Decision Time on the Estate Tax?

Decision Time on the Estate Tax?

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The fate of the estate tax, which affects a minuscule number of very rich families but has been a cause célèbre for those who want to kill it, might be decided in the next two weeks.

The estate tax is currently in a weird netherworld – it disappeared in 2010 but will return with a vengeance in 2011 unless Congress acts by Jan. 1. Now, after a nine-year political stand-off between Senate Republicans and Democrats, a deal may be at hand.

Sen. Blanche Lincoln, D-Ark., and Sen. Jon Kyl, R-Ariz., are resurrecting a proposal that would permanently eliminate the tax for almost everybody and reduce it for the few thousand biggest remaining estates.

The two are trying to attach the proposal to a small-business lending bill that Democrats hope to pass before the August recess. With the January deadline looming, and mid-term elections in November, Senate Democratic leaders may be willing to go along.

No matter what happens, the estate tax is almost certain to end up as little more than a historic artifact. The Bush tax cuts of 2001 whittled it down until it reached zero in 2010 – but only for one year. Because all the Bush tax cuts expire at the end of this year, the estate tax will jump back to the levels before 2001 unless Congress acts.

That bizarre timing has been a lucky break for the heirs of George Steinbrenner, the New York Yankees owner who died on July 13. Had Steinbrenner died in 2009, his estate – which Forbes estimated to be worth $1.1 billion last year -- would have been taxed at up to 45 percent; had he died in 2011, the rate could have been anywhere from 35 to 55 percent. Instead, the estate pays nothing.

Republicans have tried and failed to permanently eliminate the estate tax since 2001, charging that it undercuts family businesses, farmers and entrepreneurs. Those charges are wildly overblown. In 2009, according to the Urban-Brookings Tax Policy Center, about 2.5 million people died but only 5,500 people owed estate taxes.

Democrats would nearly gut the tax as well. President Obama has proposed a permanent extension of the estate tax at 2009 levels. That would exclude estates worth less than $3.5 million for individuals and $7 million for married couples – more than 99 percent of estates -- and impose a top rate of 45 percent of the remainder.

The Obama proposal would be costly. The Congressional Budget Office estimates that it would reduce revenues by $252 billion through 2020, compared with what would happen if the estate tax jumps back to pre-2001 levels.

Still, that isn’t generous enough for Senate Republicans or conservative Democrats. The Kyl-Lincoln proposal would exclude estates worth less than $5 million – all but about 3,500 estates in 2011, according to the Tax Policy Center. It would also lower the top rate from 45 percent to 35 percent.

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