Sometimes, if you’re a member of Congress, you just have to hold your nose and vote for it. Thursday, the House was having one of those moments. The subject was the estate tax. In one of those fiscal time bombs left from the Bush administration, the estate tax, having gradually dwindled, is set to be eliminated entirely next year ó only to spring back to life, full-force, in 2011. Unless something is done, 2010 will be the year to throw Mama from the train, tax-free. This would be terrible policy, not to mention unkind to Mama.
The least bad, hold-your-nose alternative would be to set the tax permanently at its 2009 level ó which the House favored Thursday and the Senate should take up soon. The 2009 level exempts the first $3.5 million of any individual estate ó $7 million for a married couple ó from taxation. At this level, 99.8 percent of estates are not subject to the tax. Claims of “death tax” foes notwithstanding, a tax at the 2009 level would have scant impact on family farms or family-owned businesses. In 2011, according to estimates from the Urban Institute-Brookings Institution Tax Policy Center, only 100 such entities would have to pay any estate tax, and virtually none would have to be liquidated to pay the tax. Nonetheless, the estate tax would continue to bring in badly needed revenue even at this level: $266 billion over the next 10 years.
This is the hold-your-nose solution because it is excessively generous to the wealthiest Americans at a time of fiscal emergency. Making the 2009 level permanent would drain nearly $400 billion from the federal treasury from 2012 to 2021 compared with letting the estate tax revert to the rules in effect in 2001, when the tax was set at 55 percent with a $1 million exemption per person. In a perfect world, which is to say not the 111th Congress, the tax would be set somewhere between the 2001 and 2009 levels.
The difficulty is that the generous 2009 exemptions do not satisfy some estate tax critics, who want to allow even more wealth to be transferred from generation to generation tax-free. Rep. Shelley Berkley, D-Nev. is pushing for an exemption of $5 million per person, and $10 million per couple, and cutting the tax rate to 35 percent ó all while disguising the true cost of the change by phasing it in over time. In the other chamber, Sens. Blanche Lincoln, D-Ark. and Jon Kyl, R-Ariz. wouldn’t even bother with that nicety: Their plan would hike the exemption and lower the rate right away.
Either would be a travesty, but the ordinary legislative inclination ó do nothing and let the tax expire in 2011 ó is also unsustainable. People are entitled to some stability for purposes of estate planning. Once the estate tax has lapsed, reinstituting it at any level will be portrayed as a tax increase, and good luck with that in an election year. In an era of increasing income inequality, at a moment of trillion-dollar deficits, it seems hardly too much to ask of the wealthiest that ó after transferring $7 million to the heirs ó they pay some tax on the rest.
ó The Washington Post