Republicans, having worked with farmers, ranchers, and other small businesses to decimate the estate tax, now aim with their governing trifecta to keep the controversial tax hobbled or eliminate it altogether.
Critics call the tax, which has been imposed in roughly its current form since 2016, the “death tax.” Death should not be a taxable event, they argue. They also maintain that the tax penalizes saving and thrift while posing a mortal threat to family-owned businesses, such as farms, that are passed down from generation to generation.
Liberals, though, counter that the tax is necessary to address inequality. They note that due to previous GOP efforts to limit the tax, it now only applies to a very small number of highly wealthy people and few family enterprises.
Republicans championing a full repeal of the estate tax have a window of opportunity as they craft a multitrillion-dollar fiscal bill to extend the 2017 Trump tax cuts through reconciliation, a legislative process that allows for bills to bypass the filibuster and pass with only a simple majority in the Senate.
If they fail, though, the provisions included in the 2017 bill will expire, including measures to exempt many people from the estate tax.
And the party’s margins in the House and Senate are so slim that merely keeping the estate tax changes they’ve won will be difficult, let alone killing the tax altogether.
What is the estate tax?
In simple terms, the estate tax imposes a tax of 40% on wealth — in the form of assets such as land, investments, cash, businesses, and more — before it is transferred to the descendants or beneficiaries of the person who died.
Today’s version of the tax is a shadow of what it once was. Only 3,900 estates paid the tax in 2022, according to the Tax Policy Center, for a total of $23 billion in revenue. In comparison, 2.8 million people died that year.
What is it now, and how has it changed?
Reforms to the tax imposed by Republicans over the past generation have greatly reduced the number of estates that have to pay it.
The 2001 Bush tax cuts significantly lowered the rate for the estate tax over time, from 55% to 45%. It also raised the exemption for the estate tax, such that the share of decedents paying it dropped from 2.1% of the population to 0.7% in 2008. Then, in 2010, it eliminated the tax altogether, before it was revived under the Obama administration.
The 2017 tax overhaul, also known as the Tax Cuts and Jobs Act, then lowered the rate to 40% and effectively doubled the exemptions. Today, it applies only to estates above $27.98 million for married couples, and only 0.1% of decedents pay it.
Altogether, the tax would collect about nine times as much revenue without the changes made by the GOP since 2001, according to the Penn Wharton Budget Model.
If Republicans don’t extend the current estate tax provision during reconciliation this year, that nearly $14 million exemption will revert to its pre-TCJA levels.
Who wants to end the estate tax?
Broadly speaking, two groups favor ending the estate tax.
The first group includes those who see the tax as economically or morally backward.
Abstractly, the estate tax penalizes savings and work.
Consider the example of two entrepreneurs who start a successful business. One takes the proceeds and, rather than spending the money, plows them into new ventures, building up the local economy and employing hundreds. He dies wealthy and is subject to the estate tax. The other takes the profit and spends it on yachts, luxury watches, and vacations. He spends down all his wealth before he dies, and pays no estate tax. Effectively, the estate tax penalizes the thrifty and rewards the profligate.
Stephen Moore, a Heritage Foundation economist and informal adviser to Trump, told the Washington Examiner that the estate tax is “extremely unproductive.” He said it might be more equitable to do away with the estate tax and in exchange eliminate a provision of the tax code known as the step-up in basis.
The step-up in basis applies to an inheritor’s capital gains. It allows inherited assets, when they’re sold by the heir, to be taxed at the basis value of when they were inherited rather than the basis value of when they were first purchased by the decedent. It can allow the appreciation of an asset over the course of a decedent’s life to go untaxed.
Moore said it would be better to eliminate the estate tax, with its 40% top rate, and instead tax assets at the top capital gains rate, of about 24%.
Ryan Young, a senior economist at the Competitive Enterprise Institute, also argued that the estate tax diverts resources from the private sector to the government, where they are less efficiently used.
