On January 1, there will be no estate tax in 2010 unless Congress acts to reinstate it retroactively early in the New Year.  Allowing the tax to disappear will deepen the deficit by about $25 billion in 2010 alone. The massive tax cuts enacted in 2001 under former President Bush included gradual reductions in the estate tax, culminating in total repeal in 2010.  Because the multi-year cost of repeal was eye-popping, Congress left the total repeal of the estate tax in place for only one year, to be followed by a reinstatement of the tax at its old levels starting in 2011.  The proponents of repeal were confident that Congress would not allow the estate tax to return to the pre-2001 level of exempting estates worth less than $1 million, with a rate of 55 percent (not counting deductions).
As the deficit deepened, support increased in Congress for retaining a reduced estate tax and avoiding outright repeal.  Several weeks ago the House passed H.R. 4154, making the 2009 estate tax levels permanent (exempting estates of under $3.5 million, with a 45 percent rate).  When it was told that the Senate did not have the votes to pass any extension, the House did not include the estate tax on the Defense Appropriations bill, the last and must-pass appropriations bill which served as the vehicle for attaching other critical program extensions.  (See Appropriations article in this issue of the Human Needs Report.)

Ironically, although opponents of the estate tax frequently claimed it hurts family farms and small businesses who are almost universally exempt, allowing repeal will actually have negative consequences for the heirs of many family farms and smaller businesses valued over $1.3 million. These estates would be exempt under 2009 estate tax rules, but under repeal, beneficiaries would be newly subject to the capital gains tax when selling the estate based on its increased value from the time it was originally purchased (perhaps decades ago).  (See Center on Budget and Policy Priorities paper, Contrary to Claims, Allowing Estate Tax to Expire Would Make Family Farms and Small Businesses Worse Off Overall.).)

Also left to be addressed are the scores of expiring tax credits (so-called ‘extenders’) that usually are passed for one year.  The House included $31 billion for these credits in its extenders bill (H.R. 4213, also passed several weeks ago), paid for by raising other revenue sources.  The Senate is disinclined to support the way the House bill pays for extending the tax credits.  Many of these credits do have bi-partisan support so it is likely that Congress will act early next year to pass these popular tax credits retroactively.  Perhaps the extenders and the estate tax could move together.  However, many in the Senate who support the tax credits would like to shrink the estate tax below 2009 levels. (For more details on the estate tax and extenders see the December 11 Human Needs Report.)

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