Future of the Federal Estate Tax

Ryan J. Donmoyer (Bloomberg): "Return of Estate Tax Looms as Impediment to Extending Tax Cuts"

On November 29, 2010, Bloomberg published Return of Estate Tax Looms as Impediment to Extending Tax Cuts, by Ryan J. Donmoyer.  Donmoyer highlights different proposals for estate tax reform:

With Obama planning to meet with bipartisan congressional leaders at the White House tomorrow, three main factions have formed in the Senate, none of which has the 60 votes needed to advance an estate-tax proposal. One includes Republicans such as South Carolina’s Jim DeMint who favor permanent repeal. Another is led by Democrats including Majority Leader Harry Reid who support a top rate of 45 percent that would apply after a $3.5 million tax-free allowance. . . .

A third faction, led by Arizona Republican Jon Kyl and Arkansas Democrat Blanche Lincoln and embraced by Republican leader Mitch McConnell of Kentucky, backs setting the top rate at 35 percent after a $5 million exemption.

Donmoyer also lays out the arguments of proponents and opponents of the estate tax.

Donmoyer’s article has received harsh criticism.  In Another Ryan Donmoyer Cheap Shot (The Future of Capitalism, 11/29/2010), Ira Stoll wrote, “[T]he goal of the article doesn't seem to be accuracy; the goal seems to be mocking opponents of the estate tax. It's outrageous. . . . [T]he treatment of Mr. Harbert in the Bloomberg article is a caricature.”

(I found Donmoyer’s article to be timely and informative. You can read the article and its critique it and reach your own conclusion.)

Update:

• See Kevin Staker, Good Analysis from Bloomberg on Impact of Various Estate Tax Exemptions, Also Points Out How Estate Tax Not Being Discussed, Estate Tax News Blog by Kevin Staker, Nov. 29, 2010 (stating that Donmoyer’s analysis confirms Staker’s opinion nothing will happen).

Hints that the federal estate tax might be relegated to a lame duck session

Mark Pazniokas, Lieberman refuses to campaign for Democratic majority, The Connecticut Mirror, Sept. 13, 2010:

Lieberman, who is returning to Washington today after the end of the summer recess, said he expects the immediate focus will be on the leader of the Senate Republican minority, Mitch McConnell of Kentucky.

"That's the interesting drama in our story today and tomorrow, which is what will Senator McConnell do on John Boehner's statement yesterday," Lieberman said. "I think if Sen. McConnell agrees, we can extend most of the tax cuts for at least a year, then leave us to argue about higher income tax cuts and the estate tax in the lame-duck session.

"That would be a significant breakthrough."

Jay Heflin, Kyl: Little progress made on the estate tax, The Hill's On The Money, Sept. 13, 2010:

With less than fours months before the estate tax returns to levels not seen in nearly a decade, Senate Minority Whip Jon Kyl (R-Ariz.) said little progress has been made on the issue. 

"I don't think the Democratic leadership has figured out how to approach the whole tax issue, and that [the estate tax] is a big part of it," he told reporters Monday. "Nobody has talked to me about it, and they know that [Sen. Blanche Lincoln (D-Ark.)] and I are the two that have been pushing reform."

(Hat tip: Kevin Staker, Spokesman for Senate Minority Leader Declines to State Republicans Have Votes to Filibuster Obama Tax Proposal, Estate Tax News Blog by Kevin Staker, Sept. 14, 2010.) 

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.]

Jay Heflin reports that “Kyl seeks to add an estate tax fix to small-business bill”

On July 13, 2010, Jay Heflin posted Kyl seeks to add an estate tax fix to small-business bill (On the Money: The Hill’s Finance & Economy Blog).  Heflin reports that Sens. Kyl and Lincoln are trying to add an estate tax fix to the small-business bill:

Senate Minority Whip Jon Kyl (R-Ariz.) will once again team up with Sen. Blanche Lincoln (D-Ark.) on an estate tax fix they hope will be voted on during debate on small-business legislation that creates a $30 billion lending pool and provides approximately $12 billion in tax relief.

“We would like to bring it forward as an amendment to the small-business bill, but it’s up the leader,” Kyl said.

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. 

The Senate returned to the small-business bill earlier on Tuesday. . . .

Under the Kyl-Lincoln proposal, estates worth [less] than $3.5 million would initially be exempt from the tax. That exemption level would rise to $5 million over a 10-year period. The tax rate would also be phased-in, ending at 35 percent after 10 years. Estates would have the option to prepay the tax at a lower rate.  

(Special thanks to Rania Combs (estate planning attorney, Texas) for bringing Heflin's post to my attention.  You can follow Rania Combs on Twitter and learn more about her practice on Texas Wills & Trusts Online.)

Jay Heflin, "Grassley accuses Democrats of slow-walking estate tax fix"

On June 18, 2010, Jay Heflin posted Grassley accuses Democrats of slow-walking estate tax fix,  On The Money: The Hill's Finance & Economy Blog. 

