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Oregon’s Death Tax Creates Major Challenges for Family-Owned Businesses

 

By Lemarr E. Carver, J.D.

 

 

“Spend your money on riotous living –­ no tax; leave your money to your children – the tax collector gets paid first.” – Milton Friedman, Nobel Laureate in Economics[1]

 

It is a truism in America that you will be rewarded for your hard work.  It is this ideal that led many of our ancestors to immigrate to this country.  The Oregon Death Tax has turned this ideal on its head.  This tax unfairly penalizes people who spent their entire lives working hard and accumulating wealth, by forcing their surviving family members to pay a tax which could potentially destroy what the decedent spent his or her life building.   

 

Many events in life are taxed: receiving dividends, selling securities or selling real property.  The death of a loved one should not be one of those taxable events.  At a time when families are grieving, this onerous tax leaps into the picture to punish the hard work and fiscal responsibility of our deceased loved ones.  Supporters of the death tax claim that only the wealthiest Americans are subject to the tax.  This assertion is misguided at best and at worst an outright lie.  For family-owned businesses and farms, it is fairly easy for an estate to surpass the $1 million dollar exemption the death tax currently provides.  At that point, the estate would be taxed at a rate ranging from 10% to 16%.  If the estate is also subject to the federal death tax, the effective rate of taxation could climb to 45.4%.[1] 

 

The elitists in power, far removed from the family businesses and farms that support our communities, do not understand that the lion’s share of the value of the deceased’s estate is composed of the assets which make up the family-owned business.  There is often little cash on hand to pay the death tax.  This necessitates the need for the family to sell the business just so they can pay the tax.  In a 2010 interview, Dr. Patrick Fagan captured a glimpse of how the death tax kills off family businesses:

 

When the Anthony Timberlands logging company was started a century ago, there were nearly 20 other privately-owned timber companies in Arkansas.  Today, every one of them, with the sole exception of Timberlands, has been claimed by the death tax – as have the small communities that depended on them.  Many of these companies were bought by foreign corporations.  John Ed Anthony, chairman of Anthony Timberlands, described the market in family-owned companies created by the death tax as a “feeding ground” for corporations – which do not have to pay estate taxes.  This dynamic of the tax code damages rural communities because absentee owners have no personal stake in them.[2]    

           

As if the taxation of one’s death and potential destruction of the deceased’s business were not bad enough, the evidence strongly suggests that the death tax does not generate any substantial revenue.  A 2006 study revealed that the estate tax has never been an important federal revenue source.[3]  In recent decades, it has accounted for only 1 to 2 percent of federal receipts, and many economists argue that even this tiny figure may overstate estate tax revenues. Substantial evidence suggests the estate tax may actually raise zero or even negative federal revenue once the full economic effects of the tax are taken into account.[4] 

 

Furthermore, Oregon’s Death Tax makes the state uncompetitive as compared to states without such a tax.  The presence of Oregon’s Death Tax results in businesses and people migrating to states with more favorable tax laws and deters firms from relocating to Oregon.  According to a 2011 study, states without estate taxes produced twice as many new jobs and their economies grew nearly 50 percent more from 2004 to 2007 than states with such taxes.[5] 

 

So what does this mean for family-owned businesses that stay in Oregon?  These businesses must take steps to deal with the Death Tax.  Some businesses will divert capital away from the business in order to pre-fund their death tax liability.  Other businesses will pay enormous sums of money on life insurance premiums to pay the death tax.  Those taxpayers whose estates meet the applicable filing threshold are also likely to hire estate planning attorneys to sort through the confusion of estate planning and often end up paying nearly as much in preparing for the tax as they do in paying the tax itself.[6]  These additional expenditures hurt family-owned businesses as this is capital that would otherwise be spent investing in the business, buying new equipment, and hiring more workers. 

 

According to a study conducted by Astrachan and Tutterow, estate taxes cause business owners to alter the management of their enterprises in ways that depress economic activity.  They invest less and create fewer jobs than they would if they did not face the prospect of estate taxes.  Those who have paid estate taxes on the assets of a prior generation reported reduced employment and investment as a result.[7]  The study also revealed that business owners spent an average of $33, 137 employing lawyers, accountants, and financial planners to deal with their expected death tax liabilities.[8]

 

The Oregon Death Tax stands in direct opposition of American values that we hold dear.  Hard work, responsible saving, and passing opportunity on to the next generation are honorable actions which should be rewarded.  However, these are actions that the death tax clearly penalizes.    The Oregon Death Tax harms family-owned businesses and discourages values that are uniquely American.  Simply put:  Oregon, it’s time to kill the death tax.

