Recently, the “Taxpayer Certainty and Disaster Relief Act of 2019” passed out of the House Ways and Means Committee. The act extends a number of tax credits — and pays for them by preemptively ending the higher estate tax exemption. While the act extends necessary tax credits, it penalizes thousands of Americans who planned their estates and managed their wealth with the understanding that the higher exemption would last through 2026.
The exemption and top rates for the estate tax change every few years in large part because Congress refuses to commit to a real solution on the issue. This isn’t just an issue of rich people wanting to keep the money they’ve earned. Persistent meddling with the estate tax could hinder all kinds of investment, from small businesses growth to charitable giving.
The compromise on the estate tax reached in the 2017 “Tax Cuts and Jobs Act” showed promise as an opportunity for both sides to put the issue to rest, but that compromise is now at risk. And with the threat of yet another change to the estate tax and the tax code at-large, more and more Americans are being affected by the uncertainty that comes with an inconsistent tax code.
This certainly isn’t the first time that lawmakers have tinkered with the estate tax. Both the exemption amount and the top rates have changed multiple times between 1997 and today — and even briefly lapsed in 2010. The current exemption amount and top rates of $11.4 million and 40 percent, respectively, were set in the “Tax Cut and Jobs Act” as temporary relief, and Americans planned accordingly. And while back-and-forth over the estate tax isn’t unprecedented, it does have consequences.
Although the tax only affects the wealthiest Americans, estate taxes have a significant effect on entrepreneurship and work rates for those affected. Higher estate taxes have been linked to lower rates of entrepreneurship and business ownership among those who stand to inherit. There’s also evidence in the same study that estate and inheritance taxes affect self-employment rates and encourage earlier retirement among those who will be impacted.
Federal Reserve research has also shown that the estate tax distorts savings and investment decisions for those affected. When it comes to estate planning and wealth management, a moving target isn’t good enough to plan for the future with peace of mind for Americans and their heirs. The shell game that legislators play with the public around the estate tax leaves taxpayers in the dark about the future of their finances.
Phasing out the increased exemption might make sense in the short term, but we need a long-term solution to take the guesswork out of estate planning. And piecemeal reform leaves individuals and businesses playing catch-up with an ever-changing tax code.
If protecting entrepreneurship and innovation, and rewarding hard work, are values that America upholds, then Congress must commit to a real solution on the issue.
Democrats and Republicans need to accept that neither side will get everything they want, but that the continued uncertainty around the estate tax negatively affects businesses, employees and our nation’s economy.
Taxpayers deserve to know their tax burden won’t suddenly change. The public deserves clear and definitive action instead of endless horse-trading on this issue, and Americans deserve certainty when it comes to their estates. Coming to a definitive solution on the estate tax — and the tax code overall — will encourage investment and innovation and protect long-term American economic growth.
Patty Crenny is an Associate Professor of Practice at the Villanova School of Business, and an expert on issues related to retirement, insurance and financial services and tax and financial accounting. Prior to teaching at Villanova, Crenny held tax manager positions at PriceWaterhouseCoopers and Nationwide Provident Life Insurance.
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