Congressional Quarterly, September 11, 1999

Eager To Hack at Estate Tax, Foes Welcome New Allies

By Lori Nitschke, CQ Staff Writer

When Elwyn Darden came to work for the National Association of Manufacturers in December 1994, he was assigned to tackle a decades-old priority for the organization’s 9,000 family-owned businesses: repealing the estate tax.

Part of Darden’s job was to represent the association at meetings of the fledgling Family Business Estate Tax Coalition, a group dedicated to repealing the tax, which applies to businesses, farms, homes and financial investments that are handed down.

Though business owners in other lines of work shared the manufacturing industry’s concern that the estate tax imposed onerous burdens on their companies and families, Darden recalls that it was difficult to round up other members for the coalition, run largely by the National Federation of Independent Business (NFIB). Many associations, he said, "had to be sold on the idea that estate relief was something possible politically…It (was) a question of people taking it as something that can seriously happen."

But sold they have been. The coalition roster has climbed from 45 associations in 1995 to 60 in 1999, and it is just one of three major umbrella organizations lobbying on the issue. Brian Reardon, the NFIB’s chief House lobbyist, estimates that 200 business associations, many of them members of the three coalitions, are working for repeal. Among those involved is former Sen. Bob Packwood, R-Ore. (1969-95),

Many business associations decided that such efforts were worthwhile, in part because of the Republican Congress’ enthusiasm for tax cuts and in part because of Democrats’ willingness to exempt at least some estates from a tax. The Democrats’ stand helped lead in 1997 to an increase in the value of estates exempt from taxes and protections for some small businesses and farmers (PL 105-34). In addition, family newspapers and minority business groups joined the effort, broadening advocates’ message and appeal. (Newspapers, p.2102; tax deal, 1997 Almanac, p. 2-3)

These advocates moved a step closer to their goal in August. The tax bill (HR2488), cleared and awaiting a trip to the White House, would phase out the estate tax in nine years. The bill is headed for a veto and is not what its supporters might have written in a perfect world. For example, it would sunset in 2009, and current law would resume in the unlikely event that future congresses did not act. But it marks the acceptance of a position on estate taxes that many were not expecting so soon. (Tax bill, CQ Weekly, p. 1923)

"I think the fact that repeal made it into the tax bill was something beyond…anybody’s expectation as recently as two or three months ago," said Frank A. Blethen, publisher of The Seattle Times, and a vocal advocate of repealing the tax.

His great-grandfather, Alden J. Blethen, founded the Times in 1896, and Frank Blethen would like to pass on the growing family business, which includes nine other publications, to the fifth generation.

Blethen and others hope that inclusion of the repeal in this Congress’ first tax bill means the estate tax, or "death tax" as opponents call it, will be among the few issues that make it into any smaller, post-veto tax bill. Congressional leaders are expected to send HR2488, which the Senate cleared Aug. 5, to President Clinton the week of Sept. 13.

Advocates cling to the dream of repealing the tax, but they say privately that they would be satisfied with incremental change this year, perhaps a rate reduction or a provision to transform the tax’s so-called unified credit, which now effectively exempts from taxes the first $650,000 in estate transfers or gifts, into an outright exemption. The change would set the lowest rate on taxable estates at 18 percent instead of the current 37 percent.

With associations from the National Chimney Sweep Guild to the Society of American Florists lobbying on the issue, it will be hard for Republicans writing future tax bills to ignore advocates of repeal, and it may be increasingly difficult for Democrats to do so as well.

Business groups lobbying on the issue are far more diverse than they once were. The National Association of Women Business Owners, the National Black Chamber of Commerce, the National Indian Business Association and the U.S. Hispanic Chamber of Commerce as among groups that have joined the effort to eliminate the tax.

Constituents in the few areas of the country still home to family-owned newspapers are seeing editorials calling for repeal, as the newspaper industry steps up its campaign against the tax.

And little by little, business officials say, more people who may have never owned a business but whose estates or parents’ estates have multiplied in value are becoming interested in the tax.

