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Now What?

Capital Letter No. 23
March 1, 2010

By Ronald D. Aucutt

While Republican and Democratic leaders alike have wrestled with estate tax stability, the solution may be so easy it’s impossible.

Dear Readers Who Follow Washington Developments:

On December 16, 2009, in a rare interlude during the consideration of the health care reform bill, Senate Finance Committee Chairman Max Baucus (D-MT) asked the Senate for unanimous consent to take up H.R. 4154, which the House had passed on December 3 to make the 2009 estate, gift, and GST tax law permanent.  His unanimous consent request included a request to approve an amendment to the bill to extend 2009 law for only two months instead of permanently.  In response, Senator Mitch McConnell (R-KY), asked Senator Baucus to agree to consideration of an amendment reflecting, as Senator McConnell described it, “a permanent, portable, and unified $5 million exemption that is indexed for inflation, and a 35-percent top rate.”  Senator Baucus objected to Senator McConnell’s request, whereupon Senator McConnell objected to Senator Baucus’s request, and all practical hopes of estate tax legislation in 2009 were dashed.

Some observers of this episode on the floor of the Senate wondered out loud what Senator Baucus knew that the rest of us didn’t about the ability of Congress to resolve in just two months what it had not been able to resolve in eight and a half years.  Most of us knew that theoretically Senators could talk about the estate tax during the Christmas and year-end break and the slow legislative month of January, could maybe even agree on a compromise, and could reduce that compromise to legislation passed by the Congress and signed by the President by, say, the end of February – two months.  Some of us even assumed that some level of informal conversations about the estate tax were almost inevitably occurring from time to time, albeit with little official or visible progress.  In any event, whether or not Senator Baucus got his two-month extension, few of us would have been surprised to see the end of February come and go without estate tax legislation.

And now it has, sealing and dramatizing the fact that the eight and a half years Congress gave itself in 2001 to permanently stabilize the estate, gift, and GST taxes slipped away with no legislation to show for it.

Now what?

Watching a Byrd (Rule) at Sunset

It is well known that in the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) the “repeal” of the federal estate tax was postponed to 2010 to minimize the cost to the federal revenue.  It is also well known that in 2011 EGTRRA “sunsets” and the estate tax law returns to where it would have been without the enactment of EGTRRA – namely the former 55% rate (with a 60% “bubble” over $10 million), a credit for state death taxes, and the $1 million exemption that would have been reached in 2006 under the phased in changes made by the Taxpayer Relief Act of 1997.

Specifically, section 901(a) of EGTRRA states:

Sec. 901. Sunset of Provisions of Act.

(a)     In General.—All provisions of, and amendments made by, this Act shall not apply—

(1)     to taxable, plan, or limitation years beginning after December 31, 2010, or

(2)     in the case of title V, to estates of decedents dying, gifts made, or generation-skipping transfers, after December 31, 2010.

(b)     Application of Certain Laws.—The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.

Section 901 is the only section in the ninth and last title of EGTRRA, entitled “Compliance with Congressional Budget Act.”  As budget reconciliation legislation – it is after all the Economic Growth and Tax Relief Reconciliation Act of 2001 – EGTRRA was subject to the Congressional Budget Act of 1974 (2 U.S.C. § 621 et seq.), which is now in the spotlight as a potential vehicle for health care reform, and which prescribes the procedures by which Congress adopts spending and tax priorities in a budget resolution and implements those priorities in a streamlined process of budget reconciliation.  In a rule added in 1985 and amended in 1990, sponsored by Senator Robert Byrd (D-WV) (and hence known as the “Byrd Rule”), section 313 of the Budget Act (2 U.S.C. § 644) makes “extraneous” provisions in budget reconciliation subject to a point of order in the Senate.  “Extraneous” is defined to include the reduction of net revenues in years beyond the period provided for in the budget resolution.  Since the 2001 budget resolution generally covered ten years, a net reduction of taxes beyond the tenth year would likely have been ruled out of order.

