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Estate Tax Reform, Not Repeal

What would estate tax reform mean?

Proposals to substantially reform the estate tax have been offered since 2000, some that would have immediately raised the amount of wealth exempted by the tax to $3 or 4 million instead of waiting until 2009. But the all-or-nothing repeal lobby has voted to completely oppose these reforms. They want to hold smaller millionaires hostage in order to win complete repeal for their wealthy patrons.

Under one reform proposal, the amount of wealth exempted would rise from $1 million to $3.5 million ($7 million for couples). How many households would pay under this provision? What would be the size of the average estate?

The table below contains state by state projections of the number of estates that would be required to pay the estate tax under these increased exemptions. This research was conducted by Quantria Research, and uses the most recent IRS data.

A few highlights include:

Under this reform, the number of estates that would pay the estate tax would decline from approximately 52,000 to 6,000. This reform would exempt some 88 percent of the households that currently pay the estate tax.

The average estate that would pay the estate tax under such a reform would be $17.1 million.

For many states, the difference between reforming the estate tax and completely repealing the tax comes down to exempting a few dozen multi-millionaires a year.

For example, in Maine, where both Senators Susan Collins and Olympia Snowe have voted to eliminate the estate tax, only 24 households per year would have to pay estate tax.

Estimates of Taxable Estate Tax Returns in 2009
Under Current Law

Estate tax returns by size of gross estate are estimates based on IRS public use Federal and State estate tax data, including "Estate Tax Returns Filed in 1999" and "Estate Taxes by State of Residence of Decedent, 1999."

Prepared by Judy Xanthopoulos, Ph.D., Quantria Strategies, LLC, 1825 I Street, NW Suite 400, Washington, DC 20006

Methodology Note: Estimates of the numbers of estate tax returns are for illustrative purposes only. These estimates were prepared to demonstrate that the number of returns decreases as the exemption level (unified credit amount) increases.

These estimates are not intended for technical economic analysis, but merely for demonstrating the effects of present law estate tax provisions.

The limitations of such estimates reflect the uncertainty in projecting demographic trends and valuation of asset portfolios. In any given year, it is difficult to predict who may die or how many. Further, it is also difficult to project the value of a given estate and the composition of assets in the estate at the time of death.

However, while the methodology employed is simplistic, it does (1) reflect the available information, both current and historical trends; and (2) allow for detailed analysis that should not distort observed trends.

The SOI provides state-by-state data on estate tax returns filed for a given year on their website as well as the larger aggregate tables. The state data only provides the gross estate, state tax credits, and net estate tax (dollars and returns). The aggregate file provides the distributions by size of the estate.

The distribution of estates was analyzed using aggregate data files for the past eight years. The distributions remain stable in both the composition of assets by estate size as well as the distribution of estates within each category. It is assumed that, in general, over time, most states reflected the aggregate figures and these distributions were applied to the states figures.

Distributions of estates within each category rely on simple estimates of skew, based on mean values of the gross estate. As stated, these calculations represent only estimates of likely distributions and are not intended for quantitative research or other detailed analysis of estate tax returns.

Updated February 27, 2006

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