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Absent Last-Minute Deal, Estate Tax Rate Will Sunset at Beginning of January

On behalf of David Whitlock at Whitlock Canter LLC

Absent Last-Minute Deal, Estate Tax Rate Will Sunset at Beginning of January

House and Senate lawmakers continued to work on a deal for extending the current estate tax rate and exemption levels but had not reached an agreement late Dec. 15, increasing the possibility that the tax will sunset Jan. 1, 2010.

Early plans to attach a one-year extension to the fiscal year 2010 defense appropriations bill (H.R. 3326) were ditched when Senate Democrats made it clear they could not get 60 majority votes in support of the underlying bill or any Republican votes for a short-term estate tax extension.

The situation was so fluid in both chambers that at various points throughout the day it appeared there was a deal to move some sort of extension-either for one year or two years or for two months or three months. “They’re still flipping a coin,” a House Democratic leadership aide said.

House members expressed exasperation with the Senate and blamed Senate rules for the situation.

“We have given them a permanent extension … we have discussed every option under the sun,” said Rep. Earl Pomeroy (D-N.D.). “The problem is you can’t get the vote requirement to pass it based on the vehicles that are left.”

“I can’t believe that the other body would walk away from this recognizing that it’s a problem that so many people [have] … the law ought to be certain and it’s embarrassing that it’s not,” said Ways and Means Committee Chairman Charles Rangel (D-N.Y.).

DOD Bill Had Been Best Option

When it became clear the Senate would not consider the House’s bill (H.R. 4154) to make permanent the 2009 levels, attaching an estate tax extension to the troop-funding bill might have been the best opportunity for moving it through because House Republicans would be unlikely to vote against troop funding, lawmakers said.

“If it [estate tax] were stand-alone we would probably oppose that extension for one year,” said Rep. Kevin Brady (R-Texas), pointing out that it would be a tax increase over the baseline for 2010. “In DOD I would think it would take an awful lot to object to those provisions because honestly we all want to fund the troops.”

But with one Senate Democrat holding out and refusing to vote for the DOD funding bill, the option had to be taken off the table.

“There are still some things being worked on to see if we can get some sort of agreement for a short term extension but we’re kind of up against the clock,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.). “The Republicans don’t want [the extension] because they want it to go to zero, at least most of them do, so you can’t get to 60” votes.

Absent congressional action, the current estate tax rate of 45% and the exemption level of $3.5 million for individual filers ($7 million for joint filers) would fall to zero in 2010 and then rebound to 55% in 2011 with an exemption level of $1 million.

Pomeroy said if the House adjourned and then the Senate passed an estate tax extension, he did not believe the House would return specifically to address it. “We did our work here,” he said.

Potential Letter of Intent for Retroactive Increase

Asked what his preference is at this point, Rangel said, “Anything so that we can take care of this issue once and for all, so people can depend on how to make their investments and plan their lives.”

“This shouldn’t have happened. It should have been fixed this year. I have every confidence that it will be fixed next year. … If we fix it quickly, I don’t think it will be a problem,” Pomeroy said.

Some lawmakers believe there is precedent for retroactively enacting a tax increase, but others believe an attempt to do so would result in litigation. To ward that off, it is possible Rangel and Senate Finance Committee Chairman Max Baucus (D-Mont.) will write a “letter of intent” alerting the public that although they could not extend the estate tax this year, they intend to do so next year.

Rangel said he was not drafting a letter of intent, but said senators discussed it with him. He said writing a letter was acceptable and he expects to hear from them again. But Sen. Kent Conrad (D-N.D.), a member of the Finance Committee, said he was not aware of any letter of intent, a sentiment echoed by House Majority Leader Steny Hoyer (D-Md.), who said it is “probably a good idea” but that he has not had any discussions about it.

An aide to Senate Finance Committee ranking member Charles Grassley (R-Iowa) said a letter of intent “would be awkward, but we live in awkward times.”

Pomeroy said, looking ahead, part of the problem is that on Jan. 1, the basis changes in the estate tax, which will result in tax increases for 71,000 taxpayers. “Those that love the notion of repealing the estate tax, say no word about imposing a new capital gains tax,” Pomeroy said.

Asked if the House will seek to change the basis, Pomeroy said, “the most likely course may be to retroactively deal with the capital gains tax question but not retroactively try to impose the tax back to Jan. 1.”

Extenders Will Wait Until 2010

The legislation will not address the annual expiring tax provisions such as the research and development tax credit, leaving an extension of those measures until 2010.

Those provisions are currently funded through 2009 but business interests were hoping for a one-year extension that would allow them some certainty in their planning. The House recently passed a one-year extension (H.R. 4213) but with the Senate busy on health care (H.R. 3590) and not likely to support an offset that would tax carried interest as ordinary income, the package stalled.

Referring specifically to the research and development tax credit, Brady said Congress was “creating so much uncertainty that we just add more misery to that … it’s just a shame to keep doing this.”

Uniting for Estate Tax Preservation

A group of wealthy individuals as well as a labor union joined together Dec. 15 for a conference call to speak about the importance of preserving of the estate tax.

“We are in an urgent situation here,” said Lee Farris with United for a Economy. The estate tax, she said, “supports vital public structures and systems” such as transportation and education and “serves as a backstop in our tax system,” recognizing wealth that would otherwise go untaxed.  Farris endorsed a proposal (H.R. 2023) by Ways and Means Rep. Jim McDermott (D-Wash.) that would set the exemption level at $2 million for individuals and base the tax rate on the value of the estate.

With discussions on how to address the estate tax still up in the air, Farris said Congress should pass a one-year extension of the 2009 law and review the issue in the greater context of tax reform in 2010.

John Bogle, founder of the Vanguard Group, called himself a “lifelong Republican” who is “going to have a substantial inheritance tax” and described himself as “happy to pay it.” If the wealthy do not step up and pay for it, “someone else will,” Bogle said, noting that middle-income taxpayers and lower-income taxpayers cannot afford it.

But not everyone is supportive of maintaining the estate tax. Dick Patten, president of the American Family Business Institute, issued a statement calling potential legislative options for extending the estate tax “sneaky, back-door maneuvers to hide unpopular actions from the American people.”