A point of order under the Byrd Rule can be waived by a vote of 60 Senators (just as a Senate filibuster against general legislation can be broken by a vote of 60 Senators).  H.R. 1836, which became EGTRRA, originally passed the Senate, on May 23, 2001, by a vote of 62-38 (while the conference report on EGTRRA passed the Senate on May 26, 2001, by a vote of only 58-33).  H.R. 1836, however, garnered 62 votes only with a “sunset” provision in it.  The Senate was not asked to vote on a non-sunsetting repeal, and presumably the votes for it were just not there.  In the Senate consideration of H.R. 1836, amendments to eliminate the estate tax repeal were defeated by votes of 43-56 and 42-57.  Even an amendment to preserve the estate tax only for estates greater than $100 million was defeated by a vote of 48-51.

The “as if … had never been enacted” language of section 901(b) of EGTRRA has attracted a lot of attention and has created a lot of speculation and exasperation.  This is particularly true in the context of the GST tax, which by its very nature carries attributes from actions in one year to consequences in future years.[1]  It is safe to surmise that members of Congress in 2001 did not think about how this language might affect estate planning in 2010 and 2011.  Indeed, it is unlikely that they expected the EGTRRA changes to still be in effect without modification and permanence by 2010.  It is certain that the “as if … had never been enacted” language was not cobbled together just to create chaos for estate planners nine years later.[2]

Attempts to Avoid the Chaos – Under Republican Leadership

The ink was hardly dry on EGTRRA when the Republican leadership of Congress resumed working toward permanent repeal of the federal estate tax by eliminating the 2011 “sunset.”  The formal effort was last embodied in the 109th Congress’s version of H.R. 8 (the “Death Tax Repeal Permanency Act of 2005”), which the House passed by a more or less bipartisan vote of 272-162 on April 13, 2005.  This is the legislation that was scheduled for a cloture vote in the Senate (the “call the question” procedure requiring 60 votes) when Congress returned from the August recess after Labor Day in 2005, but the vote was postponed because of the urgency of dealing with the aftermath of Hurricane Katrina.  This led to the House passage of the “Permanent Estate Tax Relief Act of 2006” (“PETRA”) on June 22, 2006, by a similarly bipartisan vote of 269-156, and the “Estate Tax and Extension of Tax Relief Act of 2006” (“ETETRA”) on July 29, 2006, by a somewhat less bipartisan vote of 230-180.  On August 3, the Senate cloture motion to take up consideration of ETETRA failed by a vote of 56-42, but, considering absences and parliamentary technicalities, the total support for cloture appeared to be 58 votes.

PETRA and ETETRA laid down markers of an estate tax exemption of $5 million and rates of 15 percent or 20 percent, with a 30 percent rate over $25 million.  In the run-up to the scheduling of the cloture vote in 2006, other permanent rates frequently mentioned were $10 million and $8 million.  Although it is always dangerous to try to read the minds of Senators, especially in a vote merely to take up a bill for consideration and not necessarily to enact it, it is likely that ETETRA’s rates and exemptions were just too generous to attract the needed 60 votes.

Attempts to Avoid the Chaos – Under Democratic Leadership

The Democrats, of course, controlled Congress, as well as the White House, in the last-chance year of 2009.  On November 18, the Democratic members of the House Ways and Means Committee reportedly agreed to go forward with only a one-year extension of the 2009 estate tax law, which would have closed the 2010 “repeal” gap while perhaps making ultimate congressional action even more of a fiscal and political challenge.  Majority Leader Steny Hoyer (D-MD) reportedly reconvened them later that day and urged them to embrace a permanent solution.  Then on the following day (November 19), Congressman Earl Pomeroy (D-ND), the Ways and Means Committee member whom Chairman Rangel had tapped to put the permanent statutory language together, introduced H.R. 4154, a very simple bill that would only freeze 2009 law, including the estate tax exemption of $3.5 million, the gift tax exemption of $1 million, the top rate of 45%, a stepped-up basis at death for appreciated assets, a deduction (and no credit) for state death taxes, and the special rules for conservation easements, section 6166, and allocation of GST exemption enacted in 2001.

