Quick pop quiz: what form of tax do most Americans claim to hate the most? Income taxes? Nope. Payroll taxes? Nope. Tax on alcohol? Tax on cigarettes? Nope and nope.
It’s the federal estate tax. That’s a pretty remarkable statement considering that fewer than 2% of Americans are generally subject to the federal estate tax (that number has decreased as the exemption has increased). And yet, it’s still the most hated tax in America. It’s no surprise then that the federal estate tax has again popped up as an election issue.
For those of you who aren’t familiar with what’s been happening, let me get you up to speed. The federal estate tax applies for estates which exceed a certain taxable amount. When I started practicing, that amount was $600,000 and basically what it meant was that you could pass $600,000 worth of net estate assets to someone other than a US citizen spouse without paying any federal estate tax (transfers to US spouses are eligible for a marital deduction so there’s no federal estate tax payable on those). Deductions also apply for administrative expenses (fees associated with the estate), debts of the decedent, some taxes and charitable gifts.
Congress bumped up the exemption amount over the next few years until it reached $1,000,000 in 2002. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), signed into law by President Bush, the exemption climbed to $3,500,000 in 2009. The federal estate tax was “repealed” for the current year, 2010. However, the provisions of EGTRRA 2001 mean that the law actually “disappears” for 2011 and the old law kicks back in. Under the Taxpayer Relief Act of 1997, signed into law by President Clinton, the exemption would have been $1,000,000 in 2001 (it was actually $675,000 in 2001 because of EGTRRA). I know, it’s confusing.
The bottom line is that the federal estate tax exemption, unless Congress makes other plans, will be $1,000,000 in 2011. Depending on where you sit, this is either too much or not enough.
For years, it’s looked like the fight over the federal estate tax was going to focus on the amount of the exemption. As recently as July 2010, Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) introduced a compromise bill to increase the exemption to $5,000,000; that bipartisan bill looked to have a decent amount of support.
However, as the campaigns ramp up their volume, support for a compromise bill seems to be dwindling in favor complete repeal. More than half of the Republicans running for House and Senate have signed a pledge to eliminate the federal estate tax; only two Democrats and a few Libertarians have signed the pledge. You can see all the details on this map, prepared by the American Family Business Institute (AFBI). AFBI is a 501(c)(6) trade association founded in 1994 which states on its website that:
Our mission is the permanent repeal of the death tax, the federal estate tax. We focus 100% of our energy, leadership and resources on moving America towards this goal.
Realistically, I don’t think that anyone expects the federal estate tax to actually be repealed prior to 2011: eliminating the federal estate tax would cost $410 billion in the next decade alone. That’s a lot of revenue to give up in a tight economy. However, it’s clear that a change in leadership in Congress will be pushing for repeal, not for an increased exemption. The WSJ quotes Sen. Jim DeMint (R-SC) as saying that he hoped the 2010 elections would generate “the momentum to finally kill the death tax for good.” But will it? I don’t think so. It is interesting, however, to see the issue back on the table.