The old saw about the only certainties in life being death and taxes isn't quite right: We'll also always be arguing about the taxation of death. Because of squabbling in the Senate over the estate tax -- one of the nation's most controversial levies -- taxes will rise for thousands of middle-class heirs while falling for a small number of the very wealthy.
The troubles began with reforms approved by the Republican-dominated Congress in 2001, which led to a gradual decrease in estate taxes. The current tax of 45% on estates worth more than $3.5 million (or, for couples, more than $7 million) is slated to expire in 2010. But it doesn't go away permanently. In 2011, without congressional action, it will revert to a rate not seen since the 1990s: 55% on estates worth more than $1 million.
The House passed a bill to avoid this mess by permanently extending the current rate, but unified Republican opposition in the Senate halted progress. GOP leaders, who want to eliminate or lower the tax burden, saw that as a victory. "I don't see a problem -- we aren't going to have an estate tax next year," said Sen. John Kyl (R-Ariz.). OK, then we'll explain it.
The estate tax might be gone in 2010, but its departure triggers a new tax, this one on capital gains. It applies to anyone who inherits more than $1.3 million in assets next year. Let's say Grandma dies and leaves you a home worth $1.5 million, and you decide to sell it. Normally you'd pay little or no capital gains tax on the sale, but the new provisions mean that you have to calculate capital gains based on the value of the home when Grandma and Grandpa bought it, not when you inherited it. That could prove hugely expensive. House officials estimate that extending the estate tax would have affected 6,000 people, but the new capital gains provisions will affect more than 70,000. And in general, those 70,000 will be far less wealthy than the heirs affected by a status quo estate tax.
The problems don't end there. Democrats say they plan to extend the current tax next year (thus undoing the capital gains hike) and make the changes retroactive to Jan. 1. That will probably lead to legal challenges. Meanwhile, the uncertainties are rendering responsible estate planning impossible.
Regardless of how you feel about the estate tax, this is terrible public policy and a disgraceful failure by the Senate, where the minority party's continual intransigence on what should be bipartisan issues is starting to produce the same kind of gridlock experienced by the California Legislature. Republicans who claim to have accomplished something by blocking an extension need to explain why raising taxes on the middle class while lowering them for the very rich is something to be proud of.