Where the Senate Goes Now That It Has Held Estate Tax Hearings

April 14, 2008

Now that the Senate Finance Committee has concluded its series of hearings on the estate tax (see Third Time’s a Charm? Senate Finance Committee Holds Hearing on Estate Tax Reform), it is time to ask what difference those hearings might make.

The April 3 Senate Finance Committee Hearing

At the hearing on April 3, three Democratic Senators and two Republican Senators were present at various times. (At last month’s hearing, there were three Democrats and three Republicans present from time to time.) That might seem to be a rather paltry attendance in a committee of 21 members. But in fact, with other things always going on at the same time, this attendance is really not bad. It is not unusual to have tax hearings with only a chairman, and there have been instances of hearings chaired, at least temporarily, by a senior staff member because no Senator was present at the time.

In any event, the Senators in attendance on April 3 were some of those who have expressed the most interest in estate tax reform. Chairman Max Baucus (D-MT) himself has expressed a preference for repeal of the estate tax, but has offered a public commitment to serious reform as a more achievable alternative. (A good example was his comment to that effect at the first of the three hearings, on November 14, 2007.) Senator Jon Kyl (R-AZ) was once an acknowledged leader in the effort to permanently repeal the estate tax, but more recently has focused on assembling a bipartisan coalition of Senators “in the middle” to forge a compromise with some decrease in rates and some increase in exemptions. Senator Blanche Lincoln (D-AR) has been an active supporter of tax relief targeted to family farms and other family-owned businesses. Senators Ken Salazar (D-CO) and Pat Roberts (R-KS) have cosponsored legislation, such as S. 1994, which would essentially exclude family owned and operated farms from estate tax. All those Senators, when they were able to be present, seemed interested in the topics and the witnesses’ testimony and interested in understanding the issues.

Little Likelihood of Sweeping Changes

It has often been assumed that the lower estate tax rates many taxpayers would welcome would be possible only if accompanied by “base-broadening” — that is, substantive changes to estate tax rules that would partially offset the revenue effect of lower rates. Such changes might “close loopholes” by ending or limiting the use of techniques that trouble the Internal Revenue Service. Or they might be bolder and introduce different rules for calculating the tax for all taxpayers.

Few Congress-watchers expect Congress to abandon the estate tax for a brand new approach, like the largely donee-based (rather than donor-based) tax systems discussed by the witnesses at last month’s hearing. But observers who would welcome some significant structural changes if they were accompanied by lower rates might have been disappointed by the narrowness of the topics the Finance Committee had asked the witnesses to address on April 3. Bold and sweeping structural changes require a lot of time and attention from Senators and staff, and there are still too many distractions in Congress to expect much of that this year.

Clues to More “Targeted” Estate Tax Relief

Nevertheless, the topics discussed at the April 3 hearing provide clues about the “targeted” relief we might look for in any estate tax legislation — easier payment of estate tax in deferred installments, possibly reconnecting the lifetime gift tax exemption (currently only $1 million) to the estate tax exemption (currently $2 million and scheduled to increase to $3.5 million next year), and especially “portability” of the estate tax exemption from a deceased spouse to a surviving spouse. These ideas, especially portability of the exemption and installment payments, reflect the middle-class focus and “targeted” priorities of the Democratic leadership, sometimes contrasted with a more across-the-board approach of the Republican-led Congresses in the recent past.

“Portability” of Estate Tax Exemptions

“Portability” that permits a surviving spouse to use the unused exemption of a deceased spouse could simplify estate planning for most married couples, and would be a particularly significant simplification for couples with middle-sized estates — basically combined estates with a value greater than the estate tax exemption but less than double the exemption. This year, that includes combined estates with values from $2 to $4 million. No longer would it be necessary to divide the ownership of assets between spouses in any particular way for estate tax reasons, and owning property jointly with a right of survivorship would create no tax complications for couples who prefer that form of ownership. Even more importantly, it would be unnecessary for many married couples to have complex estate planning documents with multiple trusts to make use of available exemptions, trusts which then require potentially burdensome ongoing administration after one spouse dies.

