Tax Reform Becoming A Reality : Death Tax & State Deductions

That the congress is actually working to reform some of the tax burden in this country is no less then a miracle. But given that the democrats have lost control of both houses in congress, and the republicans are always running for elections on lowering taxes, reforming the Death Tax is a good start.

Two Tax Bills Could Soon Affect Future Tax Returns
Source: Pam Villarreal, "Busy Week In Congress on a Number of Tax Bills," National Center for Policy Analysis, April 15, 2015.

April 16, 2015

This week, the House of Representatives is working on a number of tax-related bills. Two of them, in particular, will directly affect future tax returns, says NCPA senior fellow Pam Villarreal.

• H.R. 1105 - Death Tax Repeal Act of 2015:  Would "repeal the estate and generation-skipping transfer taxes for estates of decedents dying or for transfers made on or after the enactment date of this Act." It would also reduce the gift tax to a top rate of 35 percent and adjust the lifetime exemption amount for the cost of living, from $5 million to $5.43 million, retroactive to calendar year 2011.
• H.R. 622 - Permanent State & Local Tax Deduction:   "Amends the Internal Revenue Code to make permanent the taxpayer election to deduct state and local general sales taxes in lieu of state and local income taxes."

Even the most ardent supporters of taxing the rich are starting to realize that the estate tax is more bother than it's worth.

• It doesn't really target the very wealthy as much as it does those who are less wealthy but have planned their estates in order to pay as little of it as possible.  Many heirs are asset rich, but cash poor. 
• It only accounts for about one percent of federal tax revenues.  Moreover, it does a poor job of redistributing wealth since most fortunes now are earned, not inherited.

As for H.R. 622, making permanent the state and local sales tax deduction, it is a good policy on the surface since it would give state and local sales taxes the same permanent status as the state income tax deduction.  However, neither state income tax nor state sales tax deductions are good fiscal policy. 

The deduction of state taxes simply gives states incentives to raise them even higher, and taxpayers end up subsidizing high-tax states.  In other words, state tax deductions encourage bad state legislative behavior.