Congress is now engaged in negotiations to renew the Tax Cuts and Jobs Act (TJCA), with the year-end expiration of many provisions looming. From the corporate tax rate to itemized deductions, this process will involve the reconsideration of numerous policies, both big and small, from that landmark 2017 law.
Along the way, Congress should consider another bit of tax simplification, whose proposal postdates the TCJA. In 2018, then-Rep. Kristi Noem (R-S.D.) and Rep. Jason Smith (R-Mo.), now the chair of the House Ways and Means Committee, proposed the “Family Business Legacy Act,” a needed reform that never managed to navigate the choppy waters of congressional procedure.
The bill contained a simple, common-sense idea: to smooth an inconsistency in the tax code. It sought to exempt from assessment the donations of estates to section 501(c)(4), (c)(5), and (c)(6) organizations. This would harmonize the respective tax treatments of contributions to nonprofits provided for in the wills of the deceased and those made by living gift-givers. In other words, Noem and Smith sought to apply the same tax treatment to all such donations irrespective of whether those donations are provided during life or in a will at death.
Congress exempted the the former category from the gift tax in 2015’s PATH Act. A full decade later, little excuse remains not to finish the job and simplify the tax code to ensure that all nonprofit gifts receive the same treatment under U.S. tax law.
Little reason can be found to oppose this change. A donation made in life differs not at all from one made at death. Congress should not saddle charitable Americans confronting death — or their heirs — with senseless inconsistencies. A family wracked by illness, age, and grief should not be forced to contort its financial and estate planning to accommodate the federal tax code’s pointless idiosyncrasies. If donating after death suits the family, the government has no grounds to gainsay or penalize that determination.
The fiscal effects of such a proposal will likely prove small. Under the status quo, any sufficiently motivated donor can simply give to her nonprofit of choice before departing for the Stygian shore — notwithstanding the likelihood of heightened personal inconvenience noted above.
Economists have long argued that convenience is a hallmark of a good tax code. “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it,” Adam Smith wrote in his 1776 opus, An Inquiry into the Nature and Causes of the Wealth of Nations. This principle extends to cover not just the time or manner of tax collection, but the very construction of the tax code.
Absent a compelling public-policy justification, inconsistent tax treatment that imposes needless hurdles — or incentivizes taxpayers to make otherwise bothersome choices — cuts against all the principles of good governance. This complexity should be painlessly remedied in any coming tax-reform legislation.
Tax codes should resemble an orderly urban street grid, not a labyrinthine maze. Simplicity and consistency should be paramount. Like actions should receive the same treatment as like actions. These principles should obtain on grounds both of essential fairness and operational expediency. Tax law — like any other kind of law — should apply equally to similarly situated individuals, and complexity and purposeless complexity breed unwitting noncompliance.
Congress confronts a monumental task as it deliberates and bargains to extend the TCJA. As it considers these towering mountains of tax policy, however, it should not forget small hillocks, like tax-treatment harmonization. Although possessed of less lofty peaks, such legislation can improve substantially the lives of American citizens and save family businesses money in compliance and tax-preparation costs. It is often the distinctly the less glamourous tasks of governance — the ordinary administration and incremental improvement of the law — that do the most good.
Harmony, convenience, fairness and consistency — making consistent the estate and gift tax laws offers all these benefits. Congress should take care to take this chance to improve the tax code and safeguard grieving families from additional anxiety.
