{"id":1588,"date":"2010-03-01T22:19:00","date_gmt":"2010-03-02T03:19:00","guid":{"rendered":"https:\/\/www.actec.org\/?post_type=capital-letter&p=1588"},"modified":"2024-04-17T17:14:32","modified_gmt":"2024-04-17T21:14:32","slug":"now-what","status":"publish","type":"capital-letter","link":"https:\/\/www.actec.org\/capital-letter\/now-what\/","title":{"rendered":"Now What?"},"content":{"rendered":"\n

While Republican and Democratic leaders alike have wrestled with estate tax stability, the solution may be so easy it\u2019s impossible.<\/strong><\/em>
<\/p>\n\n\n\n

Dear Readers Who Follow Washington Developments:<\/p>\n\n\n\n

On December 16, 2009, in a rare interlude during the consideration of the health care reform bill,\u00a0Senate Finance Committee<\/a>\u00a0Chairman Max Baucus (D-MT) asked the Senate for unanimous consent to take up\u00a0H.R. 4154<\/a>, which the House had passed on December 3 to make the 2009 estate, gift, and GST tax law permanent.\u00a0 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.\u00a0 In response,\u00a0Senator Mitch McConnell (R-KY)<\/a>, asked Senator Baucus to agree to consideration of an amendment reflecting, as\u00a0Senator McConnell<\/a>\u00a0described it, \u201ca permanent, portable, and unified $5 million exemption that is indexed for inflation, and a 35-percent top rate.\u201d\u00a0 Senator Baucus objected to Senator McConnell\u2019s request, whereupon\u00a0Senator McConnell<\/a>\u00a0objected to Senator Baucus\u2019s 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\u2019t 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.\u00a0 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 \u2013 two months.\u00a0 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.\u00a0 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?<\/p>\n\n\n\n

Watching a Byrd (Rule) at Sunset<\/strong><\/p>\n\n\n\n

It is well known that in the\u00a0Economic Growth and Tax Relief Reconciliation Act of 2001 (\u201cEGTRRA\u201d)\u00a0the \u201crepeal\u201d of the federal estate tax was postponed to 2010 to minimize the cost to the federal revenue.\u00a0 It is also well known that in 2011\u00a0EGTRRA\u00a0\u201csunsets\u201d and the estate tax law returns to where it would have been without the enactment of\u00a0EGTRRA\u00a0\u2013 namely the former 55% rate (with a 60% \u201cbubble\u201d 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\u00a0Taxpayer Relief Act of 1997<\/a>.

Specifically,\u00a0section 901(a) of EGTRRA\u00a0states:<\/p>\n\n\n\n

Sec. 901. Sunset of Provisions of Act.<\/p>\n\n\n\n

(a)     In General.\u2014All provisions of, and amendments made by, this Act shall not apply\u2014<\/p>\n\n\n\n

(1)\u00a0\u00a0\u00a0\u00a0\u00a0to taxable, plan, or limitation years beginning after December 31, 2010, or<\/p>\n\n\n\n

(2)\u00a0\u00a0\u00a0\u00a0\u00a0in the case of title V, to estates of decedents dying, gifts made, or generation-skipping transfers, after December 31, 2010.<\/p>\n\n\n\n

(b)     Application of Certain Laws.\u2014The 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.<\/p>\n\n\n\n

Section 901\u00a0is the only section in the ninth and last title of\u00a0EGTRRA, entitled \u201cCompliance with Congressional Budget Act.\u201d\u00a0 As budget reconciliation legislation \u2013 it is after all the Economic Growth and Tax Relief\u00a0Reconciliation<\/em>\u00a0Act of 2001 \u2013\u00a0EGTRRA\u00a0was subject to the Congressional Budget Act of 1974\u00a0(2 U.S.C. \u00a7 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.\u00a0 In a rule added in 1985 and amended in 1990, sponsored by Senator Robert Byrd (D-WV) (and hence known as the \u201cByrd Rule<\/a>\u201d), section 313 of the Budget Act (2 U.S.C. \u00a7 644<\/a>) makes \u201cextraneous\u201d provisions in budget reconciliation subject to a point of order in the Senate.\u00a0 \u201cExtraneous\u201d is defined to include the reduction of net revenues in years beyond the period provided for in the budget resolution.\u00a0 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\u00a0Byrd Rule<\/a>\u00a0can 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).\u00a0\u00a0H.R. 1836<\/a>, which became\u00a0EGTRRA, originally passed the Senate, on May 23, 2001, by a vote of 62-38 (while the\u00a0conference report on EGTRRA\u00a0passed the Senate on May 26, 2001, by a vote of only 58-33).\u00a0\u00a0H.R. 1836<\/a>, however, garnered 62 votes only with a \u201csunset\u201d provision in it.\u00a0 The Senate was not asked to vote on a non-sunsetting repeal, and presumably the votes for it were just not there.\u00a0 In the Senate consideration of\u00a0H.R. 1836<\/a>, amendments to eliminate the estate tax repeal were defeated by votes of 43-56 and 42-57.\u00a0 Even an amendment to preserve the estate tax only for estates greater than $100 million was defeated by a vote of 48-51.

