), and Baird (D-WA), and Senators Kyl (R-AZ), Kerrey (D-NE), Schumer (D-NY), and Moynihan (D-NY) were particularly active in Congress on this issue. Sponsored by Representatives Dunn and Tanner, the House bill was supported by Republicans, as well as some 65 moderate Democrats who crossed party lines to vote in favor of it (apart from the Democrats mentioned above who were active on the issue, some of the other supporters included Representatives Clay [D-MO], Velázquez [D-NY], Clayton [D-NC], Wynn [D-MD] and Smith [D-WA]). In the Senate, the "Death Tax Elimination Act" was sponsored by Senators Kyl (R-AZ) and Kerrey (D-NE) and, alongside its Republican supporters, won the favor of many liberal Democrats like Senators Murray (D-WA), Schumer (D-NY) and Moynihan (D-NY), with Moynihan proposing some adjustments to the bill to bring it closer to the House-passed version which had some redeeming features in the eyes of many Democrats willing to consider the repeal. Small business coalitions and farm-related groups led the way in lobbying for the repeal of the estate tax. The most notable coalition was the Family Business Estate Tax Coalition formed in 1995, consisting of about a hundred business associations representing more than six million businesses, farms and ranches, with over fifty of them playing an active role in the tax repeal effort. The coalition was the principal voice representing, among others, many associations of automobile dealers, brewers, builders, community bankers, contractors, farmers, florists, foresters and forest products manufacturers, insurance agents, minority business owners, family-owned newspaper companies, retailers, and senior citizens and retirees. Some key members of the coalition were the American Small Business Association, Newspaper Association of America, National Association of Manufacturers, 60 Plus Association, U.S. Chamber of Commerce, National Federation of Independent Business, National Black Chamber of Commerce, National Cattlemen's Beef Association and National Cotton Council. The National Hispanic Chamber of Commerce, as well as another group called Americans Against Unfair Family Taxation were also active in the lobbying effort. With the diversity and the spread of the constituents of the Coalition and other advocates of the repeal, it was not surprising that the repeal campaign took on a public and communal flavor, which will be discussed in a later section.
As far as the opposition to the repeal is concerned, Representatives Bonior (D-MI) and Feinstein (D-CA) were active in representing the Democrats in favor of President Clinton's strong stance on the issue on the floor of the Congress, with the support primarily of labor organizations that lent credence to the perception, as one lobbyist put it, that this was "a standard business-labor fight." At various times, the more measured and varying support of insurance associations, small finance companies and charities also kicked in, in opposition to the repeal.
Between the strong advocates and opponents of estate tax abolition were found the moderates who lacked a firm position on the repeal. They recognized that a tax with high rates and numerous opportunities for shirking warranted reform, and that if there should be transfer taxes, then they could certainly be better structured. This is why many Democrats were ready to consider a third alternative apart from elimination, on the one hand, and as-is retention on the other. Indeed, the question many undecided Democrats had at this time was whether and how the legislation would address the issue of capital gains. The House version had included elimination of the stepped-up basis for capital gains, and Democrats like Senator Moynihan proposed that the Senate version should also address their concern of unrealized gains never being taxed head on. If the death tax were eliminated, so should the step-up basis-this would ensure that nothing escapes taxation as unrealized gains would be taxed not at death but if and when the inherited property were sold.
The advocates of estate tax abolition considered it to be a tax beset with moral issues: it hampers economic growth, destroys small businesses and family farms, encourages spendthrift behavior, generates huge compliance costs, and leads to ingenious sheltering schemes. The so-called "death tax" was also said to be inefficient, inequitable, and complex, hence not good policy.
