Revised June 3, 2002

Permanent Repeal of the Estate Tax Would Be Costly,
Yet Would Benefit Only a Few, Very Large Estates

by Joel Friedman and Andrew Lee

Note:  This report has been revised and updated "Permanent Repeal of the Estate Tax Would Be Costly, Yet Would Benefit Only a Few, Very Large Estates"


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Both the House and Senate have indicated they will take up the issue of the estate tax before the end of June. These debates will be framed as a choice between eliminating the estate tax altogether and reforming it by increasing the exemption level and lowering the top rate.

Last year's tax-cut legislation lowers the top estate tax rate to 45 percent by 2007, increases the estate tax exemption to $3.5 million —  $7 million for a couple —  by 2009 and then repeals the estate tax altogether in 2010. The repeal expires at the end of 2010, however, as part of the general expiration of all provisions of the tax bill at that time. Following the 2010 sunset, the estate tax reverts to prior law, with an exemption of $1 million and a top rate of 55 percent.

The sharply higher cost of permanent repeal compared to retaining and reforming the estate tax with an increased exemption level and a lower top rate would worsen the budget outlook, which has deteriorated markedly in the year since the tax-cut package was enacted. The most significant impact of eliminating rather than reforming the estate tax would come in the years beyond the current ten-year budget window, when the baby boom generation begins to retire and the Social Security and Medicare systems come under increasing pressure.

Moreover, permanent repeal of the estate tax cannot be viewed as an isolated proposal; it is part of a larger effort —  supported by the Administration and adopted by the House —  to make all of the provisions of last year's tax cut permanent. In the first decade after 2012, the extension of all of these tax cuts would reduce revenues by approximately $4 trillion. Making estate tax repeal and/or the other tax cuts permanent, rather than adopting more prudent alternatives, would deprive the Treasury of resources that could be used for such purposes as reducing the debt and addressing pressing needs confronting the nation —  from helping to restore long-term Social Security solvency and finance a prescription drug benefit for seniors to expanded health insurance coverage for the uninsured.

The higher exemption level envisioned as part of reform proposals would exempt all but a small number of very large estates from taxation. It is only this very small number of extremely wealthy estates that would benefit from permanent estate tax repeal rather than more prudent estate tax reform proposals.


Reforming the Estate Tax Preserves Options to Address the Social Security Shortfall

In 2010, there will be an estimated 53 million Social Security beneficiaries. This figure contrasts with the 10,000 or so estates that year that would remain subject to the estate tax if the tax is retained with a $3.5 million exemption rather than eliminated altogether. In other words, cutting but not eliminating the estate tax on the 10,000 wealthiest estates each year would leave resources available that could be used to assist tens of millions of elderly people on Social Security, many of whom have low or moderate incomes. Compared to permanent repeal, the amount saved by keeping the estate tax at the higher exemption level and lower top rate in effect in 2009 is equivalent to about one-fifth of the entire shortfall in the Social Security Trust Fund over the next 75 years (the period used by the Social Security actuaries to gauge the long-term financial health of Social Security).


Reform Addresses Estate Planning Problems Better Than Repeal

The argument is made that long-range estate planning is virtually impossible under current law, which calls for the estate tax to be repealed in 2010 and then reinstated in 2011 with reversion to the 2001 law. Supporters of permanent repeal argue that repeal is the only approach to address this problem. Retaining the estate tax with a high exemption level and lower top rate, however, would likely be a more effective way to stabilize long-term planning, not only because it is a more affordable policy in the long run and thus is less likely to be altered in subsequent years, but also because repeal raises serious administrative issues.

Repealing the Estate Tax Would Reduce Charitable Giving

In addition to depriving the Treasury of needed revenues, permanent estate tax repeal would be expected to have a negative impact on charitable donations. Research has shown that the estate tax increases the amount of charitable contributions, particularly among the largest estates, as these donations are fully deductible and thus act to reduce estate taxes. In 1999, for example, the latest year for which these data are available, estates contributed $14.6 billion to charities. Taxable estates of more than $20 million gave $6.2 billion of this total, averaging more than $26 million in donations per estate.

