Why Oregon Should Reform, Not Repeal, the Progressive Estate Tax

Executive Summary

Widespread interest in the estate tax is remarkable, given that it collects nothing from 98 percent of the deaths that occur each year. Lawmakers would be hard pressed to find another tax that impacts so few and exempts so many of their constituents.

The estate tax is levied when large accumulations of wealth are transferred from the estates of people who have died to the estates’ beneficiaries. Special provisions lighten or eliminate the estate tax on farms and small businesses. Only a small fraction of family farms or businesses are subject to the estate tax and for those few, the business or farm usually does not constitute a majority of the estate. The tax recognizes that extraordinary accumulations of wealth happen, in part, thanks to the investments of the broader society, and protects against the ill effects of concentrations of wealth in the hands of a few.

While Congress’ 2001 decision to gradually repeal the federal estate tax had no immediate impact on Oregon’s tax, this paper discusses why Oregon’s inheritance tax statutes are out of date and need reform.

• Oregon cannot afford the $90 million biennial revenue loss that would result from proposals to repeal estate tax. Reducing taxes on a small number of the wealthiest estates is inappropriate at a time when Oregon is cutting services that affect thousands of people, especially low-income families. In 2000, only 424 estates, 1.4 percent of Oregonians who died, paid the state inheritance tax.
• Eliminating the estate tax would make Oregon’s tax system even more regressive.
• The estate tax provides a way for Oregon to tax income that otherwise would not be taxed. Heirs still receive a large capital gains tax break. The accrued but not taxed capital gains – the “stepped up” basis that the heirs receive – will cost Oregon $444.3 million in the upcoming biennium.
• Oregon should connect to the federal Taxpayer Relief Act of 1997. Estates will pay no more in Oregon estate taxes than they do under current practice, and the tax they pay will lower their federal tax liability. Oregon should not connect to the 2001 federal estate tax changes, which would eliminate Oregon’s estate tax.

Oregon is not alone in looking for appropriate ways to continue to collect estate taxes. Twelve states have recently taken steps to “decouple” from the 2001 federal tax changes.