GOP Plan to Kill Estate Tax Sets Up Charitable Giving Conflict

Kevin Brady says Republicans have new giving incentive ideas

Rep. Kevin Brady, R-Texas (Photo: House) Rep. Kevin Brady, R-Texas (Photo: House)

Most Republicans support killing the estate tax as part of a tax overhaul, but doing so could have dire consequences for something else conservatives cherish — charitable giving.

President Donald Trump along with top GOP lawmakers have proposed ending what they call the death tax — a 40% levy that’s applied to estates worth more than $5.49 million for individuals and $10.98 million for married couples. The tax affected only 0.2% of estates in 2015. Although Republicans call the levy un-American and say it penalizes small businesses and farmers, data from 2013 show that just 3% of estates subject to the tax were businesses and farms, according to the Tax Policy Center.

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Charitable organizations have focused their lobbying efforts on how the GOP plan for doubling the standard deduction could affect charitable giving. They argue that a higher standard write-off may keep filers from itemizing deductions, which could lessen any tax incentive for charitable giving. Abolishing the estate tax — a move that would be popular among many charities’ largest donors — so far hasn’t engendered the same level of opposition, despite a similar effect on giving.

“It clearly has a very, very significant negative impact on charitable giving,” said Hadar Susskind, who runs government relations for the Council on Foundations, a philanthropic network that encourages charitable giving. “It’s not all done for tax benefits, but it’s also really clear that’s an important driver.”

‘Policy Nuances’

In 2010, when the estate tax was temporarily repealed, gross charitable bequests in IRS tax filings totaled $7.49 billion — a 37% drop from $11.9 billion the previous year. The tax returned in 2011, and charitable bequests soared to $14.36 billion.

William Gale, co-director of the Urban-Brookings Tax Policy Center, said there’s “no argument” that the estate tax leads to higher charitable giving. “Charitable contributions are highly concentrated among very wealthy households,” he said. “It encourages people to give during life as well.”

Susskind said the foundations council is speaking with lawmakers including chief House tax writer Kevin Brady to explain how cutting the top tax rate, increasing the standard deduction and removing the estate tax could reduce charitable giving. Susskind said Brady has been willing to hear suggestions about ways to keep charitable giving intact.

“Killing the death tax is the perfect example of why tax reform is hard,” said Sage Eastman, a Republican strategist and former counselor to the Ways and Means Committee. “It sounds great and has a good coalition behind it, but then you run into policy nuances like how it impacts the insurance industry and charitable giving.”

The life insurance industry sells products to help wealthy people arrange their assets to stay under the estate tax threshold.

Conservative Support

While most GOP members support repealing the estate tax, there may be a couple of outliers. Sen. Susan Collins of Maine voted against a nonbinding budget measure to scrap the estate tax in 2015. And Sen. Jeff Flake, the Arizona Republican who’s been critical of the president, said he questioned whether ending the estate tax would be that stimulative for economic growth.

Still, for some lawmakers, like Rep. Jim Jordan of Ohio, the decision isn’t complicated. “I want to preserve charitable contributions, but I definitely want to get rid of the estate tax,” said Jordan, a founder of the conservative House Freedom Caucus. “It’s peoples’ money. It’s their families’ money. It’s not the government’s money.”

“I think the principle behind repeal of the estate tax overrides whatever second order consequences there might be with respect to current estate planning strategies,” said Rohit Kumar, a former deputy chief of staff to Senate Majority Leader Mitch McConnell.

Cost of Giving

House Ways and Means Chairman Brady told reporters last week that Republicans are exploring “fresh ideas” to boost charitable giving, but didn’t specify any.

“We want Americans to give more to their church, to the scouts, to the causes they believe in,” Brady said during a tax event at the Reagan Ranch in California.

And he said that if Americans have more money as a result of a tax overhaul, they’ll give more to charity.

Una Osili, an economics professor at the Lilly Family School of Philanthropy at Indiana University, disputes that notion. Osili said the amount of money donors give is dependent on their income and the cost of giving — so incentives to reduce that cost will increase donations.

“This is a conflict, no question,” for Republicans, Gale said. “But I don’t know if they’ll let the charitable sector get in their way.” 

--- Read 7 Estate Planning Resolutions for Clients to Make Now on ThinkAdvisor. 


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