CRS Summarizes 2002 Legislation on Estate Tax

[1] The provisions of the Economic Growth and tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) are scheduled to sunset on December 31, 2010. The House has pased legislation, H.R. 586, that would remove the sunset provision and thereby make permanent all other provisions of the tax cut law enacted in June 2001. This includes making permanent the repeal of the estate tax. The Senate is unlikely to consider a bill to make the entire tax cut package permanent. Instead, the Senate is expected to take up the estate tax alone under a unanimous consent agreement, before June 28, 2002. In addition to an amendment to permanently repeal the estate tax, amendments to alter but retain the estate tax are expected to be introduced. The House may consider its own free-standing estate tax repeal bill the week of June 3. This report will be updated as legislative events warrant.

Background

[2] The estate tax and generation-skipping transfer (GST) tax are scheduled to be repealed effective January 1, 2010, under Title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16). However, under Title IX of the Act, the estate tax repeal, and all other provisions of EGTRRA, are scheduled to sunset as of December 31, 2010. In 2011 tax law would return to the law that was in place prior to the enactment of EGTRRA on June 7, 2001. For those concerned with permanently repealing the estate tax, attention is now focused on removing the sunset provision of EGTRRA with respect to the estate tax provisions of the Act. The estate tax would then be eliminated from 2010 on ward. Other proposals might retain the estate tax, but make some changes, such as making special provisions for qualified family-owned business interests or accelerating the increase in the exemption amount for all estates.

Actions and Announcements to Date

[3] On April 18,2002, the House passed H.R. 586, part of which would make permanent all of the tax provisions of the $1.35 billion [sic] tax cut law enacted in June 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16). H.R. 586 would eliminate Title IX of EGTRRA which sunsets all other parts of the Act as of December 31, 2010. ¹ Among its many effects, removing the sunset provision would make permanent the repeal of the estate tax, scheduled under EGTRRA to take effect in 2010.

[4] On April 16, Senate Majority Leader Thomas Daschle indicated that he would not bring up for Senate floor consideration legislation to extend the entire EGTRRA tax cut package. Instead, on April 23, in order to prevent the estate tax issue from delaying the energy policy bill, S. 517, Senator Daschle agreed to schedule Senate consideration of a free-standing estate tax repeal bill. Consideration is to begin sometime before June 28, 2002, under a unanimous-consent time agreement (described in the next section).

[5] In response, on May 14, House Majority Leader Richard Armey said that the House may consider its own free-standing bill to permanently repeal the estate tax the week of June 3, before the Senate considers the estate tax.

The Senate's Unanimous Consent Agreement

[6] On April 23, 2002, the Senate reached a unanimous consent agreement under which it is to take up H.R. 8 by June 28. ² When the bill reaches the floor, only four amendments to the bill will be in order, all of which must pertain to the estate tax. Senator Daschle or his designee may offer one amendment to the bill (which must be the first amendment offered) and two second-degree amendments to that amendment, after which Senator Gramm may offer one amendment to the bill. For each amendment, there will be a motion (requiring 60 yea votes) to waive the Budget Act. If the Budget Act is waived for a particular amendment, it will then be debated for two hours equally divided. If any of the amendments is adopted, the Senate will proceed to vote on final passage of the bill. If none of the amendments receives the 60 votes needed to waive the Budget Act, the bill will be returned to the calendar and further consideration would occur on H.R. 8 only if it were later again called up for consideration.

Estate Tax Amendments Previously Offered in the Senate

[7] The specific Senate amendments to be offered to H.R. 8 have not yet been released. However, the amendments regarding the estate tax that were introduced in April 2002 in relation to S. 517, the energy policy bill, may offer an indication of the types of amendments likely to be offered to H.R. 8. ³

[8] On the Republican side, Senator Phil Gramm introduced an amendment to make the repeal of the estate (death) tax permanent.⁴ Senator Gramm's amendment would have removed the sunset provision of EGTRRA with respect to estate, gift, and generation-skipping transfer taxes only.

[9] On the Democratic side, Senator Byron Dorgan introduced a proposal for an "estate tax with full tax deduction for family-owned business interests."⁵ Senator Dorgan's proposal would have amended several provisions in Title V of EGTRRA, the title which deals with estate, gift, and generation-skipping transfer taxes. It left the sunset provision of EGTRRA in place for provisions other than Title V.

[10] Notably, effective in 2003, the Dorgan proposal would eliminate the dollar limits on the special deduction for qualified family-owned business interests (Section 2057 of the Internal Revenue Code) and make the deduction permanent. Currently the maximum amount of the deduction for qualified family-owned business interests, in combination with the applicable exclusion amount available to all estates, is $1.3 million. Under EGTRRA, section 2057 is scheduled to be repealed in 2004 when the applicable exclusion amount for all estates rises to $1.5 million. Thus, under EGTRRA, there would no longer be preferential estate tax treatment for family-owned businesses compared with other assets after 2003. In direct contrast, the Dorgan proposal would restore preferential treatment for family- owned businesses and make it unlimited.

[11] The Dorgan proposal would retain the estate and generation- skipping transfer taxes after 2009. It would keep the step-up in basis rule for determining the basis for assets transferred at death, and not introduce the modified carry over basis in 2010. It would let the maximum rate of tax fall to 45 % as scheduled under EGTRRA, but remain there from 2007 on, with no repeal in 2010. It would eliminate the further reduction of the maximum gift tax rate from 45% to 35% in 2010. It would increase the applicable exclusion amount (the estate tax exemption) scheduled for 2009 from $3.5 million to $4 million per decedent, and set it to remain there from 2009 on.⁶

[12] There could also be a Democratic amendment to H.R. 8 to retain the estate tax but accelerate the increase in the exemption amount scheduled under EGTRRA.

For Additional Information

[13] CRS Electronic Briefing Book, Taxation, "Federal Estate and Gift Tax," available at [http://www.congress.gov/bfbk/html/ebtrxr35.html].

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

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

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

² H.R. 8, the Death Tax Elimination Act of 2001, was passed by the House on April 4, 2001. Many of the provisions of H.R. 8 were included in Title V of EGTRRA, P.L. 107-16. H.R. 8 would have repealed the gift tax as well as the estate and generation-skipping transfer taxes.

³ S. 517 was a bill to authorize funding the Department of Energy to enhance its mission areas through technology transfer and partnerships for fiscal years 2002 through 2006. None of the estate tax amendments to S. 517 was voted upon. S. 517 was later incorporated in H.R. 4 as an amendment.

⁴ SA 3144 (Gramm) to S. 517.

⁵ Senator Dorgan's proposal was introduced as three separate amendments to S. 5 17, all with the same language but designed for use in different parliamentary settings: S.Amdt. 3293, S.Amdt. 3303, and S.Amdt. 3304.

⁶ The exemption would remain per decedent. Unlike some proposals offered in previous years, the Dorgan amendment did not provide that any of the personal estate tax exemption amount not used by the first spouse to die could later be applied to the estate of the surviving spouse. That alternative would mean the exemption per couple would be $8 million even without estate tax planning. The current unlimited marital deduction, that is, the ability to transfer assets to a surviving spouse free from estate tax, would remain in effect.