Puget Sound Business Journal
April 22-28, 2005

While the U.S. Congress and the Bush Administration have been sharply and systematically reducing the federal estate tax, Washington has been vigorously debating the reinstatement of an estate tax. Gov. Christine Gregoire inserted such a levy into her budget, as have both chambers of the Legislature.

Coincidentally, the nation's two foremost advocates on the issues - one on each side - both live and work here in the Puget Sound area. Attorney, philanthropist and author on the topic, Bill Gates Sr. is a long-time proponent on taxing estates, while Seattle Times publisher Frank Blethen is an outspoken opponent of such policies. The Business Journal invited each to offer his views.

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Estate tax argument has national and local import

One of the myths floating around the federal estate tax debate is that if the estate tax remains on the books, then hard-working, American small-business (or family-farm) owners will not be able to pass their businesses on to their children due to the egregious amount of estate tax that will be required upon their deaths. As it turns out, there is remarkably low incidence of small-family businesses or farms that are major assets in estates, and in those cases, estate planners are able to organize the owner's affairs to avoid any need to sell the business.

Have in mind the exemption is going up to $7 million for a married couple in 2009.

To illustrate the effect of this exemption, consider the couple who has a small business worth $7 million that they want to pass on to their children when they die. They pass away in 2009, their heirs subtract the $3.5 million exemption per person, they und up owing no tax on their parents' estate, and the entire $7 million business is passed to the heirs. In this same scenario, if the business was worth $10 million, only $3 million would remain to be taxed after subtracting the exemptions. Applying a 45 percent (2009) tax rate results in only $1.35 million to be paid in estate taxes - an effective tax rate of 13.5 percent on the $10 million.
If we look at estates larger than $10 million, we note that the federal government already has relief in place for families dealing with a cash crunch, including special provisions for heirs paying estate taxes on family-owned businesses. The most significant provision gives heirs 14 years to pay the tax, at a very low interest rate.

The rhetoric around this debate has created two interesting pseudonyms.
One group is out to repeal the "death tax" while anther is out to reform the "grateful heirs tax."

I would suggest that this tax has nothing to do with anyone who is dead, and everything to do with grateful heirs who are very much alive and paying their due portion on a significant transfer of wealth that they did nothing to create.

There is no question that the estate tax needed to be reformed to increase the exemption levels and lower the rates. But the federal government did that in 2001, and the trajectory we are on leads to be fair, progressive tax that by 2009 will be imposed on only the wealthiest 0.3 percent of our society.

Will it generate any revenue if it only applies to 0.3 percent of all estates? The answer is a resounding yes!

The Congressional Budget Office estimates that if Congress were to repeal the estate tax, the revenue loss over the next two decades would be $4 trillion. One cannot help but wonder why proponents of the estate tax repeal would argue to forfeit this huge revenue stream at a time when the nation is accepting federal deficits in excess of $400 billion annually.
On the local scene, as we watch the Washington House and Senate spend the last weeks of this year's legislative session working out the differences between their two budgets, one of the elements that is on the table is restoring the state estate tax. Both budgets call for a new exemption level of $2 million and exempt family farms from paying any estate tax.

This will generate a much-needed $128 million in revenue for the next biennium.

We should applaud the governor and Legislature for the leadership they've shown in these tough economic times to reinstate this most progressive tax that was struck down by a surprising State Supreme Court decision.

William H. Gates SR. is a Seattle lawyer and founding partner in Preston Gates & Ellis. He has served as president of the Seattle/King County Bar and Washington State Bar associations, as well as a leadership roles on the boards of numerous agencies and civic organizations. He chaired the Washington State Tax Structure Study Committee, which recommended adopting a state income tax, and in 2002, along with colleague Chuck Collins, he published "Wealth and our Commonwealth - Why America Should Tax Accumulated Fortunes."

Tax rings death knell of locally owned businesses

Ever wonder why you rarely get to patronize a locally owned business anymore?

Are you concerned about how rapidly Washington is turning into a "branch office" economy? An economy where business investment and employment decisions are now mostly made by faceless mid-level executives in another state. This absentee ownership is costing our state countless jobs, lost investment and reduced tax revenue.
Do you wonder why family business owners choose to liquidate, selling out to national and international conglomerates, rather than invest in their businesses and our community for the long term?

The answer is simple - the death tax. America's most damaging and misunderstood tax.

If a business owner in our state dies today, the federal government applies its confiscatory death tax at the shocking rate of 47 percent. Yes, there is an exemption for the first $1.5 million of value. But this is small, almost meaningless, to a business. Even a very small business usually has much more than that tied up in fixed and non-liquid assets, all of which are taken into account in calculating the tax due upon the death of an owner.

The newspaper industry is a good example of how the death tax has wiped out local ownership. In 1970 there were about 1,700 daily newspapers in the country, almost all privately owned with strong local and regional connections. Today, only about 15 percent remain independent and out of the hands of absentee conglomerates. Out of our state's newspapers, all of which were independent and local 30 years ago, only about a third remain locally owned. I believe every one of them is at risk due to the death tax. I know the Seattle Times is.

Even the smallest of our daily newspapers has a value of $15 million to $25 million. The death tax bill of $6 million to $11 million on these non-liquid assets forces a sale to an out-of-state corporation that doesn't ever pay the death tax.

Sadly, the newspaper situation is mirrored in every line of business in our state. Bookstores, grocery stores, funeral homes, banks, restaurants, furniture and clothing retailers.

Now the state Legislature wants to create a brand-new state death tax. In spite of the damage it will do, in spite of the old one being repealed by a 67 percent vote of the people, and in spite of the additional state expense of administering the tax. At the federal level, this cost is estimated at 60 cents of every dollar collected. In our state, the cost would no doubt be similar, netting state government very little actual revenue.

The new state tax would add almost 8 percent to the federal bill, bringing the combined rate of state and federal death tax to more than 50 percent. Under these conditions it is clear why family businesses can't invest in their businesses and in our community for the long term. And it explains why we increasingly see revenues that should stay in Washington flow to corporations based elsewhere.

Passage of this destructive tax by the state Legislature and the governor only makes sense if it's their goal to destroy jobs and investment, wipe out the remaining locally owned businesses in our state and replace our businesses with absentee public corporations.

In addition to being the primary tool for public corporations to take over local businesses, the death tax is a big business gift in other ways. The life insurance industry is the primary behind-the-scenes lobby for keeping the death tax in place. Why? Because nationally they have a $12 billion annual revenue stream based on life insurance sold to people trying to partly mitigate the impact of the death tax. It is ludicrous that Americans are forced to subsidize the insurance industry for a tax that wipes out jobs and reduces economic activity and thus other tax revenue.

It's illogical anyone would support such a destructive and ineffective tax. I encourage anyone who cares about local employers, local investment and local jobs to speak up now against both the state's proposed new death tax and the existing federal death tax. Time is fast running out on our few remaining local employers.

Frank Blethen is publisher of The Seattle Times. He has a number of civic and industry involvements, with a focus on higher education and health and human services, and has been recognized nationally for his work in the area of diversity. Blethen became a leading voice in the effort to repeal the estate tax after studying its impact on the loss of locally and independently owned newspapers and other businesses.

Please e-mail us with your comments, death tax horror stories and suggestions on-line at feedback@deathtax.com.

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