Despite grousing from the left, it looks as if Republicans will get pretty much what they want on estate tax policy — if, as expected, Congress approves a bill that would extend all Bush-era tax cuts for two years
Despite grousing from the left, it looks as if Republicans will get pretty much what they want on estate tax policy — if, as expected, Congress approves a bill that would extend all Bush-era tax cuts for two years.
The Senate will cast an important procedural vote today on an $857 billion bill introduced by Senate Majority Leader Harry Reid, D-Nev., last week. The measure puts into legislation the compromise between President Barack Obama and the GOP that would maintain individual tax rate reductions established in 2001 and 2003 for all income levels.
Although it looks as if the bill has momentum in the Senate, the situation is volatile in the House. Last week, the Democratic caucus rejected the Obama-GOP agreement in a non-binding voice vote.
Under the compromise, estates would be subject to a 35% federal tax rate, with a $5 million exemption for individuals. ($10 million for couples). In addition, it reinstates the “step-up” in basis calculation for inherited property in which heirs can claim fair market value at the time of a relative's death.
If Congress doesn't act by Dec. 31, the estate tax will revert to 55% with a $1 million exemption, and individual tax rates will return to their late 1990s levels.
Resistance is particularly high in the House. Progressive Democrats portray the estate tax deal as a giveaway to the rich that would increase the yawning federal deficit.
House Speaker Nancy Pelosi, D-Calif., took a swipe at the estate tax compromise last week: “The Republican demands would provide tax cuts to the millionaires and billionaires, fail to create jobs and increase the deficit,” she said in a statement. To add insult to injury, the Republican estate tax proposal would help only 39,000 American families, while adding about $25 billion more to the deficit,” Ms. Pelosi said.
AIMING AT CHANGES
The speaker has indicated that she and her colleagues will seek changes in the tax deal.
But they are waging a difficult battle against the political math which is likely to end in defeat. President Barack Obama supports the bill, and the White House has waged a vigorous lobbying campaign to sway wavering Democrats. If most members of the Republican House and Senate caucuses support the tax compromise, it will take fewer than half of the Democrats in each chamber to send the bill to Mr. Obama for his signature.
“At the end of the day, after people beat their drums and pull their hair, they will get the votes they need,” said Dean Zerbe, national managing director of alliantgroup, a company that provides tax services to small and midsize businesses.
The calendar also is working against the Democrats. When the new Congress is seated next month, Republicans will control the House.
“Republicans have shown a willingness to play hardball,” said Mr. Zerbe, a former senior counsel and tax counsel for the Senate Finance Committee. “If they don't have the votes now, they'll say, "Fine. We'll have the votes come early January. We'll do it then.'”
House Democrats may be able to make a few tweaks to the bill, but nothing that will dramatically alter it, according to Brian Gardner, senior vice president for Washington research at the boutique investment banking firm Keefe Bruyette & Woods Inc.
“Any changes to the outlines of the tax deal will be additions and nibbling around the edges,” he said. “I don't think there are going to be any changes to the estate tax.”
Mr. Obama said he reluctantly agreed to the estate tax level in the compromise because it was part of the price he had to pay to achieve his priorities — such as a two-year extension of marginal tax rates and the extension of unemployment benefits for an additional 13 months.
The compromise also includes a 2% cut in payroll taxes for workers in 2011 and a roster of other tax breaks for businesses and individuals. In addition, the agreement would maintain a 15% rate for capital gains and dividends. The package costs about $900 billion.
“The Republicans have asked for more generous treatment of the estate tax than I think is wise or warranted,” Mr. Obama said in a statement last week. “But we have insisted that that will be temporary.”
Mr. Obama indicated that he got everything he could out of the agreement with GOP leaders, who stood firm on extending tax cuts for all brackets. During the standoff, Senate Republicans blocked work on any bill other than one to fund the government.
'NOT PERFECT'
“It's not perfect, but this compromise is an essential step on the road to recovery,” Mr. Obama said. “It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs and add momentum that our economy badly needs.”
Mr. Obama likely will have to do more work this week to get House Democrats in line.
“The estate tax is the one thing that really gnaws at them,” said Andrew Friedman, a financial expert and principal at The Washington Update. “It was the coup de grâce.”
House Democrats probably will have to swallow the estate tax provision, no matter how bitter. The proposal incorporates a bill written by Sen. Jon Kyl, R-Ariz., and one of the Republicans who negotiated with Mr. Obama.
“It's a pillar of the deal,” Mr. Zerbe said. “I think it's pretty much set.”
E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.
