Prospect of end to estate tax worries some charities

Efforts this year by the Republican-led Congress to kill the estate tax have come up short. On Aug. 31, President Clinton vetoed legislation that would have phased out the tax by 2009.

But if George W. Bush gets into the White House, that veto would likely disappear. The prospect concerns executives of many charitable organizations.

"The estate tax creates a powerful charitable-giving incentive," notes the Independent Sector in an issue brief for its members - 740 foundations, corporations, and nonprofit groups.

To avoid paying tax rates as high as 60 percent (a federal maximum of 55 percent, and perhaps 5 percent on the state level), many people either make donations during their lives, or set up charitable bequests for when they pass on.

What would the absence of an estate tax mean for charity?

* Research by consulting firm Price Waterhouse suggests charitable bequests could tumble up to 30 percent with an end to estate taxes, says Peter Shiras, a senior vice president at the Independent Sector.

* A recent paper by David Joulfaian, a Treasury Department tax analyst - done for the National Bureau of Economic Research in Cambridge, Mass. - finds that giving by the wealthy would shrink about 12 percent. Mr. Joulfaian is considered by academics to be the top expert on the impact of estate-tax elimination on charity.

* "It is likely that if the estate tax is eliminated, charitable bequests will fall substantially," affirmed Mr. Clinton's Council of Economic Advisers (CEA) in a report issued late last month.

If any of those sources are correct, the "thousand points of light" trumpeted by George W.'s father, former President Bush, in a campaign to boost nonprofit activities, could dim.

Individual Americans gave $144 billion to charity last year. They left an additional $16 billion in bequests to philanthropy.

Some donors' goals are sincerely aligned with the goals of a given charity. Others' motives often include a desire to avoid turning over wealth to Uncle Sam in taxes.

Without estate taxes, the well-to-do could leave more of their wealth to children or to charity. (Bequests to spouses are tax-free.) But they would have less incentive to give to charity.

The Joulfaian study suggests donations by the living rich would decline $3 billion a year without the estate tax. These people would reduce their charitable bequests by an additional $2 billion.

If Price Waterhouse is right, bequests to charities alone would plunge $5.2 billion a year now - and more in future years. Mr. Shiras notes that only in recent years have charitable organizations focused more of their fundraising efforts on seeking bequests.

"So much of giving is a result of simply being asked," he says. Since charities are now asking more often for bequests, they are expecting to get more bequest money as time goes on.

Only 1.4 percent of estates are subject to what the Republicans call the "death tax." Last year the tax kicked in on estates worth more than $650,000. That floor is scheduled to reach $1 million by 2006. The tax currently generates about $24 billion a year in federal revenues.

Charitable organizations see potential bequest revenues from the baby-boom generation as high as $5 trillion over decades, says Shiras: "It is huge."

At present, 31.6 percent of bequests go to educational, medical, and scientific organizations, 30.9 percent to private foundations, 10 percent to religion, somewhat more than 2 percent to the arts and humanities, and the remainder to "others."

Foundations themselves have become a significant source of charity and other "good works." In 1999, they gave $20 billion. If they get fewer bequests or fewer foundations are created as a result of ending the estate tax, that source of charity would atrophy too.

So far, charities have been reluctant to lobby Congress to keep the tax. After all, many of their big potential donors don't like the idea of this tax diminishing their estates, even though careful estate planning means that most large estates pay far less than the maximum 55 percent rate.

Proponents of abolishment usually say the tax makes it impossible for some owners of small businesses and farms to pass on their operations to offspring.

Even if the tax is gone, says Damon Dozier, an official with National Small Business United in Washington, most donors will continue giving to charity.

Joel Slemrod, a tax expert at the University of Michigan, says the small-business problem is a case of "the tail wagging the dog." The law already includes provisions to moderate the impact of estate taxes on them. And most estate-tax revenues come from a few hundred estates of the very rich.

He suspects Congress, evenly divided between Republicans and Democrats, will not abolish estate taxes completely. Rather, it will raise the tax-free level to, say, $5 million, lower the maximum rate to 40 percent, and close some "egregious loopholes" in the code.

(c) Copyright 2000. The Christian Science Publishing Society