01/29/2002 08:03 AM House STA
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ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
January 29, 2002
8:03 a.m.
MEMBERS PRESENT
Representative John Coghill, Chair
Representative Jeannette James
Representative Hugh Fate
Representative Gary Stevens
Representative Peggy Wilson
Representative Harry Crawford
Representative Joe Hayes
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 35
Relating to urging the United States Congress to amend the tax
code to permanently repeal the death tax.
- MOVED HJR 35 OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HJR 35
SHORT TITLE:REPEAL ESTATE TAX
SPONSOR(S): REPRESENTATIVE(S)JAMES
Jrn-Date Jrn-Page Action
01/22/02 2029 (H) READ THE FIRST TIME -
REFERRALS
01/22/02 2029 (H) STA
01/22/02 2029 (H) REFERRED TO STATE AFFAIRS
01/29/02 (H) STA AT 8:00 AM CAPITOL 102
WITNESS REGISTER
HEATH HILYARD, Staff
to Representative Jeannette James
Alaska State Legislature
Capitol Building, Room 214
Juneau, Alaska 99801
POSITION STATEMENT: Testified on behalf of the sponsor
regarding HJR 35.
ACTION NARRATIVE
TAPE 02-3, SIDE A
Number 0001
CHAIR JOHN COGHILL called the House State Affairs Standing
Committee meeting to order at 8:03 a.m. Representatives Fate,
Crawford, Hayes, and Coghill were present at the call to order.
Representatives James, Stevens, and Wilson arrived as the
meeting was in progress.
HJR 35-REPEAL ESTATE TAX
Number 0063
CHAIR COGHILL announced that the only business would be HOUSE
JOINT RESOLUTION NO. 35, Relating to urging the United States
Congress to amend the tax code to permanently repeal the death
tax.
Number 0102
HEATH HILYARD, Staff to Representative Jeannette James, Alaska
State Legislature, presented HJR 35 on behalf of Representative
James, sponsor. He compared HJR 35 to HJR 34 - which was
introduced by Representative Coghill during the Twenty-First
Alaska Legislative Session - as being similar in wording and
nearly identical in intent. He explained the main reason [the
sponsor] had chosen to revisit the issue was that in 2002,
President Bush signed into law a tax-relief Act that included a
temporary repeal of the so-called death tax that would "sunset"
in 2010.
MR. HILYARD forewarned the committee that his scope of knowledge
on federal tax policy was limited, but said he had received a
"crash course" while researching [HJR 35]. He stated his belief
that there is ample evidence to support the repeal of the death
tax and, therefore, to support [HJR 35].
Number 0189
MR. HILYARD offered the following:
As indicated in the sponsor statement, not only does
the death tax disproportionately tax several ...
demographic groups, it also does not justify its own
existence from a fiscal perspective.
In the same study cited in the sponsor statement,
using very sophisticated econometric models, analysts
believe that had the tax been repealed in 1996, the
nation's economy would have yielded an average of $11
billion in additional output, created an average of
[145,000] new jobs, and personal income would have
increased by an average of $8 billion over the
following nine years. The overall increase in the
national economy would have created enough additional
revenue to compensate for that ... which had been
generated by the tax.
MR. HILYARD noted that he had recently received a statement of
support for HJR 35, included in the committee packet, from the
National Federation of Independent Business [NFIB], Alaska. He
read from that statement as follows:
In addition to the tax itself, thousands of small
businesses are impacted each year by expensive fees
paid to attorneys, accountants, and life insurers
necessary to ... prepare for an eventual death tax
[debt].
MR. HILYARD welcomed questions from the House State Affairs
Standing Committee.
Number 0322
REPRESENTATIVE FATE asked Mr. Hilyard to define the difference
between death tax and estate tax.
MR. HILYARD responded that his understanding was that the death
tax and estate tax, although not identical, are part of the same
tax Act under federal law. He explained that the death tax
would tax the earnings of inheritors with respect to the total
value of the estate. Regarding the determination of value and
amount of tax applied, Mr. Hilyard noted there are "somewhat
complicated models."
Number 0389
CHAIR COGHILL stated his understanding that the death tax
encompasses the estate tax.
Number 0420
REPRESENTATIVE FATE said [he supported HJR 35]; however, he
asked if the nomenclature was proper. He suggested that the
term "death tax" connotes that there is one tax - it's singular.
