Rep. Jim McDermott just introduced a new Estate Tax Bill that would return the estate tax exemption to $1.0 million and restore the pre-20001 progressive rate structure with a top rate of 55%. This bill makes sense as a fair revenue raiser except for its failure to acknowledge that same-sex couples will be over taxed unless they are allowed access to the marital deduction that opposite sex married couples are given.
I have blogged about this issue before. Here and here. McDermott’s bill (see press release here) would close some current loopholes and return the estate tax regime to its pre-2001 status. That means a $1.0 million exclusion and unlimited marital deduction for married couples (other than same-sex married couples so long as DOMA remains law). One million dollars used to seem like a lot to me (remember the old TV program “The Millionaire?”). But these days, in certain communities, a lifetime of hard work produces a median-priced home and a retirement plan, which together can easily exceed $1.0 million. Zillow lists many California cities where the current median price for homes exceeds $1.0M (e.g., Palo Alto, Los Altos, Los Gatos). Even if the partners co-own the home so that only half the value is included in the estate of the first to die, adding in the value of any remaining balance in the retirement plan can easily push a single estate over $1.0 million. In such cases, when the first partner dies, the surviving partner may be forced to sell the home to pay the taxes.
I support the estate tax. But it should be equitable and treat all couples the same. Repealing DOMA is not sufficient because many states forbid any sort of recognition for same sex couples no matter how long they’ve been together and no matter how committed they are. The Respect for Marriage Act could fix that by recognizing at the federal level all marriages entered into legally in any state, but I’m not holding my breath for Congress to pass this law. Of course DOMA may fall as a result of litigation. Remember that DOMA is currently being challenged in a case filed in New York challenging the denial of the marital deduction. For a great story about the couple (Edie Windsor and Thea Spyer) see here. But if a court strikes down DOMA that is likely to help only couples in marriage states.
Transforming the estate tax into a tax that is levied only once a generation would fix the same-sex couple problem. But that would require a major overhaul of the current system. Extending the marital deduction to same-sex partners whether married or not would also fix the problem, although we’d probably need some bright line test to show the IRS that this is a committed relationship akin to marriage. Until we can accomplish either of these solutions, I think we should keep the exemption level high enough to exceed some reasonable national figure like double the median home value in the highest priced housing market in the country – or maybe the average median value in the top ten highest priced markets. I think $3.0 million would be a fairer figure than McDermott’s proposal for $1.0 million. But that’s just my opinion.
Of course if Congress does nothing before 2013, the exemption level is set to return to the $1.0 million dollar figure anyway. Raise your hand if you think it is likely that Congress will do nothing.
