Eliminating The Federal Estate And Inheritance Taxes

Testimony Of James L. Martin, President, 60 Plus Association
Delivered To The Senate Finance Committee, Senate Of Pennsylvania, Monaca, Pennsylvania

Madam Chairman and Members of the Senate Finance Committee, I am James L. Martin, president of the 60 Plus Association, and it is indeed a pleasure to be here testifying before this distinguished committee.

This committee is considering an issue of very strong interest to me and my organization– the reduction, and hopefully, eventual repeal of the Pennsylvania inheritance tax, one of the highest, I might add, in our nation.

Let me now mention something about the 60 Plus Association. We are a seven-year old, nonpartisan, national senior citizens’ advocacy organization that has, as its main mission abolishment of the federal estate tax.

Congress has imposed a levy on everything that can conceivably be taxed: income, sales, property, gasoline, and food– the list is endless. A tax is extracted from fans who attend sports or other entertainment events, but a tax for dying? Seniors say, rather emphatically, that DYING SHOULD NOT BE A TAXABLE EVENT!

60 Plus devotes a substantial portion of its resources to eliminating this most unfair and most confiscatory of all taxes. It’s actually a revenue loser, a disincentive to job creation and thus more tax revenue. It’s anti-family because nearly 90% of family-owned businesses don’t survive past the second generation. Sen. Jon Kyl of Arizona and Rep. Chris Cox of California, the chief sponsors of repeal, call their legislation the Family Heritage Preservation Act.

Benjamin Franklin proclaimed: ” In this world nothing can be said to be certain except death and taxes.” However as a result of the “death” tax, you can add a third: taxes AFTER death.

60 Plus has created the Benjamin Franklin Award to recognize the efforts of members of Congress in both parties who have sponsored legislation to repeal the “death” tax and make Franklin’s axiom true again.

60 Plus represents a half-million seniors nationally, with several thousand here in Pennsylvania, none wealthy that I know of, but who are outraged by the grim reality that they can be taxed just for dying.

I hear from many of them. One recently wrote, “At this time of life, we seniors should have the peace of mind that the fruits of our labors, after taxes, will be shared with our heirs.”

Another said, “The inheritance tax is on top of several tiers of taxes.”

Another: “Many farmers’ children have to sell the farm to pay this tax.”

Another: “My elderly parents died, leaving us 5 children with a 600-acre farm. Farm prices had risen greatly, resulting in heavy assessments of the inheritance tax. Within three years, land values had declined to where the land could not be sold for enough to pay for those taxes.

Another: ” The more successful a citizen is in this great country, the more he is penalized, even when he dies. Americans work very hard for themselves and their children and due to these unfair taxes, the children suffer.”

Another: “It astounds me how much it costs to die.”

Another: “Please ban this dumb law.”

And finally, “All of us work hard for what we have, and a lot of that effort is motivated by the desire to provide for our spouse and give our children a better life… it matters that it gets passed on, intact, and whole, without the government taking any more of this hard-earned legacy away from us.”

60 Plus does not believe that dying should be a taxable event.

We do not believe that families should have to deal with the Internal Revenue Service and the undertaker almost simultaneously.

We support the complete and total repeal of the federal estate tax.

However, we also realize another reality. Despite the federal estate tax, which essentially taxes assets, which have already been taxed, there is a first cousin to Uncle Sam ready to collect again — the tax collector in Harrisburg who hits the heirs again with an inheritance tax.

That current tax is six percent for lineal descendants and a whopping 15 percent for non-lineal descendents.

In a recent issue of Forbes magazine (June 14, 1999) featuring a story on the inheritance tax, Pennsylvania received the dubious distinction of being in the category “Grabbiest States.”

These were states that “impose an inheritance or death tax and have relatively high personal income or capital gains taxes.” Pennsylvania was included as among “the worst states to die in.”

In addition, the inheritance tax may serve to encourage seniors to leave the state of Pennsylvania after retirement and to go to states that have no inheritance tax. As New York Gov. George Pataki is fond of saying while working to abolish or lower his state’s inheritance tax: “New York’s seniors aren’t moving to Florida and Arizona just for the sunshine!”