“If that money goes into government coffers and used on government projects, it’s probably a lot less productive than it would have been, say, had the money been invested like it was prior to the person’s death,” Young told the Washington Examiner.
The second group of estate tax opponents comprises large family businesses and farms, who say that a major estate tax liability could force them to sell off their livelihoods to outsiders.
For that reason, many of the lawmakers fighting the hardest to end the tax come from states with big family farms, such as Senate Majority Leader John Thune, who represents South Dakota.
Similarly, Rep. Randy Feenstra (R-IA) sponsored House legislation that would kill the estate tax.
“The death tax is an egregious double tax that unfairly targets American family farms and small businesses and directly threatens long-held farming traditions in rural Iowa and across the country,” Feenstra told the Washington Examiner.
Grover Norquist, founder of Americans for Tax Reform, has long been one of the most vocal proponents of ending the estate tax. Norquist said that not only is eliminating the tax good policy, but it has consistently polled well with voters.
“It’s always been very popular, which has always bothered the hell out of the Left,” Norquist told the Washington Examiner.
Who thinks the estate tax should be expanded?
Left-of-center groups have advocated the estate tax be expanded or, at the very least, not abolished. They argue that the tax only affects the very wealthy and that it is an issue of fairness in the tax code.
David Kass, executive director of Americans for Tax Fairness, said that 99% of Americans will never have to pay or worry about the estate tax.
Defenders of the estate tax often point out that very few family-owned farms are subject to the estate tax. Only 0.3% of farm operator estates are subject to the estate tax, according to the USDA, thanks to the large exemptions. That share, though, would rise to 1% if the enlarged exemptions expire at the end of the year.
He also pointed out that ending the estate tax would also hurt charitable giving. That is because donations to qualified charities are exempt from estate taxes and the value of the donation is subtracted from the total estate value before taxes are calculated.
When the estate tax was not in effect in 2010, he noted, gross charitable requests in IRS tax filings plunged 37%.
“Look, if you if you get rid of the estate tax, local charities are really going to be hurt,” he said.
Chuck Marr, vice president for federal tax policy at the left-leaning Center on Budget and Policy Priorities, said the estate tax is “extremely porous” and equated it to Swiss cheese. He said the most important change isn’t making the exemption bigger, but rather close out the “loopholes” associated with the estate tax and passing along assets after death. Using complicated financial arrangements, wealthy families can avoid the estate tax by establishing family trusts, among other strategies.
“You can really game it, you have these trust funds that wealthy people can set up, and they just can manipulate and pretty easily avoid the tax,” Marr told the Washington Examiner.
Marr noted that Gary Cohn, Trump’s former National Economic Council director, reportedly once said that “only morons pay the estate tax.”
So, will it be repealed in reconciliation?
While many Republicans favor eliminating the estate tax, it is one of many competing priorities for the massive tax bill they are writing.
The problem is that merely extending the existing TCJA estate tax provisions would reduce revenues by more than $220 billion over 10 years, according to a treasury estimate. Eliminating it would add to the deficit even more.
Meanwhile, Republicans are already facing daunting or impossible math trying to figure out how to offset the cost to the treasury of extending the Trump tax cuts, as well as adding all the other tax breaks Trump has called for — and it’s worth noting that estate tax tax repeal is not among them.
The White House unveiled its list of tax priorities earlier this year. They included eliminating taxes on tips, ending taxes on Social Security, eliminating taxes on overtime pay, adjusting the cap on state and local tax deductions, removing special tax breaks for billionaire sports team owners, closing the carried interest tax deduction “loophole,” and introducing tax cuts for made-in-America products.
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Norquist acknowledged a wholesale repeal is unlikely this year. Citing the small margins in the House, he said while the support might be there, the priority is more likely to be on making the existing tax provisions of the 2017 tax cuts permanent.
“So, I don’t expect it to be part of it, I would not be surprised if it was, and if it was part of it, it would be popular and would pass,” Norquist said.
