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CRS Updates Report on 109th Congress Estate Tax Bills

JUL. 31, 2006

RL32818

DATED JUL. 31, 2006
DOCUMENT ATTRIBUTES
Citations: RL32818

 

CRS Report for Congress

 

Received through the CRS Web

 

 

Order Code RL32818

 

 

Updated July 31, 2006

 

 

Nonna A. Noto

 

Specialist in Public Finance

 

Government and Finance Division

 

 

Estate Tax Legislation in the 109th Congress

 

 

Summary

Under provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), the estate tax and generation-skipping transfer tax are scheduled to be repealed effective January 1, 2010. But the estate tax repeal, and all other provisions of EGTRRA, are scheduled to sunset December 31, 2010. If the sunset provision is not repealed, or the law is not otherwise changed beforehand, in 2011 estate and gift tax law will return to what it would have been had EGTRRA never been enacted. The unified estate and gift taxes will be reinstated with an exemption of $1 million. The maximum tax rate will revert to 55%.

Both before and after the enactment of EGTRRA, there have been efforts in Congress, primarily by Republicans, to make estate tax repeal permanent. The 106th Congress passed legislation that was vetoed by President Clinton in August 2000. In both the 107th and 108th Congresses, the House passed legislation making the repeal permanent, but the Senate did not. Democrats introduced bills, not enacted, that would have retained the estate tax but raised the applicable exclusion amount.

The Bush Administration's budget for FY2007 once again endorsed permanent repeal of the estate tax. On April 13, 2005, the House passed H.R. 8, a bill that would permanently repeal the estate tax starting in 2010. Numerous other bills to repeal or alter the estate tax have been introduced in the 109th Congress. In June 2006, the Joint Committee on Taxation (JCT) estimated that enacting legislation in 2006 to make estate tax repeal permanent effective in 2010 would cost $387 billion in lost revenues over the 10-year forecast period FY2007-FY2016 (which includes five years of full repeal).

On June 8, 2006, the Senate voted on cloture on a motion to proceed to consider H.R. 8. The vote of 57-41 was three short of the 60 votes needed. On June 16 Senator Frist proposed that the House pass a permanent estate tax reform compromise that could attract 60 votes in the Senate. On July 29 the House approved H.R. 5970 by a vote of 230-180. The bill would restore the unified estate and gift tax exclusion and raise the exclusion amount to $5 million per decedent by 2015. The exemption would be indexed for inflation after 2015. Any unused exclusion could be carried over to the estate of the surviving spouse. The tax rate on taxable assets up to $25 million would be equal to the tax rate on capital gains (currently 15% but scheduled to revert to 20% in 2011). The tax rate on assets over $25 million would drop to 30% by 2015. The deduction for state death taxes would be repealed. The JCT estimated that the estate tax provisions of H.R. 5970 would cost $268 billion over FYs 2007-2016, or about 69% of total repeal. This report will be updated as legislative activity warrants.

                               Contents

 

 

 Background

 

      Economic Growth and Tax Relief Reconciliation Act of 2001

 

      The Senate's Byrd Rule Under the Reconciliation Process

 

      Legislative Activity in Prior Congresses

 

           Preceding EGTRRA

 

           Remainder of the 107th Congress

 

           The 108th Congress

 

 

 Revenue Proposals

 

      Bush Administration's Proposal for FY2007

 

      FY2006 Congressional Budget Resolutions

 

      2005 Tax Reconciliation Bills

 

 

 Main Differences Among the Bills

 

      Bills to Permanently Repeal the Estate Tax

 

      Preserving Other Changes Made to the Taxation of Gifts and Bequests

 

           by EGTRRA

 

           Modified Gift Tax

 

           Modified Carryover Basis at Death for Capital Gains Purposes

 

      Extending All of the Major Tax Cuts Made in 2001 and 2003

 

      Part of Fundamental Tax Reform

 

      When Permanent Repeal Would Take Effect

 

      Bills to Retain but Alter the Estate Tax

 

           Exploring a Possible Bipartisan Compromise

 

 

 Bills Introduced in the 109th Congress

 

      House

 

      Senate

 

 

 For Additional Information

 

 

 List of Tables

 

 

 Table 1. Estimated Revenue Changes Through FY2016 from Acting in 2006 to

 

 Permanently Repeal the Estate and Generation-Skipping Transfer Taxes and

 

 Modify the Gift Tax Effective in 2010

 

 

 Table 2. Alternatives to Estate Tax Repeal: Estimated Effects in 2011

 

Estate Tax Legislation in the 109th Congress

 

 

Background

 

 

Economic Growth and Tax Relief Reconciliation Act of 2001

Under provisions of Title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, pronounced egg-tra, P.L. 107-16), the exempt amount under the estate tax will continue to increase from $1.5 million for decedents who died in 2004 or 2005, to $2 million for 2006-2008, and $3.5 million for 2009. The maximum estate tax rate will continue to fall from 47% for decedents who died in 2005, to 46% in 2006, and 45% for 2007-2009.

Effective January 1, 2010, the estate tax and generation-skipping transfer (GST) tax are scheduled to be repealed. The gift tax is to remain in place with a cumulative lifetime exclusion amount of $1 million and with a maximum marginal tax rate of 35% (equal to the highest rate for the individual income tax in 2006 and thereafter under EGTRRA). However, the estate tax repeal, and all other provisions of EGTRRA, are scheduled to sunset at the end of 2010. Title IX or Section 901 of EGTRRA states that the provisions of the act do not apply after December 31, 2010.1

If the sunset provision is not repealed, or the law is not otherwise changed beforehand, in 2011 estate and gift tax law will return to what it would have been if EGTRRA had never been enacted. For the unified estate and gift tax, the applicable exclusion amount would have risen to $1 million under prior law.2 The special deduction for qualified family owned business interests (QFOBI) will be restored, with a value of $1.3 million in combination with the applicable exclusion amount. The maximum tax rate will revert to 55% for taxable estate values over $3.0 million, with a 5% surtax on taxable estates over $10.0 million and up to $17.184 million.

The Senate's Byrd Rule Under the Reconciliation Process

The sunset clause was included in EGTRRA so that the bill would comply with the Senate's Byrd rule.3 The Byrd rule applies only to reconciliation legislation. Reconciliation is an optional procedure sometimes used by Congress to implement budget resolution policies on revenues and mandatory spending. If so directed by the budget resolution, House and Senate committees must develop legislation changing laws within their jurisdiction sufficient to achieve the required budgetary changes. The legislative recommendations of each committee usually are merged into an omnibus reconciliation bill, which is considered under expedited procedures. Under the Byrd rule, a point of order may be raised to strike "extraneous" matter from, or prevent it from being offered to, reconciliation legislation. A motion to waive the Byrd rule requires the affirmative vote of three-fifths of the Senate membership (60 votes).

The Byrd rule provides six definitions of what constitutes "extraneous" matter for purposes of the rule. One of those definitions declares a provision to be extraneous if it would decrease revenues in a fiscal year after the fiscal years covered by the reconciliation legislation, and such decreases are greater than outlay reductions or revenue increases resulting from other provisions in such title in such year.4 Consequently, a point of order may be raised in the Senate to strike, or prevent the offering of, any proposal for a tax cut that is not offset by a spending cut and/or revenue increase of equal magnitude in each year beyond the budget window covered by the reconciliation bill.

The Byrd rule could restrict any current efforts to extend the reduction or repeal of the estate and gift taxes beyond 2010 through the budget reconciliation process. (The reconciliation instructions in the FY2006 budget resolution approved by the House and Senate do not extend beyond FY2010.) A 60-vote waiver of the Byrd rule would be required if the projected revenue losses in years beyond 2010 were not adequately offset. In order to avoid the Byrd Rule altogether, bills to permanently reduce or repeal the estate and gift taxes (or any other taxes, for that matter) could be considered under regular legislative procedures.

Legislative Activity in Prior Congresses

Preceding EGTRRA. Even before the enactment of EGTRRA there were efforts in Congress to permanently repeal the estate tax. The 106th Congress approved H.R. 8, the Death Tax Elimination Act of 2000, but it was pocket vetoed by President Clinton on August 31, 2000. The House sustained the President's veto.5 Early in the 107th Congress, the House passed H.R. 8, the Death Tax Elimination Act of 2001. Many provisions of that bill were included in EGTRRA enacted on June 7, 2001 (P.L. 107-16).6

Remainder of the 107th Congress. H.R. 2143, the Permanent Death Tax Repeal Act of 2001 was introduced on June 12, 2001, just days after the enactment of EGTRRA. But the estate tax did not receive further congressional attention until the spring of 2002, in the second session of the 107th Congress. On April 18, 2002, the House passed an amended version of H.R. 586, the Tax Relief Guarantee Act of 2002, part of which would have removed the sunset provision of EGTRRA and thereby made permanent the repeal of the estate tax and all other provisions of the 2001 tax cut law. On June 6, 2002, the House passed H.R. 2143 which would have removed the sunset provision solely from the estate tax provisions of EGTRRA (Title V). The House defeated the Pomeroy Democratic substitute amendment that would have retained the estate tax but increased the exclusion to $3 million per decedent in 2003.

On June 12, 2002, the Senate considered three amendments offered to H.R. 8 regarding the estate tax. The Conrad Democratic substitute amendment would have retained the estate tax but increased the applicable exclusion amount to $3 million in 2003 and $3.5 million in 2009, among other changes. The Dorgan amendment to the Democratic substitute amendment would have provided a full tax deduction for family-owned business interests, and raised the applicable exclusion amount to $4 million in 2009 for all estates, among other changes. The Gramm-Kyl (Republican) amendment was identical to H.R. 2143. None of these amendments received the 60 votes needed to waive the budget point of order as established by a unanimous consent agreement. On September 19, 2002, the House approved a resolution, H.Res. 524, which called upon the Senate to approve H.R. 2143 before the 107th Congress adjourned. The Senate did not act on the bill.7

The 108th Congress. All together, 26 measures addressing the estate tax were introduced in the 108th Congress, 19 in the House and seven in the Senate. The bills can be grouped into three broad categories. First, eight House bills would have made the repeal of the estate tax permanent after 2010. Two Senate joint resolutions would have expressed the sense of Congress that the number of years during which the estate tax is repealed should be extended, pending permanent repeal of the tax. Second, one House bill and three Senate bills would have accelerated the repeal of the estate tax -- to 2003 or 2005. Third, 10 House bills and two Senate bills would have retained but altered the estate tax. Some would have lowered the tax rates. Some would have increased the exclusion amount for all estates. Some would have forgiven the estate tax on family-owned businesses and farms but imposed a carryover basis in calculating the capital gain if the heir later sold the business. Some would have repealed the modified carryover basis instituted by EGTRRA and returned to the step-up in basis rule for assets transferred at death. One would have deposited revenues from the estate tax into the Social Security trust funds.

The House approved H.R. 8, the Death Tax Repeal Permanency Act of 2003 (Dunn) on June 18, 2003, by a vote of 264-163. H.R. 8 would have made the repeal of the estate and generation-skipping transfer taxes permanent from 2010 onward by exempting the estate tax provisions (Title V) from the sunset provisions of EGTRRA. Prior to its vote on H.R. 8 the House debated and defeated the Pomeroy substitute amendment. That amendment would have retained the estate tax but increased the exclusion amount to $3 million per decedent, effective January 1, 2004. It included other changes to the estate tax laws to partially offset the cost of increasing the exclusion amount. The Senate did not take up H.R. 8 or any of its own bills.8

 

Revenue Proposals

 

 

Bush Administration's Proposal for FY2007

Among its revenue proposals for FY2007, the Bush Administration once again proposed to make permanent the tax cuts enacted in 2001 and 2003.9 This would include making permanent the repeal of the estate tax and generation-skipping transfer tax and the modifications to the gift tax as provided in Title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).10

In February 2006, the Treasury Department published its estimates of changes in federal receipts expected each year from FY2006 through FY2016 if legislation to repeal the sunset provision (effective in 2010) with respect to the estate and gift taxes were enacted in 2006. The Joint Committee on Taxation (JCT) released its estimates of budget effects for the same period in March 2006. The JCT released revised estimates in June 2006. All three sets of estimates are presented in Table 1.

