A new prognostication on tax reform

I have taken the comments below from the new edition of Estate Planning Journal, prepared by a connected, Washington D.C. attorney. I think these are reasonable, and represent the current consensus of planners who pay attention:

“Whatever the candidates say as to their campaign positions, economic and political realities will come into play when the new President takes office and must work together with Congress. Members of both political parties have an interest in avoiding the 2010-2011 train wreck. The Democrats do not want to allow even one year of repeal; it is very hard to put the genie back into the bottle. The Republicans want to avoid having the exemption return to a $1 million exemption level in 2011. Therefore, the prediction of a resolution before the end of 2009 seems sound, and it suits the needs of all parties.

Even if one of the Republican candidates becomes our 44th president, it is very unlikely that the estate tax will be repealed. President Bush campaigned twice with repeal in his platform; however, once in office, the economic realities took precedence and Congress could not enact the repeal bill that President Bush sought. Although estate tax repeal has been included in the President’s budget proposals for years, including six years with a Republican controlled Congress, estate tax repeal will not be enacted due to its budgetary cost and competing demands on the federal purse. A new Republican President would not enjoy greater success on this issue. Compromise is really the only option now.

Congressional action in spring 2007 indicates that there may be significant support for a temporary extension of 2009 law. If there is a compromise that keeps the estate tax in place, there is a onetime ability to offset some of the cost of the increased unified credit with the revenue gain in 2010, the year for which current law provides for no estate tax. In a three-year extension of 2009 law, the first year is a revenue raiser, followed by two years in which there is revenue loss due to the change from a $1 million exemption to a higher exemption. A three-year extension would certainly be helpful, as it would eliminate the nonsensical one-year repeal, and would establish a fixed exemption level and rate. Nevertheless, a three-year fix is likely to add the estate tax to the package of tax provisions that is required to be the subject of periodic extender bills, and would do nothing to eliminate the current uncertainty that plagues clients and their tax advisors.

The rate considerations are more complex than the exemption level. Under pre-EGTRRA law, the top estate tax rate was 55%, but state death taxes were creditable. For an estate over $10 million, the state tax rate was 16%, leaving a real federal rate of 39%. Under present law, the applicable rate is a flat 45%. The net result—whether an estate is paying more tax or less—depends on state law…….

Dusting off my crystal ball, here is the prediction: If the Democrats win both the Presidency and control of both houses of Congress, the compromise will be to extend the 2009 rates and exemption level: a $3.5 million exemption and a flat 45% rate. If the Republicans win both the Presidency and control of the Congress, the compromise will be a $5 million exemption and a 35% rate. While the Republicans would prefer repeal or, at a minimum, lower rates (a la McCain), that would be too expensive in terms of revenue loss. If the Democrats and Republicans split control of the White House and Congress, the compromise will still fall within this range.”

Posted in Status of Tax Legislation, WillPlan Blog.

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