Congress Faces Taxing Challenges
The estate tax fumble may be a harbinger of a tough year for Congress on a slew of tax issues.
If you think lawmakers looked bad in their failure to fix the estate tax mess during 2009, just wait: They’re probably going to look a lot worse a year from now. Congress will soon have even more momentous tax decisions staring it in the face that will be even tougher to resolve, especially against the backdrop of the midterm election campaign.
First up is fixing that estate tax. Conventional wisdom assumed that, when push came to shove, lawmakers would find some way to shut down what can best be described as the estate tax roller coaster set in motion by legislation enacted back in 2001. It called for a gradual phase-out of the tax throughout this past decade, then total repeal in 2010, then a return of the estate tax in 2011 with an effective top rate of 60% and only a $1 million exemption amount. (By comparison, the 2009 rate was 45% and the exemption amount $3.5 million.) No one ever expected lawmakers to let that happen, but it turns out eight years wasn’t enough time for them to figure out a solution.
True, it was never going to be easy to come to an agreement, with many Republicans insisting the estate tax must be abolished because they believe it harms small family run businesses, and those on the other side of the aisle arguing just as vehemently that it is a matter of tax fairness to maintain a tax on wealthy estates. But if a permanent solution couldn’t be found by the end of the year, the expectation was that Congress would at least punt and maintain the 2009 exemption amount and rate for another year or two to buy more time. That scenario seemed like a good bet well into late December, since waiting for a deadline is often the way Congress operates. Plus, keeping the estate tax alive in 2010 would have been a money maker, as opposed to letting it drop to zero. And Congress sure needs the revenue.
But in the end, lawmakers failed to approve even a simple extension. The House passed a permanent extension of the 2009 levels, but the Senate got bogged down as it was in health care reform legislation. When they do get around to fixing it, chances are it will be made retroactive to Jan. 1, 2010 but it’ll face legal challenges and no one can be 100% certain of what will happen. That led to reports of wealthy people near death trying desperately to hold on for the new year and maybe – just maybe –save their heirs a bundle.
What went wrong? Has gridlock simply gotten way out of hand? Did the acrimony that developed over health care reform poison the well to such a degree that other deals couldn’t be cut? It sure looks that way.
Which brings us to the next session of Congress, and what is likely to be the mother of all tax bills, because of the expiration at the end of 2010 of the Bush tax cuts: the 35% top individual income rate and the 15% maximum rate on capital gains and dividends, along with marriage penalty relief and the larger credit for children. Obama has made no secret of the fact that he wants to let those tax cuts disappear for singles making more than $200,000 a year and couples making over $250,000. If Obama’s poll numbers continue to sink, and if Congress can’t clear health care reform early in the year, the fight over what to do about the Bush tax cuts – and yes, the estate tax, too – will get extremely ugly. It’s not hard to envision another complete breakdown on tax legislation, but it will be one that will have bigger political and financial repercussions than any other to date.
One footnote to consider. If all of the tax cuts are allowed to expire – as they will if Congress can’t agree on any action – the added revenue will go a long way toward eliminating the deficit. But it would also violate Obama’s promise not to raise taxes on the middle class. That would be political suicide.