Retaining the estate tax at a high exemption level would maintain a tax incentive for these large estates to make charitable contributions, while eliminating the estate tax would remove this significant incentive. A study by Treasury Department economist David Joulfaian found that eliminating the estate tax would reduce charitable bequests by about 12 percent overall —  or about $1.7 billion in donations if the estate tax had been repealed in 1999. In addition, the reduction in charitable gifts is even larger when the impact of the estate tax on donations made during as person's life is also taken into account. Because charitable contributions made during life have the same effect as charitable bequests made at death in terms of reducing the size of the taxable estate, Joulfaian concluded that repeal of the estate tax also would reduce incentives for wealthy people to make charitable gifts during their lifetimes.

Despite sounding straightforward, repeal itself will be very complicated to implement, largely because it will be accompanied by a new requirement that heirs pay capital gains tax on certain inherited assets when these assets are sold. This change in capital gains taxation —  known as "carry-over basis," because the original "basis" or purchase price of an asset is carried over to the heirs —  would be exceedingly difficult, if not impossible, to administer. Past experience with carry-over basis rules exposed these problems: A similar carry-over basis provision enacted in the 1970s was found to be so complicated as to be unworkable, and it was repealed before it took effect.

A key problem with the carry-over provision is that it will require individuals to maintain records of assets for very long periods of time —  possibly for generations —  to determine the original price of an asset paid by a person who has died. This problem is avoided under current law. Today, when heirs sell an inherited asset, they owe no capital gains tax on the increase in the asset's value that occurred during the life of the decedent. Heirs need keep track only of the appreciation of the asset that occurs after they inherited it. When they choose to sell the asset, they owe capital gains tax only on this post-inheritance appreciation.

The difficulty of implementing the carry-over basis rules —  without which repeal of the estate tax would cause major problems and inequities in the taxation of capital gains —  adds another dimension to the uncertainty as to whether estate tax repeal could be sustained over time. Retaining the estate tax with a high exemption avoids this problem, since carry-over basis would not be necessary.

Still another example of why permanent repeal is not so straightforward is that some estates and their heirs will find they may face higher taxes after the estate tax has been repealed than they would have if the tax were retained with a high exemption level. Due to the carry-over basis provision, some estates will face additional capital gains taxes that make them worse off under repeal than reform. This is true of some farms, for example. As the Agriculture Department's Economic Research Service has found, "...a small number of farm estates may actually experience a tax increase or owe capital gains taxes even though they would not have been subject to Federal estate or capital gains taxes under prior law."(1)


Estate Tax Reform Offers a More Sustainable Approach Than Repeal

The fiscal outlook is far more constrained than it appeared a year ago when the tax cut was enacted. Calls to make the repeal of the estate tax permanent —  as well as to make permanent the other provisions in the tax-cut package that expire in 2010 —  fail to take these new circumstances into account. Permanent repeal would deprive the Treasury of needed revenues just as the baby boomers begin to retire and the rising cost of Social Security and Medicare strain the budget. Compared to full repeal, reforming the estate tax by increasing the exemption level and lowering the rates would cut the revenue loss, potentially by more than half. Overall, reform based on a higher exemption and lower rates offers a more sustainable approach to the estate tax and should create a more stable tax policy environment for estate planning.

The following sections examine the long-term costs of repealing the estate tax, the small number of estates that would benefit from full repeal, the impact of the estate tax on small businesses and family farms, and the implications of the carry-over basis rules that accompany repeal.


Repeal of Estate Tax Has Significant Long-Term Cost

The budget outlook has deteriorated sharply since the tax-cut package was signed into law in June 2001. The Congressional Budget Office estimates that the projected budget surplus for the years 2002 to 2011 has declined by $3.9 trillion over the past year. The budget outside Social Security is now projected to be in deficit each year through 2009.

