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Home / Washington Business - September/October 2006 / Q&A - Dick Patten: Repealing Washington’s 'Death Tax' |
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Q&A - Dick Patten: Repealing Washington’s 'Death Tax' |
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Written On: September/October 2006 |
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Dick Patten is president of the American Family Business Institute, a nationwide organization of family business owners devoted to the permanent repeal of the estate tax. In 1981 he filed Initiative 402, which repealed the Washington’s inheritance and gift taxes.
Q: What is the estate tax and why is it commonly referred to as the "Death Tax?"
A: The estate tax is a tax levied on the total value of a person’s assets when they die. In theory, it’s supposed to be a tax on the wealthy, but in practice it often penalizes people based on the liquidity of their assets — which why it’s of special concern to family businesses and farmers. Within nine days of a person’s death, the Internal Revenue Service comes to their home and business to assign a value to all of their assets, including tangible ones like factory equipment and land. While a good tax lawyer can often shield liquid assets like stock, a family business owner has much less flexibility.
The term "death tax" describes the event which triggers the tax. Income tax is levied when you bring in income, capital gains taxes when you realize capital gains, and the death tax is triggered when you die.
Q: How does the federal estate tax work?
A: When you die, the federal government places a value on all of your assets and hands your family a bill for roughly half of that amount over the exemption level. However, the federal estate tax is a bit like a roulette wheel. Depending on which year you die, you pay different rates and a different asset level is exempted. Since 2001 the rate has steadily fallen and the exemption has steadily risen. This makes planning for the tax extremely difficult and increases its burden on business owners even further.
Q: The federal estate tax completely phases out by 2010. Why does it then reinstate itself at the full-rate schedule in 2011?
A: The short answer is politics. In 2001 Congress cut a number of taxes, including the death tax, but because they weren’t able to get the support of 60 senators, they were forced by very arcane Senate rules to make all of the tax cuts they passed temporary. This has led to an extreme amount of doubt among business owners over what will eventually happen to the death tax and made it much more difficult to plan for the future.
Q: How does Washington’s estate tax work?
A: It piggybacks on top of the federal estate tax. Washington’s estate tax is added on top of the tax that the federal government already levies, so you get a bill from the federal government for the federal tax and another bill from Washington asking for an additional percentage on top of that.
Q: Is it better than the one the Washington State Supreme Court tossed out in January 2005?
A: Well, it’s better in the sense that it’s no longer illegal, but it’s an unfair tax that makes our state’s business climate even more uncompetitive.
Historically, the federal government used to let you deduct state estate taxes from the federal tax, but as part of the 2001 tax cut that provision was repealed. We wrote I-402 in 1981 to repeal the state’s death tax, and we made sure that the state government could continue levying a tax equal to what the federal government would let you deduct. That way, state residents didn’t pay any more than they otherwise would have, but the state still brought in revenue that would have gone to the federal level.
When the 2001 law repealed that deduction, the state government continued to collect the same amount of tax from state residents. Without the deduction, it was now on top of their federal tax bills rather than deducted from it. That was blatantly illegal and the state Supreme Court made that clear last year. Essentially, Washington hasn’t had a death tax since 1981 — we simply had a provision that allowed us to get money from the federal government without taxing our citizens.
What the Legislature did last year was create a new state death tax that charges state residents above and beyond what the federal government charges, something we haven’t done for more than 20 years.
Q: Washington’s death tax is supposed to protect family farms and people with less than $2 million in assets. Is that the case?
A: The death tax especially damaging to the economy. It’s one of a small handful of taxes that directly taxes capital, and it makes the state less attractive to business owners and wealthy individuals. The state’s economy affects everyone, even if they don’t pay the death tax. Washington just lost its second-largest family business to Arizona as a direct result of the death tax. It’s the employees who lost their jobs or were forced to move that were hurt far more than the business owner who was able to avoid the tax by moving.
Q: Opponents of repealing the estate tax use the "Robin Hood" argument: Tax the rich to feed the poor. In Washington’s case, they are saying: Tax the rich to fund our schools, colleges and universities. How do you deal with that argument?
A: One of the great things about this country and this state is that the "tax the rich" argument simply doesn’t fly with the average voter. Politicians on the left of the political spectrum certainly believe it, but those arguments are consistently defeated at the polls in and surveys of public opinion.
Washington’s government also has a surplus right now, and the idea that we need a new "emergency" tax is simply ludicrous. This link the death tax proponents have tried to form between education funding and the death tax is completely artificial. The money goes into the general fund and legislators can move it wherever they choose. Treating citizens like children is hardly the best political tactic, and we’ve seen how unsuccessful it has been in the past.
Q: Opponents will say the estate tax payments can be stretched out over a number of years so a family doesn’t have to sell its assets and has time to adjust. Therefore, it doesn’t cause them to sell their businesses or close up shop. Are they correct?
A: The IRS places an extremely restrictive lien on businesses that try to pay the death tax over an extended period. In the real business world, a family business has to compete every day to survive. The restrictions the IRS demands as part of the lien put businesses at such a huge disadvantage that it’s not an option for the vast majority of businesses.
Q: Proponents of repealing the estate tax say that family businesses have already paid their taxes and the death tax amounts to double taxation. Is that accurate? How would that work?
A: Take a simple case like someone’s home. A couple brings in income from a job and pays income taxes on it every year. They save up and eventually buy a home, and pay property taxes year after year. When they die, the IRS swoops in and hands their family a death tax bill for the value of their home and other assets — even though they’ve been paying income and property taxes on it for years.
The death tax is a horrible tax, not just because it damages the economy, but because it’s downright unfair. If you’ve worked hard all your life and played by the rules, why should you have to pay taxes on the same assets again just because you were unlucky enough to die?
Q: Anything else you want to add?
A: The death tax doesn’t just hurt family businesses when their owners die. Every year, family businesses that properly plan for the death tax pay tens and sometimes hundreds of thousands of dollars in lawyer’s fees, accountant’s bills and life insurance premiums to avoid facing a devastating hit from the death tax when they die. When death tax advocates cite small-sounding numbers of businesses who pay the death tax, they aren’t taking into account any of those costs to family businesses — costs that their corporate competitors don’t have to pay. According to the Heritage Foundation, every year that we keep the death tax, the state’s economy produces 5,000 fewer jobs.
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