Estate tax debate to continue, as billions trickle away to rich

We’ll get to have the same arguments for the next two years, while more untaxed billions trickle away in windfalls to the rich.

Mike Owen
Mike Owen

Americans’ generosity to the wealthy knows few boundaries. Those boundaries appear to be relaxing even further in the tax deal announced Monday. Case in point: the estate tax.

Various options on the table for the estate tax would relax its impact on inherited wealth from current law. While not in effect in 2010, current law would return the estate tax to a level higher than it was as recently as 2009, when the maximum rate was 45 percent, with an exemption for the first $7 million ($3.5 million per spouse). President Obama had proposed making those 2009 parameters permanent, which would cost between $229 billion and $253 billion over 10 years, compared with current law, not including the interest on the added debt it promised.

Generous, to be sure, but until the deal announced Monday, it appeared to be a workable compromise. No one seriously expected they could repeal the estate tax, and no one expected the estate tax to return to a 55 percent maximum rate and $2 million exemption ($1 million per spouse) as it exists in current law for 2011. And the repetitive, often misinformed debate would effectively be ended. Now, instead of the President’s compromise, we appear to be looking at an estate tax of only 35 percent, with an exemption of $10 million ($5 million spouse), for two years.

Keep in mind that even at 2009 levels, the estate tax affected less than three-tenths of 1 percent of all estates — only the extremely richest fortunes being passed on — and is the only means to tax previously untaxed income for those fortunes. So, while working families see most of their income taxed, the extremely rich do not without an estate tax.

As noted in a Center on Budget and Policy Priorities analysis earlier this year, the parameters for a new estate tax as agreed to by the White House and Republican negotiators will be much more costly than the generous compromise earlier offered by the President. When proposed earlier this year by a bipartisan group of senators who have supported full repeal of the estate tax, including Iowa’s Chuck Grassley, CBPP noted the 35 percent/$10 million parameters would “cost considerably more” than the President’s proposal:

That would cost at least $60 billion more over ten years than making the 2009 rules permanent, despite soaring federal budget deficits. Moreover, the larger the estate, the greater the tax cut for wealthy heirs would be.

However, even that estimate is understated, because it assumed a phase-in of the 35 percent/$10 million parameters. As proposed, the cost is estimated to be more than double — $125 billion over 10 years.

Worth noting: The deal in Washington on the estate tax would be for two years. So, if the deal passes, we’ll get to have the same debate and hear the same arguments for the next two years, while more untaxed billions trickle away in windfalls to the rich.

Posted by Mike Owen, Assistant Director

Increasing the Social Security Retirement Age: An Unnecessary and Unfair Cut in Benefits

Increasing the retirement age is a substantial benefit cut for all retirees, and penalizes low wage workers disproportionately.

Peter Fisher
Peter Fisher

The President’s Fiscal Commission (the “Deficit Commission”) recently joined the chorus of public figures calling for cuts in Social Security benefits. The commission did this partly in the guise of tying increases in the retirement age to increases in longevity.

This seems at first like a reasonable approach: as we live longer, perhaps we should be expected to work longer. What is not well-understood, however, is that an increase in the full benefit retirement age is a benefit cut for all future retirees, regardless of when they retire. Furthermore, increases in longevity are likely to be felt very unequally. The net result could be lower retirement income and fewer years spent in retirement for low wage workers retiring in the latter half of this century.

The table below shows how Social security benefits depend on the age at which you retire. Under current law, those born in 1960 or later will receive full benefits (100.0 in the table) if they retire at their full retirement age of 67. Those retiring sooner receive less (for the rest of their lives) and those retiring later receive more, up to age 70.

If the full benefit retirement age is increased to 69, as the commission chairs propose (others have suggested raising it to 70), then all retirees from that point on receive about 13 percent less in benefits, every year, than they would have under current law.  Those who wanted to retire at 62 or 63 would no longer be eligible for any Social Security benefit. Those wanting to retire at 66 (the full age for the baby boomers retiring now) would get 80 percent of the full benefit instead of 93.3 percent.

