Capital Letter
By Ronald D. Aucutt
No. 3
Washington, D.C.
May 7, 2007

Early debates in the Democratic-led Senate include a surprising amount of attention to the estate tax and a surprising amount of apparent support for an exemption no lower than $5 million and a rate no higher than 35%.

Dear Readers Who Follow Washington Developments:
It has been easy to suppose that in the new Democratically-controlled Congress we would not hear much about the estate tax for a while. Again, however, Congress has shown its ability to surprise us.
On March 21, 2007, while the Senate was considering the fiscal 2008 budget resolution (S. Con. Res. 21), it was estimated that the resolution would produce a $132 billion budget surplus in 2012. Finance Committee Chairman Max Baucus (D-MT), joined by Senators Mary Landrieu (D-LA), Mark Pryor (D-AR), Evan Bayh (D-IN), and Bill Nelson (D-FL), offered an amendment that would make that projected surplus available to offset tax cuts in both 2011 and 2012. The Senate approved this amendment by a vote of 97-1, with only Senator Russ Feingold (D-WI) opposed.
In explaining and advocating this amendment, Senator Baucus stated that “the Senate’s highest priority for any surplus should be American families.” 153 Cong. Rec. S3469 (daily ed. March 21, 2007). The first priority Senator Baucus cited was improving children’s health care coverage under the Children’s Health Insurance Program (CHIP). Turning to taxes, Senator Baucus said:
  Then our amendment takes the rest of the surplus and returns it to the hard-working American families who created it. Our amendment devotes the rest of the surplus to the extension and enhancement of tax relief for hard-working American families.
Senator Baucus’s amendment would permit — or “accommodate,” as they say in the budgeting process — a selective extension of the tax cuts enacted in 2001 and 2003. And the priority in selecting those tax cuts is relief for “hard-working American families.” In effect, Senator Baucus has in mind the kind of “targeted” or “middle class” tax relief leaders of the Democratic Party have cited for years as the preferred alternative to what they see as tax cuts that operate more indiscriminately or, even worse, favor the wealthy. Confirming and elaborating on that theme, Senator Baucus continued:
  Here are the types of tax relief about which we are talking. We are talking about making the 10-percent [income] tax bracket permanent....
  We are talking about extending the child tax credit....
  We are also talking about continuing the marriage penalty relief....
  We are also talking about enhancing the dependent care credit....
  We are talking about improving the adoption credit....
  We are talking about [taking] combat pay [into account] under the earned-income tax credit, otherwise known as the EITC....
  We are talking about reforming the estate tax. We want to try to give American families certainty. We want to support America’s small farmers and ranchers, and in this amendment, we have allowed room for estate tax reform that will do that.
  And we talk about returning surplus revenues to hard-working American families.
Thus, the chairman of the Finance Committee identified seven targets — the 10% income tax bracket, marriage penalty relief, credits for children, dependent care, adoption, and earned income, and the estate tax. Until he mentioned the estate tax, which was last on his list, the pattern of middle class relief was pretty clear. With respect to the estate tax, however, he did not speak of extending, continuing, enhancing, improving, or making permanent the tax relief of earlier years. For the first time in his explanation he used the word “reform.” And, in addition to the off-cited example of farmers and ranchers, which is an easily understandable note for a Senator from Montana to strike, he used the word “certainty.” Everyone who is aware of what will happen to the estate tax in 2010 and 2011 under current law knows exactly what he means. Indeed, as we reflect on that state of the law, the word “bizarre” might come to our minds. So it should be no surprise that the word “bizarre” also occurred to Senator Kent Conrad (D-ND), the Chairman of the Senate Budget Committee and a former North Dakota Tax Commissioner. He responded to Senator Baucus this way:
  Madam President, I thank very much Senator Baucus for his leadership on this very important amendment. This amendment is to reassure all those who have benefited from the middle-class tax cuts that those tax cuts will go forward, that those children who are not now currently covered under the CHIP legislation will have the opportunity to be covered.
  The Senator has also provided for small business because we have a number of provisions that are critically important to small business and, of course, to prevent the estate tax from having this bizarre outcome, which is now in the law, where the exemption would go down to $1 million from $3.5 million just two years before. That makes no sense. So the Senator provides for room in this amendment to deal with estate tax reform.
  The precise contours of that will be up to, obviously, the Finance Committee.
Neither Senate leader mentioned repeal of the estate tax. Indeed, Senator Conrad’s observation that “the exemption would go down to $1 million from $3.5 million just two years before” is one of the niftiest leap-frog of the repeal year that one could ever hope to read.
After other Senators had discussed several of the points he had made, Senator Baucus responded (id. at S3470):
There is an underlying answer to all these questions; namely, these are questions the Finance Committee is going to address and find the appropriate offsets and deal with the pay-go when it comes up at that time.
In other words, while Senator Baucus’s amendment recalls many themes of middle class tax relief, it leaves both the desirability and the details of implementation to the tax-writing committees, all subject to the admonishment that under current rules any tax relief must be “paid for.”
After being asked specifically about the estate tax, Senator Baucus stated that the amendment “contemplates extending the estate tax provisions that are in effect in 2009 permanently.” In the context of this budget resolution, of course, “permanently” means only through 2012 (or perhaps only through 2011, since the tax from the estates of decedents who die in 2011 would generally be payable in fiscal 2012, which begins October 1, 2012).
