Estate Tax’s Effect on Giving May Not Matter So Much, New Analysis Finds

Now that Democrats are in charge of Congress, fund raisers worried that the estate tax will be repealed have

little reason for concern. Nobody expects that the idea of doing away with the tax altogether will get very far.

But new research suggests that fund raisers’ concern that estate-tax reductions would hurt charitable giving might have been overblown in the first place.

Even though estate taxes have been gradually reduced each year since 2001, the changes do not seem to have caused a drop in charitable bequests. Instead, the percentage of large estates containing such bequests has remained constant or increased, according to an examination of estate-tax filings with the Internal Revenue Service conducted by the Indiana University Center on Philanthropy.

The analysis showed that, from 1995 to 2000, one in five taxable estates contained charitable bequests. After three years in which estate taxes have been reduced, the number of taxable estates leaving such bequests was 21.9 percent in 2004, the latest year for which data are available.

“There is no sign that people are not making bequests because of changes in the estate tax,” says Melissa S. Brown, the Indiana University researcher who released the analysis.

Opposing Arguments

The new research adds to the debate over the question of whether the estate tax has much influence on charitable giving. Some experts such as Diana Aviv, president of Independent Sector, a coalition of charities and foundations, say that the research does not prove that estate taxes have no dampening effect on charitable bequests. The reason: The wealthiest estates provide the majority of bequests and those estates are still subject to the tax.

Ms. Aviv points to studies by economists such as Jon M. Bakija and William G. Gale of the Urban-Brookings Tax Policy Center, in Washington. They have estimated that repealing the estate tax would reduce charitable giving by at least $10-billion annually. They say wealthy people would no longer be motivated to make tax-free charitable gifts as a way to reduce the portion of their estate subject to federal taxes.

But other scholars such as Paul G. Schervish and John J. Havens of the Boston College Center on Wealth and Philanthropy have argued that repealing the estate tax could increase charitable giving. Many wealthy people, they note, intentionally limit the amount they leave to heirs; an estate-tax repeal would leave them with more disposable income and other assets to transfer to charities.

That view seems to be supported by a recent survey of 945 affluent households by Bank of America: Eighty-five percent of those polled said their giving would either increase or stay the same if the estate tax were repealed (The Chronicle, November 9).

Tricky Decisions

When the next Congress considers budget and tax issues, it must decide whether, when, and how to change existing estate-tax laws.

Under current law, the estate tax will be repealed entirely in 2010, completing the phase-out that has been in place since 2001.

Already, changes in the law have trimmed the number of taxable estates from 52,000 in 2000 to 30,276 estates in 2004. That number will be even smaller this year when estates worth less than $2-million are exempt from the tax, up from $1.5-million last year. Before 2002, when the changes in the estate tax first took effect, all estates worth at least $675,000 were subject to taxation.

Capitol Hill aides say they doubt anyone will vote to keep a permanent repeal in place but it is unclear what tinkering will be done to increase the number of estates subject to the tax or the rate of the estate tax.

“There will be an estate tax, the only question is the rate size and exemption level,” says John Buckley, chief tax counsel for Rep. Charles B. Rangel, the New York Democrat who now heads the House Committee on Ways and Means, where most tax legislation originates.

Lawmakers are motivated not just by philosophical issues such as whether an estate tax is fair, but also by concerns about the federal deficit. The estate tax now produces about $20-billion a year, so many lawmakers will want to keep it in place.

But both Democrats and Republicans say the tricky part now is deciding who should be subject to the tax.

Almost no one agrees that the current law, which would make estates worth $1-million subject to the tax again in 2011, is desirable, because rising real-estate values and stock-market returns have made many middle-class estates worth that much.

The analysis by the Center on Philanthropy could help persuade lawmakers to set a higher exemption from the estate tax. In addition to showing that the percentage of wealthy estates with charitable bequests has increased under the current estate-tax law, the analysis also found that the Treasury has not lost much in estate-tax income, even though the rates have been lowered and the number of estates subject to the tax decreased.

In 2004, when estates valued at less than $1.5-million were exempt from the tax and the rate paid by the wealthiest estates was 48 percent — down from 60 percent in 2000 — the IRS still collected $21.5-billion in estate taxes. That was nearly double the amount it collected in 1995 and not that much less than the $23.6-billion received in 2000, a year before the estate-tax reductions began.

Whatever the eventual estate tax, the number of charitable bequests from wealthy estates since 2001 and the Center on Philanthropy’s analysis have already convinced some fund-raising experts that even a full repeal of the tax would be unlikely to depress bequests and other donations.

Says Robert F. Sharpe, a Memphis planned-giving consultant: “From what I know now, repealing the estate tax would have a neutral or possibly positive effect on philanthropy.”

Percentage of Estates That Make Charitable Bequests

Source: Internal Revenue Service and Indiana University Center on Philanthropy

How Much the Federal Government Received From the Estate Tax (In Billions)

Source: Internal Revenue Service and Indiana University Center on Philanthropy