On Monday, Americans for a Fair Estate Tax, a coalition of faith-based groups, labor unions and progressive organizations that support a robust federal estate tax, sent to Senate offices a letter signed by seventy organizations, including CTJ, in support of the Responsible Estate Tax Act. This bill, which was introduced on June 24 by Senators Bernie Sanders, Sheldon Whitehouse, and Tom Harkin, would allow the estate tax to come back into effect with higher rates on the very biggest estates, which makes it a more progressive proposal than the one President Obama has put forward.

The 2001 tax legislation signed into law by President Bush gradually reduced the estate tax over several years until eliminating it entirely in 2010. Like all the Bush tax cuts, this repeal of the estate tax expires at the end of 2010, meaning the estate tax will return at pre-Bush levels if Congress does nothing. President Obama has proposed to make permanent the estate tax rules that were in effect in 2009, which would cut the estate tax in half (meaning it would cost half as much as full repeal). The Responsible Estate Tax Act would lose less revenue than Obama's proposal.

As we reported last week, United for a Fair Economy recently sponsored a teleconference in which several very wealthy Americans, including former Treasury Secretary Robert Rubin and Disney heiress Abigail Disney, urged Congress to restore the estate tax.

Several extremely wealthy Americans — those whose estates would likely be subject to the estate tax — have spoken out against Congress's failure to prevent the estate tax from disappearing this year. During a Wednesday teleconference sponsored by United for a Fair Economy, some very wealthy folks, including former Treasury Secretary Robert Rubin and Disney heiress Abigail Disney, urged Congress to restore the estate tax.

In his remarks, Rubin noted that "our country is on an unsustainable fiscal path" and that estate tax revenues could be used "to fund deficit reduction, additional public investment, or added assistance to those affected by the economic crisis." Billionaire hedge fund manager Julian Robertson said the economic and moral case for an estate tax was simple, calling on Congress to get the country's "house in order" and bringing the deficit down, which means tax increases. The fairest way to do that, Robertson said, is to tax "the least deserving recipients of wealth, which are the inheritors."

Following the death July 13 of Yankees owner George Steinbrenner, media reports have commented on the fact that the billionaire's heirs would be able to inherit the team free of estate tax. (The federal tax on the estates of millionaires has been repealed for one year in 2010.) Several stories have contrasted that result with the heirs of Miami Dolphins owner Joe Robbie and Chicago Cubs owner P.K. Wrigley, whose heirs reportedly sold the teams in order to pay the estate tax.

Those media reports say that the Robbie and Wrigley heirs had to sell the teams in order to pay the estate tax. But that isn't the real story.

To start, the sale of the Miami Dolphins had more to do with family infighting than taxes. Owner Joe Robbie left control of his estate (and the team) to three of his nine children. Not surprisingly, the other six didn't like how things were being run and filed a multi-million dollar lawsuit against the the executors. They reached a settlement designed to keep the team in the family "well into the 21st century," but the agreement soon fell apart and the heirs agreed to sell the team and split the proceeds.

The sale of the Cubs was not something that the heirs of owner P.K. Wrigley had to do. Four years after he died in 1977, the heirs sold the team, and this is usually reported as something they had to do to pay the estate tax. But there were any number of ways they could have paid the tax. The sale of the team raised only $20.5 million. The estate tax liability was estimated at $40 million which means that there was a net taxable estate of at least about $75 million. There were obviously other assets that could have been sold to pay the estate tax. The heirs chose to sell the team rather than any of the other estate assets, including any of their stock in the W. R. Wrigley, Jr. Company, the famous maker of chewing gum. (The company was acquired by Mars, Inc. for $23 billion in 2008, so we can bet the Wrigleys did pretty well.)

Remember that if a closely-held company (i.e., a company owned and run by members of the same family) makes up more than 35 percent of an estate, the tax code allows the related estate tax to be paid over 14 years. No heirs need ever sell the family business to pay the estate tax. In both of these cases, while the estate tax was a consideration, the teams were sold primarily for other reasons. The Wrigley and Robbie stories keep being trotted out mostly as a way for estate planners to scare their potential customers.

