States Protest Senates Estate Tax Reform Plan

The U.S. Senate is expected to approve today (5/22) its $1.35 trillion tax reform package after rebuffing a stack of amendments last night that included a proposal touted by state officials as a more equitable approach to repeal of the federal estate tax by 2011.

Pushing aside all debate over the merits of the idea as a whole, a majority of the nation’s governors said yesterday that they are “absolutely united in opposing any action that would discriminate against states in the phase-out of the state and federal estate taxes.”

Among aspects of the bill to survive proposed changes last night is a provision that would cut the states’ share of revenues from the so-called “death tax” by 50 percent next year and eliminate it wholesale by 2005.

If the legislation retains its current form, the federal government would continue to receive death tax revenues until 2011.

“It certainly would hit them at the wrong time. The estate tax is not a major revenue source for states. On the other hand, it’s money they would like not to lose,” said Don Boyd, a former New York state budget analyst who directs the fiscal policy program at the Nelson A. Rockefeller Institute of Government in Albany.

The $1.6 trillion tax reform plan backed by the Bush administration and approved by the House of Representatives phases out the tax for both state and federal coffers proportionately over ten years. The governors endorsed an amendment sponsored by Sen. Bob Graham (D-Fla.) that would have inserted a similar provision in the Senate bill.

Spokesmen for the National Governors’ Association said the governors would now shift focus to win inclusion of the Graham amendment when lawmakers meet to hammer out differences in the House and Senate legislation.

In a May 21 letter sent to Senate Finance Committee chairman Sen. Charles Grassley (R-Iowa), Montana Sen. Max Baucus, the committee’s ranking Democrat and party leaders Sen. Trent Lott (R-Miss.) and Sen. Thomas Daschle (D-S.D.), the governors said that the new plan “would have abrupt, significant adverse impacts on state revenues at a particularly onerous time for many states.”

State budgets could lose between $50 billion and $100 billion in estate tax revenues over the next ten years under the Senate plan, the governors said. Federal estimates have calculated impact to the federal treasury as high as $236 billion.

The estate tax currently applies to inheritances above an exemption level of $675,000. Imposed at a 37 to 55 percent rate, the 85-year old tax has been dubbed the “death tax” by opponents because it is levied on assets transferred to others at the time of a person’s death. Repeal of the tax is especially popular with farmers and owners of small businesses.

Boyd said that the states typically direct estate tax revenues into their general funds where it helps finance top priorities such as K-12 and higher education and healthcare programs for the poor and elderly.

Thirty-four governors signed yesterday’s letter, including 18 Republicans, 14 Democrats and the two independents from Maine and Minnesota. Spokesmen for the National Governors’ Association (NGA), headquartered in Washington D.C., said they expected more governors to sign the letter by the close of business today (5/22).

State lawmakers sent a similar letter signed by state senators Jim Costa (D-Calif.) and Steve Saland (R-N.Y.), president and president-elect of the National Conference of State Legislatures, to U.S. senators on May 17.