Retroactive estate tax for 2010 unlikely, economist Young says

As Congress has yet to act on setting a rate, claw-back may be hard

Aug 22, 2010 @ 12:01 am

By Mark Schoeff Jr.

The longer that Congress drags out setting an estate tax rate and exemption level, the less likely it is to impose a retroactive tax for 2010, according to an economist with a leading agricultural organization.

The estate tax expired this year but will snap back to 55% with a $1 million exemption in January unless Congress sets different parameters. The estate tax and several tax cuts implemented during the Bush administration have languished this year, with Congress expected to take them up next month, after its summer recess.

Many investment advisers will be watching Capitol Hill warily this fall, worried not only about where the estate tax will be set but also what might be done about the lack of an estate tax in 2010.

Because Congress hasn't acted so far, it is unlikely that it will implement a retroactive tax for 2010, said Robert Young, chief economist at the American Farm Bureau Federation.

“The longer it goes on, the tougher it will be for them to come back and extract those taxes,” he said at a meeting last Monday with media at the American Petroleum Institute in Washington. “I'm not hearing a big political push to do it.”

The estate tax is the issue at the top of the Farm Bureau agenda, Mr. Young said, because agriculture is a capital-intensive industry where land is essentially a farmer's 401(k).

Like many other observers, he said that it is difficult to make predictions about tax policy.

There is “a great amount of uncertainty around it,” Mr. Young said.

Congress broke for its summer recess this month without addressing the estate tax or any of the Bush administration tax cuts that are set to expire Dec. 31. Based on proposals that have been offered, it looks as if the estate tax will land somewhere between 35% and 45%, and the spousal exemption between $3.5 million and $5 million.

It is unclear whether Congress will have time to act before it goes out of session again in early October for the fall elections. It may take up taxes in a lame-duck session in November.

The Obama administration and most Capitol Hill Democrats want to continue cuts only for individuals who earn $200,000 or less annually, or couples who bring in $250,000 or less.

Martin Regalia, chief economist at the U.S. Chamber of Commerce, urged Congress to extend the Bush era tax relief — which included cuts in marginal rates as well as on capital gains and dividends — to people at all income levels, including the wealthy.

That would be an important step toward boosting economic growth to the level — about 3% or higher — required to get the unemployed back to work, he said.

“The upper income spends a boatload of money because they have it,” Mr. Regalia said. “That tax cut will help facilitate that demand.”

However, Michael Ettlinger, vice president for economic policy at the Center for American Progress, a left-leaning think tank in Washington, said that easing taxes on high earners is misguided.

“Tax breaks for the rich are a tried-and-failed economic-growth strategy,” he said.

“They have more money than they can possibly spend at the very top,” Mr. Ettlinger said. “There are better ways to use that money to get the economy moving more strongly right now.”

Investments in infrastructure and tax cuts for middle- and low-income individuals are more likely to boost the economy than tax relief for the wealthy, Mr. Ettlinger said.

Another big problem for the economy is the questions surrounding tax policy, as well as the promulgation of regulations for massive health care and financial-reform bills passed this year, Mr. Regalia said.

Businesses are sitting on nearly $1.8 trillion in cash — about $600 billion more than normal — as they wait to see the outcome of policy and regulatory decisions, he said.

As a rule, businesses “don't hold that kind of cash, because it doesn't earn anything,” Mr. Regalia said. “It's an indication that uncertainty is palpable, and it's affecting economic growth.”

It is unlikely that solutions will be designed even after Congress returns.

Tax changes will require 60 votes in the consistently volatile Senate, meaning that all Democrats will have to remain together and persuade at least one Republican to join them.

Mr. Ettlinger thinks that support for middle-class-only tax cuts is growing.

“We're near that 60, but it's the last few that are the hardest,” he said.

E-mail Mark Schoeff at mschoeff@investmentnews.com.

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