No deal will mean estate tax goes up next week

John Ed Anthony was incorrectly identified in this article. Anthony is the chairman of Anthony Timberlands Inc.

— Unless Congress and President Barack Obama reach a budget and tax deal by Monday night, heirs to estates will face hefty increases in their tax bills.

As part of the 2001 George W. Bush-era tax cuts, Congress lowered the tax rate on estates from 55 percent to the current 35 percent. Exemptions were increased so that couples do not have to pay taxes on the first $10 million of their estates, up from $2 million in 2001.

If Congress doesn’t act, those tax cuts will expire and the pre-2001 rates will kick in beginning Tuesday. Obama has proposed setting the exemption at $7 million for couples, with a 45 percent tax rate.

Critics of the estate tax argue that it gives large companies, which do not have heirs, an advantage over small, family-owned businesses that have to pay taxes when a company founder dies. Proponents of the tax say most small businesses are exempt from the tax, which is in large part directed at the very wealthy.

U.S. Sen. John Boozman, an Arkansas Republican, who has sponsored legislation totally repealing the tax, promoted his bill on the Senate floor before Christmas.

He quoted Allen Nipper, who operates a tree farm in Magnolia and fears “multiple taxation” on his assets under the estate tax: “We know our lands provide clean water and wildlife habitat that benefits society in general without us expecting a handout ... [and] then at my death the government wants to take up to 55 percent of the value after I have invested my efforts providing those benefits. That is not right.”

B oozman added that passing down an inheritance is part of the “American Dream.”

“Our farmers and small businesses deserve to pass along their investment to their heirs without having to worry about a tax,” he said.

Arkansas’ U.S. Sen. Mark Pryor, a Democrat, who in 2006 voted against a full repeal of the estate tax, said he still opposes elimination of the levy. Although, he said, letting the tax rise to 55 percent and lowering the exemption to $2 million per couple would raise more revenue, he’s worried about the “cost of that revenue — the adverse impact on small businesses and farms.”

“You have to balance all that out,” he said, explaining why he’d like to maintain the current exemption of $10 million per couple and the 35 percent rate.

A 2010 study by the Center on Budget and Policy Priorities suggests that most small businesses and farms would not be adversely affected by the estate tax under Obama’s proposal. Using U.S. Department of Agriculture data, the liberal Washington advocacy group found that less than 3 percent of all farm estates filed estate-tax returns in 2009.

And because farmers are eligible for special treatment of their estates — including provisions that lower the assessed value of their land if it is used for farming and deductions for the creation of conservation easements — only about half of those filing estate-tax returns that year owed any tax.

Chuck Marr, the group’s director of federal tax policy, said it would be “unseemly” for large estates to see tax reductions while programs that help the elderly, such as Medicare, face cuts.

A group of wealthy individuals, including Omaha, Neb.-based investor Warren Buffett and Microsoft founder Bill Gates, signed a “statement of support” for raising estate-tax rates. The current $10 million-per-couple exemption “leaves too much revenue on the table in a time of growing deficits and painful cuts,” the group said. The group would like to start the rate at 45 percent and increase it for larger estates.

“We believe it is right to have a significant tax on large estates when they are passed to the next generation,” reads the group’s statement. “We believe it is right morally and economically and that an estate tax promotes democracy by slowing the concentration of wealth and power.”

According to the Tax Policy Center, a left-leaning Washington research group, letting the estate-tax rate revert to 55 percent with a larger exemption would increase tax revenue from $11.5 billion in fiscal 2012 to $37.7 billion in fiscal 2013. In 2017, the annual take would surpass $50 billion under those rules.

Jeff Cook, president of the Policy and Taxation Group, a Washington advocacy group that would like to repeal the tax entirely, said revenue could be found by closing “loopholes” and ending the preferable tax treatment of certain industries.

“There are plenty of places Congress could look,” he said.

Cook said families don’t just take an estate-tax hit when loved ones die. Often, families will pay into insurance plans in anticipation of a company owner’s death, and wind up setting a tax liability over time, which means the tax eats away at a company’s profits for years.

“You don’t just deal with the estate tax at death,” he said. “You deal with it during life.”

At age 73, John Ed Anthony, the chairman of Anthony Forest Products in Bearden, said he’s now planning his estate. The possibility of an estate-tax increase, he said, will make it more difficult to successfully pass the company to his heirs. The business, which runs four mills and treatment plants, and has access to more than 200,000 acres through various business partnerships has been in the family for four generations.

Back in the 1960s, he said, there were 18 similar timber companies in south Arkansas. But those smaller, privately owned companies became “the feeding grounds” for large companies such as Georgia Pacific, Potlatch and Weyerhaeuser.

“I’ve been approached by every large forest product company in the country,” he said.

When his parents died in the early 1960s and again when his grandfather died in the 1980s, he said, it took several years to pay off the tax liability.

“Every time someone dies, we have to clear-cut more acres and sell more assets,” he said.

But, he said, the company’s assets aren’t liquid — that it is difficult to sell a single mill to pay off a tax debt. Larger companies, he said, would prefer to buy the entire operation. Even if a new corporate owner kept the mills open, he said, it is likely that the local economy would suffer because a larger owner wouldn’t invest in local companies.

“All the accounting is done someplace else,” Anthony said. “All the legal is done someplace else.”

Barring a last-minute deal on Capitol Hill, many states will see their revenue increase if the estate-tax law reverts to its pre-2001 levels. Before the Bush-era tax changes, states that imposed estate taxes were offered corresponding federal tax credits, meaning that states could raise funds without imposing additional tax burdens on its residents.

Arkansas will not see any additional revenue — state lawmakers voted to eliminate the state estate tax in 2005.

Front Section, Pages 1 on 12/28/2012

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