"I think that my Woodstock generation is growing older," said Stephen B. Waters, 51, publisher of the Rome, N.Y., Daily Sentinel, another family-owned newspaper, when asked to explain the momentum behind curbing the tax.

Muted Opposition

There is little vocal or organized opposition to repeal, although insurance companies would stand to lose the millions paid each year for policies to cover estate taxes, thousands of lawyers involved in estate planning might have to find another area of expertise and charities might get lower priority in some estates.

Some repeal advocates say they have heard disparaging words about the provision behind closed doors, but no opposing businesses have organized or expressed public opposition. Doug Bates, director of federal relations for the American Council of Life Insurance, said his group does not have a position on the provision. "We have other priorities," he said.

Support for the estate tax comes from a few academics and analysts for liberal think tanks, as well as many congressional Democrats, who say the tax is still living up to its original purpose --–keeping the richest Americans from amassing too much of the nation’s wealth.

"There is an interest in preventing too much concentration of wealth in this country." Said Iris J. Lav, deputy director of the Center on Budget and Policy Priorities, a liberal-leaning think tank. "Part of the cost of having that family business and enjoying it…would seem to be making some provision for paying the estate tax," she added.

Evolution of the Tax

Until 1916, when Congress passed the Revenue Act, from which the modern tax code descended, the federal government had intermittently levied an estate tax, generally putting one in place only when deemed necessary to pay for military excursions.

But in the early 1900s, the era of the Carnegies, Mellons, du Ponts, Rockefellers and Morgans, President Theodore Roosevelt called for "a progressive tax…to put it out of the power of the owner of one of these enormous fortunes to hand on more than a certain amount to any one individual."

The estate tax included in the 1916 act had a top rate of 10 percent on estates worth more than $5 million and exempted estates worth less than $50,000.

Congress has tinkered with the tax ever since, increasing the top rate to a high of 77 percent in 1941 to help pay for World War II. Congress cut the top rate to 70 percent in 1976 (PL 94-455) and adopted a provision to cut it to 50 percent over four years as part of President Ronald Reagan’s tax bill (PL 97-34) in 1981. But subsequent Congresses delayed the cut, and in 1993, lawmakers made the 55 percent top rate permanent as part of its omnibus budget-reconciliation bill (PL 103-66). (1993 Almanac, p. 124)

In 1997, Congress increased the threshold for estates subject to taxation for the first time in decades. Provisions in the tax-reconciliation bill (PL 105-34) specified that the $600,000 threshold would be increased gradually to $1 million by 2006. Another provision gave an additional exemption to family farms and closely held family businesses. Both groups would not be subject to the tax until their estates topped $1.3 million. (1997 Almanac, p. 2-39)

But the National Association of Manufacturers’ Darden and tax policy director Dorothy Coleman say that the changes were so narrowly written that many families have found little shelter in them.

Lav and William G. Gale, a senior fellow at the Brookings Institution, a Washington think tank, agree that there may be some need to tinker with those provisions or protect small, family-owned businesses or farms in another way. But they do not believe the tax should be abolished.

With statistics continuing to show that only 2 percent of estates pay the tax each year, and that the vast majority of recipients of those estates are among the wealthiest taxpayers, Gale believes the number of small businesses and farms ensnared by the tax is overstated. "There’s a small group with a very intense problem," Gale said, "and they have allies with wealthy people who want to get rid of the estate tax."

Added Lav: "I’d actually welcome some more provisions to protect farmers and small-business people because I think they’re the stalking-horse for repeal."

Building a Business

Alexis Scott understands the argument that an estate tax is necessary to break up concentrations of wealth. But the 50-year-old publisher of a biweekly Atlanta newspaper with a largely black audience said she has become convinced that the tax is hampering her efforts to build up the company.

Scott’s grandfather started the Atlanta Daily World in 1928 with money he saved working on the railroad. When he died six years later, the paper passed on to his children, including Scott’s father. It fell into decline about a decade ago, and Scott, who had worked for the Atlanta Journal-Constitution and Cox Enterprises, decided two years ago to take over and try to rebuild it. She hopes to pass it on someday to younger relatives.