           

 

 

[1] Guin, A., & Arnold, S. (2011). State death taxes issue brief: A current assessment. Retrieved from   

  http://www.nodeathtax.org/uploads/view/2393/state_estate_taxes_report_-_final.pdf

 

[1] Friedman, M. (2001). An open letter from economists on the estate tax. Retrieved from  http://www.nodeathtax.org/uploads/view/2963/miltonfriedmanletterfinal.pdf

 

[2] Fagan, P. (2010). How the death tax kills small businesses, communities - and civil society. Backgrounder, (2438), 

   Retrieved from http://report.heritage.org/bg2438

 

[3] Chamberlain, A., Prante, G., & Fleenor, P. (2006). Death and taxes: The economics of the federal estate tax. Tax  

   Foundation Special Report, (142), Retrieved from

   http://www.nodeathtax.org/uploads/view/840/economics_of_estate_tax.pdf

 

[4] Chamberlain, A., Prante, G., & Fleenor, P. (2006). Death and taxes: The economics of the federal estate tax. Tax  

   Foundation Special Report, (142), Retrieved from

   http://www.nodeathtax.org/uploads/view/840/economics_of_estate_tax.pdf

 

[5]Guin, A., & Arnold, S. (2011). State death taxes issue brief: A current assessment. Retrieved from http://www.nodeathtax.org/uploads/view/2393/state_estate_taxes_report_-_final.pdf

 

[6] Guin, A., & Arnold, S. (2011). State death taxes issue brief: A current assessment. Retrieved from

   http://www.nodeathtax.org/uploads/view/2393/state_estate_taxes_report_-_final.pdf

 

 

[7] Astrachan, J., & Tutterow, R. (1996). The effect of estate taxes on family business: Survey results. Retrieved from

   http://coles.kennesaw.edu/centers/cox-family-enterprise/cox-family-documents/EstateTaxes.pdf

 

 

[8] Id.

Economic Effects of the Estate Tax

By Connor Harrington

Historical Overview:

 

Congress initially enacted temporary estate taxes to finance military activities.  For example, an inheritance tax was imposed by the Tax Act of 1862 to help finance the civil war, but was repealed after the war.[i]  Congress made the federal estate tax permanent in 1916.[ii]  The Revenue Act of 1916 contained an estate tax that exempted estates worth less than $50,000 (an exemption equivalent to over $11 million in today’s dollars). 

The Tax Reform Act of 1976 created the current federal estate tax system, which includes a traditional estate tax, a gift tax (a tax on transfer of wealth during life), and a generation-skipping transfer tax (a tax on transfers to generations at least twice removed). 

The justification for the estate tax has historically been that the estate tax raises revenue and reduces income inequality.  However, the estate tax is the smallest source of revenue of any major tax in the United States.  As the chart to the right demonstrates, estate tax revenues in 2012 were estimated at a mere 0.42% of total major federal tax revenues.[iii] 

The estate tax creates a “die broke” mentality amongst taxpayers subject to estate taxes.  Such a mentality encourages consumption rather than savings, because untaxed consumption becomes cheaper than savings for taxpayers who intend to pass their wealth to family members. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oregon Estate Tax: 

 

Under the federal estate tax system, individual estates worth less than $5.34 million in 2014 are exempt from federal estate taxation, with amounts in excess of the exemption being taxed at a 40% rate.  However, in Oregon, the exemption level before state estate taxes are imposed is only $1 million, with estate tax rates of 10% - 16%.  Due to its low exemption level, Oregon has recently been ranked as having one of the scariest state death taxes in the country.[iv]

 

The Oregon Office of Economic Analysis has forecasted Oregon Estate Tax revenues for 2013-14 to contribute $93,691,000 to the general fund.  Total 2013-14 general fund revenues are forecasted at $7,617,882,000, meaning Oregon Estate Tax revenues represent a mere 1.2% of forecasted general fund revenues for 2013-14.[v]  Similarly, Oregon Estate Tax revenues for 2014-15 are forecasted to contribute $104,571,000 to the general fund.  Total 2014-15 general fund revenues are forecasted at $8,163,974,000, meaning Oregon Estate Tax revenues represent 1.3% of 2014-15 forecasted general fund revenue.  The small percentage of revenue gained from the state estate tax is disproportionate to the burden it places on Oregonians who are subject to the Oregon Estate Tax. 

