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Estate Tax Reform Supported, Repeal Resisted at Finance Committee Hearing

Thursday, April 10, 1997

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Proposals for outright repeal met strong resistance from members of the Senate Finance Committee April 10, but there seems to be some consensus in favor of some estate tax relief.

"The time has come for Congress to do something" about the existing estate tax because it puts family farms and small businesses "in harm’s way," said Senate Finance Committee Chairman William Roth, R-Del., at an April 10 hearing.

If the existing $600,000 estate tax exemption had been indexed for inflation, it now would be valued at $835,000, Roth said.

Sens. Max Baucus, D-Mont.; John Chafee, R-R.I.; Susan Collins, R-Maine; Charles Grassley, R-Iowa; Jon Kyl, R-Ariz.; Richard Lugar, R-Ind.; and Don Nickles, R-Okla., said at the hearing that they support reforming the estate tax.

Roth asked Lugar to respond to critics who say that estate tax relief benefits only a few taxpayers. The estate tax requires business leaders to spend time planning their estates rather than creating new jobs while expanding their businesses, and that hurts everybody, Lugar said.

Rep. Christopher Cox, R-Calif., also responded to Roth’s question by describing the estate tax as "a virtue tax." It discourages savings and encourages consumption, and it inhibits job creation, Cox testified.

Voices of resistance

Committee Ranking Democrat Daniel Patrick Moynihan, N.Y., made what he described as the "inconvenient point" that scaling back the estate tax or repealing it would cost money during a time when Congress and the President are trying to cut back the federal budget deficit.

Moynihan expressed sympathy that the tax is burdensome to some, but added that it raises $250 billion over 10 years. One possible trade-off to fix problems the tax creates would be to repeal it, while imposing capital gains taxes on assets upon death of the owner, suggested Moynihan and Sen. Bob Kerrey, D-Neb.

Chafee opposed outright repeal of the tax. The estate tax helps distribute wealth and ensures that the entire tax system is relatively progressive, he said. "I do worry about the perpetuation of mammoth wealth" that would result in the absence of the estate tax, Chafee said.

House bill introduced

A group of House Ways and Means members, led by Rep. Jim McCrery, R-La., introduced a bill reforming the estate tax system.

"Estate taxes are often called ‘death taxes’ and rightfully so. With rates as high as 55%, many family-owned businesses are effectively killed off," when the business owner dies, McCrery said in a press release.

The bill would increase to $1 million the $600,000 estate tax credit, refine the existing rate structure so that the first $10,000 of taxable transfers in excess of the exemption will be taxed at 18%, and provide a special estate tax exemption for family-owned businesses and farms.

Battle Over Partnership Rules: House Ways and Means Committee Chairman Bill Archer, R-Texas, and Roth April 10 sent a letter to Treasury Secretary Robert Rubin asking that he withdraw proposed regulations requiring limited partners in partnerships to pay certain payroll taxes.

Treasury exceeded its regulatory authority in proposing the guidance, the two wrote. The issue "should be addressed by the Congress, not by regulations," the letter said.

Last week House Speaker Newt Gingrich, R-Ga., also criticized the proposal stating that the proposal was a hidden tax increase.

Gingrich’s Skeptics: Gingrich’s remarks that he supports repealing the estate tax and capital gains tax were met with skepticism from both Democrats and Republicans April 10.

Senate Majority Leader Trent Lott, R-Miss., said, "I’ll always be looking for an opportunity to vote to eliminate" the estate and capital gains taxes. "But I don’t think we can get that all done in one year, when you’re dealing with an overall budget situation," he added.

House Minority Leader Dick Gephardt, D-Mo., reacted more sharply to Gingrich’s proposal. "They’re for tax cuts for the wealthiest Americans," he said.

Both Gingrich and Gephardt were motivated more by politics than by policy when making their remarks. Gingrich is trying to re-establish his conservative credentials after his remark about delaying tax cuts to help reduce the budget deficit, and Gephardt is positioning himself for the next presidential election.

IRS Management Plan Discussed: Deputy Treasury Secretary Lawrence Summers told the Senate Governmental Affairs Committee April 10 that Treasury is not looking for a quick fix to IRS’s problems, but instead the goal is to "implement lasting solutions to difficulties the IRS has encountered."

A key element to Treasury’s plan is the Modernization Management Board, which was created in 1996 to "ensure IRS’s accountability . . . and to coordinate tax administration with tax policy," Summers said. A blue ribbon Advisory Board also will be established "to bring private sector expertise to bear on the management of the IRS," he said.

"What would make this board different from previous ones?" asked Senate Governmental Affairs Committee Chairman Fred Thompson, R-Tenn. Summers replied, "its focus on customer service and information technology."

"I don’t think another board is the solution," said ranking Democrat John Glenn, Ohio. "What we need is answers."

A General Accounting Office investigation found serious weaknesses in the controls used to safeguard IRS computer systems, facilities, and taxpayer data. The IRS goal to create a secure computer system "has not been accomplished," said GAO official Dr. Rona Stillman.

"Do you think the IRS recognizes the seriousness of their weakness?" asked Thompson. "They do," however, they have "fallen down on following through, and we will be tracking them," Stillman responded.

Electronic Payments: Nickles expressed concern about the IRS’s ability to handle electronic tax payments. "I think you have a big problem," said Nickles. "Businesses are not ready, banks are not ready."

Businesses with employment tax obligations of over $50,000 will be required to submit their returns electronically by July 1, under IRS rules. About 1.2 millions firms will be affected.

Deputy IRS Commissioner Michael Dolan reassured Nickles that the process was "relatively easy," and that both the IRS and the private sector would be ready. About 300,000 returns have already been filed under the system, he reported.

Hearing Schedule: A series of House Ways and Means Committee and Senate Finance Committee hearings have been announced.

The Ways and Means Oversight subcommittee will hold a hearing on IRS’ electronic deposit system for payroll taxes on April 16.

The Finance Committee will hold the following hearings: April 16 on education tax proposals, and April 17 on revenue-raising proposals.

The Finance committee also will hold a hearing on April 14 about tax freedom day. The Tax Foundation computes the number of days Americans must work before they pay off their tax bill. Tax freedom day this year is May 7.