Threat of Estate Tax Rollback Finished for 2006

by Matthew Madia, 11/21/2006

Outgoing Senate Majority Leader Bill Frist (R-TN) admitted last week the Senate was unlikely to pass any permanent reduction to the estate tax in 2006, despite repeated attempts and rhetorical ultimatums from Frist and his allies.Frist has insisted for months that the so-called Trifecta’s component parts - the first increase in the minimum wage since 1997, the extension of a package of popular tax credits, and a major rollback of the estate tax - would be voted on together as a package or not at all. But Frist appears unable to follow through on his threat. Last week, he admitted it was most likely the Senate would work on one or more of the individual parts of the Trifecta bill before finally adjourning for the year in December.

Frist created the Trifecta bill this summer in a sly, yet potentially brilliant legislative strategy aimed at enticing the three final votes needed to pass a drastic rollback of the estate tax. Unfortunately for Frist and his supporters, the vote count on the Trifecta legislation in late July was precisely the same as on a House-passed estate tax repeal bill in early June. In the end, the Trifecta strategy seemed to be based more on Frist's desire to excite his party’s base than one based on a realistic assessment of legislative likelihood.

While Trifecta may be dead and gone, some of the individual parts are likely to arise soon, either in this lame-duck session or in the 110th Congress, as stand-alone pieces of legislation.

Minimum Wage
Members of both parties campaigned on an increase on the federal minimum wage. It is less likely to find time in the three weeks left of congressional action, but the incoming Democratic leadership has promised prompt action on a proposal to raise the minimum wage from $5.15 to $7.25 per hour over the next two years. In fact, it’s a leading part of incoming House Speaker Nancy Pelosi’s (D-CA) "first 100 hours" agenda. While many Democrats inside and outside of Congress are calling for the wage to be indexed for inflation to assuage future erosion of its value, Sen. Ted Kennedy (D-MA) and other leaders in the incoming 110th Congress will likely prefer to wait until more increases have been agreed to before locking in an automatic inflationary adjustment.

Because increasing the minimum wage is very popular - a Pew Research poll conducted this spring indicates that over 80 percent of Americans, and 70 percent of Republicans, support it - President Bush will be hard-pressed to veto it, particularly if the increase includes some targeted tax credits to small businesses affected by it. Unhitched from the estate tax reductions, an increase in the minimum wage is almost assured of passing.

Extension of One-Year Tax Credits ("The Extenders")
The second leg of the three-part Trifecta bill is a package of popular tax credits due to expire at the end of 2006. Included in this package are a research and development credit for business, a state sales tax deduction, the work opportunity and welfare-to-work credit, and a college tuition deduction.

This package was originally part of the 2005 reconciliation tax bill and has gone through a series of changes over the last 20 months - moving from the reconciliation bill to a "trailer" bill, to the pension reform bill, and then to the Trifecta. The two-year, $40 billion set of tax credit extensions is widely considered must-pass legislation, but this consideration has not helped move it along since 2005. In addition, some Democrats have expressed concern that, should they re-instate Pay-As-You-Go (PAYGO) budget rules next year - another item on Pelosi’s “first 100 hours” agenda - they would then need to offset the $40 billion costs. More likely, however, is the extenders will be overwhelmingly passed in December before PAYGO rules are reestablished.

The Estate Tax
Both the minimum wage and extenders package are likely to see action in Congress in the next few months, if not sooner. What the future holds for the estate tax, though, is much less clear.

The 2001 law that gradually phased out the estate tax does not expire until 2010, when it is scheduled to revert to 2001 levels - an outcome almost no one in Congress sees as a viable solution. Incoming House Ways and Means Committee Chairman Charles Rangel (D-NY) has not mentioned the estate tax and has already ruled out making Bush’s 2001 and 2003 income tax cuts (also expiring in 2010) permanent. Action on the estate tax in early 2007 in the House is therefore less likely since it would have to go through Rangel’s committee first.

On the Senate side, however, incoming Finance Committee Chairman Max Baucus (D-MT) has been a long-time supporter of estate tax repeal. At the helm of the Finance Committee, Baucus could exercise considerable influence over moving an estate tax compromise forward in both the Senate and the House. In 2006, Baucus often remarked he was interested in a reform that would retain about half of the revenue from the estate tax ($500 billion over the next ten years). However, initial signals from the incoming chairman indicate he will have other priorities in 2007.