The Estate Tax: A Recycling Program in Disguise
Last November, Washington state voters recognized the value of their state’s inheritance tax and voted to preserve it.
This article is from the January/February 2007 issue of Dollars & Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org
This article is from the January/February 2007 issue of Dollars & Sense magazine.
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Last fall, anti-tax organizations in Washington state sponsored an initiative, I-920, to abolish the state's estate tax. Given Washington's history of voting overwhelmingly for tax cuts, it looked as if the estate tax was a goner—especially as initial polls showed over half the state's voters believed they would have to pay the tax if it remained in place.
In reality, the tax is only paid on 200 to 250 estates a year, those worth over $2 million ($4 million for a couple). More than 99% of the state's taxpayers are exempt. Revenue from the tax is dedicated to the Education Legacy Trust Account, used to reduce class size in K-12 education statewide and provide scholarships and additional financial aid to nearly 18,000 low- and moderate-income college students.
In the end, the repeal effort was roundly defeated by a margin of 62-38. Majorities in all but 3 of the state's 39 counties, even in conservative western and southeastern Washington, voted against repeal.
Organizers say the main thing they had going for them was the linkage to education. "It would have been more difficult if we had not been able to tell people exactly where their money was going," said Sandeep Kaushik, communications director for the No on 920 campaign. "In every community, we knew how many students benefited."
Hundreds of students, educators, and parents were engaged in the effort to defeat the measure. The Washington Education Association, the statewide teachers union, put substantial resources into the campaign. And some of the state's multimillionaires were outspoken opponents of repeal as well, claiming that the tax is appropriate as a way to pay back the gift of education so that others can benefit as they did.
One of them, Bill Gates, Sr., father of the richest man on earth, argued in the Seattle Post Intelligencer that Washington's estate tax was an "opportunity recycling program." Gates's op-ed bears quoting at length:
"Washington state has provided fertile ground for some very successful enterprises in the last generation. These individuals have made good use of their 'American inheritance,' including our accumulated scientific heritage and natural bounty. They have harvested plenty from our society's investments in technology and our remarkable system of property laws and regulated markets. Without this inheritance, they frankly wouldn't have succeeded in quite the same way.
If we abolish the state's inheritance tax we stop the opportunity recycling program. We allow the common wealth to stop flowing and concentrate it in the hands of a few. And worse, we slow the investments in opportunity that aim to provide every young person a chance, whether they were born in South Seattle or Mercer Island."
At the federal level, the estate tax is due to be ended for one year, 2010, then come back the following year at its 2006 levels. Partisans on all sides agree this is bad policy, an example of congressional sausage-making at its worst; Congress must act before 2010 to fix it. Total repeal of the tax is unlikely now, with a Democratic majority in Congress. This opens up all sorts of real opportunities for positive reform.
The fight to keep the federal estate tax could benefit from analyzing the Washington state experience. Why not suggest an estate tax reform that tracks the Washington state law: a $2 million exemption, along with a progressive rate structure? And why not set aside the revenue from the tax for a Children's Opportunity Trust Fund, to provide educational and wealth-creation opportunities?
While earmarking is not great public policy, in this instance it may be the best way to help the public build an enduring understanding that the estate tax represents an intergenerational transfer, a way to ensure that cultural and educational resources flow to the young. It may be the key to long term preservation of the inheritance tax.