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January 4, 2016
'Black Tax' on Estates a Red Herring?
by Stephen K. Cooper and Kaustuv Basu

Full Text Published by Tax Analysts®

In the Republican effort to repeal the so-called death tax, black wealth matters.
Estate tax repeal has made unlikely allies of new House Ways and Means Committee Chair Kevin Brady, R-Texas, and Rep. Sanford D. Bishop Jr., a Democrat who represents one of the poorest congressional districts in Georgia.

Both lawmakers are leading the effort to eliminate the "black tax," a moniker used to describe the federal inheritance taxes that they blame for rising poverty and joblessness among African-American families.

The black tax wipes out the accumulated wealth of African-American business leaders that could be used to create jobs and lift communities out of poverty, Brady said at a March Ways and Means markup of legislation to repeal the estate tax. The first-generation assets of wealthy African-Americans, the argument goes, is more susceptible to the tax.

In a December 18 interview with Tax Analysts, Brady called the estate tax "un-American," saying, "It's unfair for families to work their whole life and when they pass away . . . about 40 percent of their nest egg that isn't shielded by current law can be gone."

Women- and minority-owned businesses are among the fastest growing businesses in the United States "and they are starting to build wealth, and in a serious way," Brady said. "To ignore the damage that [it] could do to the first generation of wealth-builders, I think, you ignore at your own peril. We want to encourage every American to climb that economic ladder, own that business, and have confidence that you can give it to your kids or grandkids."

After the Ways and Means Committee approved it in March, the House the next month passed the Death Tax Repeal Act of 2015, a controversial measure introduced by Brady and cosponsored by Bishop that would completely repeal estate taxes at a cost of $268 billion over 10 years.

The legislation's detractors say that Brady and Bishop are using black poverty as a red herring in the debate over estate tax repeal. By labeling it a black tax, lawmakers are cynically overestimating the effect of inheritance taxes on a minuscule number of wealthy African-Americans, critics say. Ways and Means member Jim McDermott, D-Wash., for instance, has at recent hearings disparaged Republicans for overstating the tax's effect on minorities and women by cherry-picking one "wealthy African-American, a farmer, and a woman" as proof of the estate tax harming minorities. Most individuals in those groups, McDermott says, will not actually benefit from estate tax repeal.

Instead, estate tax repeal efforts are for "folks who are at the top of the schedule and have made money endlessly and they want to pass it all on to their kids," McDermott said at the Ways and Means markup.

The Obama administration made similar arguments when it threatened to veto H.R. 1105, stating that the legislation retains stepped-up basis rules that exempt capital gains assets from income taxes. "The wealthiest Americans can often afford to hold onto assets until death, which lets them use the stepped-up basis loophole to avoid ever having to pay income tax on capital gains," according to the statement of administration policy.

Numbers from the U.S. Census Bureau are also on McDermott's side. Two out of every 1,000 people who die owe any federal estate tax. The share of African-American families paying the tax is drastically lower.

Black Tax by the Numbers

Republicans say the estate tax hits the first generation of African-Americans that have made money, but black households have seen their overall median net worth go down by $3,746 between 2000 and 2011, according to Census Bureau figures showing distribution of household wealth. That's a drop of about 37.2 percent. Black families in the top 20 percent in terms of wealth saw their median income go up by $88,353, or 62.8 percent, in those years.

For Hispanic households, the decrease in median net worth -- the value of assets owned minus the liabilities of a household -- was even larger in the same time period, with a net worth decrease of $5,576, or 42.1 percent. The net worth of the wealthiest 20 percent of Hispanic households increased by $38,062, or 17.9 percent, over that period.

The top 20 percent of black families had a median net worth of just over $200,000 in 2011. Hispanic households in that top bracket had a similar median net worth between $200,000 and $300,000 in 2011.

In 2014, Georgia's 2nd Congressional District, which Bishop represents, had the state's highest percentage of poorest African-American households -- those with annual income of less than $10,000 -- according to

And 2014 median income for African-American households in the district was $24,987, compared with $46,675 for white households -- increases of $3,274 and $3,680, respectively, over the figures for 2005. Nationwide, the median income for African-American households in 2014 was $35,481, and $57,355 for white households.

