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Estate Tax Relief Is Aimed at Wrong Group

April 15, 2001|ROBERT KUTTNER | Robert Kuttner is co-editor of the American Prospect. E-mail: kuttner@prospect.org

The Bush administration has made a big deal about repealing what it calls the "death tax"--the tax paid by large estates. Only about 2% of Americans are wealthy enough to leave estates subject to this tax. Repeal would cost the Treasury about $30 billion a year, but by 2010 the cost could be nearly $60 billion a year and rising.

Fully half the benefits of this tax break would go to the heirs of the wealthiest one of every 1,000 people who die--people worth tens of millions of dollars.

However, there is another tax that really does harm the estates of moderate-income people. My friend, the political scientist Michael Lipsky, calls it the "pre-death tax." This is the provision under Medicaid requiring middle-class people to "spend down" their net worth to almost nothing before they can qualify for nursing-home care, as paupers.

This provision is really outrageous. Middle-income people work a lifetime and accumulate savings, often from the sale of a home. They may have total savings worth $200,000 to $300,000, or less.

They use the money to supplement Social Security, for the contingencies of old age and also hope to leave a little to their children. This kind of estate, however, is not subject to the current estate tax, which has an exemption of $675,000 that will soon rise to $1 million under existing law.

But if you are middle class and you or a loved one has a medical condition that requires long-term nursing care, the estate is simply wiped out. Medicare, which covers every senior citizen, rich or poor, doesn't pay for long-term nursing care. Medicaid, the program for the very poor, does, but first you have to get rid of your worldly assets. This pre-death tax requires you to pay for long-term nursing care out of your own savings, and only then, when you are officially destitute, will Medicaid begin paying.

The policy is appalling under ordinary circumstances. But it is particularly galling at a time when the government has an immense budget surplus, most of which President Bush proposes to give away to millionaires.

We should make long-term nursing care a universal right under Medicare for those who need it. If these were ordinary times, that would take a tax increase. But in these flush budgetary times, all it would take is a decision not to repeal the estate tax and a redirection of some of the surplus to nursing care.

Here are the numbers: About 2 million people are currently in institutionalized long-term care, either in nursing homes or assisted-living facilities. An additional 6 million require long-term care at home, which they typically get from a combination of family caregivers and visiting nurses and nurses' aides.

Nursing-home care typically costs about $60,000 a year per resident, and it costs the country as a whole about $90 billion. In 1998, Medicaid paid just under half, and people paying out of pocket covered about one-third. This "spend-down" of personal savings totaled about $30 billion in 1998--the very annual amount proposed for estate tax relief.

In other words, we could get rid of the pre-death tax on the middle class if we simply chose not to abolish the estate tax on the wealthy. We could earmark proceeds from the estate tax for long-term nursing home care for all, under Medicare.

Who is more deserving of relief? A multimillionaire, who Bush thinks should be able to leave a tax-free estate to heirs, or a middle-class person in a nursing home compelled to get rid of virtually all assets before Medicaid will start covering costs? If the American public focused on this choice, the vast majority of us would prefer relief from the pre-death tax on the middle class.

Alternatively, we might create an asset exemption of, say, $250,000. People requiring long-term care would contribute their own assets on a sliding scale, until they reached that level of net worth; then the government would take over paying the costs. Requiring the upper middle class to pay some costs would conserve public funds, which could then be spent on other long-term care needs, such as home care, respite care or assisted living.

How about it, Democrats? Can we trump Bush's death tax relief for multmillionaires with pre-death tax relief for middle-class Americans? If that's not sensible budget politics, I don't know what is.

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