Future of the Federal Estate Tax

One possibility not on the table: a 40% tax rate

I was reading various articles on BNA Daily Tax News and Tax Notes Today for the Research and Writing class I am taking at New York Law School this semester when I stumbled on a prediction in

News Analysis: How Brown's Historic Upset Reshuffles Washington's Tax Agenda (2010 TNT 13-1, subscription required), by Martin A. Sullivan. Sullivan writes,

In general, this uniquely messy situation is ripe for gridlock and is likely to produce -- where there is must-pass legislation -- only temporary fixes.

With that in mind, here are my predictions. . . .

Congress takes the middle path between the House-favored 45 percent rate and the Senate-favored 35 percent rate and passes an estate tax extension with a 40 percent rate.

The House-favored 45% rate refers to the rate in Rep. Pomeroy's H.R. 4154, which the House passed on 12/3/09. The 35% rate refers to "the amendment put up by Democratic and Republican senators [which] would reduce the estate tax rate to 35 percent and increase the exemption to $5 million." Trish Turner & Molly Henneberg, Senate Passes Amendment to Reduce Estate Tax After Obama Blueprint Calls for Killing Cut, Fox News, Apr. 2, 2009. The Fox News article further informs that "[t]he amendments to the budget do not have the force of law, but are guidelines for committees that have jurisdiction over the policies in the amendments."

Interestingly, Sullivan's proposed rate of 40% is none of the bills that have been introduced in the 111th Session of Congress. See here.

You might be wondering why Sullivan's prediction doesn't mention an exclusion. One reason might be that, according to some, the tax rate is what is important:

In some perverse way, it's fun to watch lawmakers dive into a mess largely of their own making. But as you do, don't be distracted by the argument over the size of estates that should be excluded from tax, or whether the rules are extended for one year or two. The real argument is over the rate. That's where the bucks are. . . .

While the headlines focus on the exemption, the inside players are giving most of their attention to the rates. Whether you want to slash the estate tax as much as possible, or want to hold down the revenue loss in the face of massive budget deficits, the rate is the name of the game.

Howard Gleckman, The Estate Tax Debate: Watch the Rate, Not the Exclusion, Tax Policy Center, Dec. 15, 2009.

Repeal is likely: now, even the possibility of a temporary extension of the estate tax by the Senate seems dead

Earlier today, I wrote a post titled, The Senate will probably pass a temporary federal estate tax extension.  But as Derek Jensen commented in response to my post, "things are moving fast."

The latest news is indicating that even the probability of a temporary extension is now dead.  In Estate Tax Fix Fails, Repeal Likely - US Lawmaker (Dow Jones Newswires, 12/15/09), Martin Vaughan reported the following:

Rep. Earl Pomeroy (D., N.D.), said plans to include a temporary estate tax extension in end-of-year defense spending legislation have been dropped because of Senate opposition.

As a result, he told Dow Jones Newswires, the estate tax will be repealed on Jan. 1 as foreseen by current law, and replaced with an onerous capital gains tax that heirs would have to pay when they sold any inherited assets. . . .

It is regrettable that we're going to have this disruptive period without a permanent resolution," Pomeroy said.

But he said "the prospects are 100%" that Congress will come back next year and reinstate the tax, and make it retroactive to Jan. 1, 2010.

For a detailed analysis of this news, see Derek Jensen's post, They Said It Couldn't Happen (12/15/09).

(I want to extend a special thanks to Derek Jensen for alerting me to this development.)

House passes H.R. 4154: 225 yeas, 200 nays, and 9 not voting

On December 3, 2009, the U.S. House of Representatives passed H.R. 4154, which was introduced by Rep. Earl Pomeroy on November 22, 2009.  This bill would permanently extend the current exemption amount ($3.5M) and top rate (45%).  See this earlier post for more on the bill's introduction.

For the final vote results on H.R. 4154, see here.  In summary, there were

• 225 yeas, all by Democrats
• 200 nays, 26 of which were by Democrats and 174 of which were by Republicans
• 9 no votes, 6 Democrats and 3 Republicans

Most of the votes were cast according to party affiliations.  Surprisingly, the final vote was close.  Clearly, there is a lot of support for greater relief.  

The prospects for passage of this bill in the Senate, however, are not clear.   

See also Stephen Ohlemacher, House votes to extend tax on wealthy estates, Associated Press (12/3/09).

(Special thanks to Michael Hepner for bringing the roll call to my attention.)

TaxProf, articles and posts on the expected House vote on Thursday, Dec. 3rd, on H.R. 4154

A December 2, 2009 post on TaxProf, House to Vote Tomorrow on Permanent Estate Tax Fix, collects a number of links to articles and posts on the upcoming House vote on Rep. Pomeroy's H.R. 4154.  This bill would make the current exemption ($3.5M) and rate (45%) permanent.  For more on Rep. Pomeroy's bill, see here.

House to vote next Wednesday, at the earliest, on permanent estate tax fix under Rep. Pomeroy's H.R. 4154

On November 25, 2009, Martin Vaughan published the following article in Down Jones Newswires: US House To Vote On Permanent Estate Tax Bill Next Week.

Vaughan reports:

The U.S. House of Representatives next week will vote on legislation to extend current estate tax rates permanently, but when and what action the Senate might take on the bill remains unclear.

The House will vote next week, Wednesday at the earliest, on estate tax legislation from Rep. Earl Pomeroy (D., N.D.), according to a schedule released by House Democratic leaders.

Vaughan also informs that Rep. Pomeroy's H.R. 4154 would cost "$233 billion over the next 10 years since it represents a tax cut when compared to current law" and that "there are enough opponents of the Pomeroy bill to block action in the Senate."

This news affirms and develops information we learned from a November 17, 2009 CQ Politics article: "House Democrats are likely to delay consideration of estate tax legislation until after the Thanksgiving recess." See my earlier post.

For detailed information on Rep. Pomeroy's H.R. 4154 and other estate tax bills that were introduced this year, see Federal Estate Tax Bills in Front of Congress.

Rep. Pomeroy introduces a new bill, H.R. 4154

On November 19, 2009, Rep. Earl Pomeroy [D-ND] introduced H.R. 4154, Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.  It would make the $3.5M applicable exclusion amount for the estate tax permanent.  It would also freeze the estate and gift taxes rate at 45%. 

H.R. 4154 is Rep. Pomery's second bill this year to fix the federal estate tax.  H.R. 436, which was introduced by Rep. Pomeroy on January 1, 2009, has received a lot of attention because of the restrictions it would impose on valuation discounts. 

H.R. 4154 would apply to estates of decedents dying, and gifts made, after December 31, 2009.  This bill has been referred to the House Committee on Ways and Means.

For other estate tax bills introduced in Congress, see Federal Estate Tax Bills in Front of Congress.

[Updated 11/22/09 at 9:30 am]