Most policy-makers agree that the transfer tax system -- more commonly known as the estate tax, the gift tax and the generation-skipping tax -- needs some sort of reform. What type of reform, and how far it should go, is a matter of heated debate.
Now, an American Institute of Certified Public Accountants (AICPA) task force, led by Roby Sawyers, associate professor of accounting at North Carolina State University, is weighing in with its professional opinion:
Modifying the estate tax by increasing the exemption and lowering tax rates on assets above the exempt amount -- or completely and rapidly repealing the taxes altogether -- would be the best reform measures, according to the results of a yearlong study by Sawyers and his AICPA task force.
The task force’s recommendations were reinforced in a survey of CPAs who provide estate planning and compliance services to taxpayers.
Debate rages over the transfer tax system as members of Congress attempt to achieve a fair system of taxation designed to both maintain a revenue stream and reach a variety of policy goals. Currently, about 2 percent of U.S. taxpayers are subject to the estate tax.
Although the transfer tax system historically targeted the very wealthiest Americans, a greater number of moderately wealthy folks with illiquid assets -- including small businessmen and farmers, who traditionally have large amounts of money tied up in land and equipment; retirees who have recently profited from lucrative stock and retirement funds; and home owners who have seen real estate values skyrocket -- are apt to be taxed by this system in the near future, Sawyers says.
The first $675,000 in assets is currently exempt from estate and gift taxes, but any amount greater than that is taxed at rates ranging from 37 percent to 55 percent. The task force would like to see the first $5 million exempt, and then lower rates not exceeding the highest income tax rate (currently 40 percent) assessed on amounts over the exemption.
"Exemptions are very low, tax rates are very high, and neither have been changed to keep up with inflation," Sawyers said. "People affected by this tax are not always those you’d think about as wealthy individuals."
Sawyers says that these modifications would essentially serve as repeal for the vast majority, as changes would dramatically reduce the number left on the estate tax rolls to roughly 5 percent, which would have the added benefit of reducing the administrative burden absorbed by the Internal Revenue System. Although nearly 95 percent of current estate taxpayers would become exempt from the tax, only 50 percent of the revenue would be lost, the report asserts.
Repealing the transfer tax system is another popular option. Although the study does not oppose repeal, it suggests that repeal take place rapidly, rather than in gradual phases.
"In eight to 10 years, the makeup of the Congress and the White House could be very different," Sawyers said. "There’s no certainty that later Congresses will continue what this Congress starts."
Phase-outs also provide little immediate relief to those with illiquid assets. Present phase-out plans reduce tax rates over the years, keeping most taxpayers on the estate tax rolls. The task force recommends a phase-out that increases exemption amounts and lowers tax rates, which would immediately eliminate taxpayers and lower the burden on taxpayers that remained on the rolls.
Complete repeal also presents a few more problems than modification of the present system, the study says. Elimination of a gift tax would present opportunities for an increase in income tax avoidance schemes. Lost revenue would necessitate finding $29 billion from other sources; this number could easily rise to $50 billion in 10 years.
Individual states would also be affected as state revenues in many cases are tied to the federal transfer tax. The study says that total state revenues from transfer taxes exceeds $7.5 billion, including nearly $183 million in North Carolina. Repeal would most likely force states to establish their own systems of taxation, which could be fraught with complexity in implementation and administration.
The AICPA is the national professional institution of CPAs, with more than 350,000 members. Copies of the full report or the executive summary can be downloaded from the AICPA’s Web site at www.aicpa.org.