The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) are scheduled to sunset on December 31, 2010. On April 18, 2002, the House passed legislation, H.R. 586, that would remove the sunset provision and thereby make permanent all other provisions of the tax cut law enacted in June 2001. This includes making permanent the repeal of the estate tax. On June 6, the House passed a free-standing estate tax repeal bill. H.R. 2143 would remove the sunset provision of EGTRRA solely with respect to the estate tax provisions of the 2001 Act

Noto, Nonna A.

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Congressional Research Service ˜ The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS21224Updated July 23, 2002Estate Tax: Legislative Activity in 2002Nonna A. NotoSpecialist in Public FinanceGovernment and Finance DivisionSummary Under the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA, P.L. 107-16), the estate tax is scheduled to be repealed in 2010 butreinstated in 2011.  All tax provisions of EGTRRA are scheduled to sunset onDecember 31, 2010.  On April 18, 2002, the House passed H.R. 586, part of whichwould remove the sunset provision and thereby make permanent the repeal of the estatetax and all other provisions of the tax cut law enacted in June 2001.   On June 6, 2002,the House passed H.R. 2143 which would remove the sunset provision solely from theestate tax provisions of EGTRRA.  The House defeated a substitute amendment offeredby Representative Pomeroy that would have retained the estate tax but increased theexclusion to $3 million per decedent in 2003.  The Senate leadership agreed to take up the estate tax alone, before June 28, 2002,through H.R. 8, under a unanimous consent agreement.  On June 12, the Senate failedto waive the budget point of order on the three amendments offered.  The Gramm-Kylamendment, identical to H.R. 2143, would have removed the sunset provision on theestate tax provisions of EGTRRA, making estate tax repeal permanent.  A Democraticsubstitute amendment offered by Senator Conrad would have kept the maximum estatetax rate at its 2002 level of 50% and increased the exclusion per decedent to $3 millionin 2003 and $3.5 million in 2009.  An amendment to the Democratic substitute offeredfor Senator Dorgan would have provided a full tax deduction for qualified family-ownedbusiness interests starting in 2003, increased the exclusion to $4 million per decedentin 2009, and permitted the maximum tax rate to continue to fall to 45% for 2007 andafter.  The underlying estate tax repeal bill, H.R. 8, was not voted on and was returnedto the Senate calendar.  This report will be updated as legislative events warrant.BackgroundThe estate tax and generation-skipping transfer (GST) tax are scheduled to berepealed effective January 1, 2010, under Title V of the Economic Growth and Tax ReliefReconciliation Act of 2001 (EGTRRA, P.L. 107-16).  However, under Title IX of theAct, the estate tax repeal, and all other provisions of EGTRRA (pronounced egg-tra), arescheduled to sunset as of December 31, 2010.  If the sunset provision is not repealed, inCRS-21 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 2143,“Permanent Death Tax Repeal Act of 2001,” JCX-51-02, 107th Cong., 2d Sess., June 4, 2002.2  In addition to extending the provisions of EGTRRA, P.L. 107-16, H.R. 586 contains provisionsto improve taxpayer protection and Internal Revenue Service accountability.  H.R. 586  passedthe House on April 18, 2002, by a vote of 229 to 198.2011 tax law would return to the law that was in place prior to the enactment of EGTRRAon June 7, 2001.  For the estate tax, the exclusion amount would have risen to $1 million.For those concerned with permanently repealing the estate tax, attention in 2002 hasfocused on removing the sunset provision of EGTRRA with respect to the estate taxprovisions of the Act.  The estate tax would then be eliminated from 2010 onward.  Otherchanges made by Title V of EGTRRA would also continue, such as replacing the step-upin basis with a modified carryover basis for assets transferred at death and retaining thegift tax on transfers during one’s lifetime even when the estate tax is repealed.  Therevenue cost of permanently repealing the estate and generation-skipping transfer tax wasestimated at $55.8 billion for FY2012.1 Summary of Major Actions and AnnouncementsDuring 2002, estate tax proposals offered by Republican Members in both houseshave focused on making the repeal of the estate tax permanent.  The Bush Administrationsupports permanent repeal.  Alternative proposals offered by Democratic Members in theHouse and Senate would have retained the estate tax but made some changes, such asmaking special exceptions for qualified family-owned business interests (QFOBI) and/oraccelerating an increase in the exclusion amount for all estates.  On April 16, 2002, Senate Majority Leader Thomas Daschle indicated that he wouldnot bring up for Senate floor consideration legislation to extend the entire EGTRRA taxcut package.  