Future of the Federal Estate Tax

Notes and resources on the Lincoln-Kyl proposal to add permanent estate tax fix to H.R. 5297

Notes on the proposal by Sens. Blanche Lincoln [D-AR] and Jon Kyl [R-AZ]:

• Stated purposes?  To help “hardworking farmers and small businesses” and to take Congressional action to bring certainty to the federal estate tax. (See press release.)
• Method?  The proposal is not a new bill.  Instead, the proposal would require the Senate Finance Committee to amend H.R. 5297, the Small Business Lending bill.  Senator Kyl explains why the proposal would be added as an amendment: “If the Small Business Lending bill is intended to help small business create jobs, wouldn’t it make sense to provide small business owners with the certainty that their tax rates aren’t going to skyrocket at the beginning of next year?” (From press release.)
• Estate tax rate? 35% (permanent).  Note, however, that the Motion to Commit states that the rate will be “a 35 percent estate tax rate phased in over 10 years.”
• Exemption?  $5M phased in over 10 years.
• Indexed for inflation?  Yes.
• Basis?  Stepped-up basis (election for modified carryover basis in 2010). 
• Retroactivity?  Yes, but optional: “The Lincoln-Kyl proposal provides an election for deceased taxpayers to either retain this year’s estate tax rate, which is zero percent with ‘carry over basis,’ or file under the provisions of the new bill.” (From press release.)
• Offset?  Yes.  The “proposal also instructs the Senate Finance Committee to offset the difference in revenue loss between the Obama administration’s proposed 45 percent estate tax rate with a $3.5 million exemption amount and their proposed reform.” (From press release.)

History:

• The press release states, “Senators Lincoln and Kyl introduced a similar measure in April 2009 that received broad bipartisan support and was successfully added to the non-binding congressional budget resolution.”  But the April 2009 measure was criticized by the Center on Budget and Policy Priorities.  Chuck Marr and Jason Levitis, Lincoln-Kyl Estate Tax Amendment is Both Unnecessary and Unaffordable, CBPP, Apr. 10, 2009.
• A few months ago, Sens. Lincoln and Kyl tried to gather support for their proposal, but their efforts were stalled.  Again, their proposal was criticized by the CBPP.  Chuck Marr and Gillian Brunet, Stalled Proposal to Cut Estate Tax Further Is Deeply Flawed and Should Not Be Revived, CBPP, May 21, 2010.
• N.B. I commented on the CBPP reports in a previous blog post, Two reports published by the Center on Budget and Policy Priorities criticize the stalled proposal to cut the federal estate tax (May 21, 2010).  I made the following observation regarding the second CBPP report: “It is interesting to note that the report has ‘gimmicks’ of its own.  It does not criticize just the recent proposal. . . . 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.”

Resources:

• Press release: U.S. Senator Blanche Lincoln: Lincoln, Kyl Introduce Estate Tax Reform Proposal (July 14, 2010)
• Motion to Commit With Instructions 
• Text of H.R. 5297 

See also:

• Paul Caron, Kyl-Lincoln Estate Tax Fix: $5m Exemption, 35% Rate, Election for Decedents Dying in 2010, TaxProf Blog, July 14, 2010 (linking to press release and motion to commit). 
• Sam Goldfarb, Lincoln, Kyl to Offer Estate Tax Motion on Small-Business Bill, Tax Notes Today, Doc 2010-15662, 2010 TNT 135-1, July 15, 2010  (“The Senate is not expected to begin floor action on H.R. 5297 until the week of July 19 at the earliest. Senate Majority Leader Harry Reid, D-Nev., has yet to determine which amendments will get floor votes, and he has accused Republicans of making his job difficult by offering amendments unrelated to small businesses. However, on July 14 Reid didn't rule out the possibility that senators could vote on the Lincoln-Kyl amendment, telling reporters, ‘We'll see.’”).
• Jay Heflin, Kyl seeks to add an estate tax fix to small-business bill, On the Money: The Hill’s Finance & Economy Blog, July 13, 2010 (“Senate Majority Leader Harry Reid (D-Nev.) has engaged a procedural maneuver called “filling the tree” that limits the number of amendments that can be offered on a particular bill.”).
• Carter Ruml, Breaking News – $5m Exemption and 35% Rate Sought As Amendment to Small Business Jobs Bill, KYEstates.com, July 14, 2010  (“It’s unclear whether the Lincoln-Kyl amendment is more than political theatre.”).
• Martin Vaughan, US Sens Kyl, Lincoln Seek Vote On Limiting Estate Tax, NASDAQ, July 14, 2010 (“The phase-in is a change from legislation Kyl and Lincoln have introduced in the past and is meant to make the short-term cost of the bill appear smaller. . . . In contrast to the Lincoln-Kyl proposal, U.S. President Barack Obama has proposed setting a 45% rate and a $3.5 million estate tax exemption amount.”).