News reports that the Steinbrenner family has narrowly escaped a possible sale of the team to pay the estate tax are greatly exaggerated. The Steinbrenner estate, valued at $1.1 billion obviously has lots of assets with which to pay any tax. The estate probably also has the option of paying the tax over 14 years. So even if the estate tax is reinstated retroactively, we think it's safe to say the Steinbrenner family can keep the team if it wants to. Yankee fans can breathe a sigh of relief (or regret).

A Washington Post editorial earlier this week declared, "Senate Republicans, committed as they are to preventing the debt from mounting further, can't approve an extension of unemployment benefits because it would cost $35 billion. But they are untroubled by the notion of digging the hole $678 billion deeper by extending President Bush's tax cuts for the wealthiest Americans."

Well, that's a little unfair, because Congressional Republicans actually want to increase the deficit by a full trillion dollars by extending the Bush tax cuts for the wealthy.

The $678 billion is just the cost of making the Bush income tax cuts for the richest two percent of taxpayers permanent. (President Obama and Republicans agree that they should be made permanent for the other 98 percent.) Republicans have also been pushing for years to make permanent Bush's repeal of the federal tax on the estates of millionaires. This would add over $300 billion during the first decade when its costs would be fully felt, compared to Obama's more restrained (but still awfully generous) proposal to cut the estate tax.

As the Post explains, Senate Republican Whip Jon Kyl recently said that the cost of new spending should be offset, but the revenue loss from tax cuts should not. According to Talking Points Memo, Republican Senator Judd Gregg explained that new government spending is "growing the government" and therefore should be offset, presumably with cuts in spending, but tax cuts should not be offset.

Of course, deficit-financed tax cuts have to be paid for one day, and that could be done through tax hikes. Congressional Republicans might believe that Congress will be forced to shrink government when revenues decline, but that obviously didn't happen after the Bush tax cuts were enacted.

Senate Republicans Bring Back Supply-Side Economics

But the real prize for articulating their position goes to Senate Republican Leader Mitch McConnell. When asked about this, he replied, "That's been the majority Republican view for some time, that there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy."

That's right. The most powerful Republican alive believes that when Congress cuts taxes, the result is that revenues increase.

This is the extreme version of "supply-side economics." The basic idea behind this school of thought is that tax cuts can change incentives to invest so much that they result in huge economic growth, which results in increased incomes and therefore increased income tax payments that more than make up for the loss of tax revenue resulting directly from the tax cuts.

CTJ has already explored in great detail the empirical evidence against this idea, the people who promote it anyway, and the fiscal disasters that have resulted.

But don't take our word for it. President George W. Bush's own Treasury also concluded that tax cuts do not increase revenue or come close to paying for themselves.

Douglas Holtz-Eakin Contradicts McConnell

So have the Republicans obtained some new support for supply-side economics since then? Apparently not, since the Republican witness at Wednesday's Finance Committee hearing on the Bush tax cuts conceded that they did not pay for themselves.

Douglas Holtz-Eakin, former director of the Congressional Budget Office and an adviser to the presidential campaign of John McCain testified at the hearing in favor of making permanent all the Bush tax cuts (including those for the richest taxpayers). According to his written testimony (which he paraphrased during the hearing), making the tax cuts permanent would have a positive economic effect that would reduce the direct cost of the tax cuts by 22 percent.

We have no idea how he came to that figure. But Holtz-Eakin is the closest thing the Republicans have to a reasonable and credible economist who will promote their views. (Even though we think he's wrong about most of what he says, as we explained in the previous article.) Since Holtz-Eakin is the best economist the Republicans have on their side, one would think that Senator McConnell would get on the same page.

Yankees owner George Steinbrenner died last week, leaving a fortune estimated at $1.1 billion. He is the fourth billionaire to die this year — the only year since 1916 when there has not been a federal estate tax (it's currently scheduled to return in 2011). So even if the Yankees don't repeat as World Series champs, it's a very profitable year for the Steinbrenner family.

