Dispelling Misconceptions
The Truth about the Estate Tax and the Imprudence of Repeal — an interview with Rep. Xavier Becerra of U.S. House of Representatives
Katrina C. Gonzales
Andrew Zee | UC Davis School of Law

Posted Monday, May 1, 2006
6 U.C. Davis Bus. L.J. 26 (2006)

Elected to the House of Representatives in 1992, Rep. Xavier Becerra is the only member from Southern California to currently serve on the powerful House Committee on Ways and Means. Rep. Becerra currently serves as the Chairman of both the Congressional Hispanic Caucus's Technology, Communications and the Arts Task Force and the Social Security Task Force. At the international level, he serves as Vice Chairman of the U.S.-Korea Interparliamentary Exchange. In addition to his congressional duties, Rep. Becerra serves on the Smithsonian Board of Regents, a distinguished panel of 17 men and women who oversee the Smithsonian Institution's expansive collection.

Prior to his election to Congress, Rep. Becerra served one term in the California Legislature as the representative of the 59th Assembly District in Los Angeles County. He is a former Deputy Attorney General for the California Department of Justice and began his career in 1984 working in a legal services office representing the mentally ill. In 1980, Rep. Becerra earned his Bachelor of Arts in Economics from Stanford University. He was awarded his Juris Doctorate from Stanford Law School in 1984.

Q: Do you think there is a particular aversion to this tax more so than the income tax, property taxes, or any other kind of tax?

A: I don't think most people would make that distinction. I think they only hear the word "tax." Once I've said, "I want you to take some medicine," I've already lost 80% of you who say, "I don't care what kind of medicine it is, it's going to be medicine." Even if I tell you it's medicine that tastes like apple pie, you would probably still be reluctant to take it. It's the same with taxes. I think it's the fact that it's a tax that leads to an aversion. It's like death and taxes. We associate taxes with death. In every respect taxes have been given a dirty name.

Q: Supporters of the repeal have called it an unfair tax on wealth. If people think that it affects everyone anyway, why not distribute it more equitably across society?

A: Because it is fundamentally a tax on extreme wealth and the reality is that the vast majority of society will never reach those levels of wealth. So it's never going to be a tax that can be spread the way an income tax can or a sales tax can. This is a tax that was always directed at a minute percentage of the population. It was originally imposed to help pay for extraordinary government expenditures, in the case principally of war. It has always been a tax that has been focused and directed. It will never be a generic tax. It will never be a tax meant to be spread across the population. It also serves the purpose of avoiding, at least in this country, a return to the days when aristocracy used to determine your station in life. There's always a belief that we want to avoid having your station of birth determine your station as an adult.

Q: Much of the debate centers on taxing wealth and inheritance. Do you view inheritance as an unassailable right or as a privilege afforded by society?

A: I think there is a right to inheritance. However, I think there is a limitation of what falls within that right. It's like the Rule of Perpetuities. You can only extend to a logical degree that which is yours. So long as we remain sensible, I think it's fair to speak in terms of rights of inheritance. Is it your right to inherit property that, had it been sold, would have resulted in the taxation of both the person selling and the person buying? Should there be no tax simply because you transfer property to your blood relative? That is not sensible and distorts the notion of inheritance as a right.

Q: As you mentioned, the tax was initially imposed to raise revenue for very special and extraordinary objectives. Has it become part of the overall taxation scheme or is it still used to raise revenue for extraordinary purposes?

A: It's possible to take the money we receive from the estate tax and use it for an extraordinary government activity or expenditure. However, at this stage we see it as part of a menu of revenue-raising tools that the government uses to meet the needs of the general populace. It's no longer identified with any particular expenditure, extraordinary or otherwise. It has become a part of the government's revenue-raising portfolio and is essential to maintain some very fundamental services. So the question becomes, if you repeal the tax on estates, will you then propose to raise a new tax, increase an existing tax, or reduce particular services the government currently provides? I think the question has always been not of repealing, but of how to make the best use of the money.

Q: Can you address how the repeal effort fits into the current administration's overall tax scheme?

A: I'm probably not the best person to talk about the logic or purpose behind this administration's tax policy because I fail to find much logic or meaningful, universal purpose in the tax policy. We are running the largest budget deficits this country has ever known. We are in a prolonged, protracted military struggle outside of this country in places like Iraq and Afghanistan, and have taken on extraordinary expenses as a result of natural disasters. Given these circumstances, I find it very difficult to comprehend the purpose of continuing to promote tax cuts that benefit principally very, very wealthy folks. And, it is equally difficult to comprehend why we should make those tax cuts permanent in ways that will drain the treasury of funds needed to cover not just these current activities of the federal government, but future activities as well. As you know, future federal spending will become more important and more difficult to address as the baby boom generation begins to retire. We have Social Security and Medicare healthcare issues that we face for our retiring senior population.