The relatively modest estimated revenue losses from FY2006 through FY2010 stem primarily from a projected decline in gift tax revenues. The estimates are based on the assumption that taxpayers would immediately begin to reduce taxable gifts during their lifetimes if they knew that the estate tax would be permanently repealed in 2010. In addition, the Treasury Department and the Joint Committee on Taxation project that the enactment in 2006 of permanent repeal of the estate tax (effective in 2010) would modestly affect revenues from the individual income tax, in two different ways. First, they assume that lifetime charitable donations and accompanying tax deductions would fall, thereby increasing income tax revenues. Second, they assume that capital gains realizations by the elderly would fall (the "lock-in effect" would increase), thereby decreasing income tax revenues.11

The following discussion compares the Treasury's February 2006 estimates with the JCT's March 2006 estimates. For the years prior to full repeal of the estate tax, the Treasury Department estimated losses from $1.1 billion in FY2007 up to $2.7 billion in FY2010. The JCT's revenue loss estimates were slightly lower, ranging from $1.0 billion in FY2007 to $1.6 billion in FY2010. For the years FY2011 and beyond, the JCT's revenue loss estimates were higher. FY2011 reflects a period of transition from estate taxes for decedents dying in 2009 to no estate taxes in 2010 and beyond. For FY2011 the Treasury estimated revenue losses of $23.8 billion and the JCT $30.0 billion.

For the years reflecting full repeal of the estate tax, Treasury estimated a revenue loss of $53.1 billion for FY2012, rising annually to $70.3 billion in FY2016. The JCT estimates rose from $55.7 billion in FY2012 to $78.8 billion in FY2016. The five-year revenue loss estimate for FY2007-FY2011 was $31.4 billion for Treasury and $35.1 billion for JCT. The 10-year revenue loss estimate for FY2007-FY2016 was $339.0 billion for Treasury and $369.2 billion for JCT. The JCT's revised estimates of June 2006 show a 10-year revenue loss estimate of $386.5 billion, 4.7% higher than the March estimate.

             Table 1. Estimated Revenue Changes Through FY2016 from

 

              Acting in 2006 to Permanently Repeal the Estate and

 

           Generation-Skipping Transfer Taxes and Modify the Gift Tax

 

                               Effective in 2010

 

 

                  Treasury          Joint Committee       Joint Committee

 

                 Department           on Taxation           on Taxation

 

 Fiscal         February 2006         March 2006             June 2006

 

 Year           ($ millions)         ($ millions)           ($ billions)

 

 

 2006                -205                 -204                     --

 

 

 2007              -1,102                 -983                   -1.0

 

 

 2008              -1,728               -1,521                   -1.5

 

 

 2009              -2,181               -1,199                   -1.2

 

 

 2010              -2,676               -1,559                   -1.9

 

 

 2011             -23,758              -29,862                  -32.3

 

 

 2012             -53,122              -55,661                  -58.4

 

 

 2013             -56,853              -60,166                  -63.0

 

 

 2014             -61,562              -66,503                  -69.4

 

 

 2015             -65,757              -72,925                  -75.9

 

 

 2016             -70,283              -78,798                  -81.9

 

 

 2007-2011        -31,445              -35,124                  -37.9

 

 

 2007-2016       -339,022             -369,177                 -386.5

 

 

 Note: These estimates include the projected effect on individual income

 

 tax revenue, in addition to estate and gift taxes.

 

 

 Sources: U.S. Department of the Treasury, General Explanations of

 

 the Administration's Fiscal Year 2007 Revenue Proposals (referred

 

 to as the Bluebook), Washington, February 2006, p. 143. The Treasury

 

 Department's annual estimates for FY2006 to FY2011, and the cumulative

 

 five- and 10-year estimates beginning in FY2007 are also published in U.S.

 

 Executive Office of the President, Office of Management and Budget,

 

 Analytical Perspectives, Budget of the U.S. Government, Fiscal Year

 

 2007, Table 17-3, p. 265. U.S. Congress, Joint Committee on Taxation,

 

 Description of Revenue Provisions Contained in the President's Fiscal Year

 

 2007 Budget Proposal, 109th Cong., 2nd sess., JCS-1-06, March 2006, p.

 

 314. The JCT cumulative totals were adjusted by CRS to begin in FY2007 instead

 

 of FY2006. Joint Committee on Taxation letters of June7 and June 8, 2006,

 

 cited in appendix to Joel Friedman and Aviva Aron-Dine, New Joint Tax

 

 Committee Estimates Show Modified Kyl Proposal Still Very Costly: True Cost

 

 Partially Masked, Center on Budget and Policy Priorities, June 9, 2006.

 

 Available at [http://www.cbpp.org/6-9-06tax.htm

 

 

To put these numbers in some perspective, the full set of revenue proposals presented in the Bush Administration's FY2007 budget were estimated by Treasury to cost $285.3 billion over the five-year period FY2007-FY2011 and $1.7 trillion over the 10-year period FY2007-FY2016. The JCT estimated a total revenue loss of $297.3 billion over five years and $1.9 trillion over 10 years.12 The revenue loss associated with the repeal of the estate tax and the generation-skipping transfer tax and the modification of the gift taxes represents 11.0% (Treasury) or 11.8% (JCT) of the total proposed revenue losses over the five-year period FY2007-FY2011, before the full effects of total repeal are felt. However, it represents 19.5% (Treasury) or 19.7% (JCT) of total estimated revenue costs over the 10-year period FY2007-FY2016. This reflects the large effects of full estate tax repeal during the second half of the 10-year period, FY2012-FY2016.

The Center on Budget and Policy Priorities used the JCT's March estimates as the basis for projecting the cost over 10 years of full repeal, FYs 2012-2021. They estimated $776 billion in lost revenues plus $213 billion of higher interest payments, for a total cost of nearly $1 trillion. This assumed that the forgone revenues would be met by additional borrowing. They indicated that the estimated cost would be about one-fifth lower if it were for full repeal over the FYs 2007-2016 period, reflecting lower asset prices and less wealth in earlier years.13

FY2006 Congressional Budget Resolutions

According to the House Budget Committee Majority Caucus, the FY2006 budget resolution approved by the House (H.Con.Res. 95, approved on March 17, 2005) could have accommodated permanent repeal of the estate tax.14 The House budget resolution provided for $105.7 billion in tax cuts over the five-year period FY2006-FY2010. Of that, $45 billion would be achieved under reconciliation instructions.15

The FY2006 budget resolution approved by the Senate Budget Committee on March 10, 2005, provided for a reduction in revenues of no more than $14.9 billion in FY2006 and $70.2 billion over the FY2006-FY2010 period. According to the Chairman's Mark, the $70.2 billion amount was sufficient to accommodate a permanent extension of the repeal of the estate tax.16 S.Con.Res. 18, approved by the Senate on March 17, provided for a reduction in revenues of $19.016 billion in FY2006 and $128.6 billion over FY2006-FY2010. These were substantially larger revenue reductions than the numbers approved by the Senate Budget Committee.

The concurrent resolution on the budget for FY2006, H.Con.Res. 95, was approved by both the House and the Senate on April 28, 2005. It provided for a reduction in aggregate federal revenues of $105.7 billion over the five years FY2006-FY2010. Of that total a reduction in revenues of $11 billion in FY2006 and $70 billion over the FY2006-FY2010 period would be carried out under reconciliation instructions.17 The final budget resolution thus used the House Budget Committee figure of $105.7 billion for total tax cuts and the Senate Budget Committee figure of $70 billion for reductions under reconciliation for the FY2006-FY2010 period.

These five-year limits were considered adequate to accommodate permanent repeal of the estate tax. However, as documented in Table 1 in the previous section, looking only at the projected revenue losses for FY2006-FY2010 does not adequately account for the much larger losses anticipated for FY2011 and beyond if the estate tax is fully repealed.

2005 Tax Reconciliation Bills

No provisions concerning the estate tax were included in the tax reconciliation bills approved by either the House (H.R. 4297, approved on December 8, 2005) or the Senate (S. 2020, approved on November 18, 2005) in the fall of 2005.18 Nor was any provision included in the conference report which was enacted on May 17, 2006, as P.L. 109-222.

 

Main Differences Among the Bills

 

 

Bills to Permanently Repeal the Estate Tax

All of the estate tax bills introduced in the 109th Congress prior to April 12, 2005, would permanently repeal the estate tax and generation-skipping transfer tax. The bills to permanently repeal the estate tax differ in four main ways. One is whether or not they would preserve the other changes to the taxation of gifts and inherited assets made by EGTRRA. A second is whether the extension of estate tax repeal is part of a broader effort to extend the income tax cuts enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief and Reconciliation Act of 2003. A third is whether the repeal of the estate tax is part of a fundamental tax reform effort to replace the income tax and possibly the payroll tax with some form of consumption-based tax. A fourth is when permanent repeal would take effect.

Preserving Other Changes Made to the Taxation of Gifts and Bequests by EGTRRA

Some bills to permanently repeal the estate and generation-skipping transfer taxes take the approach of repealing the sunset provision of EGTRRA (Section 901 of P.L. 107-16) with respect to Title V of EGTRRA (Estate, Gift, and Generation-Skipping Transfer Tax Provisions). By default these bills would also preserve the other changes to the taxation of gifts and bequests made by EGTRRA. Relevant among the other changes that would be preserved are the continuation of a modified gift tax and the institution of a modified carryover basis (instead of a step-up in basis) for assets transferred at death. The companion bills H.R. 8 (Hulshof) and S. 420 (Kyl and Bill Nelson), H.R. 183 (Pitts), S. 7 (Kyl), S. 988 (Sessions), and S.Amdt. 849 (Frist) to H.R. 6 would remove the sunset provision of EGTRRA.19

Other bills to permanently repeal the estate and generation-skipping transfer taxes take the approach of repealing Subtitle B of the Internal Revenue Code of 1986 (Estate and Gift Taxes). These bills would allow EGTRRA to sunset. This would have the effect of repealing other changes made by EGTRRA, such as the modified carryover basis treatment of assets transferred at death and the modified taxation of gifts. Repealing Subtitle B would repeal the gift tax, in addition to repealing the estate tax and generation-skipping transfer tax. The step-up in basis treatment for assets acquired from a decedent would remain as provided in Subtitle A (Income Taxes) of the Internal Revenue Code. H.R. 25 (Linder), H.R. 64 (Cox), H.R. 1040 (Burgess), S. 25 (Chambliss), S. 812 (Specter), and S. 1099(Shelby) would repeal Subtitle B.

Still another approach to permanently repealing the estate tax and GST tax is to amend the U.S. Constitution. H.J.Res. 14 (Paul) proposes an amendment that would prohibit Congress from levying taxes on personal incomes, estates, and gifts. This would repeal not only the estate and gift taxes but also the income tax on capital gains.

Modified Gift Tax. Under the provisions of EGTRRA a gift tax is retained even when the estate tax and generation-skipping transfer tax are repealed in 2010. The main reason given for maintaining the gift tax when the estate tax is repealed is to protect income tax revenues. The gift tax is intended to discourage people from gifting income-generating or appreciated assets to someone in a lower income tax bracket and/or with offsetting losses. In the case of appreciated property, the donee could sell the assets and pay a lower capital gains tax rate than the donor, and then gift or bequeath the sales proceeds back to the original donor.