It is important to note that the tenor of the debate between the proponents and the opponents of estate tax abolition was largely characterized by a dispute over the degree, intensity and directionality of the effects of the estate tax. For instance, both sides gave their own interpretation to the fact that the tax affects only one to two percent of Americans. The proponents of abolition saw the taxation effort as a futile exercise, with the costs outweighing the minimal revenues (only about one percent of federal revenues), since the target is so restricted. This fact, that the tax is levied on only two percent of Americans who die with substantial wealth, was also noted by opponents of the repeal. However, the opponents of the repeal appealed to the truly progressive nature of the tax claiming that the repeal of the tax would only favor the wealthiest, would have no effect on the average American (family), and would encourage inequity. They continued to believe that a highly progressive tax that patches loopholes, helps provide equality of opportunity, reduces the concentration of wealth, and encourages charitable giving could not be all bad. For example, President Clinton, in his opposition to the repeal, appealed to the high costs of the bill (estimated to be about $750 billion after a decade) and to the fact that half of the benefits would accrue to merely 3000 families (http://lobby.la.psu.edu/027_Estate_Tax/News_Stories/Washington_Post_061300.htm).
In addition, because everyone is taxed on their income throughout their life, the proponents of the bill claimed that this was clearly a double tax. Moreover, if business owners and farmers want to pass on their assets and minimize the tax burden of their heirs, they are forced to engage in costly estate planning. Proponents of the repeal claimed that preoccupation with estate planning takes away from the productivity of the business. In addition, upon the death of the owner and the implementation of the estate tax, many small businesses do not possess the assets needed to continue. This argument is illustrated nicely in a letter sent by the National Association of Manufacturers to members of the Senate:
In the United States today, only one-third of family-owned businesses survive into the next generation, in many cases because of this death tax. The burden is felt by a business on an ongoing basis, in the form of legal and accounting fees, insurance premiums and appraisal fees related to estate-tax planning. Death-tax liability considerations frequently affect business decisions about investments and expansions. Repeal of the death tax would dramatically reduce the time, money and energy spent on estate planning, and would allow business owners to concentrate on running their businesses and creating more jobs. In fact, our small and medium members consistently identify death tax repeal as one of the top three tax issues that would have the most positive impact on their companies' ability to grow. (http://www.nam.org/tertiary_search.asp?TrackID=&DocumentID=20530)
As a representative for the Family Business Estate Tax Coalition, NAM's statements reflected the concerns of many advocates of the estate tax repeal.
The more unconventional supporters of the repeal of the death tax held on to the argument that protecting smaller businesses was also a means to ward off the enormous appetites of large corporations since the former, when beset with issues of estate planning and inefficiencies, are likely to fall prey to the latter. This gave an interesting twist to an argument that could otherwise too easily be characterized as a conservative, pro-business argument. Some unusual alliances were made, between conservationists and more radical opponents of big business, which made the issue murky rather than one neatly apportioned along conventional partisan lines. It certainly enhanced the lobbyists' efforts that the Coalition could benefit from the resources, expertise and experience of the a wide array of business groups that had a longstanding interest in repealing the tax-it especially guaranteed the issue a life in the media, particularly at the local community level, which proved to be a crucial aspect of the campaign.
The series of death tax proposals brought to the Senate prior to S. 1128 stipulated either changes to the tax structure or a phase-out of the tax or alterations to federal powers. It was S.1128 (sponsored by Senators Kyl (R-AZ) and Kerrey (D-AZ)), the Senate companion to the H.R. 8, that sought to eliminate the death tax. The Kyl-Kerrey bill, as it came to be called, partly to emphasis its bipartisan substance, was entitled the "Death Tax Elimination Act." Primarily, these advocates argued that death should not be a taxable event, and there should be no tax if the heirs of the business kept it within the family. Key Democrats in support of the bill actively urged President Clinton to rescind his threat to veto legislation that would repeal the tax. They appealed to affording chances of a better life to those who worked hard and played by the rules, and affirming "the hard work of millions of small business owners, farmers and ranchers." Senator Kyl (R-AZ), one of the primary activists on this issue and a sponsor of the Death Tax Elimination Act in the Senate, rejected the rhetoric of class antagonism that, in his view, underpinned the arguments in favor of estate tax in the name of equity and redistribution made by many Democrats who were in support of President Clinton's veto pledge.
