Coalition Pushes for Estate Tax to Return to Clinton-Era Levels, Permanent Portability

By Diane Freda, Bureau of National Affairs

Americans for a Fair Estate Tax (AFET) wrote March 29 to all members of Congress asking them to support the Sensible Estate Tax Act of 2011 (H.R. 3467), which would restore the estate tax to Clinton-era levels and make portability permanent.

The bill would provide a $1.3 million tax-free exemption ($2.6 million for married couples), with graduated rates up to a maximum marginal rate of 55%. The exemption would shield about 99% of Americans from the tax and would continue to be adjusted for inflation in the future, according to AFET, a coalition of public interest groups.

It would also reunify the gift and estate tax exclusions, and close loopholes in the asset valuation and minority discount rules, among other reforms. According to AFET, the wealthy, rather than social insurance programs, should foot the bill for the government’s current budget problems. Rather than cutting Social Security, Medicare, and other programs that help low- and middle-income people, millionaires and billionaires should be taxed to raise revenues, said Lee Farris, estate tax policy coordinator of United for a Fair Economy and AFET steering committee member.

If Congress does not pass the bill, according to AFET, it should then let the current estate tax rules lapse and allow the pre-2001 rules to return in 2013, as scheduled under current law. In this scenario, an individual would be able to pass on $1 million tax free, and a married couple could pass on up to $2 million tax free. Among the 77 organizations signing the letter are YWCA and USAction, the National Committee for Responsible Philanthropy, AFL-CIO, the American Federation of State, County and Municipal Employees, and Service Employees International Union.

Getting it Done in 2012

Eileen Sherr, senior technical manager with the American Institute of Certified Public Accountants, said March 29 that the bill seems similar to provisions in effect before the Economic Growth and Tax Relief Reconciliation Act of 2001 where there was a $1 million estate tax exemption and a 55% rate. Some reforms in the bill, such as valuation of family limited partnerships, are revenue raisers taken from the president’s budget proposal, she said. AICPA has not taken a position on the House bill or one from the Senate that would repeal the estate tax altogether.

Justin Ransome, partner with Grant Thornton, said he did not believe Congress would enact legislation on the estate tax until 2013. “The appetite in Congress is usually to do something grandiose as opposed to a stand alone bill,” he said. In addition, Congress may not feel any particular pressure to act since no action would simply mean a return to prior estate tax rates. All indications are that there will be some type of estate tax in the future, he said. Harking back to 2001 when Republicans controlled the House, Senate, and Presidency, he noted that Democrats fought hard in the Senate to block any measure that would have fully repealed the estate tax.

He also said if Congress enacts a law that is retroactive, there could be a constitutional challenge. The majority of Democrats continue to believe that an estate tax is a viable revenue raiser and the philosophy of redistribution of wealth may still be alive and well, he said.

Ron Aucutt, partner with McGuireWoods said he personally does not favor repeal of the estate tax, because the more different tax bases there are, the lower the rates can be, which lowers the potential to distort economic decisions. He also said with a high enough exemption, such as $3.5 million or $5 million, indexing, and a workable portability regime, the estate tax would present no threat to the ability to pass assets on to heirs. However he said low enough rates, with appropriate provisions for assets such as family business interests, and a rational treatment of state death taxes would also be required.

He also said he does not think basis works well in the absence of an estate tax, despite the experience of Canada and other countries. “Carryover basis in 2010 was a disaster,” he said, and step-up in basis without an estate tax would be impractical.