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Forecasting the Fate of Estate Tax Repeal

Today KYEstates is one month old!  The site has grown quickly, along with readership in the T&E Community and elsewhere — thank you, readers!  It’s a Friday in early springtime, so it’s already a good day.  Let’s make it even better, shall we, with a quick review of recent reports on the status of the estate tax….

As noted in Trust & Wealth Management Marketing Blog hereThe Hill reports that:

The longer the fate of the estate tax remains unknown, the more it becomes a political liability for lawmakers. Staffers say phone calls are on the rise from constituents demanding action on the estate tax.

I don’t know about you, but to me, the way Congress has handled the estate tax during 2009 and thus far in 2010 evokes Guatemala circa 1954, so I’m not surprised that constituents are restless.

Here, we are reminded that many of the leaders in the coalition against the estate tax would still have considerable wealth after the 706s are filed.  For a detailed analysis (dating to 2006) righteously exposing the not-so-scandalous truth most people with wealth would prefer to keep it rather than giving it to the government, visit here.

Here, we see musings on the political economy of moving further into 2010 with no action on the tax:

The odds of nothing happening at all seem to be going up….Is it possible that death tax opponents want to set the precedent of a full year without estate taxes?…One would think that the prospect of a return to a $1 million exemption next year would focus some minds on the problem, and that they would want to strike a bargain now to avoid that development.  But are death tax opponents starting to think that the Republicans may gain enough seats in November that they can strike a still better deal next year?

To the commentator’s credit, he also cautions that: “Recent summaries of the discussions at the Heckerling Institute suggest that no one yet has a clear idea of what will happen to federal estate taxes this year.”

Via Tax Prof Blog and North Carolina Estate Planning Blog, we have an excellent Bloomberg analysis of the leverage of the pro-tax and anti-tax camps, and how that leverage has changed from 2009 into 2010, and how it may continue to change in months ahead.  Bloomberg observes that:

The longer Congress delays action, bringing a 55 percent tax closer to reality, the fewer reasons Democrats have to consider Kyl’s and Lincoln’s 35 percent alternative, said Jeff Shoaf, senior executive director for government affairs at Arlington, Virginia-based Associated General Contractors….Senate Majority Leader Harry Reid, a Nevada Democrat, is “very reluctant to bring this up at this point,” Shoaf said. “The closer we get to the deadline, the stronger his hand is.”….Estate-tax opponents “had leverage” in the policy debate when Democratic leaders were trying to keep the tax from disappearing at the beginning of the year, said Chuck Marr, director of federal tax policy for the Center on Budget and Policy Priorities, a nonpartisan Washington research group. “That will wane as the year goes on.”

Acknowledging that predictions on what will happen with the tax are hazardous and unlikely to be useful, KYEstates will nonetheless venture its own prediction:

Legislation retroactive to January 1 will not happen.  Republicans cannot vote for any tax increase (including reinstatement of the estate tax, at whatever exemption level) without facing Tea Party or other primary challenges. Democrats gain little political capital by voting for reinstatement – it’s a tax increase in an election year, but one that raises only $8 billion (see the Bloomberg article linked above).

Further, nothing will happen on the estate tax until after the midterms (at the earliest), or, more likely, in early January 2011.  Republican votes aren’t needed to adjust the exemption level to something reasonable, up from the $1 million default for January 1, 2011.  That gives Republicans the easy option to go for the “theatre” of demanding that repeal be permanent, or demanding an exemption high enough and/or rate low enough to be politically unattainable.  This “theatre” may be especially useful heading into an election suffused with anti-Washington, anti-tax, anti-government sentiment.  As for Democrats, they can dodge problems before the election by noting that EGTRRA was Republican legislation, and that they’re only allowing to run its course (so, constituent, if you don’t like it, call the RNC….)  Then, in very late 2010 or early 2011, Democrats can adjust the exemption upwards from $1 million to something reasonable, and get credit for a tax cut (rather than a hike).  In the meantime, while they wait for EGTRRA to run its full course to its bizarre and unexpected result, both parties can leverage angst over the estate tax into increased campaign contributions.  (For a great analysis of estate tax-as-campaign cash-catalyst, see this fine article by Ed McCaffery.)

So, readers, there you have it.  If nothing else, it’ll be fun to revisit all these predictions as we move ahead through 2010, the crazy year when estate tax repeal actually happened.

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