Election Results Create New Dynamic for Fiscal Cliff Talks

With the November 6 elections in the rear view, thoughts turn to the lame duck session and the coming 113th Congress. Observers inside the beltway continue to work to interpret the election results and determine how they will shape the near- and long-term prospects for an extension of current estate tax law and the possibility of future repeal. President Obama won reelection and Senate Democrats beat expectations, picking up two seats, despite having significantly more seats to defend than Republicans. In the House, Republicans retained the majority after losing a handful of seats.

Congressional leaders and the White House have struck a bipartisan and optimistic tone in the days following the elections, but a resolution of the fiscal cliff will still likely be difficult to achieve. Key Democrats have interpreted the election results as a mandate to pursue increased tax revenues from higher earners as part of any grand bargain, while Republicans assert a framework for tax and entitlement reform in 2013 must be part of any final deal. It is important to note that the idea of new revenues appears to be squarely “on the table” in current negotiations. Factoring significantly into the timing of the post-election debate is the fact the American people’s patience and the market’s tolerance are short for Congress to get its act together, the debt under control, and the economy back on track. In working to find a long-term deal, politics remains a key factor, such as campaign promises and the 2014 midterm elections, but both parties seem to recognize they will need to make concessions.

Advocates of estate tax relief will need to remain vigilant to prevent the interpretation of any election “mandate” extending beyond individual marginal rates to the estate tax. The President and congressional Democratic leaders are likely to make a strong push to increase the estate tax to the 2009 levels – a 45% rate and a $3.5 million exemption. Meanwhile, progressive legislators may push to keep the estate tax out of a deal altogether, as the law will automatically revert to their preferred 55% rate and $1 million exemption without legislative action.

However, the House will not only still support preserving the current 35/5 parameters, but it will also have a majority that prefers full repeal. In the Senate, despite control by leaders supporting 45/3.5, the chamber will still have a clear majority in support of 35/5 or better, with at least 55 Senators who have expressed public support (down 3 from the current Senate). At the same time, support for repeal will also drop slightly from 49 to 46 Senators. The altered math is a result of the victories of Joe Donnelly over Richard Mourdock in Indiana, Angus King over Charlie Summers in Maine and Elizabeth Warren over Scott Brown in Massachusetts. Two new Democrats who may be persuadable are Heidi Heitkamp, who won her largely rural seat in North Dakota and Tim Kaine, who as governor signed repeal of Virginia’s state death tax. As Policy and Taxation Group begins to navigate this altered political reality, it will be important to remind legislators on the Hill that it was a Democratic House, Senate and President who enacted the current 35/5 parameters in the first place.

When Congress returns after the Thanksgiving recess, only a few weeks will be available to work out a deal to avoid the fiscal cliff and the economic damage it would entail. Policy and Taxation Group and its allies in Washington will work hard to build the necessary bipartisan support to prevent the crushing increase in the estate tax burden that could return in January.

 

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