Unpleasant Estate Tax Tradeoffs

Today, the senate delayed the vote on the estate tax because "Senate Republicans are determined to pass the legislation this year, [but] they want to ensure they have the 60 votes needed to withstand a challenge by Democrats."

Most senators in favor of eliminating or reducing the estate tax also favor the Gregg bill changing the budget rules. The CBPP describes the Gregg bill as aiming a "budget knife at domestic programs while shielding tax cuts from fiscal discipline."

This analysis shows the likely outcome if those in favor of the bills prevail. If both bills are put into place at once, the estate tax cuts will trigger automatic across the board reductions in the entitlement programs:

Combined Effect of Bills Moving In The Senate Would be to Finance Near-Repeal of the Estate Tax with Cuts in Medicare, Veterans Benefits, School Lunches, and Other Programs, by by Robert Greenstein and Richard Kogan: At the urging of Senate Republican leader Bill Frist, the House of Representatives ... approved a measure designed by House Ways and Means Committee chairman Bill Thomas to repeal most but not all of the estate tax. The measure contains no “offsets”; its large cost would be financed through higher deficits. The Senate takes up the bill this week.

One day before Rep. Thomas unveiled his proposal, the Senate Budget Committee approved a far-reaching bill to make major changes in federal budget rules. Crafted by committee chairman Judd Gregg and co-sponsored by Senator Frist and 24 other Senate Republicans, the bill includes a provision that would establish binding deficit targets... In any year in which the deficit targets would otherwise be missed, automatic across-the-board cuts would be triggered in every entitlement program except Social Security.

Policymakers who have pushed for repeal of most or all of the estate tax (and for other tax cuts) often act as though tax cuts are a “free lunch,” ...[H]owever, this is not so. Sooner or later, someone has to pick up the bill.

The Gregg bill places a spotlight on how these tax cuts would be paid for. Taken together, the Thomas estate-tax bill and the Gregg budget-enforcement bill would result in multi-million dollar tax cuts for the estates of the wealthiest Americans who die, with these lavish tax cuts being financed by large reductions in health care, retirement, and other benefits on which millions of ordinary Americans rely....

Congressional Budget Office projections show that if the President’s tax cuts are extended ... and relief from the Alternative Minimum Tax is continued, the projected budget deficit in 2012 and every year thereafter will be close to or more than $200 billion above the level needed to hit the Gregg bill’s deficit targets...  Under ... the Gregg bill, every dollar that a tax-cut bill loses in revenue must eventually be made up by cutting a dollar out of entitlement or other mandatory programs (unless discretionary programs are cut more deeply, other tax cuts are terminated or scaled back, or other revenue-raising measures are adopted). ...:

Table 1: Cuts in Various Entitlement Programs
Triggered by Thomas Estate-Tax Plan
(in billions of dollars)

	Cuts 2007-2016
Medicare	121
Medicaid/SCHIP	64
Federal Civilian Retirement	17
EITC/Child Tax Credit	10
Military Retirement	10
Unemployment Insurance	10
SSI for elderly and disabled poor	10
Veterans disability compensation and pensions	8
Food stamps	8
School lunch/child nutrition	3
Farm Programs	3
Total entitlement cuts	283

...Enactment of the Thomas bill would trigger $283 billion in entitlement cuts over the 2007-2016 period, with $262 billion of these cuts coming in the second five years (2012-2016). ..

Table 1 displays the cuts that would have to be made in various entitlement programs to offset the increases in deficits the Thomas bill would cause. The Table is based on the official cost estimate that the Joint Committee on Taxation has issued of the Thomas bill...

A point could be made that few, if any, Members of Congress favor allowing the estate tax to return in 2011 to its parameters under the pre-2001 tax law. Many Senators ... support making permanent the estate-tax rules that will be in effect in 2009, when the first $3.5 million of an estate — $7 million per couple — will be exempt and the top rate will be 45 percent. Were that approach to be adopted, the entitlement cuts that would be triggered under the Gregg bill would be about half the size of the cuts shown in Table 1...