Moreover, these estimates are likely to be too optimistic. That is the conclusion a number of budget experts have reached, including former CBO director and Urban Institute president Robert Reischauer and Brookings Institution economists William Gale and Peter Orszag and University of California economist Alan Auerbach.(2) Their analyses highlight how the CBO projections, which are developed following certain prescribed rules, do not take into account a number of expected costs. For instance, the CBO estimates do not include the cost of the farm bill that was recently enacted or the increased expenditures for defense and homeland security that the Administration has requested and that are virtually certain to be adopted. Similarly, the projections do not include the cost of extending a number of popular tax breaks —  such as the research and experimentation tax credit —  that are routinely extended before they expire, nor do they include the cost of ensuring that the number of taxpayers subject to the individual Alternative Minimum Tax does not skyrocket from fewer than 2 million today to 39 million by 2012. Using more realistic assumptions, these analysts project that the non-Social Security budget will remain mired in deficit throughout the decade and beyond.

Although long-range fiscal and economic forecasts are inherently uncertain, there are things we know with some certainty about the decade that lies ahead, when the cost of permanently repealing the estate tax could be very large. Specifically, we know that the baby boom generation will begin to retire in large numbers during the second decade of this century and that the cost of Social Security, Medicare, and Medicaid long-term care will rise substantially as a result.

The Joint Committee on Taxation estimates that removing the 2010 sunset and making permanent the repeal of the estate tax would cost $99 billion between 2003 and 2012. But more than half of this cost —  or $56 billion —  would occur just in 2012. The long-term costs of permanent repeal thus are much larger than the costs that would occur in the budget window.

Retaining the estate tax at the policy in place in 2009 —  with a $3.5 million exemption and a top rate of 45 percent —  would result in approximately half of the revenue loss associated with full repeal. Relative to permanent repeal of the estate tax, the amount saved by maintaining the estate tax at the 2009 level, with the much higher exemption and lower rates, would total nearly $390 billion between 2013 and 2022. Over the next 75 years, the savings would be equivalent to about one-fifth of the long-term Social Security shortfall.

Ironically, calls to make the estate tax repeal permanent come not long after the President's Social Security Commission issued a report showing it was unable to come up with options to restore long-term Social Security solvency that do not involve shifting large amounts of funding from the rest of the budget to Social Security. The President's hand-picked Commission presented three options, one of which failed to restore solvency to the Trust Fund.

Long-Term Costs Could Be Even Higher If Gift Tax Is Also Repealed

Although the estate and gift taxes have historically been closely linked, last year's measure repealed the estate tax and left the gift tax in place. The long-term cost of estate tax repeal would be even higher if the gift tax were also repealed. According to a Joint Committee on Taxation analysis, repeal of both the estate and gift tax would lead to substantial income tax avoidance and thus a much higher cost than just the loss of estate and gift tax revenues.

These higher revenue losses are of concern, because in the long run it is unlikely that the gift tax can be maintained in the absence of the estate tax. Indeed, supporters of estate tax repeal originally proposed to eliminate both the estate tax and the gift tax and only shied away from this approach at the last minute to avoid the costly Joint Tax Committee estimate of the revenue loss from repeal of both taxes. The estate and gift taxes both address the issue of transfers of wealth and, under current law, rely on a single (unified) exemption and apply the same tax rates to amounts that are taxable.

If the estate tax is repealed and the gift tax remains, people would be taxed on large gifts given during their lifetime, but not on bequests at death. A significant number of wealthy people will want to give gifts to their children during their lifetime, however, and will inevitably view the gift tax as discriminatory. For example, people with a family business may have a reason to transfer control to their children before death. People with disabled children may want to transfer assets to assure themselves that the children will be taken care of during the parents' declining years. As a result, there would likely be strong calls for repealing the gift tax on the grounds that the differential treatment of gifts given during one's lifetime and at death is highly inequitable.

The Joint Tax Committee projects that if the gift tax and estate tax are both repealed, massive income tax evasion will occur. Without the gift tax, wealthy taxpayers could easily manipulate the system by temporarily transferring assets to taxpayers with lower incomes to take advantage of lower tax rates. For example, a wealthy person could transfer appreciated stocks to a relative or friend in a lower tax bracket. The recipient of this "gift" could sell the stock, facing a lower tax rate than the original owner would have, and later transfer the after-tax gains back to the original owners (and perhaps retain a fee for these services). Last year, the Joint Tax Committee estimated that repeal of both the estate and gift tax would result in a revenue loss of $97 billion in 2011, of which $44 billion reflected a reduction in income tax revenues due to income tax evasion. With the repeal of both the estate and gift taxes, the revenue loss in the second decade could reach $1.2 trillion.

