A split among Democrats and a busy fall agenda is likely to have
lawmakers hold off this year on debating the future of the estate tax,
even though it expires at the end of the year.

Experts and aides say a more realistic scenario involves Congress passing a one-year extension and then tackling the issue as part of broader tax reform next year.

{mosads}The estate tax hits people who inherit high-value property after a death, and Democrats are keen on avoiding the loss of much-needed revenue when it expires.

Senate Finance Committee Chairman Max Baucus (D-Mont.) “recognizes addressing the estate tax is a must-do proposition in the coming months,” according to an aide on Baucus’s panel. But the committee hasn’t scheduled when it would consider new estate tax legislation, the aide said. The panel is busy with the healthcare reform bill, which is likely to occupy the committee until October.

One option lawmakers are considering is a one-year extension of the current rates.

“That’s the easiest thing to do,” said Clint Stretch, director of tax policy for Deloitte & Touche. “We have a huge tax agenda next year.”

Next year, a raft of tax provisions are set to end, including the individual income tax cuts championed by President George W. Bush. The future of the estate tax could be considered along with the income tax since both taxes affect many in the business community, Stretch said.

The top estate tax rate is currently 45 percent, though a property’s value up to $3.5 million is exempted.

The Obama administration and Baucus have proposed making permanent the 2009 rate and indexing it to inflation in future years, while centrist Democrats have proposed reduced rates.

If lawmakers do nothing, the estate tax would disappear next year before re-emerging in 2011 at the older, higher rate of 55 percent. The Obama administration’s budget expects the estate tax and the gift tax, which applies to large property transfers between living people, to generate $19 billion in revenue in 2010. That number will be much lower if lawmakers allow the estate tax repeal and a scheduled gift tax reduction.

Allowing a one-year repeal would “create all sorts of mischief,” Stretch said. “People would have extra incentive to hand over property next year.”

Some House Democrats are still holding out hope that a more permanent fix can be found this year.
Rep. Earl Pomeroy (D-N.D.), a senior member of the House Ways and Means Committee, said that the House tax-writing panel should consider a long-term solution this month or in October.

Pomeroy said lawmakers should do “something meaningful with the estate tax issue for the American people and eliminate the uncertainty of the present tax code.” Pomeroy said he has been asked by Ways and Means Committee Chairman Charles Rangel (D-N.Y.) to prepare new estate tax legislation for the panel.

Pomeroy opposes a short-term extension, saying that it’s time to end the “hokey-pokey” estate tax code that has made tax planning difficult.

Other centrist Democrats have supported reducing the tax rates.

Sen. Blanche Lincoln (D-Ark.) joined with Senate Republican Whip Jon Kyl (Ariz.) to offer an amendment to the Senate’s budget resolution in April that called for a reduced estate tax rate of 35 percent and an increased exemption of $5 million. Nine other Senate Democrats voted with all of the Republicans for the amendment, which was adopted 51-48 but was ultimately left out of the budget resolution by conferees. Baucus was one of Democratic backers. Baucus has said before that he supports a repeal of the tax but has indicated it would be difficult to get through the Senate.

The estate tax’s future is also uncertain in the House, where a number of lawmakers have proposed their own estate tax plans.

Reps. Harry Mitchell (D-Ariz.) and Travis Childers (D-Miss.) both have bills that would reduce the rate.

Rep. Mike Thompson (D-Calif.), a Ways and Means Committee member, has proposed excluding family farms and ranches from the estate tax.

“When farms pass from generation to generation, too often families have to sell the farm to developers in order to pay the estate taxes,” Thompson said in a statement. “We need to preserve our farms and open spaces for the next generation.”

Republicans in Congress are looking for ways to join with centrist Democrats to push the estate tax rate lower. Sen. Chuck Grassley (Iowa), the top Republican on the Finance Committee, would prefer the tax be repealed, but, short of that, he supports the lower 35 percent rate pushed by Lincoln and Kyl, a Grassley aide said.