If Subtitle B of the Internal Revenue Code were repealed, the gift tax would be repealed along with the estate tax and GST tax. However, if the sunset clause of EGTRRA were repealed, the gift tax -- as modified by EGTRRA -- would remain in effect after 2010. The cumulative lifetime exclusion amount for any one donor would be $1 million.20 (This amount is not indexed for inflation.) Beyond that, gifts up to $500,000 would be subject to the same marginal tax rate schedule that had previously applied to both gifts and bequests (with marginal tax rates from 18% to 34%). Starting in 2010, when the estate tax is repealed, and continuing thereafter, the top gift tax rate would be capped at 35% on cumulative lifetime taxable gifts over $500,000. (This is in contrast to a maximum tax rate of 45% on gifts or bequests in excess of $1.5 million scheduled for 2007 through 2009.) The 35% rate is equal to the maximum tax rate on individual income scheduled by EGTRRA for tax year 2006 and subsequent years.21 The modified gift tax would continue after 2010 under companion bills H.R. 8 (Hulshof) and S. 420 (Kyl and Bill Nelson), H.R. 183 (Pitts), and S. 7 (Kyl). S. 988 (Sessions) would implement these changes to the gift tax beginning in 2005 and S.Amdt. 849 (Frist) to H.R. 6 beginning in 2006.

If the provisions of EGTRRA are permitted to sunset and we return to prior law, the unified estate plus gift tax exclusion would be $1 million. The maximum estate and gift tax rate would return to 55% for gifts and bequests combined of over $3 million (with a 5% surtax over the $10.0 million to $17.184 million range).

Modified Carryover Basis at Death for Capital Gains Purposes. Under the law in place through 2009, and scheduled to resume in 2011, a step-up in basis rule applies to assets transferred at death.22 Under this rule the cost basis of an asset is set at the value of the asset on the decedent's date of death.23 If the heir sells the asset, his or her capital gain is calculated as the difference between the sales price and the stepped-up basis, not the decedent's original purchase price (called the carryover basis). The effect of this practice is to permanently forgive the income tax liability on the increase in value of the asset (the capital gain) during the decedent's period of ownership.24

The estate tax is sometimes defended as a substitute for the capital gains tax at death.25 Consistent with this argument, an important tradeoff that EGTRRA made for the repeal of the estate tax in 2010 was the return to a carryover basis for assets transferred at death.26 However, two important exceptions were made. In what is called a modified carryover basis, a step-up of $1.3 million in the aggregate per decedent27 is permitted in the original adjusted basis of assets transferred at death ($60,000 for nonresident aliens). An additional step-up of up to $3 million is permitted for assets transferred to a surviving spouse. (These dollar amounts are indexed for inflation.28 ) The executor of the estate is left with the task of allocating the step-up allowance to specific assets.

Note that these figures apply to the net increase in value of the assets, not the gross value of the assets. Thus, the $1.3 million step-up might cover all the gains in a gross estate valued at $2-to-$3 million or more. The spousal step-up of $3 million alone could cover the gains in an estate with a gross value of $4 million to $5 million. In short, the practical effect of these two exceptions to carryover basis is to maintain a step-up in basis for smaller estates.

If the sunset provision were repealed with respect to Title V of EGTRRA, then the modified carryover basis rules introduced by EGTRRA would continue in effect after 2010 when the estate tax is permanently repealed. This would occur under companion bills H.R. 8 (Hulshof) and S. 420 (Kyl and Bill Nelson), H.R. 183 (Pitts), and S. 7 (Kyl). S. 988 (Sessions) would implement the modified carryover basis rules beginning in 2005 and S.Amdt. 849 (Frist) to H.R. 6 beginning in 2006. However, if EGTRRA is permitted to sunset, then the tax law would revert to the step-up in basis rules found in Subtitle A, Section 1012 of the Internal Revenue Code. The return to step-up in basis would also hold if the estate tax were permanently repealed by repealing Subtitle B of the Internal Revenue Code, with no accompanying changes in the basis rules, as proposed by H.R. 64 (Cox) and companion bills H.R. 25 (Linder), S. 25 (Chambliss), and S. 1099 (Shelby).

A previous effort to institute a carryover basis was enacted by the Tax Reform Act of 1976.29 Its implementation was postponed by three years by the Revenue Act of 1978.30 It was repealed before it ever took effect by the Crude Oil Windfall Profit Tax Act of 1980.31, 32 Leading up to the repeal, tax practitioners at the time pointed out the difficulties in trying to determine the historical cost basis of an inherited asset.

Extending All of the Major Tax Cuts Made in 2001 and 2003

The Bush Administration's budget for FY2007 has once again proposed making permanent all of the major tax cuts enacted in 2001 and 2003. Repealing the estate tax and modifying the gift tax was just one of the tax cuts enacted by EGTRRA in 2001. Thus, permanent repeal of the estate tax could be part of a broader bill to make other tax cuts permanent.

One example in the 109th Congress is S. 7 (Kyl). S. 7 would repeal the sunset provision of EGTRRA with respect to Title V, the estate, gift, and generation-skipping transfer tax provisions. S. 7 would also repeal the sunset provision of EGTRRA with respect to Title I relating to the reduction of income tax rates for individuals. (This includes the creation of the lowest 10% bracket and the reduction of the highest marginal tax rates.) In addition, S. 7 would repeal the sunset provision of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27) relating to the reductions in the income tax rates on capital gains and dividends for individuals, scheduled to sunset at the end of 2008.

A bill to make other tax cuts permanent as well would have a larger projected revenue cost than a bill targeted solely on making the repeal of the estate tax permanent. Both the Treasury Department and the Joint Committee on Taxation (JCT) have estimated the effect of the Bush Administration's proposals on receipts over the 10-year period FY2007-FY2016. The estimated cost over the next 10 fiscal years of making permanent a wide range of tax cuts enacted in 2001 and 2003 is $1.4 trillion dollars according to Treasury and $1.6 trillion according to JCT. Of that total revenue loss, $339 billion or 24% according to Treasury and $369 billion or 23% according to JCT was attributed to making permanent the repeal of the estate and generation-skipping transfer taxes and the modification of the gift tax. Another $203 billion or 14% according to Treasury and $197 billion or 12% according to JCT came from permanently reducing the tax rates on dividends and capital gains. Another $606 billion or 43% according to Treasury33 and $757 billion or 47% according to JCT34 was attributed to making permanent the reductions in marginal individual income tax rates, also enacted in 2001.

Part of Fundamental Tax Reform

Several of the bills introduced in the 108th Congress to implement fundamental tax reform would have repealed the estate and gift taxes, along with individual and corporate income taxes (and in some cases payroll taxes or certain excise taxes as well), and replaced them with other taxes. These other new taxes generally took the form of a broad-based tax on consumption, such as a value-added tax (VAT), a national retail sales tax, a consumed-income tax, or a flat tax on consumption. Some took the form of a tax on earned (labor) income but not on unearned (investment) income. Some, described as a modified VAT, combined a tax on wages with a cash-flow tax on businesses. The intent of these proposals is to favor savings and investment relative to consumption.35

Repealing estate and gift taxes is theoretically consistent with a consumption-based tax system. Under such a system, bequests and gifts would be taxed not when transferred or received, but only when the proceeds were spent by recipients.

In the 109th Congress, the companion bills H.R. 25 (Linder) and S. 25 (Chambliss) offer a fundamental tax reform package. They would repeal the estate and gift taxes, along with the individual and corporate income taxes, payroll taxes, and taxes on self-employment income.36 They would replace these taxes with a national sales tax. H.R. 25, and S. 25 would repeal the estate and gift taxes by repealing Subtitle B of the Internal Revenue Code. They also include a finding that the sixteenth amendment to the U.S. Constitution, which permits Congress to levy income taxes without apportionment among the states, should be repealed.

H.R. 1040 (Burgess) would offer each individual and business taxpayer the opportunity to irrevocably elect to be taxed under a flat rate income tax, instead of the regular income tax and alternative minimum tax. The tax rate would be 19% for the first two years, and 17% in subsequent years. S. 812 (Specter) would replace the current income tax with a flat tax of 20% on the taxable earned income of individuals and business taxable income. S. 1099 (Shelby) would levy a flat tax on individuals and businesses of 19% for 2006 and 2007, and 17% in 2008 and thereafter. All three of these flat tax bills would repeal the estate, gift, and generation-skipping transfer taxes by repealing Subtitle B of the Internal Revenue Code.

H.J.Res. 14 (Paul) proposes amendment to the Constitution to deny Congress the power to levy personal income, estate, and gift taxes. It would also prohibit the U.S. Government from engaging in business in competition with its citizens. It would repeal the sixteenth amendment to the Constitution. It does not propose an alternative revenue source.

When Permanent Repeal Would Take Effect

Under most of the bills that would remove the sunset provision with respect to Title V of EGTRRA, the repeal of the estate and generation-skipping transfer taxes would first take effect in 2010, as scheduled by EGTRRA. These bills would simply extend the repeal for the years 2011 and beyond. These include companion bills H.R. 8 (Hulshof) and S. 420 (Kyl and Bill Nelson), H.R. 183 (Pitts), and S. 7 (Kyl). In contrast, S. 988 (Sessions) would accelerate the repeal to 2005. S.Amdt. 849 (Frist) to H.R. 6 would accelerate the repeal to 2006.

The bills that would repeal Subtitle B of the Internal Revenue Code (Estate and Gift Taxes), would take effect earlier. H.R. 64 (Cox) would take effect January 1, 2005. H.R. 1040 (Burgess), S. 812 (Specter), and S. 1099 (Shelby) all proposing a flat rate income tax, would take effect January 1, 2006. H.R. 25 (Linder) and S. 25 (Chambliss), proposing a national sales tax in place of the income, estate and gift, and payroll taxes, would take effect January 1, 2007.

H.J.Res. 14 (Paul), proposing a Constitutional amendment to abolish the income and estate and gift taxes, would not take effect until after 2011. It would allow up to seven years for three-quarters of the state legislatures to ratify the amendment after its submission, and an additional three years after ratification for the changes to take effect.

Bills to Retain but Alter the Estate Tax

Six of the bills that would retain but alter the estate tax were introduced in the House on April 12 and 13, 2005. April 13 was the day that the House was scheduled to vote on H.R. 8, a bill to permanently repeal the estate tax. The language of H.R. 1577 was introduced as H.Amdt. 69, the Pomeroy substitute amendment to H.R. 8, offered on April 13, 2005, but defeated. Two bills were introduced in June 2006, H.R. 5638 (Thomas), which was passed by the House on June 22, and S. 3626 (Landrieu).

Six bills share some common elements: H.R. 1560 (Ford), H.R. 1568 (Leach), H.R. 1574 (Dennis Moore), H.R. 1577 (Pomeroy), H.R. 5638 (Thomas), and S. 3626 (Landrieu). All six would repeal EGTRRA's repeal of the estate tax and generation skipping transfer tax. They would also repeal the modified carryover basis introduced by EGTRRA for determining the cost basis of assets transferred at death after 2009 and would restore the step-up in basis treatment (value at the time of death). The first four of those bills would repeal EGTRRA's reduction in the maximum gift tax rate to 35% and the provision making certain transfers in trust a taxable gift, both scheduled to take effect in 2010.

The bills differ on the level at which they would set the applicable exclusion amount per decedent, when this would take effect, and whether or not it would be indexed for inflation. H.R. 1614 (Lowey) would set the applicable exclusion amount at $3 million, indexed for inflation, effective upon enactment. H.R. 1557 (H.Amdt. 69 to H.R. 8) (Pomeroy) would increase the applicable exclusion amount to $3 million for 2006 through 2008 and $3.5 million for 2009 and thereafter. H.R. 1574 (Dennis Moore) would increase the applicable exclusion amount to $3.5 million in 2006, indexed for inflation. H.R. 5421 (Collin Peterson) would increase the estate and gift tax unified credit to an exclusion equivalent of $5 million in 2007. H.R. 5638 (Thomas) and S. 3626 (Landrieu) would increase the exclusion to $5 million in 2010, and index it for inflation thereafter. H.R. 1560 (Ford) would increase the applicable exclusion amount to $7.5 million in 2006. H.R. 1568 (Leach) would increase the applicable exclusion amount to $10 million upon enactment, indexed for inflation. H.R. 1568 would also increase the annual gift tax exclusion (per donor per donee) from $10,000 to $50,000, indexed for inflation.