The opportunity to die without one's estate being taxed may disappear soon, however, as Congress appears finally ready to address the issue. On June 24, Senators Sanders (I-VT), Harkin (D-IA) and Whitehouse (D-RI) introduced estate tax legislation that would make permanent the $3.5 million exemption that was effective in 2009, with a progressive rate structure that would tax the taxable portion of estates over $10 million at 50 percent, over $50 million at 55 percent, and over $500 million at 65 percent. Yesterday, Congresswoman Linda Sanchez (D-CA) introduced the House version of this bill.

Earlier this week Senators Lincoln (D-AR) and Kyl (R-AZ) introduced their own estate tax legislation, which would reduce the rate to 35 percent and raise the exemption to $5 million ($10 million for couples).

Meanwhile, in the House, Representatives Thompson (D-CA) and Salazar (D-CO) have introduced estate tax legislation that would completely exempt farmland and would raise the exclusion for conservation easements to $5 million from its current $500,000. (See a report on all the reasons why this is a terrible idea.) One of the most alarming results would be that wealthy people start investing in farmland as never before, which could drive up prices for land and hurt genuine family farmers.

The Lincoln-Kyl proposal has been referred to the Senate Finance Committee with the pending small business jobs bill. Finance would need to find $80 billion in revenue offsets to cover the increased cost of their proposal compared to extending the rules in effect in 2009 (which is what President Obama proposes). Senators Lincoln and Kyl mask the true cost of their proposal by phasing in the cut in the estate tax over several years, meaning the $80 billion figure is misleadingly small.

With all the competing proposals and the lack of any clear consensus, it's anybody's guess where the estate tax will finally end up. But the estate tax holiday will soon be over.

On Wednesday, CTJ joined Americans for a Fair Estate Tax to voice opposition to an estate tax proposal that would benefit only the families with the largest 1 in 400 estates. In a strongly-worded letter, AFET said a reduction in the estate tax should not even be on Congress's agenda, much less be a priority.

News began to leak last week that a bipartisan group of Senators, including Senate Finance Committee Chairman Max Baucus (D-MT), Ranking Member Charles Grassley (R-Iowa), Blanche Lincoln (D-AR), and Jon Kyl (R-AZ) were negotiating a deal to weaken the estate tax even beyond the 2009 parameters that the president wants to make permanent. The deal would have eventually exempted up to $10 million per couple from the estate tax.

The proposed estate tax rules would cost the country billions of dollars per year, but a phase-in of the changes and other budget gimmicks, such as a prepayment option, would have masked the cost in the ten-year budget window that is counted when lawmakers consider legislation. A detailed report of the proposal can be found here.

News reports on Thursday indicated that the deal had begun to unravel. We hope the Senate will now turn its attention back to legislation creating jobs and helping ordinary Americans who are still struggling in this economic downturn.

National Organizations Urged to Join Statement

Americans for a Fair Estate Tax, a coalition of public interest organizations, has released a new statement calling on Congress to preserve a robust estate tax to help ensure that the federal government has the revenue to fund public services that working people depend on.

The statement calls upon Congress to exempt no more than $2 million per-spouse from the estate tax, and tax the taxable portion of estates (the portion in excess of the exemptions and deductions) at no less than 45 percent. It also calls for an additional 10 percent tax on the taxable portion of estates exceeding $10 million.

The tax cut law signed by President Bush in 2001 gradually shrank the estate tax over the course of several years before making it disappear altogether in 2010. But, like all the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning the pre-Bush rules would come back into effect if Congress does nothing.

The intention of President Bush and his supporters was to avoid discussion of the true costs of permanent repeal of the estate tax at the time the law was voted on, and to set up a situation in 2010 in which some lawmakers could be pressured into making the repeal permanent.

Last year, the House of Representatives approved a bill that would meet Bush halfway, meaning it would lose about half as much revenue as permanent, full repeal. The House bill would permanently set the per-spouse exemption at $3.5 million and the top estate tax rate at 45 percent. Americans for a Fair Estate Tax (AFET) is calling on Congress to preserve more of the estate tax by setting the per-spouse exemption at $2 million and applying an additional ten percent tax to particularly massive estates.

As the Bush estate tax cut phased in over several years, there was a period of years in which the exemption was temporarily set at $2 million per-spouse. Fewer than 1 percent of deaths resulted in estate tax liability during those years.

