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AALU and the Estate Tax: Likely Outcome in 2009

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AALU has lobbied Congress on the estate tax for nearly a decade. We now face another critical juncture as Congress will need to act to prevent repeal in 2010. AALU believes that a one-year extension of current law ($3.5M exemption, 45% rate) is an increasingly likely outcome in 2009, with the decision on permanent reform moving into next year as lawmakers address tax reform and other expiring tax cuts. That being said, we feel our prospects for reunification remain very strong – it has been included in three of the four leading estate tax bills in the 111th Congress, represents sound tax policy, and we are actively educating lawmakers beyond the rate and exemption, on such important technical features.

Below is an analysis of the current budget and political dynamics driving estate tax reform.

Budget

A permanent reform bill of any measure will be costly. The June CBO re-estimate of the administration’s budget projects that freezing the estate tax at the current $3.5 M exemption and 45% rate will cost $233 billion over ten years. With the recent estimate of a $9 trillion 10 year deficit, lawmakers are more cognizant of the increasing national fiscal pressures.
Similarly, important estate planning features such as reunification, portability and indexing for inflation will increase the cost of any permanent reform bill. That being said, the cost of these important technical features are minimal compared to the overall cost of reform, as evidenced by the most recent scoring of a House Ways and Means bill[1], which means that when lawmakers substantively address reform next year, prospects for including reunification will be good.
Alternatively, a one-year extension of current law against the baseline of repeal will create revenue. The JCT estimates that this policy, with a return to pre-2001 law in 2011 and beyond, will boost revenue by $1.3 billion over ten years. This is a highly appealing avenue for lawmakers as they are forced to decide whether other extenders in 2009, like the R&D credit as well as the AMT, can be offset.
The House passed statutory Pay-Go legislation in July, requiring that any bill with a cost be fully offset. The estate tax, however, was exempted from this rule. Conversely, in the Senate, the House Pay-Go legislation has been met with resistance as Budget Committee Chairman Kent Conrad (D-ND) feels the estate tax and other exempted items should be subject to the rule. As a result, we are seeing somewhat of a stalemate in approach.

House

Rep. Pomeroy (D-ND) introduced a bill in January which includes a $3.5 M exemption, 45% rate, and limits minority discounts. The bill currently does not include reunification, but AALU has spoken with the Congressman about its inclusion, and he is not opposed. The bill is recognized as a leading bill, but has not moved in the Ways & Means committee and has no co-sponsors.
Rep. McDermott’s (D-WA) bill, which includes a $2 M exemption, 45%-55% graduated rate, reunification, portability, and indexing, is another strong candidate, but it too has no co-sponsors and has seen no action in committee.
House leadership has realized the need to focus on the estate tax and it is increasingly likely that legislation will move by early November, as a stand-alone bill, in a bill that includes other expiring tax cuts like the R&D credit, or another yet to be determined legislative vehicle.

Senate

In March, Sen. Baucus (D-MT) introduced a middle-class tax cut package which includes estate tax language that would provide a $3.5 M exemption, 45% rate, reunification, portability, and indexing. It is the leading stand-alone Senate bill and has support from two co-sponsors.
In the debate over the Senate budget resolution, Sens. Lincoln (D-AR) and Kyl (R-AZ) introduced an estate tax amendment which would impose a $5 M exemption, 35% rate, and include reunification, portability, and indexing. The amendment passed with the support of 10 Democrats; 51-48. This shows the appetite for the majority of Senators to go beyond ‘freeze 2009’ and AALU believes including reunification and other technical features strikes the right balances for permanent reform.
Additionally, Finance Committee Ranking Member Charles Grassley (R-IA) has indicated that a Democratically drafted ‘freeze 2009’ bill could be met with significant resistance by GOP and moderate Democratic Senators who would prefer a higher exemption and lower tax rate. This dynamic is in direct conflict with the House’s likely support for a ‘freeze 2009’ framework, and we are likely to see the debate extended until mid- to late-December.

Based on the aforementioned analysis, AALU believes that a one-year patch of $3.5 million and 45% is the most likely vehicle as Congress addresses the estate tax this year. That being said, we feel confident that our education strategy on reunification and other important technical features will ensure that lawmakers make an informed decision on the important technical features to include. We continue to push for permanent reform this year, but with health care timelines slipping and other legislative priorities, it is increasingly likely that permanent reform will not be decided until 2010.

[1] The Joint Committee on Taxation (JCT) scored H.R. 2023 on February 18, 2009. In brief, the cost of including reunification in the bill, over a ten year period (2009-2019), would be $4 billion. The cost of including portability in the bill, over the same ten year period, would be $5 billion

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