The Death Tax — May It Rest in Peace

At long last, Virginia is on the verge of repealing its death tax. The Senate and House of Delegates finally found something they could agree upon, passing compromise legislation yesterday. Gov. Timothy M. Kaine has indicated his support for repeal, so his signature should be a formality.

As Death Tax foes have argued, the tax on inherited estates posed a huge burden to farmers and family businesses. Having already paid taxes on salaries, profits and dividends for years, family business had to pony up one more time, often by taking on a crippling load of debt or selling the land/enterprise outright.

As House Speaker William J. Howell, R-Stafford, said in a press release yesterday, Virginia’s top-rated business climate just got better. Citing the state’s Number One “Best State for Business” ranking by Forbes magazine, he said: “Repealing unfair taxes and improving our regulatory framework are precisely the kind of positive state tax and regulatory actions enacted over the past decade and more that enabled our Commonwealth to garner this latest accolade.”

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22 responses to “The Death Tax — May It Rest in Peace”

  1. Anonskeptic Avatar

    I am sure that the Mars family, as well as the DuPonts and their ilk, are very happy that their campaign contributions finally paid off. Next on their agenda will be the repeal of the income tax so they can give up their Florida residency.

    For all the scare tactics of burdening heirs of family owned businesses and selling off the family farms, no one has every come up with any creditable examples of that happening.

    And what are we going to do with all of those out of work estate planners?

    I guess the “Virginia No Millionaire Left Behind Act of 2006” will result in an increase in resident income as all those wealthy people flock to the Commonwealth.

  2. Ray Hyde Avatar

    Somehow, I can’t get too excited about a tax benefit I have to die to enjoy.

    But at least the state is partially recognizing that taxing capital is counterproductive. In the final reckoning, so to speak, taxes can only be paid by living people and only with cash they actually have on hand to spend.

    Tax the income and tax the sales. Eventually property will be sold and the increase in value is then income.

    Even the diehards ought to be satisfied with that: government can afford to take a longer view on when it gets its due.

  3. Jim Bacon Avatar
    Jim Bacon

    Anonskeptic, You’re spouting empty rhetoric. The Mars family, the DuPonts, Bill Gates, Warren Buffet and all of the rest can hire the best legal and accounting minds in the country to minimize their death taxes. Strategy One: Give the money away through non-taxable foundations. Strategy Two: Set up generation-skipping trusts for the children and grand-children. Strategy Three: Establish residence in states, like Florida, that don’t have a death tax. Strategy Four: Hide their money overseas.

    The people who get screwed by the inheritance tax aren’t the super-wealthy, it’s the modestly wealthy like land-wealthy (and cash-poor) farmers or small business owners who can’t afford the super-lawyers and super-accountants.

  4. Ray Hyde Avatar

    Jim’s right. And I know several families that were damaged by the previous law.

    In some cases a lack of sophistication and knowledge was as damaging as the lack of cash to provide proffessional help.

  5. Tom Paine Avatar
    Tom Paine

    Yeah? Well how come the Mars family hired McGuireWoods to lobby for the Estate Tax repeal if they weren’t going to reap a huge benefit from its repeal? That’s just the most expensive lobbying firm in the Commonwealth.

    I don’t think many will buy into the theory that the Mars were lobbying for the repeal out of a sense of civic duty.

    Another point you constantly miss is the problem of the loss of the stepped up basis for the decedent’s heirs at the federal level. As a result, if they wish to sell the asset–farm or business, they’ll have to go back to daddy or even granddaddy’s basis–if they can find documentation. If they can’t well, then the basis is “0”.

    There’s a lot more talk than knowledge on this point.

  6. Toomanytaxes Avatar

    If society is so worried about the loss of tax revenues from very large estates, the federal government would be better to place a time limit on the tax-free life of a foundation, e.g., the Ford Foundation or the Gates Foundation. After say 50 years, the foundation becomes taxable by both the federal and state governments.

    Talk about your wealth and privilege. This idea of limiting the concentration of wealth goes back to the old English statute of Mortmain. Much better to limit the life of a Ford Foundation than to tax a small business or private investor.

  7. Anonymous Avatar

    Wow! another “practical suggestion”. Now can’t you just hear the outcry from the foundations and their beneficiaries? And those beneficiaries are quite often the pet projects of the heirs (who often just happpen to draw financial benefit from those charities and foundations).

    Nope it’s the middle class that’s going to be getting the kniofe here. If you can’t sell the small business after the death of the founder without serious tax consequences, what benefit have you gained?

  8. Jim Bacon Avatar
    Jim Bacon

    Tom Paine, You raise a good point about Mars hiring McGuire Woods Consulting. I agree, they didn’t do it out of the goodness of their hearts — clearly, they must be getting something out of the law. I would like to know more about their motives.