The \u201cas if … had never been enacted\u201d language of\u00a0section 901(b) of EGTRRA\u00a0has attracted a lot of attention and has created a lot of speculation and exasperation.\u00a0 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]<\/sup>\u00a0 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.\u00a0 Indeed, it is unlikely that they expected the\u00a0EGTRRA\u00a0changes to still be in effect without modification and permanence by 2010.\u00a0 It is certain that the \u201cas if … had never been enacted\u201d language was not cobbled together just to create chaos for estate planners nine years later.[2]<\/sup><\/a><\/p>\n\n\n\n

Attempts to Avoid the Chaos \u2013 Under Republican Leadership<\/strong><\/p>\n\n\n\n

The ink was hardly dry on\u00a0EGTRRA\u00a0when the Republican leadership of Congress resumed working toward permanent repeal of the federal estate tax by eliminating the 2011 \u201csunset.\u201d\u00a0 The formal effort was last embodied in the 109th Congress\u2019s version of\u00a0H.R. 8<\/a>\u00a0(the \u201cDeath Tax Repeal Permanency Act of 2005<\/a>\u201d), which the House passed by a more or less bipartisan vote of 272-162 on April 13, 2005.\u00a0 This is the legislation that was scheduled for a cloture vote in the Senate (the \u201ccall the question\u201d 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.\u00a0 This led to the House passage of the\u00a0\u201cPermanent Estate Tax Relief Act of 2006\u201d (\u201cPETRA\u201d)<\/a>\u00a0on June 22, 2006, by a similarly bipartisan vote of 269-156, and the\u00a0\u201cEstate Tax and Extension of Tax Relief Act of 2006\u201d (\u201cETETRA\u201d)<\/a>\u00a0on July 29, 2006, by a somewhat less bipartisan vote of 230-180.\u00a0 On August 3, the Senate cloture motion to take up consideration of\u00a0ETETRA<\/a>\u00a0failed by a vote of 56-42, but, considering absences and parliamentary technicalities, the total support for cloture appeared to be 58 votes.

PETRA<\/a>\u00a0and\u00a0ETETRA<\/a>\u00a0laid 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.\u00a0 In the run-up to the scheduling of the cloture vote in 2006, other permanent rates frequently mentioned were $10 million and $8 million.\u00a0 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\u2019s rates and exemptions were just too generous to attract the needed 60 votes.<\/p>\n\n\n\n

Attempts to Avoid the Chaos \u2013 Under Democratic Leadership<\/strong><\/p>\n\n\n\n

The Democrats, of course, controlled Congress, as well as the White House, in the last-chance year of 2009.\u00a0 On November 18, the Democratic members of the\u00a0House Ways and Means Committee<\/a>\u00a0reportedly agreed to go forward with only a one-year extension of the 2009 estate tax law, which would have closed the 2010 \u201crepeal\u201d gap while perhaps making ultimate congressional action even more of a fiscal and political challenge.\u00a0\u00a0Majority Leader Steny Hoyer (D-MD)<\/a>\u00a0reportedly reconvened them later that day and urged them to embrace a permanent solution.\u00a0 Then on the following day (November 19), Congressman Earl Pomeroy (D-ND), the Ways and Means Committee member whom\u00a0Chairman Rangel\u00a0had tapped to put the permanent statutory language together, introduced\u00a0H.R. 4154<\/a>, 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\u00a0H.R. 4154<\/a>\u00a0by a vote of 225-200.\u00a0 No Republican voted for the bill, and 26 Democrats voted against it.\u00a0 The supporters of the bill in the floor debate focused on the need for predictability in planning and the unfairness of carryover basis.\u00a0 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.\u00a0 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%.\u00a0 Other Democrats of that view voted yes.

As stated at the beginning of this Capital Letter, it was the House-passed\u00a0H.R. 4154<\/a>\u00a0that\u00a0Senator McConnell<\/a>\u00a0objected to on December 16, preferring \u201ca permanent, portable, and unified $5 million exemption that is indexed for inflation, and a 35-percent top rate.\u201d\u00a0 By use of the word \u201cportable,\u201d\u00a0Senator McConnell<\/a>\u00a0meant 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\u00a0PETRA<\/a>\u00a0and\u00a0ETETRA<\/a>).\u00a0 By \u201cunified,\u201d he meant increasing the $1 million gift tax exemption to be equal to the estate tax exemption, as it had been before 2004.\u00a0 By \u201cindexed for inflation,\u201d 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).\u00a0 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\u00a02010 Congressional Budget Resolution<\/a>\u00a0in April 2009.

Before December 2009, many observers, including Capital Letters, viewed 2009 law, with a $3.5 million exemption and 45 percent top rate,\u00a0as<\/em>\u00a0the compromise.\u00a0 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.\u00a0 But, again with a caveat about reading Senators\u2019 minds, the narrow support for\u00a0H.R. 4154<\/a>\u00a0in 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.<\/p>\n\n\n\n

The Challenge and Opportunity Now Before Congress<\/strong><\/p>\n\n\n\n

Republican leadership supporting a lower estate tax and Democratic leadership supporting a higher estate tax \u2013 what an utterly predictable scenario (even though few predicted it).

But if that<\/em> is all that the debate is about, then doesn\u2019t the impasse cry out for compromise?  Certainly it is hard to find a principled<\/em> reason to insist on one exemption or rate over another.  Principles presumably influence politicians to seek to repeal what is seen as an \u201cimmoral double tax,\u201d or to oppose the \u201ctax cut for the rich\u201d that repeal is seen to represent.  How closely a lawmaker\u2019s 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 \u2013 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<\/em> 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<\/em> that Congress would act.

Here are the three things that Congress needs, in order to permit it to see how easy this is:<\/p>\n\n\n\n