The AFET statement also calls on Congress to reinstate the credit for state estate and inheritance taxes, which was repealed in the 2001 law. This has been a blow to states with taxes tied to that credit at a time when their budgets are already in crisis.

If you are authorized to sign the statement on behalf of a national organization and wish to do so, please contact Steve Wamhoff at swamhoff (at) ctj.org.

The Senate finally passed a 30-day extension of unemployment insurance and health care benefits for the unemployed, but not before benefits had expired for hundreds of thousands of jobless Americans and thousands of others were furloughed from construction jobs as federal funding expired.  The legislation had been held up by Senator Jim Bunning (R-KY) who wanted to offset the costs of the bill, while other Republican Senators threatened to block the bill if they were not promised a vote on a measure to reduce the estate tax for millionaires. 
 
The President signed the 30-day extension into law on Tuesday evening, just hours after the bill had passed.

Senators then returned to legislation extending jobless benefits, as well as many expiring tax provisions, through the end of the year. The Senate took up a substitute amendment (S. Amdt 3336) for the House  "tax extenders" bill that was passed in December. The Senate version was expected to contain a reinstatement of the estate tax (which is temporarily repealed for 2010), but it was not included. However, many amendments to the bill are being offered and it's still unclear whether any will address the estate tax. President Obama and Democratic leaders want to reinstate the estate tax at the level in effect in 2009 (which was cut down about 50 percent from the pre-Bush level) while Senate Republicans and a few Senate Democrats wish to cut the estate tax even further.

Senate Republicans blocked action on aid for millions of unemployed Americans this week, and threatened to continue to do so unless Congress acts on a completely unrelated matter: the federal tax on the estates of millionaires.

The Need for Help for the Unemployed

Congress has an opportunity to help families hardest hit by the recession while at the same time increasing consumer demand, which in turn will increase the number of businesses that are hiring. The Congressional Budget Office has found that extending unemployment benefits is one of the most effective ways to increase consumer demand (i.e., create jobs), making it attractive from the standpoint of economic policy as well as compassion for struggling Americans. (There are 6 job-seekers for every open position right now.)

By the end of February, 1.1 million people are scheduled to lose their UI benefits, and another 2.7 million are scheduled to lose them by the end of March. Senate Democrats hoped to move by unanimous consent to extend UI benefits and COBRA health care benefits for out-of-work Americans for 30 days, to tide them over until a longer-term extension can make its way through Congress.

Help for the Unemployed Held Hostage for Tax Cuts for Millionaires

Senate Republicans denied the unanimous consent request to pass an extension of UI and COBRA. The objection was raised by Senator Jim Bunning (R-KY) over the source of funding. But the measure is apparently also being held hostage by Senators wanting to give multi-millionaires a break on the estate tax.

The tax law passed under President Bush in 2001 gradually repealed the estate tax over several years until making it completely disappear this year. But, since the Bush tax cuts expire at the end of 2010, the estate tax will return in 2011 in its pre-Bush form (with the tax exempting the first $1 million in assets, per spouse, and a top estate tax rate of 55 percent).

House Democrats decided last year that a million dollars just isn't what it used to be, and passed a bill that would permanently increase the exemption and lower the rate, but not let the estate tax disappear in 2010. (Technically, they passed a permanent extension of the estate tax rules in effect in 2009, with a $3.5 million per-spouse exemption and a top rate of 45 percent.) But the Senate failed to act on the measure.
 
Under the proposal approved by the House, fewer than one percent of deaths would result in estate tax liability. Apparently that's too many for Senators Jon Kyl (R-AZ) and Senator Chuck Grassley (R-Iowa), who have wanted to repeal the estate tax for years and now hope that they can at least reduce it much further than the Democrats want. They have indicated that, until a deal is reached on the estate tax, they will block passage of the UI and COBRA extension. On Feb 24, Kyl, a long-time leader against the estate tax, said that Republicans will block consideration of the legislation unless they get "a path forward fairly soon" to voting on a measure to permanently weaken the estate tax.

Bizarrely, Senator Bunning blocked the unanimous consent motion for the $10.3 billion, 30-day UI and COBRA extension, saying he wanted the costs somehow offset, even while his Republican colleagues press for an estate tax measure that will cost hundreds of billions of dollars, with no hope of being offset.

