Bennet Estate Tax Proposal II: The Job Impact

How much would the Bennet estate tax exemption amount proposal cost in tax revenue from Colorado beyond President Obama's proposal?

About $80 million a year (61 estates at $1.35 million each, rounded down by $2 million on the assumption that a few of those estate do not receive the full $1.35 million in benefit because they involve a couple with a net worth of more than $7 million, but less than $10 million).

How much does it cost to create a permanent full time job with health insurance benefits at something close to minimum wage?

About $40,000 per year.

This assumes $14,500 for 2,000 hours per year at $7.25 per hour, $1,109.25 for employer FICA, $14,500 for health insurance benefits for a family of three or more people, a maximum unemployment insurance premium of $1,100 per employee per year,$800 for worker's compensation insurance (the twice the average annual premium paid by people covered by Pinnacol Assurance, the dominant worker's compensation provider in the state), head taxes, etc., $56 of FUTA, and the balance of a little under $8,000 per year for payroll expenses, HR department expenses, and to provide the workers with a place to work and the equipment to do their work (about $665 per month, which is enough for a small, plain furnished office with phone service and parking and a computer with internet access).

The health insurance estimate is probably high, as some employees would need less expensive individual or couple health insurance coverage, and the cost of providing work settings may also be high as many employers already have those resources which are simply underutilized at this employment low point.

How many permanent, full time jobs with benefits could be created with the money that Senator Bennet proposes to use to cut estate taxes that heirs of multi-millionaires pay beyond the cut already proposed by President Obama?

About 2,000 per year is a low end estimate of the number of full time jobs with benefits that could be created with $80 million of tax funds.

Are the jobs in the public sector that have substantial economic value that could be created in the public sector if funds were available?

Yes. There is no shortage of jobs in the public sector that could be done by typical unemployment insurance beneficiaries that are not being done for lack of taxpayer funds. Funding jobs with tax revenues doesn't have to be a make work venture, even when jobs are created for people with fairly modest skills. There are lots of public sector services that have considerable value that aren't being performed for want of tax revnues.

Denver alone, for example, is reducing its workforce by more than 150 positions this year due to reduced city tax revenues, with service cuts to the library system accounting for an important part of the total. Most governmetns in the United States have cut their employment due to declining tax revenues.

For example, libraries across the state are laying people off and closing their doors. Lots of the jobs at those libraries are relatively low skilled jobs like scanning and shelving returned books, rather than highly skilled librarian jobs. The 2,000 low wage jobs that could be created with the funds that would otherwise go to tax cuts could hire a lot of library assistants across the state. This would allow those branch libraries to keep their doors open and to have longer hours, something that benefits the public, creates permanent jobs with benefits for people who would otherwise be on the unemployment rolls, and provides resources that help those who don't have jobs to find them. Libraries are also a major resource for people who want to start small businesses, and increasing library hours could create small business jobs by helping those entrapreneurs gain access to the information they need to start their own businesses and hire employees.

There are certainly a host of other jobs that the public sector could employ people to do that would create value in the economy. The purpose of the illustration is simply to show that such jobs exist.

Also, if the jobs created by government paid minimum wage, it would be easy for private sector employers to be price competitive and lure away government employees from these jobs if the private sector had more economically productive activities for these people to perform.

How many jobs would Bennet's plan create?

Bennet's plan would provide an tax benefit to one small business or ranch estate per year in Colorado. The are a variety of definitions used to determine when a business qualifies as "small" with the two most common Small Business Administration program cutoffs being 100 employees and 500 employees. Obviously, only a small portion of the jobs created by any small business are a a function of estate tax rates.

If the average small business benefiting each year employed 500 people, and 5% of those jobs were attributable to the estate tax, the number of jobs created would be 25 per benefitting small business, and if 27 out of 30 of the benefitting businesses were non-farm/ranches over thirty years, that might create 675 jobs in Colorado.

