Estate Tax Repeal Passes in House

Estate Tax Repeal Passes in House
Déjà Vu All Over Again?

The U.S. House of Representatives in April passed a bill to permanently repeal the federal estate tax.

The House on April 13 passed the Death Tax Repeal Permanency Act of 2005 (H.R. 8) by a 272–162 vote, and immediately referred the bill to the Senate, where two similar bills have died during President George Bush’s first administration. As of this writing, the Senate had yet to take up the matter, and it was unclear whether any action would take place soon, as some observers have remarked.

“I’m absolutely going to be watching this,” said James McEvoy, a private practitioner who specializes in estate tax planning for individuals. “If it gets out of the Senate Finance Committee and there’s potential for a conference, and it gets that far, my feeling is it would go through.”

Bush’s 10-year, $1.35 trillion tax cut in 2001 included a phaseout of the estate tax that will be fully reinstated in 2011 unless Congress acts to repeal the tax permanently. Opponents, stating that the tax already affects only the wealthiest Americans, have deemed permanent repeal as “Robin Hood in reverse,” while proponents have cited the tax’s detriment to small family-owned businesses, among other issues.

The House rejected an alternative estate tax bill that would have raised the exemption to $3.5 million for individuals and $7 million for couples, according to press accounts. The bill’s Democrat sponsor said it would have exempted 99.7 percent of the American population.

Ramifications of permanent repeal on tax revenue vary. The Joint Committee on Taxation estimated H.R. 8 would cost $745 billion in the first 10 years of full repeal, while the Center on Budget and Policy Priorities, a left-leaning policy group, estimates the lost revenue to come in at $1 trillion from 2012 to 2021.

Whatever its impact on budgets, the estate tax is as much an emotional issue as a political one.

“If Bill Gates and Warren Buffet believe they have an ‘obligation’ to pay estate tax, then this is more than just about taxation,” said Fred Rothman, a member of the New York State Society of CPAs’ Exempt Organizations Committee. “It’s about societal attitudes about what we believe is proper behavior. I think it drills down in many respects to a philosophical debate.”

People on both sides of the debate seem to underscore certain aspects about estate taxation to support entrenched beliefs. Proponents for repeal underscore the tax’s detrimental effect on small businesses and farms, while opponents will cite, among other things, the negative effect it would have on charitable giving.

“It’s hard to say what will come out in the end,” Rothman said. “You can go back and see what’s happened with income tax rates, and what that did to charitable giving. Charitable giving didn’t decline.”

Both Rothman and McEvoy pointed out that a bigger issue would be what would happen if cost-basis carryover and capital gains taxes were not addressed along with estate tax repeal.

“In the absence of estate taxation, one of the big issues is compliance with cost-basis carryover,” Rothman said. “In a lot of cases, the capital gains on an individual might be greater than the estate taxes when you taxed the estate.”

McEvoy, a presenter at the NYSSCPA’s Estate and Trust Administration Conference in May, said that repeal could be a boon for federal government, if that were not addressed, because the capital gains tax would impact many more people than the estate tax does.

“Theoretically, if they repeal the estate tax, the carryover basis of assets comes into play and there would be a windfall to the government,” he said. “Heirs of assets accumulated over a generation will face a capital gains tax.”

Additionally, states that have decoupled from federal taxes would continue employing an estate tax, such as is the case in New York, New Jersey and Connecticut.

McEvoy noted that this would probably be the best chance for repeal, since it is early in Bush’s second term and revenue projections associated with estate tax and gift tax may not be very high relative to the government’s annual trillion-dollar budgets.

Both Society members expressed reservations about predicting passage of repeal this year.

“A lot of folks on either side will suggest one possibility or another,” Rothman said. “I, for one, don’t have a crystal ball.”

USA Today reported in April that talks between Republicans and Democrats have begun in the Senate, with some worried about the repeal’s impact on the federal deficit. Sen. John Kyl, a Republican from Arizona who sponsored a bill in the Senate to permanently repeal the estate tax, was also reserved about what would happen this year. Kyl told the newspaper that he was “not going to speculate.”