Kyl and Grassley tried to cut a deal earlier this month with Senate Finance Committee Chairman Max Baucus (D-MT) to get a fast track for the estate tax vote in exchange for votes on a jobs bill, but Majority Leader Harry Reid (D-NV) rejected the package and put together a jobs bill of his own. That pared-down bill passed the Senate on Wednesday, including $16 billion in tax cuts for employers who hire new workers.
 
Another wrinkle is that Grassley and Kyl have reportedly been in discussions with Senator Maria Cantwell (D-WA) who has proposed to allow multi-millionaires to prepay their estate tax at a lower rate. This is clearly a accounting gimmick designed to mask the true cost of the estate tax change. It would bring some money into the Treasury during the 10-year budget window that Congress focuses on, but lose huge amounts of revenue in years after that. United for a Fair Economy has objected to the proposal in a letter to Senator Cantwell. Washington residents are urged to sign on to the letter.

Coalition Calls for More Robust Estate Tax than Approved by House Democrats

Congress needs to move in a different direction on the estate tax. Americans for a Fair Estate Tax, a coalition of organizations including Citizens for Tax Justice, has issued a call for an estate tax that exempts no more than $2 million in assets per spouse, and taxes the taxable portion of estates at a rate of at least 45 percent, with an additional 10 percent on assets in excess of $10 million. Only about 0.7 percent of deaths resulted in estate tax liability in recent years when the per-spouse exemption was set at $2 million.

Cutting the estate tax any more than this — particularly when Congress seems to have so much trouble helping the Americans who are struggling the most — would prove that Congress really does have its priorities completely backwards.

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

"From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that's what we did for eight years."  (Applause.)  "That's what helped us into this crisis.  It's what helped lead to these deficits.  We can't do it again."

President Obama spoke these words in his State of the Union address on Wednesday night, after pledging to enact an agenda that will create jobs and tackle our long-term budget deficit. He did a good job of explaining that the budget deficits that exist today are the result of deficit-financed tax cuts, two deficit-financed wars, and a major recession all occurring before he entered the White House.

But one has to wonder if President Obama is gently bearing left at a time when any sensible directions would call for a sharp left turn.

The Bush Tax Cuts

He remains committed to extending the Bush income tax cuts for the 98 percent of taxpayers who have adjusted gross income (AGI) below $250,000 (or below $200,000 for an unmarried taxpayer). The budget document released by the administration last year showed, in a convoluted way, that this would cost $1.88 trillion between now and 2019. His proposal to partially extend the Bush cut in the estate tax (making permanent the estate tax rules in effect in 2009) would cost another $576 billion over the same period, for a total of about $2.45 trillion.

The estimated costs of these proposals may be different in the budget to be released next week (since all the projections change at least somewhat in response to developments in the economy). But make no mistake, the cost of extending most of the Bush tax cuts far exceeds the savings the President hopes to achieve with his proposed spending freeze (which will actually cut spending if one accounts for inflation and other factors).

Cutting Non-Security Discretionary Programs

The administration is reported to believe $250 billion can be saved from the spending freeze, which would last three years but would not apply to national security, Medicare, Medicaid, or Social Security. The first problem is that these exempt categories of spending, along with interest payments on the national debt that cannot be avoided, make up 70 percent of the federal budget. Americans love to complain about wasteful government spending, but few realize that, once you eliminate those categories of spending that are very popular with the public, there's not a whole lot left to cut. The non-security discretionary spending that is left has come under increasing pressure in recent years since it's the only part of the budget lawmakers feel comfortable attacking.

The second problem is that cutting back spending when the economy may still be weak could prolong our downturn. Progressive observers have warned that the Roosevelt administration's decision to stop stimulating the economy and focus on deficit-reduction plunged the country back into a deeper depression in 1937.

For their part, administration officials have explained that they are not proposing an across-the-board freeze. Rather, they will identify particular types of spending that represent wasteful giveaways to special interests rather than public services that people depend upon.