    But that doesn’t change the facts that rich families can exempt much of their estates from taxation if they choose to do so. Back in my Virginia Business days when I researched the Virginia 100 list of wealthiest Virginians, I spoke to one individual, whom I won’t name to protect his privacy, who said he’d be damned if he was going to let the government tax his estate. He had assets all around the world, and I have no doubt that he could hide/exempt them from the I.R.S. should he choose to.

  9. Ray Hyde Avatar

    I have mixed feelinga about the lack of stepped up basis.

    If the goal is to keep the farm or family business in operation, then it doesn’t make any difference. But if the goal is to avoid the tax and then sell the business, under my previous argument the sale becomes income and ought to be taxed. If it is inherited then the basis is zero and it should all be taxed. Makes a nice incentive to keep the enterprise going.

    On the other hand, if Daddy knows the children aren’t interested, he could sell before he dies. For him the basis is not zero (unless he inherited, too), and he could avoid much of the tax, what was left, his children could inherit tax free, unless you define property as different from cash. Undoubtedly there will be shenanigans with shell corporations.

    But under my plan, if they spend the money, at least that will get taxed. Clearly, if you inherit the property, you should inherit the basis, I’m not so sure you should get a new basis.

    It seems a little swarthy to me, to advocate for an elimination of the death tax in order to keep family businesses operating, and then also advocate for a stepped up basis so they can be sold.

    Say you inherit a business worth a million that your father created fo 500 thou. You invest another 500 thou over the years and sell it for 2 million. Your basis is one million and you pay tax on the half million the business grew whil you had it, and you pay deferred tax on the half million it grew when your father had it:its really tax he would have had to pay had he sold it, even if he sold it to you.

    I don’t see what is so unfair about paying a tax that is owed, just because the government allows you to defer the tax for generations.

  10. Anonskeptic Avatar

    Well, Mr. Jim, it appears that not all of my rhetoric was “empty” with respect to the Mars family, etc. So, back at you – instead of spouting the empty republican rhetoric from the ‘Death Tax’ playbook, cite an authoritative source for the number of farms that had to be sold because of the Virginia inheritance tax. You pick the time frame. Better still, how many businesses, small or otherwise, were sold to pay the Virginia inheritance tax? Show me the beef!

    If you are so worried about the non-super rich, would not it be better to cap on the Virginia inheritance tax, say $5 million or less? If you truly care about the modestly wealthy, then let’s forget about the Mars family. As you say the Mars family and the others you interviewed have all the dodges figured out, then why do they need the tax break?

    And I suppose that you subscribe to the republican rhetoric of “personal responsibility,” so then why cannot the modestly wealthy afford an attorney or accountant. I do not recall my mother paying exorbitant sums to prevent being “screwed” by the inheritance tax. Do these people not pay accountants or attorneys to handle their affairs and file their taxes? Do they not listen to the people they pay for advice?

  11. Anonymous Avatar

    I guess I just don’t like people who are so adamant about taking other people’s property, just because they have it. Like the man who asked his secretary if she would go to bed with him for $100,000: the amount isn’t the issue, its the ethics.

  12. Tom Paine Avatar
    Tom Paine

    There have been few, if any, farms or businesses sold to pay the Virginia Estate Tax or its predecessor the Inheritance Tax. those taxes were miniscule in relation to the value of the estate/inheritance.

    Besides, the Virginia Estate Tax was entitled to a full credit on the federal Estate tax until they started monkeying around with it a few years ago.

    Interesting ccomment from Mr. Bacon, bless his heart, about the guy who was going to hide his assets so they couldn’t be taxed….Oh so we repeal it because he’ll break the law? Now that’s an interesting argument. Let’s extend that theory…Hmmmm…Embezzlement?Murder? Robbery?

    And curious too is the theory that we’ll eleminate the stepped up basis so we can “keep ’em down on the farm” whether they want it or not.

    Man, this internset spawns some weird stuff….but hey, it’s America.

  13. Ray Hyde Avatar

    I think eliminating the stepped up basis is actually part of the Federal plan, so that part isn’t theory. If somebody knows the language, please fill us in.

    What the effect of eliminating the stepped up basis will be is yet unknown. I was merely postulating some thought experiments to try to see what the effects might be.

    I didn’t mean to imply that such a policy was deliberately designed as a land conservation measure, but nothing would surprise me now. All I meant was that if you don’t get taxed on capital until you make a profit on the sale of capital goods, then I think that is a policy that would encourage thrift, conservation, continuation of businesses, and savings, all of which we have far to little of.