It should also be noted that the proponents of the repeal found allies in the Black and Hispanic Chambers of Commerce. These allies support repeal in order to level the playing field for minority businesspeople and procure tax relief for businesses and establishments that have struggled for decades against inequity and injustice to be where they are. The minority-owned businesses, they claim, are likely to fall victim to the death tax just when they confront the opportunity for future generations to reap the fruits of and build on earlier efforts and toil. Especially in states with a large Hispanic population such as California, the Hispanic Chamber of Commerce was very active in approaching their Democratic representatives to persuade them to support the bill's affirmative tax relief and opt for the longevity, growth and uplift of small businesses within Hispanic communities. It is to this argument that the opponents of the bill responded by stressing the fact that the impression that estate tax preys on small, struggling businesses was illusory. According to these opponents, the tax impacts only the wealthiest of the wealthy, and support for a truly progressive tax was more in line with demands for equity and justice. It was not a surprise that many of those who were opposed to the tax as it was then structured were open to a more progressive restructuring of it, primarily by raising the exemption.
The mainstay of the arguments made by opponents of the repeal was to prove that the proponents' claims-of the negative effects of the estate tax on saving, compliance costs, and small businesses-were, if not false, then either grossly overstated or unaffirmed by definitive evidence. This type of oppositional argumentation was deemed by opponents of the repeal to be but one contemporary instance of Democrats being put on the defensive-it demanded a lot of energy and detracted from proactive efforts to ensure the longevity of public services. In the words of a lobbyist interviewed,
One of the greatest victories of the Republicans has been putting the progressives on the defensive. For example, the real issue is how to build support for the next generation of public services. But if the Republicans can make us spend time opposing their efforts to repeal the Estate Tax, that's so much time we can't be spending on building a proactive agenda of our own. They've been very effective at that.
The opponents also tried to show that the repeal would carry a huge bill and would be an irresponsible use of the federal surplus. They denied the claims that the estate tax was a double tax and unfair to family farmers. They insisted that arguments against the estate tax made on behalf of small farmers and small businesses were bogus-that while small businesses do pay the tax, they are only paying a small portion of it, and the proposed tax break was actually for the rich. They argued that while the estate tax may play a small role as the proponents claim, the role is an important one: it adds to progressivity in a way that the income tax does not, and perhaps cannot, due to capital gains issues. Society itself might choose to curtail the progressivity of income taxes through various means, hence taxing at death may have smaller costs than taxing during life. One of the presumed benefits of estate tax highlighted by the opponents of the abolition pertains to increased charitable contributions, to which we shall now turn.
The area of philanthropy
is home to an equally interesting, unsuspected and more unresolved set of
arguments within the larger debate on estate tax. Many people in the non-profit
world argued that the transfer taxes encourage giving, and that a repeal would
hamper charitable efforts. This is because the federal government heavily
taxes those portions of estates that are not earmarked for charity. To counter
some of the pro-estate tax conclusions that may be drawn in this line of argument,
the proponents of "death tax" abolition argued that sparing inheritors
taxes on their inheritance would encourage philanthropy in coming generations.
Here, it is the opponents of the bill who charged the proponents with fallacious
argumentation. They dismissed the supposed strong correlation between estate
tax and charity, and pointed to other proposals that would have positive impact
on charitable deductions without involving estate tax. They also tried to
shift the focus from simplistic material gains of donors to the more spiritual,
moral, post-materialist, considerations underpinning the generosity of the
wealthy. Much of this debate on both sides nevertheless rested on shaky and
controvertible behavioral assumptions. (http://lobby.la.psu.edu/027_Estate_Tax/News_Stories/Washington_Post_061300.htm)
With these arguments about the repeal of the estate tax in mind, a few characteristics of the debate merit emphasis. Firstly, it is quite clear that while the advocates of the repeal emphasized the bipartisan nature of their effort, with some even denying that there was any organized opposition to their bill, it was not uncommon to find oppositional lobbyists drawing very stark battle-lines, stressing how the issue mapped on to prior conservative-liberal, or business-labor, progressive-conservative contentions. Secondly, while for the former the moderate, undecided Democrats were the prime targets and all the reason for hope, for the latter the comfort of the Presidential veto was considerable in containing the intensity and spread of their lobbying effort until such a point that they feared that perhaps too many moderate Democrats may break off on this issue and facilitate a veto-proof passage of the bill.
