Estate tax may become another nail-biter debate when lawmakers return

Interest groups on both sides of the estate tax debate are unsure how the issue will play out when lawmakers return to Washington for the post-election lame-duck session.

“I hear all sorts of things, which means I hear nothing,” Craig Jennings, a federal fiscal policy analyst at OMB Watch, told The Hill.

ADVERTISEMENT
“Who knows what’s going to happen?” he added.

Lawmakers face a blistering tax agenda in the lame-duck session that, left undone, will cost taxpayers trillions of dollars beginning next year. One issue is how to stop the estate tax from returning to pre-2001 levels, which means estates worth more than $1 million are hit with a tax that could be as high as 55 percent.

The levy is currently repealed but, barring congressional action, it will return next year to the aforementioned level. Republicans and more than a few Democrats oppose returning to pre-2001 law, but there doesn’t seem to be a consensus for how the tax should be modified.

“Unfortunately, I think there is a pretty good chance that they just run it out and let [the repeal] expire,” said Phil Kerpen, vice president of policy at Americans for Prosperity.

Democratic lawmakers were supposed to have wrapped an estate-tax fix in legislation extending the middle-class tax cuts enacted under President Bush.

Sources close to the matter said the fix resuscitated 2009 law, which placed a 45 percent tax on estates exceeding $3.5 million. The levy would be indexed for inflation so fewer people would become ensnared by it.

But Democratic leaders opted to delay action on the Bush-era tax cuts until after the election, thereby punting a resolution on the estate tax into the lame-duck session.

“Inaction is certainly possible, particularly in the lame-duck, which tend to be unproductive,” Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, told The Hill. “We certainly saw last year that inaction is possible.”

Lawmakers last year vowed to fix the estate tax before January of this year, but then blew past the deadline and promised that the situation would be addressed in the new year. Ten months have passed and Democrats still have not resolved the issue.

“I thought at the end of 2009, ‘they’re never going to let this thing lapse,’” Jennings said. “Here we are in [October of] 2010 without any estate tax, with several billionaires, most notably George Steinbrenner, passing away. We’re talking hundreds of millions of dollars in forgone revenue because Congress failed to act.”

Kerpen believes the repeal should be continued into next year and was disappointed when Senate Minority Leader Mitch McConnell (R-Ky.) included in his recently introduced tax bill a compromise by Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) that taxes estates over $5 million at 35 percent.

Given the fact the Republicans could pick up a number of Senate seats in November, Kerpen believes McConnell should have extended the current repeal on the tax into 2011.

“I think it was a tactical mistake for Republicans to open this round of the debate with the Kyl-Lincoln compromise,” he said. “I think they should have started with zero. They would have been in a much stronger position — both because they would have had the moral and economic high ground and also just in tactical terms they’d have more room to compromise.”

McConnell’s office did not respond to questions on the fate of the estate tax in the upcoming lame-duck.

Several compromises on the estate tax have been floated, which include doing a retroactive fix. Another would exempt farmers from the tax, which Jennings believes could be subjected to abuse.

“There’s definitely not universal support for it, because exempting farms in the way [the bill] is written could create some pretty big loopholes,” he said, adding that indecisions surrounding the tax only increase the odds that a fix will not be in place by year's end.

“It’s not a sure thing that they’ll actually get around to doing anything about it,” he said. “It’s conceivable that we end up with the 2001 estate tax.”