If Congress fails to pass an estate tax bill before January 1, the estate tax will disappear in 2010.  The result would be a tremendous loss in much-needed revenue from the wealthiest estates for one year, and an increased challenge to bringing the tax back in 2011.  The estate tax, which has been in existence since 1916, is the most progressive tax in the federal tax code – it taxes those who can most afford to pay.  Those who favor a strong estate tax believe it is a fair and responsible tax on wealth, much of which has never been taxed, as it is transferred from one generation to the next.
On December 3, the House passed the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R. 4154), intended to avoid the complete elimination of the estate tax by instead making permanent a reduction in the tax first enacted as part of the 2001 Bush tax cuts.

The 2001 Bush Administration tax cut law included changes to the estate tax that have provided more generous exemptions for estate beneficiaries over time leading eventually to full repeal of the tax in 2010.  (In an odd maneuver aimed at reducing the official total cost of the tax cuts, the 2001 law would return the estate tax to its old levels in 2011, but proponents of repeal hoped further action at that time would prevent the tax’s return.)  In 2009, only estates valued at more than $3.5 million per individual and $7 million per couple, or 1 in 500 estates, pay any estate tax and do so at an average effective rate of less than 20 percent.  (See Center on Budget and Policy Priorities’ report, Click here.)

H.R. 4154 leaves the 2009 estate tax level in place permanently.  The vote was 225-200 with all Republicans and 26 Democrats opposing the bill.  Those in opposition voted ‘no’ for a range of reasons: some think the 2009  exemption level is too generous and wanted a one-year extension with the hope of lowering it next year; some think the exemption is not generous enough; and still others would like to see the tax permanently repealed.  H.R. 4154 is not offset by other revenue raisers and would cost $234 billion over 2010-19 excluding interest costs.

As the end of the year approaches it is not clear what the outcome will be. The Senate has been inclined to support even more generous exemption levels and a lower tax rate.  If either a one-year extension is passed or if nothing passes and the estate tax is allowed to disappear in 2010, it will revert to the pre-Bush tax law in 2011, when the exemption would be $1 million per individual and the maximum rate would be 55 percent.  Proponents of a strong estate tax are concerned that allowing it to disappear would make it difficult to pass a reasonable and responsible exemption level and rate going forward.

The Senate certainly will not consider H.R. 4154 as a free-standing bill.  The estate tax as well as other expiring laws and some job creation programs may be added to the FY 2010 Defense Appropriations bill that Congress must pass by December 18.

The House also passed H.R. 4213, the Tax Extenders Act, on December 7.  The vote was 237-182, with all Republicans and 9 Democrats voting ‘no’. This is a package of over 40 individual and business tax breaks scheduled to expire at the end of the year.  Among the largest provisions in the $31 billion bill are $7 billion for the research and development tax credit, the $5.4 billion accelerated depreciation provision for restaurants and retail businesses, $1.9 billion to allow taxpayers to deduct state and local sales taxes in states without income taxes, and $1 billion in tax credits for biodiesel and renewable-diesel production.  The efficacy and fairness of some of the so-called ‘tax extenders’ has prompted bill drafters to include a provision ordering the Joint Committee on Taxation to conduct a study regarding the cost-effectiveness of these tax breaks and determining whether there are unintended beneficiaries.  The results of the study are due to Congress by November 30, 2010.

Most Republicans opposed the bill because it is paid for with two revenue sources.  The first is estimated to raise $24.6 billion by taxing the compensation of private equity fund managers at the same rate as ordinary income instead of the lower 15 percent capital gains rate currently applied.  The second offset, estimated to raise $7.7 billion, targets international tax evasion by creating strong incentives for foreign banks to provide information to help the IRS detect fraud and evasion by U.S. citizens.

There is less of a sense of urgency for Congress to complete work on this bill this year than on the estate tax.  It can retroactively pass the tax cut extenders bill early next year before taxpayers file their 2009 tax returns.

For more details regarding the estate tax and for the number of estate subject to the tax by state see Citizens for Tax Justice’s report, Latest State-by-State Estate Tax Data Show Why We Need a Strong Estate Tax.

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