The House voted Thursday to permanently extend a 45 percent inheritance tax on estates larger than $3.5 million, canceling a one-year repeal of the tax set to begin next month.
A similar effort is afoot in the Senate, but the health care debate there could preclude action on the estate tax before Congress breaks later this month for holidays. There are also disagreements among senators over the tax rate and the size of estates that should be exempt, further clouding the bill's prospects.
Lawmakers, however, don't want to delay action until next year because they are wary of enacting retroactive tax changes.
Under the House bill, estates smaller than $3.5 million would continue to be exempt from the tax. Married couples, with a little estate planning, could exempt a total of $7 million. That leaves less than 1 percent of all estates subject to the tax.
The bill passed by a 225-200 vote, with all Republicans opposed. Majority Democrats argued that a permanent tax rate makes it easier for families and small business owners to do estate planning, noting that fewer than 1 percent of all estates are subject to the tax.
"In America, it's not a sin to be rich nor is it a crime to die rich," said Rep. Jared Polis, D-Colo. "This bill gives our nation's wealthiest families the ability to know exactly what their obligation to the nation that fostered their wealth will be, and it is fair and it is just."
The bill follows the federal budget proposed by President Barack Obama. But many Republicans called for permanent repeal of the estate tax, arguing it hurts families that pass down farms and small businesses to their children.
"The majority claims to be offering certainty to taxpayers and I suppose in a way they are — they are certainly repealing the hope of ever eliminating the death tax," said Rep. Dave Camp of Michigan, the top Republican on the tax-writing House Ways and Means Committee.
Under current law, the federal estate tax is scheduled to temporarily disappear next year before returning in 2011 at an even higher 55 percent rate. During the year without an estate tax, all estates would be subject to a 15 percent capital gains tax that they now avoid.
"If Congress does not act on this issue this month, you would have a wildly fluctuating scenario of different estate tax levels, making it impossible for families to plan," said Rep. Earl Pomeroy, D-N.D., chief sponsor of the House bill.
Some liberals have complained that the bill is a giveaway to the rich because it would result in lower rates in future years than what current law provides. Conservatives have labeled the estate tax a "death tax" and argue it should be repealed permanently.
"We're trying to forge a compromise that resolves this issue once and for all," Pomeroy said.
Rep. Louie Gohmert, R-Texas, likened the estate tax to stealing from the dead.
"After someone dies and someone comes in and steals from them, we consider that in most society reprehensible," said Gohmert, a former judge. "I have sentenced people personally to prison for doing that."
The quirk in the law, in which the estate tax would disappear for only a year, came out of a series of tax cuts enacted in 2001. Many Republicans, who controlled Congress at the time, wanted to permanently repeal the estate tax then. But they settled on a gradual reduction, with a one-year repeal, to reduce the impact on the federal budget deficit.
Under current law, the estate tax would return in 2011 with a $1 million exemption and top rate of 55 percent, unless Congress acts.
Permanently extending the tax with a top rate of 45 percent on estates larger than $3.5 million would raise about $14 billion a year. However, it would raise less tax revenue than current law over the next 10 years — an estimated $234 billion less — because the tax rate would be lower in future years. The lost revenue would be covered with increased borrowing.
Under current law, if someone inherits a $5 million estate in 2009, they would pay $675,000 in federal estate taxes, according to an analysis by Deloitte Tax. In 2010, they would pay no estate tax but the estate would be subject to a 15 percent capital gains tax. If they inherit the $5 million estate in 2011, they would pay $2,045,000 in estate taxes, according to the analysis.
Under the House bill, they would pay $675,000 in estate taxes, regardless of which year the estate is inherited.
Currently, the tax affects few estates. In 2009, about 5,500 estates will be subject to the tax, according to projections from the Tax Policy Center, a Washington think tank. That's 0.23 percent of all estates.