Thirty-five states have no death or inheritance tax. And the trend has been toward abolishing, or at least lowering inheritance taxes.

I was in North Carolina last year when the legislature met in late session and acted to repeal its inheritance tax. I also testified last year in the state of Maryland and Maryland has started down the road to eventual repeal by cutting its inheritance tax.

Pennsylvania can join the parade of states chopping down one of the most confiscatory taxes– and it can do so to benefit its citizens, especially its senior citizens.

I commend Senator Melissa A. Hart, the Chairman of the Senate Finance Committee, for holding these hearings highlighting this important issue.

I commend her for her leadership in sponsoring Senate Bill 185 and her co-sponsors that would reduce the inheritance taxes on transfers to siblings from 15 percent to 6 percent.

I also wanted to mention Senate Bill 318 introduced by Senator Jay Costa which would exempt the first $100,000 of the taxable value of an estate from the state’s inheritance, an exemption which would apply about to the 6 percent on transfer to family members and the 15 percent on transfers to other individuals.

Also, in this category of relief is Senator Jake Corman’s Senate Bill 827, which would reduce the inheritance on lineal descendents from 6 to 5 percent.

I note that these are proposals offered and co-sponsored by members from both political parties and that’s encouraging.

Let me mention another issue of special concern to seniors and which is also within the jurisdiction of this committee. This matter is the long-term care issue, a matter of growing concern to seniors and their children.

Planning ahead is the key to taking care of this issue as more and more of our seniors are living to a ripe old age.

We enthusiastically support Chairman Hart’s bill, Senate Bill 1456, that would give inheritance tax exemptions for long term care insurance premiums paid up to 10 years prior to an individual’s death. Everyone benefits from this situation — care will be provided for seniors if needed; families save money; taxpayers save money.

This committee has the opportunity to really help seniors. I urge you to lift this burden from the back of seniors and their heirs. Seniors throughout Pennsylvania will be grateful to all of you.

Now, I’d like to turn my attention briefly to the history of the federal estate, or as it is commonly called the death tax.

If the label “death” tax seems uncommonly tasteless, let me assure you it has many other names much more grotesque, if you will, and all share one common thread. They were born out of a sense of frustration by the bizarre fact that the tax is triggered for no other reason than death itself.

That’s why the 60 Plus Association’s battle cry is that DYING SHOULD NOT BE A TAXABLE EVENT!

Besides the death tax, it’s been called, in no uncertain language, the grave-robber’s tax, the grim reaper’s tax, a job-robber’s tax, an anti-savings tax, a departure tax, an exit tax, a vulture tax, a cruel tax, a success tax, a voluntary tax. …It seems we add another name weekly.

Perhaps a cruel tax, a name given it by Mr. William Morris, publisher of the Augusta (GA) Chronicle, a paper for which I was a reporter covering Congress when I went to Washington way back in 1962. For what is more cruel than while grieving over the loss of a loved one, you must prepare for a visit by the first claimant in line, and he’s not even a blood relative, Uncle Sam, waiting with outstretched palm for up to 55% of your after tax assets.

The 60 Plus Association recognizes the federal estate tax and the state inheritance tax are “kissing cousins.”

The federal estate is levied on the capital value of property changing hands at the death of the owner, and is fixed mainly by its total value, and the inheritance tax is levied on what is passed on to the heirs.

Usually wars have been the justification for adoption of a federal estate tax. We had our first one in 1797, which paid for a buildup of the U.S. Navy during a time of tension with France. Five years later (1802) it was repealed.

Congress enacted it again 60 years later in 1862 for revenue raising during the Civil War and then it met repeal in 1870. Our third venture in this area of taxation occurred with the Spanish-American War and it lasted from 1898 to 1902.

We have had the present federal estate tax since 1916, and have had some modifications on it in recent years. For example, the exemption was $600,000 until it was bumped up to $625,000 last year and $650,000 this year, with it due to rise to $1,000,000 by the year 2006, unless it’s outright repealed. By the way, the exemption in 1916 was $50,000, far less than today’s $650,000. However, adjusting for the growth in wealth, in today’s dollars, the exemption would have to be about 9 million to be comparable to that of 1916. It is interesting to me that while Congress is proud of this increase to $650,000, a retired farmer told 60 Plus he hoped Congress would stop doing him such favors, that he spent most of the increase on lawyers and accountants to figure out the maze of the new tax regulations imposed by Congress.

