At the beginning of the new year, that tax is eliminated entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more — essentially the law in effect before the 2001 change.
At the time, Republicans assumed they would simply fix the flaws well before 2009 ever arrived, presumably through a full repeal of the estate tax. But the political pendulum swung, bringing to power Democrats who were highly resistant to rescinding the tax, a move that many of them believed would be too generous to the nation’s most affluent.
As this year drew to a close, Democrats scrambled unsuccessfully to find an alternative to the wild swings in taxation. But they failed to persuade Republicans to agree to extend the current law, at least until a better approach could be devised.
There is yet another wrinkle. When they scheduled the demise of the estate tax for 2009, the authors of the 2001 tax measure replaced it with a capital gains tax of 15 percent on inherited property that is later sold.
The threshold for being subject to those taxes is set lower, with the first $1.3 million in capital gains exempted for general heirs and $3 million for spouses. Democrats argue that thousands of estates that would not have been subject to taxes under the current law could get hit in 2010 even as those at the higher end of inheritance scale escape the 45 percent tax bite.
“If you are rich, celebrate,” said Senator Harry Reid, Democrat of Nevada and the majority leader. “If you are not, you should be afraid.”
Republicans note that the capital gains tax will be levied only if heirs sell the assets, providing incentive for families to hold on to their farms and businesses.
“As between paying 45 percent and 15 percent, I think it is pretty clear what most small business folks and farmers would like to do,” said Senator Jon Kyl, Republican of Arizona and a longtime foe of the estate tax.
Democrats hope to make the situation moot by restoring the current tax and making it retroactive to Jan. 1. Republicans would like to negotiate a new tax structure, perhaps taxing eligible estates at the 15 percent capital gains rate.
Either way, one thing does seem certain: the struggle over the death tax is not likely to pass on anytime soon.