Democrats Fire First Volley in 2012 Estate Tax Debate

In late November Democratic Rep. Jim McDermott introduced the Sensible Estate Tax Act of 2011.  Under the bill, the federal estate tax exemption would revert to $1 million per person, an exemption amount that last was in effect in 2001. The exemption amount would be indexed for inflation, and McDermott's bill would continue "portability" under the current law that permits spouse's to use their deceased spouse's unused federal estate tax exemption -- thereby effectively allowing married couples to exempt up to $2 million from the imposition of federal estate tax. Under the proposal, the estate tax rate would jump from the current 35% to 55%, which is the same percentage that existed prior to the 2011 EGTRRA law. 

The proposed legislation would also revive the state death tax credit, a devise that allowed the states that have a separate estate tax -- including New York -- to derive significant revenue by collecting a "pick-up" tax.

Even were the Democrats to control all three branches of government after the 2012 elections -- with a filibuster-proof majority in the Senate -- it is hard to envision a return to a $1 million federal estate tax exemption from the current $5 million exemption.  Of course if Congress does not act by December 31, 2012, then we will see an automatic reversion to the pre-EGTRRA exemption of $1 million, with a 55% rate. 

My guess is that the Democrats, after years of allowing the Republicans to set the agenda on this issue, are feeling emboldened to take a tougher stand given polling that seems to indicate that many people would like to see the deficit reduced by both spending cuts and higher taxes on the "wealthy."  But I believe that a $1 million exemption -- although it would likely only apply to approximately 3% of all estates -- is a non-starter.  Instead, a more likely outcome would be a $3.5 million exemption per person, with a continuation of portability.

That being said, a permanent repeal of the federal estate tax -- which seemed to be a real possibility just a few years ago -- appears to be highly unlikely as we head into 2012.

Click here to read more about Congressman McDermott's proposal.