[Updated 7/15/10 4:30 PM to correct typo - Sen. Kyl.]

H.R. 5297 was read for the second time and placed on the Senate Legislative Calendar

Section 531 of H.R. 5297 would restrict grantor retained annuity trusts to help pay for tax cuts for small businesses.  This bill was read for the second time and placed on the Senate Legislative Calendar.

Here is the latest major action from Thomas.gov:

6/21/2010 Read the second time. Placed on Senate Legislative Calendar under General Orders. Calendar No. 435.

Here is a transcript of this from the Congressional Record:

Mr. REID. I am told that H.R. 5297 is at the desk and due for a second reading.

   The PRESIDING OFFICER. The Senator is correct. The clerk will read the title of the bill for the second time.

   The legislative clerk read as follows:

   A bill (H.R. 5297 ) to create the Small Business Lending Fund Program to direct the Secretary of the Treasury to make capital investments in eligible institutions in order to increase the availability of credit for small businesses, and for other purposes.

   Mr. REID. Mr. President, I now object to any further proceedings on this matter.

   The PRESIDING OFFICER. Objection is heard. The bill will be placed on the calendar.

Paul Krugman (and Senator Reid) on reducing the estate tax: “This would do nothing for the economy now, but it would reduce revenues by billions of dollars a year, permanently.”

On June 20, 2010, the New York Times published an op-ed by Paul Krugman, Now and Later. Krugman writes about the difficult state of the economy and the need to eventually raise taxes, but Krugman urges Congress to gets its timing correct.

Krugman would not reduce the federal estate tax. He asserts that such a tax cut would not help the economy:

So America has a long-run budget problem. . . .

But if we need to raise taxes and cut spending eventually, shouldn't we start now? No, we shouldn't. . . .

The responsible thing, then, is to spend now, while planning to save later.

As I said, many politicians seem determined to do the reverse. Many members of Congress, in particular, oppose aid to the long-term unemployed, let alone to hard-pressed state and local governments, on the grounds that we can't afford it. In so doing, they are undermining spending at a time when we really need it, and endangering the recovery. Yet efforts to control health costs were met with cries of "death panels."

And some of the most vocal deficit scolds in Congress are working hard to reduce taxes for the handful of lucky Americans who are heirs to multimillion-dollar estates. This would do nothing for the economy now, but it would reduce revenues by billions of dollars a year, permanently.

But some politicians must be sincere about being fiscally responsible. And to them I say, please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.

On June 21, 2010, Senator Harry Reid [D-NV] quoted Krugman's article on the floor of the Senate. Here are Sen. Reid's comments (quoted from the Congressional Record:

Mr. REID. Mr. President, my friend says he has never seen anything like this. Well, I have never seen anything like this reasoning. Everyone knows that President Obama did not cause the oil gushing into the ocean, and he has done his utmost to try to alleviate the pain and suffering of the people in the gulf. He had the good fortune of getting the company responsible for this oil gushing out of the ocean to come up with a $20 billion trust fund to pay the people who suffered. There were some Republicans last week who said they thought it was wrong for the President to do that. But that was a very small minority who believed that. I have never seen anything like this. So President Obama is not responsible for the oil gushing out of the Earth into the ocean, and President Obama is not responsible for the severe recession that hit this country in the last few months of the Bush administration.