[1] Heflin writes, “this week accused Democratic leaders of foot-dragging when it comes to fixing the estate tax.”  For a link to the full text of Sen. Grassley’s floor speech to the Senate, or to watch a video of it, see my earlier post, On Wednesday, June 16, 2010, Senator Grassley called again for repeal of the estate tax.

[2] Heflin writes, “Rep. Bill Pascrell (D-N.J.) is equally troubled by the fate of the estate tax even though his chamber passed legislation that could keep the tax increase from happening. His chamber moved a bill that applies a 45 percent tax on estates worth over $3.5 million for individuals and $7 million for couples.”  For a video of Rep. Pascrell’s support of H.R. 4154, see my earlier post, On December 28, 2009, Rep. Bill Pascrell [D-NJ] posted a video on YouTube that shows his December 3, 2009 talk, on the floor of the House, in support of H.R. 4154.

[3] Heflin writes, “Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) are expected to offer an amendment in the upcoming debate on small business legislation that would tax estates worth more than $5 million at a 35 percent rate.”  Sen. Kyl has been working hard to gather support for lower estate tax, but has had limited success.  I have categories set up for Sen. Kyl and for Sen. Lincoln.  These categories aggregated my posts that mention these senators: Sen. Jon Kyl [R-AZ], Sen. Blanche Lincoln [D-AR].

Congress's delay in deciding on H.R. 4213 is causing some unemployed Americans to contemplate "the very real possibility of joining the rolls of the homeless and having to live on the streets"

For readers coming in to this blog directly, please take a few minutes to read the comments to my earlier post, Looking ahead: (1) H.R. 4213, (2) H.R. 5486, and (3) Sen. Kyl.  

Readers are concerned about the grave consequences that Congress's "political football with the unemployment extension" can have.  Tim is sad and upset because further delay by Congress will cause "thousands drop off of the eligibility roles."  Fred's comment is especially moving.  In part, he writes,

I am one of those people who are now caught in the flux of the Senate's delay of extending the deadline of Unemployment benefits. I am currently living in a weekly hotel (because I had to give up my apartment while unemployed) and my rent has to be paid weekly. Any kind of delay on this issue means that I now face the very real possibility of joining the rolls of the homeless and having to live on the streets. How am I supposed to keep looking for work if that occurs?

As always, I greatly appreciate your comments. 

Looking ahead: (1) H.R. 4213, (2) H.R. 5486, and (3) Sen. Kyl

There are a number of items to watch for this week:

[1] The Senate is scheduled to continue considering H.R. 4213, today at 3:00 PM.  See Two updates on H.R. 4213, American Jobs and Closing Tax Loopholes Act, June 11, 2010.  My posts on H.R. 4213 are being aggregated under the category IRA Charitable Rollover.  To learn more about IRA charitable rollovers, while being entertained, I highly recommend reading Conrad Teitell’s AVATAX, which he has generously shared.  See Conrad Teitell's enlightening and entertaining production, AVATAX -- Planned Giving on Planet PandIRA.

[2] Last week, Rep. Sander Levin introduce H.R. 5486, which would limit GRATs in an identical way to H.R. 4849 (which the House recently passed).  See On June 9, 2010, Rep. Sander Levin introduced another bill that would restrict GRATs – H.R. 5486.  H.R. 5486 could be voted on by the House very soon.  See Martin Vaughan- House to vote on a bill funded by restrictions on GRATs.  The JCT increased the estimated revenue that restricting GRATs would raise from $4.450 billion to $5.297 billion.  I was curious as to why this might happen and I received two thoughtful responses.  See How much revenue would limiting GRATs raise over 10 years- $4.450 billion (H.R. 4849) or $5.297 billion (H.R. 5486)? 

[3] Last week we learned that the resilient Senator Jon Kyl is “pretty close” to getting 60 votes to support his estate tax reform initiative.  See Sen. Kyl states he is pretty close to gathering the 60 votes needed to pass estate tax reform bill: 35% top rate, $5 million exemption. 

My sense is that this week [1] the Senate will definitely consider H.R. 4213 and will probably amend it in some way, [2] the House might vote on (and pass) H.R. 5486, and [3] Sen. Kyl will probably not gather the 60 votes he is seeking. 

Sen. Kyl states he is "pretty close" to gathering the 60 votes needed to pass estate tax reform bill: 35% top rate, $5 million exemption

On June 11, 2010, Tax Notes Today published an article by Sam Goldfarb titled, “Kyl Says Momentum Is Building for His Estate Tax Proposal.” 2010 TNT 112-2, Doc 2010-12859. 

Importantly, Goldbarb writes, “Kyl acknowledged that his gauge of Senate opinion on the estate tax was not based on a formal count but on informal conversations.”

For an excerpt from Goldfarb’s article, see Paul Caron, Senate Is "Close" to Estate Tax Compromise of $5m Exemption, 35% Rate, TaxProf Blog, June 11, 2010.

