The Taxonomist

George W. Bush's transition team and House Minority Whip Tom DeLay may have had an unacknowledged motive to delay passage of the 2001 budget: An idea going around in December was to put off the budget bill until February so that it could be combined with repeal of the federal estate tax. Because budget reconciliation bills are virtually filibuster-proof in the Senate, that would probably ensure quick passage of the repeal.

According to inside sources, a bill to phase out the tax on wealth over a five-year period was drafted in early December by congressional staff at Bush's direction. (During the presidential campaign, Bush proposed to repeal the tax by 2009.) The new Bush plan was kept under wraps so that it could be sprung at the last minute, before opponents had a chance to mount a fight. Those opponents include not only fair-tax advocates like me, but also financially endangered groups such as estate planners, insurance companies, and the states.

Of course, estate planners would still have a job without an estate tax--but it would be considerably diminished. Insurance companies want to keep the estate tax so they can continue to make money acting as "withholding agents." Rich people who anticipate leaving a large estate often essentially prepay the tax during their lifetime by buying insurance, thus making the estate tax more like an annual wealth tax.

And then there are the states. Although governors and state lawmakers have yet to speak out strongly against repeal, states have a big interest in keeping the federal estate tax because they share in its revenues. In 1998, for example, the federal Treasury transferred more than a fifth of the $25.6 billion in total estate-tax receipts to the states. Every state gets a piece of the pie. The leaders in 1998 were California with $865 million, Florida with $555 million, and New York with $539 million. In New Hampshire, federal estate-tax sharing pays for about 4.5 percent of the state's total budget. In Florida, New York, and Connecticut, it pays for about 2.5 percent. Are the Republican governors of these three states ready to forgo that revenue?

Beyond the money they would lose, states also should consider what an estate-tax-free system would mean for their income taxes--a concern they hold in common with the federal government. The estate and gift taxes play an important role in protecting the integrity of income taxation.

Imagine, for instance, a parent who wants to sell some stock. If the stock were transferred to a child in a low tax bracket, the capital gains tax could be cut considerably. Then after the sale, the child could give the proceeds right back to the parent. One reason this end run doesn't currently work big-time is that the gift tax would apply to both the transfers--to and from the child--if they exceeded the $10,000 annual limit and the lifetime exemption. But with no estate or gift tax, such schemes could proliferate. Income tax rules that tried to stop them would be difficult to enforce--perhaps impossible in the case of state governments. It's conceivable that the income tax losses from repeal of the estate and gift taxes could be greater than the amount lost in wealth-tax payments.

It was easy last year for insurance companies and state governments to sit on the sidelines; it seemed obvious that President Bill Clinton would not sign the repeal bill that Congress passed. But they probably would speak up loudly--and perhaps effectively--if repeal became a genuine possibility. So one can understand why anti-estate-tax zealots like Bush and DeLay would plot to spring a sudden repeal of the tax in February, before the tax's natural allies could assert themselves.

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