An extension of 2009 tax law through 2011 or 2012, by eliminating the repeal year of 2010, would actually pick up some revenue to offset the revenue lost in 2011 and 2012. The revenue loss itself in 2011 and 2012, when the exemption would increase from $1 million (under current post-sunset law) to $3.5 million, would be complicated by the fact that the top federal rate would go from 39% (net of the state death tax credit) under current law to something like 38%, 39%, or 45% (depending on the “coupled”/”decoupled” character of state law). With such an extension, the largest estates in “coupled” states (without an independent state estate tax) would pay more federal estate tax than they would under current post-sunset law.
The prospect of extending 2009 law through 2011 or 2012 is intriguing. It would reflect some thoughtful attention to the concerns about the instability of the current estate tax law, especially as 2010 and 2011 approach and present the “bizarre outcome” Senator Conrad panned. It would also recognize that two more years, involving even a new Congress and a new President, might still not be enough time to forge the compromise that a permanent solution might require, especially in the Senate, and it would provide more time to work on it. And for those keeping score, under such an extension, as in Senator Conrad’s leap-frog, repeal would simply disappear.
Nevertheless, since the revenue gain from 2010 that such an extension would pick up would be a one-time gain, it would never again be available to mitigate revenue losses. This would recall the phase-out of the state death tax credit, by which Congress in 2001 helped to fit its estate tax reductions (and even a one-year “repeal”) within its fiscal constraints through a one-time shift of revenue from some states to the federal government. Ironically, like the one-time phase-out of the state death tax credit in 2001, an extension of 2009 law that “harvests” the revenue gain from reversing the 2010 repeal could make permanent estate tax relief even more expensive and therefore more difficult in the two or three additional years Congress might thereby give itself to work on it.
While still considering the budget resolution two days later, the Senate rejected a proposal by Senator Jon Kyl (R-AZ) to direct the tax-writing committees to report an estate tax exemption of $5 million (indexed for inflation) and a top rate no higher than 35%. The 48-51 vote was severely partisan; no Democrat voted for it, and only one Republican (Senator Voinovich of Ohio) voted against it.
Just before rejecting the Kyl amendment, the Senate also rejected an amendment offered by Senator Ben Nelson (D-NE) that he described as follows (id. at S3667 (March 23, 2007)):
  Like the Kyl amendment, our amendment will allow us to accommodate the Landrieu proposal of a $5 million [exemption] and 35 percent [rate] with a surcharge for the largest estates. Unlike the Kyl amendment, this amendment is fiscally responsible and deficit neutral [that is, it will be paid for].
The vote on Senator Nelson’s amendment was 25-74. Only four Republicans (Senators Susan Collins and Olympia Snowe of Maine, Richard Lugar of Indiana, and Voinovich) voted for it.
The Senate approved the overall budget resolution on March 23 by a largely partisan vote of 52-47.
Several things about these amendments need to be said to put Senator Baucus’s successful amendment in a perspective that some of the earliest reports of the Senate action seemed to overlook. First, the Baucus amendment is not binding. Even if the House agrees with the amendment, it would be left to the discretion of the Ways and Means and Finance Committees to determine whether and how to implement it. Second, Senator Baucus’s explanation on the floor of the Senate refers only to “reforming” the estate tax. Third, Senator Baucus’s explanation could be interpreted as treating “reforming” the estate tax as only the seventh priority out of seven — hardly the top priority. Finally, any tax relief prompted by this amendment must be paid for. This is in contrast to Senator Kyl’s amendment, which would have operated as an unqualified directive to the tax-writing committees. Senator Kyl’s amendment had some teeth in it. But, of course, Senator Kyl’s amendment received only half as many votes as Senator Baucus’s.
Nevertheless, with only Senators Collins, Lugar, and Snowe among the 25 Senators who voted for both the Nelson amendment and the 48 Senators who voted for the Kyl amendment, it might be said that 70 Senators voted on March 23 for an exemption of $5 million and a top rate no greater than 35% (at least if it can be “paid for” and depending on what Senators Nelson and Landrieu meant by “a surcharge for the largest estates”). It is always hazardous to generalize from unsuccessful votes to predict how lawmakers might vote when their votes might really matter. But it is difficult to resist the temptation to view these 70 votes as a bit of a bandwagon that gives more clues to what permanent “reform” might look like if Congress does get around to it soon.
As for other features of estate tax reform legislation, Capital Letter Number 2 speculated that the provisions of the two bills the House passed in the summer of 2006 — H.R. 5638 (“PETRA”) and H.R. 5970 (“ETETRA”) — might be a reasonable starting point, and also that we should not be surprised to see some legislative rules regarding fractionalization discounts in entity-based valuations, along the lines of the rules limiting such discounts offered as options in the January 2005 report of the staff of the Joint Committee on Taxation ( Since the November 2006 elections, some Democratic staff members have mentioned the possibility of such measures, recalling the similar proposals in the 1999, 2000, and 2001 budget proposals of the Clinton Administration. But before Republican readers react to this potential Clinton redux with “there they go again,” they should remember that similar proposals had earlier appeared in “Tax Reform for Fairness, Simplicity, and Economic Growth” (popularly called “Treasury I”), published by the Treasury Department just weeks after President Reagan’s landslide reelection.
Most folks in Washington who aren’t nostalgic for Clinton are nostalgic for Reagan.
Ronald D. Aucutt
© Copyright 2007 by McGuireWoods LLP