House votes to make estate tax permanent

By Kim Dixon
December 3, 2009

WASHINGTON (Reuters) - The U.S. House of Representatives passed a permanent extension of the federal estate tax on Thursday, but the measure, which taxes estates at rate of 45 percent after exempting the first $3.5 million, is likely to be changed in the Senate.

The current tax is due to expire on December 31 but return in 2011, when it will exempt just the first $1 million of an estate while taxing the remainder at a rate of 55 percent.

Keeping the current rate would cost the government $234 billion of revenue over 10 years, according to a congressional tax committee.

The bill passed 225 to 200, drawing all its support from Democrats.

"The estate tax is critical to prevent a permanent aristocracy from arising in this country," said Jared Polis, a Colorado Democrat who said, as one of the wealthiest members of the House, he would pay the tax under the bill.

Republicans blasted the bill and called for complete repeal of the tax. "Death in and of itself should not be a taxable event," said Dave Camp, a Michigan Republican.

Preserving the 45 percent rate and the $3.5 million exemption indefinitely will be much harder in the U.S. Senate because of the cost. In addition, Senate lawmakers are consumed by the healthcare reform bill debate, which could continue into January.

Given the price tag, the bill is "pretty much a non-starter" in the Senate, analyst Anne Mathias at Concept Capital said.

A likely compromise in the Senate is a one-year extension of current law, which would raise some money because of the 2010 phase out.

The estates of about a quarter of one percent of Americans would be subject to the tax under the House bill, according to the Brookings Institution-Urban Institute Tax Policy Center.

The non-partisan Congressional Budget Office reported in 2005 that fewer than 2 percent of all estates have had to pay estate taxes in recent years.

Republicans warned Democrats would suffer at the ballot box if they extend the tax, citing Americans' general dislike of any new taxes.

Democrats countered by citing prominent estate tax proponents, including investors George Soros and Warren Buffett, who has argued the tax helps keep America a meritocracy.

BUSINESS GROUPS SPLIT

Business groups are divided on the legislation.

The Chamber of Commerce has long called for the abolition of the estate tax, although recently said it was willing to back a continuation of the current law.

"The uncertain nature of the estate tax regime over the next two years is a major concern for business, many of which are struggling in this current economic downturn," Bruce Josten, a lobbyist for the Chamber, said in a letter to lawmakers on Wednesday backing the Democrat's bill.

The National Association of Manufacturers urged rejection of the bill, saying its members pay tens of thousands of dollars in fees for estate planning.

CAPITAL GAINS RELIEF

The House bill contains capital gains tax relief for those inheriting estates by repealing so-called carry-over basis rules.

With no action, those inheriting estates after December 31 will have to calculate capital gains taxes based on the original price paid for the property.

"People will be stuck with large tax bills forcing liquidation if they were forced to pay a capital gains tax on a 1959 basis," said Polis, the Colorado lawmaker. "Do opponents truly believe making families pay capital gains is better?"

The American Farm Bureau, the nation's largest agricultural group representing all sizes of farms, opposes any estate tax but backs the portion of the bill that repeals the cost basis rules. The group had no data on how many of its members would be impacted by the tax.

(Editing by Steve Orlofsky and Tim Dobbyn)