On December 3, the House passed H.R. 4154 by a vote of 225-200.  No Republican voted for the bill, and 26 Democrats voted against it.  The supporters of the bill in the floor debate focused on the need for predictability in planning and the unfairness of carryover basis.  Those voting no apparently did so mainly because they would have preferred to see the estate tax permanently repealed or more significantly reduced, with many references in the floor debate before the vote to an alternative bill that would have phased in a $5 million exemption and 35% rate by 2019 and indexed the exemption for inflation after that.  A few voting no, however, were Democrats who have expressed a preference for a higher tax, including, for example, a reduction of the exemption to $2 million and a return to a top rate of 55%.  Other Democrats of that view voted yes.

As stated at the beginning of this Capital Letter, it was the House-passed H.R. 4154 that Senator McConnell objected to on December 16, preferring “a permanent, portable, and unified $5 million exemption that is indexed for inflation, and a 35-percent top rate.”  By use of the word “portable,” Senator McConnell meant the ability of a surviving spouse to use any estate tax exemption available to but not used by the first spouse to die (an idea seen in PETRA and ETETRA).  By “unified,” he meant increasing the $1 million gift tax exemption to be equal to the estate tax exemption, as it had been before 2004.  By “indexed for inflation,” he meant annual increases in the unified exemption with reference to increases in the consumer price index, as the GST exemption was indexed from 1999 through 2003 (and will be indexed again in 2011 unless Congress changes the law).  And the $5 million exemption and 35 percent top rate, prominent in the House debate, had (along with unification, indexing, and portability) been part of an amendment, sponsored by Senator Blanche Lincoln (D-AR), that actually received 51 votes in the consideration of the fiscal 2010 Congressional Budget Resolution in April 2009.

Before December 2009, many observers, including Capital Letters, viewed 2009 law, with a $3.5 million exemption and 45 percent top rate, as the compromise.  It stands neatly at the midpoint between the $2 million exemption and 55 percent rate of some Democratic proposals and the $5 million exemption and 35 percent rate now frequently advanced by those on the other side of the issue.  But, again with a caveat about reading Senators’ minds, the narrow support for H.R. 4154 in the House and the majority support for a $5 million exemption and 35 percent rate last April in the Senate suggest that, just as the tax relief supported by Republican leadership in 2005-2006 was probably too generous to capture the necessary votes in both the House and Senate, merely making 2009 law permanent may be too stingy to do so.

The Challenge and Opportunity Now Before Congress

Republican leadership supporting a lower estate tax and Democratic leadership supporting a higher estate tax – what an utterly predictable scenario (even though few predicted it).

But if that is all that the debate is about, then doesn’t the impasse cry out for compromise?  Certainly it is hard to find a principled reason to insist on one exemption or rate over another.  Principles presumably influence politicians to seek to repeal what is seen as an “immoral double tax,” or to oppose the “tax cut for the rich” that repeal is seen to represent.  How closely a lawmaker’s principles align with one or the other of those paradigms may well incline the lawmaker to a higher or lower rate, or a higher or lower exemption.  But the precise level of the rate or exemption is hard to view as a matter of principle.

So, we say to Congress, settle it then, work it out, find the compromise, just do it.  That brings us face-to-face with another axiom of Washington political life – the compromise might be easy, but getting to it will be hard.  Indeed, in the current partisan climate, many have concluded that it is impossible to expect better than chaos.  We know that Congress is no better able to solve this dilemma in 2010 than it was at the end of 2009.  Of course, in 2009, we also knew that Congress would act.