He noted that there are "several winding roads" when considering
estate taxes, which are not simple. He stated that he hoped
that [the resolution] does not connote that a death tax is a
simple thing. He expressed his concern that the language of the
resolution could be misinterpreted.
Number 0493
MR. HILYARD told Representative Fate that he believed the formal
title of the federal Act relating to [the death tax] could be
found [on page 1, lines 4-5 of HJR 35], which reads in part:
"the federal estate and generation-skipping transfer tax".
Number 0517
REPRESENTATIVE FATE reminded Mr. Hilyard that the federal
legislation "would not encompass it if it was piecemeal." He
continued as follows:
It did not address the whole broad spectrum of
inheritance taxes. It only just chewed away at a
little bit. And there was some cause for some concern
about the lack of all-encompassing taxes, as a matter
of fact, in that. So, we cannot compare what the
legislation was at the federal level with what this
says.
Number 0556
REPRESENTATIVE JAMES agreed that estate tax is a complicated
issue. If it should "go away," as the resolution proposes, many
other changes would have to be made, particularly in regard to
capital gains, she added. She mentioned all-encompassing
decisions and removing unfair tax. She continued:
Probably, if people were to, as an example, inherit
some property, the way it is currently, they inherit
the property at the fair market value at the time of
the death. And that's where the recipient pays no
taxes, but the tax is paid from the estate. If that
were to change, then ... the amount that you would
receive, you would have to get it at the base value,
not the fair market value. So, at some time in the
future when that property was sold for more money,
someone would be paying taxes on that capital gain.
I don't think that we have any intent to do away with
making some capital gains not taxable at all and
others taxable, because that wouldn't be fair. People
understand what fairness is. So, it's assumed that
when they do this that they'll make all the other
adjustments that they have made, in order to tax this
entity, as opposed to taxing the people who are the
recipients - that those changes will be made.
And Representative Fate is absolutely correct. Every
single tax we have on the books, and in a particular
case, if we were to say here, repeal the income tax,
how entangled that would be to fill out that whole
bundle of changes over the years. And yet there's an
awful lot of other adjustments that have to be made to
make it fair and equitable over time. I don't think
there's any intent to not have people pay taxes on
capital gains. I think the issue is: do you need to
sell it to pay the taxes when the death occurs. And
sometimes that destroys family businesses, and I don't
think that's fair.
Number 0752
REPRESENTATIVE WILSON referred to [lines 1-2] of the resolution,
which read, in part, "to permanently repeal the death tax." She
said that appeared to be "pretty encompassing." She emphasized
the importance of supporting [HJR 35], because the population
that is adversely affected by [the death tax] includes
minorities and small businesses in Alaska. Representative
Wilson added that the [misconception] is that [the resolution]
would solely help rich people.
Number 0827
REPRESENTATIVE CRAWFORD asked Mr. Hilyard at what point the
death tax "kicks in." He asked whether it is the total
valuation or the net valuation. He added, "As far as I know,
it's the assets minus the liabilities."
Number 0876
MR. HILYARD answered that regarding the point at which it "kicks
in," he understood it ranged between $10,000 and $100,000. He
stated his suspicion that those numbers were "accelerators" in
terms of the total tax rate. He suggested Representative James
would have more knowledge of the matter. With respect to total
valuation, he said the other standard tended to be fair market
value. He surmised that fair market value would be determined
by combining assets and liabilities to derive the total value.
Number 0949
REPRESENTATIVE JAMES mentioned the accelerated value of property
and rising "past the estate-tax level." She remarked that she
had not done a generation-skipping tax return for approximately
15 years. Because she has not done consulting recently,
Representative James said she was not certain of the "level";
however, she said it was formerly at $600,000. She said many
people were considered rich who were not actually wealthy,
because of the assets which they had accumulated. Homesteads
and property values have accelerated so much over the years, she
noted, that there would be considerably more people in Alaska
now versus in the past who would be subject to generation-
skipping tax, without the bequeather making arrangements prior
to their deaths to transfer their property by allowable,
nontaxable methods. She concluded:
I don't know what that answer is, but regardless of
what the answer is, I believe that it grossly,
negatively affects an awful lot of families when
they've been able to accumulate valued property that
has a lot of capital gains on it over the years.
Number 1071
MR. HILYARD repeated that he could not answer what the current
standards are. He said one key piece of legislation currently
before Congress is S. 275, the Estate Tax Elimination Act of
2001. He noted that this bill proposes to repeal all federal
death taxes immediately, to exempt approximately $3 million in
family assets from capital gains taxation, and to tax
intergenerational wealth transfers above [this amount] and cap
that at about 20 percent.