A form of portability was included in H.R. 5638, called the “Permanent Estate Tax Relief Act of 2006” (“PETRA”), and H.R. 5970, called the “Estate Tax and Extension of Tax Relief Act of 2006” (“ETETRA”), permanent estate tax reduction bills that the House of Representatives passed in the summer of 2006 but the Senate was unable to secure 60 votes to take up. With that background, and with key Senators continuing to show interest in portability, the estate planning lawyers of McGuireWoods believe that this is a development that bears watching, and we will watch it.

Prospects for 2008

The Senators at the hearings last month and this month, both Democrats and Republicans, showed interest in moving quickly to address the anomalies in current law, under which the estate tax is repealed for 2010 only to be reinstated at a higher level for 2011. For that reason, there may be more reason than ever to be optimistic about legislation, even this year. That is not saying much, though, and there are still plenty of obstacles to congressional action in 2008, including the following:

  • Budgetary constraints. Congressional leaders are committed to “Pay-Go” — paying for tax reductions through offsetting increases in taxes or decreases in spending. Senators were blunt at the April 3 hearing about the reality that some of the things they want to do will probably not be affordable. At a minimum, whether Congress acts this year or next year or some other time, it is likely that any relaxation of rates or increases in the exemption would be phased in gradually over at least five years.
  • The presidential election. No presidential candidate is on the Finance Committee, but the extraordinary presidential campaign is certainly a distraction. With the August recess beginning August 9, the Democratic and Republican national conventions August 25-28 and September 1-4, a target congressional adjournment date of September 26, the November 4 election, and an agenda of many politically-charged issues, there just isn’t much time.
  • Political skepticism and inertia. Later on March 12, Senator Kyl, who had been at the Finance Committee hearing that morning, complained on the floor of the Senate in the debate on the budget resolution that “[e]ach year we pass a budget that, theoretically, allows for a reform of the estate tax, but then we don’t do anything about it…. So the chairman of the Finance Committee said: Well, he would have the goal of marking up a bill this spring. He has since advised me he has no plans whatsoever for a real bill on estate tax, and said: It won’t happen.”
  • The sharply-divided Senate. Senator Kyl’s remarks on the Senate floor were made in support of his proposed amendment to the budget resolution that would mandate a $5 million estate tax exemption (indexed for inflation) and a top rate of 35%. The amendment was defeated by a vote of 50-50. (Vice President Cheney had been in the presiding officer’s chair earlier that day, but he was no longer in the Senate chamber to break the tie.) Normal Senate rules, effectively requiring 60 votes to “call the question” on any legislation, make it very hard to marshal the votes needed to pass tax legislation.
  • The House of Representatives. Tracking the mood of Senators is important because of the 60-vote requirement and the likelihood that a small bipartisan group of Senators “in the middle” hold the key to a feasible compromise. But the House needs to agree to any legislation, of course, and House Ways and Means Committee Chairman Charles Rangel (D-NY) has not publicly shown much interest in fixing the 2010-2011 disconnect the Republican-led Congress created in 2001. In addition, the commitment of the Democratic leadership to Pay-Go is even more intense in the House. It is assumed that the House would go along with anything the Senate is able to agree to, but that is only an assumption. Moreover, since the Constitution requires tax legislation to originate in the House, the Senate presumably would need to attach estate tax legislation to an unrelated House-passed bill. There are such possibilities, but legislation dealing, for example, with agriculture or energy might themselves be in political trouble.
  • A presidential veto. Despite the Bush Administration’s official commitment to outright repeal of the estate tax, it has long been assumed that the President would declare any reasonable compromise to be a step in the right direction and sign it into law. But if, to “pay for” any estate tax relief, Congress attaches provisions the White House views as tax increases, the President’s support would be in doubt. This is especially true if estate tax reform is attached to any existing bill, like the farm bill, that the President has already threatened to veto for that reason.

It is conceivable that there will be more congressional staff time spent on the estate tax in 2008 than in any year since 2001 or even 1997. The question is whether it will be enough. Only time — increasingly limited time — will tell.

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