Here are the three things that Congress needs, in order to permit it to see how easy this is:

  • A new THAW in partisanship.  This needs little elaboration.  While claims both of Democratic overreaching and of Republican obstructionism seem genuine,[3] the country is not well served.  There are also differences between the House and Senate leadership that sometimes appear as significant as the differences between the parties.  Progress on the estate tax, like much of the nation’s agenda, would be served by the bipartisanship that has been seen in much of the history of the estate tax.  The Senate Finance Committee might be the most natural place to watch for this kind of progress.
  • New TIME to address the estate tax.  It is tempting to think that nine years is enough.  But members of Congress are very busy, and their staffs are very busy.  The demands on Senators of the health care reform debate almost certainly reduced the odds of successfully shoehorning an estate tax resolution in, as Senator Baucus tried to do.  The Senators, both Democrats and Republicans, most likely to forge a workable compromise need either a recess without a massive legislative overhang like health care that would permit in-depth discussion, or a break in intensive floor and committee work on high-profile, high-stakes matters, or both.
  • A new TACK for addressing the gap in views.  This is important, but is easy to overlook.  A new idea, or an old idea resuscitated, may be the core around which the compromise can fit.  This might be as simple as the notion that the rate doesn’t have to be what rival advocates have supported; it could actually be somewhere in between.  It could be a revenue raiser, like the Administration’s budget proposals in May 2009 (see Capital Letter Number 17), largely repeated in February 2010.  It could even be a controversial anomaly, like keeping the unified credit lower for the gift tax than for the estate tax.  The benefit of a new idea might be that it actually makes the legislation more workable, or it might simply be a way to gracefully build a compromise by diverting attention from the unproductive past.

If all these things happen, successful attention to the estate tax will still not be guaranteed, and there will still be vast technical, political, fiscal, and even constitutional issues.  But without at least some of these breakthroughs, it will be much harder.

On Christmas Eve, after the Senate had passed the health care reform legislation, the Senate leadership arranged, without objection, to place H.R. 4154 on the Senate calendar as “read for the first time” and, as a practical matter, scheduled the “second reading” for the Senate’s next legislative day, probably January 20, 2010, which in effect could place consideration of H.R. 4154 one day away at that time.  On January 20, 2010, H.R. 4154 was in fact considered as having been read the second time, theoretically making its consideration by the Senate possible at any time.  On January 28, 2010, the Senate approved its version of the “Statutory Pay-As-You-Go Act” (H.J. Res. 45), popularly called “Pay-Go,” essentially providing an exception for continuing the 2009 estate tax law for two years, through 2001, with the exemption indexed for inflation.  As with budget resolutions in the past, this action only accommodates, or at best permits, a two-year extension, it does not achieve or direct it.  But all this parliamentary maneuvering might indicate that someone is optimistic.

Ronald D. Aucutt

© 2009 by Ronald D. Aucutt. All rights reserved

[1] The anomalies created by the one-year suspension of the estate and GST taxes have been furiously debated in list serves and blogs.  Many are summarized in a paper entitled “Issues Raised by the One-Year Suspension of the Estate and GST Taxes,” dated February 22, 2010, which was provided to congressional staff members by ACTEC’s Washington Affairs Committee.

[2] Indeed, as of 2001, the words “as if … had never been enacted” were not unprecedented repeal or override language.  Similar language had been used, ironically, in the 1980 repeal of the original 1976 carryover basis regime.  Section 401(b) of the Crude Oil Windfall Profit Tax Act of 1980 (Public Law 96-223) stated:

Except to the extent necessary to carry out subsection (d) [which allowed executors of decedents dying from January 1, 1977, to November 6, 1978, to elect the 1976 carryover basis regime, despite its repeal], the Internal Revenue Code of 1954 shall be applied and administered as if the provisions repealed by subsection (a), and the amendments made by those provisions, had not been enacted.

[3] As usual, this sentence is written with full awareness that almost every reader will agree with half of it.  Case made.