Estate Tax
The federal estate tax, paid only by the estates of the very wealthiest individuals, raises a significant amount of revenue to fund vital services. But it continues to be the target of an aggressive campaign, financed by a few super-wealthy families, seeking to permanently repeal or drastically reduce this highly progressive tax.
The federal estate tax is imposed on very large estates. Currently, estates of $2 million for an individual ($4 million for a couple) are entirely exempt from the estate tax, which means that less than 1 percent of estates pay the estate tax. Only a tiny number of family-owned businesses or farms owe estate tax, according to a study by the Congressional Budget Office, and most of those have sufficient liquid assets to pay any tax that is owed.
As part of the 2001 tax cuts, the estate tax is being reduced. By 2009, the amount of wealth exempt from the estate tax will reach $3.5 million for individuals ($7 million for couples), and less than 0.5 percent of estates will pay the estate tax. The top tax rate on amounts over the exemption level that are subject to tax will decline to 45 percent. The estate tax is repealed for one year (2010), then reverts to pre-2001-law levels in 2011, as part of the general expiration of the 2001 tax cuts, with an exemption of $1 million for individuals ($2 million for couples), and a top rate of 55 percent.
Where things stand on the Hill
President Bush and some in Congress continue to urge permanent repeal of the estate tax, although this is unlikely to occur in the current Congress. Permanently repealing the estate tax would benefit only a small number of extremely wealthy estates and cost over $1 trillion over the first ten years of repeal (2012-2021). There is broad interest in reform of the estate tax, but very different ideas about what reform should mean. Some so-called reforms would raise the exemption so high, and cut the tax rate so much, that they would cost nearly as much as repeal. Drastically reducing the taxes paid by the estates of multimillionaires would leave average Americans to pick up the tab, through a combination of higher taxes, cuts in services, and added debt.
The Senate Finance Committee scheduled a hearing on the estate tax in November 2007, but legislative action is not expected this year.
The Estate Tax: Myths and Realities, Center on Budget and Policy Priorities (February 7, 2007).
Who Paid the Federal Estate Tax in 2005? Citizens for Tax Justice (January 10, 2007).
Spending Millions to Save Billions: The Campaign of the Super Wealthy to Kill the Estate Tax, Public Citizen’s Congress Watch, United for a Fair Economy (April 2006).
Effects of the Federal Estate Tax on Farms and Small Businesses, A CBO Paper, Congressional Budget Office (July 2005).