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.

House Majority Leader Steny Hoyer has released the floor schedule for next week. Look for debate to start Wednesday on H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses.

The bill would continue as permanent this year’s $3.5 million exemption from the death tax and a permanent top tax rate of 45 percent. Under current law, the estate tax falls to 0 in 2010 and then kicks back up to its previous, damaging level. As the American Farm Bureau explains: “When this happens, stepped-up basis will be limited to $1.3 million per person plus an additional $3 million for property passed to a surviving spouse. After 2010, the exemption will shrink to $1 million a person and the top rate will rise to 55 percent and full step up in basis will be reinstated.”

The National Association of Manufacturers is part of the Family Business Estate Tax Coalition, which urges a permanent rate. In a September 24 letter to the Senate, the coalition argued:

The FBETC is on record this year supporting the Lincoln/Kyl estate tax amendment that passed the Senate floor with a majority of votes during the budget proceedings. This amendment would provide family businesses with certain and permanent relief by reducing the top rate to 35 percent and increasing the exemption to $5 million. Such relief is critical for family businesses at a time when they are struggling to expand their businesses and create much needed jobs.

A House version is H.R. 3905.

So, House bill:

• $3.5 million exemption, 45 percent top tax rate

Preferable bill, which encourages investment and job creation:

• $5 million exemption, 35 percent top tax rate.