The major impediment in the passage of the bill initially was the inability to secure a sufficient majority in Congress to over-ride the presidential veto, more frustrating because it had already been victorious through the House and the Senate. Apart from that, the sponsors did well in garnering bipartisan support, and the bill materialized in 2001 under an endorsing presidency. The main hurdle on the part of the opponents of the bill was the problem of building support for long-term issues and those with indirect effects (each applicable to the estate tax) when more immediate threats, as one participant pointed out, call out for immediate address, and also when many organizations are too small to devote resources to the issue. One lobbyist aired the frustration in this manner:
...if you look at the "victories" of the Clinton administration, they've all been of the Democratic Leadership Council ideas, which are just long-standing Republican and business ideas: ending welfare, balancing the budget, and reducing taxes. So those ideas get lots of support now and there are few people working effectively to build support for other ideas....
The battle over whether the estate tax should be maintained, altered or abolished altogether was fought mainly in Congress, where the main targets of the lobbyists on either side were the moderate Democrats that appeared to be leaning in favor of the repeal. The House, Senate and the House Ways and Means Committee were the key venues. Members of the House Committee on Small Business and Committee on Agriculture were strong proponents of the repeal because small business and farmers are most strongly opposed to the estate tax. After the passage of the H.R.8 in the House, the locus of the lobbying activity shifted to the Senate, and met with success.
Lobbying Activities and Tactics
Moderate Democrats were the major targets of the lobbying effort, since they did not have a firm position on the issue. The proponents believed that because they had a majority of Republicans in support of the repeal, efforts to convince moderate Democrats to join them would provide a veto-proof majority in Congress. The opponents believed that some moderate Democrats might be sympathetic to the bill, and that while the Democrats could rely on the promised Presidential veto in case the vote was lost to the proponents, they needed to be aware of not ceding too much ground that would allow a veto-proof vote to sneak in. Much of the lobbying effort comprised of contacting members directly. On both sides, there were many instances of grassroots lobbying, as well as of broad-based media strategies. In the words of an advocate interviewed, "This is definitely not a top-down bill but a bottom up bill. There's more kinetic energy and passion out there on this."
Many members of the Family Business Estate Tax Coalition, notably the Newspaper Association of America had been active against the tax for a long time, and geared into public campaigns to raise awareness about the issue, urging local communities to contact their representatives and help kill the "death tax," a phrase that came to hold much resonance with proponents of the repeal. The members of the Coalition were also deeply involved in lobbying individual representatives and senators through their membership, with moderate liberals and Democrats being the main targets. For instance, the Black Chamber of Commerce, one of the proponent organizations, targeted their efforts at the Congressional Black Caucus, and the Hispanic Chamber of Commerce worked on the more liberal Democrats in the House such as Representatives Sanchez (D-CA), Velázquez (D-NY) and Pastor (D-AZ).
Labor groups led efforts to build a broad coalition of progressive and social welfare organizations through grassroots lobbying in opposition to the repeal, especially in constituencies of Democratic members of Congress who were more vulnerable to the repeal propaganda. An example of this was the case of Senator Feinstein in California surrounded by grassroots work by supporters of the bill; in the words of a lobbyist, groups of labor organizations worked together in the state and through the media there to shore up her support of the tax. Both sides, as well as think-tanks engaged in economic analysis for either side of the divide. Public opinion polls were often cited as evidence by both sides, but especially by the proponents of the repeal who anticipated public support to get them mileage in the Congress. The primary litmus test for the effectiveness of both supporters' and opponents' lobbying effort were vote counts.