On April 18, 2002, the House approved such a measure.  It passed H.R. 586,part of which would make permanent all of the tax provisions in EGTRRA by eliminatingTitle IX, which sunsets all other parts of the Act as of December 31, 2010.2  Among itsmany effects, removing the sunset provision would make permanent the repeal of theestate tax, scheduled under EGTRRA to take effect in 2010.In the Senate, there were several attempts in February and April to address the estatetax through amendments to legislation on other matters (described last in this report).  OnApril 23, in order  to prevent the estate tax issue from delaying the energy policy bill (S.517), Senator Daschle agreed to schedule Senate consideration of a free-standing estatetax repeal bill under a unanimous-consent time agreement, before June 28, 2002.  On May 14, 2002, House Majority Leader Richard Armey announced that the Housemight consider its own free-standing bill to permanently repeal the estate tax before theSenate considered estate tax legislation.  On June 6, the House passed H.R. 2143, thePermanent Death Tax Repeal Act of 2001.  H.R. 2143 would remove the sunset provisionwith respect to the estate tax provisions of EGTRRA (Title V) only.  The House defeateda substitute amendment offered by Representative Pomeroy that would have retained theestate tax but increased the exclusion $3 million per decedent effective in 2003.  CRS-33 As under current law, the exclusion remains per decedent in the Pomeroy, Conrad, and Dorganproposals. Unlike some proposals offered in previous years, these proposals did not provide thatany of the exclusion amount not used by the first spouse to die could automatically be appliedlater to the estate of the second spouse to die. However, with adequate estate tax planning, acouple could take advantage of two exclusions, and two QFOBI deductions where applicable toa family-owned business.4 Under EGTRRA, the estate tax exclusion amount is scheduled to rise from $1 million in 2002and 2003, to $1.5 million in 2004 and 2005, $2 million in 2007 and 2008 and $3.5 million in2009, before the tax is repealed in 2010.5 The step-up in basis rule sets the basis (cost) of  assets transferred at death to the value at thedate of the decedent’s death.  The effect is to eliminate capital gains tax liability for heirs who sellan inherited asset, on the increase in an asset’s value before the decedent’s death.  EGTRRA’smodified carryover basis limits the permitted step-up in the original adjusted basis of assetstransferred at death to $1.5 million per decedent, plus $3 million for assets transferred to asurviving spouse. On June 11, 2002, the Senate began its consideration of the estate tax by taking upH.R. 8.  Under the unanimous consent agreement, 60 votes were needed to waive Section311 of the Congressional Budget Act  in order to consider an amendment.  On June 12,the Senate failed to waive the budget points of order on the three amendments introducedby Senator Conrad, Senator Dorgan, and Senators Kyl and Gramm.   H.R. 8 was returnedto the Senate calendar. H.R. 2143 and Pomeroy Democratic Substitute Amendment H.R. 2143, the Permanent Death Tax Repeal Act of 2001, was introduced byRepresentative Dave Weldon on June 12, 2001, soon after the enactment of EGTRRAon June 7, 2001.  The bill would remove the sunset provision only with respect to TitleV of EGTRRA, which contains the estate, gift, and generation-skipping transfer taxprovisions.  The House passed H.R. 2143 on June 6, 2002, by a vote of 256 to171.Representative Earl Pomeroy offered an amendment in the nature of a substitute toH.R. 2143 for the Democrats (H.Amdt. 502, submitted June 6, 2002).  The amendmentwould have retained the estate tax but increased the estate tax exclusion to $3 million perdecedent3 effective January 1, 2003, to remain at that level.4  Section 2057, the specialprovision for qualified family-owned business interests, would have terminated at the endof 2002, one year earlier than under EGTRRA (since the $3 million exclusion availableto all estates would exceed the $1.3 million deduction per decedent for family-ownedbusinesses).   The maximum estate tax rate would have remained at 50% (where it is in2002 under EGTRRA, compared with 55% under prior law).  But the 5% “bubble” surtaxwould have been reinstated to phase out the advantage of  the graduated rates, as well asthe applicable credit amount, for a range of estate values over $10 million, making themarginal tax rate 55% (rather than 60% under prior law) in that range.  The Pomeroysubstitute amendment would have repealed the modified carryover basis rules thatEGTRRA implements in 2010 and instead continued the step-up in basis rules undercurrent law.5 The Pomeroy amendment also included valuation rules for certain transfersof nonbusiness assets and a limitation on minority discounts.  The amendment wasdefeated by a vote of 197 to 231.  CRS-46 Revenue loss estimates from the Joint Committee on Taxation.  