Changes to the Estate Tax in the Tax Deal

Friday, December 17, 2010 at 9:40 PM by

President Obama and Congressional Republicans have reached an agreement on a tax deal, and first the Senate and now the House have voted to approve the proposal. The package now moves to Obama for his signature.

However, some House Democrats let it be known they were reluctant to support the proposal. One of the main sticking points was a provision that would limit the estate tax to only the largest estates.

“The estate tax is the choking point for the great majority of our members,” said Representative Chris Van Hollen said (D-MD), who represented House Democrats in the negotiations on the tax issue, according to a New York Times article.

The tax deal would set a two-year estate tax exemption level of $5 million per person, or $10 million per couple. Estates would be taxed at a maximum rate of 35% for assets above that level. The estate tax provision in the tax cut proposal would cost $68 billion over 10 years, according to the Joint Committee on Taxation, compared to letting the tax return to its 2001 levels.

(A quick recent history of estate tax levels: In 2009, the exemption was $3.5 million per person, with a maximum rate of 45%. In 2010 there was no estate tax. If no action were taken, the estate tax would revert to its 2001 level of $1 million exemption per person and a top rate of 55%.)

Some House Democrats objected to the proposed version of the estate tax because the provision allows many multi-million dollar estates to avoid paying any tax at all. At the level proposed, only 0.14% of estates would owe any tax, according to the Congressional Research Service, or about one out of every 700 estates. According to the Tax Policy Center, that’s the smallest percentage of estates owing tax since 1934 (except for 2010, when there was no estate tax).

The chart below shows the erosion over time of the number of estates owing estate tax, which spiked in the late 1960s at nearly eight percent and has been at a level below 2.5 percent ever since. Even if we returned to the 2001 level of a $1 million per person exemption – a proposal that did not received serious consideration by Congress – less than 2 percent of estates would owe any tax.

Nationally, about 3,600 estates would be affected in 2011 by the tax as proposed, according to the Tax Policy Center. The average rate paid would be 14.4 percent. (If the estate tax were reinstated at 2009 levels, about 6,500 estates would be affected and pay an average rate of 18.9 percent.)

The debate about the federal estate tax has ramifications at the state level. Wisconsin’s estate tax expired in 2008 but was scheduled to take effect again in 2011. However, that was dependent on the resolution of the federal debate. The bill that was enacted will preclude Wisconsin estate tax from resuming, unless the new Governor and new Legislature decouple the state statute from federal law.

Changes in the estate tax affect estimates of the size of the shortfall the state faces over the next biennium. Recent deficit calculations by the Wisconsin Department of Administration counted on $196 million in revenue from the state estate tax over the next biennium. (The DOA based its calculations on current law, which in this case involves an assumption that the estate tax will return to 2001 levels.) That number was already unrealistically high, and now the state can expect to collect virtually no estate tax going forward.

Tamarine Cornelius
Jon Peacock

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