A Small Business-Estate Tax Myth?

For years, estate tax opponents have argued that the levy is a big killer of family-run small businesses.

But do the numbers back them up?

The answer has big implications for what happens to the estate tax, because Congress this year will almost certainly take action to straighten out an impending disaster.

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A few years ago, mired in a debate over whether to repeal the estate tax permanently, lawmakers decided to punt: They approved a measure that abolishes the estate tax for just one year -- 2010 -- and then brings it back in 2011 with a top rate of 55% and a $1 million exemption amount.

To avoid this seesaw effect, it's a good bet that lawmakers will OK a compromise before year end. President Obama and leading Democrats on the Hill are talking about keeping the estate tax at 2009 levels: An exemption amount of $3.5 million ($7 million for a couple) and a top rate of 45%.

Many staunch estate tax opponents are already lobbying to nudge that $3.5 million a bit higher. Their argument: If you exempt estates valued at up to, say, $5 million or even $10 million, you still catch the Bill Gateses and Oprah Winfreys of the world while saving a lot more small businesses that otherwise would have to be sold off to pay estate taxes.

But is that really true? A new analysis from the Urban Institute-Brookings Institution Tax Policy Center indicates otherwise. Using data from the IRS on the number of estate taxpayers and returns filed by state for 2007, this analysis projects that under current law there would be 6,160 taxable estates in 2011, when the exemption amount drops to $1 million. Out of that total, roughly 100 would be small businesses, though the tax policy center says that number could go as high as 150, depending on what happens to asset values in the next two years. And of course, it would be fewer if the exemption goes to $3.5 million.

But wait, there's more. In 2005, when the estate tax exemption amount was $1.5 million, the nonpartisan Congressional Budget Office released a report showing that only 300 farms were subject to the levy. To drill down further, all but 27 of those 300 farms would have enough liquid assets to cover the tax.

A few hundred firms, out of the more than 20 million small businesses in this country? If those two reports are accurate, they make a strong case for keeping the estate tax at current levels. It's hard to see how exempting estates with values up to $3.5 million wouldn't protect an overwhelming majority of family farms and other small businesses. Those in Congress arguing otherwise are facing an uphill battle.