Estate Tax Proponent Watchdog Group Calls Repeal Only "Symbolic Victory"

Estate Tax Proponent Watchdog Group Calls Repeal Only "Symbolic Victory"

The tax bill Congress passed and the the President signed will have only a symbolic victory with regard to repealing the estate tax.

Because Congress was limited to a $1.35 trillion tax cut, it could not make repeal of the estate happen right away. In fact, the best Congress could do is to start repeal in 2010. For every month they tried to move up the timetable, it meant a considerable hike in the cost of repeal, thereby crowding out other tax cut priorities. For example, the year full repeal would be in place, 2011, costs $53.4 billion; whereas the cost in 2009, before repeal starts, is only $12.7 billion. (See chart below on costs.) As a result, they left the repeal date as 2010.

However, the tax bill that will be sent to the President expires in 10 years at midnight on December 31, 2010. On January 1, 2011 all the provisions in the bill sunset and revert to current law. Thus, the estate tax repeal will last for only one year!

At best this is a rhetorical victory for those opposed to the estate tax. See the OMB Watch statement released on behalf of the Nonprofits to Preserve the Estate Tax coalition.

Nonetheless, there were substantial changes to the tax that will likely have an impact on charitable giving and federal and state revenues. Here are the main changes:

The tax rate drops from 55% to 45% by 2007.

The wealth exemption (under the unified credit) goes up from $675,000 to $1 million next year. (It was already scheduled to rise to $1 million by 2006.) It rises to $3.5 million by 2009. (These figures are double for couples.)

In 2004, the family-owned business deduction is repealed.

The state tax credit phases out by 2005. Next year it is reduced by 25%, in 2003 by 50%, in 2004 by 75%, and repealed in 2005. A deduction will be permitted under certain circumstances after that. This could have a large impact on state revenues.

The estate and generation-skipping transfer tax is repealed in 2010.

After repeal, a modified carryover basis for property acquired from a decedent is used.

The gift tax is retained and the top tax rate will be the top individual income tax rate.

All of these changes expire on January 1, 2011 reverting to current law.

The tax bill also expands conservation easements by repealing the 25 mile and 10 mile limits that land be located from a metropolitan area, national part, wilderness area, or Urban National Forest. Thus, a qualified conservation easement can be claimed on any land located in the U.S. The provision is effective retroactively as of January 1, 2001.

Cost of Estate Tax Changes:

Source: OMBWatch