The Super Committee
Congress has recently created a bipartisan “Super Committee” that is tasked with coming up with cutting $1.2 trillion from the U.S. Debt by November 23, 2011. The Super Committee, also known as the U.S. Congress Joint Select Committee on Deficit Reduction, was created as a result of the recent debt ceiling crisis that was resolved (at least temporarily) by the Budget Control Act of 2011.
The Super Committee consists of six members (three Democrats and three Republicans) of the U.S. House of Representatives and six members (three Democrats and three Republicans) of the U.S. Senate. Any portion of the Tax Code or the budget is at play to help make the required cuts.
If the Committee comes up with an agreement by November 23, the recommendations would immediately be put up for a vote in both the House and the Senate. If either the Committee cannot agree or Congress doesn’t pass the recommendations, a $1.2 trillion across-the-board cut of defense and domestic spending programs will automatically be triggered.
Effects on Estate and Gift Taxes
The most cynical of us believe that the Super Committee simply won’t come up with any agreement by November because each member will vote along party lines. What are the respective viewpoints?
- In general, Democrats are against any cuts to entitlement programs (such as Medicare and Social Security). They would instead desire an increased tax burden on the rich.
- In general, Republicans are against increased revenues from taxes, and are instead in favor of cuts in government spending.
Senator Jon Kyl (R-Arizona) was recently appointed to the Super Committee. According to this report by the New York Post, his inclusion will most likely mean that the estate tax will not be increased. Sen. Kyl was at the forefront of the compromise with President Obama that led to the Tax Relief Act of 2010 last December, and has long believed that the estate tax is “unfair since the government is taxing assets that were already taxed when they were earned”. His placement on the Super Committee would seem to indicate that any compromise from Republicans would need to come from tax increases elsewhere.
Additionally, the parties have already been working towards an estate tax compromise all year – the Post reports that the parties appear to be comfortable with the present estate and gift tax exemption of $5 million. If this is indeed the case, less than 0.5% of Americans will need to worry about estate or gift taxes for the foreseeable future, and all of our discussions regarding advanced estate planning strategies will mainly be of interest to the very rich or those who serve them.
On the other hand, if the Super Committee does not reach agreement, then the rates agreed upon in last December’s Tax Relief Act will remain unchanged and only last until December 31, 2012. Thereafter, starting in 2013, the estate, gift and generation-skipping taxes will revert back to pre-2001 levels (a $1 million exemption with a maximum rate of 55%) unless a compromise is reached before then.
This latter case is the reason that we must still pay close attention to the developments in Washington, D.C. If no agreement is reached, we are set up for a big tax fight at the end of 2012, right after the next Presidential election. Whether President Obama is re-elected or not, he will still have veto power over any tax or budget bill that passes through Congress at that time.
Is it likely that taxes will revert to pre-2001 levels? Probably not – in my humble opinion, my guess is that the current $5 million exemption with a maximum tax rate of 35% will remain intact. Neither Democrats nor Republicans currently control the government, so compromise is most likely.
However, while the estate tax may practically be on its last legs for the vast majority of us, we must still wait and watch before we can be sure. These issues have remained uncertain for over a decade now, so what’s another year and a half?
- Estate Tax Foe added to “Super Committee” (ncestateplanningblog.com)
- Senate Democrats named to deficit-reduction ‘Super Congress’ committee (dontmesswithtaxes.typepad.com)
- Super Committee: Obama’s Opening Bid on Taxes (forbes.com)