Meanwhile, the level at which estates would be exempt from the tax increased steadily from 2001 to 2011. Following two estate tax repeal attempts by Congress in 1999 and 2000, which President Clinton vetoed, President George W. Bush signed into law legislation that incrementally lowered the estate tax rate and increased the exemption between 2001 and 2009 before fully repealing it in 2010. With the estate tax set to return to a 55 percent rate and $1 million exemption in 2011, Congress enacted legislation setting the rate at 35 percent and the exemption level at $5 million, indexed to inflation, in 2011 and 2012. The fiscal cliff deal signed into law in early 2013 extended that same exemption level while bumping the rate up to 40 percent.

For 2015, the estate tax exemption for individuals is $5.34 million, after being adjusted for inflation. For married couples, the exemption is close to $11 million.

Thomas M. Shapiro, a professor of law and social policy at Brandeis University and author of The Hidden Cost of Being African American: How Wealth Perpetuates Inequality, pointed out that the net worth for the 99th percentile of African-American households is $1.23 million.

"So the percent of [African-American] households that are above $5 million would be less than 1 percent," he told Tax Analysts. "And of those, how many would die in a particular year and thus leave estates rising above $5.4 million?"

He described as "bogus" the arguments to repeal the tax, citing claims that family farms in Iowa "or African-American-owned family newspapers . . . would have to be sold to pony up" the tax. "These are straw arguments, at best," he said.

Ray Madoff, a professor at Boston College Law School who testified against repeal at a March hearing of the Ways and Means Select Revenue Measures Subcommittee, said the attempt to link the fortunes of black Americans to the tax was a hook to distract people from the truth.

"If they were actually concerned about protecting businesses, they could easily have a business exemption for businesses kept in the family," said Madoff, a coauthor of The Practical Guide to Estate Planning. "Everybody else will get a free ride because there might be a small number of African-Americans or Hispanics who happen to have wealth. That sounds ludicrous."

A House Democratic tax aide pointed out that a 2005 study from Boston College called "Wealth Transfer Estimates for African-American Households," which Republicans cited at the March markup, shows that 0 percent of African-American households had a net worth of $5 million or more.

Brady cited other figures from the Boston College study, which he said proves that the estate tax will rob African-American households of up to $250 billion of wealth in the first half of this century.

The Urban-Brookings Tax Policy Center estimated that in 2015, about 4,000 tax returns would qualify for the estate tax. And despite repeated talk of how repeal would help family businesses and farms, only about 20 small businesses and small farm estates owed any estate tax in 2013, according to the center's estimates.

A Congressional Research Service report issued in April put the number of farm estates affected by the estate tax at about 65. Farm estates constitute 1.8 percent of taxable estates, the CRS estimated, noting that less than one-quarter of those estates are projected to have inadequate liquidity to pay estate taxes. Overall, less than 1 percent of farm operator estates are projected to pay the tax, the CRS report says.

Unlikely Allies

H.R. 1105 is the latest front in an ongoing battle over estate tax repeal that began decades ago when Bishop joined forces with the National Black Chamber of Commerce, along with several black lawmakers.

For Bishop, African-American activism on the issue is a sign of progress. He told Tax Analysts that after years of systemic economic discrimination, some black families are just now starting to reach the higher rungs of American wealth and success and should not be punished by estate taxes.

Bishop acknowledged that the estate tax is not an issue for most African-Americans, because most do not have $5 million in assets. "But every law on the books doesn't protect poor or middle-income people," he argued.

Another prominent minority voice for repeal is Robert Johnson, who founded Black Entertainment Television LLC. In an interview, Johnson said that trying to find out the number of African-Americans affected by estate taxes is "the wrong question."

"Since 1776, through over 200 years or more, the number of wealthy African-Americans is in the 1 percent range, compared to other wealthy Americans," he said, adding that the "real question" is how many aren't wealthy enough to be affected by the tax.

