Future of the Federal Estate Tax

Heflin v. Farris on whether Kyl-Lincoln proposal for $5M exemption and 35% rate is gaining support in the House

On March 22, 2010, Jay Heflin posted Senate estate tax proposal gains steam in the House on The Hill’s Finance & Economy Blog.  Heflin wrote,

The plan by Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) to create a 35 percent tax on estates worth more than $5 million is gaining traction in the House.

One advocate is Rep. Shelley Berkley (D-Nev.). . . .

Still, paygo rules prevent the proposal from sailing through both chambers.

Lawmakers need to offset any cost beyond 2009 estate tax law, which is a 45 percent tax on estates worth more than $3.5 million.

Lee Farris posted an interesting observation as a comment to Heflin’s post.  In part, Farris wrote,

In 2009, Rep. Berkley introduced legislation calling for a $5 million individual/$10 million married couple estate tax exemption with a 35% rate. The legislation did not come up for a House vote. Instead, the House voted 225-200 to extend the 2009 estate tax law permanently, ($3.5 million exemption per spouse and 45% rate). Rep. Berkley voted for that piece of legislation, see http://clerk.house.gov/evs/2009/roll929.xmlSo I don't see how Rep. Berkley still supporting something similar to her own legislation shows that the Senate proposal is "gaining steam" in the House.

Farris is the Estate Tax Policy Coordinator at United for a Fair Economy, an organization that supports a stronger estate tax.  In his comment to Heflin’s post, Farris stated that he supports Rep. McDermott’s H.R. 2032:

I'm hoping that Rep. Levin and the Ways and Means Committee will seriously consider HR 2032, sponsored by Rep. McDermott, D-Wash. It would make permanent the exemption level at $2 million/spouse, and establish progressive tax rates of 45% for estates between $2-5 million; 50% for estates between $5-10 million; and the pre-2001 rate of 55% for estates above $10 million — all indexed for inflation. The bill also includes reunification, portability, and the state estate tax credit. This bill will do the most to prevent growing economic inequality, which is now at an all time high.

Jobs bill & the estate tax: "McConnell is demanding a time certain on when the estate tax would move"

A February 10, 2010 article by Walter Alarkon, Jay Heflin, and Alexander Bolton -- Reid: Jobs bill to come with Republican help (The Hill) -- informs that in the Reid-McConnell talks, the Senate Minority Leader "is demanding a time certain" for addressing the estate tax:

Senate leaders are working on an estate tax deal that could make it easier to move a bipartisan jobs bill. A deal being discussed by [Senate Majority Leader Harry Reid (D-Nev.)] and [Senate Minority Leader Mitch McConnell (R-Ky.)] involves moving an estate tax bill through the Senate that would prevent a huge hike in the tax from taking effect in 2011, staffers and lobbyists say.

The agreement would provide needed Republican votes for Reid on the jobs bill and stop the estate tax from returning to a historically high level.

However, McConnell is demanding a time certain on when the estate tax would move before agreeing to any deal on the jobs bill.

Earlier entries also discuss the jobs bill and the estate tax:

• Will the forthcoming Senate jobs bill also fix the federal estate tax? (2/4/10)
• The Reid-McConnell talks: the estate tax is being used as leverage for jobs bill (2/9/10)
• Senate jobs bill will not include estate state fix (2/11/10)

CQ Politics, "the House Democratic Caucus is showing signs of a split"

Derek W. Jensen (attorney, Seattle) wrote the following in regards to the recent CQ Politics article, House Likely to Delay Estate Tax Consideration: "What is interesting is that there appears to be a split developing among the Democrats on how to proceed on the Estate Tax."

When I posted about this CQ Politics article earlier, I did not focus on the split among the Democrats.  I will flesh this out a bit more here. 

The CQ Politics article indicates that there are two factions among the Democrats:

• "Democratic leaders want to move a permanent extension of the 2009 structure of the estate tax"
• "Meanwhile, a moderate faction led by Shelley  Berkley, D-Nev., has offered a proposal that would be more favorable to estates. It would gradually bring the top rate down to 35 percent, and push the exemption up to $5 million and index it for inflation."

A recent article by Gail Liberman, Better avoid kissing federal estate tax goodbye -- which I blogged about earlier -- confirms the split among the Democrats, but frames it differently:

• One contingent of Democrats "argues that the current 2009 law — with an exemption of $3.5 million and a maximum tax of 45 percent — should be made permanent."
• Another contingent of Democrats wants "to let the whole thing expire and revert to the 2001 law, when the exemption level was $1 million and the top estate tax rate, 55 percent."

Reading these articles side-by-side, it is clear that there is a split among the Democrats, but the factions are not clear.  There could be as many as three factions:

1. Democrats who want to have the estate tax repealed in 2010 only to come back with a vengeance in 2011 with an exemption amount of $1M and a top rate of 55%
2. Democrats who want to make the 2009 exemption of $3.5M and rate of 45% permanent
3. Democrats who follow Rep. Berkley's proposal and are pushing for a gradual reduction of the the top rate to 35 percent, and gradual increase of the exemption up to $5M

Which contingent's proposal would bring the most revenue to the government?  The Tax Policy Center provides numbers to work with:

1. The first option is estimated to provide $424.0B from 2009 to 2019.
2. The second option is estimated to bring $239.5B over the same period.
3. The third option is estimated to raise $192.4B over the same period.