The Oregon Estate Tax’s $2 Billion Loophole

Chuck Sheketoff

This fall Oregonians may vote on a ballot measure that boils down to a choice between preserving funding for schools, public safety and health and human services or giving a tax break to heirs of millionaires and multimillionaires. That vote, if the measure gets certified, will decide whether to continue the Oregon estate and inheritance tax.

That tax affects only the estates of the wealthiest 3 percent of Oregonians who die. If you go to two funerals a week for an entire year, you might attend two or three where the deceased’s estate would pay any Oregon estate tax. Even the busiest funeral parlor director won’t see many individuals subject to the Oregon estate tax.

Often lost in the debate about continuing the estate and inheritance tax is the fact that about $2 billion of capital gains on assets transferred at death escape the income tax each year in Oregon. Under a loophole in the income tax code that works in tandem with the estate and inheritance tax, when property is transferred upon death to an heir, unrealized capital gains on the property are excluded from the personal taxable income of the recipient of the transfer.

Here is how it works.

Assume Grandpa bought $10,000 of Nike stock on August 1, 1995. When Grandpa died mid-May of this year, his 876 shares were worth about $94,900. At the time of his death he had never paid income taxes on the $84,900 in profit from his investment; they were unrealized gains.

Under his estate plan, Grandpa’s stock passed to you at his death. Two weeks after he died you sold the Nike stock and got about $95,300.

Under the $2 billion estate and inheritance tax loophole, you will only pay income taxes on the $400 difference between the value of the stock at Grandpa’s death ($94,900) and the value of the stock when you sold it ($95,300).

The $84,900 in unrealized profit that Grandpa had and the $95,300 gift to you totally escape the income tax through an income tax loophole written as part of the estate and inheritance tax system.

Add up all the sales this year of assets transferred to Oregonians at death and you get the $2 billion per year estate tax loophole that allows those assets to avoid all taxation. This loophole exempting from taxation $2 billion in profits costs taxpayers an estimated $194 million a year in lost tax revenues — money that otherwise would fund schools, public safety or health care.

The $2 billion-a-year loophole is generous enough. Granting the heirs of millionaires and multimillionaires still more tax breaks — especially when schools are cutting teachers and college education is increasingly unaffordable — makes no sense.

The initiative’s proponents don’t like to mention the $2 billion loophole. But the loophole is one of several good reasons why Oregonians should vote “no” on any effort to repeal the estate and inheritance tax.


Oregon Center for Public PolicyChuck Sheketoff is the executive director of the Oregon Center for Public Policy. You can sign up to receive email notification of OCPP materials at www.ocpp.org.

Comments

  • (Show?)

    Given that a stepped-up basis has been the law forever, I don't know that it can fairly be characterized as a loophole. The only reason estates taxes would not be paid on the entire value is if the estate is small enough to avoid estate taxes. None of that takes away from your broader point that the estate tax only hits pretty rich people; I just don't think the argument requires that a fundamental principal of estate law be whacked.

    • (Show?)

      It's not too far away from the fact that if grandpa gave that Nike stock to a nonprofit, he wouldn't have to declare income on the difference between his basis and the fair market value, but he'd still get a charitable deduction for the fair market value. Yes, it encourages giving to charity, just like stepped up basis encourages that everyone can pass along a minimum estate without estate taxes.

  • (Show?)

    Seems to me that the right answer is that everyone should pay capital gains or the estate tax whichever is larger. Remember that taxes are the necessary cost of running government. If we have a capital gains tax why should the sale of the asset be exempt because someone died?

  • (Show?)

    When Kevin Mannix says the estate tax is a second tax he's ignoring stepped up basis on the income tax side -- much of the assets of the few that have to pay estate and inheritance taxes have never been taxed before....and will escape income taxes when beneficiaries realize the gains.

    • (Show?)

      Chuck: Is there actually a study of the amount of value that goes untaxed due to stepped-up basis? Given the amount of assets that don't go through problem, I suspect it would be impossible to get an actual number.

      • (Show?)

        The amount of revenues "lost" to the state is $389 million for the current biennium per the Department of Revenue 2011-13 tax expenditure report.

      • (Show?)

        There is, Jonathan, 56% of estates larger than $10 million is unrealized capital gains. Though I can't seem to find the source, in smaller estates, the percentage in in the 30's, but I don't recall the number.

      • (Show?)

        The biennial tax expenditure report has an estimate of the cost....you divide that by our tax rate and you get the assets sold with stepped up basis. I used 9.9 percent...if you assume some are sold by people who don't pay at that top bracket the amount is even higher than $2 billion a year.

open discussion

connect with blueoregon