Senate Democrats pushed through Wednesday legislation that would phase out the so-called “Bush-era” tax cuts except for families earning $250,000 or less at the end of this year.
But the vote is largely symbolic because Republicans control the House and House majority leader Eric Cantor, R-Va., announced soon after the vote that the House will vote next week on legislation that would extend the Bush-era tax cuts.
Analysts don’t expect compromises on ongoing tax policy until after the November election. Some groups predict that the stalemate will remain through this Congress and that the issue won’t be resolved until next year.
“While the president and Senate Democrats push for a massive tax hike on small businesses, the House will vote to stop the tax hike next week,” Cantor said.
“We know small businessmen and women do build their businesses and we are acting to give them more certainty and opportunity to grow again,” Cantor added.
Earlier, however, Vice President Joseph Biden said after the Senate vote that, “This is a big victory for the American people.” Biden’s presence in the Senate chamber was a symbolic move, as his vote was not needed to put Democrats over the top.
The bill follows through on an election-year call from President Obama to protect the middle class from an income tax hike next year. He has campaigned on the message that wealthier Americans should pay more in taxes to help reduce the national deficit.
“Democrats believe this country can’t afford more budget-busting giveaways for the top two percent of earners,” Majority Leader Harry Reid told his fellow senators on the floor.
The Senate bill the Democrats passed, S. 3412, is similar to legislation (S. 3393) introduced last week, except that S. 3412 removes any mention of estate tax rates. Upshot: absent affirmative action, the estate tax will spring back to 2001 levels, with a $1 million personal exemption and a 55% top tax rate effective Jan. 1, 2013.
Under S. 3412, income tax rates for individuals making up to $200,000 and families making up to $250,000 would remain the same in 2013. Rates on upper income Americans would expire on Dec. 31st.
The bill would also reinstate the personal exemption phase out and limitation on itemized deductions that apply to high-income households. The Democratic bill would also establish the top rates for dividends and capital gains at 20% for 2013, up from the current 15 percent rate.
The bill would additionally extend the American Opportunity tax credit, the child tax credit, and the earned income tax credit for another year, as well as the Section 179 expensing provisions for businesses. The bill would additionally provide another one-year “patch” covering 2012 from the alternative minimum tax.
A Republican plan, S. 3413, was defeated, 54-45, on a prior vote. It would have extended the Bush-era tax cuts, at least for one year.
The Bush-era tax cuts—enacted under the Economic Growth and Tax Relief Act of 2001 (EGTRRA) and amended in 2010 by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)–establish a $5 million exemption and a maximum 35 percent tax rate. JGTRRA also indexed the estate tax exemption, starting this year, raising it to $5,120,000 for 2012. The 2010 amendments also made estate tax policies more generous by unifying the estate and gift taxes.
House Speaker John Boehner, R-Ohio, is poised to push legislation through the House next week that closely mirrors the Senate GOP measure.
Industry tax lawyers predict the estate tax going forward will be either the current policy or mark a return to the 2009 levels, a policy supported by Democrats. That would establish a $3.5 million per person exemption, indexed for inflation, and a 45% top rate.
The competing bills cut both ways for the insurance industry. For life insurers, higher tax rates, especially higher estate tax rates, act as an incentive for families to purchase more of the tax-advantaged products sold by the industry.
But most agencies and brokerages are small businesses, organized as pass-through entities such as S-corporations, partnerships and sole proprietorships. Thus, less-generous estate tax policies would raise the cost for families to structure their business to ensure that the families could retain the business when the current owner dies.