Capital Letters

Finance Committee Starts to Study the Estate Tax Again

Capital Letter No. 7
December 14, 2007

Committee leaders view repeal as preferable but impractical.

Congress is struggling. It has voted to fund the federal government for just one week, pending resolution of tough issues about permanent funding, including contentious issues involved with Iraq policy. The idea of a one-year patch for the individual alternative minimum tax is still very attractive, but Congress is nowhere near a consensus on how to do it. It’s late in the year, and the last weeks of the year are not typically the most productive.  

In the midst of all this, the estate tax still keeps coming up. Surprisingly so, especially in a Democratic Congress, as Capital Letters have previously noted. (See Capital Letter Number 3, May 7, 2007, “Surprising Attention to the Estate Tax in Congress.”)  

On October 4, 2007, the Senate Finance Committee was considering the tax features of an energy, conservation, and agriculture tax package entitled the “Heartland, Habitat, Harvest, and Horticulture Act of 2007.” (You have to love these names!) In the course of that consideration, Senator Kyl (R-AZ) proposed an amendment that would set the estate tax exemption at $5 million indexed for inflation, tie the estate tax rate above $5 million to the capital gains tax income tax rate (currently 15%), and add a 30% bracket beginning at $25 million. This is essentially the same as the estate tax provisions in H.R. 5970, the “Estate Tax and Extension of Tax Relief Act of 2006” (“ETETRA”), which the House of Representatives passed in July 2006 but which the Senate declined to consider in a failed cloture vote on August 3, 2006. Senator Kyl withdrew the amendment after Chairman Max Baucus (D-MT) promised to hold a hearing on estate tax reform “later in the year,” with the goal of marking up a bill in the spring of 2008.  

The Finance Committee held that hearing on November 14, 2007. On the day before the hearing, the staff of the Joint Committee on Taxation released a document entitled “History, Present Law, and Analysis of the Federal Wealth Transfer Tax System.” This 48-page document includes an 8-page history of U.S. transfer taxes from 1797 through the present, a 12-page description of current law, and a 25-page section entitled “Background and Analysis Relating to Estate and Gift Taxation.” This last section analyzes levels of revenue, compares the transfer tax systems in several countries, and discusses the effects taxes on capital might have on wealth distribution, investment, and other economic behavior. Clearly written from an economist’s perspective, the document will not satisfy ACTEC Fellows who are most concerned with problems of compliance and administrability on a client-by-client basis.  

At the hearing, a manufacturer from Iowa and a rancher from Nevada advocated repeal of the estate tax or at least a substantial increase in the exemption. Billionaire Warren Buffett supported a steeply progressive estate tax (with an exemption of perhaps $4 million), which he viewed as necessary to prevent “plutocracy.” ACTEC Fellow Conrad Teitell pointed out the caprice of current law and the complexities and uncertainties faced in estate planning – basically picking up where the Joint Committee document left off.  

Both Chairman Baucus and Ranking Member Charles Grassley (R-IA) used the hearing to complain about the estate tax and express their preference for repeal, but they recognized that repeal is impractical and offered a commitment to serious reform as an achievable alternative. Chairman Baucus promised more extensive hearings in 2008 with a goal of major changes in the 111th Congress, which convenes in 2009).  

With all that Congress has on its mind, there is no guarantee that Senators Baucus and Grassley can make anything significant happen. But, while the legislative agenda is very crowded, the estate tax is still very much on it.  

Ronald D. Aucutt  

© 2007 by Ronald D. Aucutt