Lapse of Estate Tax Raises Doubts About Democrats

Democrats plan to renew the 2010 tax retroactively.

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As tax season gets underway, congressional Democrats are facing criticism for their failure to renew the estate tax. The tax, a levy on the wealthiest Americans, expired on the first of the year because Democrats were unable to find support for even a temporary continuation of the tax while they debated a longer-term solution. Despite assurances from Senate Majority Leader Harry Reid that the body will approve a retroactive fix when it returns to work next month, Senate Finance Chairman Max Baucus called it "embarrassing" that the Democratic-controlled Congress could allow the tax to lapse.

A quirk in the existing law means that the estate tax, which was reduced during the Bush administration but still brought in some $26.5 billion in 2008, dropped to zero on New Year's Day. In 2011, the tax is scheduled to return at even higher levels than in 2009. Estates valued at less than $3.5 million were exempt from this tax in 2009, while those above that value were subject to a levy capped at 45 percent. The limit for a married couple was $7 million. If the current law remains unchanged, in 2011 the estate tax will be back with the exemption lowered to $1 million and the maximum rate hiked to 55 percent.

Politically explosive—the GOP long ago christened it the "death tax"—the levy does have support, even from some of those it would hit the hardest. Indeed, three of the staunchest advocates of the tax are financier George Soros, investor Warren Buffett, and Bill Gates Sr., father of the software magnate. Citing government investment in business, Gates in particular has been outspoken in urging Congress to extend the estate tax. "We must acknowledge that the person who accumulates wealth in this country was not able to do that independently," Gates wrote in a recent op-ed. "Society has a just claim on our fortunes, and that claim goes by the name estate tax."

Opponents, however, argue that the estate tax amounts to double taxation, first when the money is earned and again when it is transferred to heirs. Some economists share this view, arguing that it is in the goverment's long-term interst to encourage families to keep their earned wealth and pass it to the next generation. Eliminating the tax, critics say, will lead to greater investment in family-owned businesses and promote job creation.

The tax itself affects fewer than 2 percent of estates, and that number has been on the decline as the dollar limit for exemption has risen over the past few years, according to statistics published by the IRS. In 2008, about 17,200 estates were large enough to face the tax, far fewer than the 31,300 that qualified in 2004.

Earlier this year, the House narrowly passed a bill that would have kept the current estate taxes unchanged, but the measure won little support in the Senate. Some 50 additional tax breaks, including tweaks to the alternative minimum tax, research credits, and deductions for certain types of charitable giving, expired at the end of 2009, and most will have to be retroactively reapplied. And while a retroactive reinstitution of the estate tax would most likely be legal under a 1994 Supreme Court ruling, the National Association of Estate Planners and Councils warns that it would probably prompt a flurry of expensive lawsuits that could drag on in the courts for years.