The federal estate tax, which has gradually been scaled back over the last 8 years, is scheduled to expire in just two weeks, and then to come back at a higher level in 2011!
The reason for that strange scenario is that the estate tax changes pushed through by President Bush in 2001 slowly phased out the tax; however, to keep the total cost of those amendments within a Congressional cap, the 2001 legislation allowed the estate tax to come back in 2011 – at the pre-2001 level. Thus, if Congress can’t pass an estate tax bill, the federal estate tax will soon be completely gone, but an increased estate tax could return a year later (with a much smaller amount of each estate exempted from taxation).
The federal estate tax only applies now to the very wealthiest Americans – one of every 500 estates. Nevertheless, it still generates a great deal of revenue. Allowing it to be repealed is expected to cost a little over $500 billion from 2010 through 2019, though that half-trillion figure actually understates the total cost, since the lag in collecting the tax delays the impact by almost two years. Taking that lag time into account, as well as the interest cost from adding to the federal deficit, the projected 10-year price tag for 2012-2021 is $814 billion.
A bill recently approved by the House would extend the reduced 2009 estate tax indefinitely, but finding 60 votes for that legislation in the Senate will be difficult, since a small number of Democrats and nearly all the Republicans would prefer a reduced estate tax or complete elimination. The CQ Midday Update reported Tuesday that Senate and House leaders have been unable to reach a compromise to prevent the tax from expiring in two weeks.
A brief statement Wednesday from Chuck Marr of the Center on Budget and Policy Priorities (CBPP) notes the irony in the arguments made by some of the Senators opposing an extension of the estate tax. First, extension of the estate tax is being opposed by some of the same Senators who recently resisted increasing the federal debt limit on the grounds of “fiscal responsibility.” Yet their estate tax vote will add billions of dollars to the federal deficit, and all of that will go to the richest people.
The other irony is that the people wanting to repeal or further reduce the estate tax claim they want to protect family farms and small businesses, but allowing the estate tax to expire would result in many more tax increases than tax cuts for people who inherit farm and business estates. The reason for that is that the legislation repealing the estate tax would apply the capital gains tax to an estate’s increase in value after the assets were initially acquired by the person who dies. That change would increase taxes for many people who inherit farms or small businesses because they now pay no estate tax and their capital gains taxes on the appreciated value are now forgiven at death.
Marr argues that Congress “should extend the estate tax under its 2009 parameters rather than allow it to expire altogether next year” Alternatively, he suggests that, “if Congress cannot work out a permanent solution on this matter now, it should, at a minimum, extend the current estate tax rules temporarily while it addresses the issue for the long term.”
