Tax Reform and the Estate Tax

President Trump and Republican lawmakers recently unveiled a blueprint for tax reform. Here’s a link to a story about this in U.S. News.

The blueprint calls for many things, including a reduction in and compression of income tax rates, a doubling of the standard deduction for income taxes, an elimination of most tax deductions other than the mortgage interest and charitable deductions. The blueprint also calls for the elimination of the alternative minimum tax (AMT), the estate tax, and the generation-skipping tax (GST). The blueprint calls for a dramatic reduction in the top corporate tax rates and a large reduction in the tax rate for pass-through entities (such as partnerships). Here’s a link to a deeper look at the proposal in the Atlantic.

There are many things which remain unclear, but here are a few of the uncertainties:

• If the estate tax and GST tax are repealed, will the gift tax remain? The gift tax is viewed as a backstop to the income tax and is a disincentive preventing people from dodging the income tax by gifting property to others in a different income tax situation.
• If the estate tax and GST tax are repealed, would the “step-up” in basis of Section 1014 of the Internal Revenue Code remain? The provision sets the income tax basis of property at the value determined for estate tax purposes. If there is no estate tax, it’s unclear what would happen with the step-up in basis. Other countries don’t have such a step-up in basis.
• Would the legislation have a sunset provision, like the Bush-era tax cuts? Due to the “Bryd rule,” legislation can be blocked if it will increase the deficit beyond a 10-year time horizon. Essentially, this means that 60 votes are required in the Senate to pass permanent legislation which would increase the deficit, even if using the reconciliation process.
• How will this tax cut be paid for? According to the Center for Budget and Policy Priorities, the plan would result in more than a $1.5 trillion cut in federal taxes over the next ten years. The current budget deficit for 2018 is $440 billion. This tax cut is expected to balloon the annual budget deficit by more than 1/3. Given that many in Congress have been deficit hawks, especially Republicans, this large increase in the deficit may be problematic for passage.
• Another hurdle for passage is on the income tax side. The proposal would eliminate the deduction for state and local income taxes. This would be extremely unpopular in many Congressional districts. Nearly half of the districts which reported the highest percentage of returns with deductions for state and local income taxes have Republican representatives. Here’s an article in Forbes examining this issue.
• Tax reform is very difficult. The last time this sort of comprehensive tax reform succeeded was in 1986, when Republican President Ronald Reagan worked with Democrats, including Speaker “Tip” O’Neill, to arrive at a deal. There’s an old proverb which is apropos: “there’s many a slip between the cup and the lip.” In the next blog, we’ll look at how potential changes to the estate and GST tax might impact typical families and others.