The bills also differ on the estate tax rate. Four of the bills would replace the table of increasing marginal tax rates with a flat tax rate. H.R. 1560 (Ford) would set the estate tax at a flat rate of 27.5%. H.R. 1568 (Leach) would set a flat tax of 30% on taxable estates and gifts. H.R. 5421 (Collin Peterson) would set a flat tax rate on taxable estates and gifts of 15% or, if lower, the generally applicable capital gains rate for individuals. S. 3626 (Landrieu) would set a flat tax rate of 35%. In addition, H.R. 5638 (Thomas) would have two tax rates. Taxable estate values up to $25 million would be taxed at the prevailing long-term capital gains rate, and values over $25 million would be taxed at twice the capital gains rate.

H.R. 1577 (H.Amdt. 69 to H.R. 8) (Pomeroy) would freeze the maximum estate and gift tax rate at 47%, its 2005 level. (Under EGTRRA, the maximum tax rate is scheduled to fall to 45% in 2007 through 2009.) It would restore the 5% surtax on taxable estate values over $10 million, up to the level needed to phase out the value of the graduated estate tax rates and the unified credit. It would also limit the ability to use minority discounts in determining the value of certain nonbusiness assets and to count those assets in determining the value of an interest. H.R. 1614 (Lowey) would reduce the marginal estate tax rates by 20%.

Four bills would target benefits to family-owned business and/or farms. H.R. 1624 (Mike Thompson) would provide an unlimited exclusion from the estate tax for qualified family-owned business interests but would apply a carryover basis to those assets when sold by the heirs. S. 928 (Lincoln) also would provide an unlimited exclusion from the taxable estate for family-owned farms and businesses but would apply a carryover basis to the assets when sold by the heirs. H.R. 3523 (Timothy Bishop) would exclude from estate taxes the value of farmland as long as the land continues in farmland use by a qualified heir. It would also repeal the dollar limit on the estate tax exclusion for land subject to a qualified conservation easement ($500,000 for deaths in 2002 and after). S. 3626 (Landrieu) would raise the aggregate reduction in fair market value allowed under special use valuation for property used in farming or other trade or business (IRC Sec. 2032(A)) from a base value of $750,000 to $5 million, indexed for inflation after 2010. A special tax deduction for qualified family-owned business interests (QFOBI) would be reintroduced with the maximum amount raised from $675,000 to $2.5 million (not indexed) (IRC Sec. 2057(a)). The QFOBI deduction amount would stand on its own and not be reduced by increases in the applicable exclusion amount as it was under pre-EGTRRA law.

Exploring a Possible Bipartisan Compromise. Senators Jon Kyl (R-Ariz.) and Max Baucus (D-Mont.), members of the Senate Finance Committee, began meeting in early June 2005, trying to develop a bipartisan compromise that would retain but alter the estate tax. Their proposal reportedly would raise the applicable exclusion amount and lower the tax rate, possibly down to the rate that applies to dividends and capital gains.37 Early versions of the Kyl-Baucus proposal had an exclusion amount as high as $8 million or $10 million per decedent (twice as much per couple). Subsequent versions had an exclusion amount of $3.5 million per decedent, indexed for inflation. Inherited assets would continue to receive a step-up in basis to the value at the date of death, in contrast to a carryover basis.38

On April 4, 2006, Senator Charles Grassley, chairman of the Senate Finance Committee, reportedly said that he was working with Senators Kyl and Baucus on a proposal that would involve an exclusion amount of between $3.5 million and $5 million per decedent and a tax rate of between 15% and 35%.39 (Those are currently the maximum tax rates on capital gains and ordinary income, respectively.) Critics pointed out that lowering the tax rate from 45% to 15% on taxable estates over $3.5 million would make the compromise reform cost 75% as much in foregone revenues as total repeal of the estate tax.40

The House passed H.R. 8, a bill to permanently repeal the estate tax, on April 13, 2005. In late April, 2006, Senate Majority Leader William Frist promised to bring full estate tax repeal up for a Senate vote in May. Senate consideration of permanent repeal was finally scheduled for the week of June 5, 2006, following the Memorial Day recess. On June 8, 2006, the Senate held a cloture vote on the motion to proceed to consider H.R. 8. The vote of 57-41 was three votes short of the 60 needed to proceed to consider H.R. 8. The failed cloture vote also closed off the opportunity to consider an alternative estate tax proposal.

On May 2, 2006, Senator Kyl announced a proposal with a $5 million per spouse exemption amount, an estate tax rate of 15% (the current maximum tax rate on capital gains), and a step-up in basis for assets transferred at death.41 The gift tax would have a lifetime exclusion of $1 million and a maximum tax rate of 35%, as provided under EGTRRA of 2001. Taxable lifetime gifts would be counted against the $5 million estate tax exclusion. The provisions would take effect in 2010. Senator Kyl reportedly planned to bring such a measure to the Senate floor if the vote on permanent repeal failed to gain the 60 votes needed for adoption.42

Most of the revenue from the estate tax comes from taxing the largest estates at high marginal rates. Consequently, reducing the marginal tax rate from 45% to 15% has a dramatically larger effect in reducing revenues than increasing the exemption by a proportionate amount. Estimates by the Joint Committee on Taxation (JCT) indicate that a proposal like the Kyl single-rate proposal with an exemption of $5 million per decedent and a 15% tax rate would cost 84% as much as total repeal of the estate tax when fully implemented.43 (The JCT estimated that, with an estate tax rate of 15%, an exemption of $3.5 million would cost 78% as much as total repeal in FY2015; $4.0 million, 81% as much; $5.0 million, 84% as much; and $10.0 million, 92% as much.)44

The week of May 29, 2006, it was reported that Senator Baucus was considering a proposal to retain the estate tax with an exemption of $3.5 million per spouse and graduated tax rates. The tax rate would be 15% on assets over $3.5 million up to $5 million, 25% on assets over $5 million up to $10 million, and 25% on assets over $10 million.45 The Urban-Brookings Tax Policy Center (TPC) estimated that the Baucus proposal would cost 73% as much as total repeal in 2011, whereas the Kyl single-rate proposal would cost 90% as much.

On June 8, 2006, it was reported that Senator Kyl was considering an alternative two-rate proposal with a $5 million exemption, and a tax rate of 15% on assets from $5 million to $20 million or $30 million, and 25% or 30% on assets over $20 million or $30 million.46 The JCT estimated the cost of a proposal with a $5 million exemption in 2010, indexed for inflation thereafter. The tax rate on taxable assets from $5 million up to $30 million would be equal to the long-term capital gains tax rate. Adhering to current law, JCT assumed that rate to be 15% for 2010 but 20% thereafter. The tax rate on assets over $30 million would be 30%. The proposal would not permit a deduction for state estate or inheritance taxes. The lifetime gift tax exclusion would remain at $1 million. The gift tax rate would be the highest rate of tax applicable to ordinary income which is scheduled to revert to 39.6% after 2010. The carryover basis provisions for inherited assets would be repealed. The JCT estimated that this proposal would cost 74% as much as total repeal. The revenue cost was estimated at $42.4 billion for FY2012 and $274.8 billion over the 10-year period FYs 2007- 2016.47 The TPC model estimated that it would cost 86% as much as total repeal.

A proposal attributed to Senator Olympia Snowe would raise the exemption to $7 million per decedent. It would have a tax rate of 15% on taxable assets from $7 million to $10 million, 25% between $10 million and $15 million, and 28% above $15 million. The TPC model estimated that it would cost 85% as much as total repeal.

On June 12, 2006, Senator Thomas Carper proposed a substitute amendment to H.R. 8 that would extend 2009 law with an exemption of $3.5 million per decedent (but indexed for inflation beginning in 2011) and a maximum tax rate of 45%. The TPC model has estimated that extending 2009 law (without indexing) would cost 56% as much as total repeal.

As of June 13, 2006, there was talk of attaching an estate tax reform proposal to the conference report on pension legislation (H.R. 2830) which was expected to include several other tax provisions. On June 16 Senator Frist proposed that the House pass a permanent estate tax reform compromise that could attract 60 votes in the Senate. His goal was to have the Senate vote on an estate tax measure before the Independence Day recess began on July 3.48

On June 19, House Ways and Means Committee Chairman William Thomas introduced H.R. 5638. The House approved H.R. 5638, as amended, by a vote of 269-156 on June 22. The bill would restore the unified estate and gift tax exclusion and raise the applicable exclusion amount to $5 million per decedent. (The gift tax would no longer be subject to the separate lifetime exclusion limit of $1 million imposed by EGTRRA, nor the separate tax rate of 35% after 2009.) On June 21 the House Rules Committee adopted a manager's amendment that would index the $5 million exclusion to inflation after 2010, rounded to the nearest $100,000. The bill would lower the tax rate on taxable assets up to $25 million to the tax rate on capital gains. For taxable assets over $25 million the tax rate would be twice the prevailing capital gains rate. (The capital gains tax rate is currently 15% through 2010, but is scheduled to revert to 20% in 2011 unless the lower rate is extended again.) The bill would permit married couples to carry over any exclusion unused by the first spouse to die to the estate of the surviving spouse. The bill would repeal the deduction for state death taxes. The bill would repeal the provisions of EGTRRA that introduced a modified carryover basis regime starting in 2010. Thus, the step-up in basis rules would continue to govern. The bill would also repeal the sunset provision with respect to changes to estate and gift taxes made by EGTRRA that are not repealed or modified by this bill; this means that those other provisions of EGTRRA would remain in effect after 2010. The estate and gift tax provisions of H.R. 5638 would take effect January 1, 2010, and be permanent. In addition, H.R. 5638 would create a new, temporary 60% income tax deduction for qualified timber capital gains. The timber provisions would be effective from the date of enactment through calendar year 2008.49 The timber provisions would primarily benefit corporate taxpayers who pay ordinary income tax rates up to 35% on net capital gains. The JCT estimated that, relative to current law, the estate tax provisions of H.R. 5638 as originally introduced would cost $279 billion in lost revenues over the FY2006-FY2016 period.50 The indexing provision was estimated to cost an additional $3.25 billion.51 The sum of $282 billion is 73% of the estimated cost of total repeal of the estate tax. The timber provisions were estimated to cost $940 million over the 11 fiscal years.

On July 21 there was reportedly talk in Senate leadership circles of possibly including an estate tax reform measure in the conference report on pension legislation (H.R. 2830). The proposal might reflect some combination of H.R. 5638, passed by the House, and Senator Kyl's two-rate proposal, described above.52

On July 29, the House passed H.R. 5970, which is similar to H.R. 5638. The estate tax exemption increases to $3,750,000 in 2010 and by an additional $250,000 each succeeding year until it reaches $5,000,000 in 2015. After 2015, the $5 million exemption is indexed for inflation. Married couples can transfer any unused exemption to the second spouse, increasing the effective exemption for married couples to $10 million. The tax rate for estates valued at less than $25 million would be the long-term capital gains tax rate, 15%, through 2010, then rising to 20% when the capital gains tax rate increases. The tax rate on estates valued over $25 million will be 40% in 2010, 38% in 2011, 36% in 2012, 34% in 2013, 32% in 2014, and 30% in 2015 and beyond. The $25 million bracket amount is also indexed for inflation. The deduction for state estate taxes is repealed. The legislation also extends a number of popular tax relief provisions often called "extenders."

