Committee for a Responsible Federal Budget
Concept_DC_Capitol Building

Where is the Estate Tax Heading?

Sep 21, 2012 | Taxes

POLITICO reported earlier in the week that the estate tax debate is re-emerging as the expiration of the 2001/2003/2010 tax cuts looms. The estate tax is only one small part of the extension of the 2010 tax cut, yet it appears to be one where the debate is the most jumbled. The two-year extension of the expiring tax cuts back in 2010 set the estate tax exemption at $5 million for 2011, indexed it for inflation (in 2012, it is $5.12 million), and set the top tax rate at 35 percent. When the tax cut expires at the end of this year, the exemption will fall to its pre-2001 scheduled level of a $1 million exemption, not indexed for inflation, with a 55 percent top rate.

In his annual budgets, President Obama has proposed setting the estate tax at its 2009 parameters -- a $3.5 million unindexed exemption with a 45 percent top rate. House Ways and Means Democrats agreed with that stance, releasing a bill at the end of July that extended those parameters for a year, but there is less unity on the Senate side. In the extension bill that passed the Senate a few months ago, Democrats did not include any provision dealing with the estate tax since they could not come to an agreement on the parameters. Meanwhile, Republicans in both chambers have endorsed extending the current parameters permanently in their tax cut extension bills.

There are other proposals out there as well on both sides, such as full repeal of the estate tax and a proposal by the Congressional Progressive Caucus to institute a $2.5 million exemption with rates going as high as 65 percent for estates of more than $500 million.

The latest CBO estimate of a permanent extension of the more generous provisions puts the cost around $390 billion for 2013-2022. CBO's estimate of the President's budget puts the cost of extending the 2009 parameters at about $250 billion. There is no official estimate for full repeal, although the estate tax and the related gift tax are projected to raise $536 billion over the next ten years, so repeal would likely cost a similar amount. The progressive estate tax has been roughly estimated to cost similar to the President's budget. Obviously, there is no current law cost for allowing the more generous estate tax parameters to expire altogether and return to the pre-2001 scheduled levels.

The first table shows the estate tax parameters and revenue raised in the 2000s, while the second table shows the different paths it could take going forward.

Estate Tax in the 2000s
  2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Exemption Amount (millions)  $.675 $.675 $1 $1 $1.5 $1.5 $2 $2 $2 $3.5 N/A
Top Rate 55% 55% 50% 49% 48% 47% 46% 45% 45% 45% 0%
Revenue (billions)* $29 $28.4 $26.5 $22 $24.8 $24.8 $27.9 $26 $28.8 $23.5 $18.9

Source: CBO, Tax Policy Center
*Revenue is for both estate and gift taxes

Comparison of Estate Tax Plans
  2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013-2022
Current Law
Exemption Amount (millions) $5 $5.12 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1 N/A
Top Rate 35% 35% 55% 55% 55% 55% 55% 55% 55% 55% 55% 55% N/A
Cost (billions) N/A N/A $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Current Policy
Exemption Amount (millions)* $5 $5.12 $5.19 $5.29 $5.39 $5.51 $5.63 $5.76 $5.89 $6.03 $6.17 $6.31 N/A
Top Rate 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% N/A
Cost (billions) N/A N/A -$5 -$28 -$33 -$36 -$40 -$43 -$46 -$49 -$53 -$56 -$388
President's Budget
Exemption Amount (millions)  $5 $5.12 $3.5 $3.5 $3.5 $3.5 $3.5 $3.5 $3.5 $3.5 $3.5 $3.5 N/A
Top Rate 35% 35% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45% N/A
Cost (billions)  N/A  N/A -$1 -$19 -$23 -$24 -$26 -$28 -$30 -$32 -$34 -$37 -$255
Full Repeal of Estate and Gift Tax
Exemption Amount (millions) $5 $5.12 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Top Rate 35% 35% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% N/A
Cost (billions) N/A N/A -$15 -$39 -$44 -$48 -$53 -$58 -$63 -$68 -$72 -$78 -$536
Progressive Caucus Estate Tax
Exemption Amount (millions) $5 $5.12 $2.5 $2.5 $2.5 $2.5 $2.5 $2.5 $2.5 $2.5 $2.5 $2.5 N/A
Top Rate 35% 35% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% N/A
Cost (billions) N/A N/A -$12 -$19 -$22 -$23 -$24 -$26 -$27 -$28 -$30 -$31 -$243

Source: CBO, EPI, CRFB extrapolations
*Exemption amount calculated using CBO August 2012 CPI-U projections

Clearly, these provisions are not cheap. Still, lawmakers should be willing to pay for whatever extensions they believe are important. One way to do this for the estate tax is through repealing what is called "step-up basis" of capital gains at death. This provision allows heirs inheriting assets to only pay taxes on gains based on the appreciation of value since they inherited the asset; thus, any gain prior to the inheritance goes untaxed. If the basis was the value of the asset when it was originally bought, the capital gains tax would bring in more revenue. There is no official estimate of how much repealing step-up basis would raise, but extrapolating OMB's estimate of the current provision yields a ten-year revenue loss of about $440 billion. Repealing the provision probably would not raise as much, but it could be of similar magnitude to the cost of the extensions that are currently in discussion.

Absent a comprehensive plan that puts the debt on a downward path as a share of the economy, lawmakers should pay for any changes to the estate tax.

Tags