Anti-tax and family advocacy groups are pressuring lawmakers not to breathe new life into the “death tax” — a levy on personal fortunes that was taken off the books this year, but is scheduled to return at a higher rate in 2011.
The fate of the tax, officially known as the estate tax, is directly tied to the ongoing game of political chicken that has sprung up between Democrats and Republicans over whether tax cuts passed under President Bush in 2001 and 2003 should extended before they expire next month.
Although the debate has been dominated by the scheduled hike in personal income tax rates, lawmakers also must consider what to do with the other parts of the Bush tax packages, including the refundable child tax credit, taxes on capital gains tax and the “death tax,” which is levied on big inheritances.
“Out of all those 2011 tax hikes, the one that is the most up in the air is the death tax,” said Ryan Ellis, tax policy director at Americans for Tax Reform. “No one can honestly tell you what is going to happen with it.”
The first Bush cuts began phasing the estate tax out in 2001 from a top rate of 55 percent to 45 percent in 2009 and then to zero in 2010, while the per-person exemption rose from $1 million to $3.5 million.
When the tax lapsed this year, it marked the first time since the law was adopted in 1916 that personal fortunes could be passed on tax-free to future generations, depriving the federal government of roughly $17 billion in revenue this year, according to William Ahern, director of the Tax Foundation.
That absence of tax won headlines after George Steinbrenner, the New York Yankees’ billionaire owner, died and passed on his fortune to his heirs without paying the estate tax.
Had he died a year earlier, it would have been taxed a 45 percent. If he died next year, at least under the current schedule, it would have been taxed at 55 percent.
The scenario seemed unlikely a year ago when Democrats took control of Congress and vowed to reinstate the tax for 2010. But that effort died last December, slowed by the party’s successful effort to shepherd the health care overhaul through Congress.
Now Senate Minority Leader Mitch McConnell of Kentucky is supporting a 35 percent tax and $5 million per-person exemption indexed for inflation, while President Obama is signaling support for a 45 percent tax and $3.5 million per-person exemption.
Asked about the president’s plan, Mark Zandi, chief economist at Moody’s Analytics, said, “I think there needs to be an estate tax and the president’s proposal is roughly right.”
“I think that is a reasonable place for the estate tax,” he said. “The arguments to eliminate it are very weak.”
With the Bush tax cuts poised to run out and the estate tax weeks away from snapping back to 2001 levels, it is unclear which party will blink first in the tax fight.
“I don’t think Republicans and Democrats are compromising right now,” said Andrew Roth, vice president of government affairs for the Club for Growth. “I think they are just racing towards each other in their pickup trucks seeing who is going to turn first.”
What is clear is that lawmakers are coming under increased pressure to strike a deal after they return to Washington after Thanksgiving for the remainder of the lame-duck session.