The 1916 tax was adopted to help the U.S. finance mobilization for the First World War. As with so many taxes, it has remained in place since that time. Fortunately, the Financial Freedom Act of 1999, which is being considered by the U.S. House of Representatives this week, phases out this tax after 10 years. Although the 60 Plus Association favors complete and immediate repeal of the federal estate tax, we do support this phase-out measure as an important goal towards eventual repeal.

Actually, the inheritance tax is one of the oldest forms of taxation we have in existence. We find evidence of it in ancient Egypt and Greece. A version similar to later models dates back at least to the Roman Empire, which levied a one-twentieth-portion tax on property inherited to pay for the pensions of veteran soldiers.

Perhaps the real basis of the modern inheritance taxes springs from the Middle Ages. Then, according to legal theory, the sovereign owned all the land and property and in this feudal arrangement permission of the sovereign was required to transfer any upon the death of the owner.

In cases where there were no direct descendants, relatives of the deceased were able to obtain the property through payment of an amount called “relief.” These “relief” payments can legitimately be viewed as the origins of the inheritance tax in such European countries as England, Spain Portugal, and the Netherlands.

Throughout history, various groups began pushing taxes on inheritance in order to achieve certain socially desirable end results: the ending of a concentration of wealth, redistributing wealth, and assuring an additional source of income for government. The idea limiting inheritance became a popular platform item with some of the utopian socialist movements as one way to restrict control, ownership and additional accumulation of property. Even Karl Marx and Friedrich Engels in “The Communist Manifesto” saw as one of the key measures of the proletariat gaining political supremacy in the more advanced countries through a series of attacks on private property including abolition of all rights of inheritance.

In the United States, for instance, we have had, and repealed federal estate taxes, but inheritance taxes have always been collected by the individual states.

Pennsylvania, in this regard, became famous or infamous, by levying the first state inheritance tax 173 years ago, in 1826.

New York State did so in 1885. By 1900, a total of 20 states had enacted inheritance taxes. Wisconsin established a new trend in 1903 with two innovations: progressive rates for the inheritance tax and discrimination in rates based on relationship of the heirs to the deceased.

The inheritance tax, as well as the federal estate tax, is triggered by one event: death.

Other states, over the intervening years, followed suit. However, in recent years, the trend has been in the other direction, namely repealing the state inheritance taxes.

A decade ago a total of 26 states imposed some type of inheritance or estate tax (above their automatic cut of the federal estate tax). This has fallen to 15 states.

Thus, 35 states and the District of Columbia impose no inheritance taxes.

In an informative article in Forbes magazine, writer Carrie Coolidge makes the interesting observation: “You can’t beat the Grim Reaper. But you can outrun the state tax collector.” (“Death traps,” June 14, 1999). She outlines the “Grabbiest States,” those states that impose an inheritance or death tax and have relatively high personal income or capital gains tax. Pennsylvania is one of nine states to make the list of the “worst states to die in.”

The other categories include “Better, but not good,” those states that impose an inheritance or death tax but have lower or no income or capital gains taxes. Eight states fall into this category.

And the next category is the “Estate-friendly” ones, which include states with no death or inheritance taxes. And the final category embraces those states with no death or inheritance taxes and no personal or capital gains taxes. Six states make up this ideal category.

Perhaps the work of this committee will move Pennsylvania into one of those other and more desirable categories for their taxpayers.

Interestingly enough, we hear similar arguments every time this issue comes up, we hear about the loss of revenue, the loss of inequity in taxation and the loss of fairness in the system since only a small proportion of people pay. Quite frankly, none of these arguments are very convincing.

California repealed their inheritance tax by referendum in 1982. Though only 2 percent of the population might have been affected, over 65 percent of the people voted to repeal.

Proponents of repeal realize that inheritance taxes are unfair, cause people to move out of the state, and limit expansion of businesses, retards creation of jobs, and results in break up of family property.

