Bloomberg reports on business groups lobbying for a 35 percent death tax to prevent a return to the 55 percent tax rate at the end of the year. Business has long argued for eliminating the death tax altogether, but current political and budgetary realities make that an unrealistic goal at the moment.

A 35 percent rate “is really that sort of sweet spot of what’s acceptable to all sides,” said Dena Battle, director of tax policy for Washington-based National Association of Manufacturers. “We don’t want to see the tax go up to 55. We didn’t want to see the tax at 45.”

The longer Congress delays action, bringing a 55 percent tax closer to reality, the fewer reasons Democrats have to consider Kyl’s and Lincoln’s 35 percent alternative, said Jeff Shoaf, senior executive director for government affairs at Arlington, Virginia-based Associated General Contractors.

In a December 2009 column, Sen. Jon Kyl (R-AZ) explained the reasoning behind the language he and Sen. Blanche Lincoln (D-AR) have sponsored:

I have always believed that permanent repeal of the death tax represents the best policy, since it frees capital in the private market for more productive uses than fueling the federal government’s spending binge. However, even in the best of times, we have only been able to win 56 votes in the Senate for repeal, just shy of the needed 60. With the current makeup of Congress, permanent repeal is simply not in reach.

With that in mind, Democratic Senator Blanche Lincoln and I offered an amendment to the Senate budget resolution in 2009 that attempted to strike the best compromise. It would have permanently established a 35 percent death tax rate with a $5 million exemption amount indexed to inflation. That amendment passed by a vote of 51 to 48 with the support of 11 Democrats and every Republican senator. But, unfortunately, the congressional budget resolution is only an advisory measure.

How about a new estate tax paid only by union members?

That’s fair, isn’t it?

As of January 1, 2010, the federal estate tax falls to 0 percent. Unfortunately, as of Jan. 1, 2011, it returns to a top rate of 55 percent.

From The Blog of the Legal Times, “Estate Tax Battle Looms in 2010“:

“I think we all were really hopeful that everyone would come together and find that sweet spot that everyone could accept,” said Dena Battle, director of tax policy for the National Association of Manufacturers.

In the new year, lobbyists expect a rare effort to retroactively tweak the tax, which many are prepared to fight. . “I think there is going to be a significant effort to try and get this matter resolved early on,” Battle said. Chris Walters, manager for legislative affairs for the National Federation of Independent Business, said that “any tax increase that’s retroactive is unacceptable.”

USA Today reports taxpayers may be surprised to find that many estates are now taxed as capital gains. From “Estate tax set to expire Thursday“:

In the meantime, what might seem like a potential tax savings has become a guessing game for taxpayers, accountants, estate planners and tax lawyers. The impasse also could mean capital gains taxes on more inheritances.

“No one believed that Congress in its ultimate wisdom, with all the deficits looming, with a recession and two wars … would ever allow the estate tax to lapse. But that’s what’s happening,” said Martin Press, a tax attorney in Fort Lauderdale. “It’s created great uncertainty.”

Yes. Great, great uncertainty — and life-and-death consequences. From The Wall Street Journal, “Rich Cling to Life to Beat Tax Man“:

“I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days,” says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. “Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?”

UPDATE (6 p.m.): The expiration has definitely changed individual behavior, as witness USA TODAY’s founder, Al Neuharth, who writes a column, “For old, sick, rich is 2010 year to die?”:

In anticipation of the long-awaited death of the death tax, some at-risk people postponed some things until 2010. I know one person (me) who delayed until next week elective knee surgery (on both knees) that doctors recommended several years ago.

The odds are against my demise from that now rather-common surgery. But I decided to wait because I’ve carefully planned how to preserve in every way possible as much as possible of my little nest egg, not just for my wife but also for my eight children and two grandchildren.

From Forbes.com, “Congress Lets 50 Tax Breaks Expire”

Among the disappearing breaks are the research tax credit and an annual alternative minimum tax “patch,” which keeps 23 million additional middle-income Americans from being forced into calculating and paying the dreaded AMT. (For 2009, with the patch in place, 4 million upper-middle- and high-income families will pay AMT.)

Wasn’t the AMT fix one of the major issues in Congress of 2007, roiling the political waters with claims and counterclaims about tax increases and irresponsible legislating? And it’s just an afterthought this year. Strange.

For manufacturers, the R&D tax credit is a major issue.

For businesses, the lapsing of the R&D credit–a $7 billion a year break–is a particular problem, since companies must plan for long-term research commitments amid uncertainty. Since its enactment in 1981, the credit has been extended 13 times; in the mid-1990s there was a one-year gap when it wasn’t extended retroactively.