Number 1145
CHAIR COGHILL commented that he did not know when [Americans]
got to the place where they thought the government had the first
claim on their inheritance. He emphasized his appreciation of
the resolution. Though the [House State Affairs Standing
Committee] would not be settling the actual dollar amount, Chair
Coghill expressed the need for the committee to send the
resolution to Congress to encourage its members to consider how
much of people's life inheritance should be taken from them.
Number 1205
REPRESENTATIVE CRAWFORD mentioned that Congress had debated this
issue and had decided that "if two parents die, the first $1.2
million is for free." He said he was not certain to what amount
that may have been raised. He stated his opinion that an
inheritance of more than $1.2 million, whether it was stocks and
bonds or real estate, should still be considered income;
therefore, it was unfair to tax those with incomes from regular
employment, but not tax those who inherit more than $1.2 million
[in assets]. He said, "It seems to me like a real unfair tax
break for somebody to get so much money at one point and not
have to pay a tax on it."
Number 1334
REPRESENTATIVE JAMES responded as follows:
What they're capitalizing here is the two times
[$]600,000, which is the threshold as to when you even
have to file a generation-skipping tax ... return.
And like I said, it's been awhile since I have done
it. ... If you get $1.2 million worth of property, if
it's cash, that's one thing; but if it is property,
there's a basis in that property. And the only reason
it is in this estate is because they have never sold
it.
The whole issue of capital gains is a real debatable
issue as to when you're forced to sell what you have,
to be able to pay your taxes. And so, I honestly
believe that in the end result, ... they probably will
transfer this $600,000 worth of property to the
various, different beneficiaries, and the
beneficiaries will put it on their books at the basis,
not the value.
That's the ... issue. ... If there's no tax on it,
then it comes to you at the basis. If you have a
piece of property that the basis of it is $250,000 and
it's now worth $700 million and you inherit this piece
of property, it's going to be worth $250,000 to you.
And if you sell it, you're going to have to pay taxes
on the value of it - you, because now you're the one
that's earning that capital gain. I don't believe
there's any intent in doing away with the inheritance
tax, doing away with allowing people to enlarge their
estate. ... And when they liquidate it, it gets taxed,
not before. And what ... the problem is with
inheritance tax is it's taxed the minute the person
dies and so, therefore, no one gets the opportunity to
have that property at its basis, instead of at the ...
accelerated price.
Number 1469
REPRESENTATIVE FATE clarified that the issue was inheritance,
not gifting to someone outside the immediate family. He cited
the example of parents who do not have a large cash flow, but do
have property, bequeathing that property to their offspring. At
the time of the parents' death, he continued, that property is
taxed to the extent that their inheritors can't pay the taxes
and lose the property. He added, "Why even have the incentive
to produce all your life, if you can't pass it on to your
children."
Number 1555
REPRESENTATIVE CRAWFORD cited an example of a personal friend
who had inherited stocks and bonds from her parents - an estate
valued at approximately $10 million. The first $1.2 million was
tax-free, but she'd had to pay tax on the stocks and bonds
exceeding that amount. Representative Crawford asked if that
sort of income would be exempt or included under this plan.
Number 1595
REPRESENTATIVE JAMES responded that the provision is part of the
inheritance tax - the federal estate and generation-skipping
transfer tax. If that law is taken off the books, she said,
then those issues will have to be addressed separately in laws,
because this exemption would not still exist, since it is part
of the federal estate tax. Representative James stated that she
did not believe that [Congress] would transfer large amounts of
property to persons at the fair market value at the date of
death, if the estate tax is abolished. Conversely, [the
property] would be transferred at the basis - or cost - of it,
and when [the inheritor] liquidates [the property], tax will be
due on the income.
Number 1673
CHAIR COGHILL credited Representative James for making an
excellent point. He issued a reminder that the property in the
aforementioned example had already been taxed through [the
benefactor's] lifetime, so the government had already received
its share of any capital gain "all the way down the road
anyway." He reiterated Representative James's comment that the
property would be taxed when liquidated, and he added that
therefore the government would be receiving its share. He
clarified the point was to ask if, at the termination of the
bequeather's life, the asset could be transferred without the
government's getting more than the inheritors.