These negative trends should be especially of concern to states in the northeast such as Pennsylvania. Again, as Governor Pataki observed, people are not moving to Florida and Arizona just for the sunshine.

To those who claim “death” tax repeal is a “tax cut for the rich,” 60 Plus says, “that horse has long been dead, so please, dismount!” For the rich, the Bill Gateses, the Ted Turners, have lawyers and accountants to protect their after-tax assets with trusts and foundations, and who can blame them? Even Oprah Winfrey has expressed her dissatisfaction with the realization that when she dies, Uncle Sam is first in line. As she lamented on her TV show, she found that fact “irritating,” to say the least.

An excerpt from her August 4, 1997 show is as follows:

“Here’s Mr. Herb Nass, a New York lawyer who has handled the estates of well-known millionaires and is the author of this book, ‘Wills of the Rich and Famous’. He has seen the wills of scores of celebrities and can offer us some insight into what they may have been thinking when they drafted their last will and testament. Let’s start with Jackie Kennedy Onassis. What does her will say about her?”

Mr. Nass: The bulk of her estate was left to her two children, John and Caroline.

Winfrey: So all those things that were auctioned off — I had heard this too, from some family members — they — they kept all the things that they really valued themselves and that they wanted themselves.

Mr.Nass: Correct. That auction netted over $34 million for her estate, though. And those funds were paid to her two children, subject to estate tax.

Winfrey: And isn’t that estate tax 55 percent?

Mr. Nass: At that level of wealth, yes. Her –her estate …

Winfrey: Yes. I think it’s so irritating that once I die, 55 percent of my money goes to the United States government.

Mr. Nass: Well, you should give it away while you’re alive then.

Winfrey: That’s what I’m trying to do. You know why that’s irritating? Because you would have already paid nearly 50 percent.

Mr. Nass: Correct. It’s really double tax.

Winfrey: You would have already paid — it’s double tax.

Mr. Nass: You’re taxed on your income and your estate. Alternatively…

Winfrey: And therefore, when you leave like a house or you leave money to people, then they’re taxed 55 percent, so you’ve got to leave them enough so that once they’re taxed, they still have some money.

Mr. Nass: Correct. Correct.

Winfrey: That’s why you always hear about people where their aunts left them houses or left them stuff and they can’t keep the house because the taxes are so much.

Mr. Nass: Well, charity is one other alternative. Sometimes wealthy people set up charitable foundations, which is a vehicle for avoiding the estate tax.

Winfrey: You’re talking to me.

Mr. Nass: I’m talking to you.

Winfrey: Unbelievable

“Coming up, how complete strangers got most of the money from Marilyn Monroe’s will. Details on that when we come back. Fifty-five percent — irritating.”

Mr. Nass: It is. Wealth foundations are the way to go. …

Instead it’s actually small mom and pop businesses that are hurt the most, the Chester Thigpen’s, the Mississippi tree farmer, the 88-year-old grandson of slaves, who has testified before Congress and who has worked with 60 Plus to repeal the death tax, before he became too ill to travel.

It’s Chris Bennett, radio station owner in Seattle, Washington who points out that a chain of minority owned newspapers face extinction because they don’t have the liquid assets to pay this tax bill, including, according to Mr. Bennett, the Sun Reporter Group in the San Francisco Bay area, The Los Angeles Sentinel, The Chicago Daily Defender chain of newspapers, The Cleveland Call & Post as well as The Afro American Newspapers, an east coast chain which publishes in cities such as Richmond, Washington, D.C., Baltimore, and Philadelphia, and also the New York Amsterdam News.

I’ve spoken with Alexis Scott Reeves, struggling to keep her paper, the Atlanta (GA) World, in the family after the death of the principal owner.

In the newspaper business, in general, as Frank Blethen, publisher of the Seattle Times, likes to point out, there were 2,100 independently owned daily newspapers in the United States in 1910. This number dropped to 700 in 1980 and today stands at approximately 300. The burden of estate taxes is one of the largest challenges facing family-owned newspapers, a fact heartily agreed to by other veteran newspapermen, Arizona publishers Donovan Kramer Sr., and Donovan Kramer, Jr.

