Obama, Republicans split the difference on estate tax rates
In passing a tax bill to forestall the "fiscal cliff” -- the overnight rise of a wide array of taxes combined with deep spending cuts -- lawmakers agreed to revise rates and exemptions for the estate tax.
During the 2008 presidential campaign, Barack Obama promised to exempt the first $3.5 million in value from the estate tax and impose a top rate of 45 percent. When the fiscal cliff deal was negotiated, Obama had to compromise a bit on those numbers.
In the fiscal cliff bill, passed by the House and Senate on Jan. 1, 2013, the top tax rate was set at 40 percent -- halfway between Obama's pledge and the reported 35-percent rate favored by some Republicans -- and estates smaller than $5 million will be exempted. Going forward, that $5 million limit will be indexed for inflation. (During the Clinton years, the estate tax was 55 percent.)
Given that both the White House and Congressional Republicans had to give ground on rates, we classify this as a Compromise.
Text of H.R. 8 ("fiscal cliff" bill)
House Republican Conference, summary of H.R. 8 ("fiscal cliff” bill), Jan. 1, 2013
Washington Post, "Wonkbook: Everything you need to know about the fiscal cliff deal," Jan. 1, 2013
Washington Post, "Five facts about the Biden-McConnell deal," Dec. 31, 2012
Forbes, "Tax Increases Looming in 2013: Who Pays, How Much and Will They Stick?," Nov. 10, 2012
Obama agrees to lower estate taxes
Financial planners who advise on the estate tax have had plenty to keep them busy the past couple of years. President George W. Bush signed laws that gradually reduced the estate tax for people who inherited money, until the tax went away completely in 2010. But those tax cuts were set to expire in 2011, sending the estate tax skyrocketing. With no action, the estate tax would have gone up to a 55 percent tax rate, exempting the first $1 million in value.
As a presidential candidate, Barack Obama proposed that the inheritance tax be continued. He proposed that estates worth more than $3.5 million be taxed at 45 percent.
A few weeks ago, President Obama negotiated a wide-ranging tax agreement with Senate Republicans. The agreement continues current income tax rates for everyone. It also continues other tax cuts that were part of the 2009 economic stimulus law. It grants an additional year of unemployment benefits for workers who qualify, and it gives a one-year reduction of Social Security taxes that would put 2 percent of pay back into workers' paychecks.
The agreement also set the inheritance tax lower than Obama proposed -- at 35 percent on the value of estates over $5 million, exempting the first $5 million.
Congress approved the framework, and Obama signed the measure into law on Dec. 17, 2010.
In rating this promise, Obama pledged to set the tax rates at 2009 levels. The new law is more generous than that to heirs of estates worth more than $3.5 million. Instead of the 45 percent tax rate, Obama had promised, the rate is 35 percent. Still, it does continue the tax, although only for two years. Going forward, we'll revisit this promise to see where it stands. For now, because the rates fall short of what Obama proposed, we rate it Compromise.
The White House, Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance, Dec. 7, 2010
Thomas, HR 4583
The White House, Press Conference by the President, Dec. 7, 2010
U.S. Senate Finance Committee, S.A.4753: The Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010
Tax was allowed to expire
It's been nearly four months since our last update on President Barack Obama's campaign promise to freeze the 2009 estate tax law, which exempts the first $3.5 million of an estate and has a top rate of 45 percent. At the time, we wrote that it is widely expected that Congress will freeze the tax, and thereby confirm Benjamin Franklin's famous adage that only two things in life are certain: death and taxes. Gridlocked over health care and financial regulation reform, however, Congress has let the estate tax expire, potentially making 2010 a very promising year for those with wealthy older relatives.
As we wrote in our first update, it all started in 2001, when Congress approved measures to gradually increase the tax exemption while slashing the top rate. At the time, estates valued at $675,000 or higher were subject to a tax of up to 55 percent. In 2009, the threshold was $3.5 million per individual (or $7 million per couple), with a 45 percent tax rate. In 2011, all estates worth more than $1 million will be taxed at 55 percent. In 2010, unless Congress takes measures to extend the 2009 law, the tax would temporarily disappear for a year.
On Dec. 3, 2009, the House of Representatives passed a law to permanently extend the 2009 rates. Sponsored by Rep. Earl Pomeroy, D-N.D., the legislation passed 225-200, mostly along party lines, with opposition coming mostly from Republicans, who widely support a repeal of what is often referred to as the "death tax." Overwhelmed by contentious debate on health care reform, however, the Senate did not place the bill on the legislative calendar until Dec. 24, 2009, and subsequently failed to take a vote. With no congressional action in the days between Christmas and the Jan. 1, 2010, deadline, the estate tax was allowed to expire.
The $3.5 million dollar question is whether Congress will move to retroactively enact the tax in 2010. Senate Finance Committee Max Baucus said he'll work to do just that, but there is debate in legal circles as to whether the retroactive law would survive what would surely become a constitutional challenge. According to Paul Caron, associate dean at the University of Cincinnati law school, the Supreme Court wrote in 1994 that a retroactive tax law is constitutional, as long as it has a rational purpose, is not arbitrary, and is enacted without excessive delay. Bob Williams from the Tax Policy Center wrote on his blog that he has "no idea whether such (retroactive) legislation could survive expected cries of 'Foul!' and the accompanying lawsuits," but nevertheless urged his readers to avoid making any hasty life-and-death decisions.
Because Congress could technically always go back and retroactively reinstate the tax, President Obama still has some time to uphold his promise. Until we see some form of movement toward a compromise or a retroactive reinstatement, however, we are knocking this one down to Stalled.
USA Today, Estate tax set to expire Thursday, by Kevin McCoy, Dec. 31, 2009.
The Wall Street Journal, Rich Cling to Life to Beat Tax Man, by Laura Saunders, Dec. 30, 2009.
Tax Policy Center, Estate Tax Whiplash, by Bob Williams, Dec. 18, 2009.
OMB Watch, Estate Tax Reform Bill Passes House, Moves to Senate, Dec. 8, 2009.
Reuters, Big tax issues pending in U.S. Congress, Feb. 5, 2010.
Thomas Library of Congress, H.R.4154 Index Page, Accessed Feb. 12, 2010.
Obama budget assumes estate tax stays the same
The estate tax — sometimes referred to as an inheritance tax or derisively as a death tax — is one of the quirkiest taxes on the books. Here's why: Right now, the estate tax exempts the first $3.5 million and has a top rate of 45 percent. That rate, though, is set to expire at the end of 2009. In 2010, there will be no estate tax. (We really hope nobody is tempted to off their wealthy relatives in 2010.) In 2011, the estate tax comes roaring back, at an even higher rate than in 2009.
The reason for this strangeness is that many of the tax cuts implemented by President George W. Bush will expire in 2011. It's widely expected that Congress will take action this year to change the law for 2010 and 2011.
President Barack Obama has proposed leaving the 2009 estate tax with its top rate of 45 percent in place going forward. Tax documents from the Obama administration incorporate that change into budget projects.
Congress still needs to act to change the estate tax law, and that hasn't happened yet. It seems likely, however, that it will happen before the end of 2009 when the tax expires. We'll be watching for that and meanwhile rate this promise In the Works.
U.S. Treasury Department, General Explanations of the Administration"s Fiscal Year 2010 Revenue Proposals , May 2009
Tax Policy Center, Tax Proposals in the 2010 budget , accessed Oct. 2, 2009
Tax Policy Center, TaxVox Policy Blog posts on the estate tax , accessed Oct. 2, 2009