Senate Democrats Drop Estate Tax Language
As Attention Turns to Bush-Era Tax Cuts
By Heather M. Rothman (Bureau of National Affairs Author)

Senate Democrats removed any mention of the estate tax from legislation headed to the floor that would extend the 2001 and 2003 tax cuts for families earning $250,000 or less, a Senate Democratic aide said July 19.

Majority Leader Harry Reid (D-Nev.) filed a new version of the Middle Class Tax Cut Act (S. 3412), and a vote is expected during the week of July 23.

Republicans said they still were not sure that their plan (S. 3413) would receive a vote, but neither bill is expected to pass. Instead, senators will use the floor time to showcase their positions on taxes in advance of the summer campaign season.

Since the Reid plan does not address the estate tax, unless addressed in other legislation, the estate tax rate would revert to a maximum of 55% for 2013 - up from 35% for 2012 - and the exclusion level would drop to $1 million from $5.12 million this year. An earlier version of Reid's legislation would have set the estate tax rate at a maximum of 45% while dropping the exclusion level to $3.5 million.

A Democratic aide told BNA that the leadership is narrowing the bill to focus on provisions that affect specifically families earning $250,000 or less. “We think it's more appropriate to litigate the estate tax separately,” the aide said.

The underlying legislation would set the top rates for dividends and capital gains at 20% for 2013, would reinstate the personal exemption phaseout (PEP) and overall limitation on itemized deductions (Pease) that apply to that same category of high-income households, and extend the American Opportunity tax credit, the child tax credit, and the earned income tax credit for another year, as well as the §179 expensing provisions for businesses. It also would provide another one-year “patch” covering 2012 for the alternative minimum tax.

Various Versions Scored

Early in the day, Republicans released analyses from the nonpartisan Joint Committee on Taxation showing that a Republican plan to extend the 2001 and 2003 tax cuts for all taxpayers would cost approximately $29 billion less than the original Democratic plan to limit the extension to families earning less than $250,000.

In an apples-to-apples comparison using current law baseline assuming the taxes expire at the end of 2012, the original Senate Democratic plan (S. 3393) would cost about $272.1 billion while a slightly modified version of the Senate Republican plan (S. 3413) would cost about $300.7 billion.

“The American people deserve better than to have the President and his allies threaten to melt down our economy for what amounts to less than three days of federal spending,” said Finance Committee ranking member Orrin Hatch (R-Utah).

Finance Committee member Charles Schumer (D-N.Y.) called the JCT analysis a “smokescreen” by Republicans trying to disguise the cost of their plan on the deficit.

“The truth is, if we decouple the tax cuts for those earning above $250,000, that means they will be gone for good,” Schumer said. “Over 10 years, that will reduce the deficit by $800 billion compared to what Republicans want to do.”

But the difference is much larger, according to JCT, when comparing the Republican plan to the modified Democratic plan (S. 3412) that does not address the estate tax. That plan would cost $249.7 billion, resulting in a $51.1 billion difference.