Democrats’ $3.5 Trillion Blowout Will Increase the Death Tax for Many Families

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Posted by Isabelle Morales on Tuesday, September 21st, 2021, 4:35 PM PERMALINK

As part of the $3.5 trillion reconciliation package, Democrats have included several provisions that would increase the Death Tax. The Death Tax is fundamentally unfair, hurts job creation and economic growth, and is devastating to family-owned businesses and farms across the country. This tax should not be expanded – it should be repealed. 

Specifically, the package includes three problematic changes to the death tax resulting in a $77 billion tax increase: 

1. Changing the death tax valuation rules. 

Families hit with the Death Tax are allowed two discounts when determining the value of their estate: a lack of control discount and a lack of marketability discount. A lack of control discount can be claimed when a family holds a minority ownership stake in an asset, resulting in the asset holding less value on the open market. A lack of marketability discount applies when an asset held by the family cannot easily be liquidated because of market barriers. Without these discounts, families will be forced to pay taxes on an over-valued asset.  

While this change applies to passive income, many families hold this income as part of their estate plan. Therefore, many family businesses and farms will pay a higher tax under this rule change. 

2. Repealing the TCJA Death Tax reduction.

The Tax Cuts and Jobs Act doubled the Death Tax exemption to $11.18 million for single filers and $22.36 million for married filers. For family businesses, repealing this reduction would be a major tax hike: by the end of the year, the amount of money they can protect from the estate and gift taxes would be cut in half.  

Nearly 70 percent of small business owners consider the TCJA exemption parameters important. 

3. Changing the Grantor Trust rules.  

As Family Enterprise USA explains, this provision would pull “grantor trusts into a decedent’s taxable estate when the decedent is the deemed owner of the trusts. Prior to this provision, taxpayers were able to use grantor trusts to push assets out of their estate while controlling the trust closely.” This provision would also tax a sale from a grantor trust to its owner.  

Because so many family farms and businesses use Grantor Retained Annuity Trusts (GRATS) and other estate planning tools, this change would upend many of these taxpayers’ estate plans, forcing family businesses, farms, and ranches to hire expensive lawyers and accountants to rework their plans.  

The death tax is already a fundamentally unfair and bad tax policy. It is levied on assets that have been taxed previously through income taxes, capital gains taxes, and the corporate income tax. It disproportionately impacts family-owned businesses like farmers and ranchers especially that tend to be asset rich but cash poor. On the other hand, the wealthy often evade the tax. While the mega-wealthy and family farms technically face the same death tax, small business owners cannot afford to hire a small army of lawyers and accountants to exempt large portions of their estates from the tax. Many countries recognize that a high Death Tax is bad tax policy. Currently, the United States has the 4th highest estate and inheritance tax among developed countries, just behind France.  

The tax also hurts jobs and economic growth. Family-owned businesses across the country employ 59 percent of the workforce. Family-owned businesses also generate 54 percent of the U.S. GDP. Importantly, a 2017 study by the Tax Foundation found that the US could create over 150,000 jobs by rolling back the estate tax. Similarly, a 2012 study by the Joint Economic Committee found that the death tax has destroyed over $1.1 trillion of capital in the US economy, which results in fewer jobs and lower wages.  

Finally, the death tax is radically unpopular. A report by NPR found that 76 percent of Americans support full, permanent repeal of the Death Tax. A similar 78 percent, and 67 percent of Democrats, believe “death itself should not be a taxable event. Families should not have to pay taxes just because a family member with some wealth died.” Further, 80 percent of voters, and 73 percent of Democrats, believe “death should not result in the highest tax rates of the entire US tax code…taking more than 40% of someone’s wealth just because they died isn’t fair.” 

By expanding this tax, Democrats will impose new, damaging costs on families, family-owned businesses, farms, ranches, and more. 

Photo Credit: "Family Farm Day" by Lauren G. is licensed under CC BY-ND 2.0.

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