Table-Social Security BenefitsThe Commission and others who argue that increased life expectancy is a major contributor to the projected shortfall in Social Security revenue in 2037 or thereabouts ignore an important trend. Life expectancy at retirement has become very unequally distributed.

Those born in 1912 who reached age 65 in 1977 could expect to live about another 15 years. For those born in 1960, it depends on how well off you are.

Those with earnings above the median can expect to live another 22 years in retirement. But those with earnings below the median have a life expectancy beyond age 65 of just 17 years.

(See Dean Baker and David Rosnick, The Impact of Income Distribution on the Length of Retirement, Center for Economic Policy Research, at http://www.cepr.net/index.php/publications/reports/impact-of-income-distribution-on-retirement-length ).

If the increasing inequality in longevity continues and the retirement age is raised to 69 or 70, a lower wage worker born in 1973 and retiring at 69 or 70 could actually expect to enjoy retirement for fewer years than his or her grandfather who retired at the full retirement age of 65 in the mid-1970s.

In actuality, no benefit cuts of any kind are needed to guarantee payment of full Social Security benefits for the rest of this century. Modest increases in the earnings threshold and the payroll tax are sufficient. Increasing the retirement age is a substantial benefit cut for all retirees, and penalizes low wage workers disproportionately.

Posted by Peter Fisher, Research Director

Give thanks for what we do and do not have

Iowa does not have a reputation for having great water quality, but it could be worse.

Will Hoyer
Will Hoyer

My job here at IPP requires me to think a lot about water. Iowa does not have a reputation for having great water quality, and there are certainly plenty of threats, but it could be worse. As Thanksgiving approaches here are a few things I’m thankful for:

1) We don’t have companies extracting natural gas using unknown chemicals and potentially fouling our groundwater like Pennsylvania, New York, Michigan and other states do.

2) We have adequate water (for the most part). You don’t have to go too far to find areas where water quantity is a serious concern, like in Nebraska and Wisconsin. Travel further, to places like Florida and the American southwest and the issues get even more serious. Certainly increased chances of drought in the Midwest are recognized as a possibility with climate change, but to date we’ve avoided drought for a few decades.

3) We don’t (yet!) have major oil pipelines running across our state. It just so happens that they rupture occasionally like this one did in Michigan. A few years ago, Wisconsin had an oil pipeline break, too. And now there’s a pipeline proposed that would cross Nebraska.

4) While we’ve seen our fair share of flooding in parts of the state, we’re not going to see the problems that coastal cities will as sea levels rise.

5) We don’t have acutely toxic groundwater like this city in California does.

We in Iowa are plenty busy working on polluted runoff, CAFOs, emerging contaminants and seasonal flooding, among other things. That’s plenty for now.

Happy Thanksgiving!

Posted by Will Hoyer, Research Associate

Legacy vote message: clean air, water, land

The message from the vote last week is that voters want environmental quality and outdoor recreation initiatives to thrive. How will policy makers respond?

Will Hoyer
Will Hoyer

Amid all the sorting of implications from the November 2 election, one message should not be missed: Iowa’s land, air and water are important to the state’s residents.

Iowa’s Water and Land Legacy Amendment passed with over 60 percent of the vote — a margin that surely understates the support for environmental programs. The constitutional amendment creates a dedicated trust fund that will be funded upon the next state sales tax increase.

Overwhelming approval of the trust fund must be seen as a “floor” for support of water quality improvements, soil protection, state parks, recreational trails and better wildlife habitat. Support no doubt is much greater than the vote last week reflects. That’s because the trust fund is tied to a potential sales-tax increase that many more environmental proponents would oppose on various philosophical grounds — objecting to any tax increase, or that type of tax increase, or earmarking funds outside the legislative process by constitutional amendment.

Rather, the vote recognizes that longtime budget trends are shortchanging environmental quality efforts. Such programs largely have been dependent upon gambling revenue and have been underfunded for years.

Clearly, Iowans care about the environment and want increased funding for programs that protect our air and water and add additional outdoor recreation opportunities. And a vast majority favored the Legacy Amendment approach. Still, it depends upon a sales-tax increase that faces significant political challenges.

