Capital Letters

Senate Hearings Keep Estate Tax Reform Hopes Alive

Capital Letter No. 9
April 7, 2008

A Finance Committee hearing focuses on narrow topics but affirms the interest of some Senators in estate tax reform. Nevertheless, legislation still faces political and fiscal obstacles.

Dear Readers Who Follow Washington Developments:

Last Thursday, April 3, 2008, the Senate Finance Committee held its third and final hearing on the estate tax.  

The first hearing had been on November 14, 2007. A manufacturer from Iowa and a rancher from Nevada advocated repeal of the estate tax or at least a substantial increase in the exemption. Warren Buffett of Berkshire Hathaway supported a progressive, higher estate tax (with an exemption of perhaps $4 million) 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. Both Chairman Baucus and Ranking Member Grassley complained about the estate tax, expressed their preference for repeal, but offered a commitment to serious reform as an achievable alternative. Chairman Baucus promised more extensive hearings in 2008, but he pointed to action in the 111th Congress (2009-2010) as the goal.  

The first hearing of 2008 was held on March 12. Three professors, including Academic Fellow Joe Dodge, discussed alternatives to the estate tax system, largely donee-based taxes such as inheritance taxes and inclusion of inheritances in income, as well as income taxes on gains at the donor level. It was clear that the Senators in attendance (three Democrats and three Republicans at various times) were not inclined to replace the estate tax with another regime, although they obviously were aware of the coming anomaly in 2010 and 2011 and seemed interested in finding some way to avoid it. Both Democrats and Republicans expressed concern for the liquidity problems of family-owned farms and businesses.  

Last week’s witness panel included President-Elect Dennis Belcher and Transfer Tax Study Committee Chair Shirley Kovar. Dennis had chaired the multi-organization Task Force on Federal Wealth Transfer Taxes, which in 2004 had published a 200-page report identifying issues presented by current law (including 2010), analyzing various options for addressing those issues, and evaluating alternative approaches to the taxation of wealth transfers. Dennis had been invited to show the Committee the need to clarify, modernize, simplify, and otherwise improve the rules for deferred payment of estate tax under section 6166.  

Shirley had been invited to talk to the Committee about the “portability” of transfer tax exemptions (and exemption equivalents represented by the unified credit) from deceased spouses to surviving spouses, a concept that has been viewed favorably for a long time. The practical issues presented by the portability concept were addressed in chapter 17 of the Task Force’s 2004 report, and portability was given an important boost by its inclusion in the “Permanent Estate Tax Relief Act of 2006” (H.R. 5638) and the “Estate Tax and Extension of Tax Relief Act of 2006” (H.R. 5970), which had been passed by the House of Representatives for Senate consideration in the summer of 2006. (See Capital Letter No. 1.) Shirley was able not only to draw from that history but to speak explicitly on ACTEC’s behalf (a rare privilege) in support of the legislative proposal on portability that had been prepared by the Transfer Tax Study Committee and unanimously approved by the Board of Regents on March 10, 2008.  

Another witness, Roby Sawyers, who had been an AICPA representative on the Task Force on Federal Wealth Transfer Taxes, made the case for reunifying the estate and gift tax unified credits. The final witness, the president of Independent Sector, spoke about the effect of the estate tax on charitable giving.

The Senators in attendance (three Democrats and two Republicans at various times) seemed interested in the topics and the witnesses’ testimony and interested in understanding the issues correctly. By the way, it might seem that in a committee of 21 members the attendance of six Senators last month and five this month is rather paltry. But in fact, with other, more politically charged, things always going on at the same time, this attendance is really not bad. It is not unusual to have tax hearings with only a chairman, and there have been instances of hearings chaired, at least temporarily, by a senior staff member because no Senator was present at the time.  

Observers who are anxious to see significant structural changes to the estate tax law might be concerned by the narrowness of the topics the Finance Committee had asked the witnesses to address, although those topics might provide some clues about the “targeted” relief we might look for in any legislation (tied to family farms and other family businesses which have been a public concern of Senators, especially Democrats like Senators Lincoln of Arkansas and Salazar of Colorado). But significant structural changes require a fair amount of attention and time by Senators and staff, and there are still too many distractions in Congress to expect much of that this year. The apparent interest in moving quickly to address the 2009-2010-2011 disconnect was strong enough on both sides of the aisle that there is probably more reason to be optimistic about legislation in 2008 than there has ever been. That is not saying much, though, and there are still plenty of obstacles to congressional action this year, including the following:  

