THREE YEARS AGO, Congress approved a provision to increase the capital gains tax levied on the sale of inherited property. It was one of several major tax "reforms" passed that year. Last Monday, the Senate voted 81-to-4 to repeal that provision before it goes into effect. And more than 200 members of the House are already on record as favoring repeal.
So sharp a turnabout in congressional thinking suggests that a terrible mistake was made in 1976 and Congress simply didn't understand then what it was doing. But something else is at work here. The 1976 provision appears to be administratively impossible to enforce and also unfair to some taxpayers. Opponents of any increased taxation on inherited property have used those deficiencies to convince many members of Congress that it is easier to forget about the basic "reform" than to try to redraft the law in a more workable form. It is a case in which the complexities of the tax laws are working strongly against any real change in them.
Under the existing law, the capital gains tax is imposed on the increase in value of inherited property -- land, stocks and so forth -- between the time an heir receives that property and the time it is sold. This is regarded as a "loophole" by tax reformers because it exempts from capital gains taxation the increase in value during the lifetime of the original owner. The change approved in 1976 would eliminate this by carrying through an estate the property's old capital basis instead of giving it a new one.
That may, or may not, be a good idea. But it was an idea that Congress overwhelmingly approved in 1976. Since then, however, lobbying against it has been so intense that the reason for the change has been largely overlooked. Indeed, that lobbying seems to have led some members of Congress to believe that the change will break up family farms and small businesses by forcing heirs to sell property to pay the tax. In fact, the tax would not be imposed unless the property were sold.
Rather than repeal the 1976 change outright, as the Senate has voted to do, Congress should postone its effective date for another year and examine seriously a revised version introduced by Rep. Joseph L. Fisher (D-Va.). His bill seems to solve most of the administrative problems, and the other difficulities could be worked out. That would be a better course than for Congress to announce now, by repealing the law, that it didn't know what it was doing in 1976. The record shows it knew exactly what it was doing, but was unable (like many of the rest of us) to work its way through the tangled web of the tax laws to reach the result it intended.