Center for Non-Profits - Estate Tax Update

Center Logo

Congress Passes Tax Cut Package - Phases Out Estate Tax, Sunsets in 2010

(Posted 6/4/01)

On May 26, 2001, both houses of the U.S. Congress passed the House/Senate conference agreement version of sweeping tax cut legislation, which includes a gradual repeal of the federal estate tax. This variation of the tax cut package sought by President Bush is now awaiting his signature.

A major initiative of President Bush's tax cut plan revolved around the repeal of the Federal estate tax. This part of the tax cut passed the U.S. House of Representatives in April. The entire Senate tax bill, including the estate tax provisions, passed by a 62-38 vote on May 23, followed by the conference agreement, which resolved the differences between the House and Senate versions.

The tax bill, as passed, mandates both a gradual lowering of the rates of taxation and a gradual raising of the taxable values for estates over an eight-year period until 2009. In 2010 this bill does ultimately repeal the estate tax; however, under budget rules, the entire tax bill is subject to a sunset provision, meaning that its provisions will expire at midnight on December 31, 2010. Therefore, the repeal of the estate tax and many of the accompanying tax cuts will last for only one year and will have to be re-authorized by Congress in 2011 in order to stay in effect.

Highlights of the Estate Tax Provisions

Currently, the estate tax is only applied estates valued at $675,000 and above. Under the newly passed tax legislation, the graduated implementation will bring that exemption will rise to $1 million in 2002, with the threshold increasing gradually to $3.5 million by 2009. Also, under the new tax bill, the estate tax rates will be gradually decreased over the next few years as this taxable estate threshold rises. By 2007, that rate will gradually lower to 45 percent. Also, the family-owned business deduction will be repealed by 2004.

By 2005, state governments will no longer receive revenue through the federal estate tax, a provision that will remove billions of dollars out of State revenues in upcoming years. Under current federal estate tax law, taxpayers receive a dollar-for-dollar credit against their federal estate tax liability for state estate tax payments up to a specified amount. Effectively, the state receives a share of the estate tax payment made to the federal government, at no extra cost to the taxpayer. In 2000, for example, New Jersey received $158 million in credit against the estate tax. Since the state-level tax is tied directly to the federal estate tax, the federal repeal is tantamount to a state-level repeal for all or most of the tax and a corresponding loss of revenue.

Impact on Charitable Sector

There has been substantial debate regarding the impact of repeal on the non-profit community, charitable donations and bequests, and spending on government programs.

During the debate on the tax package, both of New Jersey's Senators, Jon Corzine and Robert Torricelli, voted for unsuccessful amendments that would have reformed the estate tax as opposed to repealing it outright. Opponents of repeal fear that the new law will dramatically reduce charitable bequests and the amounts of money spent on government programs as well as increase the divide between rich and poor in America.

The Joint Committee on Taxation has estimated that repealing the estate tax will cost the federal government approximately $186 billion over a 10-year phase-out period from 2002 to 2011. After the phase-out period, $800 billion to $1.3 trillion, or $80 to $130 billion annually, would be lost in the following decade from 2012-2021.

Studies done by the U.S. Department of Treasury and Duke University indicate that charitable donations may decline by as much as 12 to 45 percent under the estate tax repeal because people would have less of an incentive to give.

The Center had joined with numerous other groups at both the local and national level to lobby against repeal of the tax. Although national repeal opponents are claiming a partial victory because the complete repeal is only in effect for one year, they also point out that significant effort will be required to prevent reauthorization of the repeal before it sunsets in 2010.

For more information about the estate tax repeal legislation, please contact Brian Berness at the Center for Non-Profit Corporations at (732) 227-0800 or by e-mail at BrianB@njnonprofits.org.

Additional Web resources on this issue:

OMB Watch Estate Tax Resource Page: http://www.ombwatch.org/npadv/estatetax/

Center on Budget and Policy Priorities: http://www.cbpp.org.

Return to Main Advocacy/Public Education page

Return to Home Page