Estate tax becomes focal point of fiscal-cliff debate

As the Senate on Wednesday voted to pass controversial legislation extending some of the Bush administration tax cuts, it became clear that estate tax policy will be a focal point of the debate. The Senate Democratic bill, which won approval by a narrow 51-48 margin, would continue the Bush tax cuts through 2013 for households earning less than $250,000 annually but allow them to revert to pre-2001 levels for those above that threshold. The bill follows the policy backed by President Barack Obama. The measure doesn't address estate taxes, which are set at 35% with a $5 million exemption. If the Bush cuts expire at the end of the year without congressional action, the estate tax would increase to 55%, with a $1 million exemption. The estate tax was left out of the Senate legislation because of disagreement among Senate Democrats about an appropriate estate tax rate. Some lawmakers up for re-election this year are nervous about the issue. Sen. Minority Leader Mitch McConnell, R-Ky., said that leaving the estate tax by the wayside threatened small businesses and farms. “A vote for the Democrat plan is a vote to put these farms and ranches out of business,” he said on the Senate floor Wednesday. The other key point about the Democratic tax bill is that it would set capital gains and dividend taxes at 20% for all income levels, according to Dean Zerbe, national managing director of alliantgroup LP, a tax services firm, and former Republican tax counsel to the Senate Finance Committee. Under Mr. Obama's approach, the capital gains rate would be 20% and dividends rate would be taxed as ordinary income for households making more than $250,000. “You've got a clear signal right out of the gate that the [congressional] Democrats will be willing to tie dividend rates and capital gains rates,” Mr. Zerbe said. Earlier in the day, the Democratic-controlled Senate rejected a Republican tax bill. Senate Republicans, however, are confident that the Democratic bill will die. They say it is not viable because tax bills must start in the House. Next week, the House is expected to approve a bill that would extend all Bush tax cuts for a year. There's no chance the Republican-majority House would approve the Democratic-majority Senate's bill or vice versa, leaving the fate of the Bush tax cuts, as well as domestic spending reductions and other elements of the so-called fiscal cliff, to negotiations between legislators and the White House during a lame-duck session of Congress after the election. One of the primary topics of negotiation could be the estate tax. “The Democrats couldn't get agreement on the estate tax in their own caucus,” Mr. Zerbe said. “They're probably going to be more open to working with Republicans on taxpayer friendly solutions to the estate tax.” On the other side of the Capitol on Wednesday, Rep. Kevin Brady, R-Texas, said that a bill that he wrote that would end the estate tax has 218 bipartisan cosponsors, or a House majority. It isn't clear whether the legislation will receive a vote this year. A companion bill in the Senate has 37 Republican cosponsors. Also Wednesday, Mr. Brady, vice chairman and the top Republican on the Joint Economic Committee, released a report by the panel's GOP economists that showed that the estate tax has “reduced the amount of capital stock [buildings, equipment and software] in the U.S. economy by roughly $1.1 trillion since its introduction as a permanent tax in 1916,” according to a statement. During a conference call with reporters, Mr. Brady said that the estate tax has led to the dismantlement of family businesses and has undermined savings and investment. “Our economy and [tax] revenue would grow faster if the death tax were abolished,” he said during the call. Some Democrats and liberal groups are pushing to raise the estate tax as a matter of what they call tax fairness. They say that a low estate tax primarily benefits the wealthy.