Government created barriers to private sector business growth and job creation are a major cause of the current prolonged recession. One of the more significant barriers to free market entrepreneurs is the estate tax. It is often referred to as the death tax because, after exempting a certain dollar value for each estate, the tax is levied on the remaining accumulated value of a person’s holdings at the time of their death. According to the Congressional Joint Economic Committee, death taxes are the primary reason why small businesses fail to survive beyond one generation.
The first federal estate tax was imposed to help pay the costs of the Civil War. Over nearly a century and a half, the death tax has been repealed and reinstated several times. It reached the highest marginal rate of 60 percent in 2001. That year, Congress passed the Economic Growth and Tax Relief Reconciliation Act that gradually phased out the estate tax to zero in 2010. However, that law was structured so that if it was not reauthorized by Congress, the tax would return to 55 percent in 2011. A congressional compromise with the Obama administration reestablished the marginal rate of the death tax at 35 percent for 2011 and 2012. It is our understanding that without further action, that marginal rate will automatically revert back to the 55 percent rate in 2013 and the federal exemption will be lowered to one million dollars.
Oregon is one of only twenty two states that levies an additional death tax. The current combined state and federal estate tax for Oregonians is the sixth highest in the nation standing at 45.4 percent. That combined marginal rate is scheduled to escalate to nearly two thirds of the taxable estate value in 2013. Death taxes are generally due and payable within nine months of the death of the estate owner. Penalties of up to 25 percent, plus annual interest payments, are added to the tax bill
The case for repealing both state and federal estate taxes is compelling for a number of reasons. Estate taxes are a regressive form of double taxation wherein income is taxed when earned and then a “government share” of accumulated savings is extracted at death. Governments unfairly levy taxes amounting to what is often as much as half of the total value of all forms of accumulated assets before those savings can be transferred to the next generation.
Death taxes are killers of sustainable small business and private sector job creation. The economic viability of myriad small businesses across our state and nation have been destroyed by estate taxes.
For example, the heirs to an Oregon small business enterprise valued at three million dollars might be required to pay about $900,000 in combined state and federal estate taxes within nine months of the death of the estate owner after taking a million dollar exemption. Assuming the heirs do not have $900,000 in available cash, their only options may be to either borrow the money if possible, or to sell part or all of the assets to make the death tax payment. The cost of paying a $900,000 debt could be estimated to be at least $10,000 per month over the term of a ten year loan. Moreover, the business may no longer be a workable economic unit after the forced sale of a significant portion of its assets.
Too often, the only viable alternative is to liquidate the business, pay the death taxes, and divide what is left among the heirs. Ultimately, the business and the private sector jobs that it sustains are lost. Lost too is the potential job growth that a successful expanding business creates. These small businesses being destroyed by death taxes are the same business entities that create and sustain more than half of all private sector jobs in the United States. In fact, businesses that employ fewer than twenty people account for more than 20 million private sector jobs. The elimination of all federal death taxes would result in the creation of between one and a half and two million private sector jobs in the United States according to studies cited by the American Family Business Institute. Abolishing Oregon’s death tax would add significantly more to our own job growth potential.
State and federal governments unquestionably do receive immediate short term revenue gains from the collection of estate taxes. However, numerous studies have shown that the immediate gain is greatly exceeded by the future losses in tax revenue directly attributable to death taxes. That one time tax collection is offset by the loss of all forms of future tax revenue that would have been collected from the liquidated small business. It is also offset by both the lost income tax revenue that would have been collected from the firm’s employees, as well as the potential cost of unemployment benefits, food stamps, subsidized housing and other forms of government aid available to unemployed citizens.
Death taxes are often politically supported as a means for the redistribution of wealth between generations. This political agenda is misguided at best. The wealth is ultimately redistributed to the governments rather than to other people in the private sector.
Moreover, the estate heirs are often forced to withdraw their capital from the business enterprise in order to pay the death taxes. They are frankly discouraged from reinvesting that capital in future Oregon business ventures after experiencing the Oregon penalty on savings and entrepreneurship. Further, the employees that lose their jobs and means of family support are ultimately made less wealthy by the supposed wealth redistribution.
All estate taxes should be permanently repealed. The federal death tax is a matter that must be dealt with in Congress. The Legislature only has the ability to abolish Oregon’s 10.4 percent state tax on dying. Gail and I, along with our fiscal conservative colleagues, will be working toward that end during the upcoming February Legislative session.