The message from the vote last week is that voters want environmental quality and outdoor recreation initiatives to thrive. Improvements to our natural resources can help attract economic development for Iowa cities and towns. How, policy makers must ask themselves, will they meet that firmly stated desire of Iowa voters?

Many eyes will be watching.

Posted by Will Hoyer, Research Associate

Implementing Health Reform: Early Successeses

A number of health-reform provisions already have taken effect, and are showing results.

Andrew Cannon, research associate
Andrew Cannon

The new health reform law is already helping thousands of Iowans and small businesses.

Though the major provisions of the health reform law won’t be implemented until 2014, a number of provisions have already gone into effect.

The new law provides tax credits to small businesses that offer health insurance to their employees. The rapid growth of premiums over the past decade have made insurance provision extremely difficult for small businesses. According to the Agency for Healthcare Quality and Research’s Medical Expenditure Survey, In Iowa, just 28 percent of firms with 10 or fewer offered insurance to employees, compared to 92 percent of firms with 100 or more employees.

The Wall Street Journal‘s Janet Adamy reported Tuesday that the percentage of small businesses with three to nine employees offering health insurance to employees has increased significantly over the past year — from 46 percent to 59 percent. Researchers at Bernstein Research attribute that growth to the health reform law’s small business tax credits.

In addition to small businesses, health reform is helping Iowa prepare for full implementation of the law and helping Iowa’s seniors. The state received a $1 million grant to plan for a Health Insurance Exchange, one of the key components of the overhaul.

Though Medicare recipients gained prescription drug coverage through Medicare Part D in 2003, the law had a $2,000 gap in coverage — often called the “donut hole.” Early implementation of health reform lessens that gap, by providing a $250 tax-free rebate to Medicare recipients. In Iowa, 17,774 Medicare beneficiaries have received the rebate.

Posted by Andrew Cannon, Research Associate

Why is Iowa government smaller?

Iowans might be surprised to learn that sensible measures indicate Iowa government actually has declined.

Andrew Cannon, research associate
Andrew Cannon

Calls for smaller government carry a number of distortions. Our roads, schools and public health, to name just a few publicly financed services, often operate with the bare minimum financing as it is.

The primary distortion, however, involves concepts about the size of our state government.

Iowans might be surprised to learn that sensible measures indicate Iowa government actually has declined.

Iowa’s General Fund spending as a share of the economy has decreased by more than 26 percent since the early 1990s.

When measured by personal income — all the income generated each year by all Iowans — General Fund spending peaked in Fiscal Year 1997, at 6.4 percent. In FY10, General Fund spending was just 4.7 percent of Iowans’ personal income.

And that is not just a result of the recent Great Recession and the 10 percent across-the-board budget cut by Governor Culver. In FY09, spending as a share of personal income was 5.5 percent — nearly a full percentage point lower than the high-water mark of the late 1990s.

Posted by Andrew Cannon, Research Associate

Figure 1 from IFP brief, "Getting Public Value Out of Our Public Dollars"
Figure 1 from IFP brief, "Getting Public Value Out of Our Public Dollars"

Tough choices look at total budget

Iowans rely on many publicly funded services.

Andrew Cannon, research associate
Andrew Cannon

It’s easy to forget all the publicly funded services on which Iowa businesses, health and personal lives rely.

Funding for education — our public universities, community colleges, and state aid to local schools — consumes more than 60 percent of Iowa’s budget. Realistically, there simply is no way to reduce General Fund spending without touching education.

We expect and rely on safe, well-maintained roads and highways. We need water that is clean and drinkable. We enjoy parks that are kept neat and safe by public funds.

Budgeting requires tough choices, even when the economy is thriving. Balancing a budget in tough times — when needs are greater than usual — is even more difficult.

Iowa has cut quite a bit already. Further reductions would come at a price that might not be so apparent on a sheet of paper. But they would become clear as Iowans move about their daily lives.

Posted by Andrew Cannon, Research Associate