The Daily Tax Report® interviews Beth Shapiro Kaufman concerning the future of the estate tax. Below is the article in its entirety.
A scaled-back estate tax helped end the fiscal cliff crisis in 2012. Now, the fiscal cliff deal may help end the estate tax.
Lobbyists and tax professionals told BNA the week of March 25 that the estate tax is an easier target for Congress, thanks to the exemption level and tax rate negotiators reached in the American Taxpayer Relief Act (Pub. L. No. 112-240), which slashes the amount of revenue the estate tax raises for the government.
In an early sign that repeal has bipartisan support—given certain conditions—the Senate March 23 agreed that the estate tax should be repealed or reduced as long as the lost revenue can be made up from other sources. That provision, on an amendment to the Democratic budget resolution for fiscal year 2014 (S. Con. Res. 8), passed on an 80-19 vote; an amendment to repeal it regardless of replacing the revenue failed on a more partisan 46-53 vote (58 DTR G-4, 3/26/13).
The budget resolution is nonbinding, but votes in favor of amendments can be a signal that separate legislation has promise if it reaches the Senate floor. The issue will probably resurface as Congress tackles comprehensive tax reform in 2013, lobbyists and congressional aides said.
Bipartisan Support, Tax Critic Says
"It has not been put to bed, and obviously this has bipartisan support," said Dick Patten of Patten and Associates, a lobbying firm working to repeal the tax. Repeal would be good news for family-run businesses and farms, Patten said, although fewer are affected since ATRA moved the exemption level to $5 million and allowed it to adjust for inflation—which translates to $5.25 million in 2013—and set the top rate at 40 percent.
The 40 percent rate is an increase from 35 percent in 2012, but a reduction from the 55 percent level that would have resulted in 2013 had Congress not taken action. In addition, the exemption level was set to fall to $1 million, a level last seen during the early part of the George W. Bush administration.
Patten said he has learned from government sources that the changes mean that the estate tax will raise about one-third as much money as it would have otherwise. The congressional Joint Committee on Taxation and the Congressional Budget Office have not released official cost estimates for the estate tax revisions.
Statistics released by the Internal Revenue Service also illustrate the estate tax's weakening punch as a revenue raiser. For fiscal 2012, the IRS estimated the estate and gift taxes will raise $14.5 billion, or sharply less than the $57 billion the federal government estimated in 2007; the earlier estimate was based on expectations that the exemption level would be $1 million and the top rate 55 percent.
Competing Views of Political Effects
The political effect of scaling back the estate tax falls into two competing interpretations, Chris Edwards, director of tax policy at the Cato Institute, a libertarian think tank, told BNA March 27.
One on hand, opponents of the estate tax resist partial steps because they worry they will lose momentum toward full repeal. On the other hand, Edwards said, the diminished tax reduces revenue in the budget baseline and makes the tax easier to eliminate, even if the revenue has to be recovered somewhere, he said.
"It just doesn't appear to raise that much money anymore," Edwards said.
When lawmakers look for a deal to end the estate tax, Edwards said, they may consider policies that other countries such as Canada have adopted—notably a capital gains tax that hits an estate's assets. In that scenario, he said, a tax of 14.5 percent, perhaps, could apply to such assets based on the idea that once the person who holds them dies, they become realized for tax purposes.
"That seems like fair and equal treatment," Edwards said.
Prospects in Congress depend on the Senate, where the March 23 vote to repeal the tax regardless of replacing the revenue split along mainly partisan lines. But one Democrat voting for it was Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, which will take up tax reform.
Bills Introduced; Fate Rides on Tax Reform
Several bills to repeal or scale back the estate tax have been introduced in the House. Some lawmakers are pushing to make farmland and land that is kept in conservation programs exempt.
A spokesman for Sen. Mark Warner (D-Va.), who sponsored the successful estate tax amendment from March 23, told BNA the proposal was mainly for "messaging" but that the senator expects the issue to come up again during tax reform debates.
Other analysts see little appetite on Capitol Hill for revisiting the estate tax so soon.
Considering the drama of the fiscal cliff negotiations, and the estate tax's role as a bargaining chip, lawmakers may want to leave it alone, said Beth Kaufman, a tax attorney with Caplin & Drysdale in Washington, and a former adviser in the Treasury Department's Office of Tax Policy.
Estate tax repeal could not advance even when President George W. Bush pushed for it and had a Republican House on his side, she added.
"I would not see the setting as ripe right now," Kaufman said.
Reproduced with permission from Daily Tax Report, 60 DTR G-3 (Mar. 28, 2013). Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>