Does New House Bill Sound the Death Knell for Estate Tax?

Mar 30th 2015
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The federal estate tax has been around for almost 100 years. However, if some Republican legislators on the Hill have their way, it will be going the way of the five-cent cigar and the VCR.

On March 25, the tax-writing arm of the House of Representatives, the Ways and Means Committee, approved legislation that would repeal the estate tax, sometimes referred to as the “death tax,” once and for all. The bill, known as the “Death Tax Repeal Act of 2015” (HR 1105), which was sponsored by Rep. Kevin Brady (R-TX), passed by a 22-10 vote along party lines. It would benefit approximately 5,500 families each year that are currently hit by the estate tax, costing the government close to $270 billion in tax revenue, according to a Bloombergarticle. Only about 0.2 percent of the estates in the country pay the tax, down from 2.16 percent as recently as 15 years ago.

Not surprisingly, pundits don’t believe the measure will ever make it to the president’s desk, let alone be signed. It is shaping up as another litmus test of partisan politics, with Republicans lining up with the upper crust who must contend with the tax versus Democrats favoring higher estate taxes for the wealthy.

But GOP members on the Ways and Means Committee dispute the claim that an estate tax repeal would only benefit the rich and famous.

“This tax doesn’t just hit the big guy,” said Ways and Means Chairman Paul Ryan (R-WI). “It hits the little guy – like the small business and the family farm. It is both unwise and unfair, and it needs to go.”

Democrats countered that massive sprawls in the Midwest can hardly be characterized as “family farms” anymore.

This isn’t the first time a movement to repeal the estate tax has recently gained traction. Back in 2000, President Clinton vetoed a bill eliminating the tax. Subsequently, under President Bush’s watch, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) gradually reduced the top estate tax while increasing the estate tax exemption. EGTRRA culminated with a one-year repeal of the estate tax in 2010 – notably, the year billionaire New York Yankees owner George Steinbrenner died – before the tax roared back with a vengeance in 2011.

In the meantime, a small cottage industry has grown around trusts and other techniques to avoid or minimize the tax. As things stand now, the top estate tax rate is 40 percent – as opposed to 55 percent prior to EGTRRA – and the exemption is $5 million, subject to inflation indexing. (It is $5.43 million for decedents dying in 2015.)

The new Ways and Means legislation contains another twist. Under the EGTRRA repeal, someone inheriting investment assets would generally lose the step-up in basis in the value of the assets at the date of death. Instead, heirs other than a spouse who sold the assets had to pay capital gains tax on any resulting gain exceeding $1 million. In Brady’s version, the threshold is increased to $20 million.

Despite the likelihood that the bill will die a relatively quick death, this latest turn of events shows that estate tax reform is back on the table, perhaps part and parcel of a larger overhaul of the tax code. It also indicates that tax issues will likely remain front and center as the 2016 presidential race heats up.

Related article:

The Death Tax That Wouldn’t Die

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