Will Trump Do Away with the Death Tax?
Published January 4, 2017
Last year, House Republicans led by Speaker Paul Ryan (R-WI) released “A Better Way: Our Vision for a Confident America,” which they called their “Blueprint” for tax reform. This Blueprint announces three important goals:
- It will fuel job creation and deliver opportunity for all Americans;
- It will simplify a broken tax code and make it fairer and less burdensome; and
- It will transform the IRS into an agency focused on customer service.
Promises of the Blueprint
Among many other individual and corporate tax provisions, the Blueprint promises to repeal the estate tax, which it refers to as the death tax. It deliberately does not promise to repeal the gift tax — more on that below. President-elect Trump has promised to repeal the death tax, but plans to replace it with a capital gains carryover tax, similar to the one that existed in 2010 when estate tax repeal was briefly enacted under then-President Bush.
With a slim Republican majority in the Senate (52-48), Republican control of the House, and a Republican White House, one would assume that estate tax repeal is in the bag. Before planning your estate around that assumption, read on.
First, one might assume that Republican leadership would want some Democratic votes before pushing tax reform through. After all, the Republicans made a big deal of the enactment of the Affordable Care Act (aka Obamacare) without a single Republican vote. But memories are short. In any event, it is not clear that the Republican leadership would want Democratic votes so much that they would try to get 60 total votes in the Senate to “call the question” on regular legislation.
A few bipartisan votes are fine, but not so desirable that the leadership would really want to “negotiate” or to concede much to get them. That leaves the process of “budget reconciliation” as the likely process, especially for a clearly fiscal agenda like tax legislation. But while “reconciliation” famously does not need 60 votes in the Senate, the 60-vote requirement cannot be avoided just by using the label “reconciliation.” There must first be a “budget resolution,” setting out broad guidelines for the inputs of multiple committees that will be brought together and “reconciled.” If that budget resolution is not passed by March, or perhaps April, tax reform will be behind schedule.
Budget reconciliation can be used only once a year. It is limited to fiscal matters. And it is limited further by constraints like the impropriety of affecting budget outcomes beyond an arbitrary budget window — most recently ten years. We all remember (or have heard about) the peculiar one-year “repeal” of the estate tax that was enacted in budget reconciliation in 2010 that I referred to above. That repeal sunset the next year, leaving us with today’s law.
Sunsets are not inevitable. There are workarounds. The Taxpayer Relief Act of 1997 was also enacted through budget reconciliation, with substantial permanent estate tax cuts. But both 1997 and 2001 presented much different fiscal environments. In June 2001, when the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was enacted — before 9/11, Afghanistan, and Iraq — budget surpluses of trillions of dollars were forecast for the coming decade. EGTRRA included only a modest one and one-third trillion dollars of tax cuts! Today, the forecasts are only more deficits.
Predictions are hard. The Trump Administration, and the political tone it sets, will not be conventional. There are no useful behavioral baselines. The fiscal climate is grim. And Republican leaders have many priorities and many diverse and sometimes combative constituencies to which they have made many promises.
With that in mind, the technical paths to permanent repeal of the estate tax are complicated and maybe risky to Republicans (especially to the extent they need Democratic support). The unexpected surge of disillusioned middle-class voters that propelled President-elect Trump to victory may not be very excited about the estate tax, and the attractiveness of repeal even to traditional supporters may be blunted by the prospect of having to keep the gift tax, or having to deal with a scary new capital gain or basis regime, and attempts to “have it all” will cost still more and look still more greedy. The reason to retain the gift tax, by the way, is to prevent lifetime gifts that could be used to effectively move income producing assets from high-income tax brackets to low-income tax brackets within the family, then back again without penalty.
Repeal of the estate tax in 2017, permanently or temporarily, would require political capital that the Republican leadership may decide to spend elsewhere. A compromise reduction of rates by 5 or 10 percent is possible, and, even with high exemptions, there might actually be some justification in tax policy for bringing transfer tax and income tax rates closer together. But that, too, would look expensive and possibly too greedy.
All anyone can do is guess. To learn more about how to plan your estate in this time of uncertainty, please browse our website, where we introduce to you our unique estate planning process, The Family Estate & Legacy Program™ designed to provide you and your loved ones with confidence and clarity.
©2017 Craig R. Hersch.