Baker Institute expert: Estate tax exclusion changes the dynamics of planning and compliance

Jeff Falk
713-348-6775
jfalk@rice.edu

Baker Institute expert: Estate tax exclusion changes the dynamics of planning and compliance  

HOUSTON – (April 25, 2018) – The substantial increase in the estate tax exclusion, a provision in the Tax Cuts and Jobs Act of 2017, changes the dynamics of estate tax planning and compliance and will impact taxpayers and federal and state governments, according to an expert at Rice University’s Baker Institute for Public Policy.

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Joyce Beebe, fellow in public finance, outlined her insights in a new issue brief, “The Estate Tax After the 2017 Tax Act,” which examines the implications of this change.

The Tax Cuts and Jobs Act of 2017 (TCJA) leaves the federal wealth transfer tax system in place but temporarily doubles the exclusion amount for estate and gift taxes to $11.18 million per individual or $22.36 million per married couple until the end of 2025. In 2026, absent congressional action, the base exclusion amount will revert to $5 million, indexed for inflation, Beebe said.

Statistics showed that an estate tax is collected from only 2 out of every 1,000 people upon their death, Beebe said. For the 5,219 taxable estate tax returns filed in 2016, the total value of gross estates was $108 billion, which resulted in $18 billion in tax revenue. For gift and generation-skipping transfer taxes, 2,719 taxable returns collected more than $2 billion in 2016. Estate and gift taxes combined collected over $21 billion in 2016, which represented less than 0.7 percent of the federal government’s revenue, according to Beebe’s brief.

The Joint Committee on Taxation estimated that after the TCJA doubled the exclusion, less than 2,000 estate tax returns filed will be taxable, representing a 60 percent reduction in taxable returns, Beebe said.

“Over the next 10 years, this provision would reduce federal tax revenue by $83 billion, which encompasses a reduction of $8 billion to $10 billion on an annual basis,” she wrote. “Researchers have cited several different reasons for this phenomenon of low revenue collection. Some indicate that high exclusion amounts as well as the unlimited spousal and charitable contribution deductions are the main causes, while others say it is a consequence of extensive and effective planning, making the estate tax a ‘voluntary tax.’”

Since 2001, states have gradually moved away from the estate tax as a stable revenue source, Beebe said. “Many states either repealed the tax or increased the exclusion amounts. In 2018, only 12 states plus Washington, D.C., levy estate taxes, all with different structures from the federal code,” she wrote. “New Jersey and Delaware dropped their estate taxes within the last year, even though both have budget shortfalls. State officials stated that a major reason for eliminating the estate tax was tax competition — they believe that if wealthy senior citizens do not move to other states to avoid paying state estate taxes, the state may eventually collect more revenue from state personal income taxes, property taxes or sales taxes to recoup the lost estate tax revenue.”

Beebe said that after the TCJA, states may feel more pressure to raise their exclusion levels or repeal estate taxes altogether. “With a lower federal estate tax to deduct against a state estate tax, the real cost of a state estate tax is higher for residents,” she wrote. “States may need to balance the costs of managing the system, the volatility of revenue and the amount of revenue collection to make informed decisions about whether to keep the estate tax. Additionally, if the federal estate tax is repealed in the future, states would have to bear the full administrative burden of collecting estate taxes themselves — they would no longer be able to rely on the IRS to issue guidance, regulations and private letter rulings, which would further increase the costs of collection.”

Given the current political environment, government deficit levels, the recent increased exclusion amount in 2017 and the perceived wealth concentration in the U.S., a targeted full repeal of the federal estate tax is unlikely in the next few years, Beebe said.

“However, a reversal to the pre-TCJA low exclusion level is equally unlikely, at least until the next presidential election,” she wrote. “There was significant momentum to repeal the federal estate tax during the 2016 presidential campaign and throughout the tax reform discussion in 2017, but it was ultimately not adopted in the TCJA. The TCJA relied on the budget reconciliation to pass the legislation, a process that would be similarly challenging if not more difficult to accomplish in the next two years. After 2020, a more likely outcome is either the increased exclusion will be made permanent, or the exclusion amount will be adjusted prior to the 2026 sunset of the bill. Stakeholders on both sides will continue to advocate for changes; however, if history is any guide, changes to the exclusion amount — either permanency or reduction — are unlikely to happen until the dawn of 2026 is upon us.”

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Related materials:

Issue brief: www.bakerinstitute.org/media/files/files/328b0f06/bi-brief-041718-cpf-estatetax.pdf.

Beebe biography: www.bakerinstitute.org/experts/joyce-beebe.

Baker Institute Center for Public Finance: www.bakerinstitute.org/center-for-public-finance.

Founded in 1993, Rice University’s Baker Institute ranks among the top five university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blogs.chron.com/bakerblog.