According to a Wall Street Journal article published this morning, efforts to pass some sort of estate tax extension in the upper chamber broke down late Wednesday afternoon. It seems the Democratic caucus can't agree on whether to permanently or temporarily extend 2009 estate tax levels. Though legislators are already promising to address the issue as soon as they return from the holidays, there is still time left to pass something. OMB Watch and a host of other organizations have submitted a letter to the Senate urging them to take action. Ironically enough for those who would champion the tax's death on Jan. 1, the consequences of inaction for small businesses and farms are costlier than extension.

In a new report from the authoritative Center on Budget and Policy Priorities (CBPP), Chuck Marr and Gillian Brunet show that "the number of people likely to face tax increases [because] of congressional inaction on the estate tax far exceeds the number of wealthy people who would secure a tax cut." This is due to a "little-known provision" in the 2001 Bush Tax Cuts that would pile up a new capital gains tax burden on many small businesses and family farms that never would have owed any estate tax.

The current estate tax exemption of $7 million for couples ($3.5 million for individuals) touches only a tiny number of estates in this country each year. Moreover, the small numbers of estates that owe any tax pay "less than one-fifth of the estate’s value...in estate taxes." However, expiration of the estate tax will trigger a change in the tax treatment of unrealized capital gains in estates.

Currently, heirs of an estate do not pay taxes on unrealized capital gains. This means that if an estate passes on a stock that the decedent purchased for $10 but is now worth $100, the heir does not pay taxes on the $90 of appreciation when selling the stock. With expiration of the estate tax, heirs will now have to pay taxes on that appreciation. This is particularly important to family farms and small businesses because often, "the primary asset in a family farm or small business estate is the farm or business itself, which has increased substantially in value over time but the owner has never paid capital gains tax on that increase."

There are exemptions that would moderate the impact of the tax, but, according to CBPP, the change in the tax treatment of unrealized capital gains in estates would rope in some 62,500 new estates, and farms and small business estates would "constitute a disproportionately large share of this group." Indeed, the only group the expiration of the estate tax would help would be the wealthiest 4,590 estates in the country.

Opponents of the estate tax in the Senate, mainly conservative Democrats and the Republican caucus, have refused to work with the Democratic leadership to extend the tax even temporarily to allow further debate on the issue. The Wall Street Journal article cited Republicans "cheering" the impending temporary demise of the estate tax because it would provide leverage for achieving a lower rate when the expected reintroduction of the estate tax occurs. It's sad that opponents of the estate tax who say they are advocates of farms and small family businesses would play with the livelihoods of farmers and small business owners just to score political points in the future.

Image by Flickr user Tammra McCauley used under a Creative Commons license.