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THOMAS COMPROMISE MAY BE SHORT OF 60 SENATE VOTES

June 21, 2006

The estate tax fix we discussed yesterday may be struggling to get the 60 votes it needs to get through the Senate. The stumbling block appears to be projected lost revenues, according to Tax Analysts (viia the Tax News blog).

One important item that we should have mentioned yesterday: the proposed $5 million per taxpayer exemption could be inherited if not used. This would mean that a married couble would be able to pass $10 million tax-free even if the first to die didn't have $5 million to inherit. If he or she) only had $1 million of property in his own name, the spouse could use his remaining $4 million at her death. This is great from a policy standpoint, as it eliminated the need for trusts to keep couples from wasting their exemptions. Unfortunately it comes at a price:

Those provisions help push the cost of the bill about $5 billion higher than Kyls proposal, with the Joint Committee on Taxation estimating the 10-year cost of H.R. 5638 at $280 billion. The additional cost comes despite a provision permanently repealing the credit against and eliminating the deduction for state estate taxes and despite JCT assumptions that the capital gains tax rate will climb back to 20 percent in 2011, as scheduled under current law. According to the left-leaning Center on Budget and Policy Priorities, the cost of the legislation would climb to $800 billion between 2012 and 2021 if lawmakers were to extend the lower capital gains tax rate.

In an ideal world much of this lost revenue would be recovered as part of a comprehensive reform package (and by spending less, but that's not their way). Such a package would included standardized valuation rules that would eliminate the benefits family partnerships and other artificial vehicles to suppress estate values. It would also eliminate special valuation rules for farms and small businesses; these become unnecessary at a 15% or 20% rate with a large exemption. But it's not an ideal world; even though it has been clear for some time that there weren't 60 votes for repeal, they didn't get serious until this week about the fallback plan.

The TaxProf has a great roundup of stories on the estate tax saga.

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