Congress will need to address the estate tax as it seeks to simplify the whole tax code, experts told the Senate Finance committee at a hearing on May13.
Currently, the estate tax is in the midst of a gradual phase-out, with the tax set to be eliminated in 2010 under a 2001 law. However, the law did not make the repeal permanent, and the tax would return at 2000 levels in 2011.
“It seems unlikely that Congress will simply let the tax cuts expire as scheduled,” said Leonard Burman, director of the Tax Policy Center and a senior fellow at the Urban Institute in Washington. Among the main reasons why, he said, is that “the potential behavioral responses to the one-year estate tax holiday are too ghoulish to contemplate.”
Extending the estate tax, and others passed in the first 4 years of President Bush’s term, would be costly, however, Mr. Burman added, noting a Congressional Budget Office estimate of $2.3 trillion in lost tax revenue from 2008 through 2018 if the cuts are extended.
The question of what to do with the estate tax has been debated between members of Congress who seek to eliminate it entirely and those who seek to reform it to affect only the wealthiest estates. To illustrate the confusion, Mr. Burman noted a survey that showed a majority of respondents who felt the rich should pay more in taxes actually opposed the estate tax, which he referred to as “highly progressive” in its nature.
“The estate tax is obviously fraught with controversy,” he said in testimony, “but a reasonable compromise would be to extend the 2009 exemption of $3.5 million and top tax rate of 45%. This would exempt all but very wealthy estates from the tax and might defuse the issue politically.”