Federal Estate Tax: Get Ready to Rumble!

On January 27, 2009, the Center on Budget and Policy Proposals posted an article entitled "Congress Should Not Weaken Estate Tax Beyond 2009 Parameters", by Chye-Ching Huang, who reported:

Senate Finance Committee Chairman Max Baucus reportedly plans to unveil a proposal in coming weeks to make permanent key features of the estate tax that are in place in 2009.

This will launch a major congressional debate. * * *

Reform of the federal estate, gift, and generation-skipping tax system have been debated routinely since the last enactment in 2001. In October, 2007, CBPP prepared its "Issues Surrounding the Federal Estate Tax" slide show presentation (11 slides), which summarized its concerns long-term.

The current article notes that, "[i]n his campaign, President Obama called for addressing this matter by making the 2009 estate-tax parameters permanent."

Consistent with its prior presentations, CCPP argues forcefully -- using updated data and projections, and considering six legislative scenarios -- against reducing rates and thresholds below those now applicable in 2009.

These are the summarized reasons advocated by CCPP:

• Making the 2009 parameters permanent would be very expensive, costing $609 billion over the first decade in which its effects would be fully felt (2012-2021). Going further would not be fiscally responsible.

• Under the 2009 parameters, the estates of fewer than three of every 1,000 people who die will owe any estate tax whatsoever; there is no need to shrink this tiny fraction further.

• While going beyond the 2009 rules would benefit only a very small number of wealthy individuals, millions of middle- and low-income Americans likely would eventually bear a significant share of the costs, in the form of higher taxes and lower government benefits. Millions of ordinary Americans could end up with a lower standard of living so that some of the nation’s wealthiest individuals could escape much or all of the estate tax.

• The few estates that are taxable under the 2009 rules would be taxed much more lightly than is commonly understood. In 2011, taxable estates would owe less than one-fifth of their value in tax, on average.

• Under the 2009 estate tax parameters, almost no small business and farm estates would owe any estate tax — just 140 such estates in the entire nation would be taxable in 2011, for example. Moreover, it is extremely unlikely that any taxable estates would have to be liquidated to pay the tax under the 2009 estate tax parameters.

• A meaningful estate tax is an important incentive for charitable giving. Shrinking the tax beyond its 2009 level would weaken this incentive, likely producing a drop in donations.

Read the article for the detailed analysis under each scenario.

The article's conclusion recognizes that maintenance of the 2009 status quo into the future would represent a compromise already:

Estate-tax legislation is necessary and is likely to be considered in 2009.

Repeal of the estate tax would be fiscally irresponsible, costing $1.3 trillion over the decade from 2012 through 2021.

Making the 2009 estate tax parameters permanent would be very costly itself but would be a much more responsible approach. Under it, the estates of 997 of every 1,000 Americans who die would be entirely tax free in 2011; for 99.7 percent of Americans who die, there would be no estate tax at all.

Going farther than this, especially in the face of the grave long-term fiscal problems the nation faces and the array of significant unmet needs, would be exceedingly difficult to justify.

Congressional debate and some enactment is crucial to avoid the "mayhem" anticipated by The Tax Foundation in its posting on December 31, 2008, entitled "365 Days until Estate Tax Mayhem Begins" by Gerald Prante:

Beginning [January 1, 2009], the federal estate tax will have a rate of 45 percent combined with a generous exemption level of $3.5 million. That's until Dec. 31, 2009.

On Jan. 1, 2010, the federal estate tax rate is scheduled to be zero. That's until Dec. 31, 2010.

On Jan. 1, 2011, the federal estate tax rate is scheduled to be 55 percent with an exemption level of only $1 million. * * *

The Tax Foundation views the FET system far less favorably, stating: "Studies routinely find that estate taxes discourage entrepreneurship and lead to large tax compliance costs." Its prior postings under the heading Estate and Gift Taxes stretch back to 1969.

These two organizations are among perhaps thousands that have taken a position on reform of the FET system. This is the year when those divergent viewpoints will be resolved in Congress in the political process and then enacted long-term.

To examine proposals pending before Congress, see: "Four Pending Federal Estate Tax Bills" (01/16/09) posted by Greg Herman-Giddens on the North Carolina Estate Planning Blog. For background regarding prior proposals, read past postings on this PA EE&F Law Blog under the heading "Federal Estate Tax."

"Let's get ready to rumble!"

-- Trademarked catchphrase owned & used by
American boxing & Professional Wrestling announcer Michael Buffer.