Estate Tax Legislation in the 109th Congress

Publication Date: June 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Under provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), the estate tax and generation-skipping transfer tax are scheduled to be repealed effective January 1, 2010. But the estate tax repeal, and all other provisions of EGTRRA, are scheduled to sunset December 31, 2010. If the sunset provision is not repealed, or the law is not otherwise changed beforehand, in 2011 estate and gift tax law will return to what it would have been had EGTRRA never been enacted. The unified estate and gift taxes will be reinstated with an exclusion amount of $1 million. The maximum tax rate will revert to 55%.

On April 13, 2005, the House passed H.R. 8, a bill to permanently repeal the estate tax. The House defeated the Pomeroy substitute amendment (H.Amdt. 69) which would have retained the estate tax with higher applicable exclusion amounts.

The sunset clause was included in EGTRRA so that the bill would comply with the Senate's Byrd rule, which applies only to reconciliation bills and requires 60 votes to waive. The Byrd rule could restrict efforts to extend the reduction or repeal of the estate and gift taxes beyond 2010 through the budget reconciliation process.

Both before and after the enactment of EGTRRA, there have been efforts in Congress, primarily by Republicans, to make estate tax repeal permanent. The 106th Congress passed legislation that was vetoed by President Clinton in August 2000. In both the 107th and 108th Congresses, the House passed legislation making the repeal permanent, but the Senate did not. Democrats introduced bills, not enacted, that would have retained the estate tax but raised the applicable exclusion amount.

The Bush Administration's budget for FY2006 has once again endorsed permanent repeal of the estate tax as part of a broader proposal to extend the major income tax cuts enacted in 2001 and 2003. The FY2006 budget resolutions from both the House and Senate can accommodate the gift and income tax revenue losses anticipated in advance of permanent repeal of the estate tax in 2010 in the revenue losses they will permit for FY2006-FY2010.

There are differences among the bills introduced thus far in the 109th Congress to permanently repeal the estate and generation-skipping transfer taxes. Bills like H.R. 8 that would repeal the sunset provision of EGTRRA with respect to Title V (Estate and Gift Taxes) would preserve the modifications to the gift tax and the modified carryover basis for assets transferred at death scheduled to be put in place by EGTRRA in 2010. In contrast, bills that would repeal Subtitle B of the Internal Revenue Code (Estate and Gift Taxes) would also repeal the gift tax and allow the return of step-up in basis for assets transferred at death. House bills introduced to retain but alter the estate tax differ on the level of the applicable exclusion amount, from $3 million up to $7.5 or $10 million, and whether it is indexed for inflation. Three bills would introduce a flat estate tax rate. One would reduce rates by 20%. Two would exempt qualified family-owned farms and businesses from estate tax but impose a carryover basis. This report will be updated when new estate tax bills are introduced or other legislative activity warrants.