Dear Supporters:

On a party-line vote, today the Senate accepted Senate Majority Leader Harry Reid’s (D-NV) amendment to re-impose a statutory pay-as-you-go (PAYGO) requirement that spending increases and revenue decreases be offset by equal amounts of spending decreases and revenue increases.  The amendment was added to legislation that would increase the federal debt limit by $1.9 trillion, which then passed the Senate on a similar party-line vote and headed over to the House.  The amendment made partial exceptions for certain policy areas, enabling Congress to pass legislation affecting those areas with fewer offsets.  In addition to exemptions for the cost of continuing the 2001 tax cuts for those making under $200,000 per year (permanently), preventing reductions in Medicare provider payments (five years) and protecting taxpayers against the alternative minimum tax (two years), PAYGO would also make an exception for estate tax policy in 2010 and 2011.

What does this mean?  Essentially, this means that instead of having to offset the cost of any changes beyond current law (repeal in 2010 and 55%/$1 million in 2011), Congress would have to offset the cost of any changes beyond the continuation of 2009 levels (45%/$3.5 million) through 2010 and 2011.  The amendment would also allow for the indexing of the exemption for inflation in 2010 and 2011 without any need for offsets.  In 2012, Congress would continue to assume the permanent return of a 55% rate and $1 million exemption, meaning that any relief from higher taxes in future years would have to be offset.

Last year, the House passed legislation to make the 45% rate and $3.5 million exemption permanent, which was estimated to cost $256 billion.  As you know, Policy and Taxation Group played an important role in facilitating the Lincoln/Kyl proposal in the Senate, which would make a 35% rate and $5 million exemption permanent at a cost of $97 billion above the cost of the House-passed bill.  We also helped draft and coordinate introduction of the Berkley/Brady compromise in the House, which would phase in over 10 years toward the Lincoln/Kyl levels at a cost of $47 billion above the cost of the House-passed bill.  Any reduction in the amount that needs to be offset as a result of the PAYGO amendment would be a small drop in the bucket toward the cost of permanent relief for families ($353 billion for Lincoln/Kyl), but it does set the precedent of Democratic leadership recognizing the need to make allowances for the cost of estate tax reform.

The consideration of PAYGO is a precursor to the critical substantive debate on estate tax policy that House and Senate leaders have promised.  We will continue to keep you posted.