Estate Tax Repeal: Pro and Con

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Con: Estate Tax Affects Few Americans

by Charles Davis

If you need any further evidence of the yawning gulf between news media owners and working journalists, take a look at how the industry's management and ownership associations worked to influence a key vote in the United States Senate last week.

The issue was not freedom of information, or privacy law, or any other measure a press hound can get too worked up about. Instead, what got America's publishers and newspaper owners in a white hot lather were efforts to thwart a bid by President Bush and GOP colleagues in Congress to permanently kill the estate tax. That effort failed in the Senate, but not before a withering phone campaign by the owners of American media.

As the vote drew near, I was peppered with e-mail by the many press groups whose e-mail lists I populate from my perch as executive director of the Freedom of Information Center. State press associations were as aggressive as I have ever seen on an issue, their pleas for lobbying growing ever more desperate as it became ever more apparent that the votes for permanent repeal simply were not there.

The Newspaper Association of America's Web site directed members to slick "death tax" ads available in half and quarter-page sizes for newspaper owners the nation over to advertorialize with. The National Newspaper Association's online site urged members to action: "The tax relief package enacted June 7th that includes elimination of the death tax was an important first step. However, the estate tax will come back to haunt publishers in 2011 unless we act immediately."

Much has been written on the disconnect between American journalism and the citizens who depend upon it. That the folks who own the press would so publicly embrace the estate tax repeal -- a Christmas wish list item of the wealthy that even many of the wealthy can't stomach -- shouldn't surprise anyone, but it should allow those dependent upon the press to express their disapproval with ownership so detached from the rest of us working stiffs.

Minus the ideologues, most Americans could care less about estate taxes, as they have absolutely no chance of paying them. In my state, Missouri, 129 incredibly lucky people (well, not that lucky ... they are dead) paid estate taxes in 2002, based on past tax return studies culled from federal statistics. A Greenberg/Quinlan/Rosner survey found in May that of all possible tax "reforms," repeal of inheritance taxes is the one least favored by voters. The most popular? A tax cut targeted to low- and moderate-income Americans was favored by a 6-1 margin over estate tax repeal. I haven't seen the American press rallying to that cause, have you?

Finally, the poll found that if Congress must touch the estate tax, voters favor reform over repeal by a 58-37 margin. But America's media owners find reform too messy. Eliminate the "death tax," they cry, conveniently ignoring the outright falsity of that label, as the estate tax is nothing more than a tax on assets given to heirs of an estate. It is no more a "death tax" than it is a summer squash.

An inheritance is unearned income, the great good fortune of having been born to parents who own valuable things. Eliminate the death tax, or we'll all have to sell to corporate chains, and where will the family newspaper be then? And the difference would be what, exactly?

Charles N. Davis is executive director, Freedom of Information Center and associate professor (news-editorial) at the Missouri School of Journalism.

Pro: Repeal Would Protect Family-owned Papers

by Tonda F. Rush

The difference would be, what? Not much. Just a few more companies with the wonderful flexibility of private ownership biting the dust. A few more newspapers driven by Wall Street's quarterly earnings sweepstakes. Fewer kids coming home to take over mom-and-pop's community weekly that still runs the kids' sports photos and lists of piano recital students.

The estate tax does hit family newspapers where it hurts. And there are still many family newspapers in the United States. Some are quite large -- such as The Seattle Times. Most are among the some 6,000 weeklies that serve small towns, suburbs, ethnic and demographic communities, and inner city neighborhoods. With all due respect to the many fine, group-owned metro papers, these family-owned newspapers occupy an important spot in the spectrum of American media.

Why should those publishers care about estate taxes? Because after the funeral there may be a forced sale of the newspaper. Simple as that.

Why don't the heirs just pay the tax and, as Charles Davis suggests, endear themselves to the millions of newspaper readers who don't own a business and are happy just to collect a paycheck from those who do? It's not as simple as it looks.

With many family businesses the value of the business grows faster than the cash flows. When the owner dies and the taxes kick in, it becomes evident that the only way to pay is to cash out. The newspaper is put up for sale and, bingo, a larger publisher nearby realizes that title would be a nice addition to the cluster of its group, and one more independent bites the dust.

Are newspaper publishers seeking repeal, or reform? Reform is certainly needed. Today's $1 million exemption isn't high enough to protect most media businesses. Even raising the exemption to $3 million will force the sale of most family-owned newspapers that operate in even a two- or three-paper group, or operate as part of a larger printing plant, niche publishing company, or other related enterprise. A million dollars isn't what it used to be. Today, 25-year-old dot-com retirees look fondly back upon their first million.

Even by raising the exemption -- one of the suggestions of those opposed to outright repeal -- doesn't address the wisdom of taxing wealth at death in this way.

First, the income that created the wealth was already taxed when it was earned. It was taxed when it was used to employ people -- to fund the various federal and state benefits programs. It is taxed for its equipment, and when it purchased supplies and machinery and paid a sales tax. The principal left over may earn interest -- which is taxed. The rest of the principal may continue to appreciate untaxed, which seems to be the objection of the anti-repeal forces. (One wonders if they object equally to the gains in the IRAs and 501(k)s that are taxed -- probably at a lower rate-only when they retire.) Shouldn't all of that wealth be taxed, argue the anti-repeal forces?

Never fear. When the underlying enterprise is sold, the untaxed becomes taxed. The capital gains tax will take its bite out of the appreciated value.

But this inevitability of both death and taxes brings up a little known aspect of the Kyl-Gramm amendment defeated by the Senate this week. Kyl-Gramm sought to encourage families to keep their businesses running, not to cash out upon inheritance. Instead of forcing sales with estate taxes, Kyl-Gramm would have embraced the heirs with encouragement to stay in business.

Kyl-Gramm would require the cashing-out heirs to pay capital gains tax on the appreciated value of the business during the parent's life, where the current law lets the heirs take their own base value as of the day they inherit, and pay tax only on the appreciated value from that day. If they sell the day after inheritance under today's law, the tax is zero. Under Kyl-Gramm, Uncle Sam would collect on the capital gain.

By replacing the estate tax with a heavier bite in capital gains tax, the Kyl-Gramm approach would encourage those family properties to continue in the families.

Whether or not the benefits of family ownership are worth extolling is a point upon which reasonable people may differ. But do we really want a tax policy that discourages it?

Tonda F. Rush is a media lawyer in Arlington, Va. As president of American PressWorks Inc., she directs public policy for the National Newspaper Association, an organization of 3,500 community weeklies and dailies.