Even if that's true (and the jury is still out on that), it's still peculiar that taxes aren't getting more attention. This is the third problem with the President's approach. The need for higher taxes is like an 800 pound elephant in the room that everyone is trying to ignore, even if they vaguely acknowledge that Bush's tax cuts got us into this mess. Does a family with an income of $190,000 really need every cent of their Bush tax cuts? Do families with $7 million in assets really need to be fully exempt from the estate tax? The President's tax proposals would have us believe so.

Steps in the Right Direction

The President certainly wants to move in the right direction, as was evident in various parts of his speech. He reiterated his proposal to charge a fee on risk-taking by the largest banks, which would raise $90 billion over a decade according to the administration. We've argued before that this is entirely reasonable. The institutions affected know they have an implicit guarantee from the government and are prone to put the entire economy at risk as a result. It makes sense to demand that they pay up in proportion to their risk-taking.

The President also reaffirmed his desire to do something about offshore profit-shifting by corporations. The proposals he made last year along these lines would raise $200 billion over a decade and would be extremely important, as we have explained in detail, in preventing U.S. corporations from shifting their profits to other countries.

Sometimes this shifting means companies actually move jobs and operations offshore, but other times it involves accounting gimmicks and transactions that exist only on paper. Either way, Americans lose tax revenue for no good reason other than that Congress is afraid to take on the lobbying power of multinational corporations.

America has a budget problem that is long-term in nature. The money we spend this year or next year to stimulate the economy has little impact on the long-term deficit. Reforming our tax system permanently, however, is an important part of the long-term solution.

With all the talk about federal budget deficits and families hit hard by unemployment during this recession, you would think the last thing Congress would want is a tax cut for millionaires. So, it seemed a sure bet that Congress would prevent a massive one that was scheduled under the Bush administration from taking effect this year.

The 2001 tax cut law enacted by President George W. Bush and his allies in Congress gradually shrank the estate tax each year until eliminating it altogether in 2010. Like almost all the Bush tax cuts, this change expires at the end of 2010, meaning the estate tax will come back at pre-Bush levels in 2011 if Congress does nothing. But allowing the estate tax to disappear even for a year sets a terrible precedent.

Only a tiny fraction of families, those with gigantic fortunes, are impacted by the estate tax. They have benefited more than any other Americans from the educated workforce, infrastructure and stability that government provides and that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

Democratic leaders always supported the estate tax and obviously had plenty of time to plan to repeal (or at least modify) Bush's estate tax break. The House did exactly that late last year when they passed a bill that would make permanent the estate tax rules in effect in 2009 (which is still a big break for families with big estates, compared to the pre-Bush rules).

Pathetically, the Senate failed to act.

That's right. There is no federal estate tax in effect right now. Some pundits have wondered if there will be an uptick this year in unexplained deaths of elderly wealthy people coinciding with visits from their children. We think an early death is more likely for the public services that will have to be cut to make up the lost revenue if repeal (or any proposal close to repeal) is made permanent. 

Call Congress Now!

United for a Fair Economy is providing a toll-free number and information that people can use to call their members of Congress and urge them to reinstate the estate tax. Every member of the House and Senate -- particularly those who claim to care about budget deficits -- needs to hear this message. Click here for information from UFE.

The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:

Health Care Reform

On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).

(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)

The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.

While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.

(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)

One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).

While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.

Job Creation

On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).

(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)

The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.

Estate Tax

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.

Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.

So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.

(See CTJ's previous analysis of the estate tax legislation, along with state-by-state figures showing how few estates are actually subject to the tax.)

Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.

Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.

Corporate Tax Breaks (aka "Tax Extenders")

On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.

(See our previous article on H.R. 4213 explaining the points made in the letter.)

Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.

(Read CTJ's recent report on the House estate tax bill.)

On Thursday, the U.S. House of Representatives approved a bill (H.R. 4154) that would partially extend the Bush cut in the estate tax. H.R. 4154, introduced by Rep. Earl Pomeroy (D-ND), would make permanent the estate tax rules in effect in 2009, which would prevent the estate tax from disappearing in 2010 but which would still constitute a massive tax cut for millionaires in years after that.

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 included a gradual reduction in the estate tax over several years followed by repeal of the estate tax in 2010. Like almost all of the Bush tax cuts, this one expires at the end of 2010, meaning the estate tax will reappear at pre-Bush levels if Congress does nothing.

