The Sad (and False) Tales of Victims of the Estate

Policymakers in Washington have come to accept “spin” as a normal feature of the legislative process, with each side in a debate pushing a message and bending facts so they best support its case.

But bending facts is one thing, breaking them is another. In some cases, one side actually ignores facts and creates a mythical reality – one based solely on ideology. In no instance is this truer than in the current debate over whether to reduce the federal estate tax beyond its reductions of recent years.

That debate raises two serious questions: Who most needs help from Washington at this time of economic distress? And how should Washington allocate resources at a time of huge budget deficits?

Under current law, the estate tax is set to take a rollercoaster ride of irrational ups and downs. Congress cut the tax in 2001 and, in doing so, also set it to expire in 2010 but then return to its pre-2001 levels in 2011.

Why? Because, for reasons of arcane budget “scoring” in Washington, Congress wanted to cut taxes as much as possible in 2001 while containing the costs of doing so as much as possible over the ensuing 10-year period

In 2001, the Bush Administration and Republican-controlled Congress understood that, as 2010 approached, today’s lawmakers would step in to prevent the rollercoaster from taking off. That’s where we are now.

Despite what you hear, the estate tax is not a monstrous burden on farms and small businesses. Under current law, the first $3.5 million in value of an individual’s estate (and $7 million of a couple’s estate) is exempt from tax. For values exceeding those levels, estates pay taxes of up to 45 percent.

President Obama proposes to keep things as they are, making today’s rules permanent. In its budget blueprint (or “resolution”) for 2010, the House voted to go along. The Senate, however, approved an amendment by Democrat Blanche Lincoln of Arkansas and Republican Jon Kyl of Arizona to its own resolution to raise the exemption for couples to $10 million and cut the top tax rate to 35 percent.

House and Senate negotiators will iron out a final budget resolution for congressional approval in the coming weeks. But even if, as expected, they discard the Lincoln-Kyl amendment, that won’t be the last word. The two senators will likely try to add it to any tax legislation Congress considers later this year.

Listening to Lincoln and Kyl, you might think they are fighting a valiant battle for fairness for hard-pressed farms and small businesses, and for those who inherit the fruits of their parents’ labor.

“This amendment provides real relief to our family-owned businesses,” Lincoln said during the Senate debate. In an April 4 letter to the Washington Post, the two senators wrote of those who need further estate tax relief, “Many have relatively low profit margins and are considered ‘wealthy’ by the government only because they own expensive equipment or land.

If only it were so. In fact, says the Tax Policy Center, a project of the Urban Institute and Brookings Institution, the overwhelming majority of farms and small businesses are already exempt from estate taxes under current law.

More specifically, only the estates of one out of every 400 people who die – that is, the top 0.25 percent – would benefit from the Kyl-Lincoln proposal. The other 99.75 percent of estates would pay no taxes under current law.

Nor is the further relief that Lincoln-Kyl would provide for the wealthiest among us cost-free. The amendment would cost nearly a hundred billion dollars more over its first decade than Obama’s plan to extend the estate tax at its current levels.

The estate tax battle comes as Washington faces projections of huge future budget deficits that, if not addressed by the president and Congress, will soon threaten the nation’s long-term economic viability.

Lawmakers of both parties have complained that Obama’s budget plan for 2010 does not do nearly enough on that score. Among those complaining, ironically, are some who voted for the Lincoln-Kyl giveaway.

The appropriate question for policymakers is not whether to give another generous tax break to the wealthiest among us. The question is whether, facing deficits of the size that Washington projects, the president and Congress should make permanent the generous estate tax cuts that it enacted in 2001.

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