    You are probably right, the Virginia portion of the estate tax probably hasn’t caused much hardship, unless the hardship happens to be yours. I guess I’m not concerned that the Mars family gets off scott free: even if they lose 90% they are still fabulously rich. It doesn’t make that much difference. I’m more concerned that the Smith family gets inadvertently ruined by the state after they have supported it for generations.

    If you earn more money and spend more money, then you should pay more taxes. But, having done that, I see no reason why you should then be expected to pay still more, just because you have saved more.

    It’s one thing to charge people their full costs and make those charges somewhat in relation to cash flow that represents consumption. It is something else to wail egregiously about “excess” wealth and then argue to confiscate property far beyond an individuals actual cost to the government.

    If you have a problem with the Mars family, don’t eat their candy. Sure, some people will use the law to avoid taxation.that is perfectly fair and OK as long as it is legal. “Taking Advantage” of the law is an oxymoron. Commercial property kije kind exchanges are a total end run around the tax law, but they are perfectly accepted as common practice.

    Philosophically and economically the Viginia estate tax is as screwed up as the federal law, asnd it should rightfully be eliminated for the same reasons.

  14. Tom Paine Avatar
    Tom Paine

    Standard stuff here…lots of philosophy, little knowledge.

    The stepped up basis problem applies to a heck of a lot more than real estate (although that’s a special problem because with depreciated real estate one loses the advantage of the lower capital gains tax).

    Anyway, try figuring out how you establish the basis on something like a furniture store, grocery store (and I don’t mean a Ukrop’s chain) or the like. Many businesses have “grown” over many years. The basis may end up close to “0”. Do we say that the heir must forever stay in that business, willy nilly?

    Seems like “social planning” to me….This gets curiouser and curiouser

  15. Ray Hyde Avatar

    How does the basis go to zero on something you haven’t depreciated?
    Don’t we have rules for recapturing depreciation on assets that have actually appreciated?

    I don’t claim the accounting is easy. If the business has grown over the years, it is either because you put in sweat equity for which you have not yet been paid, or you have made other cash investments. No one says you have to stay in the business, but you must pay tax on your actual profits when you leave, same as with holding stocks. I don’t see the problem.

    If you have a store you paid for land and structure, Your inventory is paid for and valued separately, but if your inventory grows, so does your basis. If the inventory becomes obsolete it is valued at less but your basis is the same, unless you depreciate it. Seems like pretty standard stuff.

    I built a barn two years ago. I cut the trees, sawed the lumber, and constructed the barn. All I bought was the nails and roofing. I haven’t made any money from the barn, except by selling the hay I keep there, and I pay tax on that income and the customer pays tax too, if he is not commercial.

    But in addition, I now get taxed for merely owning the barn, with the result that all of my effort means that my remaining income is permanently reduced by the amount of the tax. If the perceived value of the barn increases, my income is reduced still more.

    I won’t make the mistake of being industrious again, not until I’m nearly ready to sell. Then I can put up nice stuff, charge the new owner for it, pay the tax and be done with it. But from now on, its tarps, and I’ll put that ugly mess right out by the road so everyone can enjoy the pastoral viewshed.

    If I had bought the barn as a prefab, and had it delivered, I would expect to pay tax on the transaction. But once I own it, it’s purpose is to generate more transactions, why would you create a tax that helps prevent that?

    I don’t know what is fair, but I’ve watched a couple of families destroyed by estate and property taxes they couldn’t afford, and i’m pretty sure that is not fair.

  16. Anonymous Avatar

    Estate taxes are effectively paid by those who inherit property. I am sympathetic to the very rare situation in which several generations have lived and worked on a farm, vineyard, etc but get hit by estate taxes when the initial owner dies, often at an advanced age. However there are ways to handle this without abolishing the estate tax outright. And as we all agree, most estates are too small to tax anyway.

    Mark Warner (MW) made a lot of money in cell phone technology. Some of it was no doubt luck, but a lot of it was intelligence and skill. I think he should pay higher taxes than the average working stiff, but I certainly don’t want those taxes to be confiscatory. He earned his money and I don’t begrudge him a dime of it.

    MW has 3 daughters. They have, by virtue of their birth, access to a marvelous life-style, excellent schools, the best universities that they can get into, parents who can perhaps pull a few strings to get them into iteresting jobs, and possibly good financial starts in life when they marry and start their own families. Wouldn’t be at all surprised if Mark & Lisa started trust funds for the grandkids as they came along.

