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Don’t be surprised if Congress does nothing about the estate tax this year, not even a one year extension. Instead, it can wait and pass an amendment that retroactively taxes the estates of people who die in 2010.
Lots of people have written about the consequences of Congress doing nothing by the end of the year and letting the estate tax expire in 2010 . Expect to hear even more from people the longer Congress waits to do something.
But Congress isn’t likely to do anything. Jonathan Weisman reported in the Wall Street Journal on Saturday that Congress will likely not pass a long term solution to the estate tax this year:
With health care and routine spending bills jamming the Senate calendar, an estate-tax fight -- first on the Senate floor, then with the House -- could make passage of a bill virtually impossible this year, House and Senate aides say.
Congress wants people to think that it has to something this year, which at the very least means a one year extension of current rates. Cathy Koch, chief tax counsel for the Senate Finance Committee, said that dealing with the estate tax expiration before the year ends is a “must-do.” Similarly, John Buckley, chief tax counsel for the House Ways and Means Committee, said that if Congress doesn’t address the estate tax expiration this year, it cannot retroactively reinstate it.
Here’s what people have said about Congress missing the end-of-year “deadline:”
It reminds me of Chicken Little running around about how the sky is falling.
But the sky isn't falling.
What nobody talks about is that Congress can pass a retroactive amendment to the estate tax.
Despite all the commotion, Congress does not need to address the 2010 estate tax repeal this year. Instead, it can take up the issue next year and then retroactively apply the tax to the estates of all people who died before the amendment.
A Quick Review
Generally, the estate tax is levied on the value of a person’s estate when he dies. In 2009, the top rate for the tax was 45%. However, the estate tax has an applicable exclusion amount, $3.5 million in 2009. This means that estates valued up to $3.5 million aren’t taxed.
But the estate tax is scheduled to disappear for 2010 (and come back in 2011). As things stand now, the estates of people who die next year won’t be taxed.
Nobody believes that Congress will willingly give up the estate tax for a year, so everyone has expected it to reinstate the tax for 2010 before the end of 2009. But actually, it can just wait and then pass a retroactive tax.
Aren’t Retroactive Taxes Unconstitutional?
Not according to the Supreme Court, which said that Congress can pass retroactive tax changes. Take a look at United States v. Carlton, 512 U.S. 26 (1994). The court held in a unanimous decision that a retroactive change to the estate tax was constitutional.
Jeffrey Pennell, a nationally recognized expert on estate planning and professor at Emory University Law School, explained in his treatise just how Carlton gives Congress the authority to make retroactive changes to tax laws:
[T]he Court basically concluded that Congress may impose retroactive tax law changes with constitutional impunity. Faced with the constitutionality issue in a case in which there was no prior notice that a change might be made, no overall net gain from the tax law changes made by the particular Act, and detrimental reliance on prior law with respect to a transaction that occurred prior to adoption of the new legislation—probably the very best situation for finding a retroactive legislative change to be invalid—the Supreme Court held that retroactive tax legislation is not invalid and, in the process, may have guaranteed “that all retroactive tax laws will henceforth be valid.” . . . The Supreme Court’s opinion in Carlton should lay the issue of constitutional retroactivity to rest.
The Court gave a broad standard for when retroactive changes to tax laws are constitutional. Professor Pennell says that, according to the decision,
due process is not violated by retroactive tax legislation that is "justified by a rational legislative purpose," with the same standard applied to retroactive economic legislation in general being applied to retroactive tax legislation, making the sole inquiry whether Congress has acted in an arbitrary and irrational manner.
Basically, as long as Congress has some reason for applying a retroactive tax, even if it's not a good reason, it can. This standard is low. Passing a retroactive estate tax for 2010 will have no problem meeting it.
Why Not Just Do It Now? Follow the Money.
So if Congress can amend the estate tax now (or at least pass a one year extension), why would it wait until 2010 and apply a tax retroactively? Three reasons, all about money.
The first is that if Congress passes a long term solution to the estate tax, fixing not just 2010 but all future years, it would have to also reinstate an applicable exclusion amount ($3.5 million for 2009). Otherwise everyone would pay the tax. If the exclusion amount remains at $3.5 million, then the extension would be a revenue loser. Under Pay-Go rules, Congress would have to pay for the exclusion, either by cutting funding somewhere else or raising taxes. A long term estate tax means a long term revenue loser. Congress doesn't want that. Better to have a short term revenue loser than a long term one.
The second reason is more cynical. I asked Professor Pennell why he thought Congress might wait till next year and pass a retroactive estate tax. He said because 2010 is an election year. Congress would love to deal with estate tax legislation next year. While almost everyone recognizes that we'll have some sort of estate tax, special interest groups disagree on the applicable rate and applicable exclusion amount. These groups will donate to congress members to encourage them to vote their way. Congress members want these contributions next year when people are up for reelection. Both sides would benefit from delaying legislation.
The third reason is the most cynical at all. As Professor Pennell explained to me, Congress would rather deal with the estate tax frequently than pass a long term solution. Through a series of retroactive amendments and short term extensions, Congress could set itself up to address estate tax legislation every election year. That means that those same special interest groups would, on each of those election years, once again round up contributions in support of their position.
So it's okay if Congress does nothing this year. The estates of people who die in 2010 can still be taxed. In fact, expect to hear about estate tax legislation for years to come.
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