   I cannot imagine anyone thinking we should not have taken the measures we did to help bolster the economy. The economic recovery package created millions of jobs. There is still money in the pipeline to create more jobs. And as it says in this one op-ed piece in the New York Times today:

   And some of the most vocal deficit scolds in Congress are working hard to reduce taxes for the handful of lucky Americans who are heirs to multimillion-dollar estates. This would do nothing for the economy now, but it will reduce revenue by billions of dollars a year, permanently.

   It will be interesting to see in the next few weeks how these same budget hawks feel about the estate taxes that we have to address. I would hope we can all be calm and deliberate here. We have a few weeks left. We have 2 weeks in this week period, 4 or 5 the next work period to get some things done here.

   We have appropriations bills we have to do. We have these tax extenders we have been working on, as I indicated, for 8 weeks. We have the unemployment benefits we need to extend. People are now desperate for that money. We have also something to help States called FMAP, which helps for Medicaid, which has been such a drain on the States because of the tremendous problems we have had with people being out of work and needing to go on Medicaid because there is no place else for them to go for health care.

   I would hope we can move forward on the legislation that we tried try to finish last week. I am grateful we were able to finally get the short-term fix on the patients who are Medicare recipients. Now if we can get something done in the House there, doctors will be able to be reimbursed not at the fat and sassy rate, but at least it will be better than the 21-percent cut that was going to go into effect today or tomorrow.

Sen. Reid's comments inform that (1) the Senate might take up estate tax reform in the coming weeks, if it has time; and (2) Sen. Reid will probably oppose any estate tax measure that would increase the deficit.

Senate considered H.R. 4213 on June 14, 2010 and Sen. Reid filed cloture

On June 14, 2010, the Senate considered H.R. 4213 --  American Jobs and Closing Tax Loopholes Act --  and a number of proposed amendments.  Importantly, Senator Harry Reid [D-NV] filed cloture:

6/14/2010:

Considered by Senate.

6/14/2010:

S.AMDT.4301 Considered by Senate.

6/14/2010:

S.AMDT.4311 Considered by Senate.

6/14/2010:

S.AMDT.4312 Considered by Senate.

6/14/2010:

S.AMDT.4318 Considered by Senate.

6/14/2010:

S.AMDT.4344 Amendment SA 4344 proposed by Senator Reid to Amendment SA 4301.
To amend the Internal Revenue Code of 1986 to extend the time for closing on a principal residence eligible for the first-time homebuyer credit.

6/14/2010:

S.AMDT.4333 Amendment SA 4333 proposed by Senator Thune to Amendment SA 4301.
Of a perfecting nature.

6/14/2010:

S.AMDT.4301 Cloture motion on the motion to concur in the House amendment to the Senate amendment to H.R. 4213 with an amendment SA 4301 presented in Senate.

Senate Likely to Vote on Tax Extenders & Unemployment Extension Bill HR 4213 by End of Week, Gather: Politics, explains cloture:

according to Senate rules, any senator can hold up a final vote on a particular bill by filibuster (endless debate or argument in opposition to the bill). In theory, this allows a single senator to hold a bill hostage despite even an overwhelming majority to pass the bill.

Cloture allows the Senate to break the filibuster. With 60 votes, the Senate can pass cloture, which ends the debate (usually a delaying tactic) and forces the bill to the floor for a final vote. This is the reason why 60 votes is bandied about so often as the "magic number" for the Democrats in the current Senate - it allows them to break a filibuster by staunch Republican opposition and force through a vote on bills that then only have to pass by a mere 51-vote majority to make their way eventually to President Obama's desk.

C-SPAN Congressional Glossary provides additional details on cloture:

Cloture is the formal procedure used to end a filibuster. It can take up to three days and requires 60 votes.

Cloture can also be used even if there is no filibuster underway, to ban non-germane amendments.

If cloture wins, 30 additional hours of debate are allowed prior to voting, but they are rarely used.

If cloture fails, debate would continue without limits. Instead, the bill is usually set aside.

See also Vicki Needham, Reid files cloture on tax extenders bill, On the Money: The Hill’s Finance & Economy Blog, June 14, 2010. 

