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THOMAS INTRODUCES ESTATE TAX COMPROMISE

June 20, 2006

Now that the Senate has shown that it can't generate 60 votes to repeal the estate tax, lawmakers are finally getting serious about a long-term fix. As the law stands now, the estate tax will disappear in 2010, only to revive at much higher rates and with lower deductions one year later.

In an attempt to help the Senate put together the 60 votes needed for a fix, House Ways and Means Chairman Bill Thomas has proposed an estate tax with a $5 million per person exemption and a rate linked to the capital gains rate, currently 15%, for estates between $5 million and $25 million. Estates over $25 million would have a rate of twice the capital gain rate.

This makes sense under current law, but the linkage could get ugly if capital gain rates increase. In my 20 years of tax practice I've seen capital gains taxed at effective rates of 28% or more, and 56% strikes me as too high a rate for about any tax. Also, capital gains taxes tax only gains; the estate tax applies to 100% of the value of property held at death, whether it is appreciated or not.

The bill doesn't seem to have any provision to clean up the tax code by standardizing valuations or eliminating special provisions for small businesses. As the bill apparently does have a special income tax provision for tree growers, I don't think it's about cleaning up the tax code.

Links:

Center for Tax Studies crib of Tax Analysts report

Text of H.R. 5638

TaxProf Blog coverage

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