Obama Plans to Lock in 2009 Estate Tax Rules

January 13, 2009

The Wall Street Journal reports that President-elect Barack Obama and congressional leaders plan to block the estate tax from disappearing in 2010. Although Mr. Obama has expressed reluctance to press forward with his campaign pledge to raise income-tax rates on top earners, Democrats are reportedly determined to act quickly to prevent the estate tax's scheduled repeal. Elimination of the levy on big inheritances was approved by Congress under President George W. Bush in 2001, with a slow phase-in of increased exemptions, and its full elimination slated to take effect next year.

The Journal¹ cites congressional tax writers as saying that the Senate Finance Committee will move within weeks on legislation to reverse that law, and Mr. Obama is expected to detail his estate-tax preservation proposal in his budget next month.

During his presidential campaign, President-elect Obama said that he would seek to lock in permanently the estate tax rate and exemption levels that took effect this year. That approach would exempt estates of $3.5 million — $7 million for couples who undertake estate tax planning— from any taxation. The value of estates above that level would be taxed at 45 percent. If the tax were returned to pre-Bush-era levels, only $1 million would be excluded from taxation with the rest taxed at 55 percent.

According to the Journal, in making their case to keep the estate tax, Democrats contend that such a large additional tax break for the rich shouldn't go into force halfway through Mr. Obama's proposed economic-recovery package. They argue that the deficit is already in record territory, while their plan wouldn't have any impact on the economy since it would merely keep the estate-tax rate at its current level. Mr. Obama and his party also say that the affluent already have benefited handsomely from the Bush tax cuts. They also reason that if they don't act now, it will be politically harder to go ahead with their plan to resurrect the estate tax once it has disappeared.

At the level proposed in the Obama policy, all but the largest estates — fewer than 2 percent of annual deaths — would escape taxation. Over 10 years, the Obama plan would cost the Treasury around $324 billion more than if the pre-Bush estate-tax levels were maintained, according to the Joint Committee on Taxation. Full repeal would cost more than $500 billion over a decade.

Senate Finance Committee Chairman Max Baucus (D-MT) said in a recent interview that he will move "in the next few weeks" on legislation to deal with urgent tax matters not related to any economic stimulus. The Journal cites an aide to the Montana Democrat that estate-tax preservation will be front and center in that legislation.

_______________________________

¹ See "Obama Plans to Keep the Estate Tax," The Wall Street Journal, Jan. 12, 2009, p.1.