On June 8, the Senate rejected, by a vote of 57-41, a motion to consider permanent repeal of the estate tax (under Senate rules, the measure required 60 votes to pass). During the lead-up to the vote, Senator Jon Kyl floated a modification of his longstanding “compromise” proposal to repeal most but not quite all of the estate tax. His hope, apparently, was to persuade a sufficient number of Senators who oppose repeal that his proposal could now serve as a reasonable compromise solution.
But new Joint Committee on Taxation estimates (which are attached) indicate that Senator Kyl’s modified proposal differs little in cost from the original version.
- The new variant of the Kyl proposal costs nearly as much as the earlier Kyl proposal — and about three-quarters as much as full repeal over the long term.
- Moreover, the new Joint Tax Committee estimate understates the cost of the estate tax policy that Senator Kyl actually seeks to implement, because what amounts to a gimmick in the design of the plan compels the Joint Tax Committee to make an assumption that lowers the cost estimate.
- Taking this into account, the new variant of the Kyl proposal would likely cost about 80 percent as much as full repeal — or about $800 billion over the first ten years in which its budgetary effects would be fully felt (2012-2021), including the costs of the increased interest payments that would have to be made on the national debt.
Senator Kyl is a staunch advocate of estate-tax repeal, but has recently acknowledged that repeal supporters “do not have the votes” in the Senate for permanent repeal and that their “position is eroding,” as was confirmed by this week’s vote.[1] Given this situation, he has for several months been promoting a “compromise” position: an estate tax with a $5 million exemption ($10 million per couple) and a 15 percent rate. According to Joint Committee on Taxation estimates, this proposal would cost 84 percent as much as repeal. Over the 2012-2021 period, the first decade in which the proposal’s costs are fully reflected in the estimates, it would reduce revenues by about $680 billion. Because Senator Kyl has not proposed to offset these revenue losses, they will result in higher deficits and debt, generating $180 billion in higher interest costs over the period for a total ten-year cost of $860 billion.
Due to the proposal’s high cost, most have recognized it as little different than repeal.[2] In an attempt to generate more support for his proposal and to portray it as a reasonable compromise, Senator Kyl has suggested several modifications. The new version of the proposal calls for an estate tax with a $5 million ($10 million per couple) exemption, indexed for inflation, and a rate linked to the capital gains rate — now 15 percent — for the taxable value of an estate up to $30 million. The proposal would then apply a rate of 30 percent to the taxable value of an estate above $30 million. It also would eliminate the deduction for state estate taxes paid, thereby raising a small amount of additional revenue at the expense of states.[3]
The Joint Committee on Taxation estimates show that with these changes, Senator Kyl’s proposal would lose $60 billion in revenue in 2016, or 74 percent of the revenue that the Joint Tax Committee projects would be lost by estate tax repeal in that year.[4] The Joint Committee’s estimate similarly shows the new proposal losing 74 percent as much as full repeal over the 2012-2016 period, which constitutes the first five-year period in which the proposal’s budgetary effects would be fully felt. The addition of the new 30 percent tax bracket for estates over $30 million thus does little to mitigate the high cost of Senator Kyl’s original proposal (see Figure 1).
Moreover, while this cost estimate reflects Senator Kyl’s intended exemption level and his elimination of the state estate tax deduction, it does not reflect the permanent 15 percent rate that Senator Kyl seeks for the taxable value of an estate below $30 million. In preparing its cost estimates, the Joint Committee on Taxation must assume current law, under which the 15 percent tax rate on capital gains is slated to revert to 20 percent at the end of 2010, one year after Senator Kyl’s proposal would take effect.
Yet if, as the White House, the Congressional Republican Leadership, and Senator Kyl all intend, the 15 percent capital gains rate is extended, the cost of the new Kyl proposal would be greater than the Joint Tax Committee estimates show. Urban Institute-Brookings Institution Tax Policy Center estimates indicate that the cost would reach about 80 percent of the cost of repeal over the long term, which means more than $600 billion in revenue losses from 2012-2021, the first ten-year period in which the proposal’s full budgetary effects would be felt. The total cost would be about $800 billion over the 2012-2021 period once the cost of the increased interest payments on the debt are included, as they should be in assessing the proposal’s impact on deficits and debt. This is the period in which the baby boomers will be retiring in large numbers and federal health care and retirement costs will rise.