 

Calculating the amount an individual may owe under the Oregon Estate Tax is complicated and fact dependent.  The tax rate on an estate valued at over $1 million may be anywhere between 10% and 16%, depending on the size of the estate, estate planning measures taken, and other factors.  If an estate located in Oregon is worth more than $5.34 million, then it will also be subject to the federal estate tax.  Thus, an estate in Oregon worth more than $5.34 million will owe state and federal estate taxes at a combined tax rate of between 50% and 56% of the estate’s value. 

 

Such a result not only requires owners of large estates to engage in expensive estate planning, but also encourages Oregon residents with large estates to re-locate in order to avoid Oregon’s Estate Tax entirely.  Additionally, a study conducted in 2012 revealed that phasing out the Oregon Estate Tax starting in 2013 would result in increased employment, personal income, and net in-migration of new taxpayers by 2017.[vi]  Furthermore, the elimination of the Oregon Estate Tax would provide incentives for existing Oregonians to save and invest more in the economy, thereby creating more jobs, income and revenues to support public services. 

 

Effect of Estate Taxes on Small Businesses: 

 

Estate taxes are particularly harmful to family owned businesses and farms.  Although the amount of estate tax owed is based on asset value, the tax must be paid out of income.  Consider two examples articulated by the Heritage Foundation:[vii]

 

Take a family-run store yielding a 10 percent return each year. Taxes reduce the return to 5 percent.  If the owner dies and his estate is subject to the 55 percent estate tax rate, how do the heirs pay the bill? They could send 55 percent of the

store’s inventory or other physical assets to Washington, except Treasury does not accept payment-in-kind, only cash.  Devoting the entire 5 percent annual return, the heirs could pay off the estate tax in only 11 years, except Treasury wants the money now. The heirs could borrow from the bank at 9 percent (4.5 percent after tax) and pay off the loan in 50 years, but rather than run the store for 50 years for free, they probably would sell.

 

Consider the small farmer who owns land near an urban area. His farm would yield a 10 percent return only when it is valued as farmland. But tax law requires that the asset be valued at its “best use,” lowering the pre-tax return to 5 percent (2.5% after tax). In this case, even the 50-year bank loan will not save the farm.

 

Congress has aimed to reduce the hardship for small businesses and farmers in general, but ultimately, heirs are left to choose between ownership of an unprofitable business for a number of years or selling that business to pay estate taxes. 

 

 

[i] Gary Robbins, Estate Taxes: An Historical Perspective, Backgrounder, The Heritage Foundation, 16 Jan. 2004, available at: http://www.heritage.org/research/reports/2004/01/estate-taxes-an-historical-perspective last visited 27 Dec. 2013. 

 

[ii] Representative Kevin Brady, Cost and Consequences of the Federal Estate Tax, Joint Economic Committee Republicans, 25 Jul. 2012, available at: http://www.jec.senate.gov/republicans/public/?a=Files.Serve&File_id=bc9424c1-8897-4dbd-b14c-a17c9c5380a3 last visited 27 Dec. 2013. 

 

[iii] David Block and Scott Drenkard, The Estate Tax: Even Worse Than Republicans Say, Tax Foundation, 04 Sept. 2012, available at: http://taxfoundation.org/article/estate-tax-even-worse-republicans-say last visited 27 Dec. 2013. 

 

[iv] Sandra Block, States With Scariest Death Taxes – Estate Taxes, Inheritance Taxes, Kiplinger, 27 Dec. 2013, available at: http://finance.yahoo.com/news/states-scariest-death-taxes-estate-050001861.html last visited 30 Apr. 2014. 

 

[v] Oregon Office of Economic Analysis, Revenue Forecast, Appendix B, Table B.1 General Fund Revenue Statement - 2013-15, available at: http://www.oregon.gov/DAS/OEA/docs/economic/appendixb.pdf  last visited 30 Apr. 2014.  

 

[vi]  Eric Fruits, Ph.D. and Randall J. Pozdena, Ph.D., Oregon’s Death Tax: An Impediment to Economic Growth, In-Migration, and Public Revenue, February 2012, available at: https://s3.amazonaws.com/familybusinesscoalition.org/assets/Studies/OR+Death+Taxes.pdf last visited 30 Apr. 2014. 

 

[vii] Gary Robbins, Supra at pg. 2.   

Oregon Estate Tax Timeline

By Connor Harrington

 

1903:  Oregon first enacted inheritance tax; rate was a range (1% to 6%) based on the recipient’s relationship to the decedent and the amount of property received.

 

1977:  Oregon began phasing into a pure pick-up tax state based on the federal state credit pass through.

 

1987:  Oregon became a purely pick-up tax state (estate tax tied to federal law and state tax credit).