Table 2 contrasts the projected effects in calendar 2011 of each of these proposals with current law (with an exemption of $1 million per decedent and a maximum tax rate of 55%) according to the estimates of the Urban-Brookings Tax Policy Center. By raising the exemption from $1 million to $3.5 million and lowering the maximum tax rate from 55% to 45%, the number of taxable estate tax returns would drop from 50,500 (or 19.2 per 1,000 adult deaths) under current law to 8,200 (or 3.1 per 1,000) by extending 2009 law. Revenue from the estate tax would drop from $40.4 billion under current law to $18.0 billion under 2009 law. Extending 2009 law would cost 56% as much as total repeal.

By keeping the exemption at $3.5 million but lowering the tax rates to 15%-25%-35%, Senator Baucus's proposal would modestly reduce the number of taxable returns to 8,000 (or 3.0 per 1,000), relative to extending 2009 law. But it would substantially reduce estate tax revenue to $10.8 billion, costing 73% as much as total repeal.

          Table 2. Alternatives to Estate Tax Repeal:

 

                   Estimated Effects in 2011

 

 

                                Taxable returns

 

                                                                  Revenue loss

 

                                      Number per                  relative to

 

 Option                 Number        1,000 adult  Revenue        total repealc

 

 (exemption,            in 1,000s     deathsb     ($ billions)      (%)

 

 maximum tax rate)a

 

 

 Current law              50.5         19.2        $40.4            ___

 

 ($1 million, 55%)

 

 

 Sen. Carper              8.2           3.1        $18.0            56%

 

 Extend 2009 law

 

 ($3.5 million, 45%)

 

 

 Sen. Baucus              8.0           3.0        $10.8            73%

 

 ($3.5 million,

 

 15%-25%-35%)

 

 

 H.R. 5638                4.2           1.6         $9.0            78%d

 

 ($5 million, 20%,

 

 40% over $25 million)

 

 

 H.R. 5638                4.1           1.6         $6.6            83%

 

 ($5 million, 15%,

 

   30% over $25 million)

 

 

 Sen. Kyl -- 2 rates ($5  3.9           1.5         $5.8            86%

 

 million, 15%,

 

 30% over $30 million)

 

 

 Sen. Kyl -- 1 rate       3.9           1.5         $4.1            90%e

 

 ($5 million, 15%)

 

 

 Sen. Snowe               2.1           0.8         $5.9            85%

 

 ($7 million,

 

 15%-25%-28%)

 

 

 Source: Urban-Brookings Tax Policy Center Microsimulation

 

 Model (version 0305-3A). Tables T06-0138 (June 1, 2006), T06-0147

 

 (June 8, 2006), and T06-0186 (June 23, 2006). Available at

 

 [http://www.taxpolicycenter.org

 

 

                         FOOTNOTES TO TABLE 2

 

 

      a The TPC assumes that there is a deduction for state

 

 death taxes under each of the alternatives other than H.R. 5638.

 

 

      b The number of adult deaths in 2011 was estimated at

 

 2,629,000 by the Center on Budget and Policy Priorities. This

 

 compares with an estimate of 2,694,300 total deaths reported by TPC.

 

 The year 2011 refers to the calendar year and the year of death.

 

 Estate tax revenue is attributed to the year of death rather than to

 

 the year the estate tax return might be filed.

 

 

      c Calculated by CRS as the difference between current

 

 law ($40.4 billion) and the option's revenue, divided by $40.4

 

 billion.

 

 

      d Assuming a 20% capital gains rate, the JCT estimated

 

 that the estate tax provisions of H.R. 5638 would cost $42.6 billion

 

 in FY2012, or 73% as much as total repeal. The JCT uses a different

 

 estimation model which also takes into account the effects on gift

 

 tax and income tax revenues.

 

 

      e The JCT's estimate of the cost of a proposal like

 

 Senator Kyl's with one 15% rate was 84% of total repeal, in contrast

 

 to 90% based on the TPC's model.

 

END OF FOOTNOTES TO TABLE 2

 

 

Raising the exemption to $5 million and indexing it to inflation after 2010 would further cut the number of taxable returns by approximately half. The TPC made two estimates of the effects of H.R. 5638. The first assumes, as the JCT did, that the long-term capital gains rate will return to 20% after 2010. The second assumes that the current 15% rate will be made permanent. The number of taxable returns is estimated at 4,200 and 4,100, respectively (or approximately 1.6 per 1,000 adult deaths). Under the 20% rate assumption, revenue in 2011 is projected at $9.0 billion, costing 78% as much as total repeal. Under the 15% rate assumption, revenue in 2011 is projected at $6.6 billion, costing 83% as much as total repeal.

For Senator Kyl's two proposals with a $5 million exemption, the TPC model predicts 3,900 taxable returns (or 1.5 per 1,000 deaths). The Kyl proposal with a 15% rate on assets between $5 million and $30 million and 30% on assets over $30 million is estimated to cost 86% as much as total repeal, raising $5.8 billion in revenue. The Kyl proposal with a single 15% rate on assets over $5 million is estimated to cost 90% as much as total repeal, raising $4.1 billion in revenue.

By raising the exemption to $7 million, Senator Snowe's proposal would reduce the number of taxable returns to 2,100 (or 0.8 per 1,000 deaths). By levying rates of 25% and 28% rather than 15% over a wide middle range of assets, the Snowe proposal is estimated to raise slightly more revenue, $5.9 billion in 2011, than the Kyl two-rate proposal. The Snowe proposal is estimated to cost 85% as much as total repeal.

 

Bills Introduced in the 109th Congress

 

 

All of the bills introduced in the 109th Congress to permanently repeal the estate tax have been introduced by Republican Members of Congress. Those cases where there is a Democratic co-sponsor are noted in the summaries below. Of the eight House bills to retain but alter the estate tax, six were introduced by Democratic Members and two by Republican Members (H.R. 1568 and H.R. 5638).

On April 13, 2005, the House passed H.R. 8 by a vote of 272-162. This bill would permanently repeal the estate tax. On June 8, 2006, the Senate held a cloture vote on a motion to proceed to consider H.R. 8. The vote of 57-41 fell three votes short of the 60 needed to consider the bill. On June 22, the House approved H.R. 5638, a bill to retain but alter the estate tax, by a vote of 269- 156.

House

H.R. 8 (Hulshof) -- Action in the House of Representatives. Death Tax Repeal Permanency Act of 2005. H.R. 8 would repeal the sunset provision of EGTRRA solely with respect to the estate, gift, and generation-skipping transfer tax provisions (Title V). This would make the repeal of the estate and generationskipping transfer taxes permanent starting in 2010. It would leave in place the modified gift tax and the modified carryover basis for assets transferred at death instituted by EGTRRA. The Joint Committee on Taxation estimated that H.R. 8 would cost $290 billion in lost revenues over the fiscal years 2006-2015 (JCX-20-05, April 13, 2005). (See the numbers reported in the right-hand column of Table 1 earlier in this report.) Introduced February 17, 2005; referred to the Committee on Ways and Means. Passed by a vote of 272- 162 on April 13, 2005. Companion to S. 420. As of April 13, 2005, H.R. 8 had 206 co-sponsors, including 16 Democrats.

The bill continues the precedent, begun by Representative Jennifer Dunn in 1999 in the 106th Congress, of using H.R. 8 as the number for a bill to permanently repeal the estate and generation- skipping transfer taxes. H.R. 8, the Death Tax Elimination Act of 2000, was passed by the 106th Congress but vetoed by President Clinton on August 31, 2000. H.R. 8 (Dunn and Tanner), the Death Tax Elimination Act of 2001, was reintroduced in the 107th Congress, substantially amended by the Ways and Means Committee, and passed by the House on April 4, 2001. Many of its provisions were included in EGTRRA (P.L. 107-16), enacted on June 7, 2001. In the 108th Congress, H.R. 8 (Dunn), the Death Tax Repeal Permanency Act of 2003, was passed by the House on June 18, 2003.

H.Res. 202 (Rules Committee). Provided for the consideration of H.R. 8 with one hour of debate. Also provided for the consideration of the amendment in the nature of a substitute, if offered by Representative Pomeroy, with one hour of debate. Introduced April 12, 2005. Agreed to by voice vote April 13, 2005. House Calendar No. 20, H.Res. 202, 109th Cong., 1st sess., H.Rept. 109-35, April 12, 2005. Some Democrats sought to defeat the rule in order to offer an amendment that would have directed the savings from the Pomeroy substitute compared with H.R. 8 ($218 billion) to strengthen Social Security.

H.Amdt. 69 (Pomeroy) to H.R. 8. Certain and Immediate Estate Tax Relief Act of 2005. Identical to H.R. 1577. H.Amdt. 69 was an amendment in the nature of a substitute to H.R. 8. The Pomeroy substitute amendment would repeal EGTRRA's repeal of the estate tax and generation skipping transfer tax. It would raise the applicable exclusion amount to $3 million per decedent, effective January 1, 2006, through December 31, 2008. The exclusion would rise to $3.5 million per decedent in 2009, and remained at that level thereafter. The amendment would freeze the maximum estate tax rate at 47%, its 2005 level. It would restore the 5% surtax on taxable estate values over $10 million, up to the level needed to phase out the value of the graduated estate tax rates and the unified credit. It would repeal the modified carryover basis enacted by EGTRRA, and restore the step-up in basis rules (value at the time of death) for determining the cost basis of assets transferred at death after 2009. It would repeal EGTRRA's reduction of the maximum gift tax rate to 35% and the provision making certain transfers in trust a taxable gift, also scheduled to take effect after 2009. The preceding provisions would all take effect January 1, 2006. The amendment also would limit the ability to use minority discounts in determining the value of certain nonbusiness assets and to count those assets in determining the value of an interest. This provision would take effect upon enactment. The Joint Committee on Taxation estimated that the amendment would cost $72 billion in lost revenues over the ten fiscal years 2006-2015.53 Defeated by a vote of 194-238 (Roll no. 101) on April 13, 2005. Representative Pomeroy had offered a similar substitute amendment in the 108th Congress (H.Amdt. 171 to H.R. 8).

H.R. 8 (Hulshof) -- Action in the Senate. Senator Frist planned to have the Senate vote on permanent estate tax repeal before it recessed at the end of July 2005. On July 29, 2005, Senator Frist filed a motion to proceed on H.R. 8 and a cloture motion on the motion to proceed, but he then withdrew the motion to proceed.54 Senator Frist next proposed that the Senate take up the matter on September 6, 2005, the day it was originally scheduled to reconvene after the August recess. On September 6, however, Senator Frist canceled a scheduled cloture vote on a motion to proceed to consider H.R. 855 because Congress was in the midst of dealing with the damage to New Orleans and the Gulf Coast brought about by Hurricane Katrina.56 H.R. 8 was returned to the Senate calendar on September 7, 2005.

The cloture vote was eventually held on June 8, 2006, with a result of 57-41. This was three votes short of the 60 needed to consider H.R. 8. This vote also closed off the opportunity for the Senate to consider an alternative estate tax proposal that might have been introduced by Senator Kyl if H.R. 8 had been voted on but failed to gain 60 votes.

H.R. 25 (Linder). Fair Tax Act of 2005. H.R. 25 would repeal the estate and gift taxes along with the corporate and individual income taxes, payroll taxes, and taxes on self-employment income. In their place it would institute a national sales tax, to be administered primarily by the states. It would repeal Subtitle B of the Internal Revenue Code. It contains a finding that the 16th amendment to the U.S. Constitution should be repealed Would take effect January 1, 2007. Introduced January 4, 2005; referred to the Committee on Ways and Means. Companion bill to S. 25. A similar bill, also numbered H.R. 25, was introduced by Representative Linder in January 2003, at the outset of the 108th Congress.

H.R. 64 (Cox). Family Heritage Preservation Act. H.R. 64 would repeal Subtitle B of the Internal Revenue Code of 1986. This would repeal the estate tax, the generation-skipping transfer tax, and the gift tax. It would repeal other changes made by EGTRRA to the taxation of bequests and gifts such as the modified carryover basis for assets transferred at death and the modified gift tax. The repeal would take effect as of January 1, 2005. The bill lists six findings of Congress opposing the taxes to be repealed. Introduced January 4, 2005; referred to the Committee on Ways and Means. As of April 14, 2005, H.R. 64 had 160 co-sponsors, including four Democrats.

