Estate Tax Should Change With Changing America
Congress enacted the estate tax in 1916. America has changed a lot since then. We need to change the estate tax, too.
Since 1916, America has made tremendous advances in science, technology, transportation and communications. The standard of living for the average American — measured by gross domestic product per person — is 15 to 25 times better today than in 1895. America’s colleges and universities educate 100 times more students than they did in 1900.
In 1916 Congress enacted the permanent estate tax as part of a raft of reforms that made up the progressive era. During that important period, Congress enacted laws on child labor, the direct election of U.S. Senators, women’s right to vote and the progressive income tax.
Congress enacted many of these laws as a reaction to vast and reckless fortunes accumulated by “robber barons” during the latter half of the 19th century. Congress put these laws in place to diffuse power and opportunity among a broader swath of the American people.
In large measure, these reforms worked. They rest as the foundation for subsequent important progressive reforms like Social Security, securities laws, the Voting Rights Act, Medicare and Medicaid.
President Theodore Roosevelt said that the estate tax was meant to apply to great wealth. But while the progressive income tax has successfully shifted the tax burden onto those who are best able to pay, the estate tax has had dire consequences for many Americans whom Congress did not intend to cover.
The estate tax taxes assets, not income. Thus, it can hit families with valuable family ranches and farms, but modest incomes. As a result, people and businesses often have a difficult time paying the estate tax. Even though relatively few ranchers, farmers and small businesses pay the estate tax in Montana, the tax places a substantial burden on many state residents.
In recent years, Montanans, like many across the West, have seen land values rise significantly. Scenic ranch land in Gallatin County that used to sell for $1,000 an acre, now routinely sells for more than $20,000 an acre. Yet, in the same time, most Montana ranchers and farmers have not seen their incomes rise to 20 times what they were.
Ranchers and farmers often generate very little cash income. They are often land rich, and cash poor. They do their work — and it is hard work — because they love the land. They love to work with their hands. They love to work outdoors.
Because ranchers and farmers often have little cash income, the estate tax threatens that work. Because ranchers and farmers often have little cash on hand, paying the estate tax calls on them to sell off part of the family ranch or farm to pay the tax due.
No ranchers or farmers want to divide up the land that they have worked. Ranchers and farmers often just want to be left alone to do the work they love. It bothers them that some law threatens to break up their family’s ranch or farm. A law that forces family ranchers and farmers to break up their land is a bad law.
Ranchers and farmers with modest incomes are often forced to pay tens of thousands of dollars in insurance premiums to plan for the estate tax. They often have to scale back on business expenditures, such as buying livestock, to pay for those premiums. When Congress enacted the estate tax in 1916, it did not intend to put ranchers and farmers in this position; rather, Congress intended the estate tax for the rich.
That is why I have supported full repeal of the estate tax.
But our nation’s finances are in disarray. Last year, the government ran a record budget deficit. This year the government projects that it will run the third-largest deficit in history. As a result, we simply do not have the votes for repeal right now.
Full repeal of the estate tax would cost $417 billion from 2006 through 2015. That is almost as much as the recently enacted prescription drug benefit over the same period. And that is more than our entire military budget for the wars in Iraq and Afghanistan last year.
That is why I have been working together with like-minded Republicans and Democrats to find a reasonable compromise. My goal — short of repeal — is to make sure that as few Montanans as possible have to pay the estate tax. I want to protect family ranches, farms and small businesses. I want Montana ranchers and farmers to be able to pass on their land to future generations.
I believe a compromise is possible; one that will make sure that not a single Montana farm or ranch will ever be affected by the estate tax again. Such a compromise will take work. It will require Democrats and Republicans to stop listening to the shrill voices of lobbyists and interest groups. It will require Members of Congress to deliver a common sense reform of the estate tax by working together.
If we cannot achieve repeal, we should be able to work together, so that the estate tax affects only the people who can afford to pay it. That would be a progressive reform. And that is a reform that is way overdue.
Sen. Max Baucus (D-Mont.) is the ranking member on the Senate Finance Committee.