Two reports published by the Center on Budget and Policy Priorities criticize the stalled proposal to cut the federal estate tax

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.

[1] 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.  

[2] 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:

1. 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,   
2. proposals to extend the 2009 rates -– one section in the report is titled, “Even Extending 2009 Estate Tax Rules Would be Costly” -- and
3. 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.

Senators could not agree to gradually reduce the federal estate tax rate to 35% and raise the exemption to $5 million

The news.

A number of articles have reported that Senators have reached no agreement on the federal estate tax. 

In Kyl: Senate deal off on estate tax (On the Money: The Hill’s Finance & Economy Blog, 5/18/10), Vicki Needham reports the following:

Senate Minority Whip Jon Kyl (R-Ariz.) said the accord, which was all but forged a week ago, began to dissolve Monday night and broke down Tuesday after talks between leaders in both parties.

After talks with Senate Finance Chairman Max Baucus (D-Mont.) and Senate Minority Leader Mitch McConnell (R-Ky.), they scrapped a plan to move forward with the tax that expired at the end of 2009.

In US Senate Effort to Reduce Estate Tax Hits Turbulence (Dow Jones Newswires, 5/18/10), Martin Vaughan reports:

[I]n a closed-door meeting of Senate Democrats Tuesday, several senators denounced the plan in strong terms, according to those present. They argued that with problem budget deficits and with many Americans still out of work, it is the wrong time to cut taxes on the richest Americans.

In their own words.

Here are few quotes from senators:

• Senate Minority Whip Jon Kyle [R-AZ]:
  • “Nothing is clear about how the estate tax will be considered.” (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence)
  • “We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they’re not going to allow it on the floor, at least not voluntarily. . . . So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it.”  (Source: Vicki Needham, Kyl: Senate deal off on estate tax.) (You can hear Sen. Kyle speak the first sentence at Republican Kyl Says Democrats Are Blocking His Estate Tax Amendment, Talk Radio News Service, May 18, 2010.)
• Senate Finance Committee Chairman Max Baucus [D-MT]: “There’s no agreement on estate tax, neither on substance nor on process.  None whatsoever.”  (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)
• Senator Robert P. Casey, Jr. [D-PA]: “The idea that we’re going to give an incredible economic advantage to less than 1 percent of our taxpaying population is really offensive to me. . . . Most of our caucus is very concerned with what would happen on the estate tax.” (Source: Sam Goldfarb, No Deal Yet on Estate Tax, Baucus Says, Tax Notes Today, May 18, 2010, 2010 TNT 96-5.)
• Senator Bernard Sanders [D-VT]: “The idea that we would make significant exemptions within the estate tax to give more tax breaks to the top three-tenths of 1% is nauseating.  I will do everything I can to stop that.”  (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)

Notes on the proposed deal.

Although the details of the proposed deal have not been disclosed, here are some notes, which are compiled from various news articles:

• Tax cuts. Tax cuts would be phased-in over ten years: the rate would go down 35% and the exemption up to $5 million, indexed for inflation.  (Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)
• Prepaying the estate tax.There have been talks about giving individuals the option of prepaying the estate tax through pre-paid trusts.  Individuals who pre-pay would benefit from a lower rate.  (Id.)
• Budget offsets.  Lawmakers were searching for budget offsets within the estate tax.  The offsets would (1) help to prevent a higher deficit, and (2) prevent “dipping into other revenue streams” (Meg Shreve, Lobbyists Say Lawmakers Looking for $60 Billion in Offsets for Estate Tax Bill, Tax Notes Today, May 17, 2010, 2010 TNT 94-4). 
• No credit for state estate taxes.  The federal tax credit for state estate taxes would continue to be repealed.
• Limits on GRATs.  Limits on the use of GRATs were being considered.   
• Pay-as-you-go.  The proposal could comply with pay-as-you-go rules.  “Budgeting rules dictate that the 2009 estate tax levels can be extended for two years without revenue offsets, but additional revenue loss must be offset.  Senators can waive the offset rule, however, with a 60-vote supermajority.”  (Eric Kroh, Kyl Says Agreement Reached on Some Estate Tax Details, Tax Notes Today, May 18, 2010, 2010 TNT 95-2.) 

A number of issues were not clarified in the articles that I read:

• the gift tax rate and exemption
• whether any changes would be retroactive 

Also, there is no indication that portability of the exemption amount between spouses was discussed.

Status of the reform.

Estate tax uncertainty continues.  Reform is hampered by a deep divide between democrats and republicans:  

• House.  As indicated in the voting for H.R. 4154, most Democrats in the House supported a permanent estate tax with an exemption of $3.5 million and a tax rate of 45%.  Republicans in the House did not.
• Senate. As the current talks indicate, some Republicans (and some Democrats) would support a lower estate tax rate (down to 35%) and a higher exemption (up to $5 million).  Yet some Democrats vehemently oppose such a tax reduction.  At least one Democrat in the Senate finds the idea “nauseating.”