H.R. 183 (Pitts). H.R. 183 would repeal the sunset provision of EGTRRA solely with respect to the estate, gift, and generation-skipping transfer tax provisions (Title V). This would make the repeal of the estate and generation-skipping transfer taxes permanent starting in 2010. It would leave in place the modified gift tax and the modified carryover basis for assets transferred at death and other changes made to the gift tax by EGTRRA. Introduced January 4, 2005; referred to the Committee on Ways and Means.

H.R. 1040 (Burgess). Freedom Flat Tax Act. H.R. 1040 would permanently repeal the estate, gift and generation-skipping transfer taxes by repealing Subtitle B of the Internal Revenue Code. Would take effect January 1, 2006. H.R. 1040 would also offer individuals and persons engaged in business activities the chance to make an irrevocable election to be subject to a flat tax instead of the regular income tax and alternative minimum tax. For individuals, taxable income would include the sum of cash wages, retirement distributions, and unemployment compensation, minus a basic standard deduction and an additional standard deduction (akin to a personal exemption) for each dependent. For-profit businesses would be taxed on gross receipts minus deductions for wages, retirement contributions, and business inputs. Tax-exempt and governmental organizations would pay a tax on the on the noncash compensation provided to their employees. The flat tax would be levied at a rate of 19% for the first two years after its election by the taxpayer, and 17% for subsequent years. Introduced March 2, 2005; referred to the Committee on Ways and Means. One of the four original co-sponsors is a Democrat.

H.R. 1560 (Ford). H.R. 1560 would repeal EGTRRA's repeal of the estate tax and generation skipping transfer tax. It would increase the applicable exclusion amount to $7.5 million. The estate tax would be set at a flat rate of 27.5%. The bill would repeal EGTRRA's modified carryover basis provisions and reduction of the maximum gift tax rate to 35% after 2009. It would repeal the EGTRRA provision making certain transfers in trust a taxable gift after 2009. The bill would take effect January 1, 2006. Introduced April 12, 2005; referred to the Committee on Ways and Means.

H.R. 1568 (Leach). H.R. 1568 would repeal EGTRRA's repeal of the estate tax and generation skipping transfer tax. It would raise the applicable exclusion amount to $10 million, indexed for inflation. It would replace the tables of increasing marginal tax rates with a flat tax of 30% on taxable estates and gifts. It would apply the 30% rate and an increase in the unified credit to the estates of nonresidents who are not citizens. It would repeal the modified carryover basis provisions of EGTRRA and the reduction of the maximum gift tax rate to 35% in 2010. It would repeal the EGTRRA provision making certain transfers in trust a taxable gift after 2009. These parts of the bill would take effect after the date of enactment. H.R. 1568 also would increase the annual gift tax exclusion (from $10,000) to $50,000, indexed for inflation. This would apply to gifts made after December 31, 2004. Introduced April 12, 2005; referred to the Committee on Ways and Means.

H.R. 1574 (Dennis Moore). H.R. 1574 would repeal EGTRRA's repeal of the estate tax and generation skipping transfer tax. It would increase the applicable exclusion amount to $3.5 million, indexed for inflation. It would also repeal EGTRRA's modified carryover basis provisions, reduction of the maximum gift tax rate to 35%, and provision making certain transfers in trust a taxable gift, all scheduled to take effect in 2010. The bill would take effect January 1, 2006. Introduced April 12, 2005; referred to the Committee on Ways and Means.

H.R. 1577 (Pomeroy). Certain and Immediate Estate Tax Relief Act of 2005. Identical to the Pomeroy substitute amendment to H.R. 8, H.Amdt. 69. H.R. 1577 would repeal EGTRRA's repeal of the estate tax and generation skipping transfer tax. It would raise the applicable exclusion amount to $3 million per decedent, effective January 1, 2006, through December 31, 2008. The exclusion would rise to $3.5 million per decedent in 2009, and remain at that level thereafter. The maximum estate tax rate would be frozen at 47%, its 2005 level. The bill would restore the 5% surtax on taxable estate values over $10 million, up to the level needed to phase out the value of the graduated estate tax rates and the unified credit. It would repeal the modified carryover basis for determining the cost basis of assets transferred at death, the reduction of the maximum gift tax rate to 35%, and the provision making certain transfers in trust a taxable gift, all scheduled to take effect in 2010 under EGTRRA. The preceding provisions would take effect January 1, 2006. The bill also would limit the ability to use minority discounts in determining the value of certain nonbusiness assets and to count those assets in determining the value of an interest. This provision would take effect upon enactment. The Joint Committee on Taxation estimated that the identical Pomeroy substitute amendment to H.R. 8 would cost $72 billion in lost revenues over the ten fiscal years 2006-2015 (JCX-21-05, April 13, 2005). Introduced April 12, 2005; referred to the Committee on Ways and Means.

H.R. 1614 (Lowey). Estate Tax Reduction Act of 2005. H.R. 1614 would reduce the graduated marginal estate tax rates by 20% each. This would leave a maximum estate tax rate of 39.2% on taxable amounts over $2 million. The applicable exclusion amount would be set at $3 million, indexed for inflation. The provisions would take effect upon enactment. Introduced April 13, 2005; referred to the Committee on Ways and Means.

H.R. 1624 (Mike Thompson). Estate Tax Repeal for Family- Owned Farms and Businesses Act of 2005. H.R. 1624 would strike from the Internal Revenue Code Section 2057 which provided a special deduction for qualified family-owned business interests (QFOBI), such that the deduction and applicable exclusion amount totaled $1.3 million. It would introduce a new section, 2059, which would allow an unlimited deduction from the gross estate for qualified family-owned business interests. These assets would be subject to carryover basis rules when sold by an heir. Qualified spousal property could still receive the aggregate spousal property basis increase of up to $3 million. A decedent would be treated as engaged in a trade or business if any member of the decedent's family is engaged in the trade or business. A qualified heir could include an active employee of the trade or business who was employed by the trade or business for at least 10 years before the decedent's death. The provisions would apply to the estates of decedents dying and gifts made from 2006 through 2009, and after 2011 (after EGTRRA sunsets). Introduced April 13, 2005; referred to the Committee on Ways and Means.

H.R. 3523 (Timothy Bishop). Estate Tax Deferral for Working Farms and Land Conservation Act of 2005. H.R. 3253 would exclude from estate taxes the value of farmland as long as the land continues in farmland use by a qualified heir. The bill would also repeal the dollar limit on the estate tax exclusion for land subject to a qualified conservation easement ($500,000 for deaths in 2002 and after). Introduced July 28, 2005; referred to the Committee on Ways and Means.

H.R. 5421 (Collin Peterson). H.R. 5421 would restore the unified estate and gift tax and repeal the carryover basis rule. It would increase the unified credit to an exclusion equivalent of $5 million effective in 2007. The bill would reduce the tax on estates and gifts to a flat rate of 15% or, if lower, to the generally applicable capital gains rate for individuals. Introduced May 18, 2006; referred to the Committee on Ways and Means.

H.R. 5638 (Thomas). Permanent Estate Tax Relief Act of 2006. H.R. 5638 would restore the unified estate and gift tax exclusion and raise the applicable exclusion amount to $5 million per decedent. (The gift tax would no longer be subject to the separate lifetime exclusion limit of $1 million imposed by EGTRRA, nor the separate tax rate of 35% after 2009.) The bill would lower the tax rate on taxable assets up to $25 million to the tax rate on long-term capital gains. For taxable assets over $25 million the tax rate would be twice the prevailing capital gains rate. (The capital gains tax rate is currently 15% through 2010, but is scheduled to revert to 20% in 2011 unless the lower rate is extended again.) The gift tax rates in effect at the time of the decedent's death (rather than the rates in effect at the time of the gifts) would be used to determine the total tax due on cumulative lifetime gifts and the credit allowed for taxes previously paid on those gifts.

The bill would permit married couples to carry over any exclusion unused by the first spouse to die to the estate of the surviving spouse. The bill would repeal the deduction for state death taxes. The bill would repeal the provisions of EGTRRA that repealed the estate tax and generation-skipping transfer tax and introduced a carryover basis regime starting in 2010. Thus, the step-up in basis rules would continue to govern. The bill would also repeal the sunset provision with respect to changes to estate and gift taxes made by EGTRRA that are not repealed or modified by this bill, meaning that those other provisions would remain in effect after 2010. The estate and gift tax provisions of H.R. 5638 would take effect January 1, 2010. In addition, H.R. 5638 would create a new, temporary 60% income tax deduction for qualified timber capital gains. (These provisions included most of the language contained in companion bills H.R. 3883 and S. 1791, the Timber Tax Act of 2005.) The timber provisions would be effective from the date of enactment through calendar year 2008. Introduced June 19, 2006; referred to the Committee on Ways and Means.57

H.R. 5638 bypassed consideration by the Ways and Means Committee. On June 21 the House Rules Committee adopted a manager's amendment from Representative Thomas to index the $5 million basic exclusion amount for inflation after 2010, rounded to the nearest multiple of $100,000. The Rules Committee defeated a motion to consider an amendment offered by Representative Pomeroy that would have made the effective date of the bill January 1, 2007, dedicated estate taxes to the Social Security Trust Fund, and required additional IRS resources to reduce the tax gap by 5% annually.58 On June 22 the House approved H.R. 5638 as amended by a vote of 269-156. The Joint Committee on Taxation estimated that the estate tax provisions of the bill would cost $282 billion over the period FY2006-FY2016,59 or 73% of total repeal. (The indexing provision had added $3.25 billion to the original cost estimate.60) The timber provisions were estimated to cost an additional $940 million.

H.R. 5970 (Thomas). On July 29, the House passed H.R. 5970, which is similar to H.R. 5638. The estate tax exemption increases to $3,750,000 in 2010 and by an additional $250,000 each succeeding year until it reaches $5,000,000 in 2015. After 2015, the $5 million exemption is indexed for inflation. Married couples can transfer any unused exemption to the second spouse, increasing the effective exemption for married couples to $10 million. The tax rate for estates valued at less than $25 million would be the long-term capital gains tax rate, 15%, through 2010, then rising to 20% when the capital gains tax rate increases. The tax rate on estates valued over $25 million will be 40% in 2010, 38% in 2011, 36% in 2012, 34% in 2013, 32% in 2014, and 30% in 2015 and beyond. The $25 million bracket amount is also indexed for inflation. The deduction for state estate taxes is repealed. The legislation also extends a number of popular tax relief provisions often called "extenders."

H.J.Res. 14 (Paul). H.J.Res. 14 proposes an amendment to the U.S. Constitution that would deny Congress the power to levy personal income, estate, and gift taxes. The amendment would prohibit the United States Government from engaging in business in competition with its citizens. It would repeal the sixteenth amendment to the Constitution (which grants Congress the power to levy taxes on incomes without apportionment among the states). Introduced January 26, 2005; referred to the Committee on the Judiciary.

Senate

H.R. 8 (Hulshof). Death Tax Repeal Permanency Act of 2005. Received in the Senate on April 14, 2005, after passage in the House on April 13. For further information about action on H.R. 8 in the Senate, see the end of the preceding discussion of H.R. 8 in the House portion of this section.

S. 7 (Kyl). Jobs and Growth Tax Relief Act of 2005. Also known as the Permanent Tax Cuts bill. S. 7 would repeal the sunset provision of EGTRRA with respect to Title V, the estate, gift, and generation-skipping transfer tax provisions. This would make the repeal of the estate and generation-skipping transfer taxes permanent starting in 2010. S. 7 would also repeal the sunset provision of EGTRRA with respect to Title I relating to the reduction of income tax rates for individuals. This includes the creation of the 10% bracket and the reduction of the highest marginal tax rates. In addition, S. 7 would repeal the sunset provision of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27) relating to the reductions in the income tax rates on capital gains and dividends for individuals. Introduced January 24, 2005; referred to the Committee on Finance.

