Partisan Reactions to S&P Downgrade Foreshadow Coming Tax Debate

Following S&P’s downgrading of the nation’s credit rating, the reactions of party leaders reflected their continuing disagreement on whether tax increases should be part of the nation’s approach to deficit reduction. Republicans blamed years of out-of-control spending and called for structural reforms to costly entitlements, while Democrats asserted the need for Congress to follow a “balanced approach” for further deficit reduction, including both spending cuts and tax increases.

Due to the CBO “current law” baseline it is supposed to follow, the Joint Committee is less likely to address aspects of tax policy affected by the expiration of the 2010 Tax Act, which included applicable rates for individual income, capital gains, dividend and estate taxes. In terms of estate tax policy, the 2010 Tax Act lowered the rate to 35%, increased the exemption to $5 million indexed for inflation, reunified estate, gift and GST taxes, retained stepped-up basis and the deductibility of state estate taxes and provided for spousal portability, all through the end of 2012.

Because the Joint Committee must assume for scoring purposes the return of a higher 55% rate and a lower $1 million exemption in 2013, any changes it could consider that would institute more favorable parameters would be viewed as decreasing revenues and setting the committee farther from its goal of $1.2 trillion in deficit reduction. Since most Democrats prefer a lower 45% rate and most Republicans and many Democrats support the current 35% rate or better, the Joint Committee is less likely to consider changing the rate and exemption. However, other changes that could significantly increase estate tax liability, such as the elimination of valuation discounts and restrictions on grantor-retained annuity trusts (GRATs), are at higher risk because they would be viewed as permanent changes that raise revenue.

Policy and Taxation Group continues to analyze the impact of the recently passed Budget Control Act on our efforts to win sustainable estate tax relief and assess and mitigate risk in the emerging environment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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