Another interesting week in our nation’s capital. The big news is the tax deal struck between Congressional Republicans and the White House. We expect this deal to pass, with few changes, either next week or when Congress returns the first couple weeks in January. Here are some useful summaries and the legislative text if you’re interested:
The Senate is going to take the package up on Monday and should pass it Tuesday night or Wednesday morning. It then goes to the House, where it faces an angry liberal caucus and its leadership. According to the Hill:
House Majority Leader Steny Hoyer (D-Md.) said earlier Thursday night that the House will probably take a vote but on what remains to be seen.
“Well, we’re going to see what comes from the Senate,” he said on MSNBC. “But we’re going to vote on something, I’m sure. Whether it’s exactly what the president made a deal with on the Republicans or not, that remains to be seen.”
For S corporations and the markets, though, the key was to get an agreement. It is less important that the deal is being temporarily blocked and more critical that we have a little clarity on tax policy for the next two years. Either this year or very early next year, Congress will pass a two year extension of most existing tax policies. The delay of a few weeks might matter to the IRS and short-term withholding tables, but not to real investment and hiring decisions.
In the meantime, the question for policymakers is whether to make concessions to the current House Democratic leadership in order to get them to bring up the bill next week. Knowing that they can pass the deal intact on January 3rd, Republicans are going to be reluctant to make substantive changes to the deal, especially on key items like the estate tax, so the leverage of House leadership should be limited. We’ll see.
Estate Tax Compromise
We know lots of folks care about the estate tax provisions in the deal so here is summary of those provisions. Considering the alternative — higher rates and lower exemptions from now on — the negotiators did a remarkable job getting this agreement:
Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.
President Mentions Tax Reform
With the tax outlook for the next two years almost in place, we’re wondering what’s next? The current extension takes us right up to the President’s reelect in 2012 (and the reelect of 23 Democratic Senators) and we can’t imagine they’d welcome a reprise of this year’s battle over rates, etc.
So what’s the plan? The Hill’s On the Money Blog suggests it could be broad based tax reform. According to the Blog:
An administration official said the tax reform ideas are now being examined under the direction of Assistant Treasury Secretary Michael Mundaca and Treasury adviser Gene Sperling.
Treasury and the President’s Economic Recovery Advisory Board previously had examined reforming corporate tax rates, but had not considered eliminating individual tax breaks and lowering individual rates as part of a deficit reduction package until the commission raised the idea, the official said.
The administration official said a likely next step will be for placeholder language for tax reform to appear in the Obama 2012 budget, with the details of the tax reform to be worked out in the following months. The deficit commission report recommends putting the new tax code in place by 2012.
Lots of folks are skeptical that this President will be able to work with the incoming Republican House, especially on something like tax reform, but the tax deal just agreed to is evidence that the two sides can work together when circumstances force their hands. With massive deficits projected from now on, the circumstances should be there.