 

1997:  Oregon gift tax repealed.  Federal Taxpayer Relief Act passed, which gradually increased the gross estate value filing threshold from $600,000 in 1997 to $1 million in 2006.       

 

2001:  President Bush signed Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which phased out the available state tax credit from 100% in 2001 to 0% in 2005.  The credit was replaced with a deduction for state death taxes paid.  This required Oregon to rewrite its estate tax law or no longer receive any estate tax income.  Oregon coupled to the December 2000 federal tax code and set a threshold of $1 million. 

 

2003:  Oregon legislature passed HB 3072.  Connected Oregon’s estate tax to federal Taxpayer Relief Act of 1997 for deaths in 2003 and thereafter (no longer connected to EGTRRA).  References in statute to IRC still connected to December 2000 IRC.  Estate taxes due on decedent’s estate if value is: $700,000 after Jan. 1, 2003; $850,000 after Jan. 1, 2004; $950,000 after Jan. 1 2005; and $1 million after Jan. 1, 2006. 

 

2007:  Oregon legislature passed HB 3201.  Oregon passed tax breaks for natural resource, commercial fishing, and forestland properties valued at $7.5 million or less if the property is transferred to a spouse or certain family members.  Natural resource property must be used as natural resource property for at least 5 of next 8 years after decedent’s death or apportioned taxes become due. 

2010: Federal estate tax repealed for one year. 

 

2011:  Oregon legislature passed HB 2541.  Estates valued at over $1 million taxed at rate ranging from 10% - 16%.  References in statute to IRC connected to December 2010 IRC.  Federal rates set at a $5 million exemption and a 35% top rate through 2013. 

 

Sources:  ORS 118.010; Laws 1997, c. 99, § 7; Laws 2003, c. 806, § 6; Laws 2011, c. 526, § 3, eff. Sept. 29, 201; Wendy Johnson, Oregon Law Commission Memorandum to House and Senate Revenue Committees, December 15, 2010, Willamette University College of Law. 

Why Oregon Should Eliminate the Estate Tax

By Connor Harrington

The Estate Tax is a tax on your right to transfer property upon death.  It consists of an accounting of everything you own or have certain interests in at the date of death.  Estate taxes used to be a headache for only the super wealthy, but low exemption levels in state estate tax systems have become particularly harmful to family owned businesses and farmers.

 

Under the federal estate tax system, individual estates worth less than $5.34 million in 2014 are exempt from federal estate taxation, with amounts in excess of the exemption being taxed at a 40% rate.  However, in Oregon, the exemption level before state estate taxes are imposed is only $1 million, with estate tax rates of 10% - 16%. 

 

Small businesses with non-liquid assets, such as farms, are disproportionately harmed by Oregon’s Estate Tax.  When the owner of a small business valued at over $1 million dies, the deceased owner’s heirs are left to pay the Oregon Estate Tax.  If the owner of a family-run store yielding 5% - 10% return each year dies and is subject to the 10% - 16% Oregon Estate Tax, how do the heirs pay the bill?  The heirs of the family-run store have the choice of owning an unprofitable business for a number of years while the estate tax is paid off or selling the business to cover the tax bill. 

 

Oregon is one of only 15 states that impose state estate taxes on residents.  In the last four years, Indiana, Kansas, North Carolina, Ohio and Oklahoma have all repealed their state estate taxes, and Tennessee is on its way out by Jan. 1, 2016.  Recently, both Maryland and New York passed legislation to gradually raise their state’s exemption amount to match the federal exemption.  It’s time that Oregon re-thinks the implications of the Oregon Estate Tax.   

 

The justification for Oregon’s Estate Tax is that it raises revenue for the state.  In reality, Oregon’s General Fund receives an average of $100 million in revenue from the estate tax per year, representing roughly 1% of the entire General Fund.  The small percentage of revenue gained from the estate tax does not outweigh the harmful effects the estate tax imposes on small business owners.   

 

Common Sense For Oregon has two legislative solutions to eliminate the harmful effects of the Oregon Estate Tax.  The first approach is to eliminate the Oregon Estate Tax entirely.  The second approach is to protect family giving from taxation.  Under the first approach, Oregon residents would only be subject to federal estate taxes.  Under the second approach, state and local taxes would be prohibited as to any property that is given from one family member to another family member.

Federal Landownership in the U.S.

By Connor Harrington

Roughly 28% of the 2.27 billion acres of land in the United States is owned by the federal government.[1]  Of the 635-640 million acres owned by the federal government, four agencies administer 609 million acres of that land: the Forest Service, the National Park Service, the Bureau of Land Management, and the Fish and Wildlife Service.[2]  All of which, are in the Department of the Interior.  Most of this land is in the western states and Alaska. 