  • Budgetary constraints.  Senators were very blunt at the hearing about the reality that some of the things they want to do will probably not be affordable.  At a minimum, whether Congress acts this year or next year or some other time, it is clear that any relaxation of rates or increases in the unified credit would be phased in gradually over at least five years.  
  • The presidential election.  No presidential candidate is on the Finance Committee, but the extraordinary campaign is certainly a distraction. With the August recess beginning August 9, the Democratic and Republican national conventions August 25-28 and September 1-4, a target adjournment date of September 26, and the November 4 election, there just isn’t much time.  
  • Political skepticism and inertia.  Later in the day on March 12, one of the Republican Senators who had been at the Finance Committee hearing, Senator Kyl of Arizona, complained in the debate on the budget resolution that “[e]ach year we pass a budget that, theoretically, allows for a reform of the estate tax, but then we don’t do anything about it.… So the chairman of the Finance Committee said: Well, he would have the goal of marking up a bill this spring. He has since advised me he has no plans whatsoever for a real bill on estate tax, and said: It won’t happen.”
  • The sharply-divided Senate.  Senator Kyl’s remarks on the Senate floor were made in support of his proposed amendment to the budget resolution that would direct a $5 million estate tax exemption (indexed for inflation) and a top rate of 35%. The amendment was defeated by a vote of 50-50. (Vice President Cheney had been in the presiding officer’s chair earlier that day, but he was no longer in the Senate chamber to break the tie.) Normal Senate rules, effectively requiring 60 votes to “call the question” on any legislation, make it very hard to marshal the votes needed to pass tax legislation.  
  • The House of Representatives.  Tracking the mood of Senators is important, because of the effective 60-vote requirement and the likelihood that a small bipartisan group of Senators “in the middle” hold the key to a feasible compromise. But the House needs to agree to any legislation, of course, and Ways and Means Committee Chairman Rangel has not publicly shown much interest in, so to speak, cleaning up the mess the Republican-led Congress created in 2001. In addition, the commitment of the Democratic leadership to “paying for” any tax relief is even more intense in the House. It is assumed that the House would go along with anything the Senate is able to agree to, but that is only an assumption. Moreover, since tax legislation must originate in the House, the Senate presumably would need to attach estate tax legislation to an unrelated House-passed bill. There are such possibilities, but legislation dealing, for example, with agriculture or energy might themselves be in political trouble.  
  • A presidential veto.  Despite the Bush Administration’s official commitment to outright repeal of the estate tax, it has long been assumed that he would declare any reasonable compromise to be a step in the right direction and sign it into law. But if, to “pay for” any estate tax relief, Congress attaches provisions the White House views as tax increases, the President’s support would be in doubt. This is especially true if estate tax reform is attached to any existing bill, like the farm bill, that the President has already threatened to veto on that ground.   One of the themes of past Capital Letters has been the possibility that any significant estate tax relief would be accompanied with “base-broadeners,” and that chief among such base-broadeners might be rules limiting entity-based valuation discounts (as to which no one could view the current state of the law as satisfactory). See Capital Letter No. 2. In anticipation of the April 3 hearing, the staff of the Joint Committee on Taxation addressed the scheduled topics in a 50-page document entitled “Taxation of Wealth Transfers Within a Family: A Discussion of Selected Areas for Possible Reform”. With regard to valuation discounts, it may be significant that the staff included as an appendix an excerpt from its January 2005 report entitled “Options to Improve Tax Compliance and Reform Tax Expenditures” (, presenting an option to “Determine Certain Valuation Discounts More Accurately for Federal Estate and Gift Tax Purposes” (as well as options to “Limit Perpetual Dynasty Trusts” and “Curtail the Use of Lapsing Trust Powers to Inflate the Gift Tax Annual Exclusion Amount”). For more discussion of the staff’s January 2005 report, see “Washington Report,” 31 ACTEC Journal 76, 77-78 (Summer 2005).   It may be no exaggeration to predict that there will be more congressional staff time spent on the estate tax in 2008 than in any year since 2001 or even 1997. The question is whether it will be enough. Only time – limited time – will tell.   Meanwhile, we should all be proud of our ACTEC officers, committee chairs, committees, task forces, and Board of Regents and their publicly acknowledged contribution to the improvement of the law.    

Ronald D. Aucutt

© 2008 by Ronald D. Aucutt