Sen. Grassley "urged" Sen. Reid to reform the estate tax: Has the finger-pointing begun?

If the estate tax comes back in 2011 at the scheduled rate and exemptions, Democrats and Republicans will probably blame each other for the increase in taxes.  A June 2, 2010 post by Jay Heflin, Grassley urges Reid to act on the estate tax (On the Money: The Hill’s Finance & Economy Blog), indicates that finger-pointing might have already begun:

Sen. Chuck Grassley (R-Iowa) on Wednesday urged Senate Majority Leader Harry Reid (D-Nev.) to act on making changes to estate tax law before it reverts back to pre-2001 levels in 2011.

The senator warned that no action would mean thousands of small business owners and farmers would be subjected to the tax.

"I hope that the Democratic leadership will soon reveal their hand so that those thousands of small businesses and farmers aren't hung out to dry," he told reporters. . . .

"It's difficult, particularly when Republicans with only 41 members, [don't] have much push to make the majority do such-and-such," he said.

Even though it seems that finger-pointing with regards to the estate tax may have started, it is probably just the way politicians talk to and about each other.  For example, Senator Reid made comparable comments about republicans with regards to different proposed legislation:

Senate Majority Leader Harry Reid accused the Republican Party of "making love to Wall Street," as illustrated by moves to delay votes on amendments to the financial reform bill.

"They won't let us move on any amendments," he said, adding that "It's obvious that they do not want to put in decent restrictions" on the financial industry.

Reid suggested the GOP is stalling because "they are having difficulty determining how they're going to continue making love to Wall Street" by opposing regulation.

Brian Montopoli, Harry Reid: GOP "Making Love to Wall Street", CBS News, May 5, 2010.

It is interesting to note that Senator Reid “may have some tough competition in his 2010 bid for re-election, a new poll shows, in spite of -- or perhaps because of -- his high profile role as Senate Majority Leader.”  Stephanie Condon, Sen. Reid Already in Battle for 2010 Reelection, CBS News, Aug. 24, 2009.

Cognizant of Senator Reid’s “tough competition,” the National Republican Senatorial Committee Communications Director Brian Walsh had this response to Senator Reed’s comments on the financial reform bill: "Considering Nevada's unemployment stands at 13%, Senator Reid would be well-advised to get his mind off sex and onto getting America's economy back on track."  Montopoli, supra. 

In some trades, people sound like they are yelling at each other when they are trying to agree on a price.  In Washington, it seems that politicians prefer to shame each other into action. 

(Special thanks to Michael Hepner, a benefits professional, for bringing to my attention the competition for Senator Reid’s seat.)

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)

Senate jobs bill will not include estate state fix

On February 4, 2010, I asked, Will the forthcoming Senate jobs bill also fix the federal estate tax?  Derek Jensen (attorney, Seattle) provides a response with links to articles in Jobs Bill Does Not Include Estate Tax Fix (Derek's Tax Blog, 2/9/10).  

The Reid-McConnell talks: the estate tax is being used as leverage for jobs bill

In Senate works on estate tax deal to grease the skids for a jobs bill (The Hill, 2/9/10), Jay Heflin explains how the estate tax is being used as a means to an end:

Senate leaders are working on an estate tax deal to make it easier to move a bipartisan jobs bill.

The deal 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.

For Reid, it could provide crucial Republican votes for the jobs bill in a Senate where Democrats now have only 59 votes. Republicans would get a vote on legislation to stop the estate tax from returning to a historically high level.

The exact nature of the deal is still subject to negotiations, and the final details of a jobs bill are unclear. But the basic deal would involve Republicans providing enough votes on the jobs bill to give it the 60 votes necessary to clear procedural hurdles in exchange for a vote on the estate tax. . . .

Lobbyists say the Reid-McConnell talks have been fruitful, but historic snows in Washington have delayed a final decision on when an estate tax fix might move.

The rest of Heflin's article explains some of the alternatives regarding the federal estate tax. 

See also Will the forthcoming Senate jobs bill also fix the federal estate tax? (2/4/10)