Just before senators departed for the Christmas holiday, they wrapped up most of their pressing business for the year, including health care reform and an extension of the debt ceiling, but they failed to address the expiring estate tax. Because of the Senate's inaction, the estate tax effectively died on Jan. 1 and will stay dead until Jan. 1, 2011. That is until senators return from their winter break and resurrect the tax, which top tax writers on Capitol Hill are promising to do before March.

According to a recent Congressional Quarterly (subscription required) article, Sen. Charles Grassley (R-IA), the ranking member of the Senate Finance Committee, said that he "expects tax writers to act quickly to revive the estate tax." The only question is whether the fix will be permanent or temporary. President Obama endorsed permanent extension of 2009 estate tax levels that provide a $7 million exemption for couples at a 45 percent tax rate. The House passed a permanent extension of the 2009 estate tax in December. Before the winter break, Sen. Max Baucus (D-MT), the chair of the Senate Finance Committee, favored temporarily extending the tax in order to address it later in a larger tax package.

Grassley also told reporters during his regular weekly conference call that Republicans best hope for the estate tax would be adoption of a proposal similar to that introduced last year by Sens. Blanche Lincoln (D-AR) and Jon Kyle (R-AZ). The proposal raised the exemption level to $10 million for couples and lowered the tax rate to 35 percent. The only comforting aspect of that statement is that enemies of the estate tax seem to have given up on repeal, if only temporarily, and have resigned themselves to attempting to weaken the tax.

The other question is whether Congress will apply the revived estate tax retroactively to Jan. 1. If Congress chooses to do so, most expect legal challenges from heirs to wealthy estates that turned over during the interim, though the Supreme Court has ruled in favor of retroactively applied taxes in the past. In what may be a sign that Congress prefers to avoid those probable legal challenges no matter what, the CQ article notes that Baucus did not guarantee that the Senate would apply the tax retroactively.

Either way it will be interesting to see how the above scenarios play out in the months ahead. With any luck, we'll have at least the 2009 estate tax permanently extended or maybe even a more progressive scheme like the one introduced by Rep. Jim McDermott (D-WA) last year.

Image by Flickr user skullkid used under a Creative Commons license.