The other two options were able to eliminate the shortfall in the Trust Fund and restore long-term solvency only by relying both on substantial cuts in traditional Social Security benefits (cuts likely to be too large to be acceptable politically) and the transfer of several trillion dollars in revenue from the rest of the budget. Permanent extension of estate tax repeal thus eliminates essential resources that likely will be needed if long-term Social Security solvency is to be restored without deep Social Security benefit cuts or sizeable payroll tax increases.


Very Few Would Benefit from Permanent Repeal of the Estate Tax

The estate tax is a progressive tax paid by only the highest income and wealthiest people in the country. This will be even more true as the exemption level rises under current law from $1 million in 2002 ($2 million for a couple) to $3.5 million ($7 million for a couple) in 2009.

IRS data for 1999, the latest year available, show that only two percent of the estates of people who died in that year —  when the exemption was $650,000 —  were subject to the tax. Of the two percent of estates subject to tax, the largest estates paid by far the most in estate tax.(6)

Moreover, these figures reflect the effects of the estate tax when the estate tax exemption was $650,000. As the exemption level rises over the decade, fewer estates will be affected by the estate tax, with only the very largest estates paying any tax.


Small Businesses and Family Farms

Despite the rhetoric around the impact of the estate tax on small family farms and businesses, only a very small fraction of small family farms or businesses are ever subject to the estate tax. Current estate tax law already provides sizable special tax breaks for family farms and businesses. Furthermore, raising the exemption to $3.5 million would sharply reduce the already small number of family-owned enterprises subject to the tax.

It often is claimed that repeal of the estate tax is necessary to save family businesses and farms —  that is, to assure they do not have to be liquidated to pay estate taxes. This claim makes a good sound bite, but there is little evidence to support it. In fact, the vast bulk of estates that include a farm or family-owned business are not taxable even at the current exemption levels. Furthermore, in most estates that are taxable and include a business or farm, the business or farm does not constitute the majority of the estate. Indeed, the American Farm Bureau Federation acknowledged to the New York Times that it could not cite a single example of a farm having to be sold to pay estate taxes.(9)

Family-owned businesses and farms already are eligible for special treatment under current law (see box on page 11 for the definition of "family-owned").(10) For instance, family-owned businesses and farms may use special valuation rules to reduce or eliminate estate tax liability and, when the enterprise accounts for at least 35 percent of an estate, tax payments can be deferred for up to 14 years. To the extent that any problems may remain in the taxation of small family-owned businesses and farms under the estate tax once the exemption has risen to $3.5 million, those problems could be specifically identified and addressed at a modest cost to Treasury. Wholesale repeal of the estate tax is not needed for this purpose.


Double Taxation and Carry-Over Basis

During the debate on the estate tax, proponents of repeal can be expected to level some of the same charges against the estate tax that have been raised during previous debates. In particular, advocates of estate tax repeal will claim that the estate tax is unfair because the assets in an estate have already been taxed once as income under the income tax and should not be taxed again. The premise on which this "double taxation" claim is based, however, is not accurate.(11) A significant portion of the value of estates —  and the majority of the value of the largest estates —  has never been taxed as income because the value is in the form of unrealized capital gains. In this respect, the estate tax serves as a backstop to the income tax, providing a way to tax income that otherwise would avoid taxation altogether.

Without the estate tax, capital gains included in an estate would never be taxed. Under current law, the gain from the appreciation of an asset is subject to income tax only when the asset is sold. When an individual sells an asset, the capital gains tax calculation is based on the profit from the sale —  the difference between the amount received when the individual sells the asset and the individual's investment in the asset, which is known as the "basis." In many cases, the basis is simply the original purchase price. When heirs inherit an asset, the basis of the asset is increased —  or "stepped up" —  to equal the value of the asset at the time the decedent passed away. Under these "step-up basis" rules, if an individual holds an asset until he dies, the gain in the asset's value from the time the individual purchased the asset to the time the individual dies is never taxed under the income tax. The appreciated value of the asset is included in the decedent's estate, however, and if the estate is large enough, it will be subject to estate tax.

