Capital Letters

Ways and Means Committee Chairman Taking Up the Estate Tax

Capital Letter No. 19
October 26, 2009

Signs suggest that Ways and Means Committee attention to the estate tax might come soon.

Dear Readers Who Follow Washington Developments:

In the last couple weeks, House Ways and Means Committee Chairman Charles Rangel (D-NY) has been talking more about the estate tax.

For years, most significant clues about likely congressional action have been found in the Senate, especially in the Finance Committee, including the early permanent repeal efforts led by Senator Jon Kyl (R-AZ) and others, the subsequent compromise efforts led by Senators Kyl and Blanche Lincoln (D-AR) and others, and the “Baucus Bill” (S. 722) introduced by Chairman Max Baucus (D-MT) on March 26, 2009.  (As discussed in Capital Letter Number 15, S. 722 would make 2009 estate tax law permanent, index the applicable exclusion amount for inflation, reconform the gift tax and estate tax exclusion amounts, make the unified credit portable from deceased spouses to surviving spouses, and increase the benefits of special use valuation for family farms and other family businesses with substantial real estate.)

In the Democratic-led 110th Congress (2007-08), Chairman Rangel said little about the estate tax and seemed to have little interest in fixing the “problem” of the one year repeal in 2010 followed by a full reversion in 2011 to pre-2002 law, a problem that had been created in the Republican-led Congress in 2001.  With a Democrat in the White House and larger Democratic congressional margins this year threatening to make this a “Democratic problem” if the Democratic leadership cannot fix it, there has been a greater willingness to acknowledge that some action is needed before the end of the year.  Furthermore, a consensus of sorts has developed that the proper response is to simply extend 2009 law, with a $3.5 million estate tax exemption and a top 45 percent rate.  This consensus was seen in both the Obama Administration’s budget proposals and the fiscal 2010 Congressional Budget Resolution.  Even so, at least through September, the infrequent references to the estate tax by Chairman Rangel and others close to the Ways and Means Committee leadership tended to hold out the possibility that 2009 law would be extended only for one year, eliminating the repeal year but leaving permanent stability to another day and, with the revenue gains from 2010 already harvested, a higher price tag.

Then on Wednesday, October 14, after a meeting with the Democratic members of the committee, Chairman Rangel said that the committee was considering moving at least three items – the economy and jobs, the “extenders” of temporary provisions, and the estate tax – independently of health care reform.  Unlike past references to the estate tax, however, the reports of his remarks did not reveal the same inclination to limit the extension of 2009 law to only one year.

On the next day, October 15, as ACTEC Fellows were gathering in Williamsburg, the whole Ways and Means Committee met and, by a largely party-line vote, rejected Republican efforts to reopen the decisions the committee had previously made regarding health care reform.  Understandably this action provoked considerable discussion of the political implications for the health care reform debate.  But, as we had the opportunity to report in Williamsburg, the subtext was that the committee itself now had some time to step back from the health care debate and devote some effort to other tax issues, possibly including the three e’s – economy, extenders, and estate tax – that Chairman Rangel had identified for attention the day before.

Sure enough, on October 22, Chairman Rangel described making the 2009 estate tax law permanent as a “high priority” and said he was working on legislation to accomplish that, so the House could take up the legislation when it had the opportunity.  The legislative options are likely to be discussed in the next meeting of committee Democrats, which should be this week.

On the same day, Ways and Means Committee members Shelley Berkley (D-NV), Kevin Brady (R-TX), Artur Davis (D-AL), and Devin Nunes (R-CA) introduced H.R. 3905, called the “Estate Tax Relief Act of 2009.”  Under H.R. 3905, in each of the ten years from 2010 through 2019, the estate tax applicable exclusion amount would increase by $150,000 and the top rate would decrease by 1 percent.  Thus, by 2019 the exemption and rate would be $5 million and 35 percent, the levels embraced aspirationally by a majority of Senators last April while considering the fiscal 2010 budget resolution (see Capital Letter Number 16).  In addition, the deduction for state death taxes would be reduced 10 percent per year through 2019, when it would be eliminated entirely.  Finally, the $5 million exemption would be indexed for inflation after 2019.  H.R. 3905 would abandon carryover basis and make permanent the other 2001 transfer tax changes, including the several helpful rules regarding allocation of the GST exemption.  But it would not reconform the gift and estate tax exemptions or make the exemption portable between spouses.  While the Ways and Means Committee Democratic caucus is unlikely to embrace such a reduction in the estate tax as H.R. 3905, the timing of the introduction of this bill confirms that committee members are getting ready to talk about the estate tax.

Thus, Ways and Means Democrats will have a lot to discuss when they meet this week.  A week from now we will not have all the answers, but we might know more than we know now. 

Ronald D. Aucutt