Tax News

Tax Analysts report:

Although the House is likely to approve this week a new plan to provide a permanent fix to the estate tax, the legislations prospects in the Senate are still unclear as Democrats grapple with the estimated costs of the proposal.

House Majority Leader John A. Boehner, R-Ohio, told reporters June 20 that the Permanent Estate Tax Relief Act of 2006 (H.R. 5638) will likely come to the House floor on June 22. The bill, introduced by House Ways and Means Committee Chair William M. Thomas, R-Calif., attempts to bridge the gap between Democrats and Republicans on the issue of the estate tax by raising the estate tax exemption level and lowering the rate.

Senate Majority Leader William H. Frist, R-Tenn., has said he would like his chamber to vote on permanent estate tax legislation before the Independence Day recess, which begins July 3. However, senators from both parties were reluctant to predict that the Thomas plan would win the 60 votes that estate tax repeal supporters lacked on previous repeal legislation (H.R. 8).

I don't know that we have the votes for it, and I don't think anybody knows whether we have the votes for it, Senate Finance Committee Chair Chuck Grassley, R-Iowa, told Tax Analysts. I don't think we'll bring it up until we know we've got the votes.

Thomas said that to get those votes he added many provisions to his proposal to make it more attractive than any other existing estate tax compromise proposal. The final product, he said, is a reasonable and appropriate compromise that even advocates of full repeal could support.

H.R. 5638 would increase the estate tax exemption level to $5 million ($10 million for couples). Estates between $5 million and $25 million would be taxed at the same rate as capital gains -- currently 15 percent -- while estates above $25 million would be taxed at twice the capital gains tax rate. The proposed rates and exemption level would go into effect on January 1, 2010.

Under current law, the estate tax is scheduled for complete repeal in 2010 before reverting to 2001 levels in 2011. Unless Congress acts, that reversion would drop the exemption level to $1 million and increase the tax rate to as high as 55 percent.

Thomass basic proposal is similar to a compromise plan previously promoted by Senate taxwriter Jon Kyl, R-Ariz. But Thomas said his legislation differs from the Kyl plan because it reunifies the estate, gift, and generation-skipping transfer taxes and also includes a portable spousal estate and gift tax exclusion that makes it easier for married couples to claim the full exemption.

Those provisions help push the cost of the bill about $5 billion higher than Kyls proposal, with the Joint Committee on Taxation estimating the 10-year cost of H.R. 5638 at $280 billion. The additional cost comes despite a provision permanently repealing the credit against and eliminating the deduction for state estate taxes and despite JCT assumptions that the capital gains tax rate will climb back to 20 percent in 2011, as scheduled under current law. According to the left-leaning Center on Budget and Policy Priorities, the cost of the legislation would climb to $800 billion between 2012 and 2021 if lawmakers were to extend the lower capital gains tax rate.

A provision that would create a new 60 percent deduction for qualified timber capital gains was included in the legislation to draw support from several Democrats who have long pushed for that provision. Under the Thomas bill, the deduction would expire at the end of 2008.