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House Democrats proposed a change to the estate tax that would lead to more households having to pay up each year.
But just how many people actually pay the tax, and how might the proposal change that share?
The short answers: Few people pay it now, and the share wouldn’t grow by much.
“It’s a tiny fraction of decedents who pay any estate tax at all,” said Beth Shapiro Kaufman, an estate planner at the law firm Caplin & Drysdale.
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The estate tax, which is owed at death, is a tax on wealth transfer. Taxes are levied on cumulative property like stock and real estate valued over a certain level before they’re passed to heirs.
Lawmakers created the federal estate tax in 1916. Since then, Congress has changed elements like the tax rate and estate size at which the tax applies.
Currently, a 40% federal tax applies to estate values exceeding $11.7 million for single individuals and $23.4 million for married couples.
There were 6,409 estate tax returns filed in 2019, according to IRS data. About 40% of them (2,570 returns) were taxable. They owed $13.2 billion in net estate tax.
Publicly held stock accounted for the biggest portion of property held by taxable estates. It represented $23 billion, or 30%, of taxable estates.
0.2% owe tax
Historically, between 1% and 2% of U.S. adults who die each year owe estate tax, Kaufman said.
But the share fell to about 0.2% annually from 2011 to 2016, according to most recently available IRS data. That’s the lowest percentage on record, dating to 1934.
Democrats on the House Ways and Means Committee proposed and passed a plan to cut the taxable asset threshold to $5 million per individual, the same level as in 2010. (The measure is part of a $3.5 trillion budget plan Democrats are weighing.)
It’s a tiny fraction of decedents who pay any estate tax at all.
Beth Shapiro Kaufman
estate planner at Caplin & Drysdale
In the short-term, the change would likely increase the taxable share to about 0.3% or 0.4% of deceased adults, Kaufman said.
While House Democrats’ proposal wouldn’t significantly raise the share of people subject to estate tax, the policy would raise $52.3 billion over the next five years, according to an estimate from the Joint Committee on Taxation, the nonpartisan tax scorekeeper for Congress. That’s about four times more than tax revenues from 2019 returns.
Declining tax base
The record-low share of estates that owe tax each year is largely attributable to an increase in the taxable asset threshold. That increase effectively reduces the number of estates that owe taxes.
For example, estates of more than $1 million were taxable in the early 2000s. By 2009, that threshold jumped to $3.5 million, and then to roughly $5 million for several years last decade. In 2017, Republicans passed a tax law that doubled the asset threshold to about its current level.
As a result, the number of estate tax returns filed each year decreased by almost 60% from 2010 to 2019, according to the IRS.
The asset threshold would roughly halve after 2025, even without action by Democrats, due to a provision in the Republican tax law.
Total tax revenues
Tax revenues from wealthy estates have also been low by historical standards in recent years.
The $13.2 billion in net estate tax for returns filed in 2019 represented about 0.4% of federal tax receipts in 2018 (i.e., the corresponding year of death).
By comparison, revenue from federal estate and gift taxes has generally hovered between 1% and 2% of federal budget receipts since World War II, with limited exception, according to a historical account of the estate tax by IRS economists.
The share of revenue hit a post-war high of 2.6% in 1972. (There was a top 77% federal estate tax rate from 1942 to 1976; estates of more than $60,000 were subject to tax, according to the IRS account.)
House Democrats may not be successful in wrangling more estates into taxation. President Joe Biden didn’t propose such a measure as part of his tax plan issued earlier this year. Senate Democrats haven’t yet unveiled their plan to levy higher taxes on wealthy Americans to help fund the $3.5 trillion budget measure.
Congressional Republicans have generally been loath to scale back any parts of their 2017 tax law.
“Proponents have frequently advocated that these taxes are effective tools for preventing the concentration of wealth in the hands of a relatively few powerful families, while opponents believe that transfer taxes discourage capital accumulation, curbing national economic growth,” according to IRS economists.