Unfortunately, many observers believe Congress is not likely to simply allow the pre-Bush estate tax rules to come back into effect in 2011 (despite the obvious need for revenue). In fact, if the estate tax is allowed to disappear in 2010, lawmakers could be more tempted to make repeal permanent or to enact legislation that would allow only a very scaled back version of the estate tax to reappear in 2011.

In other words, the good thing about H.R. 4154 is that it could prevent a situation in which Congress would be tempted to enact an even more ludicrous tax cut for families with enormous estates.

The bad thing about H.R. 4154 is that it's a massive tax cut for the richest families in America. As CTJ's recent report points out, only 0.7 percent of the Americans who died in 2007 left an estate that was taxable. In 2009 that number will be far lower because the amount exempt from the estate tax has grown significantly under the changes scheduled in the 2001 law.

The 2009 estate tax rules, which the Pomeroy bill would make permanent, significantly reduce taxes for extremely wealthy families. These are the very families who benefit the most from the infrastructure, education, stability and other things that taxes pay for and which make it possible for some Americans to accumulate massive fortunes.

Congress must prevent the estate tax from disappearing in 2010 and also must set estate tax rules as close as possible to the pre-Bush estate tax rules. Many progressive lawmakers in the House decided that the Pomeroy bill is the best that can be hoped for. Now attention turns to the Senate, which must find time to enact legislation that will prevent the estate tax from disappearing and must overcome any temptation to cut the estate tax even more.

In a major tactical retreat, the U.S. Chamber of Commerce, the National Federation of Independent Businesses and several other organizations that claim to represent the interests of business have announced that they will no longer push for repeal of the estate tax. They will, however, push for a plan that will gut the estate tax and that has received some support in the Senate.

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax will disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton will come back into effect in 2011. Many Republicans and some Democrats in the Senate have, in the past, supported permanently repealing the estate tax. 

President Obama and Democratic leaders in the House and Senate support a compromise that would prevent the estate tax from disappearing in 2010, but which would also unnecessarily cut the estate tax below the level it would reach in years after 2010 if Congress simply does nothing. This compromise would essentially freeze in place the estate tax rules in effect in 2009, which exempt the first $3.5 million in estate assets (or $7 million in the case of a married couple) and tax the rest at a rate of 45 percent.

Citizens for Tax Justice has argued that even this policy amounts to an unwarranted cut in the estate tax. State-by-state figures from CTJ show that only 0.7 percent of the deaths that occurred in 2006 resulted in any estate tax liability in 2007. (Estate taxes are usually paid in the year after the year in which an individual dies.) 2006 was a year in which the estate tax exempted the first $2 million in estate assets (or $4 million in the case of a married couple). (A proposal put forward by Congressman Jim McDermott in April would make permanent adjustments to the estate tax without giving away as much revenue.)

The coalition of business groups that has been trying for years to permanently repeal the estate tax now says it supports a permanent estate tax that exempts the first $5 million in estate assets (or $10 million in the case of a married couple) and taxes the rest at a rate of 35 percent.

A budget amendment with these basic parameters was approved by 51 Senators in April, but was not included in the final budget resolution adopted by Congress. It's difficult to know if a majority of Senators would ever really support the enactment of such a policy. The budget amendment was to be deficit-neutral (which would be difficult to achieve) and several of the 51 Senators who voted in favor would likely oppose a cut in the estate tax if it increased the budget deficit.

Any legislation to change the estate tax would require 60 votes. Democratic leaders are hoping to round up that many votes to pass a bill that at least extends the 2009 estate tax rules for one year, through the end of 2010, to prevent the estate tax from disappearing for a year. Then, sometime during 2010, Congress could take up the question of what the estate tax should look like in the long-run while they take up the larger debate over which components of the Bush tax cuts to extend.

At least one anti-estate tax group, the American Family Business Institute, refused to change its position and still backs full repeal of the estate tax. The organization is apparently linked to the American Family Business Foundation, which issued two studies earlier this year that claimed to show how repeal of the estate tax was vital to economic growth. CTJ released a report in May that examined the methodological flaws and illogical assumptions that underpin these two studies.