Fed Est Tax Reform Bill Introduced

This week, various listserv messages noted the recent introduction of a bill in Congress that would amend the current federal estate tax thresholds, but keep its overall structure intact & make it permanent, and would also make permanent a 15% capital gains income tax rate.

H.R.3170 was introduced on July 24, 2007, in the House of Representatives by Rep. Harry E. Mitchell [AZ-5] and two co-sponsors (last one added 08/02/07). The full text of H.R. 3170 is available here.

The Bill was then referred to the House Committee on Ways and Means, and now awaits further consideration.

The National Association of Enrolled Agents noted the introduction of HB 3170 in the midst of an already ongoing Congressional debate about the "alternative minimum tax" component of the federal income tax. See: NAEA Newsletter, dated July 27, 2007, available online (PDF, 5 pages), in items entitled "House, Senate Differ on AMT Plans", and "House Members Introduce Bipartisan Capital Gains, Estate Tax Bill":

H.R. 3170, introduced by Reps. Harry Mitchell (D-AZ) and Chris Shays (R-CT), would increase the estate tax exemption by $250,000 every year from 2009 until 2015, when the exemption would be $5 million. From 2015 forward, the exemption would be indexed to inflation.

The bill would also create two rates — 15 percent for estates worth $25 million and below, 30 percent for estates worth more than $25 million.

The long-term capital gains rate would remain at 15 percent.

Mitchell and Shays did not include provisions to raise revenue or cut spending to offset the bill’s $329 billion price tag.

Because the current capital gains and estate tax laws don’t expire until 2011, Congress is unlikely to address them this year.

Upon its introduction, Rep. Mitchell issued a Press Release, dated July 25, 2007, entitled "Mitchell, Shays Introduce Bipartisan Legislation to Extend Key Tax Cuts":

U.S. Rep. Harry Mitchell and Rep. Christopher Shays (R-Conn.) today joined forces to introduce bipartisan legislation to permanently reduce capital gains and estate taxes.

“Key tax cuts are set to expire, and that ought to concern Democrats as well as Republicans,” said Mitchell. “We need to get beyond partisanship and get rational about our nation’s tax policy. Raising capital gains taxes discourages investment and raising the estate tax hurts families who own homes and small businesses. That just doesn’t make sense. I appreciate Congressman Shays’ strong leadership and partnership on this important issue.”

“The fact is our economy averaged a 3.4 percent growth between 2004 and 2006 after we reduced the capital gains tax rate in 2003,” said Shays. “This bill will ensure that middle class families, retiring Baby Boomers, and small business owners are not saddled with a tax increase on their savings and investments." * * *

Another Press Release, also dated July 25, 2007, was issued by Rep. Mitchell, entitled "Background Information About the Mitchell-Shays Capital Gains and Estate Tax Relief", which explained the anticipated effects of H.R. 3170, if adopted by Congress:

Mitchell-Shays Capital Gains and Estate Tax Relief Act.permanently reduces estate and capital gains taxes by preserving 2001 and 2003 reductions that are set to expire December 31, 2010. Permanently reducing these cuts encourages investment and makes our tax code fairer and more predictable. * * *

The Mitchell-Shays Capital Gains and Estate Tax Relief Act permanently reduces the capital gains tax to 15 percent. Prior to 2003, capital gains were taxed at a 20 percent rate. Unless Congress acts to extend these tax cuts, Americans will see a 33 percent increase in capital gains taxes in 2011.

Mitchell-Shays also permanently reduces the estate tax. Prior to the first tax cut in 2001, taxpayers with combined assets of more than $675,000 were subject to the estate tax. The 2001 and 2003 tax cuts increased the exempted amount to $1 million in 2003, $2 million in 2007, and $3.5 million in 2009.

Mitchell-Shays establishes an automatic increase in the exemption, indexed for inflation, beginning with $3.75 million in 2010. It raises the exemption to $5 million by 2015 and then indexes the exemption for inflation thereafter. Furthermore, Mitchell-Shays eliminates the flat 55 percent tax rate and creates two lower estate tax rate brackets: 15 percent for estates valued below $25 million, and 30 percent for estates valued above $25 million. * * *

The Mitchell-Shays Capital Gains and Estate Tax Relief Act provides tax relief for middle-class families, small business owners, those who own stock and 401(k) retirement plans and anyone who owns a home. * * *

This is only the beginning of a renewed Congressional debate on the future form of federal estate & gift tax law, which will be considered in the context of reform of federal income tax law -- and particularly its application of the "alternative minimum tax" now affecting many "middle Americans".

Rep. Mitchell recognizes this. He was quoted here as saying: “There’s going to be a tax bill this year and tax cuts are going to be part of the discussion. It's a good start.”

Update: 02/27/08:

The Law Firm Management & Marketing Systems Blog posted an update on February 27, 2008, quoting from a worthwhile summary written by Mina N. Sirkin, Esq., of Los Angeles, California, about the status of legislation before the 110th Congress that would affect the federal estate & gift tax. See: "How Congress intends to manage your inheritance: 2008 Estate Tax Legislation on the horizon" (02/27/08).