Also, a study by Kennesaw State College, Marietta, Georgia, confirms that minority –owned companies, just starting out, find the tax a major hindrance to job expansion. In that regard, Harry C. Alford, Jr., President of the National Black Chamber of Commerce, has written an excellent editorial in which he makes the case that getting rid of the death tax “will start to create a needed legacy and begin a cycle of wealth building for blacks in this country. That would be a great start to breaking the economic chains that bind us.” He urges members of the Congressional Black Caucus to end the “death tax.”

Repeal is not a liberal or conservative issue, either. To social redistributionists who have favored this tax as a “means to social justice,” 60 Plus cites testimony by USC Law Professor Edward J. McCaffrey who says as an “unrequited liberal,” he now concludes that the tax is hurting those it was intended to help, because of its hindrance to job expansion, and serious thought should be given to repeal, a policy 60 Plus has always advocated.

Various experts from across the political spectrum have centered their criticism on the motivation and reality of the estate and inheritance taxes.

Two prominent liberal economists, Aaron and Alicia Munnell, noted the following in their study of the estate tax:

“In short, the estate and gift taxes in the United States have failed to achieve their intended purposes. They raise little revenue. They impose large excess burdens. They are unfair.” (“Reassessing the Role for Wealth Transfer Taxes,” National Tax Journal, June 1992.)

And Nobel-prize winning conservative economist Milton Friedman poses it as a policy question: “Finally, it seems illogical to say that a man is entitled to what he has produced by personal capacities or to the produce of the wealth he has accumulated, but that he is not entitled to pass any wealth on to his children; to say that a man may use his income for riotous living but may not give it to his heirs.” (Capitalism and Freedom, 1963). To paraphrase Dr. Friedman, he indicates that the tax sends a bad message to savers, to wit: you may as well spend your money on wine and song, because Uncle Sam is going to get the largest piece of it.

The evidence is in for all to see. It is time for the death knell to be sounded for both the federal estate and state inheritance taxes.

It is important to note, as I wrote in an opinion piece for The Washington Times (“The death tax is killing the family,” May 22, 1997) eliminating the estate tax as well as the inheritance tax, is “not a tax cut for the rich.” The real rich do not pay it as they have their lawyers, financial planners and accountants devise all types of means to avoid it. The burden falls on middle-class Americans who may lack liquid assets but find that a family tree farm, a small business or a ranch must be sold to pay for the federal estate tax and/or inheritance taxes. The 60 Plus Association has championed the cause of Mr. Thigpen, the 88-year-old Mississippi tree farmer and a grandson of slaves, whose ecology-winning tree farm may have to be sold when he passes on. He is cash poor but has property. He wants to leave that farm to his wife and five children but the federal estate tax and the Mississippi inheritance taxes will stand in the way.

The inheritance tax is harmful to a wide range of people. We want to encourage minorities and women to get more involved in owning businesses. We can see that the federal estate tax and a state inheritance tax can be detriments and can limit opportunities.

The 60 Plus Association commissioned a public opinion poll on the death tax. This poll was conducted by the Polling Company. We asked whether the person would be More or Less likely to vote for a member of Congress if they voted to eliminate the death tax. We found an overwhelming 77 percent would be more likely to vote for their Member of Congress if he or she voted to eliminate the death tax. Not that they’re affected by it, but they cited the unfairness of a tax on assets, which have already been taxed!

Opposition to this tax cuts across all demographic groups. It is especially significant when we review whether individuals believe this tax is fair or unfair. Here were the percentages: not yet moms (women aged 18-34 with no children), 86 percent; pre-retirees (voters aged 55-64), 84 percent; Liberals 74 percent; and those of a low socio-economic status (individuals with a high school diploma or less, earning under $25,000), 73 percent.

And in a very informative study by the Joint Economic Committee of the U.S. Congress (“The Economics of the Estate Tax,” December, 1998), it concludes that the estate tax generates costs to the taxpayers, the economy and the environment that far exceeds any benefits that it may produce.

