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June 2006
by James C. Musser, ASBA Washington Representative

The Death Tax, like some hideous vampire from an old movie, simply will not die and continues to drain and sometimes kill the family businesses and farms that it hits so hard. The Death Tax, often called the federal estate, gift and generation skipping tax, has been on a path to complete phase-out in 2010. Unfortunately, Congress has not made all of President Bush’s tax cuts permanent and, if no action is taken, the Death Tax comes back to life in 2011 with a top rate of 55%, just as it was before the Bush tax cuts took effect.

The U.S. Senate took up legislation this month to make the repeal of the Death Tax permanent but was unable to muster the 60 votes necessary to break a liberal filibuster and bring the repeal to a final vote. The cloture vote received 57 votes from Senators in favor of repeal and 41 votes from those against with two Senators not voting. Of those voting in favor of repeal, 53 were Republicans and four were Democrats. Democrats Mary Landrieu of Louisiana and Mark Pryor of Arkansas changed their positions to oppose the bill after campaigning to vote for the repeal. If Landrieu, Pryor and liberal Republicans Chafee of Rhode Island and Voinovich of Ohio voted with the majority, the Death tax would be permanently dead come 2010. The House had already voted for permanent repeal by a vote of 272 to 162 in April of 2005.

Liberal supporters of the Death Tax now claim to favor a compromise that would increase the estate tax exemption. Given their past opposition to any relief from the Death Tax, the debate is at least moving in the right direction. A Harris poll in March found that 68% of Americans favor a full repeal and even those opposed to the repeal understand that some action must be taken to protect small businesses and family-owned farms.

In response to the Senate’s failure to permanently repeal the Death Tax, House Ways and Means Committee Chairman Bill Thomas (R-CA) has introduced H.R. 5638 the Permanent Estate Tax Relief Act of 2006. The Thomas bill would increase the exemption amount to $5 million per person effective January 1, 2010. The bill would also reduce the tax rate on estates valued up to $25 million to the amount of the capital gains tax rate which is currently set at 15%. The proposed legislation would also reduce the top rate on estates over $25 million to twice the rate on capital gains. The capital gains tax rate is currently set at 15% but is scheduled to increase to 20% in 2011 unless Congress acts prior to that date to make the 15% rate permanent.

The Permanent Estate Tax Relief Act also contains provisions to make estate planning simpler. The bill proposes to unify the estate, gift and generation skipping transfer tax. Under a non-unified estate and gift tax, gifts made during one’s lifetime receive less favorable tax treatment than those made at death via a will. The Act also allows married couples to take full advantage of the proposed $5 million exemption by carrying over any unused portion of the exemption to the surviving spouse.

The Thomas bill was introduced on June 19, 2006 and currently has two co-sponsors, Congressman Kenny Hulshof (R-MO), the prime sponsor of the full Death tax repeal legislation that passed the House, and Congressman Bud Cramer (D-AL). The bill has been referred to the Committee on Ways and Means. No hearings on the bill have been scheduled at this time.

ASBA will continue to follow and report on these and other issues that might have an impact on small businesses and the people who own them.

James C. Musser, Esq. is a legislative consultant based in Falls Church, Virginia. His reports are updated monthly.