Number 1710
REPRESENTATIVE CRAWFORD expressed the need for further
clarification. He referred to his previous example and pointed
out that, to his knowledge, the stock had never been taxed,
other than dividends; none of the gain had ever been taxed, from
the time that his friend's parents bought the stock until the
time she inherited it from them. Her parents had given her
gifts of $10,000 for each birthday to "transfer that, so that
they could beat some of those taxes at death," he said; however,
there was still a considerable amount of taxable money left at
the time of their deaths.
Number 1759
REPRESENTATIVE JAMES stated that the provisions of giving
$10,000 a year tax-free and getting the $1.2 million exempt
would no longer exist if the federal estate tax and generation-
skipping transfer taxes were abolished. She continued:
What happens, then, is the same as if anybody would
give you anything today: Your family transferred this
property to you, which is worth $1 million, or
whatever, and it never has been sold. They transfer
it to you before they die, and you take it at the
basis. In other words, if they had $250,000 in it,
you take it. The tax is not paid until that property
is liquidated, and then the capital gains is
recognized by whoever is selling it. That's part of
the estate tax that we're talking about, is the
unfairness that's in the estate tax. If the estate
tax goes away, we'll be having the same provision as
if I gave you something today. If I gave you
something today and it was an inheritance type or
whatever, I'd have to pay the tax. If I gave you
something that was worth $10,000, that I only had
$2,000 in it, and if I give that to you today, I have
to pay the tax immediately on the difference between
the two and the ten. You don't have to pay anything
because it's a gift to you.
... If you take the estate tax away, if I want to give
you something that is $10,000 worth and I only have
[$2,000] in it, the only thing I can do is will you
that at the $2,000 value at some time in the future.
And you liquidate that - then you'll have to pay the
taxes because you're the one that's getting the
benefit from selling the property.
... All those other little things are kind of like the
income tax, where we have something, and then we have
to fix this, and this, and this. My personal belief
is that that tax goes away, all of those things get
[put back] into perspective, and there is no real ...
windfall for people without the taxes having been paid
on the ... accelerated capital gains on these
properties. That's my personal opinion.
Number 1876
REPRESENTATIVE FATE, as one example of how complex this subject
is, admitted he didn't have an understanding of how far spousal
exemptions extend. He stated that without an expert present to
testify, it was beyond his capability to make a decision. He
acknowledged Representative James's former experience in the tax
field. Representative Fate expressed his suspicion that the
committee was saying things that were not quite correct. He
said HJR 35 was a "plain bill to correct some inequities," and
he supported it.
Number 1984
REPRESENTATIVE WILSON indicated a need for clarification of
terminology. For example, she mentioned "basis" as a
potentially unfamiliar term. She said whether it's land or
stocks and bonds that are inherited, it is worth nothing in
terms of cash to the person who inherited it, until it is sold.
Representative Wilson concurred with Representative James that
the point of sale is when the inheritor is taxed. She stated
her understanding that if an inheritance tax is levied at the
point of inheritance, often the inheritor is forced to sell the
inheritance to get the money [to pay the tax].
Number 2063
REPRESENTATIVE CRAWFORD surmised that according to
Representative James's previous example, if his aforementioned
friend never sold the stock that she inherited and passed it on
to her children, there still would not have been a transfer of
wealth. He said, "Maybe she doesn't feel like she's gotten
wealth, because she hasn't spent it all yet, but she sure seems
richer than me. And it certainly seems to me that income is
income." He said before he would give the resolution his
approval, he would like to know if land and businesses were
being treated separately from cash and stocks and bonds.
Number 2129
REPRESENTATIVE FATE moved to report HJR 35 out of committee with
individual recommendations and the accompanying zero fiscal
note.
REPRESENTATIVE HAYES asked Mr. Hilyard what the vote in Congress
was.
MR. HILYARD clarified that Representative Hayes was inquiring
about the temporary appeal. He said he did not know the final
vote; however, at the time of the analysis which he studied, it
was his belief that [congressional] H.R. 330 was widely
supported, with 149 cosponsors.
[An objection was stated to the motion.]
Number 2185
A roll call vote was taken. Representatives Fate, Hayes, James,
Stevens, Wilson, and Coghill voted for moving HJR 35 from
committee. Representative Crawford voted against it.
Therefore, HJR 35 was moved out of the House State Affairs
Standing Committee by a vote of 6-1.
CHAIR COGHILL stated his intent to cosponsor the resolution.
REPRESENTATIVE FATE indicated the same. [HJR 35 was moved out
of committee.]
ADJOURNMENT
Number 2290
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at 8:40
a.m.
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