No American has missed the drama of the public debate over the so-called debt ceiling. Some would prefer the word “negotiation” to “debate,” but over the last several weeks it has been hard to tell whether any real “negotiation,” in contrast to mere posturing, has been occurring. On the other hand, focusing on the “public” debate, which is all that most of us have been aware of, has left open the possibility – indeed, the hope – that some progress is being made behind the scenes after all, despite the sharp and deep differences that public pronouncements have reflected.
Those of us who have been involved in settling difference between our clients and others, or even among some of our clients themselves, know that progress toward a resolution is hard to measure. Sometimes there are a lot of interrelated elements, and discussion of any of those elements can often contribute to the perspective that will make the final “deal” fall into place, while still recognizing the truth of the slogan that “nothing is agreed to until everything is agreed to.” And isn’t that the best description of how such “deals” often get done – they just somehow “fall into place”? This is not to deny the role of hard and perseverant work. It simply recognizes common experience that often the last piece is something no one would have predicted, there is suspense and anxiety until the end, and the final outcome is rarely what anyone would have designed on purpose with the benefit of a blank slate.
But the most notable generalization from both our own negotiation experiences and the 2011 debt ceiling drama is probably that no matter how much time is available to make a deal, it inevitably goes down to the last minute.
Parallels in Recent Estate Tax Dialogue
The history of recent estate tax legislation also confirms these generalizations. The approach of the Economic Growth and Tax Relief Reconciliation Act of 2001
itself is certainly one that would never have been designed on purpose, with its “repeal” of the estate tax postponed to the very last year of the ten-year budget window, decoupled from the gift tax, and lasting only one year.
Likewise, the congressional efforts to stabilize the estate tax since 2001 have been textbook studies in last-minute brinksmanship. For example, just before the August 2005 recess, Senate Majority Leader Bill Frist (R-TN) filed a motion of “cloture,” basically the Senate form of calling the question that requires approval of 60 Senators, on the “Death Tax Repeal Permanency Act of 2005
” (H.R. 8), a House-passed bill that would have eliminated the 2011 “sunset” and made the repeal of the estate tax in 2010 permanent. The Senate was unlikely to approve the bill in that form, but would substitute a compromise that would be forged in the meantime by a bipartisan group, probably including Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR). The cloture vote was scheduled for the day after Labor Day, but was postponed in light of the pressures of dealing with Hurricane Katrina, which had slammed into the Gulf Coast just one week before Labor Day. Yet, even though most of the month of August had been available to work on the compromise, no such compromise had emerged with only one week to go. We will never know what compromise, if any, could have been achieved, but we do know it would have come with time running out. In any event, the effort to deal permanently with the estate tax never did regain the traction it had lost.
The pattern continued under Democratic leadership. The House of Representatives passed H.R. 4154
to make the 2009 estate tax law permanent by a vote of 225-200, but not until December 3, 2009 – the very last month – 102 months after the 2001 Act had become law. Even the tradition and pressure of last-minute consideration was not enough to divert the Senate from health care reform on December 16, 2009, a failure that was so intolerable for Finance Committee Chairman Max Baucus (D-MT) that he promised action on the estate tax after
the last minute – in overtime – by warning that “we would clearly work to do this retroactively so when the law is changed, however it is changed, or if it is extended next year, it will have retroactive application.” Ominous words that hung like a cloud over our estate planning for almost all of 2010.
But not, of course, in the last month of 2010. On December 6 – now 114 months into the 2001 Act – President Obama announced on national television “the framework of a deal” (naturally) that included a two-year extension of the estate tax with a $5 million exemption, a 35 percent rate, and other surprises.
The “deal” was described in Capital Letter Number 27
and analyzed by countless writers since. The point here is not to add to that technical analysis (although future Capital Letters may undertake to do so), but to highlight the obvious: A deal needs a crisis.
Lessons for Future Estate Tax Dialogue
So it may fairly confidently be stated, of both the debt ceiling and the estate tax—
- There will be a “deal.”
- The deal will come with time running out, or maybe even in overtime.
- The deal will include surprises.
- Meanwhile, the suspense will be nearly unbearable.
In hindsight, the December 2010 legislative experience may have confirmed a few more things about the estate tax. After all, in the House of Representatives, with all the concerns of state and the world to deal with, the sole amendment that was offered and debated dealt with our little estate tax. The proposal to substitute 2009 law for the “deal” was defeated by a vote of 194-233 on December 16, 2010, exactly one year after the Senate had failed to take up the same proposal that the House had passed 225-200. That shift of some thirty votes, coupled with the 277-148 margin (seven votes short of two-thirds) by which the “deal” was then approved by a Democratically-controlled House of Representatives that did not yet reflect the results of the 2010 elections, as well as the 81-19 approval vote in the Senate, could signify, in part, a resignation to substantial estate tax relief. Indeed, the very prominence and intensity of the unsuccessful December 2010 effort in the House to go back to 2009 law could reflect a realization that that vote was likely the last chance to do so.
This leads to the conclusion that Congress is unwilling to incur the political cost of permitting the estate tax to return to a level more burdensome than 2011 law. Even a return to 2009 law would be distasteful. A return to 2001 law would be intolerable. The fact that a return to 2001 law is already the law in 2013 if Congress does nothing means that the pressure to do something to prevent that will be very great. And if Congress does anything, the pressure to maintain an exemption no lower than $5 million (probably indexed for inflation) and a rate no higher than 35 percent will be almost as great. Anything is possible, and surprises seem almost inevitable, but the $5 million exemption and 35 percent rate of current law, themselves a surprise when they were introduced without even a phase-in last December, now have at least a fighting chance of sticking around.
But when will we know? If the debt ceiling deal, either now or in a subsequent phase, really does get broad enough to revisit the “Bush tax cuts,” even the estate and gift tax might be addressed. If not, then it’s hard to see anything happening until next year – perhaps, as almost happened in 2005, right after Labor Day. Otherwise, there is the true last minute, another lame duck session in December 2012. And maybe even overtime action in 2013. Those possibilities, in order of increasing anguish, may also be in order of increasing likelihood.