“Companies are sensitive to that,” says Monica McGuire, executive secretary of the R&D Credit Coalition in Washington, which represents such research heavyweights as 3M, AT&T, Genentech, Hewlett-Packard, and Xerox. “If Congress is serious about jobs in this jobless recovery, they ought not to treat the credit like a yo-yo,” she adds.The lapse could also affect companies’ reported earnings, since they won’t be able to assume the credit will be extended.

The expiring estate tax is a particularly complicated case, full of questions of life and death and retroactivity. Forbes.com covered the issue in a good story last week, “Congress Throws Estate Plans Into Disarray,” anticipating litigation and administrative nightmares. To say the least.

From Portfolio.com:

The House passed legislation December 3 to make the current estate tax rate of 45 percent permanent and exempt $3.5 million of assets from the tax. Many Republicans in the Senate, however want a lower rate and higher exemption. With health care reform dominating its agenda, the Senate couldn’t hash out this issue.

The House then planned to attach a two-month extension of the estate tax on today’s defense bill, but dropped the idea when it became clear that could jeopardize that bill’s passage.

So next year, Congress will try to reinstate the estate tax. They’ll probably try to make it retroactive so there is no tax-free window for death, but lots of experts say that would be unconstitutional.

• ABC News, “Democrats: Estate Tax Repeal to Be Short-Lived”
• Wall Street Journal, “Baucus to Try Next Year to Extend Estate Tax Retroactively”
• Bloomberg, “Estate Tax to Expire Temporarily as Extension Dropped”

Congress might not find it not so easy to quickly reinstate the elapsed tax in 2010. Every vote to impose the death tax will be one that can be described as a “vote to raise taxes on family-owned businesses by 45 percent.” Or 35 percent, or whatever the rate may be.

CQ Politics, “No Deal Yet on Estate Tax Extension”

Bloomberg, “Senate’s Baucus Seeks Temporary Estate-Tax Extension”

The Bloomberg article has an infuriating quote from Bill Gates Sr.

“Society has a just claim on these fortunes,” Gates told reporters today on a conference call organized by United for a Fair Economy, a Boston-based advocacy group in favor of keeping the estate tax. “The facts are clear: The estate tax raises substantial revenue from those with the capacity to pay it.”

The House has passed H.R. 4154, a permanent extension of the estate tax with an exorbitant top rate of 45 percent and a $3.5 million exemption, but the Senate is so bogged down with health care it may not get to the legislation before leaving for the holiday recess. The upshot would a one-year expiration of the death tax — a tax rate of ZILCH — for one year effective Jan. 1, which would be a hell of thing.

The death tax discourages investment by family-owned businesses and diverts useful resources into expensive estate planning, and its permanent elimination is a worthy goal. But a one-year expiration would create all sorts of perverse, even macabre incentives. With no action by Congress, the death tax would kick back in at the start of 2011 for estates valued above $1 million, with a top rate of 55 percent.

To be bald about it, the one-year absence of the estate tax creates an incentive to die. Those with property who want to leave it to their heirs? Better to shuffle off in 2010.

Some in the Senate don’t think it’s a problem. You can simply meet in January, pass something like the House bill and make it retroactive. Well…

The schedule has the Senate reconvening for the second session of the 111th Congress with a pro forma session on Jan. 5 and for business on Jan. 19. There are a lot of days in there for mortality to strike, and imagine the legal complications of IRS trying to collect on an estate from someone who died before Congressional enactment of a retroactive tax. Imagine the person circling January 4 on the calendar.

The Washington Business Journal reports on the state of play today, “Estate tax on brink of problematic repeal,” with a contribution from NAM Board Member Drew Greenblatt of Marlin Steel Wire Products.

Democrats are now looking at the must-pass Department of Defense appropriations bill to tack on an extension of the death tax. The bill starts in the House this week; the House could pass it and leave town, giving the Senate no opportunity to amend it.

Earlier posts here. The NAM opposed House passage of H.R. 4154, objecting to the high tax rate. See “Key Vote” letter here. We have previously expressed grudging acceptance of a permanent tax rate of 35 percent with a $5 million exemption.

The House passed H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act, by a vote of 225-200. Here’s the roll call.

The NAM’s Key Vote Committee had urged a no vote on the bill. Earlier Shopfloor.org posts on the issue.

