Republicans are close to achieving one of their longest-sought policy goals—a repeal of the estate tax. But they still face tight fiscal constraints and a tough campaign to sell the idea to the public.
GOP leaders are already battling the broader perception that the current tax-overhaul framework, released in September, is a giveaway to the wealthy at the expense of the middle class. They’ve backtracked on their plans to slash tax rates for top earners, opting to add a fourth, top tax bracket beyond the 35 percent rate proposed in the framework.
Amid the backroom bargaining, the proposal to repeal the estate tax could get scaled back in similar fashion.
“At the end of the day, everything is negotiable,” said Sage Eastman, a former House Ways and Means staffer and now a principal at lobbying firm Mehlman Castagnetti Rosen & Thomas. “The good news is the debate is somewhere between increasing the thresholds again and complete elimination, which is really only a question of, ‘How big is the win?’”
Current law levies a top estate-tax rate of 40 percent on inheritance income beyond $5.49 million, or $10.98 million for married couples. Repealing the estate tax would cost about $269 billion over a decade, according to the Joint Committee on Taxation.
Republicans are delivering a multipronged argument for eliminating the tax. First, they say, wealthy individuals already avoid paying it through complex financial arrangements and charitable donations.
“You know the George Soroses of the world don’t pay estate tax,” Sen. Ted Cruz said at a CNN debate on tax reform last week. “They have armies of lawyers and accountants. They do all sorts of trusts and generation-skipping. They don’t pay it.”
Indeed, estate-tax revenue is declining. As lawmakers have pushed the estate-tax threshold ever higher in the past few years, its contribution to total federal revenue has decreased, down from about 1 percent in 1990 to 0.6 percent in 2014, according to the conservative-leaning Tax Foundation.
Still, the revenue remains significant as lawmakers search every corner of the tax code for a way to pay for the framework’s broad income-tax cuts.
Using IRS data, the nonpartisan Tax Policy Center estimates that 11,310 individuals dying in the 2017 tax year will have estates large enough to be covered by the tax, but after deductions and credits, about half of those will end up owing the tax. That will amount to about $19.95 billion in federal tax revenue this year.
The burden skews toward the top. More than two-thirds of those estates will come from the top 10 percent of income earners, and about one-fourth will come from the top 1 percent, the Tax Policy Center said.
The Tax Foundation argues that the estate tax amounts to double taxation, once on the original income and again when the owner dies and passes on the inheritance. Progressive groups reject the double-taxation argument and view the repeal effort as regressive.
“I think it’s always important to note that a lot of this money has never been taxed before; half are unrealized capital gains and have never been taxed,” said Chuck Marr, director of federal tax policy at the left-leaning Center on Budget and Policy Priorities.
Opponents of the estate tax, or as some call it, the death tax, also argue that it unfairly captures family farms and small businesses, whose heirs may have to sell parts of their operation to cover the tax.
“We’ll also protect small businesses and family farmers here in North Dakota and across the country by ending the death tax,” President Trump said in a speech in September. “Tremendous burden for the family farmer. Tremendous burden.”
There are dueling views on that point, though some conservatives and business groups concede that only a few outliers are really impacted in the way Trump described.
The Tax Policy Center estimates that only 50 small farms and closely held businesses will be captured by the estate tax this year. That’s about 1 percent of all inheritances that will fall under the tax in 2017.
Pat Wolff, senior director of congressional relations at the American Farm Bureau Federation, said that while the tax may not hit many small farmers, its impact is outsized.
“That doesn’t completely eliminate the impact on their operations, because they must continue to engage in estate-tax planning to mitigate any impact of the estate tax if it would be due,” Wolff said.
Wolff says that farmers’ net worth is tied up in land, whose value fluctuates, meaning that some must prepare for their operation to be potentially captured by the estate tax in the future.
Jack Mozloom, communications director for the National Federation of Independent Business, said that while most small businesses represented by his organization aren’t captured by the estate tax itself, nearly 40 percent incur expenses related to protecting themselves from liability.
The politics of the estate-tax repeal generally falls on party lines, but there are a few key exceptions among Republicans. Sen. Susan Collins has voted against an estate-tax repeal before, and Sen. Mike Rounds has said he opposes the current proposal. Sen. Jeff Flake has in the past questioned the economic benefit of repeal.
Still, repeal has powerful backers. House Ways and Means Chairman Kevin Brady and Senate Finance Committee member John Thune have both sponsored repeal legislation.
Public opinion on the issue is mixed. A 2016 Gallup survey showed 54 percent of respondents favored eliminating the estate tax, though other data suggests many Americans are mistaken about how few people are actually subject to the tax.
Americans for Tax Reform President Grover Norquist—who describes the repeal effort as the “crown jewel of tax reform”—said that backtracking on the estate tax isn’t likely to help Republicans pass a bill.
“Even a handful of Republicans in the House or the Senate wanting to say, ‘Let’s not get rid of the death tax,’ I think signals to the Democrats that you just scream ‘tax cut for the rich’ and the Republican Party falls over,” Norquist said.