Senate Democrats, who are united in support of higher income tax rates for millionaires and billionaires, are fragmented due to disagreements on how to tax the estates of the wealthiest Americans.
Democrats including Mark Pryor of Arkansas and Mary Landrieu of Louisiana resisted a proposal from President Barack Obama to tax individual estates of more than $3.5 million — roughly three in 1,000 — at a top rate of 45 percent. The split among Democrats, who control the Senate, will give Republicans more influence on the issue after the Nov. 6 election.
As a result, when the Senate votes today on a bill to extend income tax cuts that expire Dec. 31, the proposal will not touch upon the estate tax issue. Democratic leaders in the Senate chose instead to focus on an issue on which almost all of them agree: Obama’s plan to let income tax cuts expire for the top 2 percent.
Democrats who balked at Obama’s proposal say they are worried about the effect of increasing the estate tax rate and lowering the per-person exemption to $3.5 million from $5.12 million for farms and small businesses. Not surprisingly, Republicans favor the $5.12 million exemption, which means a compromise on the issue would be more generous to estates than Obama’s plan.
Democrats, who currently control 53 seats in the 100-member Senate, are trying to muster a majority for Obama’s plan to extend most of the income tax cuts first enacted in 2001 and 2003. Republicans can use Senate rules to require a 60-vote threshold, meaning that the income tax plan isn’t expected to advance.
The politics of the estate tax center on two numbers: the per-person exemption and the top tax rate. The exemption matters most to business owners, farmers and ranchers who can use it to avoid estate tax liability.
For billionaires, the rate is the priority.
This year, the per-person exemption is $5.12 million and the top rate is 35 percent. Obama agreed to those parameters as part of a December 2010 deal with Senate Republicans that also extended expiring tax cuts and created a payroll tax cut.
Under those numbers, which Republicans want to extend, 3,600 estates would pay taxes, or fewer than 0.2 percent of estates, according the nonpartisan Joint Committee on Taxation (JTC).
Obama proposed a $3.5 million per-person exemption and a 45 percent top rate, returning to parameters that were in effect in 2009. That would require 7,200 estates, or about 0.3 percent, to pay taxes.
If Congress does nothing, as would be the case if the Democratic bill and no others became law, the exemption would drop to $1 million and the rate would rise to 55 percent. Under that regime, the tax would affect about 2 percent of estates, or 55,200, according to the JCT.
The U.S. is expected to collect $11 billion in estate and gift taxes in fiscal 2012, according to the Congressional Budget Office. Obama’s plan would raise $9 billion more, and allowing the $1 million exemption and 55 percent rate to take effect would raise an additional $22 billion beyond Obama’s proposal, according to JCT.
Senate Majority leader Harry Reid, a Nevada Democrat, included Obama’s estate-tax proposal in the first draft of his bill. He then backed off after hearing objections from some Democrats.
This is not to say that the Estate tax issue will not be dealt with it will just be addressed in a different piece of legislation.
The same dynamic occurred in April 2009, as 10 Senate Democrats joined Republicans in a test vote that showed majority support for a $5 million exemption and 35 percent top rate.
Under current rules, the tax would affect about 200 small businesses and 100 farmers, according to the Joint Committee on Taxation. That would jump to 2,700 and 2,400, respectively, if Congress doesn’t act. The numbers under Obama’s proposal would be 400 and 300, respectively.
Despite the death-tax rhetoric that has overwhelmed arguments for keeping the estate tax. The tax reduces concentrated wealth, is relatively efficient because it doesn’t tax people as they earn, and affects only a few people.
For those who wish to read the bills in their entirety the Senate Democrats’ bill is S. 3412 and the Republican proposal is S. 3413.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.