    After Mark and Lisa are dead, no doubt these 3 daughters will be taken care of in their wills. I see no more reason why these 3 daughters should escape paying taxes on what they inherit than a lottery winner should escape paying taxes on his winnings. It’s both “found money”. The lottery winner got lucky when he bought his $20 million ticket at 7-11; the 3 daughters got lucky when they were born. Tax ’em.

  17. Jim Bacon Avatar
    Jim Bacon

    Anonymous 11:17, You, like many supporters of the death tax, focus on the “windfall” enjoyed by the inheritors of the estate. Indeed, Mark Warner’s three children did nothing to “deserve” their great fortune.

    Those who oppose the death tax focus on the person who made the money in the first place. Lucky or just plain brilliant, Mark Warner made his money fair and square. He’s paid his taxes on his earnings. When he invests his earnings and collects interest and/or dividends on that earnings, he pays taxes a second time(except in the case of his municipal bond portfolio.) I think of that money as his. He should be able to do what he wants to with it. He can endow a foundation, like Bill Gates and Warren Buffet, he can leave it to his children, or he can donate it to the U.S. Treasury. That’s his decision. It should be his decision. That’s because the money belongs to him — not the state.

    I find odious the idea that the public has the right to make the value judgment that Mark Warner’s children, or the progeny of the Mars brothers, don’t deserve the money Warner/the Mars brothers choose to leave to them. The argument implies that the state should be allowed to decide how much wealth people can keep and how they dispose of it. In other words, individuals enjoy only those rights that the state allows them. That’s diametrically opposed to the founding principle of this country: that the state has only those powers given them by the people.

    The estate tax is the only one that I can think of that is justified not on fiscal/budgetary grounds — e.g. the state needs the money to support vital programs — but on moral grounds — e.g. members of the lucky sperm club don’t deserve the windfall of wealth. That strikes me as nothing more than the legislation of envy.

  18. Ray Hyde Avatar

    You are right, Jim.

    Calling something a windfall is no excuse for attempting to steal it. Frequently the money is not a windfall but simply property that was accumulated over a long period of time. As you note, the original income was already taxed, and when it is spent, it will be taxed again.

    You don’t tax stocks, for example until the dividends are paid or until the profit is recognized when sold. I don’t see any reason why real estate or other estate property should be any different.

    With real estate there is some justification for creating a cash flow for the state that is not dependent on the immediate ups and downs of the economy, although the state ought to be able toplan well enough to avoid that problem. Nevertheless, the situation in Fairfax, where property values have grown at 12 times the rate of personal income shows why the property tax increases should be capped or means tested. If the state is unable to plan for extraordinary circumstances, why should they expect their citizens to be able to do so?

    Money should be taxed when it is income and taxed when it is spent. Property isn’t income, even if it has increased in value over time.

    Even with a true windfall, in its original sense, you can’t enjoy the bounty unless you have had the patience and foresight to grow the trees.

  19. Ray Hyde Avatar

    Speaking of the lucky sperm club, I know a man who inherited the family business. But, by the time he did, he had already spent 25 years working in the shop, some of it as child labor. Because his father was an immigrant, a considerable amount of the growth of the business was due to the children, who speak better English. By the time they inhertied, much of the business was already “theirs”.

  20. Anonymous Avatar

    Envy, Jim, no. If envy was the issue, then why not propose taking it all?

    Ray, I noted that situations where several generations may have worked their entire lives in a privately owned business like a farm should be taken into consideration.

    The estate tax has generous exemption amounts, allowing a rich person to pass on more to his heirs than most folks will ever see. I don’t have a problem with them and think they should have adjustments for inflation factored into them. As I said, I’m not for confiscatory taxes.

    I see the US becoming more statified with a thin layer of wealth at the top with undue influence and power increasingly removed from the rest of us. The best colleges are full of their kids. A college education, which was a ticket into the good life a few years back, is more and more expensive for the middle class. As their neighborhoods depend less and less on public services, I see an elite that no longer sees their fate as connected to the overall good fortune of the US in general and its middle and working class people in particular. They see themselves as separate. They can retreat to their gated communities and ignore what is happening in the rest of the country. Allowing great wealth, as opposed to a moderate amount, to be passed on only makes this worse.

    The US has enjoyed a stable government for many years because the average citizen doesn’t see the cards stacked firmly against him. If we start looking like a third-world banana republic, we just might start acting like one.

  21. Tom Paine Avatar
    Tom Paine

    For what it’s worth the basis will be 0 if the heirs cannot locate the records to establish the basis. The IRS places the burden on the taxpayer in these cases.

    I guess it’s too late because you have probably moved on to ather things but thought I’d throw this in to correct the record….

  22. James Atticus Bowden Avatar
    James Atticus Bowden

    Tax capital one time – at a flat rate – and then leave it the Hell alone.

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