So it's hard for me to make sense of the policy. If you are to look at its results, the policy is aimed at reducing the tax burden of wealthier individuals who, as proponents point out, pay the lion's share of estate taxes. If it is meant to flatten what has been for generations the progressive nature of our tax system, then the proponents are succeeding in reducing the burden on very wealthy folks and on corporations. The policy then shifts the burden principally onto middle-income families, since modest-income families already have protections which prevent them from paying very much in income taxes. Although when you consider non-income-based taxes like Social Security, sales tax and so forth, modest-income families continue to take on a higher share of the burden.

If you extend that analysis beyond the federal government, you'll see how the state and local governments have in essence shifted the tax burden more onto middle and modest-income families because they lose revenues for the federal government. What they have resorted to are increased local fees and state taxes. In California, the fees that students must pay to go on to higher education - whether community college, state college or the U.C. system - have increased dramatically. If you want to go visit a state park, you're paying more in entrance fees. Local governments are increasing their trash collection fees, and fees for other local services. The administration's policy hasn't eliminated the need to collect revenues at whatever level of government. It's just shifted the burden of providing those revenues from wealthier individuals and from corporations onto middle and modest-income families.

Q: Given the current political climate, can you address the fate of the repeal effort?

A: I think circumstances have become very challenging for this administration. Political conditions within Washington have become challenging for Republicans generally. I think the atmosphere for repeal of the estate tax has lost a lot of steam. It is probably not the preferred tax cut that a majority of Republicans would support if they could only move on certain tax cut proposals. I suspect there are several who would like to make this permanent because they see it as a victory and another step in their path toward realigning the tax system. However, for many repeal proponents running for reelection, it would be more important to be able to go back home and say they did something that's going to help a lot of folks, and live to fight another term in office for permanent repeal.

I think the skies are turning cloudy for permanent repeal of the estate tax at this stage. But I have been amazed at how fervent some proponents of these tax changes have been - and again we're talking principally Republicans here - and how aggressive they have been in moving this agenda. To me, there's a logic to it if you really do believe that the federal government has grown too big and is injecting itself into areas where it was never meant to be. There's a logic to it if you believe that national security should be its principal concern and that states and local governments should take care of things like education, health care, housing, and so forth. Then it makes perfect sense to try to deplete the treasury to ultimately lead toward the elimination of programs that the federal government could no longer afford.

Q: Has there been any support for specific alternatives proposed by the Democrats?

A: I think most people believe that we can reform the estate tax and make it a fair means of addressing everyone's concerns. There have been proposals before Congress that would continue to increase the exemption to about $3.5 million and then make that exemption level permanent. Some have talked about having the exemption level adjust with inflation. Others have talked about increasing the types of assets that can be sheltered, or ways to shelter, so that you end up with a tax that probably would affect no more than one half of one percent of the American public that dies. Currently, about 2% of Americans qualify for the tax and could possibly pay something. Remember that paying something doesn't mean that you're paying at the effective tax rate, listed at 45%. If you start paying taxes only on dollars that are above the threshold, then the effective tax rate on your estate is far less than the listed tax rate. Much of your income will have been shielded from any taxation whatsoever.

Q: It sounds like there is some misunderstanding over the effective taxation rate of qualifying estates.

A: That goes back to the whole issue of why people hate the tax when so few people actually pay it. You hear "tax" and you automatically hate it. You hear "tax" and you automatically think you're going to get hit at the set tax rate. Even among folks who are taxed, the vast majority pay far less than the listed tax rate for their estates.

The alternative is to continue increasing the exemption so that you're letting most estates escape any taxation whatsoever, but you're still capturing the mega-wealthy estates and still receiving substantial revenues from those estates that remain.

Q: Do you believe that passage of the alternative legislation you've described would effectively take the wind out of the sails of the permanent repeal campaign?

A: There's always going to be a breeze. There's always going to be someone who will get support by saying "I want to get rid of this tax" because most Americans would love to hear that. They don't care what it is because they figure they have to pay it anyhow. There will always be some momentum toward repeal. Speaking tactically, it helps when you put a reform in place and then those who wish to eliminate it completely have to argue why the reform is not enough. In contrast, those who are trying to eliminate the tax right now simply say, "It's a bad tax to begin with and the solution is to repeal it."

If the reformers have a chance to win the day, and the proponents of repeal have to get out there and argue that reform is not enough, it becomes a very difficult argument to win. It will unmask that proponents favor repeal for a very small segment - the wealthiest segment of American society. I think that's when the general public will say we've done about as much as we need to with this tax. There are enough other taxes that we have to reform.