As with any of the proposals thatincreased the exclusion amount sooner or higher than EGTRRA does, but continued the estate taxinto 2010 and beyond, the Pomeroy proposal would have had larger revenue losses in the shortterm (five years) but smaller losses in the long term (ten years, or periods including FY 2011 andbeyond).7 Under the unanimous consent agreement, when the bill reached the floor, only four amendmentsto the bill would be in order, all of which must pertain to the estate tax.  Senator Daschle or hisdesignee could offer one amendment to the bill (which must be the first amendment offered) andtwo second-degree amendments to that amendment could be offered by Democratic Senators.After action on the two second degree amendments, Senator Gramm could offer one amendmentto the bill.  For each amendment, there would be a motion (requiring 60 yea votes) to waive theBudget Act (Section 311 of the Congressional Budget Act).  If the Budget Act were waived fora particular amendment, it would then be debated for two hours equally divided.  If any of theamendments were adopted, the Senate would proceed to vote on final passage of the bill.  If noneof the amendments received the 60 votes needed to waive the Budget Act, the bill would bereturned to the calendar and further consideration would occur on H.R. 8 only if it were lateragain called up for consideration.8 H.R. 8 would have phased out the estate, GST, and gift taxes over a 10-year period and repealedthem  in the 11th year.  Many provisions of H.R. 8 were included in Title V of EGTRRA, P.L.107-16, but not repeal of the gift tax. 9 Although a second Democratic second-degree amendment was permitted under the UC timeagreement, none was offered.The revenue loss estimates for H.R. 2143 were $9.2 billion for FYs 2002-2007;$99.2 billion over FYs 2002-2012; and $740 billion over FYs 2013-2022; for a total ofapproximately $850 billion over FYs 2002-2022.  In comparison, the Pomeroy substituteamendment was estimated to lose $21.9 billion over five years, $5.3 billion over 10 years,$165 billion over the second decade, and $170 billion over 20 years.6 Senate Amendments Offered to H.R. 8On April 23, 2002, the Senate reached a unanimous consent (UC) agreement underwhich it was to take up H.R. 8 by June 28, 2002.7  (H.R. 8, the Death Tax Elimination Actof 2001, was passed by the House on April 4, 2001, in the first session of the 107thCongress.8)   Following the terms of the UC agreement, the Senate began considerationof H.R. 8 on June 11 and held its votes on June12, 2002.  Three amendments were offeredto H.R. 8, but none received the 60 votes needed to waive the budget point of order.9  Theunderlying estate tax reduction and repeal bill, H.R. 8, was returned to the Senatecalendar.  A Democratic substitute amendment was offered by Senate Budget CommitteeChairman Kent Conrad (S.Amdt. 3831, submitted June 11, 2002).  It would have kept themaximum estate tax rate at its 2002 level of 50% and provided a $3 million exclusion perdecedent, effective in 2003, and a $3.5 million exclusion starting in 2009.  The 5% surtaxwould be restored on a range of estate values over $10 million to phase out the advantageof the applicable credit amount as well as the graduated tax rates.  The Conradamendment also included a section setting valuation rules for certain transfers ofnonbusiness assets in conjunction with business entities and a limitation on minoritydiscounts (if an individual transferee did not have control of an entity but the transfereeCRS-510 Currently, through 2003, the maximum amount of the deduction for qualified family-ownedbusiness interests, in combination with the applicable exclusion amount available to all estates,is $1.3 million, higher than the amount available to other estates.  Under EGTRRA, Section 2057is scheduled to be repealed in 2004 when the applicable exclusion amount for all estates rises to$1.5 million.  Thus, under EGTRRA, there would no longer be preferential estate tax treatmentfor family-owned businesses compared with other assets after 2003.  The Pomeroy and Conradproposals take a similar position.  In direct contrast, the Dorgan proposal would have restoredpreferential treatment for family-owned businesses and made the dollar amount unlimited. and members of the family did have control); this was identical to the section containedin the Pomeroy substitute amendment in the House.The Conrad amendment would have kept the estate and generation-skipping taxesand the step-up in basis, by eliminating their repeal under EGTRRA.  It would have keptother estate tax changes under Title V of EGTRRA by removing the sunset provision forthem.  But it would have kept the sunset provision for titles other than Title V.  It wouldhave terminated the Section 2057 provision in 2003 rather than 2004 under EGTRRA(because the exclusion amount of $3 million would already be larger than the $1.3 milliondeduction available to qualified family-owned business interests).  