Estate Tax Disappears for 2010 After Senate Fails to Act

The estate tax will vanish in 2010 because the Senate, preoccupied with health care legislation, failed to address the controversial tax. Under the 2001 Bush tax cuts, the estate tax top rate has gradually dropped, while the exemption level has increased throughout the decade. However, the 2001 law required the estate tax to disappear in 2010 for one year before returning to pre-2001 levels in 2011, a 55 percent top rate and $1 million per-person exemption.

On Dec. 3, the House passed the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (HR 4154), 225-200. The entire Republican caucus (except three absent Republicans) were joined by 26 Democrats in opposition to the legislation that would make permanent the 2009 estate tax rate and exemption levels, a top rate of 45 percent and a $3.5 million exemption.

The Senate was expected to take up HR 4153 or consider a one-year extension of the 2009 rate and exemption levels. However, Senate Republicans refused to accept these proposals, preferring to allow the estate tax to expire for one year.

Senate Democrats are not content with the estate tax disappearing for 2010. Word on the Hill is that Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee which has jurisdiction over tax legislation, will attempt to retroactively extend the 2009 estate tax law into 2010 when the Senate returns after the new year. It is unclear whether there is enough support in the Senate to make this a reality.

The repeal of the estate tax does not necessarily mean lower taxes for all small business owners. Currently, heirs receive what is known as "stepped-up basis" on assets they inherit. As a result, when heirs sell inherited assets, they pay capital gains taxes only on the difference between the value when inherited and the value at the time of the sale. In 2010, stepped-up basis is replaced with a "carryover basis" system for assets after the first $1.3 million. Carryover basis will result in heirs paying capital gains taxes on the difference between the value of assets when sold and the value when originally purchased. For many, the tax bill will be greater than if the estate tax were left in place.

Most Republicans and several moderate Democrats do not want the estate tax to return to pre-2001 levels in 2011. It is expected that that Sens. Blanche Lincoln (D-AK) and Jon Kyl (R-AZ) will offer legislation early in 2010 that would permanently cap the top estate tax rate at 35 percent with a $5 million per-person exemption (indexed for inflation).

In April 2009, a similar proposal was approved by the Senate 51-48 as an amendment to the budget resolution. The Senate amendment was taken out during conference between the House and Senate, and the final budget resolution allowed for the estate tax rate and exemption to be frozen at 2009 levels (similar to HR 4154).
However, next year's congressional agenda is already starting to fill up and members of Congress do not like to take tough votes on controversial issues in election years, making it uncertain whether the estate tax will be considered in 2010. There is also a core group of more liberal Democrats that are content with allowing the estate tax to go away for one year in anticipation of the tax returning to pre-2001 levels in 2011.

ARSA will continue to monitor the estate tax debate and urge Congress to find a reasonable solution to provide small, family-owned businesses with much needed certainty.