Because of the debate over repeal of the estate tax, OMB Watch has produced a series of articles providing background on the tax. This fact sheet focuses on the impact the estate tax has on government revenue. As with other discussions of the estate tax, we include the gift tax and generation-skipping transfer taxes in the discussion when we use the term estate tax, since it is a unified tax. While there is no definitive figure on the amount of lost charitable contributions, it is clear that repeal of the tax would have a significant, adverse impact of charitable bequests. The best estimates peg the loss at between $5 billion and $6 billion per year, and likely to increase sharply in future years. This will have an impact on many charities – those that depend on charitable bequests, such as universities, museums, and service delivery organizations, as well as those who depend on grants from foundations. Roughly one-third of private foundation revenue comes from charitable bequests under the estate tax. This fact sheet focuses on the impact the estate tax has on government revenue. As with other discussions of the estate tax, we include the gift tax and generation-skipping transfer taxes in the discussion when we use the term estate tax, since it is a unified tax. Since 1996, estate and gift tax revenues have grown at a pace that far exceeds the annual growth of government's general revenues, called on-budget revenue. (Off-budget revenue includes such items as Social Security payroll taxes.) Figure 1 below shows the difference graphically and Table 1 provides specific figures. On average, the estate and gift tax grew at nearly double the rate of annual increase of the on-budget revenue – an annual 14.1% rate for the estate and gift tax and a 7.25% pace for on-budget revenue. This rapid growth in the estate and gift tax is likely to continue as the transfer of inter-generational wealth continues to grow. Year On-Budget Revenue Estate/Gift Tax 1996 8.5% 16.4% 1997 9.4% 15.5% 1998 10.0% 21.3% 1999 5.9% 15.4% 2000 7.0% 9.7% 2001 (est.) 2.7% 6.0% The Congressional Joint Committee on Taxation published a 1999 report projecting revenue from the estate and gift tax. According to JCT, from 2000 to 2008, the tax will generate $303.4 billion. An excerpt from their table follows: Year Number of Taxable Estates Revenue ($ billions) 2000 51,700 28.8 2001 54,200 29.8 2002 57,000 30.8 2003 59,800 32.7 2004 62,800 33.8 2005 54,600 34.4 2006 50,400 35.7 2007 52,600 37.7 2008 56,200 39.7 On average, this is $33.7 billion per year, a sizable amount of federal revenue. To put it in perspective, you could fund each of the following programs and still have a little left over: Program $ Billions Education of Disadvantaged Children 8.6 Job Training 1.0 Youth Training/Summer Jobs 1.1 Head Start 6.2 Child Care Block Grant 2.0 Runaway, Homeless Youth 0.07 College Work Study 1.0 Low-Income Energy Assistance (LIEHP) 1.4 Individuals with Disability Education Act 7.4 Community Health Centers 1.2 Substance Abuse Block Grant 1.7 Mental Health Block Grant 0.4 Community Services Block Grant 0.6 Refugee Assistance 0.4 Total 33.07 If Congress were to repeal the estate tax – and President Bush successfully gets his massive tax cut – it will cuts substantially into the surplus. Along with other planned spending increases, such as for prescription drugs and military spending, it is likely that Congress will be faced with difficult funding choices in the near future. One might expect that programs without powerful constituencies, possibly some of the ones listed above, would be targets for spending cuts. Thus, in very direct ways, the estate tax repeal can result in significant cuts in human needs programs. State Revenues All states and the District of Columbia impose estate, gift or inheritance taxes. Most states – 35 states – impose a "pick-up" estate tax. Under a "pick-up" tax, the state specifies the amount allowed as a credit against the federal tax. The revenue goes to the state but it does not increase tax payments made by the decedent's estate. Instead, the amount paid to the state is listed as a credit on the federal tax. Thus, the repeal of the federal tax would mean a full or partial loss of state revenue. The Joint Committee on Taxation acknowledges that "repeal of the Federal estate tax would eliminate this source of revenue sharing. The burden of estate taxation would rest with the States." Revenue from Estate, Inheritance & Gift Tax as Percentage of GDP in OECD Countries, 1996 Country % of GDP Australia 0.00 Canada 0.00 New Zealand 0.0 Turkey 0.01 Austria 0.05 Italy 0.07 Portugal 0.07 Sweden 0.08 Iceland 0.09 Norway 0.10 Germany 0.11 Luxembourg 0.12 Spain 0.18 Ireland 0.19 United Kingdom 0.22 Denmark 0.23 Finland 0.23 Netherlands 0.29 Switzerland 0.30 United States 0.30 Greece 0.36 Belgium 0.37 France 0.40 While it is very difficult to estimate the impact repeal of the estate tax would have on state revenues, the Center on Budget and Policy Priorities has put together figures that show once the tax has been fully phased out at the federal level, "state revenue loss would approach $9 billion" per year. Comparison to Other Countries Is the estate tax and gift tax higher in the United States than other countries? Since our estate tax structure is different from other countries – some tax the heirs instead of donor – a direct comparison is not easy to do. The Joint Committee on Taxation, however, has made such a comparison among OECD countries.