The Estate Tax

• What is the estate tax?
• Where things stand on the Hill
• Information & resources

The federal estate tax, paid only by the estates of the very wealthiest individuals, is a highly progressive tax that raises a significant amount of revenue to fund vital services. An aggressive campaign, financed by a few super-wealthy families, has sought to permanently repeal or drastically reduce the tax.

Eliminating or 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. But the estate tax is scheduled to disappear in 2010 and then return at roughly 2000 levels if Congress doesn’t take action.

What is the estate tax?

The federal estate tax is imposed on the transfer of wealth from very large estates. Often, the wealth has not been previously taxed.

In 2009, estates of up to $3.5 million for an individual ($7 million for a couple) are entirely exempt from the tax. This represents the continued erosion of the tax that was initiated by the 2001 tax cuts. Estates of over 99.7 percent of Americans will not owe any estate tax at all. Only a very small number of small businesses and farms will owe estate tax – just 100 in the entire country annually, according to a study by the Tax Policy Center – and most of those have sufficient liquid assets to pay any tax owed without requiring the sale of a family farm or small business.

The tax rate on amounts over the exemption level that are subject to the tax is 45 percent in 2009. However, because the tax is owed only on the value of the estate that exceeds the exemption level and because certain bequests such as those to spouses or to charity are excluded completely, the effective tax rate is less than 20 percent of an estate’s total value.

Where things stand on the Hill

There has been broad interest in reforming the estate tax before the 2010 repeal, but policy makers have very different ideas about what reform should look like. The reform options confronting Congress in 2009 included: permanent reform in 2009; a short-term patch that would extend the 2009 estate tax parameters for several months or a year so that Congress could address long-term estate tax reform in 2010, perhaps as part of reform encompassing a wide variety of taxes; and letting the estate tax expire for 2010 and either seeing it return in 2011 to a $1 million exemption ($2 million for a couple) and 55 percent rate or addressing the issue in 2010.

The Obama Administration’s budget and the budget resolution passed by Congress in April 2009 assumed an extension of the 2009 estate tax. During budget consideration, the Senate narrowly passed an amendment sponsored by Senators Blanche Lincoln (D-LA) and Jon Kyl (R-AZ) authorizing an increase in the exemption to $5 million for an individual ($10 million for a couple) and a reduction in the tax rate to 35 percent, assuming the costs of these changes were fully offset. The provision was dropped during conference and did not appear in the final budget resolution, but Senators Lincoln and Kyl are expected to continue to pursue their proposal. According to the Tax Policy Center, the Lincoln-Kyl proposal would cut the number of taxable estates by almost half compared with President Obama’s proposal, and estates worth over $20 million would save an average of $3.5 million.

In April 2009, Rep. Jim McDermott (D-WA) introduced the Sensible Estate Tax Act of 2009 (H.R. 2023), which would set the estate tax exemption level at $2 million, with a graduated tax rate that begins at 45 percent and increases to 55 percent for the very largest estates. The bill has been referred to the House Committee on Ways and Means.

In December 2009, the House passed a permanent extension of the estate tax's 2009 levels (H.R. 4154) that would retain the $3.5 million exemption level and 45 percent top rate. But the Senate did not take any action on estate tax before the end of the year, so repeal will take effect in January 2010.

Senate Finance Committee Chairman Max Baucus (D-MT) has said that the Senate will seek to retroactively extend the tax early in 2010. Court challenges are expected if that happens, on the grounds that retroactive laws are unconstitutional, but some experts believe that retroactive tax laws are enforceable.

Basic information:

Federal Estate and Gift Taxes, a Congressional Budget Office Economic and Budget Issue Brief (Dec. 18, 2009).

Contrary to Claims, Allowing Estate Tax to Expire Would Make Family Farms and Small Businesses Worse Off Overall, Chuck Marr and Gillian Brunet, Center on Budget and Policy Priorities (Dec. 17, 2009).

Policy Basics: The Estate Tax, Center on Budget and Policy Priorities (revised Dec. 16, 2009).

Latest State-by-State Estate Tax Data Show Why We Need a Strong Estate Tax, Citizens for Tax Justice (Dec. 2, 2009).

Reports Calling For Estate Tax Repeal Seriously Flawed: Repeal Would Increase Deficits and Likely Slow Economic Growth as a Result, Chye-Ching Huang, Gillian Brunet, and Chuck Marr, Center on Budget and Policy Priorities (July 7, 2009).

Caviar, Cruises, and Cocaine: Two New Studies from a Right-Wing Foundation Say the Estate Tax Causes the Rich to Stop Working and Spend Away Their Millions, Citizens for Tax Justice (June 12, 2009).

Number of Taxable Estates by State, 2011, Tax Policy Center Tax Vox (April 10, 2009).

The Estate Tax: Myths and Realities, Center on Budget and Policy Priorities (Revised Feb. 23, 2009).

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).