On May 20, 2010, two reports on the federal estate tax were published by the Center on Budget and Policy Priorities. Both reports criticize the now-stalled proposal to reduce the federal estate tax. For more on this proposal, see my previous post, Senators could not agree to gradually reduce the federal estate tax rate to 35% and raise the exemption to $5 million.
 The first report is Stalled Estate Tax Proposal Could Threaten State Revenues that Support Education, Public, and Other Key Services, by Elizabeth C. McNichol. The report states that the now-stalled proposal would pose serious challenges to states:
Currently, individuals who pay state-level estate and inheritance taxes can deduct them from their federal taxes. The proposal the senators were negotiating, however, reportedly included a provision that — to reduce its overall costs — would end the federal deduction that taxpayers can take for state-level estate and inheritance tax payments. . . .
But if this provision is enacted, then once state budgets begin to recover from the recent recession, states may face the choice of restoring the deep cuts they were forced to make in K-12, higher education, public safety, and other key services — or eliminating or reducing their estate or inheritance taxes.
The exact details of the proposal were not released to the public, so it is not clear whether the now-stalled proposal contemplated eliminating the deduction or the credit for state death taxes. In US Senate Effort to Reduce Estate Tax Hits Turbulence (Dow Jones Newswires, 5/18/10), Martin Vaughan writes, “The federal credit for state estate taxes would be repealed under the Lincoln- Kyl plan.” McNichol examines the challenges that states could face if both the credit and the deduction were eliminated.
 The second report is Stalled Proposal to Cut Estate Tax Further Is Deeply Flawed and Should Not Be Revived: Reportedly Uses Gimmicks to Mask True Costs, by Chuck Marr and Gillian Brunet. The “gimmicks” are (1) the slow phase-in of the tax cuts, and (2) prepayment of the estate tax:
The reported gimmicks are:
- The higher exemption level and lower tax rate would be phased in over the coming decade rather than provided up front, thereby lowering the bill’s cost in the first ten years without reducing its cost after that. In that way, the legislation resembles a bill that Rep. Shelly Berkley introduced in the House last year.
- A wealthy individual would be enticed to “prepay” his or her estate taxes now at a discounted rate, rather than have his or her estate pay the taxes upon the individual’s death. That would generate revenue for the federal government in the short run but cost the government even more revenue in the long run, because it would push into the next ten years taxes that would have been paid in subsequent decades at a higher rate.
Although this report leans to the political left, it is informative. The report shows that planning just to meet the pay-as-you-go provisions can be short-sighted:
The proposal’s true cost impact would be felt only in future decades, which conveniently lie outside the ten-year budget window for which the Joint Committee on Taxation provides cost estimates.
Yet it is precisely in those future decades that the nation’s fiscal situation will become grave. Virtually every fiscal analyst across the political spectrum regards the nation’s long-term fiscal path as unsustainable, with our fiscal problems growing significantly worse over time and with an increasing risk to the economy with each passing decade.
It is interesting to note that the report has “gimmicks” of its own. It does not criticize just the recent proposal. It also criticizes:
- Rep. Shelley Berkley’s similar proposal in H.R. 3905, which has been popular among those who would like to see the estate tax eliminated but know it is not possible with the current composition of the House and Senate,
- proposals to extend the 2009 rates -– one section in the report is titled, “Even Extending 2009 Estate Tax Rules Would be Costly” -- and
- arguments made by vocal opponents of the estate tax: small businesses and farmers.
So, despite its title, the scope of the report is vaster than just the stalled proposal. This is a classic technique, or “gimmick,” used in media activism: re-frame the conversation to make sure your cause’s points are discussed.