A substantial proportion of assets subject to the estate tax appear to be capital gains that have never been taxed. Estimates recently made by economists James Poterba and Scott Weisbenner, based on data from the Survey of Consumer Finances, suggest that these untaxed capital gains make up about 37 percent of the value of estates worth more than $1 million and about 56 percent of estates worth more than $10 million.(12) Repeal of the estate tax would eliminate this backstop to the income tax code.


Implementation of "Carry-Over Basis" Requirements

To avoid being accused of allowing significant amounts of capital gains to go untaxed, supporters of estate tax repeal included a provision in last year's legislation that replaces the "step-up basis" with a "carry-over basis" system. The new system is slated to take effect at the same time that the estate tax is repealed.

Under this approach, the original basis of assets that are inherited would be "carried over" to the heirs. In other words, when the heirs sold the assets, they would be responsible for paying capital gains tax on all of the gains that had accrued since the decedent originally acquired the assets, rather than (as under current law) only on the gains since the heirs inherited the assets.

Not all heirs would have to pay capital gains tax on the increase in the value of an inherited asset that occurred during the life of a decedent. Under the carry-over basis rules, the "basis" assigned to the assets in an estate could be increased by $1.3 million.

Is It Difficult to Qualify as a "Family-Owned" Business?

Despite the assertions of those advocating repeal of the estate tax, few family-owned businesses actually face the estate tax at all. Further, current law grants special treatment to family-owned businesses to minimize the impact of the tax. Proponents of estate tax repeal assert that these targeted provisions are ineffective because the rules make it difficult to qualify as a family-owned business; in fact, businesses easily qualify for this special status as long as the family owns and operates the business and intends to continue doing so.

If a business is wholly owned and operated by the person who died, it readily qualifies for treatment as a family-owned business under current estate tax law. It will also qualify if other family members participate in the business. For estate tax purposes, the definition of "family" is quite broad —  it includes not only the decedent's spouse, but also their children, grandchildren, and great-grandchildren and their spouses as well as their nieces and nephews and their spouses.

In general, the family must own at least 50 percent of the business —  or as little as 30 percent if more than one family owns the business —  and the family must have worked at the business and taken part in management decisions for at least five of the previous eight years. In the decade after the person's death, the heirs or one of their family members must continue to operate the business for at least five of any eight consecutive years. If three siblings inherit a business, for example, the test would be met if any one of them participated, or even if one sibling's daughter were the only participant.

Businesses that manufacture or sell a product, provide a service, or engage in farming qualify for the special treatment. A business that is a holding company for managing other investments would not qualify. Nor can a company be publicly-traded. If stock in the business has been publicly-traded within three years of the person's death, the business does not qualify as family-owned.

For assets bequeathed to the decedent's spouse, an additional $3 million upward adjustment would be allowed, for a total basis adjustment of $4.3 million. (Such adjustments could not increase the basis for an asset to a level that exceeded the asset's value at the time of the decedent's death.) For large estates in which the amount by which the decedent's assets had appreciated during the decedent's life exceeded the basis adjustments that could be made, the estate's executor would be responsible for deciding how to allocate the basis adjustments among the assets in the estate. The executor could raise the basis for some assets while leaving the basis for other assets unchanged.

These basis adjustments would relieve heirs of some capital gains tax. But, as explained below, executors and heirs would face immense administrative complexities in trying to apply these carry-over basis rules. A similar carry-over basis provision was enacted as part of the Tax Reform Act of 1976; due to its inordinate complexity and administrative difficulty, it was repealed four years later, before ever taking effect. In testimony before the Senate Finance Oversight Subcommittee last year, the former chair of the American Bar Association Section of Taxation, Stefan Tucker, stated that the carry-over basis provision would "add incredible layers of complexity" to the tax code, a view that other practitioners have echoed.(13)

The record-keeping requirements that the carry-over basis provision would entail would be formidable. In some cases, heirs would have to determine the price that a decedent paid to acquire an asset many decades earlier. Estate executors also would face substantial complexity in figuring out how best to allocate the $1.3 million and $3 million basis adjustments among the assets in an estate to minimize subsequent capital gains taxes, as well as how to deal with missing or inadequate records for establishing the basis for various assets.