There are 37,054 people employed as farmers in Colorado. About eighty percent of them are sole proprietors, most of whom have no employees other than temporary migrant workers and family members. Very few farms, even big "corporate farms" employ more than twenty employees other than temporary migrant workers.

The largest ranch in the United States, the King Ranch in Texas with 825,000 acres employed about 700 people at its peak. The largest ranches in Colorado are about a quarter of that size, and there is probably not a single ranch in the state of Colorado that employs more than 200 people. A thousand acre ranch can barely support a single sole proporietor without any employees as a working cattle operation (many ranches are effectively resorts that run cattle as a side venture, and there are about 2,500 working cattle ranches in Colorado).

Farm jobs are already heavily subsidized by government at all levels. About 15% of farm income came from government payments last year. Farms pay reduced property tax rates, receive sales tax exemptions, benefit from above average per child state school funding, receive subsidized telephone and mail service, and are exempt from regulatory requirements that apply to comparable non-farm businesses in a variety of areas from labor laws to environmental regulations.

If an outrageously large 5% of the jobs at the largest ranch in Colorado were attributable to lower estate taxes and three of the small businesses or ranches that benefited from the estate tax break over 30 years were ranches (a proportion grossly disporpotionate the roughly 1%-2% of small businesses in the state that are farms or ranches), the proposal would create about thirty ranching job in the state, on average.

Thus, Bennet's proposed tax break, using wildly optimistic estimates of what share of a small business's jobs are created by estate tax breaks and how many jobs those businesses employ, would create about a third as many jobs as simply hiring people outright. A more realistic estimate would probably bring the number of jobs created to under ten percent of the jobs that could be created by simply hiring people outright.

How many jobs would Bennet's proposal destory in the charitable sector?

Higher estate tax exemptions would also reduce charitable giving, and since charities spend a very high proportion of their revenues to pay employees, and since those employees typically work at low end of market rates of compensation, increasing estate tax exemptions would destroy many jobs in the charitable sector, even as it creates jobs in the small business and ranching sector.

Assuming that charitable giving would drop by $16 million (a bit less than the estimate made in an Urban-Brookings Tax Policy Center study of estate tax reduction's impact on charitable giving), that a little less than two-thirds of charitable giving goes to pay employees, and that an average charity employee (who rarely receives full benefits) costs $40,000 per year to employ, the Bennet estate tax proposal would destroy about 250 jobs or more in the charitable sector of the economy. This would probably offset a majority of the job gains created in small business and ranching operations by the tax cut for heirs of multi-million dollar estates.

The assumptions on the amount of charitable giving that goes to employees and their pay is somewhat ad hoc, but not out of line with available data on charitable employment

The net number of permanent jobs created by Bennet's proposal would probably not be more than a couple of hundred and could easily be less.

Are the economic benefits of estate tax cuts worth it?

No.

Estate tax exemption increases are an expensive way to boost job creation in the economy that provides most of the benefit to the wealthy heirs whose taxes are lowered as a result of the tax cut.

Lowering estate tax rates, as opposed to increasing the exemption amount, would reduce revenue by a far larger amount, and would create almost no additional small business or ranch jobs, or for that matter, jobs of any kind. Any estate tax rate reduction, coupled with estate tax exemption increases, would almost surely destroy more jobs in the charitable sector than it created in businesses.

If job creation is the goal, a better approach is to simply use the money that would otherwise have been used for estate tax cuts to hire people to do worthwhile things in the public sector.

An estate tax exemption increase tailored exclusively to small businesses, farms and ranches, without an estate tax rate reduction, in contrast, would cost less than 2% of the estate tax proposed (i.e. about $1.6 million), while providing the same amount of job creation (some modest fraction of 705 jobs created), and just 2% of the charitable sector job destruction (on the order of 5 jobs destroyed). This might be competitive with the 40 permanent jobs that could be created directly with that quantity of tax revenue.