S. 25 (Chambliss). Fair Tax Act of 2005. H.R. 25 would repeal the estate and gift taxes along with individual and corporate income taxes, payroll taxes, and taxes on self-employment income. In their place it would institute a national sales tax, to be administered primarily by the states. Would repeal Subtitle B of the Internal Revenue Code. Contains a finding that the 16th amendment to the U.S. Constitution should be repealed. Would take effect January 1, 2007. Introduced January 24, 2005; referred to the Committee on Finance. Companion to H.R. 25. A similar bill, S. 1493, was introduced by Senator Chambliss in the 108th Congress.

S. 420 (Kyl). Death Tax Repeal Permanency Act of 2005. Identical to H.R. 8. S. 420 would repeal the sunset provision of EGTRRA solely with respect to the estate, gift, and generation- skipping transfer tax provisions (Title V). This would make the repeal of the estate and generation-skipping transfer taxes permanent starting in 2010. It would leave in place the modified gift tax and the modified carryover basis for assets transferred at death as provided by EGTRRA. Introduced February 17, 2005 on a bipartisan basis with Senator Bill Nelson (D-FL);61 referred to the Committee on Finance.

S. 812 (Specter). Flat Tax Act of 2005. S. 812 would repeal Subtitle B of the Internal Revenue Code, thereby repealing the estate, gift, and generation-skipping transfer taxes, effective January 1, 2006. It would replace the current income tax with a flat tax of 20% on taxable earned income of individuals and business taxable income. Introduced April 15, 2005; referred to the Committee on Finance.

S. 928 (Lincoln). Estate Tax Repeal Acceleration (ExTRA) for Family-Owned Businesses and Farms Act. S. 928 would immediately and permanently repeal the estate tax on family-owned businesses and farms. A carryover basis interest (COBI) is defined as any interest in a trade or business, with a principal place of business in the U.S., that is substantially owned by one, two, or three families. There would be no estate tax on a COBI. But the basis for the person acquiring the property from the decedent would be the carryover (not step-up) basis -- the lesser of the adjusted basis of the decedent or the fair market value of the property at the date of the decedent's death. Consequently, the heirs would likely be subject to capital gains taxes if they sold the business.

An unlimited portion of a decedent's estate could be treated as a COBI. The COBI would also be eligible for an unlimited marital deduction. To qualify, the decedent or a member of the decedent's family must own and materially participate in the trade or business for five out of the eight years ending on the date of the decedent's death. If the member of the decedent's family is the spouse, then the participation requirement is met under the active management standard. A qualified heir includes an active employee of the trade or business who has been employed by the trade or business for at least 10 years before the decedent's death. The proposal would take effect after the date of enactment and before January 1, 2010, and then again after December 31, 2010. In 2010, the one year the estate tax is repealed, the COBI would be eligible for the $3 million property basis increase available to surviving spouses, plus the aggregate $1.3 million basis increase for any heirs, under EGTRRA's modified carryover basis rules. Introduced April 27, 2005; referred to the Committee on Finance.

S. 988 (Sessions). Jobs Protection and Estate Tax Reform Act of 2005. S. 988 would accelerate to 2005 the changes to the estate, gift, and generation skipping transfer taxes that are scheduled to take effect in 2010 under EGTRRA. Effective retroactively to January 1, 2005, it would repeal the estate and generation skipping transfer taxes, modify the gift tax, and introduce the modified carryover basis for assets transferred at death. It would make these changes permanent by repealing the sunset provision of EGTRRA solely with respect to the estate and gift tax provisions of that act. Introduced May 10, 2005; referred to the Committee on Finance.

S. 1099 (Shelby). Tax Simplification Act of 2005. S. 1099 would permanently repeal the estate, gift and generation-skipping transfer taxes by repealing Subtitle B of the Internal Revenue Code effective January 1, 2006. S. 1099 would also replace the current income tax on individuals and businesses with a flat tax levied at a rate of 19% in 2006 and 2007, and 17% in 2008 and thereafter. For individuals, taxable income would include the sum of cash wages, retirement distributions, and unemployment compensation, minus a basic standard deduction and an additional standard deduction (akin to a personal exemption) for each dependent. The taxable income of any dependent child under age 14 would be included in the parent's taxable income. For-profit businesses would be taxed on gross receipts minus deductions for business inputs, wages, and retirement contributions. Tax-exempt and governmental organizations would pay the tax on noncash (excludable) compensation provided to their employees. S. 1099 would simplify the rules relating to qualified retirement plans. It would permit employer reversions of excess pension assets under certain conditions. It would repeal the alternative minimum tax and all tax credits. It would require a super-majority vote on any legislation that would increase or add any federal income tax rate, reduce the standard deduction, or provide any exclusion, deduction, credit, or other benefit which would reduce federal revenues. Introduced May 23, 2005; referred to the Committee on Finance.

S. 3626 (Landrieu). Estate Tax Relief and Reform Act of 2006. The provisions of the bill would take effect January 1, 2010. S. 3626 would raise the applicable exclusion amount to $5 million per decedent. The value of the exclusion would be phased out by 5% of the amount by which the taxable estate exceeded $100 million. Thus, the exclusion would be reduced to zero if the taxable estate were $200 million or more. The $5 million exclusion would be indexed for inflation after 2010. The inflation-adjusted amount would be rounded (up or down) to the nearest $10,000. The bill would retain the separate exclusion limit of $1 million on cumulative lifetime gifts imposed by EGTRRA. The system of graduated estate and gift tax rates (which will range from 18% to 45% in 2007, 2008, and 2009) would be replaced by a single rate of 35%.

The aggregate reduction in fair market value allowed under special use valuation for property used in farming or other trade or business (IRC Sec. 2032(A)) would be increased from a base value of $750,000 to $5 million, indexed for inflation after 2010. A special tax deduction for qualified family-owned business interests (QFOBI) would be reintroduced with the maximum amount raised from $675,000 to $2.5 million (not indexed) (IRC Sec. 2057(a)). The QFOBI deduction amount would stand on its own and not be reduced by increases in the applicable exclusion amount. The gift tax rate in effect at the time of the decedent's death (rather than the rates in effect at the time of the gifts) would be used to determine the total tax due on cumulative lifetime gifts and the credit allowed for taxes previously paid on those gifts. S. 3626 would restore the step up in basis treatment of assets transferred at death and repeal the portion of EGTRRA that provided for modified carryover basis in 2010. The bill would repeal the sections of the Internal Revenue Code that once provided a tax credit for state death and generation-skipping taxes but would retain the deduction for state taxes established by EGTRRA. Introduced June 29, 2006; referred to the Committee on Finance. It was roughly estimated that this proposal would cost $245 billion over 10 years,62 or 63% as much as total repeal of the estate tax.

S.Amdt. 849 (Frist) to H.R. 6. This proposed amendment to the energy bill would accelerate to 2006 the changes to the estate, gift, and generation skipping transfer taxes that are scheduled to take effect in 2010 under EGTRRA. Effective January 1, 2006, it would repeal the estate and generation skipping transfer taxes, modify the gift tax, and introduce the modified carryover basis for assets transferred at death. It would make these changes permanent by repealing the sunset provision of EGTRRA solely with respect to the estate and gift tax provisions of that act. The proposal was filed, but not offered, by Senate Majority Leader William Frist on June 22, 2005, as an amendment to H.R. 6, the Energy Policy Act of 2005.63

 

For Additional Information

 

 

CRS Report 95-444, A History of Federal Estate, Gift, and Generation-Skipping Taxes, by John R. Luckey.

CRS Report RS20593, Asset Distribution of Taxable Estates: An Analysis, by Steven Maguire.

CRS Report RS20609, Economic Issues Surrounding the Estate and Gift Tax: A Brief Summary, by Jane G. Gravelle.

CRS Report RL30600, Estate and Gift Taxes: Economic Issues, by Jane G. Gravelle and Steven Maguire.

CRS Report RL31061, Estate and Gift Tax Law: Changes Under the Economic Growth and Tax Relief Reconciliation Act of 2001, by Nonna A. Noto.

CRS Report RL32768, Estate and Gift Tax Revenues: Several Measurements, by Nonna A. Noto.

CRS Report RL31776, Estate Tax Legislation in the 108th Congress, by Nonna A. Noto.

CRS Report RS21224, Estate Tax: Legislative Activity in 2002, by Nonna A. Noto.

CRS Report RL33070, Estate Taxes and Family Businesses: Economic Issues, by Jane Gravelle and Steven Maguire.

CRS Report 95-416, Federal Estate, Gift, and Generation-Skipping Taxes: A Description of Current Law, by John R. Luckey.

CRS Report RL33443, Flat Tax Proposals and Fundamental Tax Reform: An Overview, by James M. Bickley.

CRS Report RL33501, Indexing the Estate Tax Exemption for Inflation, by Nonna A. Noto.

CRS Report RS20853, State Estate and Gift Tax Revenue, by Steven Maguire.

CRS Report RL30875, Step-Up vs. Carryover Basis for Capital Gains: Implications for Estate Tax Repeal, by Nonna A. Noto.

CRS Report RL30862, The Budget Reconciliation Process: The Senate's "Byrd Rule," by Robert Keith.

 

FOOTNOTES

 

 

1 The text of the sunset clause is as follows:

TITLE IX -- COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

Sec. 901. Sunset of Provisions of Act.

 

(a) IN GENERAL. -- All provisions of, and amendments made by, this Act shall not apply --

(1) to taxable, plan, or limitation years beginning after December 31, 2010, or

(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.

(b) APPLICATION OF CERTAIN LAWS. -- The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.

 

2 The Taxpayer Relief Act of 1997, P.L. 105-34.

3 The Byrd Rule is Section 313 of the Congressional Budget Act of 1974 (2 U.S.C. § 644). For a detailed account, see CRS Report RL30862, The Budget Reconciliation Process: The Senate's "Byrd Rule," by Robert Keith.

4 Sec. 313(b)(1)(E) of the Congressional Budget Act of 1974. It applies to increases in net outlays as well as decreases in revenues.

5 H.R. 8 was introduced in the 106th Congress on Feb. 25, 1999, on a bipartisan basis by Representatives Dunn and Tanner. The version of H.R. 8 approved by the House Ways and Means Committee was an amendment in the nature of a substitute offered in the committee by Chairman Archer. This was the version approved by the House and the Senate. For further description of H.R. 8 in the 106th Congress, and the Democratic substitute amendments offered in its place, see archived CRS Report RS20592, Estate Tax Legislation: A Description of H.R. 8, The Death Tax Elimination Act of 2000, by Nonna A. Noto (for a copy contact the author).

6 H.R. 8 was reintroduced in the 107th Congress on March 14, 2001, on a bipartisan basis by representatives Dunn and Tanner. It was replaced by an amendment in the nature of a substitute by the Ways and Means Committee on March 29 and passed by the House on April 4. For further discussion of H.R. 8 in the 107th Congress, and the Democratic substitute amendments offered in its place, see archived CRS Report RL30912, H.R. 8: The Death Tax Elimination Act of 2001, by Nonna A. Noto, Apr. 9, 2001 (for a copy contact the author). For a brief description of H.R. 8 and three other bills introduced in the first session of the 107th Congress to permanently repeal the estate tax, see CRS Report RL30875, Step-Up vs. Carryover Basis for Capital Gains: Implications for Estate Tax Repeal, by Nonna A. Noto.

7 For additional information, see CRS Report RS21224, Estate Tax: Legislative Activity in 2002, by Nonna A. Noto.

8 For additional information, see CRS Report RL31776, Estate Tax Legislation in the 108th Congress, by Nonna A. Noto.

9 U.S. Congress, Joint Committee on Taxation, Description of Revenue Provisions Contained in the President's Fiscal Year 2007 Budget Proposal, 109th Cong., 2nd sess., Joint Committee Print JCS-1-06 (Washington: GPO, 2006), pp. 2-5.