The burden of distinguishing between assets, or portions of assets, that were revalued at death as a result of basis adjustments and assets that were not revalued and thus retain their original basis would be significant. These problems would multiply over time, as each generation's estate administrators would have to keep track not only of assets entirely exempted from carry-over basis by a basis adjustment made when a decedent died, but also of the amount by which other assets may have had their basis adjusted upward when previous decedents died before the assets were passed on to the current decedent. As assets are held by each succeeding generation, it could eventually become necessary to track changes in value that occurred over a century or more.

That supporters of eliminating the estate tax included the carry-over basis provision in last year's law as an accompaniment to estate tax repeal highlights the misleading nature of claims that the estate tax represents unfair double taxation. By including a carry-over basis provision in the legislation, supporters of repeal acknowledged that significant amounts of capital gains would escape taxation altogether in the absence of an estate tax. (Indeed, as noted earlier, some estates and their heirs may actually be required to pay more in capital gains tax than they would be required to pay in estate tax if the estate tax were retained with a $3.5 million exemption and no carry-over basis.(14))

The carry-over basis rules, however, are unlikely to provide a viable solution to this problem. If history is a guide, they are likely to prove so complicated and cumbersome to administer that intense pressure is generated for their repeal.

Yet some means of taxing these capital gains is necessary to ensure equity in the income tax system and deter income tax avoidance schemes. Retaining the estate tax, even with higher exemption levels, would address these problems. It would eliminate the need for unworkable carry-over basis rules and allow the continuation of the current practice of a "step-up basis" for inherited assets.



Both the House and Senate are expected to consider proposals related to the estate tax before the end of June. The context of the debate will be far different than it was one year ago when the current estate tax changes were enacted as part of the large tax-cut package. Since then, the budget outlook has substantially worsened, with projected surpluses having largely evaporated. While the current situation created by the 2010 sunset may disrupt estate planning, permanent repeal is not a viable solution. Although the costs over the next decade may appear affordable to some, the full effects of estate tax repeal will be felt most strongly after the end of the decade, when the budget will be struggling to cope with the high cost of the baby-boomers' retirement.

Given the pressures on the budget, policymakers should reject calls for making the repeal of the estate tax permanent. If they feel that action is necessary to address the current uncertainty surrounding estate planning, they should adopt a more prudent approach than full repeal. For example, simply making permanent the $3.5 million estate-tax exemption and the 45 percent top-estate-tax rate that are slated to be in effect in 2009 would preserve nearly $400 billion in revenues between 2013 and 2022, compared to the revenue that would be foregone under permanent repeal. With this high exemption level, fewer than one-half of one percent of estates would face any estate tax whatsoever. Adopting a somewhat lower exemption such as $2 million —  the policy scheduled to be in effect in 2008 —  would save even more revenue and still exempt all but the largest estates.

Stopping short of full repeal and retaining the estate tax with an increased exemption level represents a far more sustainable solution to the estate tax. Such an approach carries a significantly lower cost, while also eliminating the need for the complex, unworkable carry-over basis provision.