Johnson said the estate tax does not reward the free-market capitalist society; moreover, the federal government has been unable to address black poverty and other systemic social ills by redistributing wealth through government programs. "Republicans don't believe that the way to salvation for black people is through federal programs," he said.

Johnson, who wrote a letter to lawmakers in support of estate tax repeal, says the bill is unlikely to become law unless the Republican-controlled House is bolstered by a Republican president and a supermajority of Republicans in the Senate.

As for the lobbying effort behind repeal, the involvement of groups like the National Black Chamber of Commerce demonstrates the success of repeal advocates in including wealthy minority voices who would speak out against the tax.

There are some who credit Frank Blethen, co-owner and publisher of The Seattle Times, in involving minorities in the repeal effort. Blethen, who has campaigned for repeal for over two decades, said the tax was one factor why family-owned newspapers and television stations were wiped out in the United States. The tax now perpetuates wealth gaps and income inequality, he said.

"The [minority communities] are going through the same thing that the majority went through all these years, which is [that] your main equity is your house or property investment you might make," Blethen said, adding that the estate tax has the potential to wipe out the equity that these families have built. If the tax were repealed, he said, there would be a gradual growth and rebirth of small businesses, including those owned by minorities.

Blethen often points out that the superwealthy have ways of blunting how the tax affects them, while small businesses end up paying it. "The very wealthy, they have the ability to put wealth in a foundation and control it, and control it to their benefit," he said.

If true, such an effect would be contrary to the tax's original purpose. According to Goldburn P. Maynard Jr., author of a Washington University in St. Louis study, the estate tax was created as a revenue raiser in 1916, but "this was not the only reason for its enactment; the federal government also wished to redistribute the tax burden and reduce the concentrations of wealth." The estate and gift tax rates were later aligned in 1976 to prevent individuals from giving away their wealth during life to avoid the higher rate on estates.

Lawmakers Disagree

Ways and Means member Danny K. Davis, D-Ill., insists, however, that it is only the very wealthy who ever have to worry about paying the estate tax. "We are talking about people in a wealth category that very few people will ever reach, or even come close to reaching," he told Tax Analysts, downplaying all the "moaning and groaning" from Republicans about estate tax repeal.

Thomas Barthold, Joint Committee on Taxation chief of staff, said at the markup that he could not give an accurate estimate on the number of wealthy black families affected by estate taxes because the IRS does not collect data segregated by race. But Davis said later, "There's a minuscule number of African-Americans who would have to have any concern about having to pay any estate tax."

Bishop said it's not the number of black taxpayers subject to the tax that's important. Like Johnson, he said it's the lack of opportunities for job growth when African-Americans are forced to pay the tax. Although they may be few in number, wealthy black-owned businesses create good-paying jobs, and those salaried employees spend money in local communities to help local economies, he said.

Bishop's fellow Democrats who represent nearby congressional districts in Georgia disagree with his support for repeal, although they acknowledge his right to represent his constituents as he sees fit. Ways and Means member John Lewis, D-Ga., said his family is not worried about having to pay estate taxes on property bought many years ago. "I hate to think what it would be worth today," he said. "You keep it in the family, put it in a foundation. You're not going to take it with you; use it for good."

Rep. Henry C. "Hank" Johnson Jr., D-Ga., said that not many people in his district have large estates, so he doesn't support repeal. "If it were good for the nation, I would vote for it," he said of repeal. "It only benefits only a small number of people. The overwhelming number of people [who would benefit] are not in the state of Georgia."

But whether the black tax repeal argument is obfuscation or a stroke for economic equality, its failure to convince Obama is forcing repeal advocates to bide their time at least until after 2016. When that time comes, if trends in black wealth evident in census data continue, both sides will likely be able to make their same arguments: that not enough African-Americans are affected by the tax for it to influence repeal, and that that just signals their continued economic marginalization, partly as a result of the black tax's effects.

Tom Kasprzak contributed to this article.

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