The Conradamendment was estimated to cost $12.6 billion in revenues over the first ten years.  Witha vote of 38 to 60, the Senate failed to waive the budget point of order on the Conradamendment.Senator Byron Dorgan offered a second-degree amendment to the Democraticsubstitute (S.Amdt. 3832, offered June 12, 2002) labeled “Estate tax with full taxdeduction for family-owned business interests.”  Senator Dorgan’s proposal, like theConrad proposal, would have amended several provisions  in Title V of EGTRRA, thetitle which deals with estate, gift, and generation-skipping transfer taxes and removed thesunset on them.  But it would have left the sunset for other provisions of EGTRRA.Notably, effective in 2003, the Dorgan proposal would have eliminated the dollarlimits on the special deduction for qualified family-owned business interests (QFOBI,defined in Section 2057 of the Internal Revenue Code) and made the deductionpermanent.10  Starting in 2009, the Dorgan proposal would have increased the applicableexclusion amount (the estate tax exemption) to $4 million per decedent, and set it toremain there.  It would have retained the estate and generation-skipping transfer taxesafter 2009.  It would have kept the step-up in basis rule for determining the basis forassets transferred at death, and not introduce the modified carryover basis in 2010.   Itwould have let the maximum rate of tax fall to 45% as scheduled under EGTRRA, butremain there from 2007 on, with no repeal in 2010.  It would have eliminated the furtherreduction of the maximum gift tax rate from 45% to 35% in 2010.  With a vote of 44 to54, the Senate failed to waive the budget point of order on the Dorgan amendment.The Gramm-Kyl amendment (S.Amdt. 3833, submitted June 12, 2002) was identicalto H.R. 2143 as passed by the House.  It would have removed the sunset provision onlyon the estate tax provisions of EGTRRA, thereby making repeal of the estate taxpermanent from 2010 on.  The Bush Administration supported Senate approval of theamendment.  The vote of 54 to 44 failed to waive the budget point of order on theGramm-Kyl amendment. CRS-611 S. 1731 was the Agriculture, Conservation, and Rural Enhancement Act of 2001.  Further actionon S. 1731 occurred as H.R. 2646, which became P.L. 107-171.  The estate tax reference was notincluded in the final Act.12 S. 517 was a bill to authorize funding the Department of Energy to enhance its mission areasthrough technology transfer and partnerships for fiscal years 2002 through 2006.  S. 517 was laterincorporated in H.R. 4 as an amendment.Estate Tax Amendments Previously Offered in the SenateIn February and April 2002 there were several attempts in the Senate to address theestate tax through amendments to legislation on other matters.  An amendment to removethe sunset on the repeal of the estate tax was offered for Senator Jon Kyl on February 5.(S.Amdt. 2807 was an amendment to S.Amdt. 2721 to H.R. 622, the economic stimulusbill.)  The amendment was considered by the Senate on February 6 but not voted upon.On February 13, the Senate agreed, by a vote of 56 to 42, to an amendmentexpressing “...the sense of the Senate that the repeal of the estate tax should be madepermanent by eliminating the sunset provision’s applicability to the estate tax.”  (S.Amdt.2850 was introduced by Senators Jon Kyl and Don Nickles as an amendment to S. 1731,the Senate’s farm aid bill.11)The amendments regarding the estate tax that were offered, but not voted upon, inApril 2002 in relation to S. 517, the energy policy bill,12 were the same as those lateroffered to H.R. 8 by Senator Gramm and Senator Dorgan.  On the Republican side,Senator Gramm’s amendment to S. 517 (S.Amdt. 3144, offered April 18, 2002) wouldhave made repeal of the estate tax permanent by removing the sunset provision for theestate, gift, and generation-skipping transfer tax provisions of EGTRRA only.  On theDemocratic side, Senator Byron Dorgan introduced a proposal for an “estate tax with fulltax deduction for family-owned business interests.”  (The Dorgan proposal was offeredin three separate amendments to S. 517, all with the same language but designed for usein different parliamentary settings:  S.Amdt. 3293, S.Amdt. 3303, and S.Amdt. 3304,offered April 23, 2002.)For Additional InformationCRS Electronic Briefing Book, Taxation, “Federal Estate and Gift Tax,” available at[http://www.congress.gov/bfbk/html/ebtxr35.html].CRS Report RL31061, Estate and Gift Tax Law: Changes Under the Economic Growthand Tax Relief Reconciliation Act of 2001, by Nonna A. Noto.CRS ReportRL30600, Estate and Gift Taxes: Economic Issues, by Jane G. Gravelle andSteven Maguire.CRS Report 95-416, Federal Estate, Gift, and Generation-Skipping Taxes: A Descriptionof Current Law, by John R. Luckey, Legislative Attorney.

Estate Tax: Legislative Activity in 2002

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Estate Tax: Legislative Activity in 2002

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