Appendix 1
Taxable Estate Tax Returns Filed in 1999 By State of Residence

(All figures are estimates based on samples —  Money amounts are in thousands of dollars)
State of Residence  
Gross Estate For Tax Purposes
Gross Estate For Tax Purposes
Estates of $5 Million or More
Number Amount Number Amount
Total 49,870 119,176,309 3,283 52,383,542
Alabama 416 1,016,970 41 420,667
Alaska 48 90,361 0 0
Arizona 958 1,842,355 46 538,326
Arkansas 183 501,057 17 243,158
California 7,445 16,262,673 491 6,339,829
Colorado 591 1,192,530 26 429,250
Connecticut 980 2,340,424 73 972,675
Delaware 214 383,435 11 87,597
District of Columbia 198 638,740 18 367,719
Florida 4,859 13,521,011 412 6,974,470
Georgia 831 3,621,398 63 2,473,912
Hawaii 160 598,391 12 353,239
Idaho 148 245,502 6 64,569
Illinois 2,722 5,618,817 158 2,000,431
Indiana 793 1,484,582 42 463,643
Iowa 643 1,216,753 23 433,342
Kansas 491 819,134 23 218,143
Kentucky 384 836,567 27 317,891
Louisiana 454 873,109 23 319,047
Maine 203 420,496 11 153,791
Maryland 1,030 2,226,972 59 817,271
Massachusetts 1,478 3,116,850 86 1,129,377
Michigan 1,299 3,036,676 83 1,410,854
Minnesota 636 1,377,055 36 586,112
Mississippi 173 399,658 13 160,699
Missouri 1,090 2,146,331 54 656,953
Montana 208 259,841 4 27,352
Nebraska 481 1,291,617 13 717,217
Nevada 223 988,715 21 666,684
New Hampshire 188 544,914 18 240,315
New Jersey 1,963 4,583,623 152 2,087,171
New Mexico 184 360,418 14 133,249
New York 3,571 11,803,345 331 6,682,967
North Carolina 1,322 2,734,552 76 1,015,954
North Dakota 116 186,580 5 53,199
Ohio 2,175 6,117,946 127 3,254,656
Oklahoma 382 884,171 28 339,239
Oregon 553 963,015 21 283,204
Pennsylvania 2,184 5,289,598 144 2,150,024
Rhode Island 134 440,215 15 260,103
South Carolina 403 1,163,087 34 612,123
South Dakota 149 222,032 5 37,797
Tennessee 686 1,581,215 38 667,986
Texas 2,571 5,953,974 152 2,410,080
Utah 146 237,632 6 54,014
Vermont 174 346,031 9 130,624
Virginia 1,504 3,142,191 74 1,064,442
Washington 850 1,589,678 51 458,928
West Virginia 262 523,763 20 218,310
Wisconsin 790 1,594,486 50 649,930
Wyoming 101 227,169 6 70,502
Other areas 122 318,654 11 164,506
Source: IRS Statistics of Income

End Notes:

1. Ron Durst, James Monke, and Douglas Maxwell, "How Will the Phaseout of Federal Estate Taxes Affect Farmers," USDA Economic Research Service, Agriculture Information Bulletin No. 751-02, February 2002.

2. Robert Reischauer, "Statement before the Senate Budget Committee," January 29, 2002. Alan Auerbach, William Gale, and Peter Orszag, "The Budget Outlook and Options for Fiscal Policy," April 2002 (available at

3. Dan L. Crippen, "The Budget and Economic Outlook: Fiscal Years 2003-2012," Testimony before the Senate Budget Committee, January 23, 2002.

4. "Budget of the United States Government —  Fiscal Year 2003," Analytical Perspectives, p. 39.

5. As noted, the $740 billion figure assumes that the cost of estate tax repeal will remain constant at its 2012 level, measured as a share of the economy. This is a conservative estimate that is likely to understate the cost of estate tax repeal in the decade after 2012. The estate tax exemption that is slated to be in place in 2011 under existing law is not indexed for inflation. As a result, under current law, estate tax revenues would grow faster than GDP after 2011 and represent an increasing (rather than a constant) share of the economy. It thus is likely that the actual revenue loss from permanent repeal of the estate tax would be more than $800 billion over the second decade.

6. Distributional analyses typically show the impact of a tax at different income levels. The Treasury Department assumes that the estate tax is borne by the decedent and thus assigns the tax based on the decedent's income. Under these assumptions, the Treasury Department estimates that 91 percent of the estate tax is paid by the highest-income five percent of taxpayers. Some object to this approach, claiming that the incomes of the heirs are not as high as those as the decedents. A Brookings Institution analysis concludes, however, that it makes little difference whether a distributional analysis is based on the incomes of the decedents or the heirs because "the recipients of large inheritances tend to have very high income and (non-inheritance) wealth themselves." See William Gale and Joel Slemrod, "Overview" in William Gale, James Hines, and Joel Slemrod, eds., Rethinking Estate and Gift Taxation (Brookings Institution Press: Washington, 2001).

