The Estate Tax and Political Blackmail

The Progress Report. Posted August 3, 2006.

On Friday, the Senate will vote on a bill that increases the minimum wage for the first time in nine years. Conservatives "who never voted for the minimum wage before, you'll see them vote for this," explained Sen. Jim DeMint (R-SC). Why? Because the minimum wage increase -- which is at its lowest buying power in 51 years -- is being coupled with an unnecessary and costly reduction in the estate tax for the super-wealthy, a windfall for a small number of powerful legions in the conservative base.

The Senate leadership, demonstrating that it cannot act on behalf of low-wage workers without bribing the rich, has said it will prevent any attempts to strip the estate tax provision from the bill and allow a straightforward vote on the minimum wage increase. In a moment of candor last week, Rep. Zach Wamp (R-TN) revealed the political motives behind the bill, informing proponents of the minimum wage increase that "you have seen us really outfox you on this issue tonight."

Editorials across the nation, however, have taken note, decrying the pairing of the minimum wage with the estate tax as a "cynical move," a "political ploy," and a "minimum wage, maximum gall" effort that "screams of unfairness, hypocrisy and economic disaster."Sen. Edward Kennedy (D-MA) added, "It's political blackmail to say the only way that minimum wage workers can get a raise is to give a tax giveaway to the wealthiest Americans. Members of Congress raised their own pay -- no strings attached. Surely, common decency suggests that minimum wage workers deserve the same respect."

Why the Paris Hilton Tax Cut should be a deal-breaker

The estate tax reduction -- aka the "Paris Hilton tax cut" -- would exempt the first $10 million of a couple's estate ($5 million for an individual) from taxation entirely by 2015. Amounts above this and up to $25 million would be taxed at the capital gains rate, while amounts above $25 million would be taxed at 30 percent. Wealthy heirs who stand to receive a $10 million inheritance would receive a tax break of as much as $2.76 million. Center for American Progress Director of Tax and Budget Policy John Irons explains that the "the heirs of the $10 million estate would get a tax break worth as much as 183 years of the income of a full-time minimum wage earner."

The Center on Budget and Policy Priorities (CBPP) reports that while 6.6 million minimum wage earners nationwide stand to gain an average benefit of $1,200 if the increase passes, a small number of ultra-wealthy beneficiaries (8,200 individuals) stand to reap an average of $1.3 million. CBPP also concluded that the estate tax provision would cut government income by $753 billion in the first 10 years, forcing lower spending for Medicaid, food stamps and unemployment insurance, which help low-wage workers. (By comparison, the White House estimates the federal deficit for this year will be $296 billion.)

Over a million low-wage workers would get a wage cut

While the proposed minimum wage-estate tax cut bill raises the wage for most employees, it results in a wage cut for approximately 1.1 million workers. The Economic Policy Institute (EPI) explains that the proposed bill would strike down state laws that require employers to "pay a full minimum wage without relying on tips from customers to reach the minimum level." Currently, seven states -- Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington -- mandate that their employers pay the applicable minimum wage without factoring in tips.

If the bill is passed, employers in these states could begin paying their minimum wage earners as little as the federally-allowable $2.13 an hour for tipped employees, assuming tip earnings make up the difference to add up to the federal minimum wage. EPI calculates that states that have those laws will see the minimum wage for tipped employees (restaurant workers, hotel maids, parking attendants, etc.) fall as much as $5.50 per hour. "Everything that has been achieved in seven states to support low-wage workers who earn tips is destroyed by this bill," said Sen. Dianne Feinstein (D-CA). "This bill would slash the salaries of thousands of workers."

Frist stands to personally benefit

Senate Majority Leader Bill Frist (R-TN) said the proposed legislation would be the only opportunity this year to increase the minimum wage. Frist declared, "It's now or never," stating his unwillingness to strip the estate tax reduction from the bill. His stance is sullied by the fact that he possibly stands to personally benefit from a cut in the estate tax -- a tax that he has been trying to escape for years.

Frist Family Foundation, whose sole trustees are Bill Frist and his wife, had more than $2 million in assets in 2004. Up until 2001, the foundation had very little money. At that time, Frist transferred stocks of HCA Inc. that he inherited from his mother to the foundation. The move appears to have been an effort by Frist to dodge paying the estate tax on his inherited HCA stock. "Janne Gallagher, vice president and general counsel at the Washington-based Council on Foundations, said assets that go directly from an estate into a private family foundation, as in this case, are generally not taxed, unlike money distributed directly to heirs. She said once in the foundation, the money is largely tax exempt." The only charitable contribution the foundation made was an $877,000 donation to a private boys' school in Nashville that Frist once attended.

Sweetening the pot with special interest tax breaks

In June, a Senate vote to permanently repeal the estate tax failed by three votes needed to receive the 60 vote required to overcome a filibuster. Indications are that this Friday's vote on the minimum wage-estate tax bill will be similarly close. Realizing three votes are needed in the Senate, the House-passed version of the bill includes a number of new special-interest tax breaks, unrelated to the estate tax, that are clearly intended to buy votes.

"The bill is sprinkled with incentives drafted with particular lawmakers in mind. A rural bonds provision is aimed at Sen. Mark Pryor (D-AR). A tax break for timber interests is a possible lure for Sen. Maria Cantwell (D-WA). A provision benefiting coal mines is targeted at Sen. Robert C. Byrd (D-WV)." In June, Pryor, Cantwell, and Byrd all voted against the the irresponsible estate tax cut, which would have cost the government $71.6 billion a year by 2015. Their support will be crucial in turning back this ill-conceived piece of political blackmail.

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