The Return of Congress and The Challenge of The Estate Tax

January 3, 2008

Today the 110th Congress convenes for its Second Session.  What should we expect?  What should those of us who have monitored the volatile estate tax legislation, at least since 1997 or 2001, look for?  How about the folks who have worked longer than that – decades in some cases – for repeal of the estate tax?  What can they realistically hope for?

Today is also the day for the Iowa caucuses – proof that the presidential campaign at last has entered its final year!  We will not wake up tomorrow knowing who our next President will be.  We may not learn much at all.  But the drama is a clear reminder that there is a lot going on, and even as Congress is back in town looking like it’s ready to work, we know that the distractions will be great.

Recent history does not make Congress-watchers optimistic.  Early in the consideration of the budget resolution last March, Senate Finance Committee Chairman Max Baucus (D-MT) identified the State Children’s Health Insurance Program (SCHIP) as the first priority of an amendment that the Senate approved by a vote of 97-1.  Even so, a short-term extension of the SCHIP program, satisfactory to no one, was signed by the President only on December 29.  Democrats, of course, blame Republican obstructionism; Republicans blame Democratic expansionism.  Congress blames the White House, and the White House blames Congress.  The House blames the Senate, and the Senate blames the House.  And so on.

Meanwhile, the IRS has mailed out 2007 income tax packages that do not reflect the one-year alternative minimum tax relief that Congress did not enact until late in December.  The IRS estimates that it will be February 11 before its computers are adequately reprogrammed to handle some of the changes affecting as many as 13.5 million taxpayers.  Again, a number of fingers of blame have been pointed.

With the other things that Congress has on its mind, it is hard to imagine that it will be able to give much attention to the estate tax.  It is also hard these days to expect ground-breaking tax legislation of any kind in an election year.

Against that background, however, recent history suggests a few considerations that Congress-watchers should keep in mind:

1.  The estate tax is controversial.  Many regard it as an unfair tax on income that has already been taxed.  Others regard it as an important tool to discourage inefficient and undemocratic concentrations of wealth.  These feelings, whether realistic or not, often run deep.

2.  In any event, the estate tax is challenging to administer.  This is partly because of the stressful occasion upon which it is imposed, and the very fact that it is not regularly wrestled with (like the annual income tax) makes it harder to understand at the time it is paid.  But the biggest challenges in complying with the estate tax are that it is based on the value of assets that are often non-marketable and hard to value and that it is influenced by complex and seemingly disconnected or overlapping rules.

3.  There may still be a lot of rank-and-file residual sympathy in Congress for repeal of the estate tax.  Of the 272 Members of the House who voted in April 2005 for permanent repeal of the estate tax, 227 returned to the current Congress, nine more than a bare majority.  Of the 57 Senators who voted in June 2006 to take up that bill in the Senate (fewer than the necessary 60 votes), 52 are back in the 110th Congress.

4.  The current congressional leadership does not share this distaste of the estate tax.  Moreover, even those who would prefer repeal appear resigned to political realities that prevent it.  Examples include Chairman Baucus and Ranking Member Charles Grassley (D-IA) of the Senate Finance Committee, who expressed such views at a committee hearing on the estate tax on November 14, 2007.

5.  At that November 14 hearing, Chairman Baucus promised more extensive hearings in 2008, but he pointed to action in the 111th Congress (2009-2010) as the goal.

6.  Both parties could be embarrassed if the repeal-reinstatement two-step scheduled for 2010 and 2011 takes effect – Republicans because they caused it in 2001, and Democrats (if they retain control of Congress) because they failed to fix it.

7.  The estate tax has been mentioned in the presidential campaign – perhaps not so much of a surprise in view of the number of candidates.  Governors Romney and Huckabee and Mayor Giuliani have supported repeal and criticized Senator McCain for voting against repeal, while Democratic candidates have generally criticized repeal as a “tax cut for the rich.”  Nevertheless, the estate tax is unlikely to be a large factor in the overall campaign, as candidates focus on broad issues of interest to more voters.  The new President in 2009 is not likely to be heavily invested in the estate tax issue one way or the other.

8.  Consistent with the history of both repeal efforts and compromise efforts in recent years, the congressional approach to the estate tax is likely to be forged by a small bipartisan group of Senators “in the middle.”  The House of Representatives, for the sake of putting the issue to rest, is likely to go along with whatever the Senate is able to muster 60 votes to do.  There is not likely to be a House-Senate conference.  For the same reason, the President is likely to sign the legislation.

All these considerations suggest that there might be important estate tax legislation – not this year, but in 2009 – providing more phased-in reductions of rates and increases in exemptions.  That congressional attention might also extend to selected substantive issues, such as reunification of the estate and gift tax, transferability of unused exclusions from a deceased spouse to the surviving spouse, and possibly valuation.  Nevertheless, in view of a demanding agenda of international and domestic issues and a sharply-divided electorate reflected in a close balance of power, one can never be sure.

And there is one more thing.  Sometimes Congress’s idea of a “permanent” or “stable” compromise produces still more uncertainty and challenges for those of us involved in complying with the rules on a day-to-day basis.  Again, there are no guarantees.

Whatever the 110th and 111th Congresses accomplish, the lawyers of McGuireWoods Private Wealth Services and Fiduciary Advisory Services are equipped and ready to continue to assist our clients in understanding and complying with estate tax requirements, and we are committed to doing that in a way that maximizes the ability of thoughtful individuals to achieve their family, business, and charitable objectives.