Congress grapples with estate tax reform

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Washington – Lawmakers have known it was coming since a temporary scheme was enacted in 2001: without congressional action, the estate tax will be repealed for a year in 2010 and then reset at the highest rates in a decade.

But just months before the yearlong repeal is set to begin, lawmakers have yet to pass an estate law reform package.

Now, several lawmakers, as well as some estate tax experts and small business organizations, are ramping up their calls to kill the death tax completely.

“Some are calling for complete repeal of the estate tax,” said Rep. Nydia Velázquez, D-N.Y., who chairs the House Committee on Small Business, at a Nov. 4 hearing on estate tax reform. “Others have suggested that Congress freeze estate tax provisions in their 2010 form. One thing is clear: we will need to find a solution.”

The estate tax quagmire stems from the Economic Growth and Tax Relief Reconciliation Act of 2001.

The Act established a gradual decrease in the overall highest estate tax rate from 55 to 45 percent between 2001 and 2009, while raising the exemption amount from $675,000 to $3.5 million during the same period.

Then in 2010, the tax is set to be repealed for one year before being reset to the pre-2001 levels of 55 percent and $1 million in 2011.

This temporary measure was enacted on the assumption that Congress would revisit the issue before 2009 in order to set rates at appropriate levels. But the absence of congressional action has left small businesses and estate planning attorneys in a state of uncertainty. See: “Estate tax hokey pokey: Uncertainty over estate tax reform keeps attorneys and clients in flux.”

Now, the economic crisis has spurred a growing movement to axe the tax altogether.

“Death should not be a taxable event,” said Rep. Sam Graves, R-Mo., who has introduced a bill that would phase out the estate tax. “The notion that the federal government is owed anything upon the death of a family member is outrageous to me.”

But whether or not the tax is retained, something must be done soon, Graves said.

“The fact that there's uncertainty in the law makes it very difficult for small- business owners and farmers to plan, and we cannot allow these entrepreneurs to risk their future or their companies,” he said.

Some proposals pending

Lawmakers have introduced proposals for reforming estate tax laws before the reset. The most recent plan, the Estate Tax Relief Act of 2009, H.R. 3905, was filed in October. It has more than a dozen sponsors, giving it the best chance of passing.

The measure would exempt estates worth $3.5 million from the estate tax, increasing that exemption to $5 million by 2019. It would then index the exemption to inflation to automatically increase each year after 2019.

The bill would also cut the maximum tax rate to 35 percent by the year 2019.

At the Nov. 4 hearing, Velázquez expressed concern that if the estate tax is reset to a higher rate, small businesses, particularly family-run businesses and farms, will again be subject to devastating taxes on the death of an owner, making it impossible for the business to survive to the next generation.

Terry Neese of the National Center for Policy Analysis, a nonprofit, nonpartisan public policy research organization, echoed that sentiment.

“Middle-class Americans, especially small-business owners, are often stuck with a burdensome estate,” Neese testified. “Small-business owners generally have large investments in infrastructure. Many don't have large capital assets that can be used to pay the tax, [so] many heirs have to liquidate [to] pay the estate tax.”

Neese said the revenue the government receives from estate taxes – amounting to less than 3 percent of total federal tax revenue – is not worth the negative impact on job creation.

“Small-business owners are the job-creators of this country, and will lead us out of the recession as [they] did in 2001,” Neese said. “They don't need any more taxes, not now, and not when they die.”

Estate attorneys say that business owners aren’t the only ones in jeopardy. Small farms could also face devastating taxes.

Arthur G. Uhl III, founding partner of the San Antonio firm Uhl, Fitzsimons & Jewett, is also a cattle rancher. He said the estate tax significantly impacts family businesses and farms, and needs to be modified in a way that will result in the least negative impact.

And, he said, the details of any tax reform plan matter greatly.

“Indexing for inflation is absolutely critical in countering escalating land values,” said Uhl, who traveled to Washington for the hearing.

He also said that any reform measure must address the fact that equipment is often assessed so high that the owners don’t have free cash to cover the tax.

“Inflated market value is the basis for assessing the death tax, resulting in the need to liquidate” to pay the tax, Uhl charged.

Velázquez acknowledged the effect of the tax on small businesses, and the increasing push for repealing the tax altogether. But she said that lawmakers have to consider other competing fiscal interests during these tough economic times.

“We all support your concern regarding the estate tax, but we have a lot of competing interests right now, and one of them is facing rising deficits and the impact this could have on our economy in the future,” Velázquez said. “Estimates say that repeal will cost $1 trillion over 10 years.”

She said the toughest job now for lawmakers is finding an exemption amount that will satisfy all the competing interests.

Uhl said he doesn’t know what the magic number might be.

But, he said, “the higher the number the better.”