On February 3, Virginia’s House of Delegates voted 69-29 to repeal its state estate tax, bucking a trend among state legislatures to work to preserve the tax’s revenue in a time of record setting state deficits. Governor Mark Warner (D) had petitioned hard to preserve this piece of revenue for Virginia, which is facing an estimated 1.1 billion budget gap for FY 2004, but the vote is being touted by the Republican-controlled legislative body as a “veto-proof” majority. Though repeal advocates in Virginia argued that repeal would protect the state’s small farms and family businesses, data from the USDA and the Federal Reserve show that both the average large farm and family business in Virginia already fall well below the current $1 million exemption under federal law.

The President (faced with a 6 percent unemployment rate, increased homeland security needs and costs, and a projected $300 billion deficit for the coming year) has decided that repeal of the estate tax must be made permanent – at all costs. And the costs are great: nearly $56 billion in the first full year of repeal. But you wouldn’t know it from the President’s budget charts.

On February 3, Virginia’s House of Delegates voted 69-29 to repeal its state estate tax, bucking a trend among state legislatures to work to preserve the tax’s revenue in a time of record setting state deficits. Governor Mark Warner (D) had petitioned hard to preserve this piece of revenue for Virginia, which is facing an estimated 1.1 billion budget gap for FY 2004, but the vote is being touted by the Republican-controlled legislative body as a “veto-proof” majority. Though repeal advocates in Virginia argued that repeal would protect the state’s small farms and family businesses, data from the USDA and the Federal Reserve show that both the average large farm and family business in Virginia already fall well below the current $1 million exemption under federal law.

The President (faced with a 6 percent unemployment rate, increased homeland security needs and costs, and a projected $300 billion deficit for the coming year) has decided that repeal of the estate tax must be made permanent – at all costs. And the costs are great: nearly $56 billion in the first full year of repeal. But you wouldn’t know it from the President’s budget charts.

The President’s FY 2004 budget proposal released yesterday employed a host of questionable tools: the use of the average family’s annual budget increase to justify limiting that of the nation to 4 percent; a claim to this 4 percent growth in discretionary spending that is actually a collection of large increases for just a few programs, no increases for some programs, and substantial cuts for many others. One of these outlandish elements of the Bush budget unfortunately comes as no surprise, namely a renewed proposal to make repeal of the estate tax permanent – at an annual cost of more than $50 billion.

As our most progressive tax, the estate tax affects fewer than 2 percent of the wealthiest estates in this country, and yet generates about $30 billion in revenue each year. In June 2001, however, the President and Congress included a ten-year phase-out and one-year repeal of the tax in its $1.35 trillion tax cut. As a result, the revenue generated by the tax slowly falls for the next eight years, until finally, in 2010 – but only in 2010 –the estate tax drops off entirely. The one-year elimination was all Congress could afford (at a time of a projected $5.6 trillion surplus), but the President (faced with a 6 percent unemployment rate, increased homeland security needs and costs, and a projected $300 billion deficit for the coming year) has decided that repeal of the estate tax must be made permanent – at all costs. And the costs are great: nearly $56 billion in the first full year of repeal, according to the Congressional Joint Committee on Taxation. But you wouldn’t know it from the President’s budget charts.

In an effort to offer a “more reasonable timeframe for forecasting deficits and surpluses,” this year’s White House budget limits its forecast to five years. This may prevent an over-reliance on initial estimates of the available surpluses in the out years, but it also allows for the obfuscation of the real costs of policy proposals. As the President’s budget explains, “Of course, it is appropriate to analyze the long-term impact of policies, particularly pension and other entitlement programs, where costs are driven by predictable populations and benefits that are defined in law.” To “pension and other entitlement programs,” the White House’s Office of Management and Budget (OMB) should also add “tax cuts,” whose revenue loss is also easily estimated from predictable population and IRS data.

Unfortunately, the President’s budget uses a 5-year (2004-08) window to show the cost of permanently repealing the estate tax – about $6 billion. Though it may be an accurate calculation of the budget impact for this 5-year window, these numbers are dangerously misleading in terms of the full cost of permanently repealing the estate tax, since repeal doesn’t begin until 2010 – a full 2 years after the end of this 5-year window. Essentially then, the 2004-08 cost of making repeal of the estate tax permanent is meaningless. It is not until the President provides a glimpse of the costs of permanent repeal beyond 2010 that these numbers take on any significance. According to the Bush administration, the 2004-13 costs of making estate tax repeal permanent are $126 billion – quite a substantial chunk of change – and these costs will only grow larger with each year of permanent repeal. In the first decade of full repeal (2013-22), the total cost will be well over $740 billion, just at the 2016 and 2017 tipping points of rapidly escalating deficits in the Medicare and Social Security trust funds as baby boomers retire.

OMB Watch has been leading a coalition of nonprofit organizations in an effort to find a sensible reform option that preserves both the estate tax’s unique progressivity and revenue-generating capabilities. See www.fairestatetax.org for more information on the efforts of OMB Watch and the Americans for a Fair Estate Tax Coalition.