Estate tax repeal could leave hole in state budget for education

Monday, Aug. 2, 1999 | 11:40 a.m.

CARSON CITY -- Repeal of the estate tax may seem like a good idea to Congress, but it could spell cutbacks for the state's schools and slow goals such as achieving financial equity between southern and northern campuses of the university system.

The phasing out of the inheritance tax was included in the House Republicans' plan for a tax cut, which passed last week. The Senate version of the bill, which passed Friday, provides for a break on the federal estate tax but does not repeal it. Clinton has vowed to veto the bill as its written.

The tax, which Nevada has collected since 1986, raises about $28 billion a year for the federal government -- a small percentage of its budget. Under the current law, the state is able to collect a share of the tax that would have otherwise gone into federal coffers.

For Nevada, those funds range from $8.5 million to $30 million a year, depending on how many rich people die in the state.

If the federal estate tax were phased out, as the House bill provides, the state would lose that income.

That money has been split 50-50 for public schools and the state's universities and community colleges. The school districts have used the money -- $13.8 million this year -- for class size reduction. The higher education portion has gone into an endowment. The interest from that endowment has paid for several programs, including funding some research.

In addition, the 1999 Legislature authorized the system to spend $55.2 million in the next two years of revenue generated from Nevada's share of the estate tax to begin to even out funding between the campuses in Southern and Northern Nevada. That came to more than the income generated by the endowment, making the move controversial.

Doug Thunder, deputy state superintendent of public instruction for finance, said the repeal of the inheritance tax would leave a "void" in the public school budget. Even if the bill passes, Thunder said there would still be money "in the pipeline" for the school improvement account which goes to class size reduction programs.

Without the annual collections, the university system's endowment would be eaten away, Tom Anderes, interim chancellor of the university system, said. "We would have to eliminate some programs or build them into the general fund."

How great the impact would be, he said, "depends a great deal on the time" in the legislation, he said.

The estate tax under the House GOP version would be phased out over 10 years, Rep. Jim Gibbons, R-Nev., said, noting that's plenty of time for the state to find ways to replace the money. Gibbons was the only member of the Nevada congressional delegation to vote for the GOP tax bill, a vote that largely followed party lines. He is also the only Republican among Nevada's Congressional members.

"It allows Nevada to choose whether or not it wants to make up for the loss on its own," he said. "It should have that right."

He added that other bills in Congress would make up some of the lost income. One would send more than $13 billion to the states for such things as teacher training, smaller class sizes and other improvements in education.

Nevada's Democrats all voted against the tax cuts. The Senate version would reduce the tax by raising the exemption to $1.5 million beginning in 2007 and repealing rates above 50 percent.

Figures from the Internal Revenue Service shows that in 1996 the average tax on estates of $600,000 to $1 million was 6 percent. But the rate on the largest estates can be as high as 55 percent.

Sen. Richard Bryan, D-Nev., said the loss of Nevada's estate tax credit, enacted while he was governor, would "have a tremendous impact on the state's budget. Eliminating the death tax is very costly," a move he would oppose.

Rep. Shelley Berkley, D-Nev., a former university regent, was well aware of the financial impact on Nevada's educational system when she voted against phasing out the estate tax, her spokesman said. Richard Urey, Berkley's chief of staff, said elimination of the tax would be a "severe financial hit on the schools."

Republican Gov. Kenny Guinn noted that the loss of that revenue "would hurt" but he supports the elimination. "As a Republican, I don't think we should have a double tax. People work all their lives and then have to pay 55 percent over $625,000." Estates larger than $625,000 pay 55 percent tax.

"That's a very hefty tax," Guinn said. "By the very fact that Nevadans have seen fit not to have a state inheritance tax, I think people feel there should not be a tax."

Guinn thinks congressional negotiations over the tax bill will result in amending the estate tax, rather than repealing it outright.

Of bigger concern to him, Guinn said, are the millions of dollars not taxed on the Internet. "Where are we going to be in five to ten years if we don't do something nationally on allocating a fair share of Internet taxes?" he asked.