Permanent repeal of Wisconsin's estate tax remains uncertain

Expect Wisconsin to follow Washington's lead when it comes to the future of the estate tax.

The state tax went on hiatus Jan. 1 as the federal tax continues to be phased out until it goes away in 2010. But the phaseout has a sunset, and the federal tax will return in 2011 unless Congress takes action to repeal it.

With the way state law is written, Wisconsin's estate tax would make a return as well, much to the chagrin of small businesses and farmers.

What happens to the federal tax will likely depend heavily on the political makeup of Congress and the presidency after this fall's election. But regardless of who controls Washington, D.C., it's a good bet that Wisconsin lawmakers will take their cues on the estate tax from their federal counterparts, observers say.

From 1992 to 2002, Wisconsin's tax equaled the credit the federal government offered for state estate taxes paid. In other words, the state tax paid resulted in a dollar-for-dollar reduction in the amount paid to the federal government, grabbing dollars that otherwise would have gone to the federal government.

The state changed the way it collected the tax after the federal government approved the phase-out in 2001. But the old formula would return if the estate tax makes a comeback in 2011.

Depends on federal action

Todd Berry, president of the Wisconsin Taxpayers Alliance, said that will likely be a key factor in what the state decides to do in a few years.

If the federal government eliminates the tax, it would be hard for the state to bring back the tax on its own.

If the federal government allows the tax to return, state lawmakers would likely be content to return to collecting a tax equal to the state credit offered because the state wouldn't be adding anything to the total amount of estate tax paid.

"You could predict that state legislators generally would rather get their fingers in the federal government's pockets than get their fingers in the taxpayers' pockets that have already been picked," said Berry, who served as assistant secretary of the Wisconsin Department of Revenue.

Berry said it's more likely that a Republican Congress and president would move to permanently repeal the federal tax. Even if Democrats control Congress and the presidency when the federal sunset ends in 2011, they will likely push the threshold high enough that it wouldn't hit smaller estates, he said.

As part of the phaseout approved in 2001, Congress began exempting more estates from the tax on a sliding scale. Before the changes, any estate worth $675,000 was subject to it. For 2009, estates worth less than $3.5 million are exempt from the federal tax.

If the sunset occurs, the threshold would be $1 million, barring congressional action to change it.

Berry said some believe lawmakers would move to keep the threshold more in the $3.5 million range if the federal tax comes back.

"If that were to happen, Wisconsin would just come back with the status quo and have an estate tax again with the federal credit," he said.

Two groups favor repeal

Two of the groups most interested in repeal are farmers and small business owners.

The Wisconsin Farm Bureau Federation's Casey Langan said a total repeal remains a priority for the organization, which has been encouraging members to seek out professional estate planning help to prepare for the uncertainty of the next few years.

The U.S. Department of Agriculture census of farm data from 2002, the most recent year available, found about one in 10 Wisconsin farms had land and buildings worth at least $1 million.

The average Wisconsin farm is now around 200 acres, and some farm land is going for $2,000 to $3,000 an acre, Langan said. That means more and more farms are going to approach that $1 million threshold that would be in effect if the sunset occurs.

"The Farm Bureau on the state and federal level have always wanted to see the permanent repeal of the estate tax because it hampers the transition of family farms from one generation to the next," he said.

Wayne Corey of Wisconsin Independent Businesses Inc. said the organization wants a full repeal as well and had hoped things were moving that way. But he said he won't make any predictions about what will happen next with the tax until after the fall elections.

Still, he expects Wisconsin to phase out its tax for good should the federal government decide to make that move. If that doesn't happen, he expects at least some tweaks to the tax, but won't venture a guess beyond that.

Following the feds

"I think Wisconsin will go in lock step with the feds as long as the feds are phasing out the tax," said Corey, whose group represents small businesses. "If the feds are not phasing out, I suspect all bets will be off a far as what Wisconsin does, no matter what party control both houses of the Legislature."

State Rep. Dan LeMahieu, R-Cascade, introduced legislation last year that would repeal Wisconsin's estate tax beginning Jan. 1, 2007. An Assembly committee approved the bill 10-3 last spring, but it's been held up in the Joint Finance Committee since May. That committee typically has to consider any legislation that affects revenues or spending for state government. It's currently split evenly between Democrats and Republicans, and LeMahieu doesn't have high hopes the two sides will suddenly take it up before the current two-year session ends.

Any bill introduced during the 2007-08 session that doesn't make it through the full Legislature before lawmakers break has to start the process over next year.

LeMahieu said he would likely face an uphill battle with the legislation again next year if control of the Legislature remains split between Democrats, who have the governor's office and the state Senate, and Republicans, who have the Assembly.

But that doesn't mean he won't try.

"If we only introduced bills that both sides liked, we wouldn't introduce too many bills around here," he said.

"All it is, is a redistribution of wealth, and I think a redistribution of wealth is wrong."

On the other side are groups like One Wisconsin Now, which urged lawmakers earlier this year to pass legislation restoring the state tax even as the federal tax phases out. That seems unlikely at best, too.

Scot Ross, executive director of One Wisconsin Now, said opponents of the tax have exaggerated its effects on small business owners and farmers and can't really point to any examples in Wisconsin of the tax forcing a family to sell rather than passing either down to the next generation

To him, eliminating the tax is nothing more than a break for the wealthy, depriving the state of $100 million a year that could go to things like health care and education.

"It's an enormous amount of money going to the wealthiest sons and daughters of the people of the state," he said. "We think it's an issue now, and we're going to continue to raise the issue that it's important that Wisconsin do what needs to be done to make sure this enormous loophole doesn't stay open."

JR Ross is the editor at WisPolitics.com.