7. There are no official estimates of the number of taxable estates assuming a $3.5 million exemption. Using IRS Statistics of Income data on 1999 estate tax returns and Joint Committee on Taxation projections of the number of taxable estates over the decade under the estate tax laws in effect prior to last year's tax cut, we estimate the number of taxable estates in 2010 assuming a $3.5 million exemption to be between about 6,000 and 12,000, or less than one-half of one percent of the projected 2.6 million deaths in that year. In the text, we have used a conservative point estimate of 10,000 taxable estates, which falls modestly above the midpoint of this range.

8. In large estates, such as those over $20 million, family-owned business assets accounted for more than 20 percent of the value of all taxable estates. These figures imply that in some large estates family-owned businesses are not necessarily "small" businesses. Some of the country's largest businesses are family owned. Examples of large family-owned businesses include Mars Candy, Levi Strauss, Hallmark Cards, Enterprise Rent-a-Car, and Gallo Winery.

9. David Cay Johnston, "Talk of Lost Farms Reflects Muddle of Estate Tax Debate," The New York Times, April 8, 2001.

10. When a family-owned businesses or farm constitutes more than half of an estate, the estate is eligible for an exemption of $1.3 million, higher than the current $1 million exemption for other estates. This special treatment is repealed in 2004, when the general exemption rises to $1.5 million.

11. The charge of "double taxation" is used by some to imply that the estate tax is unfair and can distort economic decisions about work, savings, and investment. However, economists William Gale and Joel Slemrod point out that the double taxation argument is "an exercise in rhetoric, and has no economic significance"; they use the following example to explain their point: "[I]n a value-added tax, goods are taxed at each stage of production; in a retail sales tax, they are only taxed once, at the retail level. Yet economists understand that —  aside from administrative features —  the two systems are economically equivalent, and the difference in the number of times the item is taxed is economically meaningless." See "Rhetoric and Economics in the Estate Tax Debate," paper presented at the National Tax Association spring symposium, May 22, 2001.

12. James Poterba and Scott Weisbenner, "The Distributional Burden of Taxing Estates and Unrealized Capital Gains at Death," Rethinking Estate and Gift Taxation, Brookings Institution, 2001.

13. Stefan Tucker, "Testimony before the Senate Finance Oversight Subcommittee," March 15, 2001. Also see, Joseph Dodge, "What's Wrong With Carryover Basis Under H.R. 8," Tax Notes, May 4, 2001. Lee Sheppard, "Debt in Contemplation of Death," Tax Notes, June 1, 2001. Frank S. Berall, Ellen K. Harrison, Jonathan G. Blattmachr, and Lauren Y. Detzel, "Planning for Carryover Basis That Can Be/ Should Be/ Must Be Done Now," Estate Planning, Volume 29, March 2002.

14. Some estates with large amounts of debt, for instance, may face higher taxes after repeal of the estate tax. Consider the following example: A single person has assets worth $6 million; these assets are the result of an investment of $2 million, and have appreciated by $4 million during the person's life. In addition, the person has debts (such as a mortgage) of $3 million. If the person were to pass away in 2009, this person's estate would be exempt from estate tax under the law in effect that year. The estate would be valued at $3 million ($6 million of assets minus $3 million of debt), or $500,000 less than the $3.5 million exemption in effect that year. If the person were instead to die in 2010 after the estate tax has been repealed, the heirs of this estate would have to pay capital gains tax on a portion of the appreciation of the inherited assets that occurred during the decedent's life. Under the carry-over basis rules that accompany estate tax repeal, $1.3 million of the appreciated value of the inherited assets would be exempt from capital gains tax. But because the appreciated value of the assets is $4 million, the heirs would owe capital gains tax on the remaining $2.7 million when they sell the assets. See, for example, Donald Kiefer, et. al., "The Economic Growth and Tax Relief Reconciliation Act of 2001: Overview and Assessment of Effects on Taxpayers," National Tax Journal, March 2002.