UPDATE (5:10 p.m.): Should note that a motion to recommit was defeated, 187-233. (Roll call vote.) The motion included instructions to extend the one year of a 0 percent rate from 2010 to 2011.

The bill now goes to the Senate, which will do this or that and pass something to send back to the House and some conference agreement will win passage the last day before Congress breaks for the Christmas recess. Letting the tax disappear in January 2010 — as now called for in current law — and then return in full force of 55 percent in 2011 is politically untenable.

UPDATE (5:25 p.m.): Bloomberg story, “House Votes to Restore Estate Tax, Exempt $7 Million,” covers the bases, although it’s odd that the editors use the $7 million figure as the exemption. Not every business is owned by a married couple. The better point of reference is the basic one: A $3.5 million wealth exemption.

The National Association of Manufacturers yesterday sent a “Key Vote” letter to the House urging a no vote on H.R. 4154, which would make permanent the current estate tax rate of 45 percent with a $3.5 million exemption. (See yesterday’s blog post, “NAM Opposes House Bill to Set Permanent High Rate for Death Tax.”

Fox News anticipates today’s House vote in the report, ”Lawmakers Race to Extend Reduced Tax on Large Estates.” Supporters of the bill or an even higher tax rate emphasize the relatively small number of estates affected by the tax, about a quarter of 1 percent of all estates. We doubt those percentages comfort the many small, family-owned manufacturing companies affected by the tax: “Yeah, tough luck. You just happen to be one of the few punished for your success.”

In addition, as the NAM letter argues, the estate tax diverts investment from more productive uses:

For small and medium-sized manufacturers, owners and families, the estate tax is more than a one-time tax. In a recent survey of the NAM’s small and medium-sized manufacturers, respondents said that, on average, they spend $94,000 annually on fees and estate-planning costs in preparation for their estate tax bill. This is money that could have been used to grow businesses and add jobs.

More …

• Dow-Jones reports, “US Business Groups Split Over Estate-Tax Efforts.” True enough, but the differences are based mostly on tactical considerations as groups weigh several questions: What is realistically achievable in the current Congress, and would it improve the chances of more relief to let current law stand, leading to the tax’s full elimination in 2010 followed by its return in full force of 55 percent in 2011.
• NACS (the convenience store association), “NACS Urges Estate Tax Relief With Compromise Bill“: “NACS supports estate tax repeal. However, it does not support H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, because it quite simply is an incomplete solution to adequately removing this tax burden on family-owned and -operated convenience and petroleum retail operations. …Instead, NACS is asking members to consider an alternative measure, H.R. 3905, which would better protect small businesses by providing an exemption level of $5 million per person and a rate of 35 percent.”
•  National Cattlemen’s Beef Association, “NCBA Opposes House Proposal To Extend Current Estate Tax Law“: “The Pomeroy bill is a disservice to America’s family farmers and other small businesses,” said NCBA President Gary Voogt. “By keeping a flawed law in place, Congress will simply extend our problems with the current system into the future.”The Washington Post editorial page dismisses compromise legislation as “a travesty.” That’s overblown and offensive. Legislators who believe business owners and farmers should not be punished for successful lives are not committing “a travesty.” They’re supporting investment, jobs and free enterprise.
•  National Federal of Independent Business letter calling H.R. 4154 an “incomplete solution” and expressing support for H.R. 3905.

The National Association of Manufacturers just sent a “Key Vote” letter to members of the U.S. House urging a no vote on H.R. 4154 Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act.

Key votes are determined by the NAM’s Key Vote Advisory Committee and are used to rank a member’s voting record on manufacturing-related legislation.

From the letter (copy here):

The NAM has consistently supported efforts to either repeal or significantly reform the estate tax. For small and medium-sized manufacturers, owners and families, the estate tax is more than a one-time tax. In a recent survey of the NAM’s small and medium-sized manufacturers, respondents said that, on average, they spend $94,000 annually on fees and estate-planning costs in preparation for their estate tax bill. This is money that could have been used to grow businesses and add jobs.

Legislation enacted in 2001 gradually phases out the estate tax and ultimately repeals the tax in 2010. However, without congressional action to make the repeal permanent, the tax will revert in 2011 to the extremely high pre-2001 rates.

H.R. 4154 would make permanent the 2009 rate of 45 percent and the $3.5 million exemption. While the NAM appreciates efforts to provide certainty by making the estate tax rates permanent, we do not view a 45 percent rate or an exemption that is not indexed to inflation as efforts that will achieve significant reform.

The House is expected to vote on the bill on Thursday.