10 U.S. Executive Office of the President, Office of Management and Budget, Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2007, p. 252; Table 17-3, p. 265.

11 For more information, see CRS Report RL32768, Estate and Gift Tax Revenues: Several Measurements, by Nonna A. Noto.

12 See source notes for Table 1. Treasury Department, General Explanations of the Administration's Fiscal Year 2007 Revenue Proposals, p. 146. JCT, Description of Revenue Provisions Contained in the President's Fiscal Year 2007 Budget Proposal, p. 317.

13 Joel Friedman, The High Cost of Estate Tax Repeal, Center on Budget and Policy Priorities, June 5, 2006. Available at [http://www.cbpp.org/6-5-06tax.htm].

14 U.S. Congress, House Committee on the Budget, Majority Caucus, FY20006 Budget Resolution: Overview, March 9, 2005. Available online at [http://www.house.gov/budget/fy06overview.htm].

15 U.S. Congress, House Committee on the Budget, Concurrent Resolution on the Budget -- Fiscal Year 2006, report to accompany H.Con.Res. 95, 109th Cong., 1st sess., H.Rept. 109-17, March 11, 2005 (Washington: GPO, 2005), pp. 17-18, 69-71, and 137.

16 U.S. Congress, Senate Budget Committee, Chairman Judd Gregg, Chairman's Mark 2006 Budget, March 9, 2005,pp. 3, 22. Available online at [http://budget.senate.gov/republican/pressarchive/2005/ FY06ChairmansMark.pdf].

17 U.S. Congress, House of Representatives, Concurrent Resolution on the Budget for Fiscal Year 2006, conference report to accompany H.Con.Res. 95, 109th Cong., 1st sess., H.Rept. 109-62, Apr. 28, 2005, Sec. 101(1)(B), Sec. 201(b), and Sec. 202(b).

18 The Senate approved H.R. 4297 on February 2, 2006, after striking the original language and replacing it with the contents of S. 2020.

19 S. 7, discussed later, would extend other tax cuts made in 2001 and 2003 as well. H.R. 8, H.R. 183, and S. 420 focus solely on making the repeal of the estate tax permanent.

20 This lifetime exclusion is in addition to the annual exclusion available for gifts of up to $11,000 (indexed for inflation) per donor per donee. There is an exclusion from the gift tax for qualified transfers of payments for tuition or medical expenses on behalf of another individual (IRC Section 2503(e)). In addition, there is also a special exclusion from the gift tax for contributions to qualified tuition programs (IRC Section 529).

21 For a fuller explanation of the gift tax provisions of EGTRRA, see CRS Report RL31061, Estate and Gift Tax Law: Changes Under the Economic Growth and Tax Relief Reconciliation Act of 2001, by Nonna A. Noto.

22 Section 1014 of the Internal Revenue Code, relating to the basis of property acquired from a decedent.

23 Or, the value may be determined as of the alternate valuation date, six months after the date of death, if that value is lower.

24 For an asset that has decreased in value since the decedent purchased it, such as an automobile, or stocks or real estate after a decline in the market, the stepped-up basis can be lower than the original cost. As a consequence of the step-up in basis rule, the loss in value during the decedent's period or ownership cannot be claimed as a capital loss when an inherited asset is sold.

25 For a discussion of this tradeoff, written prior to the enactment of EGTRRA, see CRS Report RL30875, Step-Up vs. Carryover Basis for Capital Gains: Implications for Estate Tax Repeal, by Nonna A. Noto.

26 For property acquired from someone dying after December 31, 2009, the basis for the person acquiring the property is to be the lesser of (A) the adjusted basis of the decedent, or (B) the fair market value of the property at the date of the decedent's death. Under both prior law and EGTRRA, property transferred by gift has a carryover basis.

27 This limit may be increased by the amount of unused built-in losses and loss carry-overs that the decedent may have had.

28 The minimum increments are $100,000 for the $1.3 million amount, $6,000 for the $60,000 amount, and $250,000 for the $3 million amount.

29 Sec. 2005 of H.R. 10612, P.L. 94-455.

30 Sec. 515 of H.R. 13511, P.L. 95-600.

31 Sec. 401 of H.R. 39319, P.L. 96-233.

32 See CRS Report 95-444, A History of Federal Estate, Gift, and Generation-Skipping Taxes, by John R. Luckey.

33 U.S. Department of the Treasury, General Explanations of the Administration's Fiscal Year 2007 Revenue Proposals (referred to as the Bluebook), Washington, February 2006, p. 143. Percentages calculated by CRS.

34 U.S. Congress, Joint Committee on Taxation, Description of Revenue Provisions Contained in the President's Fiscal Year 2007 Budget Proposal, 109th Cong., 2nd sess., JCS-1-06, March 2006, p. 314. The JCT cumulative totals have been adjusted by CRS to begin in FY2007 instead of FY2006. Percentages calculated by CRS.

35 For more information on these proposals, see CRS Report RL33443, Flat Tax Proposals and Fundamental Tax Reform: An Overview, by James M. Bickley.

36 The taxes on self-employment income correspond to the combined employer and employee share of payroll taxes for old-age, survivors, and disability insurance plus hospital insurance (OASDHI).

37 The tax on capital gains currently has a maximum rate of 15% through 2010, but is scheduled to revert to 20% in 2011, according to the provisions of P.L. 109-222, enacted on May 17, 2006. Taxpayers in the 10% and 15% rate bracket for ordinary income will have a capital gains tax rate of 0% in 2008-2010. There are proposals to reduce all capital gains tax rates to zero.

38 Dustin Stamper, "Framework of Estate Tax Deal is Set, Kyl Says," Tax Notes by Tax Analysts, July 18, 2005, p. 263.

39 "Hill Watch Annotated Source," Daily Tax Report, no. 78, Apr. 24, 2006, p. GG-1.

40 Kurt Ritterpusch, "Durbin, Others Criticize Revenue Drain Under Reform Deal Proposed by GOP's Kyl," Daily Tax Report by BNA, Inc., no. 169, Sept. 1, 2005, p. G-1.

41 Kurt Ritterpusch, "Kyl Says Vote Could Slip to June, Sets $5 million, 15 Percent as Fallback," Daily Tax Report by BNA, Inc., no. 85, May 3, 2006, p. G-1.

42 H.R. 5421, introduced by Representative Collin Peterson (D-Minn.) on May 18, 2006, contains a unified estate and gift tax exclusion of $5 million per decedent and a 15% tax rate on taxable estates and gifts.

43 Joel Friedman, "Estate Tax 'Compromise' With 15 Percent Rate is Little Different Than Permanent Repeal," Center on Budget and Policy Priorities, Washington, DC, May 31, 2006, p. 11. Available at [http://www.cbpp.org/5-31-06tax.htm].

44 The JCT estimated that full repeal would cost $72 billion in FY2015 relative to current law, under which the estate tax would have an exemption of $1 million and a top marginal rate of 55%. JCT cost estimates as reported in Ruth Carlitz and Joel Friedman, "An Estate Tax with a 15 Percent Tax Rate Does Not Represent a Reasonable Compromise," Center on Budget and Policy Priorities, Washington, DC, Sept. 22, 2005, p. 2. Available at [http://www.cbpp.org/9-22- 05tax.htm].

45 Kurt Ritterpusch, "Repeal Opponents See Prospects in Gridlock, More Fiscally Responsible Solution Next Year," Daily Tax Report, no. 106, June 2, 2006, p. G-10.

46 Kurt Ritterpusch, "Kyl Forging Compromise With Democrats As Senate Estate Tax Voting Set to Begin," Daily Tax Report, no. 110, June 8, 2006, p. G-3.

47 See appendix attached to Joel Friedman and Aviva Aron-Dine, New Joint Tax Committee Estimates Show Modified Kyl Proposal Still Very Costly: True Cost Masked, Center on Budget and Policy Priorities, June 9, 2006. Available at [http://www.cbpp.org/6-9-06tax.htm].

48 Wesley Elmore, "GOP Leaders Plan to Wrap Up Estate Tax, Pensions by Early July," Tax Notes, vol. 111, no. 12, June 19, 2006, pp.1336-1337.

49 For further explanation of the bill, see U.S. Congress, Joint Committee on Taxation, Technical Explanation of H.R. 5638, The "Permanent Estate Tax Relief Act of 2006" as introduced in the House on June 19, 2006 (JCX-20-06), June 20, 2006. Available at [http://www.house.gov/jct/].

50 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 5638, The "Permanent Estate Tax Relief Act of 2006" (JCX-21-06), June 20, 2006.

51 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 5638, as Amended, Scheduled for Consideration by the House of Representatives on June 22, 2006 (JCX-23-06), June 22, 2006.

52 Kurt Ritterpusch, "Estate Taxes: Pension Measure Deemed Last Hope For Legislation on Estate Tax Reform," Daily Tax Report, no. 141, July 24, 2006, p. G-10.

53 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of an Amendment in the Nature of a Substitute Offered by Mr. Pomeroy to H.R. 8, the "Death Tax Repeal Permanency Act of 2005," Scheduled for Consideration by the House of Representatives on April 13, 2005, 109th Cong., 1st sess., JCX-21-05, Apr. 13, 2005.

54 The chronicle of the bill is available online from Library of Congress, Congressional Research Service, Legislative Information Service (LIS) under: 109th Congress, H.R. 8, All Except Bill Text, Bill Summary and Status for the 109th Congress.

55 A motion to proceed to consideration of H.R. 8 would be a debatable motion in the Senate and, thus, potentially subject to a filibuster. The Senate can prevent (or end) a filibuster, and limit consideration of a debatable question, by invoking cloture. This requires a vote of three-fifths of the Senate. H.R. 8 would also potentially be subject to a filibuster, as it is a debatable question as well. If cloture were invoked (on either the motion to proceed or the bill), a subsequent majority vote of the Senate would be required for passage. If repeal of the estate tax were included as part of a reconciliation measure, it would not be potentially subject to a filibuster, but would instead be subject to the rules pertaining to the consideration of reconciliation measures. For more on this, see CRS Report RL33030, The Budget Reconciliation Process: House and Senate Procedures, by Robert Keith and Bill Heniff, Jr.

56 Kurt Ritterpusch, "Frist Pulls Vote on Estate Tax Repeal; Others Express Uncertainty Over Measure," Daily Tax Report by BNA, Inc., no. 172, Sept. 7, 2005, p. G-1.

57 U.S. Congress, Joint Committee on Taxation, Technical Explanation of H.R. 5638, The "Permanent Estate Tax Relief Act of 2006" as introduced in the House on June 19, 2006 (JCX-20-06), June 20, 2006. Available at [http://www.house.gov/jct/].

58 U.S. Congress, House Committee on Rules, Providing for Consideration of H.R. 5638, Permanent Estate Tax Relief Act of 2006, report to accompany H.Res. 885, 109th Cong., 2d sess., H.Rept. 109-517, June 21, 2009.

59 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 5638, as Amended, Scheduled for Consideration by the House of Representatives on June 22, 2006 (JCX-23-06), June 22, 2006.

60 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 5638, the "Permanent Estate Tax Relief Act of 2006" (JCX-21-06), June 20, 2006.

61 See Sen. Jon Kyl and Sen. Bill Nelson, statements accompanying the introduction of S. 420, Congressional Record, daily edition, vol. 151, no. 18, Feb. 17, 2005, pp. S1633-S1634.

62 Kurt Ritterpusch, "Landrieu Offers Estate Tax Reform Bill As Number of Forces at Work Before Vote," Daily Tax Report, no. 126, June 30, 2006, p. G-1.

63 Sen. Frist, SA 849, Congressional Record, daily ed., vol. 151, no. 84, June 22, 2005, pp. S7080-S7081.

 

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