The study also considers the devastating impact of the tax on small and medium-sized family-owned businesses and the people they employ. As you are aware, the maximum rate of 55 percent is imposed on estates with a value equal to or in excess of $3 million even if such value is comprised largely of non-liquid assets, which often is the case with family-owned and operated businesses and farms. To prepare for expected death tax liability, many businesses are forced to borrow funds, mortgage assets, pay expensive insurance premiums, and generally structure assets in an unproductive way that is purely tax motivated. In the frequent case in which a family, upon the death of a patriarch or matriarch, is forced to liquidate all or a portion of the business to raise the cash necessary to pay the death tax, the same precious resources that are expended on the death tax planning and liability could be more usefully applied towards reinvestment in business and the creation of new jobs.

In sum, the study is most helpful in terms of documenting the negative collateral impacts of the death tax and in examining the degree to which repeal of the death tax would increase levels of savings and investment, expand the economy, and result in higher federal tax receipts.

Among the new Joint Economic Committee findings are:

The Death Tax this century has reduced the stock of capital in the economy by approximately $497 billion.

The Death Tax causes inefficient allocation of resources, discouraging saving and investment and lowering the after-tax return on investments.

Death tax rates are extremely punitive, with marginal rates from 37 percent to nearly 55 percent.

The Death Tax obstructs environmental conservation. Large Death Tax bills often force families to sell environmentally sensitive land.

The Death Tax is a “virtue tax” because it penalizes work, saving and thrift in favor of large-scale consumption.

Empirical and theoretical research indicates that the Death Tax fails to reduce inequality, and may actually increase inequality of consumption.

Enormous compliance costs associated with the Death Tax are of the same general magnitude as its revenue yield, or about $23 billion in 1998.

Thus, the Death Tax raises very little, if any, net revenue for the federal government.

One very perceptive poem expresses this burden put on the taxpayers. This anonymous poem is one we have circulated on Capitol Hill and has been placed in the Congressional Record. It reads as follows:

Tax his cow, tax his goat,

Tax his pants, tax his coat,

Tax his crops, tax his work,

Tax his tie, tax his shirt.

Tax his tractor, tax his mule,

Teach him taxes are a rule,

Tax his oil, tax his gas,

Tax his notes, tax his cash;

Tax him good and let him know,

After taxes he has no dough.

If he hollers, tax him more;

Tax him ’til he’s good and sore.

Tax his coffin, tax his grave,

Tax the sod in which he lays.

Put these words upon his tomb:

“Taxes drove me to my doom.”

And after he’s gone, he can’t relax;

They’ll soon be after his Inheritance Tax!

As a chief proponent of repeal has stated: “The absurdity of this tax is illustrated by the fact we’re issued a certificate at birth, a license at marriage, and a bill at death.” That was a direct quote from Rep. Jennifer Dunn (R-WA), co-author of rate direction leading to final repeal, along with Rep. John Tanner (D-TN).

A tax should benefit society but this one has no socially redeeming value, benefiting not society as a whole, but only a clutch of lawyers and accountants. Actually, there are thousands of law firms making huge sums setting up trusts and foundations to help their clients avoid the tax. But, happily, there are a number of attorneys who, believe it or not, are working to repeal this tax. Most prominent among them, a first among equals is Harold Apolinsky of Birmingham, Alabama, who points out that his firm has 10 trust and estate lawyers out of 120. His firm believes that instead of losing work, there will be more legal fees once repeal is accomplished due to job creation and start up of new businesses!

Seniors are hopping mad about a tax triggered only by the act of dying.

Let’s repeal this socially unconscionable negative revenue-producing, job-robbing tax a fourth and final time!

I’ve lived and worked for nearly 37 years in Washington, starting as a young newspaper reporter covering Congress way back in 1962, when John F. Kennedy was in the White House, and Neil Armstrong had not yet walked on the moon. Pennsylvania’s Senators then were Hugh Scott (Republican) and Joe Clark (Democrat) while the Governor was a young Republican named Bill Scranton. So I’ve seen a lot of history come and a lot of history go and I’ve seen a lot of taxes come, but not many taxes go.

But here’s one tax whose time to go … has come!

In addition, I sincerely hope the great Commonwealth of Pennsylvania will also join the 35 other states and repeal its inheritance tax. Thank you for your time.