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Facing a December 31 deadline, the U.S. House of Representatives has voted 225-200 to make permanent the federal estate tax rules that have applied in 2009. The measure would exempt from taxation the first $3.5 million ($7 million for a couple) of inherited wealth and would impose a 45 percent tax on estates above those levels. The question of what to do about the estate tax now moves to the Senate, where prospects for passage of a similar bill are uncertain. The House bill, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R. 4154), was introduced by House Ways and Means Committee Member Earl Pomeroy (D-ND). The bill generally makes permanent the estate, gift, and generation skipping transfer tax laws in effect for 2009. If Congress fails to act by December 31, the estate tax is scheduled to disappear for 2010 and then return in 2011 with a Clinton-era exemption of $1 million and a top rate of 55 percent. Although Senate Finance Committee Chairman Max Baucus (D-MT) has said he would like to bring to the Senate floor a bill similar to the House bill, Senate Republicans and even some Democrats want a bill that is even more generous to the wealthy, one that raises the individual exemption to $5 million and imposes a top rate of only 35 percent. "Clearly, there is a lot of support for greater relief," comments Hani Sarji on the Future of the Federal Estate Tax blog, noting the closeness of the House vote. But there will also be likely concern among some Senate Democrats that the House bill is too large a giveaway to the rich that will only add to the federal deficit. The bill would result in $234 billion in lost tax revenue over 10 years compared to what will be the case if Congress does nothing. Reuters quotes one analyst that the House bill is "pretty much a non-starter" in the Senate because of its price tag. Reuters notes that a "likely compromise in the Senate is a one-year extension of current law, which would raise some money because of the 2010 phase out." Nevertheless, Sens. Tom Carper (D-DE) and George V. Voinovich (R-OH) have reintroduced S. 2784, which would freeze the estate tax at its 2009 level. One point of conflict between the House and Senate is that while Senate leaders have expressed a wish to extend the estate tax exemption at the 2009 levels and index the rate to inflation, the House bill would not index for inflation. It is not even clear that the Senate will act before the end of the year. The Associated Press reports that "the health care debate there could preclude action on the estate tax before Congress breaks later this month for holidays." But at the same time it observes that lawmakers "don't want to delay action until next year because they are wary of enacting retroactive tax changes." Congressional Inaction Would Hit Families of More Modest Means Tens of thousands more families will be facing tax bills in 2010 if Congress fails to act on the estate tax by December 31. For 2010, the vanished estate tax would be replaced by a 15 percent or 28 percent capital gains tax on all but the first $1.3 million in inherited wealth. This would subject the heirs of 75,000 estates to capital gains taxes, compared to an estimated 7,500 families that would face estate taxes this year, according to a 2005 study by the Ways and Means Committee's chief tax counsel. Moreover, heirs would have to calculate capital gains taxes based on the original price paid for inherited property, not on the price assets are worth at the time they are bequeathed to heirs, as under current law. "People will be stuck with large tax bills forcing liquidation if they were forced to pay a capital gains tax on a 1959 basis," said Jared Polis (D-CO). "Do opponents truly believe making families pay capital gains is better?" For the text of H.R. 4154, click here. For a technical explanation of H.R. 4154 prepared by the staff of the Joint Committee on Taxation, click here.
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