Dems squawk, but Obama likely to win out in estate tax flap

Despite grousing from the left, it looks as if Republicans will get pretty much what they want on estate tax policy — if, as expected, Congress approves a bill that would extend all Bush administration tax cuts for two years. The Senate will cast an important procedural vote on Monday afternoon on an $857 billion bill introduced by Senate Majority Leader Harry Reid, D-Nev., on Thursday that puts into legislation the compromise between President Barack Obama and the GOP that would maintain individual tax rate reductions for all income levels established in 2001 and 2003. Although it looks as if the bill has momentum in the Senate, the situation is volatile in the House, where the Democratic caucus rejected the Obama-GOP agreement in a non-binding voice vote on Thursday. Under the compromise, estates would be subject to a 35% federal tax rate, with a $5 million exemption for individuals. ($10 million for couples). In addition, it reinstates the “step-up-in-basis” calculation for inherited property in which heirs can claim fair market value at the time of their relative's death. If Congress doesn't act by Dec. 31, the estate tax will revert to 55% with a $1 million exemption and individual tax rates will return to their late 1990s levels. Many congressional Democrats are incensed by the estate-tax agreement between Mr. Obama and the GOP. Originally, the Obama administration and most Democrats favored a 45% rate and a $3.5 million exemption. Resistance is particularly high in the House. Progressive Democrats portray the estate tax deal as a giveaway to the rich that would increase the yawning federal budget deficit. House Speaker Nancy Pelosi, D-Calif. took a swipe at the estate tax this week. “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. “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.” Ms. Pelosi indicated on Thursday that she and her colleagues would seek changes in the tax deal. “We will continue discussions with the president and our Democratic and Republican colleagues in the days ahead to improve the proposal before it comes to the House floor for a vote,” Ms. Pelosi said in a statement. But they are waging a difficult battle that is likely to end in defeat. The White House has undertaken a vigorous lobbying effort on Capitol Hill to sway wavering Democrats – and is achieving success in building Senate support. “At the end of the day, after people beat their drums and pull their hair, they will get the votes they need,” said Dean Zerbe, national managing director of alliantgroup, a company that provides tax services for small and mid-size businesses. House Democrats may be able to make a few tweaks to the bill, but nothing that will dramatically alter the proposal, according to Brian Gardner, senior vice president for Washington research at Keefe Bruyette & Woods, a financial markets research firm. “Any changes to the outlines of the tax deal will be additions and nibbling around the edges,” Mr. Gardner said. “I don't think there's going to be any changes to the estate tax.” Indeed, House Dems will probably have to swallow the estate tax provision, no matter how bitter. The proposal incorporates a bill written by Sen. Jon Kyl, R-Ariz. and one of the Republicans who negotiated with Mr. Obama. “It's a pillar of the deal,” Mr. Zerbe said. “I think it's pretty much set.” (To read an expanded version of this story, see the Dec. 13 print issue of InvestmentNews.)