Estate Tax Reform Bill Passes House, Moves to Senate

On Dec. 3, the House passed [1] the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R. 4154 [2]). With time running short, the bill now moves to the Senate, where straight passage of it is uncertain, and passage of any estate tax legislation is anything but assured.

Introduced by Rep. Earl Pomeroy (D-ND), the legislation [3] permanently extends current estate tax law, which taxes the heirs of a deceased individual whose estate is valued above $3.5 million ($7 million for couples) at a 45 percent tax rate. The Pomeroy bill passed the House by a narrow margin – just 225 to 200 – and mainly along partisan lines, though 26 Democrats did join a united Republican caucus in opposition to the measure. The bill essentially mirrors what the president asked for in his FY 2010 budget request. Most importantly, the Pomeroy bill would extend current law and prevent the estate tax from expiring in 2010 and then coming back in 2011 under its pre-Bush tax cut levels.

According to an estimate [4] released by the Congressional Joint Committee on Taxation, the Pomeroy bill would bring in $468 million in 2010, when the government would otherwise collect no estate taxes, but then cost the government $533 billion over the next nine years because of higher exemptions and lower tax rates than would have been in place if current law was left unchanged.

Passage of the Pomeroy bill in the Senate is unlikely because several important senators have misgivings about certain provisions. Sens. Max Baucus (D-MT) and Kent Conrad (D-ND), chairs of the Senate Finance and Budget Committees, respectively, argue that Congress should index the tax for inflation, something the Pomeroy bill does not do. Moreover, the Pomeroy bill includes the Statutory Pay-As-You-Go Act of 2009 (H.R. 2920 [5]) that would give PAYGO budget rules the force of law in Congress. The House passed the PAYGO bill in July, but the Senate has yet to take action on it because, according to a recent CongressDaily article [6] (subscription required), top Democratic senators are opposed to enacting the provisions.

Estate tax legislation is therefore likely to go down one of two paths in the Senate. One alternative is for the Senate to bring up legislation similar to the Pomeroy bill, debate it, and pass it. The other option is for the Democratic leadership to tack a one-year estate tax extension onto a likely omnibus appropriations bill that insiders say Congress will pass before the end of 2009. Depending on how congressional events play out, either option is possible.

Some members of Congress have suggested that passing an estate tax bill in 2010 could be a possibility. However, passing legislation then means the government would retroactively apply the estate tax, an extremely rare occurrence, according to the aforementioned CongressDaily article. There are also questions about the legality of such a measure, something Congress would like to avoid.

Beyond the policy differences, there are several procedural obstacles to the Senate bringing up legislation similar to the Pomeroy bill and passing it before the estate tax expires at the end of 2009.

First, the health care debate is currently consuming the Senate. If the Senate were to move off the current debate to take up the estate tax, senators would need to vote again to take health care back up, an unlikely course of events given the difficulty Senate Democrats went through the first time to enter the health care debate. Yet with the Senate not guaranteed to finish health care before the end of 2009, the chance of squeezing in the estate tax is doubtful at best.

Making matters worse, if the Senate passes stand-alone estate tax legislation, it will have to conference with the House over any differences between the two bills. Once the conference reaches a compromise, each chamber would have to vote to pass the consensus estate tax legislation before Congress could send it to the president for his signature. Again, with time running out to intervene in the expiration of the estate tax, this seems an incredible feat.

Any estate tax legislation brought to the Senate floor would also be vulnerable to amendments. Democratic leaders in the House prevented a competing estate tax proposal (H.R. 3905 [7]), introduced by Rep. Shelly Berkley (D-NV), that sought to reduce the estate tax beyond 2009 levels from coming to the floor. In the Senate, though, language that Berkley based her proposal on passed earlier in 2009.

In March, when the Senate passed its budget resolution to begin the FY 2010 appropriations process, opponents of the estate tax won a small battle by adopting an amendment by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) that cut the estate tax to a $10 million exemption per couple at a 35 percent rate. Later, conferees meeting to reconcile House and Senate versions of the budget resolution stripped the provision out. It is not clear at this point that the Lincoln/Kyl amendment could muster the necessary 60 votes in the Senate.

The other option is for Democratic leaders to attach a one-year extension of the estate tax onto a likely omnibus appropriations bill that will come before the end of 2009. If Congress passes a one-year extension, legislators would have to revisit the issue next year, when most expect Congress to take up a comprehensive tax reform package.