Monday, December 28, 2009

EC:An Estate Tax Mess

For much of the last eight years, the majority Republicans pushed through tax break after tax break that mostly benefited the wealthy. Now in the majority, Democratic lawmakers have failed to stop yet another tax benefit for the richest of the rich from taking effect in 2010. The tax in question is the estate tax, which President George W. Bush and Republicans and some Democrats in Congress were determined to cut from the day Mr. Bush took office in 2001. Even then, the tax hit only a tiny portion of Americans, but estate-tax foes sold Americans a myth about a “death tax” that prevented average people from passing on hard-earned money.

The result was a measure that made big reductions in the federal estate tax, phased in through 2009, and then repealed the tax, for one year only, in 2010. After that, the tax is to be reinstated at pre-2001 levels. Writing the law in that convoluted way helped to mask the true costs. It also created an untenable situation in which a one-year repeal is followed by reinstatement.
There was a giant catch, as well. In 2010, the one-year repeal of the estate tax is coupled with a new tax that will hit smaller estates. That tax could affect up to an estimated 70,000 estates next year, compared with the current estate tax law, which applies to about 5,500 estates annually. If that sounds wacky, it is. It would also be harmful to many small family businesses, precisely the group that estate-tax cutters say they want to help.

Today, the estate tax applies to estates that are worth more than $7 million (for couples), or $3.5 million (for individuals). More than 99 percent of all estates are exempt, so there is no reason to reduce or repeal the tax.

In addition, under today’s law, when heirs sell inherited property, no capital gains tax is due on the increase in value that occurred during the lifetime of the original owner. (If your parents pass on stock worth $2 million that they bought for $200,000, and you sell it for $2 million, you owe no tax on the $1.8 million gain.)

But when the estate tax is repealed in 2010, the capital gains tax will kick in once the gains in an estate exceed $1.3 million. There’s an extra $3 million exemption for assets left to a spouse.

The bottom line is this: there will be many more losers than winners under estate-tax repeal, and the losers will be among Americans who are farther down the wealth ladder.

Earlier this month, the House voted to continue the estate tax permanently as it is this year, with its more-than-generous exemptions and no tax on the sale of inherited assets.

The Senate has failed to act. Republicans refused to consider the House bill or even a two-month delay to allow time for debate. Democrats correctly refused to consider a proposal to increase the exemption to $10 million for couples and $5 million for individuals, an unconscionable giveaway to the wealthy at a time when ordinary Americans are suffering. Compared with keeping the 2009 law, it would cost $250 billion more over 10 years.

Democratic Senate leaders have said that in 2010, they will seek to restore retroactively the 2009 estate tax rules. Fairness, progressivity and the need for revenue demand just that. But failure to act in a timely way is a disturbing display of intransigence and failed leadership. That bodes ill for the more daunting tax debates next year, when the rest of the Bush tax cuts are set to expire.

American taxpayers need — and deserve — better.

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