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Tax Issues Take Back Seat to Campaigning

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Congress is unlikely to be able to complete work on critical tax issues, including the future of the federal estate tax, before it departs to campaign in mid-October. This raises the possibility that resolving these issues will be delayed until a post-election “lame-duck” legislative session.

In a briefing, officials of the Association for Advanced Life Underwriting said that “positioning” on the critical estate tax in both chambers has remained somewhat consistent.

But AALU lobbyists conclude that while action on the estate tax is far from certain, they believe that if Congress does act this year, it will likely reinstate and extend the estate tax at $3.5 million, with a 45% maximum rate, for one to two years. A key issue on the critical matter for insurance producers is the inclusion of the reunification of the estate and gift tax limits that were separated in 2001.

AALU officials said they have generated considerable bi-partisan support for reunification, particularly among key Senate Finance Committee members. This provision appears in tax bills introduced by members from both sides of the aisle in the Senate.

The industry also supports “portability” and indexing for inflation. “Portability” would not require a couple to establish a trust in order to ensure that the beneficiaries of the second-to-die in any family gain the benefit of two exemptions.

The House bill, sponsored by Rep. Earl Pomeroy, D-N.Dakota, and passed by the House in 2009, is a bare-bones proposal focused solely on rate and exemption.

“We also believe the tax will not be retroactive, but taxpayers could be provided with the option to elect, for 2010, to pay their estate taxes under 2009 law with a stepped up basis, or under 2010 law, with no estate tax liability, but a carryover in basis,” AALU officials said.

Regarding current activities, AALU officials say the key battle is in the Senate, where the need to obtain 60 votes is necessary for any proposal that continues.

Besides the $3.5 million/45% maximum tax rate proposal, the other proposal that has been subject to the most discussion centers on the more generous exemption and lower rate advanced by Sen. Blanche Lincoln, D-Ark.; and Sen. Jon Kyl, R-Ariz.

The Lincoln-Kyl proposal is for a phased-in $5 million exemption and a phased-in 35% tax rate.

“Finding a compromise has not been easy and appears unlikely in the September work period,” AALU officials said.

Furthermore, they said, the Senate leadership, in reports, has indicated a tax bill will not be sent through the Finance Committee. Any base bill will likely include an estate tax with a $3.5 million exemption and a 45% rate.

The House, “meanwhile, has not wavered in its support of a reinstatement and extension of 2009 law on a permanent basis,” AALU officials said.

The AALU officials explain that one factor complicating the resolution of the issue is a pending report from a bipartisan “debt commission,” which is scheduled to release its fiscal policy prescriptions in early December.

“In any event, we are headed for a debate over the long-term future of our tax regime in the 112th Congress,” AALU officials warn.

Besides the continuing battle over the fate of the 2001 Bush tax cuts, the insurance industry did win a small victory recently through provisions included in a jobs bill just passed by Congress.

One provision included in the legislation, H.R. 5297, simplifies the rules dealing with partial withdrawal of funds contained in an annuity contract. It had been long sought by the industry and was lauded by both the American Council of Life Insurers and the National Association of Insurance and Financial Advisors.


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