Friday, June 18, 2010

Extenders blocked--what does it mean for estate tax reform?

Tax Notes reports ($) that the Senate is having trouble swallowing the extension of  expired tax provisions, which have been coupled with the extension of unemployment benefits and other spending.  Reportedly, certain centrist Senators have objected that the provisions aren't fully "paid for," suddenly they've become deficit hawks. I wonder if the real story isn't that the hedge fund managers are successfully heading off a change in the taxation of carried interests, currently treated as capital gains. That's the new provision intended to offset the lost revenue from the extenders.  (Please ignore the fact that the extenders, such as the R&D credit, create economic growth that likely make them revenue generators, not losers; those effects are beyond the capacity of our scorekeepers to measure.)

Let's take the deficit reduction argument at face value.

Like nearly all observers of transfer tax policy, I never expected to have a year without federal estate taxes. I thought it was a clever ploy for manipulating the scoring system.  If, in 2009, Congress had lifted the estate tax exemption to $5 million, the lost revenue in 2011 and later years would have been offset by the gain over having no estate tax in 2010.  That would have made the change more palatable.

Now it looks increasingly as if there will be no estate tax for 2010, no retroactive changes.  Any increase in the exemption amount above $1 million, even a restoration to 2009's $3.5 million, will be scored as a serious addition to the deficit.  One that benefits only "the rich."  I don't think it will happen.

We are preparing marketing materials based on a $1 million exemption in 2011 and later years.

BTW, once it becomes crystal clear that there will be no retroactive changes to gift tax rates, I expect a flood of taxable gifts this year to take advantage of the temporary 35% tax rate.  Good revenue news short term, but long term it's the largest family fortunes that will take advantage of the opportunity, and so estate tax collections will be reduced for decades.


Anonymous said...

Really?? You seriously think Congress will leave the exemption about at a mere $1 Million? I say $1 Million because I hardly call that the "filthy" rich in today's terms. There will me so many hard working folks whose assets will have to be sold to pay estate taxes. I am going to tell my father just to spend it all now and enjoy! This is an outrage if this comes to pass!

Jim Gust said...

I seriously think that Congress will not be able to come up with a compromise this year. That means the default kicks in of, yes, only a $1 million exemption.

Ironically, this will hit the blue states of New York and California the hardest. But they love taxes in those states anyway.

However, let me temper the prediction with this. The Republicans will make gains in November. If those gains are large enough, it is possible that in 2011 a retroactive increase to the $1 million exemption could be enacted.

Anonymous said...

I certainly hope you are wrong. With aging parents who have lived very modestly all their lives and saved every penny possible, I think it's a shame. Many who were dirt poor and survived the Great Depression but then were successful adults, can't spend money unnessarily. I really hate to think that what my parents have worked for will have to be sold to pay estate taxes simply because the died in the wrong year. This stresses them out thinking about it. It's just a shame. I just can't believe what they are doing to people...I am to the point that I just want them to make a decision! They have known this issue with estate taxes existed for TEN years!!! How much time do they need!!!!

Jim Gust said...

The issue isn't time needed for a decision, Anonymous. The issue is, it has been in every politician's interest, on every side of the question, to leave the matter undecided for ten years. That's how they maximize campaign contributions from those who will be affected by the decision.

Note the genesis of this post was the "tax extenders" bill. Why does Congress create so many temporary tax measures? Why don't they make the R&D credit permanent? Because it is not in their interest to have a permanent tax code. Or an understandable one.

Just one politician in my lifetime has understood those facts and acted on them, to force limited tax simplification and usher in unprecedented prosperity.