"It may have had a good intention," Scott said of the estate tax, "(but) if you are working to build a business in one generation, it gets cut out from under you in the next. You lose either way….It just doesn’t seem to make sense."

Scott has joined Blethen of The Seattle Times and other publishers in lobbying Capitol Hill offices, particularly Democrats. Blethen said he has targeted Democrats in an effort to broaden the debate. He wants to show that the tax does not affect just one group.

Blethen said repeal advocates used to have a "message problem" on Capitol Hill. Advocates lobbying members and staff would frame the issue "in terms of ‘this is not fair to me,’ and 99 percent of the time they’re looking at a middle-aged white guy."

Now several minority business groups have advocated repeal, in large part because minorities are increasingly likely to become entrepreneurs. According to the Small Business Administration, the number of minority-owned businesses grew by 168 percent in a decade, to 3.25 million in 1997, the last year for which statistics are available. Their revenue grew by 343 percent, to $495 billion.

The publishers’ efforts appear to have made some inroads. Of the 36 Democrats who cosponsored an estate-tax phaseout bill (HR8) introduced by Reps. Jennifer Dunn, R-Wash., and John Tanner, D-Tenn., seven were members of the Congressional black caucus and two were members of the Hispanic Caucus.

"Democrats and members of the black caucus understand that building wealth in the black community is important to improving the quality of life," Scott said. But, she added, most Democrats were more likely to be swayed by the plight of cash-strapped family farmers who must sell part or all of their inherited estate to pay the tax. Of the 36 Democratic cosponsors, 14 were in the Blue Dog Coalition, a group of conservatives generally from rural areas. (Two Blue Dogs who signed on to the bill – Sanford D. Bishop Jr. of Georgia and Harold E. Ford Jr. of Tennessee – are also black caucus members.)

Democratic Sen.. Bob Kerrey from the farm state of Nebraska has also cosponsored an estate tax repeal bill (S1128) with Arizona Republican Jon Kyl. It has three other Democratic cosponsors – John B. Breaux of Louisiana, Charles S. Robb of Virginia and Blanche Lincoln of Arkansas.

Kyl had earlier introduced another repeal bill (S56) that won only Republican cosponsors. The difference between the two bills? The Kyl-Kerrey measure would make estates subject to higher capital gains taxes as a trade-off for repealing the estate tax.

Under current law, those inheriting an estate pay capital gains only on any increase in value since they acquired the property or asset.

Under the bill, like the final version of the Republican tax bill, those inheriting estates worth more than $2 million would pay capital gains when they sold any portion of the estate on any increase in value after the person who died acquired it. Anyone inheriting an estate worth $1.3 million to $2 million would be phased in to the higher rate.

But spouses who inherit estates worth up to $3 million would continue to pay under the lower capital gains rate.

While some repeal advocates oppose the capital gains provision because they fear that it will become law and the repeal will not, most others say it is a fair trade and that those inheriting an estate will come out ahead paying the 20 percent capital gains rate instead of the 37 percent to 55 percent estate tax rate.

The piece was included, several repeal advocates said, to make it harder for Democrats to oppose. But Lav and Gale say it could cause problems in determining a starting point for counting capital gains on some assets. A similar change in the so-called carryover basis rule was included in the 1976 tax act (PL 94-455) but was repealed in 1980, in part because of fear that it would be too complicated. (1980 CQ Almanac, p. 301)

While estate tax opponents have been trying to increase Democratic support, Gale said he does not expect that they will find much more common ground. "I think that this is an issue that is ripe for demagoguery, and that’s basically going to poison the potentially intelligent debate on the topic," he said.

But advocates on both sides of the issue expect that they will hear more and more about the tax, especially if real estate and stock values continue to climb and subject more people to the tax.

At a January hearing in the Senate Budget Committee, ranking Democrat Frank R. Lautenberg of New Jersey, the founder of a successful data processing firm, said, "I’ve gotten phone calls from four avowed Democrats saying, ‘Estate taxes ought to be eliminated, Dad.’"