Death tax gets new life

Tax deal includes lowest estate tax rate, highest exemption

By Mark Schoeff Jr.

Dec 7, 2010 @ 11:50 am (Updated 1:45 pm) EST

President Barack Obama and congressional Republicans have reached an agreement on extending all Bush administration tax cuts for two years that would include the lowest rate and highest exemption for the estate tax of any option considered.

The Bush tax cuts were set to expire Dec. 31.

Under the proposal, the estate tax rate would be 35% with a $5 million exemption for individuals and $10 million for couples. Democrats and the Obama administration favored a 45% rate and $3.5 million exemption.

“The Republicans have asked for more generous treatment of the estate tax than I think is wise or warranted,” Mr. Obama said in a statement Monday night. “But we have insisted that that will be temporary.”

(View a quick fact sheet of the full tax plan.)

Mr. Obama accepted the estate tax level as well as an extension of the Bush tax cuts for high-income earners — two compromises that will draw strong resistance from congressional Democrats.

House and Senate Democrats forced votes last week and over the weekend on proposals that would extend tax cuts only for individuals making less than $200,000 and families making less than $250,000 — a level they term middle class — while letting reductions for the wealthy expire.

The measures failed, as did one that would have set the cutoff for tax break extensions at $1 million. It's not clear how much support the compromise plan will achieve in voting, which likely will take place within the next two weeks.

Mr. Obama hoped to assuage members of his party by securing in the tax agreement an extension of unemployment benefits for 13 months at a level that reaches 99 weeks in the states hit hardest by unemployment.

The accord also includes a 2% cut in payroll taxes for workers in 2011 and a roster of other tax breaks for businesses and individuals. It would maintain a 15% rate for capital gains and dividends.

The White House did not have a cost estimate as of late Monday, but speculation centered on the price's reaching the same level as the 2009 economic-stimulus measure — at least $800 billion.

“It's not perfect, but this compromise is an essential step on the road to recovery,” Mr. Obama said. “It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs and add momentum that our economy badly needs.”

Democratic opposition to the deal between the White House and congressional Republicans will center on extending the Bush rates to the highest earners as well as the generous estate tax terms.

“The estate tax is the one thing that really gnaws at them,” said Andrew Friedman, a financial expert and principal at The Washington Update (www.thewashingtonupdate.com). “It was the coup de grace.”

House Speaker Nancy Pelosi, D-Calif., included a swipe at the estate tax accord in her criticism of the agreement.

“The Republican demands would provide tax cuts to the millionaires and billionaires, fail to create jobs and increase the deficit,” Ms. Pelosi said in a statement on Tuesday. “And to add insult to injury, the Republican estate tax proposal would help only 39,000 of America's richest families, while adding about $25 billion more to the deficit.”

Normally, Capitol Hill Democrats would seek to make changes in the accord, such as limiting provisions they oppose to a one-year extension instead of two or demanding other concessions.

Following the election and a bitterly partisan congressional session, however, this is not a normal time in Washington. Observers say that it will be difficult for Democrats to make changes.

For one thing, if the House and Senate leaders agree to a vote, all the Republicans will be on board, requiring less than the majority of the Democrats in either chamber to pass the tax-cut extension. In addition, Republicans, with momentum from their election victories, are in a strong position.

“This feels like a moment when there ought to be something disgruntled Democrats get,” said Clint Stretch, managing principal for tax policy at Deloitte Tax LLP. “On the other hand, I'm not sure Republicans need to negotiate. They got what they want.”

Republicans indicated that the tax cut debate is going their way, following their strong performance in the November elections, which will give them control of the House of Representatives in January, and also bigger Senate numbers.

“Their efforts reflect a growing bipartisan belief that a new direction is needed if we are to revive the economy and help put millions of Americans back to work,” Senate Minority Leader Mitch McConnell, R-Ky., said of the negotiations in a statement Monday night. “I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown.”

The Securities Industry and Financial Markets Association endorsed the deal, saying that it provides certainty for investors.

“Extending current tax rates on capital gains and dividends for the next two years will help stimulate savings and investment, thus promoting economic growth and job creation,” Kenneth Bentsen Jr., SIFMA's executive vice president for public policy and advocacy, said in a statement.

Although groups such as SIFMA are pleased with the accord, President Obama's aides acknowledged that he had to acquiesce to tax policies that he has long opposed — such as allowing rate cuts to stay in place for high-income individuals. Nonetheless, they termed the agreement a breakthrough.

“This framework for a deal is a large step forward,” a senior administration official said in a conference call with reporters Monday night. “We're very close to making real progress that will be good for the economy and the middle class.”

First, though, the White House will have to convince its liberal allies not to try to unravel the accord.

Senate Majority Leader Harry Reid, D-Nev., said that a number of members of his caucus have reservations about the tax deal and expressed their concerns at a Capitol Hill meeting on Tuesday afternoon with Vice President Joe Biden.

“To say that I am disappointed with the deal the President laid out tonight is an understatement,” Sen. Tom Harkin, D-Iowa, said in a statement. “[Republicans] can fight for their tax breaks for the wealthy, fine. But to say that we cannot extend unemployment benefits for people out of work without giving tax breaks to the wealthy — that's a moral outrage.”

Mr. Reid said that a number of members of his caucus have reservations about the tax deal and expressed their concerns at a Capitol Hill meeting on Tuesday afternoon with Vice President Joe Biden.

"This only a framework," Mr. Reid told reporters on Tuesday. "It's up to the Congress to pass it. I think we're going to have to do some more work on it."

Mr. Reid said that the estate tax is an issue that "a number of people raised" when discussing their misgivings about the deal.

"We've been fighting the estate tax a long, long time," Mr. Reid said.

Mr. Reid's counterpart didn't sound inclined to negotiate further.

"The agreement is essentially final," Mr. McConnell told reporters on Tuesday.