Tuesday, May 4, 2010
President Obama was widely criticized for "dithering" over the decision of whether to add more troops in the Afghanistan War. Yet Presidents and Congresses over the past decade escaped similar opprobrium for “dithering” in the face of the long-scheduled one-year repeal of the estate tax beginning January 1, 2010, to be followed by the reinstatement of the tax on January 1, 2011. Although the “smart money” agreed after the passage of the Bush tax cuts in 2001 that the Administration and Congress would never allow the repeal-reinstatement scenario to play out, that is precisely where we now find ourselves. In this TePoel Lecture and Keynote Address, delivered at Creighton University School of Law on April 16, 2010 as part of a Symposium on Estate Planning: Moral, Ethical, and Religious Perspectives, I discuss what the failure to enact a new estate tax law by the end of 2009 tells us about the state of our tax law and politics.
The lecture first discusses the history and purpose of the estate tax (and companion gift tax and generation-skipping tax). For eighty-five years, there was a rough consensus that the estate tax raised needed revenue, enhanced the progressivity of the tax system, and helped curb concentrations of wealth, in line with the experience of other countries. But the estate tax consensus evaporated in the United States during the 1990s and 2000s, as anti-tax advocates turned large swaths of the public and politicians against the estate tax, culminating in the 2001 Bush tax cuts (which unfolded in a context very similar to the recent health care reform legislation).
It is especially ironic that the political establishment allowed the estate tax to expire at a time with a greater need than ever for the revenues, progressivity, and wealth redistribution produced by the estate tax. The lecture discusses several consequences of the expiration of the estate tax, including the impact on the timing of deaths and the chaos confronting estate planners, tax lawyers, and accountants during this interregnum period – including the distribution of a decedent’s property where the estate planning documents employ formula clauses tied to the estate tax; the roles of lifetime non-charitable gifts and charitable gifts; the application of the new basis rules in the absence of IRS guidance; and the specter of Congress retroactively bringing back the estate tax. Although a unanimous Supreme Court sixteen years ago (United States v. Carlton, 512 U.S. 26 (1994)) gave a wide constitutional berth to Congress in enacting retroactive tax legislation, each passing day adds to the potential retroactive reach-back and increases the possibility in this Tea Party age that Justice Scalia’s critique of “bait-and-switch” taxation will attract more adherents. The lecture concludes by discussing three recent celebrity deaths – Casey Johnson, Ruth Lilly, and Dan Duncan – and asks whether any of those estates might contest a retroactive re-imposition of the estate tax. In many ways, a successful constitutional challenge would be a fitting denouement to the costs of estate tax dithering.