 

In Oregon, approximately 53%, or 32,665,403 acres, is federal land.[3]  The Forest Service (USFS) administers 15,687,556 acres, the National Park Service (NPS) administers 192,020 acres, the Fish and Wildlife Service (FWS) administers 574,510 acres, the Bureau of Land Management (BLM) administers 16,134,191 acres, and the Department of Defense administers 77,153 acres.

 

Source:  The New York Times. The Open West, Owned By The Federal Government.  March 23, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Land Ownership by State:[4]

State                                                    % of State

 Alabama                                                2.7%

    Alaska                                                    61.8%

     Arizona                                                   42.3%

     Arkansas                                                   9.4%

     California                                                47.7%

      Colorado                                                 36.2%

       Connecticut                                              0.3%

   Delaware                                               2.3%

 District of Columbia                           21.6%

   Florida                                                 13.1%

 Georgia                                               5.2%

    Hawaii                                                 20.3%

    Idaho                                                   61.7%

 Illinois                                                 1.1%

  Indiana                                                 1.5%

  Iowa                                                    0.3%

  Kansas                                                 0.6%

Kentucky                                            4.2%

  Louisiana                                             4.6%

Maine                                                  1.1%

 Maryland                                             3.1%

 Massachusetts                                     1.6%

   Michigan                                             10.0%

  Minnesota                                           6.8%

  Mississippi                                           5.0%

 Missouri                                              3.8%

    Montana                                              28.9%

 Nebraska                                             1.1%

   Nevada                                                81.1%

  New Hampshire                                  13.5%

  New Jersey                                          3.7%

  New Mexico                                       34.7%

New York                                           0.7%

North Carolina                                    7.7%

North Dakota                                      3.9%

Ohio                                                    1.1%

Oklahoma                                            1.6%

  Oregon                                                53.0%

Pennsylvania                                       2.1%

Rhode Island                                      0.8%

South Carolina                                    4.6%

South Dakota                                      5.4%

  Tennessee                                            4.8%

Texas                                                   1.8%

  Utah                                                    66.5%

Vermont                                              7.6%

Virginia                                               9.2%

  Washington                                         28.5%

West Virginia                                      7.3%

Wisconsin                                            5.3%

Wyoming                                            48.2%

Total                                                   27.7%

 

 

 

[1] See, CRS Report R42346, Federal Land Ownership: Overview and Data, by Ross Gorte and Carol Vincent, February, 2012.  Available at http://www.fas.org/sgp/crs/misc/R42346.pdf (last visited Jan. 7, 2014).     

 

[2] See, CRS Report R42346, Supra. 

 

[3] See, CRS Report R42346, Supra at 5. 

 

[4] See, CRS Report R42346, Supra at 4-5. 

List of States With/Without Estate Tax

 

History of Hawaii's Estate Tax Law

By Connor Harrington

In 1983, Hawaii adopted The Estate and Transfer Tax Reform Act of 1983.  When this law was enacted, Hawaii’s death tax, which used to be an inheritance tax, became an estate tax.  Hawaii’s estate tax was called a “pick-up” tax, because it allowed the state to pick up for itself part of the estate tax which the federal government could collect.  The amount that Hawaii could collect was the maximum amount that the federal government allowed as a credit for state death taxes against the federal estate tax. 

 

Later, the federal government passed the Economic Growth and Tax Reconciliation Act of 2001, which phased out the state death tax credit at the rate of 25% a year starting in 2002.  The amount of federal death tax which Hawaii got to keep was reduced each year, until it became zero in 2005.  From 2005 to 2010 there was no state death tax in Hawaii.

 

In April 2010, Governor Lingle vetoed the proposed Hawaii Estate Tax Law, but the Hawaii legislature overrode the Governor’s veto.  After April 30, 2010, anyone who died with assets in Hawaii had to pay the state Estate and Generation-Skipping Transfer Tax, in addition to federal taxes.  However, the 2010 Estate Tax Law was criticized as poorly drafted, ambiguous, and unclear. 

 

As a result, on July 25, 2012, the Estate and Generation-Skipping Tax Reform Law was passed to remedy problems created by the 2010 law.  This fix made the exemption from the Hawaii estate tax match the federal estate tax exemption.  By tying the state exemption to the federal exemption, the Hawaii Legislature’s intent was to simplify the filing of returns and minimize taxpayers’ burdens in complying with the tax law, in addition to raising revenue.    

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